<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 MARCH 31, 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 May 11, 1998, there were 106,643,322 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 March 31, 1998 and December 31, 1997.............. 2
Consolidated Statement of Operations for the three months ended
March 31, 1998 and 1997.......................................................... 3
Consolidated Statement of Cash Flows for the three months ended
March 31, 1998 and 1997.......................................................... 4
Notes to Consolidated Financial Statements......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 9
PART II. OTHER INFORMATION........................................................................ 18
SIGNATURES......................................................................................... 19
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Properties...................................................... $1,424,667 $1,358,807
Less accumulated depreciation................................... (243,094) (235,832)
---------- ----------
1,181,573 1,122,975
Other assets and deferred charges, net........................... 52,277 50,138
Notes receivable, less allowance................................. 32,254 30,971
Accounts receivable, less allowance.............................. 19,069 19,641
Restricted cash................................................. 906 --
Cash and cash equivalents........................................ 14,461 17,294
---------- ----------
Total............................................. $1,300,540 $1,241,019
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage and other debt.......................................... $ 630,268 $ 568,699
Accounts payable and accrued expenses............................ 45,763 62,681
Deferred credits and other liabilities........................... 42,387 40,035
Deferred income taxes............................................ 120,998 117,705
---------- ----------
Total liabilities...................................... 839,416 789,120
---------- ----------
Commitments and contingencies (Note 8)
Stockholders' equity
Preferred stock............................................. -- --
Common stock - 106,601 and 106,503 shares issued and
outstanding at March 31, 1998 and December 31, 1997.. 1,066 1,065
Paid-in capital............................................. 477,358 476,047
Accumulated deficit......................................... (17,300) (25,213)
---------- ----------
Total stockholders' equity............................. 461,124 451,899
---------- ----------
Total............................................. $1,300,540 $1,241,019
========== ==========
See notes to consolidated financial statements.
</TABLE>
2
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
---------- --------
(UNAUDITED)
<S> <C> <C>
INCOME PRODUCING PROPERTIES
Rental revenue...................................................... $ 35,494 $30,805
Property operating costs............................................ (9,988) (9,056)
Equity in earnings of joint ventures, net........................... 2,694 1,983
-------- -------
28,200 23,732
-------- -------
DEVELOPMENT ACTIVITIES AND FEE SERVICES
Gain on development property sales.................................. 6,139 484
Development and management fee income, net.......................... 755 719
Equity in earnings (losses) of joint ventures, net.................. (42) 58
Land holding costs, net............................................. (407) (173)
-------- -------
6,445 1,088
-------- -------
Interest expense......................................................... (9,562) (9,794)
Depreciation and amortization............................................ (8,185) (7,476)
General and administrative expense....................................... (3,274) (2,615)
(Loss) gain on non-strategic land and other asset sales.................. (53) 3,640
Litigation and environmental costs, net.................................. - 42
Other, net............................................................... (373) -
-------- -------
INCOME BEFORE INCOME TAXES.......................................... 13,198 8,617
-------- -------
INCOME TAX EXPENSE
Current.............................................................. (1,538) (537)
Deferred............................................................. (3,747) (2,971)
-------- -------
(5,285) (3,508)
-------- -------
NET INCOME.......................................................... 7,913 5,109
Preferred stock dividends................................................ - (1,353)
-------- -------
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS........................ $ 7,913 $ 3,756
======== =======
Net income per share of common stock - basic and assuming dilution.. $0.07 $0.05
======== =======
Average number of common shares outstanding - basic................. 106,554 79,776
======== =======
Average number of common shares outstanding - diluted............... 109,776 82,547
