<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, 1999 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 11, 1999, there were 107,090,603 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, 1999 and December 31, 1998............ 2
Consolidated Statement of Operations for the three months and six months ended
June 30, 1999 and 1998......................................................... 3
Consolidated Statement of Cash Flows for the six months ended
June 30, 1999 and 1998......................................................... 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........................................................................ 23
SIGNATURES........................................................................................ 24
EXHIBIT INDEX..................................................................................... 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,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Properties..................................................................... $1,794,700 $1,660,554
Less accumulated depreciation.................................................. (281,057) (265,077)
---------- ----------
1,513,643 1,395,477
Other assets and deferred charges, net......................................... 87,978 80,240
Notes receivable, less allowance............................................... 21,906 15,275
Accounts receivable, less allowance............................................ 27,958 32,289
Restricted cash and investments................................................ 104,122 49,284
Cash and cash equivalents...................................................... 23,798 52,975
---------- ----------
Total................................................................ $1,779,405 $1,625,540
========== ==========
Liabilities and stockholders' equity
Mortgage and other debt........................................................ $ 920,614 $ 873,207
Accounts payable and accrued expenses.......................................... 83,789 81,951
Deferred credits and other liabilities......................................... 48,786 40,608
Deferred income taxes.......................................................... 151,118 138,533
---------- ----------
Total liabilities.................................................... 1,204,307 1,134,299
---------- ----------
Minority interests............................................................. 47,902 1,012
---------- ----------
Commitments and contingencies (Note 8)
Stockholders' equity
Common stock - 107,070 and 106,808 shares issued at June 30, 1999 and
December 31, 1998, respectively........................................ 1,071 1,068
Paid-in capital......................................................... 482,413 479,636
Accumulated earnings.................................................... 43,712 9,525
---------- ----------
Total stockholders' equity........................................... 527,196 490,229
---------- ----------
Total........................................................... $1,779,405 $1,625,540
========== ==========
</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 June 30, Six Months Ended June 30,
--------------------------- --------------------------
1999 1998 1999 1998
----------- ---------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Rental properties
Rental revenue........................................... $ 41,291 $ 37,786 $ 82,770 $ 73,280
Property operating costs................................. (11,256) (10,085) (22,812) (20,073)
Equity in earnings of operating joint ventures, net...... 3,153 2,986 6,589 5,680
-------- -------- -------- --------
33,188 30,687 66,547 58,887
-------- -------- -------- --------
Other property activities and fee services
Gain on property sales................................... 10,338 3,957 24,644 10,096
Development and management fee income, net............... 1,299 2,388 1,970 3,143
Equity in earnings of development joint ventures, net.... 4,287 158 4,419 116
Land holding costs, net.................................. (464) (698) (769) (1,105)
-------- -------- -------- --------
15,460 5,805 30,264 12,250
-------- -------- -------- --------
Interest expense............................................ (9,640) (10,447) (19,046) (20,009)
Depreciation and amortization............................... (9,422) (8,586) (18,584) (16,771)
General and administrative expense.......................... (3,749) (3,089) (7,593) (6,363)
Gain on non-strategic asset sales........................... 2,904 4,423 3,890 4,370
Other, net.................................................. 1,087 802 1,797 429
-------- -------- -------- --------
Income before income taxes.................................. 29,828 19,595 57,275 32,793
-------- -------- -------- --------
Income tax expense
Current................................................ (4,313) (2,052) (9,210) (3,590)
Deferred............................................... (7,708) (5,800) (13,878) (9,547)
-------- -------- -------- --------
(12,021) (7,852) (23,088) (13,137)
-------- -------- -------- --------
Net income............................................... $ 17,807 $ 11,743 $ 34,187 $ 19,656
======== ======== ======== ========
Net income per share
Basic................................................. $0.17 $0.11 $0.32 $0.18
======== ======== ======== ========
Assuming dilution..................................... $0.16 $0.11 $0.31 $0.18
======== ======== ======== ========
Average number of common shares outstanding - basic...... 106,974 106,675 106,903 106,615
======== ======== ======== ========
Average number of common shares outstanding - diluted.... 109,350 109,713 109,264 109,745
======== ======== ======== ========
</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,
------------------------
1999 1998
----------- ---------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................................................. $ 34,187 $ 19,656
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization......................................................... 18,584 16,771
Deferred income taxes................................................................. 13,878 9,547
Amortization of deferred loan fees and other costs.................................... 2,184 1,363
Equity in earnings of joint ventures.................................................. (11,008) (5,796)
Operating distributions from joint ventures........................................... 26,905 4,875
Gain on sale of operating property.................................................... (10,270) (3,650)
Cost of properties and non-strategic assets sold...................................... 81,473 21,471
Expenditures for development properties............................................... (136,464) (64,099)
Other property acquisitions........................................................... (289) (9,214)
Other, net............................................................................ 351 (1,602)
Change in operating assets and liabilities................................................. (1,343) 8,486
--------- --------
Net cash provided by (used in) operating activities............................................. 18,188 (2,192)
--------- --------
Cash flows from investing activities:
Proceeds from sale of operating property................................................... 13,926 3,691
Property acquisitions...................................................................... (17,709) (13,800)
Capital expenditures for investment properties............................................. (73,067) (45,432)
Tenant improvements........................................................................ (1,140) (461)
Contributions to joint ventures............................................................ (9,627) (2,624)
Restricted cash for future investment...................................................... (54,838) (6,925)
--------- --------
Net cash used in investing activities........................................................... (142,455) (65,551)
--------- --------
Cash flows from financing activities:
Borrowings................................................................................. 156,460 148,871
Repayment of borrowings.................................................................... (110,208) (77,199)
Contributions from minority partners....................................................... 50,000 797
Distributions to minority partners......................................................... (3,110) (5,999)
Proceeds from issuance of common stock..................................................... 1,948 1,879
--------- --------
Net cash provided by financing activities....................................................... 95,090 68,349
--------- --------
Net (decrease) increase in cash and cash equivalents............................................ (29,177) 606
Cash and cash equivalents at beginning of period................................................ 52,975 17,294
--------- --------
Cash and cash equivalents at end of period...................................................... $ 23,798 $ 17,900
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized).................................................. $ 16,910 $ 18,357
Income taxes.......................................................................... $ 6,670 $ 5,813
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS
Catellus Development Corporation, together with its consolidated
subsidiaries (the "Company") is a diversified real estate operating company with
a large portfolio of rental properties and developable land that manages and
develops real estate for its own account and that of others (interests of third
parties are separately reflected as minority interests in the accompanying
balance sheet). The Company's development portfolio of industrial, residential,
retail, office, and joint venture projects is primarily located in major markets
in California and five other states. The Company's rental 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 1998 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. RESTRICTED CASH AND INVESTMENTS
Of the total restricted cash and investments of $104.1 million at June 30,
1999, $33.6 million represents proceeds from development property sales being
held in separate cash accounts at trust companies in order to preserve the
Company's options of reinvesting the proceeds on a tax-deferred basis. In
addition, restricted investments of $26.5 million at June 30, 1999 represent
certificates of deposits used to guarantee completion of building construction
and lease performance for certain properties that secure debt, and $44.0 million
represents funds which will become available to the Company, once adequate
collateral is identified and provided to the issuing party.
