<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 0-18694
CATELLUS DEVELOPMENT
CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2953477
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 MISSION STREET
SAN FRANCISCO, CALIFORNIA 94105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(415) 974-4500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 5, 1998, there were 106,744,908 issued and outstanding shares
of the registrant's common stock, $.01 par value per share.
================================================================================
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of June 30, 1998 and December 31, 1997............ 2
Consolidated Statement of Operations for the three months and six months ended
June 30, 1998 and 1997........................................................ 3
Consolidated Statement of Cash Flows for the six months ended
June 30, 1998 and 1997........................................................ 4
Notes to Consolidated Financial Statements...................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 10
PART II. OTHER INFORMATION................................................................. 21
SIGNATURES.................................................................................. 25
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Properties...................................................... $1,511,643 $1,358,807
Less accumulated depreciation................................... (250,811) (235,832)
---------- ----------
1,260,832 1,122,975
Other assets and deferred charges, net.......................... 55,288 50,138
Notes receivable, less allowance................................ 19,370 30,971
Accounts receivable, less allowance............................. 29,233 19,641
Restricted cash................................................ 6,925 --
Cash and cash equivalents....................................... 17,900 17,294
---------- ----------
Total............................................ $1,389,548 $1,241,019
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage and other debt......................................... $ 677,226 $ 568,699
Accounts payable and accrued expenses........................... 56,338 62,681
Deferred credits and other liabilities.......................... 55,290 40,035
Deferred income taxes........................................... 126,200 117,705
---------- ----------
Total liabilities..................................... 915,054 789,120
---------- ----------
Commitments and contingencies (Note 8)
Stockholders' equity
Preferred stock............................................... -- --
Common stock - 106,741 and 106,503 shares issued and
outstanding at June 30, 1998 and December 31, 1997.. 1,067 1,065
Paid-in capital............................................... 478,984 476,047
Accumulated deficit........................................... (5,557) (25,213)
---------- ----------
Total stockholders' equity............................ 474,494 451,899
---------- ----------
Total............................................ $1,389,548 $1,241,019
========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -------------------------
1998 1997 1998 1997
------------ ---------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
INCOME PRODUCING PROPERTIES
Rental revenue............................................. $ 37,786 $ 31,421 $ 73,280 $ 62,226
Property operating costs................................... (10,085) (10,045) (20,073) (19,101)
Equity in earnings of joint ventures, net.................. 2,986 2,884 5,680 4,867
-------- -------- -------- --------
30,687 24,260 58,887 47,992
-------- -------- -------- --------
DEVELOPMENT ACTIVITIES AND FEE SERVICES
Gain on development property sales......................... 3,957 3,154 10,096 3,638
Development and management fee income, net................. 2,388 1,435 3,143 2,154
Equity in earnings of joint ventures, net.................. 158 1,167 116 1,225
Land holding costs, net.................................... (698) (169) (1,105) (342)
-------- -------- -------- --------
5,805 5,587 12,250 6,675
-------- -------- -------- --------
Interest expense............................................ (10,447) (10,205) (20,009) (19,999)
Depreciation and amortization............................... (8,586) (7,723) (16,771) (15,199)
General and administrative expense.......................... (3,089) (2,701) (6,363) (5,316)
Gain on non-strategic land and other asset sales............ 4,423 418 4,370 4,058
Litigation and environmental costs.......................... -- -- -- 42
Other, net.................................................. 802 (45) 429 (45)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES............................... 19,595 9,591 32,793 18,208
-------- -------- -------- --------
Income tax expense
Current.................................................... (2,052) (599) (3,590) (1,136)
Deferred................................................... (5,800) (3,307) (9,547) (6,278)
-------- -------- -------- --------
(7,852) (3,906) (13,137) (7,414)
-------- -------- -------- --------
NET INCOME............................................... 11,743 5,685 19,656 10,794
Preferred stock dividends................................... -- -- -- (1,353)
-------- -------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS............. $ 11,743 $ 5,685 $ 19,656 $ 9,441
======== ======== ======== ========
Net income per share of common stock:
Basic............................................... $0.11 $0.06 $0.18 $0.11
======== ======== ======== ========
Assuming dilution................................... $0.11 $0.06 $0.18 $0.10
======== ======== ======== ========
Average number of common shares outstanding:
Basic............................................... 106,675 97,302 106,615 88,595
======== ======== ======== ========
Assuming dilution................................... 109,713 100,327 109,745 91,493
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
----------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $ 19,656 $ 10,794
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................... 16,771 15,199
Deferred income taxes....................................... 9,547 6,278
Amortization of deferred loan fees and other costs.......... 1,363 1,536
Equity in earnings of joint ventures........................ (5,796) (6,092)
Operating distributions from joint ventures................. 4,875 4,895
Cost of non-strategic land and development properties sold.. 21,471 26,030
Gain on sales of other assets............................... (3,650) (1,600)
Expenditures for development properties..................... (63,114) (20,806)
Other, net.................................................. (1,602) 1,839
Change in operating assets and liabilities....................... 5,829 (1,344)
--------- --------
Net cash provided by operating activities............................. 5,350 36,729
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions............................................ (59,869) --
Capital expenditures............................................. (42,775) (54,951)
Tenant improvements.............................................. (461) (3,737)
Net proceeds from sale of other assets........................... 3,691 2,623
Contributions to joint ventures.................................. (3,609) (11,295)
Restricted cash for future investment............................ (6,925) (11,902)
--------- --------
Net cash used in investing activities................................. (109,948) (79,262)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings....................................................... 185,726 72,128
Repayment of borrowings.......................................... (77,199) (26,548)
Dividends paid................................................... -- (5,975)
Redemption of preferred stock.................................... -- (471)
Distributions to minority partners............................... (5,202) (3,771)
Proceeds from issuance of common stock........................... 1,879 2,198
--------- --------
Net cash provided by financing activities............................. 105,204 37,561
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ 606 (4,972)
Cash and cash equivalents at beginning of period...................... 17,294 23,580
--------- --------
Cash and cash equivalents at end of period............................ $ 17,900 $ 18,608
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)........................ $ 18,357 $ 18,379
Income taxes................................................ $ 5,813 $ 647
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
NOTE 1. DESCRIPTION OF BUSINESS
Catellus Development Corporation (the "Company") is a diversified real
estate operating company, with a large portfolio of income-producing properties
and developable land, that manages and develops real estate for its own account
and others. The Company's portfolio of industrial, residential, retail, and
office projects, undeveloped land, and joint venture interests are primarily
located in major markets in California and seven other states. The Company's
income-producing properties consist primarily of industrial facilities, along
with a number of office and retail buildings located in California, Arizona,
Illinois, Texas, Colorado, and Oregon. The Company also has substantial
undeveloped land holdings primarily in these same states.