======== =======
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED)
<S> <C> <C>
Net income....................................................... $ 7,913 $ 5,109
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................... 8,185 7,476
Deferred income taxes....................................... 3,747 2,971
Amortization of deferred loan fees and other costs.......... 702 711
Equity in earnings of joint ventures........................ (2,652) (2,041)
Operating distributions from joint ventures................. 901 1,423
Cost of non-strategic land and development properties sold.. 7,259 4,170
Gain on sales of other assets............................... - (1,600)
Expenditures for development properties..................... (16,311) (7,792)
Other, net.................................................. (865) 358
Change in operating assets and liabilities.................. (6,809) (5,182)
-------- --------
Net cash provided by operating activities............................. 2,070 5,603
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions............................................ (32,519) -
Capital expenditures............................................. (25,662) (23,114)
Tenant improvements.............................................. (757) (483)
Net proceeds from sale of other assets........................... - 2,623
Contributions to joint ventures.................................. (1,492) -
Restricted cash for future investment............................ (906) -
-------- --------
Net cash used in investing activities................................. (61,336) (20,974)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings....................................................... 81,315 30,061
Repayment of borrowings.......................................... (19,746) (16,518)
Dividends paid................................................... - (4,603)
Redemption of preferred stock.................................... - (395)
Distributions to minority partners............................... (5,994) (2,893)
Proceeds from issuance of common stock........................... 858 726
-------- --------
Net cash provided by financing activities............................. 56,433 6,378
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................ (2,833) (8,993)
Cash and cash equivalents at beginning of period...................... 17,294 23,580
-------- --------
Cash and cash equivalents at end of period............................ $ 14,461 $ 14,587
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)........................ $ 8,758 $ 9,202
Income taxes................................................ $ 2,899 $ 15
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 months
ended March 31, l997.
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 March 31, 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.
NOTE 4. RESTRICTED CASH
At March 31, 1998, proceeds of $906,000 from a development property sale
are being held in a separate cash account at a title 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 MARCH 31,
-------------------------------------------------------------------------
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........................................ $7,913 $ 5,109
Less preferred stock dividends.................... - (1,353)
------ -------
Net income applicable to common
stockholders................................... 7,913 106,554 $0.07 3,756 79,776 $0.05
===== =====
Effect of dilutive securities: stock options...... - 3,222 - 2,771
------ ------- ------- ------
Net income applicable to common
stockholders assuming dilution................. $7,913 109,776 $0.07 $ 3,756 82,547 $0.05
====== ======= ===== ======= ====== =====
</TABLE>
Preferred stock convertible into 16,574,000 shares of common stock was
outstanding at March 31, 1997, but was not included in the computation of
diluted income per share because the assumed conversion would have been anti-
dilutive for the period.
NOTE 6. MORTGAGE AND OTHER DEBT
Mortgage and other debt at March 31, 1998 and December 31, 1997 are
summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(in thousands)
<S> <C> <C>
First mortgage loan - Prudential.. $250,135 $251,589
Secured revolving credit line..... 228,100 192,100
First mortgage loans.............. 65,471 65,843
Residential construction loans.... 8,212 6,453
Assessment district bonds......... 17,624 17,825
Term loan - secured............... 12,893 12,929
Secured promissory notes.......... 47,489 21,570
Other loans....................... 344 390
-------- --------
Total mortgage and other debt..... $630,268 $568,699
======== ========
Due in one year................... $258,401 $218,933
======== ========
</TABLE>
In connection with a February 1998 acquisition of approximately 5,300
acres of land and 1,588 leases, the Company issued a $26 million secured
promissory note. The note bears interest at 7.23% and matures on February 24,
2003.