NOTE 4. INCOME PER SHARE
Net income per share of common stock is computed by dividing net income 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,
---------------------------------------------------------------------
1999 1998
------------------------------- --------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------- ------- --------- ------- ------ ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net income........................................ $17,807 106,974 $0.17 $11,743 106,675 $0.11
===== =====
Net effect of dilutive securities:
stock options................................... -- 2,376 -- 3,038
------- ------- ------- -------
Net income assuming dilution...................... $17,807 109,350 $0.16 $11,743 109,713 $0.11
======= ======= ===== ======= ======= =====
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------------
1999 1998
------------------------------- --------------------------------
Net Per Share Net Per Share
Income Shares Amount Income Shares Amount
------- ------- --------- ------- ------ ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net income........................................ $34,187 106,903 $0.32 $19,656 106,615 $0.18
===== =====
Net effect of dilutive securities:
stock options................................... -- 2,361 -- 3,130
------- ------- ------- -------
Net income assuming dilution...................... $34,187 109,264 $0.31 $19,656 109,745 $0.18
======= ======= ===== ======= ======= =====
</TABLE>
NOTE 5. MORTGAGE AND OTHER DEBT
Mortgage and other debt at June 30, 1999 and December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- -------------
(In thousands)
<S> <C> <C>
First mortgage loans............................. $558,011 $557,180
Secured revolving credit line.................... 161,135 190,135
Acquisition secured promissory notes............. 32,855 34,311
Unsecured revolving credit lines................. 54,100 24,700
Construction and acquisition loans - secured...... 43,950 3,975
Assessment district bonds........................ 21,029 19,585
Term loan - secured.............................. 12,697 12,778
Secured promissory notes......................... 27,332 21,360
Other loans...................................... 9,505 9,183
-------- --------
Total mortgage and other debt............... $920,614 $873,207
======== ========
Due in one year.................................. $ 53,741 $ 10,059
======== ========
</TABLE>
In April 1999, the residential subsidiary increased its variable rate
(prime or LIBOR plus 1.5%) $60 million unsecured line of credit facility to $80
million. The borrowing capacity at any point in time varies as property and
homes are acquired, built, and sold. At June 30, 1999, the capacity was $60.0
million, of which $54.1 million was drawn. This line matures on October 1, 2000.
In May 1999, the Company closed a variable rate (three months LIBOR plus
1.8%) secured construction loan with a total capacity of $14.0 million. This
loan had an outstanding balance of $9.0 million at June 30, 1999, and matures in
November 2000.
In May 1999, the residential subsidiary closed a variable rate (prime plus
0.50%) secured construction loan with a total capacity of $11.5 million. This
loan had an outstanding balance of $1.5 million at June 30, 1999, and matures in
May 2001.
In June, 1999, the residential subsidiary closed a variable rate (prime
plus 0.50%) secured acquisition loan with a total capacity of $20.4 million.
This loan had an outstanding balance of $19.7 million at June 30, 1999, and
matures in November 1999.
In June 1999, the remaining $4.6 million of the 1998 6.65% first mortgage
loans was funded as collateral provisions were met. Effective rate is 6.81% when
considering financing costs.
6
<PAGE>
In June 1999, in connection with acquisitions of land and land leases, a
subsidiary of the Company issued $1.2 million of secured promissory notes. The
Company intends to sell these assets. Accordingly, these collaterized promissory
notes are paid down on a pro-rata basis upon sales of these assets.
Interest costs relating to mortgage and other debt for the three-month and
six-month periods ended June 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Total interest incurred............. $16,099 $13,512 $ 31,399 $26,057
Interest capitalized................ (6,459) (3,065) (12,353) (6,048)
------- ------- -------- -------
Interest expensed.............. $ 9,640 $10,447 $ 19,046 $20,009
======= ======= ======== =======
</TABLE>
NOTE 6. PROPERTIES
Book value by property type at June 30, 1999 and December 31, 1998
consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
(In thousands)
Rental properties:
Industrial buildings.............................................................. $ 588,511 $ 547,903
Office buildings.................................................................. 197,199 205,024
Retail buildings.................................................................. 94,488 95,729
Land leases (1)................................................................... 67,162 65,245
Investment in joint ventures...................................................... (45,256) (48,330)
---------- ----------
902,104 865,571
---------- ----------
Developable Properties:
Industrial........................................................................ 176,679 168,453
Residential....................................................................... 127,351 72,413
Mixed-use......................................................................... 299,839 294,084
Retail, office and other.......................................................... 24,405 20,532
Resources......................................................................... 6,267 6,445
Properties held for sale.......................................................... 9,436 10,144
Investment in joint ventures...................................................... 51,099 62,203
---------- ----------
695,076 634,274
---------- ----------
Work-in-process:
Industrial........................................................................ 94,742 103,456
Residential....................................................................... 78,582 34,350
---------- ----------
173,324 137,806
---------- ----------
Other.................................................................................. 24,196 22,903
---------- ----------
Gross book value....................................................................... 1,794,700 1,660,554
Accumulated depreciation............................................................... (281,057) (265,077)
---------- ----------
Net book value......................................................................... $1,513,643 $1,395,477
========== ==========
</TABLE>
(1) This category includes approximately $35.4 million of land which the
Company intends to sell.
7
<PAGE>
NOTE 7. SEGMENT REPORTING
The Company's reportable segments are: Asset Management, Commercial
Development, Residential Development and Mixed-Use Development. Each segment is
evaluated on the excess of revenues over costs, exclusive of depreciation,
amortization, gain on non-strategic asset sales, and income taxes. Inter-
segment gains and losses are not recognized.
