<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 September 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 November 10, 1999, there were 107,141,805 issued and outstanding
shares of the registrant's common stock, $.01 par value per share.
================================================================================
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of September 30, 1999 and December 31, 1998........ 2
Consolidated Statement of Operations for the three months and nine months ended
September 30, 1999 and 1998.................................................... 3
Consolidated Statement of Cash Flows for the nine months ended
September 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>
September 30, December 31,
1999 1998
--------------- ----------------
(Unaudited)
<S> <C> <C>
Assets
Properties......................................................... $ 1,884,610 $ 1,667,573
Less accumulated depreciation...................................... (285,331) (265,077)
--------------- ----------------
1,599,279 1,402,496
Other assets and deferred charges, net............................. 90,636 80,240
Notes receivable, less allowance................................... 21,456 15,275
Accounts receivable, less allowance................................ 19,157 25,270
Restricted cash and investments.................................... 42,626 49,284
Cash and cash equivalents.......................................... 46,350 52,975
--------------- ----------------
Total............................................... $ 1,819,504 $ 1,625,540
=============== ================
Liabilities and stockholders' equity
Mortgage and other debt............................................ $ 924,749 $ 873,207
Accounts payable and accrued expenses.............................. 90,360 81,951
Deferred credits and other liabilities............................. 47,852 40,608
Deferred income taxes.............................................. 161,949 138,533
--------------- ----------------
Total liabilities........................................ 1,224,910 1,134,299
--------------- ----------------
Minority interests................................................. 47,858 1,012
--------------- ----------------
Commitments and contingencies (Note 8)
Stockholders' equity
Common stock - 107,110 and 106,808 shares issued at
September 30, 1999 and December 31, 1998, respectively... 1,071 1,068
Paid-in capital............................................. 482,827 479,636
Accumulated earnings........................................ 62,838 9,525
--------------- ----------------
Total stockholders' equity............................... 546,736 490,229
--------------- ----------------
Total............................................... $ 1,819,504 $ 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Rental properties
Rental revenue............................................. $ 43,081 $ 37,145 $ 125,851 $ 110,425
Property operating costs................................... (11,905) (10,910) (34,717) (30,983)
Equity in earnings of operating joint ventures, net........ 1,517 1,674 8,106 7,354
------------- ------------- ------------- -------------
32,693 27,909 99,240 86,796
------------- ------------- ------------- -------------
Other property activities and fee services
Gain on property sales..................................... 15,378 10,144 40,022 20,240
Development and management fee income, net................. 1,632 2,602 3,602 5,745
Equity in earnings of development joint ventures, net...... 3,239 1,489 7,658 1,605
Land holding costs, net.................................... (777) (432) (1,546) (1,537)
------------- ------------- ------------- -------------
19,472 13,803 49,736 26,053
------------- ------------- ------------- -------------
Interest expense............................................... (10,404) (9,043) (29,450) (29,052)
Depreciation and amortization.................................. (10,039) (8,230) (28,623) (25,001)
General and administrative expense............................. (3,934) (3,214) (11,527) (9,577)
Gain on non-strategic asset sales.............................. 2,529 2,858 6,419 7,228
Other, net..................................................... 1,785 550 3,582 979
------------- ------------- ------------- -------------
Income before income taxes..................................... 32,102 24,633 89,377 57,426
------------- ------------- ------------- -------------
Income tax expense
Current.................................................... (2,054) (3,002) (11,264) (6,592)
Deferred................................................... (10,922) (6,929) (24,800) (16,476)
------------- ------------- ------------- -------------
(12,976) (9,931) (36,064) (23,068)
------------- ------------- ------------- -------------
Income before extraordinary expense........................ 19,126 14,702 53,313 34,358
Extraordinary expense related to early retirement of debt,
net of income tax benefit.................................. -- (3,307) -- (3,307)
------------- ------------- ------------- -------------
Net income................................................. $ 19,126 $ 11,395 $ 53,313 $ 31,051
============= ============= ============= =============
Income before extraordinary expense per share
Basic.................................................... $ 0.18 $ 0.14 $ 0.50 $ 0.32
============= ============= ============= =============
Assuming dilution........................................ $ 0.18 $ 0.13 $ 0.49 $ 0.31