NOTE 2. INTERIM FINANCIAL DATA
The accompanying consolidated financial statements should be read in
conjunction with the Company's 1997 Annual Report on Form 10-K as filed with the
Securities and Exchange Commission. In the opinion of management, the
accompanying financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial
position, results of operations and cash flows for the interim periods
presented. Certain prior period financial data has been reclassified to conform
with the current period presentation.
NOTE 3. NEW ACCOUNTING STANDARDS
In the fourth quarter of 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share", which changes the method of
calculation and presentation of earnings per share. This change did not have
any impact on previously reported income per share amounts for the three and six
months ended June 30, 1997.
During June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", and
No. 131, "Segment Reporting". Both standards are effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes the disclosure
requirements for reporting comprehensive income in an entity's annual and
interim financial statements and is effective for the Company for the year
ending December 31, 1998. Comprehensive income represents changes in
stockholders' equity except those resulting from investments by and
distributions to owners. As of June 30, 1998, the Company has no other
comprehensive income; accordingly, no such disclosure is made in the
consolidated statement of operations. SFAS No. 131 establishes standards for
determining an entity's operating segments and the type and level of financial
information to be disclosed. This statement need not be applied and will not be
applied to interim financial statements during the year ending December 31,
1998. However, this statement will be applied to the Company's annual financial
statements for the year ending December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 is effective for years beginning after
June 15, 1999. The statement requires all derivatives to be recorded on the
balance sheet at fair value and establishes new accounting treatment for the
different types of transactions qualifying for Hedge Accounting. The Company
plans to adopt this statement in the first quarter of 2000. Management does
not believe this new standard will significantly impact the financial position
or results of operations; however, management is evaluating the effects, if
any, from this new standard.
NOTE 4. RESTRICTED CASH
At June 30, 1998, proceeds of $6,925,000 from development property sales
are being held in separate cash accounts at a trust company in order to preserve
the Company's options of reinvesting the proceeds on a tax-deferred basis.
5
<PAGE>
NOTE 5. NET INCOME PER SHARE
Net income per share of common stock is computed by dividing net income,
after reduction for preferred stock dividends, by the weighted average number of
shares of common stock and equivalents outstanding during the period (see table
below for effect of dilutive securities).
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
---------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Net income........................................ $11,743 $5,685
Less preferred stock dividends.................... -- --
------- ------
Net income applicable to common
stockholders................................... 11,743 106,675 $0.11 5,685 97,302 $0.06
===== =====
Effect of dilutive securities: stock options...... -- 3,038 -- 3,025
------- ------- ------ -------
Net income applicable to common
stockholders assuming dilution................. $11,743 109,713 $0.11 $5,685 100,327 $0.06
======= ======= ===== ====== ======= =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
1998 1997
----------------------------------- ------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
---------- ----------- ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except per share data)
Net income........................................ $19,656 $10,794
Less preferred stock dividends.................... -- (1,353)
------- -------
Net income applicable to common
stockholders................................... 19,656 106,615 $0.18 9,441 88,595 $0.11
===== =====
Effect of dilutive securities: stock options...... -- 3,130 -- 2,898
------- ------- ------- ------
Net income applicable to common
stockholders assuming dilution................. $19,656 109,745 $0.18 $ 9,441 91,493 $0.10
======= ======= ===== ======= ====== =====
</TABLE>
6
<PAGE>
NOTE 6. MORTGAGE AND OTHER DEBT
Mortgage and other debt at June 30, 1998 and December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(in thousands)
<S> <C> <C>
First mortgage loans..................................... $313,734 $317,432
Secured revolving credit line............................ 253,000 192,100
Acquisition secured promissory notes..................... 35,811 --
Unsecured revolving credit line.......................... 17,000 --
Residential construction loans........................... 5,974 6,453
Assessment district bonds................................ 16,947 17,825
Term loan - secured...................................... 12,893 12,929
Secured promissory notes................................. 21,570 21,570
Other loans.............................................. 297 390
-------- --------
Total mortgage and other debt............................ $677,226 $568,699
======== ========
Due in one year.......................................... $298,497 $218,933
======== ========
</TABLE>
In connection with February and June 1998 acquisitions of approximately
13,100 acres of land and 1,970 ground leases, the Company issued $36 million of
secured promissory notes. The notes bear interest at 7.23% and are due at
various dates through June 26, 2003.
On May 22, 1998, the Company expanded a $25 million unsecured revolving
credit line to $95 million. At June 30, 1998, $17 million was drawn on this
credit line. The Company has exercised its option to extend the maturity to
November 1, 1998. Additionally, the $265 million secured revolving credit line
will mature on November 1, 1998. The Company is currently negotiating with the
lender for a new secured revolving credit line in place of these two credit
lines; the new credit line is expected to mature two years from its issuance.
Interest costs relating to mortgage and other debt for three-and six-month
periods ended June 30, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------------
1998 1997 1998 1997
--------- --------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Total interest incurred................. $13,512 $11,331 $26,057 $22,605
Interest capitalized.................... (3,065) (1,126) (6,048) (2,606)
------- ------- ------- -------
Interest expensed.................. $10,447 $10,205 $20,009 $19,999
======= ======= ======= =======
</TABLE>
7
<PAGE>
NOTE 7. PROPERTIES
Book value by property type at June 30, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
Income-producing properties: (in thousands)
<S> <C> <C>
Industrial buildings................................ $ 461,193 $ 458,963
Office buildings.................................... 194,165 193,654
Retail buildings.................................... 98,419 97,483
Land development /(1)/.............................. 327,572 341,821
Land leases......................................... 50,969 8,036
---------- ----------
1,132,318 1,099,957
---------- ----------
Developable properties:
Industrial.......................................... 99,390 79,658
Residential......................................... 79,578 66,069
Retail, office and other............................ 43,980 37,401
Natural resources................................... 6,647 4,975
Properties held for sale............................ 41,592 29,588
---------- ----------
271,187 217,691
---------- ----------
Work-in-process:
Industrial.......................................... 77,569 39,264
Residential......................................... 32,408 7,411
---------- ----------
109,977 46,675
---------- ----------
Other.................................................... 22,022 20,948
Investment in joint ventures............................. (23,861) (26,464)
---------- ----------
Gross book value......................................... 1,511,643 1,358,807
Accumulated depreciation................................. (250,811) (235,832)
---------- ----------
Net book Value........................................... $1,260,832 $1,122,975
========== ==========
</TABLE>
/(1)/ This category represents interim income-producing uses of properties
intended for mixed-use development
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is a party to a number of legal actions arising in the ordinary
course of business. While the Company cannot predict with certainty the final
outcome of these proceedings, considering the substantial legal defenses
available, management believes that none of these actions, when finally
resolved, will have a material adverse effect on the consolidated financial
position, results of operations, or cash flows of the Company.