Interim financial data by reportable segment is as follows:
<TABLE>
<CAPTION>
Asset Commercial Residential Mixed-Use Others Consolidated
Management Development Development Development (a) Total
---------- ----------- ----------- ----------- -------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended June 30, 1999
Revenues from external customers......................... $ 46,433 $49,877 $16,489 $ 3,361 $ 7,332 $123,492
Interest revenue......................................... 1,512 477 350 1 229 2,569
Interest expense, net of capitalized..................... (12,082) -- -- (205) 2,647 (9,640)
Segment earnings before depreciation, amortization,
gain on non-strategic asset sales and income taxes..... 20,861 7,518 7,407 1,538 (978) 36,346
Depreciation and amortization............................ (8,299) (163) -- (382) (578) (9,422)
Three Months Ended June 30, 1998
Revenues from external customers......................... 36,281 5,513 13,195 3,189 7,402 65,580
Interest revenue......................................... 34 213 420 2 175 844
Interest expense, net of capitalized..................... (11,227) -- -- (554) 1,334 (10,447)
Segment earnings before depreciation, amortization,
gain on non-strategic asset sales and income taxes.... 16,791 2,764 1,213 363 2,627 23,758
Depreciation and amortization............................ (7,268) (129) (1) (698) (490) (8,586)
Six Months Ended June 30, 1999
Revenues from external customers......................... $137,534 $54,469 $32,316 $ 6,426 $14,763 $245,508
Interest revenue......................................... 1,591 714 573 4 443 3,325
Interest expense, net of capitalized..................... (24,270) -- -- (382) 5,606 (19,046)
Segment earnings before depreciation, amortization,
gain on non-strategic asset sales and income taxes..... 50,489 7,604 11,391 2,514 (29) 71,969
Depreciation and amortization............................ (16,353) (434) -- (729) (1,068) (18,584)
Six Months Ended June 30, 1998
Revenues from external customers......................... 78,407 10,184 19,486 6,377 10,384 124,838
Interest revenue......................................... 71 240 420 4 321 1,056
Interest expense, net of capitalized..................... (21,837) -- -- (1,197) 3,025 (20,009)
Segment earnings before depreciation, amortization,
gain on non-strategic asset sales and income taxes..... 37,604 2,921 2,859 548 1,262 45,194
Depreciation and amortization............................ (14,534) (281) (2) (991) (963) (16,771)
</TABLE>
(a) Includes a company that manages land and other properties for third parties
and disposes of various properties, and corporate. None of those segments
meets any of the quantitative thresholds for determining reportable
segments.
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, management believes that, considering current
insurance coverages and the substantial legal defenses available, 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.
8
<PAGE>
Inherent in the operations of the real estate business is the possibility
that environmental liability may arise from the current or past ownership, or
current or past operation, of real properties. While the Company or outside
consultants have evaluated the environmental liabilities associated with most of
the properties currently owned by the Company, any evaluation necessarily is
based upon then-prevailing law, identified site conditions and the use of
sampling methodologies. 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 other
responsible parties, and the extent to which such costs are recoverable from
insurance.
At June 30, 1999, management estimates that future costs for remediation of
identified or suspected environmental contamination on operating properties and
properties previously sold approximate $10.1 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 $11.3 million to $28.8
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 that 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
each property extensively on a regular basis. Also, the Company does not
generally have access to properties sold in the past that could create
environmental liabilities. Such estimates are not precise and may change as a
result of new 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.
As of June 30, 1999, the Company has outstanding standby letters of credit
and surety bonds in the amount of $128 million in favor of local municipalities
or financial institutions to guarantee performance on construction of real
property improvements or financial obligations. Additionally, the Company
guarantees 50% of a secured loan associated with a joint venture investment; the
outstanding balance of the loan was $48.3 million as of June 30, 1999.
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 our 1998 Form 10-K.
Results of Operations
Comparison of the six-month periods ended June 30, 1999 and 1998
Rental Properties. Rental revenue and property operating costs from our rental
- ------------------
properties for the six-month periods ended June 30, 1999 and 1998 are summarized
below:
<TABLE>
<CAPTION>
Rental Revenue Property Operating Costs
----------------------------------- ----------------------------------
Six Months Ended June 30, Six Months Ended June 30,
----------------------------------- ----------------------------------
1999 1998 Difference 1999 1998 Difference
-------- -------- ---------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Industrial buildings.................. $45,472 $38,651 $6,821 $ 9,928 $ 7,911 $2,017
Office buildings...................... 16,371 15,971 400 6,835 6,234 601
Retail buildings...................... 6,887 6,780 107 2,023 1,886 137
Land development(1) .................. 5,701 5,716 (15) 3,663 3,599 64
Land leases........................... 8,339 6,162 2,177 363 443 (80)
------- ------- ------ ------- ------- ------
$82,770 $73,280 $9,490 $22,812 $20,073 $2,739
======= ======= ====== ======= ======= ======
</TABLE>
(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:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1999 1998
-------------------------- ------------------------
(In thousands, except percentages)
Owned Leased % Owned Leased %
-------- ------ ---- ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
Industrial buildings............. 17,962 16,487 91.8% 14,570 14,286 98.1%
Office buildings................. 1,622 1,505 92.8% 1,620 1,542 95.2%
Retail buildings................. 916 821 89.6% 928 862 92.9%
Land development(1).............. 1,205 1,111 92.2% 1,220 1,020 83.6%
------ ------ ------ ------
Total(2)......................... 21,705 19,924 91.8% 18,338 17,710 96.6%
====== ====== ====== ======
</TABLE>
(1) This category represents interim income-producing uses of properties
intended for mixed-use development.
(2) Excludes property owned by joint ventures.
The increase in rental revenue from industrial buildings for the six months
ended June 30, 1999, as compared to the same period in 1998, is primarily
because of the net addition of five new buildings, totaling approximately
947,000 square feet, that were added to the portfolio during the first six
months of 1999, and a full six months of operations from the net addition of
eleven buildings, totaling approximately 2.7 million square feet, that were
added to the portfolio in 1998. Approximately 60% of the 947,000 square feet
was leased at June 30, 1999, the remaining added space is expected to be leased
during the next six months. The $6.8 million increase in rental revenue is
because of base rents and tenant pass-throughs for new properties added in 1999
and 1998. Additionally an increase of $0.1 million in revenues was because of
base rents and higher tenant pass-through charges from properties which were
owned and operated for all of 1999 and 1998 ("Same Space") offset by ($0.2)
million lower revenue from properties sold during 1999 as compared to the same
period in 1998.
Operating costs for the industrial buildings increased by $2.0 million
primarily because of repairs and maintenance for the existing properties and
property taxes related to the new additions to the industrial portfolio.
10
<PAGE>
Rental revenue for our office portfolio increased by $0.4 million for the
six months ended June 30, 1999, compared to the same period in 1998, primarily
because of a one-time lease termination fee. Operating costs for office
buildings increased by $0.6 million, primarily as a result of higher repairs and
maintenance.
The $2.2 million increase in revenues from land leases for the six months
ended June 30, 1999, compared to the same period in 1998, is primarily
attributable to a full six months of revenues related to land leases and other
leases acquired in 1998. The majority of the increase is of a short-term
nature, as we intend to sell approximately $35 million of these assets (see
Other Property Activities and Fee Services below).
In total, property operating costs were higher because of property taxes
associated with the new buildings and higher operating and maintenance costs
attributable to Same Space.
Equity in earnings of operating joint ventures, net, increased by $0.9
million for the six months ended June 30, 1999, compared to the same period in
1998, primarily because of higher occupancies and room rates in our hotel joint
ventures.