============= ============= ============= =============
Net loss per share - extraordinary expense
Basic.................................................... $ -- $ (0.03)$ -- $ (0.03)
============= ============= ============= =============
Assuming dilution........................................ $ -- $ (0.03)$ -- $ (0.03)
============= ============= ============= =============
Net income per share after extraordinary expense
Basic.................................................... $ 0.18 $ 0.11 $ 0.50 $ 0.29
============= ============= ============= =============
Assuming dilution........................................ $ 0.18 $ 0.10 $ 0.49 $ 0.28
============= ============= ============= =============
Average number of common shares outstanding - basic........ 107,085 106,747 106,964 106,660
============= ============= ============= =============
Average number of common shares outstanding - diluted...... 109,266 109,190 109,261 109,570
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
(Unaudited)
Cash flows from operating activities:
Net income ............................................................. $ 53,313 $ 31,051
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Extraordinary expense related to early retirement of debt, before
income tax benefit .............................................. -- 5,484
Depreciation and amortization ..................................... 28,623 25,001
Deferred income taxes ............................................. 24,800 15,681
Amortization of deferred loan fees and other costs ................ 3,344 2,223
Equity in earnings of joint ventures .............................. (15,764) (8,959)
Operating distributions from joint ventures ....................... 32,512 8,528
Gain on sale of investment property ............................... (10,270) (4,529)
Cost of properties and non-strategic assets sold .................. 158,449 72,592
Expenditures for development properties ........................... (183,396) (139,355)
Other property acquisitions ....................................... (289) (10,467)
Other, net ........................................................ (864) (1,527)
Change in operating assets and liabilities ............................. 7,671 (4,175)
------------ ------------
Net cash provided by (used in) operating activities ......................... 98,129 (8,452)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of operating property ............................... 13,926 4,886
Property acquisitions .................................................. (50,290) (33,230)
Capital expenditures for investment properties ......................... (148,257) (68,424)
Tenant improvements .................................................... (1,851) (2,001)
Contributions to joint ventures......................................... (10,496) (6,434)
Restricted cash ........................................................ 6,658 (31,235)
------------ ------------
Net cash used in investing activities ....................................... (190,310) (136,438)
------------ ------------
Cash flows from financing activities:
Borrowings ............................................................. 229,969 401,777
Repayment of borrowings ................................................ (193,582) (236,147)
Redemption premium on early retirement of debt ......................... -- (4,610)
Contributions from minority partners ................................... 50,000 797
Distributions to minority partners ..................................... (3,100) (5,999)
Proceeds from issuance of common stock ................................. 2,269 1,934
------------ ------------
Net cash provided by financing activities ................................... 85,556 157,752
------------ ------------
Net (decrease) increase in cash and cash equivalents ........................ (6,625) 12,862
Cash and cash equivalents at beginning of period ............................ 52,975 17,294
------------ ------------
Cash and cash equivalents at end of period .................................. $ 46,350 $ 30,156
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) .............................. $ 25,628 $ 25,608
Income taxes....................................................... $ 10,118 $ 6,137
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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, Arizona, Illinois, Texas, Colorado, Ohio, Kentucky, and Oregon.
The Company's rental properties consist primarily of industrial facilities,
along with a number of office and retail buildings, located primarily in the
same states. The Company also has other undeveloped land holdings primarily in
these same states.
These consolidated statements include the assets and liabilities of
Catellus Development Corporation and its consolidated subsidiaries, whether
wholly or partially owned, and whether directly or indirectly owned, by Catellus
Development Corporation, each of which is a separate legal entity. In the
absence of specific contractual arrangements, none of the assets of any of these
entities would be available to satisfy the liabilities of Catellus Development
Corporation or any other of these entities.
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 $42.6 million at
September 30, 1999, $32.9 million represents proceeds from 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 $9.7 million at September 30, 1999 represent
certificates of deposits used to guarantee lease performance for certain
properties that secure debt.