Inherent in the operations of the real estate business is the possibility
that environmental liability may arise from the ownership, or previous
ownership, of real properties. The Company may be required in the future
to take action to correct or reduce the environmental effects of prior disposal
or release of hazardous substances by third parties, the Company, or its
corporate predecessors. Future environmental costs are difficult to estimate
because of such factors as the unknown magnitude of possible contamination, the
unknown timing and extent of the corrective actions that may be required, the
determination of the Company's liability in proportion to that of responsible
parties, and the extent to which such costs are recoverable from insurance.
At June 30, 1998, management estimates that future costs for remediation of
identified or suspected environmental contamination on operating properties and
properties previously sold approximate $11 million, and has provided a reserve
for that amount. It is anticipated that such costs will be incurred over the
next ten years with a substantial portion incurred over the next five years.
Management also estimates that similar costs relating to the Company's
properties to be developed or sold may range from $11.8 million to $37 million.
These amounts will be capitalized as components of development costs when
incurred, which is anticipated to be over a period of twenty years, or will be
deferred and charged to cost of sales when the properties are sold. The
Company's estimates were developed based on reviews which took place over
several years based upon then prevailing law and identified site conditions.
Because of the breadth of its portfolio, and past sales, the Company is unable
to review extensively each property on a regular basis. Such estimates are not
precise and are always subject to the availability of further information about
the prevailing conditions at the site, the future requirements of regulatory
agencies and the availability of other parties to pay some or all of such costs.
8
<PAGE>
NOTE 9. PREFERRED STOCK CONVERSION/REDEMPTION
In December 1996, the Company called for redemption of approximately $25
million of its $3.75 Series A Cumulative Convertible Preferred Stock (Series A
Preferred Stock). In January 1997, of the 475,000 preferred shares called,
471,730 shares were converted into 2,603,168 common shares and 3,270 shares were
redeemed at $52.625 per share plus accrued and unpaid dividends at a cost of
approximately $175,000.
On February 5, 1997, the Company called for redemption of approximately $90
million of its Series A Preferred Stock. On March 24, 1997, of the 1,720,000
preferred shares called, 1,715,837 shares were converted into 9,469,015 common
shares and the remaining shares were redeemed at $52.25 per share plus accrued
and unpaid dividends at a cost of approximately $220,000.
On March 24, 1997, the Company called for redemption of the remaining
outstanding 250,000 shares, or approximately $13 million, of its Series A
Preferred Stock and 1,470,000 shares, or approximately $75 million, of its
$3.625 Series B Cumulative Convertible Exchangeable Preferred Stock (Series B
Preferred Stock). In May 1997, 99.7% of the Series A Preferred Stock shares
were converted into 1,376,742 shares of common stock and the remaining shares
were redeemed at $52.25 per share plus accrued and unpaid dividends at a cost of
approximately $45,000; additionally, the Series B Preferred Stock shares were
converted into approximately 7,500,000 shares of common stock.
On May 1, 1997, the Company called for redemption of the remaining
outstanding 1,521,000 shares, or approximately $80 million, of its Series B
Preferred Stock. In June 1997, all of the remaining Series B Preferred Stock
shares were converted into 7,758,201 shares of common stock.
With the completion of the May 1, 1997 call, the Company has no remaining
outstanding preferred stock.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's 1997 Form 10-K.
RESULTS OF OPERATIONS
Comparison of the six-month periods ended June 30, 1998 and 1997
Income-Producing Properties. Rental revenue and property operating costs for
the Company's income-producing properties for the six-month periods ended June
30, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
RENTAL REVENUE PROPERTY OPERATING COSTS
---------------------------------------- ----------------------------------------------
SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ----------------------------------------------
1998 1997 DIFFERENCE 1998 1997 DIFFERENCE
------------ ----------- ------------- --------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Industrial buildings................... $38,651 $31,841 $ 6,810 $ 7,911 $ 7,019 $892
Office buildings....................... 15,971 14,142 1,829 6,234 6,139 95
Retail buildings....................... 6,780 6,656 124 1,886 1,925 (39)
Land development /(1)/................. 5,716 5,630 86 3,599 3,558 41
Land leases............................ 6,162 3,957 2,205 443 460 (17)
------- ------- ------- ------- ------- ----
$73,280 $62,226 $11,054 $20,073 $19,101 $972
======= ======= ======= ======= ======= ====
</TABLE>
Building square footage owned, square footage leased and
occupancy are as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------------------
1998 1997
------------------ ------------------
(in thousands, except percentages)
<S> <C> <C>
Industrial buildings
Square feet owned.............................................. 14,570 13,361
Square feet leased............................................. 14,286 12,958
Percent leased................................................. 98.1% 97.0%
Office buildings
Square feet owned.............................................. 1,620 1,619
Square feet leased............................................. 1,542 1,439
Percent leased................................................. 95.2% 88.9%
Retail buildings
Square feet owned.............................................. 928 928
Square feet leased............................................. 862 829
Percent leased................................................. 92.9% 89.3%
Land development (1)
Square feet owned.............................................. 1,220 1,230
Square feet leased............................................. 1,020 1,177
Percent leased................................................. 83.6% 95.7%
Total
Square feet owned.............................................. 18,338 17,138
Square feet leased............................................. 17,710 16,403
Percent leased................................................. 96.6% 95.7%
</TABLE>
/(1)/ This category represents interim income-producing uses of properties
intended for mixed-use development
10
<PAGE>
The increase in revenue from industrial buildings is primarily attributable
to eleven newly constructed buildings totaling approximately 2.6 million square
feet that have been added to the portfolio since January 1, 1997, offset by a
decrease in revenues resulting from sales in 1997 of three buildings totaling
approximately 0.6 million square feet. Approximately $4.9 million of the
increase was attributable to base rents and tenant pass-through for the net
additions. Approximately $1.4 million was attributable to higher base rental
rates from properties which were owned and operated for all of 1997 and year-to-
date 1998 ("Same Space"), and approximately $0.5 million was attributable to
higher tenant pass-through charges associated with Same Space. The increase in
operational costs is primarily attributable to approximately $0.7 million from
Same Space and $0.2 million from the new buildings.
Rental revenue for the Company's office portfolio increased by $1.8 million
for the six months ended June 30, 1998, compared to the same period in 1997,
primarily because of higher rental rates and occupancy for Same Space. Operating
costs for office buildings increased by $0.1 million, primarily as a result of
higher utility costs and property taxes.
The $2.2 million increase in revenues from land lease portfolio for the six
months ended June 30, 1998 as compared to the same period in 1997 is primarily
attributable to the acquisitions of 1,588 ground leases in February, 1998.
In total, property operating costs were higher for the six months ended
June 30, 1998 as compared to the same period in 1997, because of higher overhead
costs and property taxes associated with the new buildings.
Income-producing joint venture earnings, net, increased by $0.8 million
primarily because of higher occupancies and room rates in certain hotel joint
ventures.