Other Property Activities and Fee Services. Gain on property sales was $24.6
- -------------------------------------------
million in the six months ended June 30, 1999 compared to $10.1 million for the
same period in 1998, summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
1999 1998 Difference
------- -------- -----------
(In thousands)
<S> <C> <C> C>
Commercial Sales:
Sales..................................... $77,374 $11,544 $65,830
Cost of sales............................. 65,906 8,648 57,258
------- ------- -------
Gain.......................... 11,468 2,896 8,572
------- ------- -------
Residential Sales:
Sales..................................... 27,709 18,885 8,824
Cost of sales............................. 24,803 17,009 7,794
------- ------- -------
Gain.......................... 2,906 1,876 1,030
------- ------- -------
Other Sales:
Sales..................................... 39,700 7,164 32,536
Cost of sales............................. 29,430 1,840 27,590
------- ------- -------
Gain.......................... 10,270 5,324 4,946
------- ------- -------
Total gain on property sales.............. $24,644 $10,096 $14,548
======= ======= =======
</TABLE>
The 1999 results from commercial sales for the six months ended June 30,
1999 include the closings of the sale of 669,000 square feet of new industrial
building space that was completed this year, 100,000 square feet of office
building space that was completed in 1998 and 108 acres of land capable of
supporting 1.5 million square feet of commercial development, as compared to 86
acres of land capable of supporting 1.6 million square feet of commercial
development for the same period in 1998. The 1999 commercial sales also include
the sales of 468.6 acres of land and related land leases associated with
acquisitions in the land lease portfolio during 1998, as noted above. We
anticipate continued gains from land lease sales in 1999. Residential sales
revenue in 1999 resulted from the closings of 61 homes and 9 lots, as compared
to the closings of 55 homes and 17 lots in 1998. The increased gain for the
residential sales is primarily attributable to the average higher profit margin
and higher priced units and lots sold. Other sales include a sale by one of our
joint ventures of an apartment project in San Diego, California, in 1999; the
1998 results include the sale of a commercial development by a joint venture in
Texas.
We expect there will be significant variability in income generated from
our other property activities (see Variability in Results section below).
11
<PAGE>
Following is a summary of sales of development property under contract but
not closed as of June 30, 1999 and 1998:
<TABLE>
<CAPTION>
June 30,
---------------------
1999 1998
-------- -------
(In thousands)
<S> <C> <C>
Commercial development property.............. $53,615 $77,107
======= =======
Residential development property
Owned projects
Units................................... $74,419 $37,227
Lots.................................... 6,371 14,500
------- -------
$80,790 $51,727
======= =======
Joint venture projects - units(1)....... $30,911 $34,879
======= =======
</TABLE>
(1) The amounts shown are 100% of the gross sales price; we are entitled to
receive 25%-67% of the net profits from these unconsolidated joint ventures.
Development and management fee income, net, for the six months ended June
30, 1999 as compared to the same period in 1998 decreased by $1.2 million. Over
the previous two years, a major source of fee income was from a contract to
manage and sell the non-railroad real estate assets of a major railroad company.
As anticipated, the majority of these assets have been sold and the inventory of
managed assets is now depleted, and it is expected that future management fees
will decrease.
Equity in earnings of development joint ventures, net, for the six months
ended June 30, 1999, as compared to the same period in 1998, increased by $4.3
million primarily because of the increased lot sales at a residential project in
El Dorado County near Sacramento, California. Residential joint ventures closed
383 lots and 20 units during the first six months of 1999, compared to 18 units
during the same period in 1998.
Other Items on the Statement of Operations. Interest expense decreased
- -------------------------------------------
approximately $1.0 million for the six months ended June 30, 1999, compared to
the same period in 1998; however, total interest incurred increased $5.3
million. The increased interest expense attributable to additions to the rental
portfolio was offset by the increase in capitalized interest related to higher
development activity and lower interest rates resulting from a major refinancing
completed in 1998. During the six months ended June 30, 1999, the average
number of square feet of commercial development under construction was 4.8
million as compared to 4.6 million during the same period in 1998. Additionally,
our residential property held for sale or under development expenditures were
$118.2 million for the six months ended June 30, 1999, as compared to $54.2
million during the same period in 1998. We have also started construction on 268
residential units thus far in 1999 as compared to 193 units during the same
period in 1998 from our projects and projects of consolidated joint ventures.
Following is a summary of interest incurred:
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------------------
1999 1998 Difference
--------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Total interest incurred...................... $ 31,399 $26,057 $ 5,342
Interest capitalized......................... (12,353) (6,048) (6,305)
-------- ------- -------
Interest expensed............................ $ 19,046 $20,009 $ (963)
======== ======= =======
</TABLE>
General and administrative expense increased by $1.2 million for the six
months ended June 30, 1999 as compared to the same period in 1998 primarily
because of the increase in our overall activities.
12
<PAGE>
The decrease in gain on sales of non-strategic assets from the six months
ended June 30, 1999 compared to the same period in 1998 is summarized as
follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------
1999 1998 Difference
--------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Sales........................................ $4,886 $5,621 $(735)
Cost of Sales................................ 996 1,251 (255)
------ ------ -----
Gain (loss)............................ $3,890 $4,370 $(480)
====== ====== =====
</TABLE>
In 1995, we began an accelerated program of selling non-strategic assets,
with the proceeds paying down a portion of existing debt and funding new
development. From 1995 through June 30, 1999, we sold $264 million of non-
strategic assets. The most significant remaining non-strategic asset is our
approximately 779,000-acre desert and agricultural portfolio.
During the first quarter of 1999, we signed an agreement with a non-profit
conservation group to sell and donate up to 437,000 acres of desert holdings and
20,000 acres of severed mineral rights to the conservation group or the federal
government for a total cash consideration of up to $54.6 million. This sale will
generate a significant gain when completed; however, the sale and its potential
gain are contingent upon the completion of due diligence by the appropriate
parties and funding by both the conservation group and the federal government.
In April 1999, we received an initial deposit of $5.0 million from the
conservation group. The remainder of the transaction is expected to close by
late 1999 or early 2000. The closing schedule is subject to federal government
appropriations of up to $36.0 million from the Land and Water Conservation Fund.
However, if the government funds are not appropriated, the agreement provides
for a partial closing on the portion of the transaction covered by private
funds.
In addition, we plan to exchange a portion of our remaining desert land for
land of equal value managed by the U.S. Bureau of Land Management in order to
consolidate our desert land holdings. Additional non-strategic sales are
expected to be substantially lower than the levels of the past three years.
Other, net, changed by $1.4 million in the six months ended June 30, 1999,
compared to the same period in 1998, primarily because of interest income
generated by higher restricted funds (tax-deferred sales and financing
deposits).