6
<PAGE>
Interest costs relating to mortgage and other debt for the three-month
periods ended March 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Total interest incurred.............................. $ 12,545 $ 11,274
Interest capitalized................................. (2,983) (1,480)
-------- --------
Interest expensed................................... $ 9,562 $ 9,794
======== ========
</TABLE>
NOTE 7. PROPERTIES
Net book value by property type at March 31, 1998 and December 31, 1997
consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Income-producing properties:
Industrial buildings........................................................................ $ 349,175 $ 351,704
Office buildings............................................................................ 101,532 102,934
Retail buildings............................................................................ 82,813 83,612
Land development............................................................................ 334,914 331,360
Land leases................................................................................. 40,536 8,036
---------- ----------
908,970 877,646
---------- ----------
Land holdings:
Developable properties...................................................................... 253,200 229,202
Natural resources........................................................................... 5,458 4,260
Properties held for sale.................................................................... 28,870 28,129
---------- ----------
287,528 261,591
---------- ----------
Other (including proportionate share of joint ventures'
net deficits of $25,070 and $26,464)........................................................ (14,925) (16,262)
---------- ----------
$ 1,181,573 $1,122,975
========== ==========
</TABLE>
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.
7
<PAGE>
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 owned. 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 which 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 March 31, 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 $11.9 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.
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.
After additional calls for the redemption of the outstanding preferred
stock were completed during the second quarter of 1997, the Company has no
remaining outstanding preferred stock.
8
<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 three months ended March 31, 1998 and 1997
Income-Producing Properties
- ---------------------------
Rental revenue and property operating costs for the Company's income-
producing properties for the three months ended March 31, 1998 and 1997 are
summarized below:
<TABLE>
<CAPTION>
RENTAL REVENUES PROPERTY OPERATING COSTS
----------------------------------- -------------------------------------------
THREE MONTHS ENDED MARCH 31, THREE MONTHS ENDED MARCH 31,
1998 1997 DIFFERENCE 1998 1997 DIFFERENCE
--------- ---------- ----------- ----------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Industrial buildings.............. $18,824 $15,591 $3,233 $3,977 $3,267 $710
Office buildings.................. 7,905 7,075 830 3,055 2,879 176
Retail buildings.................. 3,371 3,456 (85) 953 957 (4)
Land development (1).............. 2,719 2,767 (48) 1,745 1,719 26
Land leases....................... 2,675 1,916 759 258 234 24
------- ------- ------ ------- ------- -------
$35,494 $30,805 $4,689 $9,988 $9,056 $932
======= ======= ====== ======= ======= =======
(1) This category represents interim income-producing uses of properties intended for mixed-use development.
Building square footage owned, square footage leased, and occupancy are as follows:
AS OF MARCH 31,
-------------------------------
1998 1997
----------- ----------
(in thousands, except percentages)
Industrial buildings
Square feet owned....................................................... 14,326 12,821
Square feet leased...................................................... 13,974 12,370
Percent leased.......................................................... 97.5% 96.5%
Office buildings
Square feet owned....................................................... 1,620 1,683
Square feet leased...................................................... 1,550 1,477
Percent leased.......................................................... 95.7% 87.8%
Retail buildings
Square feet owned....................................................... 928 928
Square feet leased...................................................... 862 837
Percent leased.......................................................... 92.9% 90.2%
Land development
Square feet owned....................................................... 1,220 1,231
Square feet leased...................................................... 1,001 1,124
Percent leased.......................................................... 82.0% 91.3%
Total
Square feet owned....................................................... 18,094 16,663
Square feet leased...................................................... 17,387 15,808
Percent leased.......................................................... 96.1% 94.9%
</TABLE>
9
<PAGE>
Since March 31, 1997, the Company added ten newly constructed industrial
buildings totaling approximately 2.1 million square feet to the industrial
income-producing portfolio and sold two industrial buildings totaling
approximately 588,000 square feet. The increase in revenue from industrial
buildings for the three months ended March 31, 1998 compared to the same
period in 1997 was $3.2 million. Approximately $1.6 million of the increase
was attributable to base rents for the net additions and approximately $0.6
million was attributable to tenant pass-through charges and other income
associated with these net additions. Increases of approximately $1.0 million
in rental rates and tenant pass-through charges were attributable to the
existing portfolio. Operating costs for the industrial portfolio increased by
$0.7 million primarily because of property taxes and other operating expenses
related to the new construction.