NOTE 4. INCOME PER SHARE
Income per share of common stock is computed by dividing income before
extraordinary expense 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 September 30,
----------------------------------- ------------------------------
1999 1998
----------------------------------- ------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- -------------- --------- --------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary expense ............... $ 19,126 107,085 $ 0.18 $ 14,702 106,747 $ 0.14
============== ===========
Net effect of dilutive securities: stock options .. -- 2,181 -- 2,443
--------- --------- --------- ---------
Income before extraordinary expense assuming
dilution ........................................ $ 19,126 109,266 $ 0.18 $ 14,702 109,190 $ 0.13
========= ========= ============== ========= ========= ===========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------- ------------------------------
1999 1998
----------------------------------- ------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- -------------- --------- --------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary expense ............... $ 53,313 106,964 $ 0.50 $ 34,358 106,660 $ 0.32
============== ===========
Net effect of dilutive securities: stock options .. -- 2,297 -- 2,910
--------- --------- --------- ---------
Income before extraordinary expense assuming
dilution ........................................ $ 53,313 109,261 $ 0.49 $ 34,358 109,570 $ 0.31
========= ========= ============== ========= ========= ===========
</TABLE>
NOTE 5. MORTGAGE AND OTHER DEBT
Mortgage and other debt at September 30, 1999 and December 31, 1998
are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(In thousands)
<S> <C> <C>
First mortgage loans ............................................................. $ 586,759 $ 557,180
Secured revolving credit line .................................................... 113,135 190,135
Acquisition secured promissory notes ............................................. 45,383 34,311
Unsecured revolving credit lines ................................................. 54,300 24,700
Construction and acquisition loans - secured ..................................... 55,093 3,975
Assessment district bonds ........................................................ 23,185 19,585
Term loan - secured .............................................................. 12,655 12,778
Secured promissory notes ......................................................... 21,360 21,360
Industrial capital lease ......................................................... 3,419 --
Other loans ...................................................................... 9,460 9,183
-------------- --------------
Total mortgage and other debt ............................................... $ 924,749 $ 873,207
============== ==============
Due in one year .................................................................. $ 42,935 $ 10,059
============== ==============
</TABLE>
In July 1999, the Company closed a variable rate (one month LIBOR plus
1.50%) secured construction loan with a total capacity of $8.0 million. This
loan had an outstanding balance of $5.9 million at September 30, 1999, and
matures in March 2002.
In July 1999, Catellus Residential Group, Inc. ("CRG") closed a
variable rate (prime plus 1.0%) secured construction loan with a total capacity
of $8.4 million. This loan had an outstanding balance of $2.1 million at
September 30, 1999, and matures in December 2000.
In August 1999, CRG closed a variable rate (prime plus 0.75% or LIBOR
plus 3.25%) secured acquisition and development loan with a total capacity of
$20.4 million. This loan had an outstanding balance of $2.9 million at September
30, 1999, and matures in August 2001.
In August 1999, the Company closed a $23.7 million first mortgage loan
bearing interest at 7.29% (7.42% effective rate when considering financing
costs), maturing in September 2009. The entire amount was outstanding at
September 30, 1999.
6
<PAGE>
In August 1999, in connection with acquisition of land, the Company
issued a $14.0 million secured promissory note which matures in September 2005.
In September 1999, the Company closed a $7.0 million first mortgage
loan bearing interest at 7.29% (7.45% effective rate including financing costs),
maturing in September 2009. The entire amount was outstanding at September 30,
1999.