Comparison of the three-month periods ended June 30, 1999 and 1998
Rental Properties. Rental revenue and property operating costs from our rental
- ------------------
properties for the three-month periods ended June 30, 1999 and 1998 are
summarized below:
<TABLE>
<CAPTION>
Rental Revenues Property operating costs
---------------------------------- ---------------------------------
Three Months Ended June 30, Three Months Ended June 30,
----------------------------------- ----------------------------------
1999 1998 Difference 1999 1998 Difference
-------- -------- ---------- ------- -------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Industrial buildings........... $22,871 $19,827 $3,044 $ 5,046 $ 3,934 $1,112
Office buildings............... 8,003 8,066 (63) 3,408 3,179 229
Retail buildings............... 3,450 3,409 41 890 933 (43)
Land development(1)............ 2,768 2,997 (229) 1,749 1,854 (105)
Land leases.................... 4,199 3,487 712 163 185 (22)
------- ------- ------ ------- ------- ------
$41,291 $37,786 $3,505 $11,256 $10,085 $1,171
======= ======= ====== ======= ======= ======
</TABLE>
(1) This category represents interim income-producing uses of properties
intended for mixed-use development.
13
<PAGE>
The increase in revenue from industrial buildings for the three months
ended June 30, 1999, as compared to the same period in 1998, is primarily
because of the net five new buildings totaling approximately 947,000 square feet
that have been added to the portfolio since January 1, 1999, and a full quarter
of operations from eleven buildings totaling approximately 2.7 million square
feet that were added to the portfolio in 1998. The increase in operational costs
is primarily attributable to approximately $0.3 million from Same Space and $0.8
million from the new buildings.
The $0.2 million decrease in revenues from the land development portfolio
for the three months ended June 30, 1999, as compared to the same period in
1998, is primarily the result of lower parking revenue due to the
reconfiguration of the parking lot at one property.
The $0.7 million increase in revenues from land lease portfolio for the
three months ended June 30, 1999, as compared to the same period in 1998, is
primarily because of the acquisitions of land leases and other leases during
1998.
In total, property operating costs were higher for the three months ended
June 30, 1999, as compared to the same period in 1998, because of higher
overhead costs and property taxes associated with the new buildings.
Other Property Activities and Fee Services. Gain on development property
-------------------------------------------
sales was $10.3 million in the three months ended June 30, 1999, compared to
$4.0 million for the same period in 1998, summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------
1999 1998 Difference
------- ------- ----------
(In thousands)
<S> <C> <C> <C>
Commercial Sales:
Sales............................................................................. $58,901 $ 7,152 $51,749
Cost of sales..................................................................... 49,533 3,767 45,766
------- ------- -------
Gain.................................................................. 9,368 3,385 5,983
------- ------- -------
Residential Sales:
Sales............................................................................. 12,118 12,963 (845)
Cost of sales..................................................................... 11,148 12,391 (1,243)
------- ------- -------
Gain.................................................................. 970 572 398
------- ------- -------
Other Sales:
Sales............................................................................. -- -- --
Cost of sales..................................................................... -- -- --
------- ------- -------
Gain.................................................................. -- -- --
------- ------- -------
Total gain on property sales...................................................... $10,338 $ 3,957 $ 6,381
======= ======= =======
</TABLE>
The 1999 results from commercial sales for the three months ended June 30,
1999, include the closings of the sale of 686,000 square feet of new industrial
building space that was completed this year, and 83.4 acres of land capable of
supporting 1.5 million square feet of commercial development, as compared to
63.4 acres capable of supporting 0.8 million square feet of development for the
same period in 1998. The 1999 commercial sales also include the sales of 407.6
acres of land and related land leases associated with acquisitions in the land
lease portfolio during 1998.
The 1999 results from residential sales for the three months ended June 30,
1999, include the closings of 19 homes and 9 lots, as compared to 42 homes and
17 lots for the same period in 1998. The increase in gain from the residential
sales is primarily because of the average higher profit margin and higher priced
units sold in 1999.
We expect there will be significant variability in income generated from
our other property activities (see Variability in Results section below).
14
<PAGE>
Development and management fee income, net, decreased by $1.1 million for
the three months ended June 30, 1999 compared to the same period in 1998. Over
the previous two years a major source of fee income was from a contract to
manage and sell the non-railroad real estate assets of a major railroad company.
As anticipated, the inventory of managed assets is now depleted, and it is
expected that future management fee income will decrease.
Equity in earnings of development joint ventures increased by $4.1 million
for the three months ended June 30, 1999 compared to the same period in 1998.
The increase is primarily because of the increased lot sales at a residential
project in Sacramento, California. Residential joint ventures closed 364 lots
and 14 units during the three months ended June 30, 1999, compared to 12 units
during the same period of 1998.
Other Items on the Statement of Operations. Interest expense decreased
- -------------------------------------------
approximately $0.8 million for the three months ended June 30, 1999 compared to
the same period in 1998; however, total interest incurred increased $2.6
million. Increased interest expense attributable to additions to the rental
portfolio was offset by the increase in capitalized interest related to higher
development activity and lower interest rates resulting from a major refinancing
completed in 1998. At June 30, 1999, the average number of square feet of
commercial development under construction was 4.8 million as compared to 4.6
million during the same period in 1998. Additionally, we have started
construction on 176 residential units for the three month period ended June 30,
1999 as compared to 129 units during the same period in 1998 from our projects
and projects of consolidated joint ventures.
Following is a summary of interest incurred:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------
1999 1998 Difference
-------- ------- ----------
(In thousands)
<S> <C> <C> <C>
Total interest incurred................................ $16,099 $13,512 $ 2,587
Interest capitalized................................... (6,459) (3,065) (3,394)
------- ------- -------
Interest expensed...................................... $ 9,640 $10,447 $ (807)
======= ======= =======
</TABLE>
General and administrative expense increased by $0.7 million for the three
months ended June 30, 1999 as compared to the same period in 1998 primarily
because of the increase in our overall activities.
The decrease in gain on sales of non-strategic land and other property from the
three months ended June 30, 1999 as compared to the same period in 1998 is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------
1999 1998 Difference
------- -------- -----------
(In thousands)
<S> <C> <C> <C>
Sales............................. $3,557 $5,328 $(1,771)
Cost of sales..................... (653) (905) 252
------ ------ -------
Gain......................... $2,904 $4,423 $(1,519)
====== ====== =======
</TABLE>
The 1999 results include a $2.6 million gain from the sale of certain
desert land parcels; the 1998 results include a $3.6 million gain from the sale
of a land lease. Because of the diminishing amount of such assets in our
portfolio, we expect future sales of non-strategic assets to be substantially
lower than the levels in the recent past.
Variability in Results
- ----------------------
Although we have a large portfolio of rental properties that provides
relatively constant operating results, our earnings from period to period will
be affected by the nature and timing of acquisitions and sales of property and
sales of non-strategic assets. Many of our projects require a lengthy process
to complete the development cycle before they
15
<PAGE>
are sold. Additionally, sales of assets are difficult to predict and are
generally subject to lengthy negotiations and contingencies that need to be
resolved before closing. These factors tend to "bunch" income in 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 while some properties were acquired within the
last ten to fifteen years; (ii) properties are owned in various geographical
locations; and (iii) development projects have varying infrastructure costs and
build-out periods.