Rental revenue for the Company's office portfolio increased by $0.8
million for the three months ended March 31, 1998 compared to the same period in
1997 because of higher rental rates and occupancy. Operating costs for office
buildings increased by $0.2 million principally as a result of higher utility
costs and property taxes.
The company's retail rental revenue decreased by $0.1 million primarily
because of a decrease in tenant pass-through charges. Property operating costs
for the retail buildings remained approximately the same.
Revenue from land leases increased by $0.8 million primarily because of
rental revenues received from new tenant leases, as a result of the acquisition
of $32.5 million of ground leases in February 1998, and from higher percentage
rents from existing ground leases.
Income-producing joint venture earnings, net, increased by $0.7
million principally because of higher occupancies and room rates in certain
hotel joint ventures and higher occupancy for an office building joint venture.
Development Activities and Fee Services
- ---------------------------------------
Gain on development property sales was $6.1 million in the three months
ended March 31, 1998 compared to $0.5 million for the same period in 1997,
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997 DIFFERENCE
-------- -------- ----------
(in thousands)
<S> <C> <C> <C>
Commercial Sales:
Sales..................................... $11,556 $1,205 $10,351
Cost of sales............................. 6,721 565 6,156
------- ------ -------
Gain.......................... 4,835 640 4,195
------- ------ -------
RESIDENTIAL SALES:
Sales..................................... 5,922 2,447 3,475
Cost of sales............................. 4,618 2,603 2,015
------- ------ -------
Gain (loss)................... 1,304 (156) 1,460
------- ------ -------
TOTAL GAIN ON DEVELOPMENT PROPERTY SALES.. $ 6,139 $ 484 $ 5,655
======= ====== =======
</TABLE>
The 1998 results include the sale of a commercial development by a joint
venture in Texas and the sale of an 800 lot residential project in California.
In addition, the Company sold 12 homes in the three months ended March 31, 1998
compared to 4 homes during the same period in 1997.
10
<PAGE>
Following is a summary of development property sales under contract but
not closed at March 31, 1998 and 1997.
<TABLE>
<CAPTION>
MARCH 31,
-------------------
1998 1997
-------- ---------
(in thousands)
<S> <C> <C>
Commercial.......................... $80,389 $13,157
======= =========
Residential (lot and unit sales)
Owned projects.............. $29,478 $ -
======= =========
Joint venture projects (1).. $17,041 $33,540
======= =========
</TABLE>
(1) The amounts shown are 100% of the gross sales price; the Company is
entitled to receive 25% of the net profits from these joint ventures.
Development and management fee income, net increased less than $0.1 million
for the three months ended March 31, 1998 compared to the same period in 1997.
Equity in earnings (losses) of development joint ventures, net decreased by
$0.1 million for the three months ended March 31, 1998 compared to the same
period in 1997. The decrease is primarily attributable to lower residential
joint venture earnings.
Land holding costs, net for the three months ended March 31, 1998 increased
approximately $0.2 million compared to the same period in 1997 primarily because
the land holding costs in 1997 included an offset for interim ground lease
rental income. This lease was terminated in October 1997.
Other Items on the Statement of Operations
- ------------------------------------------
Interest expense was $0.2 million lower in the three months ended March 31,
1998 compared to the same period in 1997 as a result of an increase in
capitalized interest related to higher development activity, partially offset by
higher interest expense for buildings completed in 1998.
Following is a summary of interest costs for the three months ended March
31, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997 DIFFERENCE
-------- -------- -----------
(in thousands)
<S> <C> <C> <C>
Total interest incurred.. $12,545 $11,274 $ 1,271
Interest capitalized..... (2,983) (1,480) (1,503)
------- ------- -------
Interest expensed........ $ 9,562 $ 9,794 $ (232)
======= ======= =======
</TABLE>
General and administrative expense increased by $0.7 million for the
three months ended March 31, 1998 compared to the same period in 1997 primarily
because of an increase overall in the Company's activities.