Development Activities and Fee Services. Gain on development property sales was
$10.1 million for the six months ended June 30, 1998 compared to $3.6 million
for the same period in 1997, summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
1998 1997 DIFFERENCE
------------- ------------- -------------------
(in thousands)
<S> <C> <C> <C>
COMMERCIAL:
Sales........................................... $18,708 $15,516 $ 3,192
Cost of sales................................... 10,488 13,010 (2,522)
------- ------- -------
Gain....................................... 8,220 2,506 5,714
------- ------- -------
RESIDENTIAL:
Sales........................................... 18,885 18,417 468
Cost of sales................................... 17,009 17,285 (276)
------- ------- -------
Gain....................................... 1,876 1,132 744
------- ------- -------
Total gain on development property sales........ $10,096 $ 3,638 $ 6,458
======= ======= =======
</TABLE>
The 1998 results include a $5.3 million gain from the sale of a commercial
development joint venture in Texas and the sale of an 800-lot residential
project in California. The 1997 results include a $2.2 million gain from the
sale of a 279,000-square-foot industrial building in La Mirada, California. In
addition, the Company sold 55 homes in the six months ended June 30, 1998
compared to 28 homes during the same period in 1997.
The Company expects there will be significant variability in income
generated from its development activities.
11
<PAGE>
Following is a summary of development property sales under contract but not
closed as of June 30, 1998 and 1997:
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------
1998 1997
------------- ------------
(in thousands)
<S> <C> <C>
Commercial.................................................. $77,107 $ 2,741
======= =======
Residential (lot and unit sales):
Owned projects
Units............................................... $37,227 $ --
Lots................................................ 14,500 --
------- -------
$51,727 $ --
======= =======
Joint venture projects /(1)/........................... $34,879 $46,047
======= =======
</TABLE>
/(1)/ The amounts shown are 100% of the gross sales price; the Company is
entitled to receive 25%-50% of the net profits from these joint ventures.
Development and management fee income, net, increased by $1.0 million for
the six months ended June 30, 1998 compared to the same period in 1997. The
increase is primarily attributable to increases in management fees from
management contracts and related services to railroad company clients.
Equity in earnings of development joint ventures decreased by $1.1 million
for the six months ended June 30, 1998 compared to the same period in 1997. The
decrease is primarily attributable to a 1997 sale which generated a $1.0 million
gain.
The $0.8 million increase in land holding costs, net, for the six months
ended June 30, 1998 compared to the same period in 1997 is primarily because the
land holding costs in 1997 included an offset for interim ground lease income.
This lease was terminated in October 1997.
Other Items on the Statement of Operations. Interest expense for the six months
ended June 30, 1998 approximated that of the same period in 1997, however total
interest incurred increased $3.5 million. Interest expense increases
attributable to additions to the portfolio were offset by the increase in
capitalized interest related to higher development activity.
Following is a summary of interest incurred for the six months ended June
30, 1998 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------
1998 1997 DIFFERENCE
---------------- ---------------- -------------------
(in thousands)
<S> <C> <C> <C>
Total interest incurred................... $26,057 $22,605 $ 3,452
Interest capitalized...................... (6,048) (2,606) (3,442)
------- ------- -------
Interest expensed......................... $20,009 $19,999 $ 10
======= ======= =======
</TABLE>
General and administrative expense increased by $1.0 million for the six
months ended June 30, 1998, compared to the same period in 1997 primarily
because of the increase in the Company's overall activities.
12
<PAGE>
The increase in gain on sales of non-strategic land and other property from the
six months ended June 30, 1998 as compared to the same period in 1997 is
summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------
1998 1997 DIFFERENCE
----------------- ------------------- ----------------
(in thousands)
<S> <C> <C> <C>
Sales......................................... $ 5,621 $ 9,265 $(3,644)
Cost of sales................................. (1,251) (5,207) (3,956)
------- ------- -------
Gain.................................... $ 4,370 $ 4,058 $ 312
======= ======= =======
</TABLE>
In 1995, the Company began an accelerated program of selling non-strategic
assets, with the proceeds intended to pay down a portion of existing debt and
fund new development. From 1995 through June 30, 1998, the Company sold $184.6
million of non-strategic assets. In addition, at June 30, 1998, $63.4 million
of such assets were under contract or option for sale. Because of the
diminishing amount of such assets in the Company's portfolio, the Company
expects future sales of non-strategic assets to be substantially lower than the
levels in the recent past, with the exception of two significant sales expected
to close in the next twelve months.
Preferred Stock Dividends. Preferred stock dividends declined by $1.4 million
from the six-months ended June 30, 1997 compared to the same period in 1998 as a
result of preferred stock calls in 1997. With the completion of the preferred
stock calls in June 1997, the Company has no remaining outstanding preferred
stock.
Comparison of the three-month periods ended June 30, 1998 and 1997.
Income-Producing Properties. Rental revenue and property operating costs for
the Company's income-producing properties for the three-month periods ended June
30, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
RENTAL REVENUES PROPERTY OPERATING COSTS
----------------------------- ----------------------------------
THREE MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------- ----------------------------------
1998 1997 DIFFERENCE 1998 1997 DIFFERENCE
------- ------ ----------- ------- ------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Industrial buildings..... $19,827 $16,250 $3,577 $ 3,934 $ 3,752 $182
Office buildings......... 8,066 7,067 999 3,179 3,260 (81)
Retail buildings......... 3,409 3,201 208 933 969 (36)
Land development /(1)/... 2,997 2,862 135 1,854 1,838 16
Land leases.............. 3,487 2,041 1,446 185 226 (41)
------- ------- ------ ------- ------- ----
$37,786 $31,421 $6,365 $10,085 $10,045 $ 40
======= ======= ====== ======= ======= ====
</TABLE>
/(1)/ This category represents interim income-producing uses of properties
intended for mixed-use development.
The increase in revenue from industrial buildings is primarily attributable
to eleven newly constructed buildings totaling approximately 2.6 million square
feet that have been added to the portfolio since January 1, 1997, offset by a
decrease in revenues resulting from sales in 1997 of three buildings totaling
0.6 million square feet sold. Approximately $2.4 million of the increase was
attributable to base rents and tenant pass-through for the net additions.
Approximately $0.8 million was attributable to base rents associated with Same
Space, and approximately $0.4 million was attributable to higher tenant pass-
through charges associated with Same Space. The increase in operational costs is
primarily attributable to approximately $0.3 million from Same Space and $0.1
million from the net new buildings, offset by a reduction of $0.2 million from
properties sold.
13
<PAGE>
Rental revenue for the Company's office portfolio increased by $1.0 million
for the three months ended June 30, 1998, compared to the same period in 1997,
primarily because of higher rental rates and occupancy for Same Space. Operating
costs for office buildings decreased by $0.1 million, primarily as a result of
lower utility costs and property taxes.
The $0.2 million increase in rental revenue for the retail buildings was
primarily because of higher rental rates from Same Space.
The $1.4 million increase in revenues from land lease portfolio for the
three months ended June 30, 1998 as compared to the same period in 1997 is
primarily attributable to the acquisitions of 1,588 ground leases in February,
1998.