Earnings Before Depreciation and Deferred Taxes ("EBDDT")
We use a supplemental performance measure, EBDDT, along with net income, to
report our 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, we believe that EBDDT provides relevant
information about our operations and is useful, along with net income, for an
understanding of our operating results.
EBDDT is calculated by making various adjustments to net income.
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 assets and extraordinary items, including their current tax effect,
represent unusual and/or non-recurring items and are excluded from the EBDDT
calculation.
Net income is reconciled to EBDDT as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
1999 1998 1999 1998
--------- -------- -------- --------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net income applicable to common stockholders............ $ 17,807 $ 11,743 $ 34,187 $ 19,656
Depreciation and amortization........................ 9,422 8,586 18,584 16,771
Deferred income taxes................................ 7,708 5,800 13,878 9,547
Gain on non-strategic asset sales.................... (2,904) (4,423) (3,890) (4,370)
-------- -------- -------- --------
Earnings before depreciation and deferred taxes......... $ 32,033 $ 21,706 $ 62,759 $ 41,604
======== ======== ======== ========
Average number of common shares outstanding - basic..... 106,974 106,675 106,903 106,615
======== ======== ======== ========
Average number of common shares outstanding - diluted... 109,350 109,713 109,264 109,745
======== ======== ======== ========
</TABLE>
For changes in EBDDT, see discussions on Results of Operations above.
Liquidity and Capital Resources
Cash flows from operating activities
Cash provided by (used in) operating activities reflected in the statement
of cash flows for the six months ended June 30, 1999 and 1998 was $18.2 million
and $(2.2) million, respectively. The change is primarily because of sales of
commercial, residential, and other properties of $105.1 million and $37.6
million, and operating distributions from joint ventures were $26.9 and $4.9
million for the six months ended June 30, 1999 and 1998, respectively and a
decrease in other property acquisitions. These increases are offset by the
increase in capital expenditures for properties to be sold after development,
which are included in the schedule of capital expenditures in the following
discussion of Capital expenditures from investing activities. Cash generated
from rental properties increased principally because of the addition of new
buildings.
16
<PAGE>
Cash flows from investing activities
Net cash used in investing activities reflected in the statement of cash
flows for the six months ended June 30, 1999 and 1998 was $142.5 million and
$65.6 million, respectively. The increase between 1999 and 1998 is because of a
$27.6 million increase in capital expenditures (primarily attributable to $10.0
million for construction and building improvements, $5.3 million for capitalized
interest and property taxes, and $18.3 million for infrastructure and other), a
$7.0 million increase in contributions to joint ventures and a $3.9 million
increase in commercial property acquisitions. The increase is also due to a
$47.9 million increase in short-term investments and restricted cash. Included
in the restricted cash and investment balance is $33.6 million of proceeds from
property sales held in separate accounts at a trust company in order to preserve
our options of reinvesting the proceeds on a tax-deferred basis. These increases
were offset by the proceeds of $13.9 million from the sale of an operating
project by one of our joint ventures.
Capital expenditures include the following:
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1999 1998 Difference
-------- -------- ----------
(In thousands)
<S> <C> <C> <C>
Capital Expenditures For Operating Activities and Non-Cash Acquisitions (1)
Capital expenditures for residential and industrial development properties.... $ 90,207 $ 43,885 $ 46,322
Residential property acquisitions............................................. 39,363 16,780 22,583
Capitalized interest and property tax......................................... 6,894 3,434 3,460
-------- -------- --------
Expenditures for development properties.................................... 136,464 64,099 72,365
Other property acquisitions................................................... 289 9,214 (8,925)
-------- -------- --------
Capital expenditures in cash flows from operating activities............... 136,753 73,313 63,440
Seller-financed acquisitions.................................................. 1,155 36,855 (35,700)
-------- -------- --------
Total capital expenditures in operating activities......................... 137,908 110,168 27,740
-------- -------- --------
Capital Expenditures in Cash Flows For Investing Activities (2)
Construction and building improvements........................................ 37,273 27,275 9,998
Predevelopment................................................................ 5,425 11,436 (6,011)
Infrastructure and other...................................................... 22,067 3,747 18,320
Capitalized interest and property tax......................................... 8,302 2,974 5,328
-------- -------- --------
Capital expenditures for investment properties............................. 73,067 45,432 27,635
Commercial property acquisitions.............................................. 17,709 13,800 3,909
Tenant improvements........................................................... 1,140 461 679
-------- -------- --------
Capital expenditures in investing activities............................... 91,916 59,693 32,223
-------- -------- --------
Total Capital Expenditures.................................................... $229,824 $169,861 $ 59,963
======== ======== ========
</TABLE>
(1) This category includes capital expenditures for properties the Company
intends to build 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 industrial for-sale development
properties. The increase from 1998 to 1999 is primarily because of the increase
in both residential and industrial for-sale development activity.
For the six months ended June 30, 1999, we started construction on 268
residential units and completed 56 units compared to 193 starts and 37
completions during the same period in 1998 including our consolidated joint
venture projects.
17
<PAGE>
Construction and building improvements -- relates primarily to development
of new commercial properties held for lease and improvements to existing
buildings. Development activity is summarized below:
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
1999 1998
---------- ----------
(In square feet)
<S> <C> <C>
Under construction, beginning of period....................................... 5,036,500 3,774,000
Construction starts........................................................... 1,566,000 2,145,000
Completed - retained in portfolio............................................. (951,000) (240,000)
Completed - design/build or sold.............................................. (1,008,000) (235,000)
---------- ---------
Under construction, end of period............................................. 4,643,500 (1) 5,444,000
========== =========
Contracts signed, construction not started.................................... 1,371,000 172,000
========== =========
</TABLE>
(1) This includes 498,000 square feet of development that will be sold upon
completion, 195,000 square feet of "design/build" development for third
party owners, and 3,950,500 square feet that will be added to our portfolio
upon completion.
Property Acquisitions--For the six months ended June 30, 1999 and 1998, we
invested approximately $58.5 million and $76.6 million, respectively, in the
acquisition of new property directly or through joint ventures.
. Residential Acquisitions--For the six months ended June 30, 1999, we
invested approximately $39.4 million in the acquisitions of residential
development property directly or through joint ventures. These
acquisitions will support up to 806 homes, of which 471 were previously
controlled.
. Commercial Acquisitions--For the six months ended June 30, 1999, we
invested approximately $17.7 million in the acquisitions of entitled
commercial development land, and a partially completed industrial
building. These acquisitions added approximately 1.3 million square feet
of potential industrial development in Grand Prairie, Texas, and 0.5
million square feet in the industrial development portfolio in
Romeoville, Illinois. Additionally, we invested $1.4 million in the
acquisition of certain income generating land and land leases.