11
<PAGE>
The decrease in gain on sales of non-strategic land and other property from
the three months ended March 31, 1998 compared to the same period in 1997 is
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997 DIFFERENCE
------ -------- ------------
(in thousands)
<S> <C> <C> <C>
Sales.................. $ 293 $7,481 $ (7,188)
Cost of sales.......... 346 3,841 (3,495)
----- ------ --------
(Loss) gain.. $ (53) $3,640 $ (3,693)
===== ====== ========
</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 March 31, 1998, the Company
sold $179.3 million of non-strategic assets. In addition, at March 31, 1998,
$62.9 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 land assets to be substantially lower than
the levels in prior periods.
Other, net increased by $0.4 million primarily because of an increase in
consulting fees.
Preferred Stock Dividends
- -------------------------
Preferred stock dividends declined by $1.4 million from the three months
ended March 31, 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.
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.
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 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, for an understanding of its operating results.
EBDDT is calculated by taking net income 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 non-recurring items and
are excluded from the EBDDT calculation.
12
<PAGE>
EBDDT is reconciled to net income as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
NET INCOME APPLICABLE TO COMMON STOCKHOLDERS................ $ 7,913 $ 3,756
Depreciation and amortization............................ 8,185 7,476
Deferred income taxes.................................... 3,747 2,971
Gain (loss) on non-strategic land and other asset sales.. 53 (3,640)
------- -------
EARNINGS BEFORE DEPRECIATION AND DEFERRED TAXES............. $19,898 $10,563
======= =======
Average number of common shares outstanding - basic 106,554 79,776
======= =======
Average number of common shares outstanding - diluted 109,776 82,547
======= =======
</TABLE>
The $9.3 million increase in EBDDT in 1998 compared to 1997 was primarily
because of an increase in gain on development property sales, improved operating
results from income-producing assets, and a reduction in preferred stock
dividends.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities
Cash provided by operating activities reflected in the statement of
cash flows for the three-month periods ended March 31, 1998 and 1997 and was
$2.1 million and $5.6 million, respectively. This $3.5 million decrease is
primarily due to an $8.5 million increase in 1998 expenditures for development
of residential and commercial properties developed for sale offset by an
increase in cashflow from income-producing properties and proceeds from sales
of development property.
Capital expenditures for development properties for the three months ended
March 31, 1998 and 1997 are included in the schedule of capital expenditures in
the discussion of cash flows from investing activities.
Cash generated from sales of non-strategic land and development property
was $10.9 million and $5.2 million for the three-month periods ended March 31,
1998 and 1997, respectively. The amount for 1998 includes $7.2 million in
proceeds from the sale of a joint venture. 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 three months ended March 31, 1998 and 1997 was $61.3 million
and $21.0 million respectively. The increase between 1998 and 1997 is primarily
because of a $35.3 million increase in capital expenditures.
13
<PAGE>
Capital expenditures reflected in the statement of cash flows include the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1998 1997 DIFFERENCE
-------- -------- ----------
(in millions)
<S> <C> <C> <C>
Capital Expenditures Included in Cash Flow From Operating Activities(1)
Capital expenditures for residential and industrial development properties.. $14.6 $ 7.4 $ 7.2
Capitalized interest and property taxes..................................... 1.7 .4 1.3
----- ----- -----
Subtotal............................................................... 16.3 7.8 8.5
----- ----- -----
Capital Expenditures Included in Cash Flow From Investing Activities(2)
Construction and building improvements...................................... 15.0 17.0 (2.0)
Commercial property acquisitions............................................ 32.5 - 32.5
Predevelopment.............................................................. 3.9 1.9 2.0
Infrastructure and other.................................................... 5.3 3.0 2.3
Capitalized interest and property taxes..................................... 1.4 1.2 .2
Tenant improvements......................................................... .8 .5 .3
----- ----- -----
Subtotal............................................................. 58.9 23.6 35.3
----- ----- -----
Total capital expenditures.................................................. $75.2 $31.4 $43.8
===== ===== =====
</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 accounts.