In total, property operating costs were higher for the three months ended
June 30, 1998 as compared to the same period in 1997 because of higher overhead
costs and property taxes associated with the new buildings.
Development Activities and Fee Services. Gain on development property
sales was $4.0 million in the three months ended June 30, 1998 compared to $3.2
million for the same period in 1997 is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------
1998 1997 DIFFERENCE
------------- -------------- ------------------
(in thousands)
<S> <C> <C> <C>
COMMERCIAL:
Sales........................................... $ 7,152 $14,311 ($7,159)
Cost of sales................................... 3,767 12,445 (8,678)
------- ------- --------
Gain....................................... 3,385 1,866 1,519
------- ------- --------
RESIDENTIAL:
Sales........................................... 12,963 15,970 (3,007)
Cost of sales................................... 12,391 14,682 (2,291)
------- ------- --------
Gain....................................... 572 1,288 (716)
------- ------- --------
Total gain on development property sales........ $ 3,957 $ 3,154 $ 803
======= ======= ========
</TABLE>
The 1998 results include a $1.3 million gain from the sale of a 28-acre
industrial land parcel in Woodridge, Illinois. In addition, the Company sold 42
homes in the three months ended June 30, 1998 compared to 24 homes during the
same period in 1997; however, the decrease in gain from residential sales is
primarily attributable to greater number of higher profit margin units sold in
the same period in 1997. In June 1998, the Company sold certain residential
lots subject to repurchase options which generated approximately $8.0 million in
deferred gain. The gain will be recognized as the repurchase options expire. The
repurchase options are expected to expire during 1998 and 1999.
The Company expects there will be significant variability in income
generated from its development activities.
Development and management fee income, net, increased by $1.0 million for
the three months ended June 30, 1998 compared to the same period in 1997. The
increase is primarily attributable to increases in management fees from
management contracts and related services to railroad company clients.
Equity in earnings of development joint ventures decreased by $1.0 million
for the three months ended June 30, 1998 compared to the same period in 1997.
The decrease is primarily attributable to a 1997 sale which generated a $1.0
million gain.
14
<PAGE>
The $0.5 million increase in land holding costs, net, for the three months
ended June 30, 1998 compared to the same period in 1997 is primarily because the
land holding costs in 1997 included an offset for interim ground lease rental
income. The lease for which this income was attributable was terminated in
October 1997.
Other Items on the Statement of Operations. Interest expense for the three
months ended June 30, 1998 was $0.2 million higher than the same period in
1997; however, total interest incurred increased $2.2 million. Interest expense
increases attributable to additions to the portfolio were offset by the
increase in capitalized interest related to higher development activity.
Following is a summary of interest incurred for the three months ended June
30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------
1998 1997 DIFFERENCE
---------------- ---------------- -------------------
<S> <C> <C> <C>
(in thousands)
Total interest incurred................... $13,512 $11,331 $ 2,181
Interest capitalized...................... (3,065) (1,126) (1,939)
------- ------- -------
Interest expensed......................... $10,447 $10,205 $ 242
======= ======= =======
</TABLE>
General and administrative expense increased by $0.4 million for the three
months ended June 30, 1998, compared to the same period in 1997 primarily
because of the increase in the Company's overall activities.
The increase in gain on sales of non-strategic land and other property from the
three months ended June 30, 1998 as compared to the same period in 1997 is
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------
1998 1997 DIFFERENCE
---------------- ------------------- ----------------
<S> <C> <C> <C>
(in thousands)
Sales......................................... $5,328 $ 1,784 $3,544
Cost of sales................................. (905) (1,366) (461)
------ ------- ------
Gain.................................... $4,423 $ 418 $4,005
====== ======= ======
</TABLE>
The 1998 results include a $3.7 million gain from the sale of a ground
lease. Because of the diminishing amount of such assets in the Company's
portfolio, the Company expects future sales of non-strategic assets to be
substantially lower than the levels in the recent past, with the exception of
two significant sales expected to close in the next twelve months.
Variability in Results. Although the Company has a large portfolio of income-
producing properties that provides stable operating results, the Company's
earnings from period to period will be affected by the nature and timing of
sales of development property and non-strategic assets. Many of the Company's
projects require a lengthy process to complete the development cycle before they
are sold. Additionally, sales of non-strategic assets are difficult to predict
and are generally subject to lengthy negotiations and contingencies that need to
be resolved prior to closing. These factors tend to "bunch" income in the
particular periods rather than producing a more even pattern throughout the
year. In addition, gross margins may vary significantly as the mix of property
varies. The cost basis of the properties sold varies because (i) a number of
properties have been owned for many decades; (ii) some properties were acquired
within the last ten to fifteen years; and (iii) properties are owned in various
geographical locations.
15
<PAGE>
Earnings Before Depreciation and Deferred Taxes
The Company uses a supplemental performance measure called Earnings Before
Depreciation and Deferred Taxes (EBDDT) along with net income (loss) to report
its operating results. EBDDT is not a measure of operating results or cash flows
from operating activities as defined by generally accepted accounting
principles. Additionally, EBDDT is not necessarily indicative of cash available
to fund cash needs and should not be considered as an alternative to cash flows
as a measure of liquidity. However, the Company believes that EBDDT provides
relevant information about its operations and is necessary, along with net
income (loss), for an understanding of its operating results.
EBDDT is calculated by taking net income (loss) and making various
adjustments. Depreciation, amortization and deferred income taxes are excluded
from EBDDT as they represent non-cash charges. In addition, gains on the sale of
non-strategic land and other assets represent unusual and/or nonrecurring items
and are excluded from the EBDDT calculation. Net income is reconciled to EBDDT
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- -------------------------------
(in thousands)
1998 1997 1998 1997
------------------ ------------ ------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income applicable to common stockholders................ $ 11,743 $ 5,685 $ 19,656 $ 9,441
Depreciation and amortization............................... 8,586 7,723 16,771 15,199
Deferred income taxes....................................... 5,800 3,307 9,547 6,278
Gain on non-strategic land and other asset sales............ (4,423) (418) (4,370) (4,058)
-------- -------- -------- -------
Earnings before depreciation and deferred taxes....... $ 21,706 $ 16,297 $ 41,604 $26,860
======== ======== ======== =======
Average number of common shares outstanding - basic......... 106,675 97,302 106,615 88,595
======== ======== ======== =======
Average number of common shares outstanding - assuming
dilution.................................................. 109,713 100,327 109,745 91,493
======== ======== ======== =======
</TABLE>
The $14.7 million increase in EBDDT for the six-month period ended June 30,
1998 compared to the same period in 1997 was primarily because of improved
results from income-producing assets and higher gains on development property
sales.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities
Cash provided by operating activities reflected in the statement of cash
flows for the six-month periods ended June 30, 1998 and 1997 was $5.4 million
and $36.7 million, respectively. The decrease is primarily attributable to
approximately $43 million used for capital expenditures for residential and
industrial development properties that the Company intends to sell.