Interest costs relating to mortgage and other debt for the three-month
and nine-month periods ended September 30, 1999 and 1998 are summarized as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
(In thousands) (In thousands)
Total interest incurred ........................ $ 16,777 $ 15,104 $ 48,176 $ 41,161
Interest capitalized ............................ (6,373) (6,061) (18,726) (12,109)
-------------- --------------- -------------- ---------------
Interest expensed .......................... $ 10,404 $ 9,043 $ 29,450 $ 29,052
============== =============== ============== ===============
</TABLE>
NOTE 6. PROPERTIES
Book value by property type at September 30, 1999 and December 31,
1998 consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ -----------------
(In thousands)
<S> <C> <C>
Rental properties:
Industrial buildings ......................................... $ 694,516 $ 547,903
Office buildings.............................................. 197,800 205,024
Retail buildings ............................................. 92,450 95,729
Land leases (1) .............................................. 64,995 65,245
Investment in joint ventures ................................ (45,631) (48,330)
------------------ -----------------
1,004,130 865,571
------------------ -----------------
Developable properties:
Industrial ................................................... 181,383 167,188
Residential .................................................. 130,152 72,413
Mixed-use .................................................... 304,735 294,084
Retail, office and other ..................................... 25,030 20,532
Resources .................................................... 4,906 6,445
Properties held for sale ..................................... 8,058 10,144
Investment in joint ventures ................................ 53,981 62,203
------------------ -----------------
708,245 633,009
------------------ -----------------
Work-in-process:
Industrial ................................................... 31,259 103,456
Industrial - capital lease ................................... 41,147 8,284
Residential .................................................. 74,892 34,350
------------------ -----------------
147,298 146,090
------------------ -----------------
Other ............................................................. 24,937 22,903
------------------ -----------------
Gross book value .................................................. 1,884,610 1,667,573
Accumulated depreciation .......................................... (285,331) (265,077)
------------------ -----------------
Net book value .................................................... $ 1,599,279 $ 1,402,496
================== =================
</TABLE>
(1) This category includes approximately $32.9 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 sales of non-strategic assets, 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
Management Development Development
----------------- ------------------------------------
<S> <C> <C> <C>
(In thousands)
Three Months Ended September 30, 1999
Revenues from external customers........................................ $ 52,655 $ 31,547 $ 54,733
Interest revenue........................................................ 730 145 749
Interest expense, net of capitalized.................................... (13,599) -- --
Segment earnings before depreciation, amortization, gain on non-
strategic asset sales, income taxes, and extraordinary expense.......... 20,304 1,262 6,171
Depreciation and amortization........................................... (8,821) (165) --
Three Months Ended September 30, 1998
Revenues from external customers........................................ 34,099 53,090 10,343
Interest revenue........................................................ 48 56 86
Interest expense, net of capitalized.................................... (11,487) -- --
Segment earnings before depreciation, amortization, gain on non-
strategic asset sales, income taxes, and extraordinary expense.......... 8,521 15,399 2,186
Depreciation and amortization........................................... (7,247) (145) (1)
Nine Months Ended September 30, 1999
Revenues from external customers........................................ 190,189 86,016 87,049
Interest revenue........................................................ 2,321 859 1,322
Interest expense, net of capitalized.................................... (37,869) -- --
Segment earnings before depreciation, amortization, gain on non-
strategic asset sales, income taxes, and extraordinary expense.......... 70,793 8,866 17,562
Depreciation and amortization........................................... (25,174) (599) --
Nine Months Ended September 30, 1998
Revenues from external customers........................................ 112,506 63,274 29,829
Interest revenue........................................................ 119 296 506
Interest expense, net of capitalized.................................... (33,324) -- --
Segment earnings before depreciation, amortization, gain on non-
strategic asset sales, income taxes, and extraordinary expense.......... 46,125 18,320 5,045
Depreciation and amortization........................................... (21,781) (426) (3)
</TABLE>
<TABLE>
<CAPTION>
Mixed-Use Consolidated
Development Others (a) Total
---------------- --------------- ----------------
<S> <C> <C> <C>
(In thousands)
Three Months Ended September 30, 1999
Revenues from external customers........................................ $ 3,807 $ 6,961 $ 149,703
Interest revenue........................................................ 1 269 1,894
Interest expense, net of capitalized.................................... (239) 3,434 (10,404)
Segment earnings before depreciation, amortization, gain on non-
strategic asset sales, income taxes, and extraordinary expense.......... 1,520 6,065 35,322
Depreciation and amortization........................................... (463) (590) (10,039)