Capital expenditures for residential and industrial development
properties - relates to the development of residential and for-sale industrial
development properties. For the three months ended March 31, 1998, the Company
started construction on 90 residential units and completed 15 units compared to
50 starts and 18 completions for the same period in 1997.
Construction and building improvements - relates primarily to
development of new properties held for lease and improvements to existing
buildings. Development activity is summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1998 1997
----------------- -----------
(in square feet)
<S> <C> <C>
Under construction, beginning of period..... 3,774,000 2,286,961
Construction starts......................... 100,000 43,000
Completed - retained in portfolio........... - (308,761)
Completed - design/build................... (235,000) -
----------- ---------
Under construction, end of period........... 3,639,000(1) 2,021,200
=========== =========
Contracts signed, construction not started.. 884,000 -
=========== =========
</TABLE>
(1) Includes 690,000 square feet of "design-build" development for third party
landowners.
As of March 31, 1998, the Company had 3.6 million square feet under
construction, of which 3.5 million square feet is expected to be completed in
1998. Of the 3.6 million square feet under construction, approximately 1.9
million square feet is expected to be added to the Company's portfolio.
Property acquisitions - In February 1998, the Company executed a
contract subject to various conditions to acquire a large portfolio of land
valued at approximately $55 million in the aggregate. The majority of this
portfolio is subject to existing land leases. The first of three closings
occurred on February 23, 1998, in the amount of $32.5 million. Subsequent
closings are scheduled to occur in May and August 1998. There can be no
assurance that all conditions for the remaining closings will be satisfied.
14
<PAGE>
Predevelopment - relates primarily to amounts incurred in obtaining
entitlements for the Company's major mixed-use projects. The increase in
predevelopment costs in 1998 compared to 1997 relates primarily to activity at
the Mission Bay and Pacific Commons Projects.
Infrastructure and other - represents primarily infrastructure costs
incurred in connection with the Company's major mixed-use and development
projects. The increase in 1998 compared to 1997 relates primarily to an overall
increase in development activity.
Capitalized interest and property taxes - represents construction period
interest and property taxes capitalized to the Company's development projects.
The increase in 1998 compared to 1997 is due to the increase in development
activity, as noted above.
Cash flow from financing activities
Net cash provided by financing activities reflected in the statement of
cash flows increased by $50.1 million in 1998 compared to 1997. This increase
is primarily because of a $48.0 million increase in net borrowings used to
finance development projects and a $4.6 million decrease in preferred stock
dividends paid offset by a $3.1 million increase in distributions to minority
partners.
As of March 31, 1998, the Company had total outstanding debt of $630.3
million, of which 59.2% was non-recourse to the Company and secured by certain
property of the Company, 40.4% was recourse to the Company and also secured by
certain property, and 0.4% was unsecured. During the next twelve months,
approximately $258.4 million of debt matures, consisting primarily of the
secured line of credit but also including construction financing, term loans,
and first mortgage loans. The Company expects that the maturing debt will most
likely be resolved through a combination of long-term fixed-rate financing
combined with a restructure of the secured line of credit. All other maturing
debt is expected to be repaid upon sale of the property securing it, extended,
refinanced, or repaid.
Capital commitments
As of March 31, 1998, the Company had approximately $39.9 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 March 31, 1998, the Company had $15.4 million in cash and cash
equivalents of which $0.9 million is restricted. At March 31, 1998, the
Company had available $36.9 million under its modified secured revolving
credit facility, $12.2 million under its residential construction facilities,
and $25 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 Company believes it will be able to obtain the
additional required debt capacity to complete its planned development
activities.