Capital expenditures for development properties for the six months ended
June 30, 1998 and 1997 are included in the schedule of capital expenditures in
the following discussion of cash flows from investing activities.
Cash generated from sales of development properties was $41.5 million and
$30.3 million for the six-month periods ended June 30, 1998 and 1997,
respectively. Cash generated from sales of non-strategic land was $1.4 million
and $4.7 million for the six-month periods ended June 30, 1998 and 1997,
respectively. Cash generated from rental operations increased principally
because of the addition of new buildings.
Cash flow from investing activities
Net cash used in investing activities reflected in the statement of cash
flows for the six-month periods ended June 30, 1998 and 1997 was $109.9 million
and $79.3 million, respectively, primarily because of an increase of $59.9
million in property and land lease acquisitions, offset by a decrease of $12.2
million in capital expenditures for commercial development properties that the
Company intends to hold for its own account and the decrease of $7.7
million in joint venture contributions.
16
<PAGE>
Capital expenditures reflected in the statement of cash flows include the
following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1998 1997
------------- ------------
(in millions)
<S> <C> <C>
CAPITAL EXPENDITURES INCLUDED IN CASH FLOW FROM OPERATING
ACTIVITIES /(1)/
Capital expenditures for residential and industrial
development properties..................................... $ 42.9 $20.7
Residential property acquisitions........................... 16.8 --
Capitalized interest and property tax....................... 3.4 0.1
------ -----
63.1 20.8
------ -----
CAPITAL EXPENDITURES INCLUDED IN CASH FLOW FROM INVESTING
ACTIVITIES /(2)/
Construction and building improvements...................... 24.5 37.6
Property acquisitions............................ 59.9 --
Predevelopment.............................................. 11.4 5.5
Infrastructure and other.................................... 3.8 9.6
Capitalized interest and property tax....................... 3.0 2.3
Tenant improvements......................................... 0.5 3.7
------ -----
103.1 58.7
------ -----
Total Capital Expenditures.................................. $166.2 $79.5
====== =====
</TABLE>
/(1)/ This category includes capital expenditures for properties the Company
intends to sell.
/(2)/ This category includes capital expenditures for properties the Company
intends to hold for its own account.
Capital expenditures for residential and industrial development
properties -- relates to the development of residential and for-sale industrial
development properties. The increase for the six months ended June 30, 1998, as
compared to the same period in 1997, is primarily because of the increase in
both residential and for-sale industrial development activity.
For the six months ended June 30, 1998, the Company started construction on
257 residential units and completed 48 units compared to 145 starts and 96
completions for the same period in 1997.
Construction and building improvements -- relates primarily to development
of new industrial properties held for lease and improvements to existing
buildings. Commercial development activity is summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
1998 1997
------------------ -----------------------
(in square feet)
<S> <C> <C>
Under construction, beginning of period................ 3,774,000 2,286,961
Construction starts.................................... 2,145,000 346,000
Completed - Retained in portfolio...................... (240,000) (846,761)
Completed - Sold....................................... (235,000) --
--------- ---------
Under construction, end of period................. 5,444,000 1,786,200
========= =========
</TABLE>
17
<PAGE>
As of June 30, 1998, the Company had 5.4 million square feet under
construction, of which 2.1 million square feet are build-to-suit, and 1.2
million square feet are speculative development space; both of which will be
added to the Company's portfolio.
Property acquisitions--The Company invested approximately $90.8
million in 1997 and $76.7 million for the six-month period ended June 30, 1998,
in the acquisition of new property, either directly or through joint ventures.
* Residential acquisitions--For the six months ended June 30, 1998, the
Company invested approximately $17 million in the acquisition of
residential development property directly or through joint ventures. These
acquisitions will support up to 213 homes and included the following
significant acquisitions: (1) a 20-acre, 94-lot site in Martinez,
California, and (2), a 38-acre, 119-lot site in La Quinta, California.
Entitlements and approvals for these lots have been received, and
construction or development of these sites has commenced or is scheduled to
commence during 1998.
* Industrial acquisitions--For the six months ended June 30, 1998, the
Company invested approximately $14 million in the acquisition of industrial
development property. These acquisitions added approximately 4.5 million
square feet of potential industrial development and include the
acquisition of a 280-acre entitled land site in Portland, Oregon.
* Ground lease acquisitions--For the six months ended June 30, 1998, the
Company invested a total of $46 million acquiring land subject to ground
leases. This occurred in two closings, one in February 1998 for $32.5
million and a second in June 1998 for $13.6 million.
Predevelopment--relates primarily to amounts incurred in obtaining
entitlements for the Company's major mixed-use projects. The increase in
predevelopment costs primarily relate to activity at the Mission Bay project in
San Francisco, California and the Pacific Commons project in Fremont,
California.
Infrastructure and other--primarily represents infrastructure costs
incurred in connection with the Company's major mixed-use and development
projects. The decrease in 1998 compared to 1997 primarily relates to the Pacific
Commons and Woodridge, Illinois, projects.
Capitalized interest and property taxes--represents construction period
interest and property taxes capitalized to the Company's development projects.
The increase for the six-month period ended June 30, 1998 compared to the same
period in 1997 is due to the significant increase in development activity, as
noted above.
Cash flow from financing activities
As of June 30, 1998, the Company had total outstanding debt of $677.2
million, of which 41.4% was recourse to the Company and also secured by certain
property, 55.7% was non-recourse to the Company and secured by certain property,
and 2.9% was unsecured. During the next twelve months, approximately $298.5
million in debt matures, consisting primarily of the secured line of credit, but
also including construction financing, term loans, or first mortgage loans. The
Company expects that the maturing debt will most likely be refinanced through a
combination of long-term fixed-rate financing combined with a restructure of the
secured line of credit. All maturing debt is expected to be extended, refinanced
or repaid. (Also see cash balances, available borrowings and capital resources
section below.)
Net cash provided by financing activities for the six month periods ended
June 30,1998 and 1997 was $105.2 million and $37.6 million, respectively. This
increase is primarily attributable to the $62.9 million increase in net
borrowings used to finance acquisitions and development projects and a $6
million decrease in preferred stock dividends paid.
18
<PAGE>
Capital commitments
As of June 30, 1998, the Company had approximately $43.5 million in total
commitments for capital expenditures. These commitments are primarily to fund
the construction of industrial development projects, predevelopment costs and
re-leasing costs.
Cash balances, available borrowings and capital resources
As of June 30, 1998, the Company had $17.9 million in cash and cash
equivalents. At June 30, 1998, the Company had available $12 million under its
secured revolving credit facility, $13.4 million under its residential
construction facilities, and $78 million under an unsecured line of credit.
The Company's short- and long-term liquidity and capital resources
requirements will essentially be provided from three sources: (1) ongoing
operating income from rental properties, (2) proceeds from development, non-
strategic and other asset sales, and (3) fee services income. As noted above, a
secured revolving line of credit, an unsecured line of credit, and residential
construction loan facilities are available to the Company for meeting liquidity
requirements. The Company currently estimates the debt requirements relating to
its planned development activities will exceed the current commitment under
existing debt facilities.