Three Months Ended September 30, 1998
Revenues from external customers........................................ 3,339 7,132 108,003
Interest revenue........................................................ 3 188 381
Interest expense, net of capitalized.................................... (537) 2,981 (9,043)
Segment earnings before depreciation, amortization, gain on non-
strategic asset sales, income taxes, and extraordinary expense.......... 71 3,828 30,005
Depreciation and amortization........................................... (341) (496) (8,230)
Nine Months Ended September 30, 1999
Revenues from external customers........................................ 10,233 21,724 395,211
Interest revenue........................................................ 5 712 5,219
Interest expense, net of capitalized.................................... (621) 9,040 (29,450)
Segment earnings before depreciation, amortization, gain on non-
strategic asset sales, income taxes, and extraordinary expense.......... 4,034 6,036 107,291
Depreciation and amortization........................................... (1,192) (1,658) (28,623)
Nine Months Ended September 30, 1998
Revenues from external customers........................................ 9,716 17,516 232,841
Interest revenue........................................................ 7 509 1,437
Interest expense, net of capitalized.................................... (1,734) 6,006 (29,052)
Segment earnings before depreciation, amortization, gain on non-
strategic asset sales, income taxes, and extraordinary expense.......... 619 5,090 75,199
Depreciation and amortization........................................... (1,332) (1,459) (25,001)
</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 the 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 September 30, 1999, management has provided a reserve for estimates
of future costs for remediation of identified or suspected environmental
contamination on operating and previously sold properties. 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 $28.0 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 the 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 September 30, 1999, the Company has outstanding standby letters
of credit and surety bonds in the amount of $125.4 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 $41.6 million
as of September 30, 1999.
NOTE 9. SUBSEQUENT EVENT (PDC)
After the date of the balance sheet, a joint venture, in which a
wholly owned subsidiary of the Company owned an indirect interest, transferred
ownership of its primary asset to a third party. The Company's subsidiaries
received $400,000 in cash consideration for the transfer. The transaction
generated an after-tax extraordinary gain of approximately $26 million.
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.
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.
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
. 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
. Liability for and changes in the scope of environmental remediation
at properties currently or formerly owned, leased, or operated by
us or our predecessors.
. Failure of third parties to fulfill their commitments
. 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
. 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
. 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
10
<PAGE>
Results of Operations
Comparison of the nine-month periods ended September 30, 1999 and 1998
Rental Properties. Rental revenue and property operating costs from our rental
- ------------------
properties for the nine-month periods ended September 30, 1999 and 1998 are
summarized below:
<TABLE>
<CAPTION>
Rental Revenue Property Operating Costs
--------------------------------------------------------------------------------
Nine Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------------------------------------------
1999 1998 Difference 1999 1998 Difference
------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Industrial buildings ............. $ 70,542 $ 57,655 $ 12,887 $ 14,826 $ 11,932 $ 2,894
Office buildings ................. 24,322 23,945 377 10,516 9,840 676
Retail buildings ................. 10,062 10,058 4 3,027 3,007 20
Land development(1) .............. 8,885 8,765 120 5,642 5,578 64
Land leases ...................... 12,040 10,002 2,038 706 626 80
------------ ------------ ------------- ------------ ------------ ------------
$125,851 $110,425 $ 15,426 $ 34,717 $ 30,983 $ 3,734
============ ============ ============= ============ ============ ============
</TABLE>
(1) This category primarily 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>
September 30,
-----------------------------------------------------------------------------------
1999 1998
--------------------------------------- ---------------------------------------
(In thousands, except percentages)
Owned Leased % Owned Leased %
---------- ------------ ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Industrial buildings......... 20,929 19,117 91.3% 15,105 14,370 95.1%
Office buildings............. 1,622 1,485 91.6% 1,620 1,528 94.3%
Retail buildings............. 881 790 89.7% 928 827 89.1%
Land development(1).......... 1,176 1,063 90.4% 1,220 1,054 86.4%
---------- ------------ ----------- -----------
Total(2)..................... 24,608 22,455 91.3% 18,873 17,779 94.2%
========== ============ =========== ===========
</TABLE>
(1) This category primarily 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 nine
months ended September 30, 1999, compared to the same period in 1998, is
primarily because of the net addition of fourteen new buildings, totaling
approximately 3.9 million square feet, that were added to the portfolio during
the first nine months of 1999, and a full nine 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 12.1 million of the
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 $1.4 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 ($0.6) million lower revenue from properties sold during 1999.