Predevelopment--relates to amounts incurred in obtaining entitlements for
our major mixed-use projects, the Mission Bay project in San Francisco,
California, and our Fleet Industrial Supply Center, Alameda Annex, project in
Alameda, California.
Infrastructure and other--primarily represents infrastructure costs
incurred in connection with our major mixed-use and development projects. The
increase in 1999 compared to 1998 relates primarily to our projects in
Woodridge, Illinois; Denver, Colorado; Portland, Oregon; and Mission Bay in San
Francisco, California.
Capitalized interest and property taxes--represents interest and property
taxes capitalized to our development projects. The increase in 1999 compared to
1998 is because of the significant increase in construction activity, as noted
above.
Cash flows from financing activities
Net cash provided by financing activities reflected in the statement of
cash flows increased by $26.7 million in 1999 compared to 1998. This increase
is primarily because of $46.9 net contributions from minority partners. During
the second quarter of 1999, we formed a consolidated venture to which we
contributed cash and promissory notes collaterized by certain of our major
mixed-use and development projects and rental properties, as well as partnership
and limited liability company interests in a variety of rental properties and
sold 10% of this consolidated venture's stock to a minority investor for $50.0
million. This was offset by a $25.4 million decrease in net borrowing in 1999,
as compared to 1998.
18
<PAGE>
Capital commitments
As of June 30, 1999, we had outstanding standby letters of credit and
surety bonds in the amount of $128.0 million in favor of local municipalities or
financial institutions to guarantee performance on construction of real property
improvements or financial obligations.
As of June 30, 1999, we had approximately $86.4 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, and to fund the construction of residential developments.
Cash balances, available borrowings and capital resources
As of June 30, 1999, we had $23.8 million in cash and cash equivalents, and
$104.1 million in restricted cash and investments. In addition, we had
available $88.2 million under our secured revolving credit facility and
construction line of credit.
Our residential subsidiary has a $80 million line of credit facility at
June 30, 1999. The borrowing capacity at any point in time varies as property
and homes are acquired, built and sold. At June 30, 1999, the capacity was
$60.0 million, of which $54.1 was drawn. Consequently, an additional $25.9
million of liquidity is available, provided the appropriate collateral level is
achieved to increase the borrowing capacity.
Our short- and long-term liquidity and capital resources requirements will
be provided from three sources: (1) ongoing operating income from rental
properties, (2) proceeds from sales of development property, other property and
non-strategic assets, and (3) additional debt. As noted above, lines of credit
are available to us for meeting liquidity requirements. Our ability to meet
mid- and long-term capital requirements is dependent upon the ability to obtain
additional financing for new construction, acquisitions, and currently
unencumbered properties. There is no assurance that this financing can be
obtained at this time.
Debt covenants--Certain loan agreements contain restrictive financial
covenants, the most restrictive of which require our debt coverage ratio to be
at least 1.60:1, require stockholders' equity to be no less than $427 million,
and require that we maintain certain other specified financial ratios. We were
in compliance with all such covenants at June 30, 1999.
Environmental Matters
Many of our properties are in urban and industrial areas and may have been
leased to or previously owned by commercial and industrial companies that may
have discharged hazardous materials. We incur on-going environmental
remediation costs, and legal costs relating to clean-up, defense of litigation
and the pursuit of responsible third parties. Costs incurred in connection with
operating properties and with properties previously sold are expensed. As of
June 30, 1999, we have provided a reserve of $10.1 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 (see Note 8 of the
accompanying consolidated financial statements for further discussion).
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, 1999, our
estimate of potential liability for identified environmental costs relating to
properties to be developed or sold ranged from $11.3 million to $28.8 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 1999 totaled $0.5 million.
19
<PAGE>
While we or outside consultants have evaluated the environmental
liabilities associated with most of the properties currently owned by us, any
evaluation necessarily is based upon then-prevailing law, identified site
conditions and the use of sampling methodologies. Also, we do not generally
have access to properties sold in the past, which could create environmental
liabilities. We monitor our 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, we do not believe that such costs for identified
liabilities will have a material adverse effect on our financial position,
results of operations or cash flows.
Year 2000 Readiness
Overview. To address the potential effects of the Year 2000 problem (the
inability of some hardware and software to distinguish the year 2000 from the
year 1900), we have adopted a program (the "Program") that examines three areas:
. Our information systems, including hardware and software ("I.S.");
. Our non-I.S. systems that use date-sensitive technology ("Embedded
Technology"); and
. Third parties with whom we do business ("Third Parties").
For each area, the Program has three phases:
. Phase I, Inventory: Develop a list of potentially affected functions;
. Phase II, Assessment and planning: Assess the nature and severity of the
problem and determine necessary corrective action; and
. Phase III, Remediation and testing: Implement any necessary corrective
action and test the results.
Information Systems. A failure of systems such as our telephones or
computer network could materially impair our ability to perform essential
business functions, such as the collection of revenue, payment of debts, and
communications generally.
We have substantially completed Phases I and II of the Program for I.S.,
and Phase III is currently underway. Since January 1997, we have ensured that
all regularly scheduled I.S. replacements and upgrades are Year 2000 compliant.
From January 1, 1997, through June 30, 1999, we spent approximately $1.2 million
on I.S. improvements, upgrades and replacements. Additionally, for the
remainder of 1999, we may spend up to approximately $1.6 million on I.S.
improvements, upgrades and replacements. Substantially all of these expenditures
are primarily for business purposes other than addressing Year 2000 issues. In
1999, we expect to spend approximately $175,000 on testing and upgrades
specifically related to the Year 2000 issue. No significant planned I.S.
projects have been deferred because of the Program.
We believe that, with these improvements, upgrades and replacements, the
Year 2000 problem will not significantly affect I.S. If planned improvements,
upgrades and replacements are not timely completed (for example, because of a
scarcity of Year 2000 compliant products), the Year 2000 problem could have a
material impact on us. Nonetheless, we believe that our plans for resolving the
Year 2000 problem with respect to I.S. are adequate and that we will not need to
develop contingency plans.
20
<PAGE>
Embedded Technology. Electronic monitoring and control systems may have
date-sensitive coding embedded within their circuitry that is susceptible to
failure if it is not Year 2000 compliant. Year 2000 noncompliance could affect
the functioning of elevators and escalators, heating, ventilation and air
conditioning systems, security systems, fire-life safety systems, and other
automated building systems, which could affect use and access to buildings and
emergency response capabilities.
In December 1998, we completed an inventory of Embedded Technology in those
systems for which we are responsible in our approximately 250 buildings. Phases
II and III are currently underway. In February 1999, we engaged an engineering
firm to conduct an analysis of embedded technology in a sampling of buildings.
Based on the results of their work, we have engaged them to perform similar
analyses of our higher risk buildings nationwide. While we are currently unable
to estimate the costs we will incur in Phases II and III, we expect that these
costs will not exceed $1,000,000. We expect to substantially complete this work
in August and September 1999, with the remaining work to be completed in October
1999. If necessary, contingency planning is scheduled for the third quarter of
1999. Meanwhile, we have incorporated Year 2000 compliance in our due diligence
for any acquisition of property.