The secured revolving credit facility and the unsecured line of credit will
mature on November 1, 1998. The Company is currently negotiating with the
lender for a new secured credit line to replace these credit lines; the new
credit line is expected to mature two years from its issuance.
At June 30, 1998, the Company is seeking to obtain two permanent
loans, in the amounts of approximately $152 million and $380 million,
approximately $532 million in aggregate, with certain existing and new lenders.
Subject to certain conditions and approvals, the proceeds of these loans will be
used for a combination of repayment of certain existing secured loans,
paydown of the lines of credit, or to fund development activities. The terms of
these loans are being reviewed and considered by the Company. Subject to certain
conditions and approvals, the closings of the loans are expected to occur in the
third quarter of 1998; however there can be no assurance that the Company will
obtain these two permanent loans.
The Company has entered into treasury lock agreements which fix the
interest rate of fixed-rate debt instruments currently under negotiation. The
Company has identified the significant characteristics and terms of the probable
debt issuances and has designated the treasury locks as hedges. The Company will
capitalize the amount paid or received on settlement and amortize the amount
over the life of the debt agreement as a component of interest expense. In the
event that the Company decides not to issue such debt or if the treasury lock no
longer qualifies as a hedge, the fair value will be recognized in earnings. The
Company enters into treasury rate locks with financial institutions meeting
certain financial criteria, such that the risk of non-performance by
counter-parties is not deemed to be significant.
Debt covenants--Certain loan agreements contain restrictive financial
covenants, the most restrictive of which require the maximum funded debt to net
worth ratio not to exceed 0.75:1, require stockholders' equity to be no less
than $408 million, and require that the Company maintain certain specified
financial ratios. In addition, certain agreements restrict the total leverage
for the Company. The Company was in compliance with all such covenants at June
30, 1998.
ENVIRONMENTAL MATTERS
Many of the Company's properties are in urban and industrial areas and may
have been leased to or previously owned by commercial and industrial tenants
that may have discharged hazardous materials. The Company incurs on-going
environmental remediation costs, and legal costs relating to clean-up,
litigation defense and the pursuit of responsible third parties. Costs incurred
in connection with operating properties and properties previously sold are
expensed. As of June 30, 1998, management has provided a reserve of $11 million
for such costs. These costs are expected to be incurred over an estimated ten-
year period, with a substantial portion incurred over the next few years.
19
<PAGE>
Costs incurred for properties to be sold are deferred and will be charged
to cost of sales when the properties are sold. Costs relating to undeveloped
properties are capitalized as part of development costs. At June 30, 1998, the
Company's estimate of its potential liability for identified environmental costs
relating to properties to be developed or sold ranged from $11.8 million to $37
million. These costs generally will be capitalized as they are incurred over
the course of the estimated development period of approximately 20 years.
Environmental costs capitalized during the six-month period ended June 30, 1998
totaled $1.5 million.
While the Company or outside consultants have evaluated the environmental
liabilities associated with most of the Company's properties, any evaluation
necessarily is based upon then prevailing law, identified site conditions and
the use of sampling methodologies. The Company monitors its exposure to
environmental costs on a regular basis. Although an unexpected event could have
a material impact on the results of operations for any period, the Company does
not believe that such costs for identified liabilities will have a material
adverse effect on its financial position, results of operations or cash flows.
YEAR 2000 COMPLIANCE
The Company has examined the problem presented by the inability of many
computer programs to distinguish the year 2000 from the year 1900 (the "Year
2000 Problem"). The primary software package used by the Company is one
designed by an outside vendor to be Year 2000 compliant (that is, not to be
negatively affected by the occurrence or use of a date in 2000). Other
significant operating software has also been designed by third party vendors who
have represented that the current versions being used are Year 2000 compliant.
Although there can be no assurances, at the present time the Company does not
believe problems likely to be faced by its vendors, lenders or customers because
of the Year 2000 Problem would be likely to have a material adverse impact on
the Company. The Company would be affected by systemic problems in the economy
resulting from the Year 2000 Problem, such as problems in air traffic control,
other transportation systems or overall economic dislocation. In addition, the
Company's development activities could be halted or materially delayed if its
banks are, as a result of the Year 2000 Problem, unable to advance funds on
construction loans, lines of credit or similar facilities. The Company is in
the process of testing all of its systems to ensure Year 2000 compliance. The
Company expects to re-deploy systems resources from its current staff for such
testing so as to eliminate any incremental costs.
RISK FACTORS
This quarterly report on Form 10-Q contains statements which, to the extent
that they are not recitations of historical fact, may constitute "forward-
looking statements" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities and Exchange Act of 1934. All forward-
looking statements involve risks and uncertainties. Any forward-looking
statements in this document are intended to be subject to the safe harbor
protection provided by Section 27A and 21E. Factors that may affect
the Company's operating results and financial condition include (i) changes in
general economic conditions in regions in which the Company's projects are
located, (ii) supply and demand for office, industrial, and residential space,
(iii) the delay in receipt of or the denial of government approvals and
entitlements for development projects, (iv) other public and private development
activity in the areas in which the Company owns property, (v) the ability to
recruit and retain or replace key personnel, (vi) land and building material
costs, (vii) the availability and cost of project financing, (viii) competition
from other property owners, (ix) limitations on or challenges to title to the
Company's properties (x) liability for environmental remediation at properties
owned or formerly owned by the Company or its predecessor, (xi) the Company's
ability to increase development fees, (xii) the Company's ability to sell non-
strategic assets, (xiii) the Company's ability to meet its debt service
obligations, (xiv) changes in the capital markets affecting the ability of the
Company to minimize its interest costs, (xv) the Company's ability to control
the timing of the recognition of deferred tax liability, (xvi) the impact of
discretionary government actions, (xvii) the exposure of the Company's assets to
natural occurrences, such as earthquakes, tornadoes, and similar events, (xviii)
changes in the legal and regulatory environment, including the tax treatment of
the Company's activities and assets, (xix) strength of competition in the areas
in which the Company operates, and (xx) risks related to the performance,
interests, and financial strength of the Company's joint venture partners.