Operating costs for the industrial buildings increased by $2.9 million
primarily because of repairs and maintenance for the existing properties and
property taxes related to the new additions to the industrial portfolio.
Rental revenue for our office portfolio increased by $0.4 million for
the nine months ended September 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 $0.7 million, primarily as a result of higher
repairs and maintenance.
11
<PAGE>
The $2.0 million increase in revenues from land leases for the nine
months ended September 30, 1999, compared to the same period in 1998, is
primarily attributable to a full nine 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 a substantial portion of these assets (see
Other Property Activities and Fee Services below).
Equity in earnings of operating joint ventures, net, increased by $0.8
million for the nine months ended September 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 $40.0
- -------------------------------------------
million in the nine months ended September 30, 1999 compared to $20.2 million
for the same period in 1998, summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------
1999 1998 Difference
--------------- --------------- --------------
<S> <C> <C> <C>
(In thousands)
Commercial Sales:
Sales.............................................................. $124,292 $63,595 $60,697
Cost of sales ..................................................... 102,952 52,235 50,717
-------- ------- -------
Gain(1)................................................ 21,340 11,360 9,980
-------- ------- -------
Residential Sales:
Sales.............................................................. 79,118 28,937 50,181
Cost of sales...................................................... 70,706 25,381 45,325
-------- ------- -------
Gain................................................... 8,412 3,556 4,856
-------- ------- -------
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....................................... $ 40,022 $20,240 $19,782
======== ======= =======
</TABLE>
(1) Includes portion of gain attributable to depreciation recapture of $4.3
million for 1999.
The 1999 results from commercial sales for the nine months ended
September 30, 1999 include the closings of the sales of 1.2 million 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 127 acres of land
capable of supporting 2.1 million square feet of commercial development. In the
same period in 1998, the gains were attributable to 0.8 million square feet of
1998 completed industrial building space and 152.5 acres of land capable of
supporting 2.5 million square feet of commercial development. The 1999
commercial sales also include the sales of 659 acres of land and related land
leases associated with acquisitions in the land lease portfolio during 1998. We
anticipate continued gains from land lease sales in 1999.
Residential sales revenue in 1999 resulted from the closings of 185
homes and 9 lots, compared to the closings of 61 homes and 836 lots in 1998. The
increased gain for the residential sales is primarily attributable to the higher
sales volume. Other sales include a sale 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).
12
<PAGE>
Development and management fee income, net, for the nine months ended
September 30, 1999 as compared to the same period in 1998 decreased by $2.1
million. Over the previous two years, a major source of fee income was a
contract to manage and sell the non-railroad real estate assets of a major
railroad company. As anticipated, most of the inventory of managed assets has
been sold in accordance with the customer's goals, and it is expected that
future management fees will decrease.
Equity in earnings of development joint ventures, net, for the nine
months ended September 30, 1999, as compared to the same period in 1998,
increased by $6.1 million primarily because of the increased lot sales at a
residential project in El Dorado County near Sacramento, California. Residential
joint ventures closed 765 lots and 29 units during the first nine months of
1999, compared to 35 units during the same period in 1998.
Other Items on the Statement of Operations. Interest expense increased
- -------------------------------------------
approximately $0.4 million for the nine months ended September 30, 1999,
compared to the same period in 1998; total interest incurred increased $7.0
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 nine months ended September 30, 1999, the average
balance of our industrial and residential work-in-process was $147 million as
compared to $92 million during the same period in 1998. Additionally,
expenditures for our residential property held for sale or under development
were $162.8 million for the nine months ended September 30, 1999, as compared to
$97.0 million during the same period in 1998. We have started construction on
378 residential units thus far in 1999 as compared to 264 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>
Nine Months Ended September 30,
-------------------------------------------
1999 1998 Difference
-------------- ------------ --------------
<S> <C> <C> <C>
(In thousands)
Total interest incurred.................. $ 48,176 $ 41,161 $ 7,015
Interest capitalized..................... (18,726) (12,109) (6,617)
-------------- ------------ --------------
Interest expensed........................ $ 29,450 $ 29,052 $ 398
============== ============ ==============
</TABLE>
General and administrative expense increased by $2.0 million for the
nine months ended September 30, 1999 as compared to the same period in 1998
primarily because of the increase in our overall activities.