Third Parties. We depend on a wide variety of Third Parties. To the
extent that Third Parties are unable to perform because of their own Year 2000
problems, we may be adversely affected. Because of the speculative nature of
these risks, it is not possible to estimate their financial impact on us. Third
Parties on whom we depend include:
. Customers, such as tenants and buyers of properties;
. Suppliers of goods, services or capital; and
. Regulatory bodies, such as government agencies from whom we must obtain
permits in order to proceed with our projects.
In the third quarter of 1998, we began identifying and prioritizing Third
Parties and communicating with them about their approach to the Year 2000
problem. This phase is ongoing as we continue to follow up with those third
parties that have not responded to our inquiries. We have initiated more
detailed evaluations of the most critical Third Parties. If necessary, these
evaluations will be followed, where possible, by the development of contingency
plans, scheduled for third quarter of 1999. In most cases, we must rely
primarily on statements from Third Parties as to their Year 2000 readiness and
will not attempt any independent verification. Because the systems of Third
Parties are outside our control, the remediation and testing phase of the
Program is not applicable to Third Parties.
This area of the Program is being undertaken by our employees and is not
expected to involve significant additional expenditures or to delay any of our
other work significantly.
Summary. The Program schedule is subject to change depending on future
developments, including delays by Third Parties. A failure to correct
significant Year 2000 problems could impair our ability to conduct our business
and could affect our financial performance. Because of the general uncertainty
inherent in the Year 2000 problem and the uncertainty about the Year 2000
readiness of Third Parties, we cannot determine whether there will be a material
impact on its results of operations, liquidity, or financial condition. We
believe that the Program will significantly reduce the risk of interruption of
our business operations.
Forward-Looking Information and Risk Factors
Except for historical matters, the matters discussed in this report are
forward-looking statements that involve risks and uncertainties. We try,
whenever practical, to identify these forward-looking statements by using words
like "anticipate," "believe," "estimate," "project," "expect," and similar
expressions. Forward-looking statements include, but are not limited to,
statements about plans; opportunities; markets and economic conditions;
development, construction and sales activities; fee income; availability of
financing; and property values.
21
<PAGE>
We caution that these forward-looking statements reflect our current
beliefs and are based on information currently available to us. Accordingly,
these statements are subject to risks and uncertainties that could cause our
actual results, performance, or achievements to differ materially from those
expressed in or implied by these statements. In particular, among the factors
that could cause actual results to differ materially are:
. Changes in the real estate market or in general economic conditions in
the areas in which we own property
. Changes in tax laws, successful challenges to the company's tax
positions and other events or circumstances that affect the amount,
timing and recognition of our tax liabilities
. Availability of financing to meet our capital needs, the variability of
interest rates and our ability to use our assets to secure loans
. Delay in receipt of or denial of government approvals and entitlements
for development projects, and other political and discretionary
government decisions
. Inability or unwillingness of negotiating parties to reach agreement on
open terms or definitive documents
. Failure of third parties to fulfill their commitments
. Exposure of our assets to damage from natural occurrences such as
earthquakes
. Weather and other natural conditions that affect the commencement or
progress of construction
. Liability for and changes in the scope of environmental remediation at
properties currently or formerly owned, leased, or operated by us or our
predecessors.
. Changes in the cost of land and building materials
. Our ability to recruit and retain or replace key personnel
. Limitations on or challenges to title to our properties
. Risks related to the performance, interests, and financial strength of
our joint venture projects or co-owners
. Availability of Year 2000-compliant products and the impact of the Year
2000 problem on third parties
22
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on April 29, 1999,
stockholders voted as follows with respect to the election of directors:
<TABLE>
<CAPTION>
Nominees Votes For Votes Withheld
-------- ---------- --------------
<S> <C> <C>
Joseph F. Alibrandi 97,132,487 151,524
Stephen F. Bollenbach 97,127,229 156,782
Daryl J. Carter 97,135,237 148,774
Richard D. Farman 97,135,156 148,855
Christine Garvey 97,134,230 149,781
William M. Kahane 97,135,473 148,538
Leslie D. Michelson 97,164,728 149,283
Nelson C. Rising 97,136,006 148,005
Jacqueline R. Slater 97,134,080 149,931
Thomas M. Steinberg 97,164,925 149,086
Beverly Benedict Thomas 97,134,412 149,599
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
An Exhibit Index follows the signatures below.
(b) No reports on Form 8-K were filed during the quarter for which the
report is filed.
23
<PAGE>
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) 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 13, 1999 By: /s/ C. William Hosler
---------------- -----------------------------------
C. William Hosler
Senior Vice President
Chief Financial Officer
Principal Financial Officer
Date: August 13, 1999 By: /s/ Paul A. Lockie
---------------- ------------------------------------
Paul A. Lockie
Vice President and Controller
Principal Accounting Officer
24
<PAGE>
EXHIBIT INDEX
3.1 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 (13)
3.4 Form of Certificate of Designations, Preferences and Rights of $3.625
Series B Cumulative Convertible Exchangeable Preferred Stock (6)
4.1 Amended and Restated Line of Credit Loan Agreement among Catellus
Development Corporation, Bank of America National Trust and Savings
Association as Arranger and Administrative Agent, The First National
Bank of Chicago as Documentation Agent, and The Other Financial
Institutions Party Hereto, dated as of October 28, 1998 (12)
4.2 Loan Agreement by and between Catellus Finance 1, L.L.C and Prudential
Mortgage Capital Company, Inc. dated as of October 28, 1998 (12)
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 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)
25
<PAGE>
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 (13)
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)
10.22 Letter Agreement dated November 14, 1997 between the Registrant and
Doug Gardner (12)
27 Financial Data Schedule*
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.
26
<PAGE>
(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.
(12) Incorporated by reference to the Form 10-K for the year ended December 31,
1998.
(13) Incorporated by reference to the Form 10-Q for the quarter ended March 31,
1999.
27
<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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 23,798
<SECURITIES> 0
<RECEIVABLES> 53,012
<ALLOWANCES> 3,148
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,794,700
<DEPRECIATION> 281,057
<TOTAL-ASSETS> 1,779,405
<CURRENT-LIABILITIES> 0
<BONDS> 920,614
0
0
<COMMON> 1,071
<OTHER-SE> 526,125
<TOTAL-LIABILITY-AND-EQUITY> 1,779,405
<SALES> 149,669
<TOTAL-REVENUES> 252,191
<CGS> 121,135
<TOTAL-COSTS> 175,870
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,046
<INCOME-PRETAX> 57,275
<INCOME-TAX> 23,088
<INCOME-CONTINUING> 34,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,187
<EPS-BASIC> .32
<EPS-DILUTED> .31
</TABLE>