20
<PAGE>
For discussions identifying other important factors that could cause actual
results to differ materially from those anticipated in the forward-looking
statements, see the Company's filings with the Securities and Exchange
Commission filings, "Management's Discussion and Analysis of Financial Condition
and Results of Operations' of Financial Statements included in this Form 10-Q
and Note 15 to the Consolidated Financial Statements included in the Company's
Form 10-K for the year ended December 31, 1997. The Company cautions that the
foregoing list of risk factors is not exclusive. Further, the Company does not
undertake to update any forward-looking statements that may be made from time to
time by or on behalf of the Company.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 28,1998,
stockholders voted as follows with respect to the election of directors:
<TABLE>
<CAPTION>
NOMINEES VOTES FOR VOTES WITHHELD
- ---------------- ---------------- --------------
<S> <C> <C>
Joseph F. Alibrandi 95,715,764 195,876
Daryl J. Carter 95,771,493 140,147
Richard D. Farman 95,767,715 143,925
Christine Garvey 95,769,055 142,585
William M. Kahane 95,766,616 145,024
Donald McNamara 95,767,757 143,883
Leslie D. Michelson 95,766,761 144,879
Nelson C. Rising 95,773,235 138,405
Jacqueline R. Slater 95,773,269 138,371
Thomas M. Steinberg 95,772,788 138,852
Beverly Benedict Thomas 95,771,057 140,583
</TABLE>
On May 28, 1998, William Kahane was elected as Non-Executive Chairman of
the Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Form of Restated Certificate of Incorporation of the
Registrant(1)
3.1A Amendment to Restated Certificate of Incorporation of the
Registrant(6)
3.2 Form of Certificate of Designations, Preferences and
Rights of $3.25 Series A Cumulative Convertible Preferred
Stock(2)
3.3 By-Laws, as amended(11)
3.4 Form of Certificate of Designations, Preferences and
Rights of $3.625 Series B Cumulative Convertible
Exchangeable Preferred Stock(6)
4.1 Form of stock certificate representing Common Stock(1)
4.2 Loan Agreement dated as of February 16, 1994 between the
Registrant and The Prudential Insurance Company of
America(7)
22
<PAGE>
4.3 Loan Agreement dated as of October 28, 1996 between the
Registrant and Bank of America National Trust and Savings
Association(10)
10.1 Exploration Agreement and Option to Lease dated
December 28, 1989 between the Registrant and Santa Fe
Pacific Minerals Corporation(1)
10.2 Registration Rights Agreement dated as of December 29, 1989
among the Registrant, BAREIA, O&Y and Itel(1)
10.2A Letter Agreement dated November 14, 1995 between the
Registrant and California Public Employees' Retirement
System(9)
10.3 Restated Tax Allocation and Indemnity Agreement dated
December 29, 1989 among the Registrant and certain of its
subsidiaries and Santa Fe Pacific Corporation ("SFP")(1)
10.4 State Tax Allocation and Indemnity Agreement dated December
29, 1989 among the Registrant and certain of its
subsidiaries and SFP(1)
10.5 Registrant's Incentive Stock Compensation Plan(3)
10.6 Termination, Substitution and Guarantee Agreement between
ATSF and the Registrant dated December 21, 1990(4)
10.7 Registrant's Amended and Restated 1991 Stock Option
Plan(11)
10.8 Registrant's Amended and Restated Executive Stock Option
Plan(11)
10.9 Form of First Amendment to Registration Rights Agreement
among the Registrant, BAREIA, O&Y and Itel(5)
10.10 Amended and Restated Executive Employment Agreement dated
as of November 29, 1995 between the Registrant and
Nelson C. Rising(9)
10.11 Executive Employment Agreement dated February 10, 1995
between the Registrant and Timothy J. Beaudin(8)
10.12 Employment Agreement dated July 24, 1996 between the
Registrant and Stephen P. Wallace(9)
10.13 Registrant's Amended and Restated 1995 Stock Option
Plan(11)
10.14 Registrant's Amended and Restated 1996 Performance Award
Plan(11)
10.15 Employment Agreement dated February 1, 1996 between the
Registrant and Ira Yellin(10)
10.16 Letter Agreement dated February 1, 1996 between the
Registrant and Ira Yellin(10)
10.17 Amended and Restated Employment Agreement dated September
16, 1997 between the Registrant and Kathleen Smalley(11)
10.18 Letter Agreement dated November 16, 1996 between the
Registrant and Steve Wallace(10)
10.19 Letter Agreement dated November 16, 1996 between the
Registrant and Timothy Beaudin(10)
10.20 Office lease dated November 22, 1996 between Bradbury
Associates, L.P. and the Registrant(10)
10.21 Registrant's Deferred Compensation Plan(11)
23
<PAGE>
21.1 Subsidiaries of the Registrant(11)
27 Financial Data Schedule*
99.1 Report of the Independent Real Estate Appraisers dated
March 12, 1996(9)
The Registrant has omitted instruments with respect to long-term debt
where the total amount of the securities authorized thereunder does not exceed
10 percent of the assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant agrees to furnish a copy of such instrument
to the Commission upon request.
- ------------------------------
*Filed with this report on Form 10-Q.
(1) Incorporated by reference to the Registration Statement on Form 10
(Commission File No. 0-18694) as filed with the Commission on July 18, 1990
("Form 10").
(2) Incorporated by reference to the Form 8 constituting a Post-Effective
Amendment No. 1 to the Form 8-A as filed with the Commission on February
19, 1993.
(3) Incorporated by reference to the Form 8 constituting Post-Effective
Amendment No. 1 to the Form 10 as filed with the Commission on November 20,
1990.
(4) Incorporated by reference to the Form 10-K for the year ended December 31,
1990.
(5) Incorporated by reference to Amendment No. 2 to Form S-3 as filed with the
Commission on February 4, 1993.
(6) Incorporated by reference to the Form 10-K for the year ended December 31,
1993.
(7) Incorporated by reference to Amendment No. 1 to the Form 10-K for the year
ended December 31, 1993.
(8) Incorporated by reference to the Form 10-K for the year ended December 31,
1994.
(9) Incorporated by reference to the Form 10-K for the year ended December 31,
1995.
(10) Incorporated by reference to the Form 10-K for the year ended December 31,
1996.
(11) Incorporated by reference to the Form 10-K for the year ended December 31,
1997.
(b) No reports on Form 8-K were filed for the quarter ended June 30, 1998.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Catellus Development Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CATELLUS DEVELOPMENT CORPORATION
Date: August 14, 1998 By: /s/ STEPHEN P. WALLACE
-------------------------- ------------------------
Stephen P. Wallace
Executive Vice President, Chief
Operating Officer
and Chief Financial Officer
Date: August 14, 1998 By: /s/ PAUL A. LOCKIE
-------------------------- --------------------
Paul A. Lockie
Vice President and Controller
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 17,900
<SECURITIES> 0
<RECEIVABLES> 50,268
<ALLOWANCES> 1,665
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,511,643
<DEPRECIATION> 250,811
<TOTAL-ASSETS> 1,389,548
<CURRENT-LIABILITIES> 0
<BONDS> 677,226
0
0
<COMMON> 1,067
<OTHER-SE> 473,427
<TOTAL-LIABILITY-AND-EQUITY> 1,389,548
<SALES> 43,214
<TOTAL-REVENUES> 127,210
<CGS> 28,748
<TOTAL-COSTS> 74,408
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,009
<INCOME-PRETAX> 32,793
<INCOME-TAX> 13,137
<INCOME-CONTINUING> 19,656
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,656
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