15
<PAGE>
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 $385 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 March 31, 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 who
may have discharged hazardous materials. The Company incurs on-going
environmental remediation costs, including clean-up costs, consulting fees for
environmental studies and investigations, monitoring 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 March 31, 1998, management has provided a
reserve of approximately $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 five years.
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 March 31, 1998, the
Company's estimate of its potential liability for identified environmental costs
relating to properties to be developed or sold ranged from $11.9 million to
$37.0 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 three months ended March 31, 1998
totaled $2.2 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
sampling methodologies. The Company monitors its exposure to environmental
costs for properties it owns on a regular basis. Properties formerly owned by
the Company or its predecessors are not generally accessible for assessment.
Although an unexpected event could have a material impact on the results of
operations for any period, based on existing assessments, 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 redeploy systems resources from its current staff for such
testing so as to eliminate any incremental costs.
16
<PAGE>
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 most typically 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) liability for environmental remediation at the
Company's properties, (x) the Company's ability to increase development fees,
(xi) the Company's ability to sell non-strategic assets, (xii) changes in the
capital markets affecting the ability of the Company to minimize its interest
cost, (xiii) the Company's ability to control the timing of the recognition of
deferred tax liability, (xiv) the impact of discretionary government actions,
(xv) the exposure of the Company's assets to natural occurrences, such as
earthquakes, tornadoes, and similar events, (xvi) changes in the legal and
regulatory environment, including the tax treatment of the Company's activities
and assets, and (xvii) risks related to the performance, interests, and
financial strength of the Company's joint venture partners.
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 this Form 10-Q and the Company's Form 10-K for the
year ended December 31, 1997, Note 8 to the Consolidated 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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. OTHER INFORMATION
FORT CARSON, COLORADO. In April 1997, Catellus Residential Group
("CRG"), along with a proposed co-investor, responded to a Department of Defense
("DOD") Request for Proposal for the rehabilitation and construction of
approximately 2,600 housing units at Fort Carson, Colorado. The Department of
the Army ("DOA") initially designated CRG and its proposed co-investor as the
"apparent selected offeror", but two competing offerors initiated lawsuits
challenging this designation. In settlement of the lawsuits, the DOA has
committed not to go forward with the proposed award to CRG without a further
bidding process. It is not possible to predict either the timing or extent of
any subsequent bidding process, or the likelihood that CRG will be awarded any
contract in connection with this project.
MISSION BAY, CALIFORNIA. The City and County of San Francisco
published the Subsequent Environmental Impact Report (EIR) on April 11, 1998,
for the development of the Company's Mission Bay project. The publication of the
EIR commenced a 45-day public comment period, which has been extended by two
weeks. At the end of the comment period, the Company will address the comments
and finalize the EIR in accordance with the usual procedures in California and
San Francisco.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. 27 Financial Data Schedule
18
<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
<TABLE>
<S> <C>
Date: May 15, 1998 By: /s/ Stephen P. Wallace
----------------------- ------------------------
Stephen P. Wallace
Executive Vice President, Chief Operating Officer
and Chief Financial Officer
Date: May 15, 1998 By: /s/ Paul A. Lockie
----------------------- ------------------------
Paul A. Lockie
Vice President and Controller
</TABLE>
19
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(Article 5 of Regulation S-X)
20
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,461
<SECURITIES> 0
<RECEIVABLES> 53,272
<ALLOWANCES> 1,949
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,424,667
<DEPRECIATION> 243,094
<TOTAL-ASSETS> 1,300,540
<CURRENT-LIABILITIES> 0
<BONDS> 630,268
0
0
<COMMON> 1,066
<OTHER-SE> 460,058
<TOTAL-LIABILITY-AND-EQUITY> 1,300,540
<SALES> 17,771
<TOTAL-REVENUES> 57,143
<CGS> 11,685
<TOTAL-COSTS> 34,383
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 9,562
<INCOME-PRETAX> 13,198
<INCOME-TAX> 5,285
<INCOME-CONTINUING> 7,913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,913
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