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 September 30, 1999, we sold $269 million of non-
strategic assets. The most significant remaining non-strategic asset is our
approximately 777,000-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. At least a portion of the transaction is expected to
close, if at all, by late 1999 or early 2000. The closing schedule is subject to
due diligence and federal government appropriations of up to $36.0 million from
the Land and Water Conservation Fund and we understand that the current Federal
budget negotiations have centered on a Federal government appropriation of up to
$30.0 million. 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 at the option of the non-profit group.
13
<PAGE>
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 asset
sales are expected to be substantially lower than the levels of the past four
years.
Other, net, changed by $2.6 million in the nine months ended September
30, 1999, compared to the same period in 1998, primarily because of interest
income generated by higher restricted funds (tax-deferred sales proceeds and
financing deposits).
Extraordinary Expense. As of September 30, 1998, we closed $116.8 million of the
total $526.5 million long-term non-recourse fixed rate financing. The closing in
the 3/rd/ Quarter resulted in recognition of a 3.3 million extraordinary charge,
net of tax benefit of 2.2 million, related to yield maintenance payment and
write-off of unamortized loan issuance costs.
Comparison of the three-month periods ended September 30, 1999 and 1998
Rental Properties. Rental revenue and property operating costs from our rental
- ------------------
properties for the three-month periods ended September 30, 1999 and 1998 are
summarized below:
<TABLE>
<CAPTION>
Rental Revenues Property operating costs
------------------------------------------ -----------------------------------------
Three Months Ended September 30, Three Months Ended September 30,
------------------------------------------ -----------------------------------------
1999 1998 Difference 1999 1998 Difference
------------ ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Industrial buildings ....... $ 25,070 $ 19,004 $ 6,066 $ 4,898 $ 4,021 $ 877
Office buildings............ 7,951 7,974 (23) 3,681 3,606 75
Retail buildings............ 3,175 3,278 (103) 1,004 1,121 (117)
Land development(1)......... 3,184 3,049 135 1,979 1,979 --
Land leases................. 3,701 3,840 (139) 343 183 160
------------ ------------ ------------- ------------ ------------ -------------
$ 43,081 $ 37,145 $ 5,936 $ 11,905 $ 10,910 $ 995
============ ============ ============= ============ ============ =============
</TABLE>
(1) This category primarily represents interim income-producing uses of
properties intended for mixed-use development.
The increase in revenue from industrial buildings for the three months
ended September 30, 1999, as compared to the same period in 1998, is primarily
because of the net fourteen new buildings totaling approximately 3.9 million
square feet that have been added to the portfolio since January 1, 1999, and a
full quarter of operations from ten buildings totaling approximately 2.4 million
square feet that were added to the portfolio between July and December 1998. The
increase of operational costs is primarily attributable to $0.9 million from the
new buildings.
Other Property Activities and Fee Services. Gain on development
-------------------------------------------
property sales was $15.4 million in the three months ended September 30, 1999,
compared to $10.1 million for the same period in 1998, summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------
1999 1998 Difference
--------------- --------------- --------------
<S> <C> <C> <C>
(In thousands)
Commercial Sales:
Sales................................................................ $ 46,918 $ 52,051 $(5,133)
Cost of sales........................................................ 37,046 43,587 (6,541)
--------------- --------------- --------------
Gain..................................................... 9,872 8,464 1,408
--------------- --------------- --------------
Residential Sales:
Sales................................................................ 51,409 10,052 41,357
Cost of sales........................................................ 45,903 8,372 37,531
--------------- --------------- --------------
Gain..................................................... 5,506 1,680 3,826
--------------- --------------- --------------
Total gain on property sales......................................... $ 15,378 $ 10,144 $ 5,234
=============== =============== ==============
</TABLE>
14
<PAGE>
The 1999 results from commercial sales for the three months ended
September 30, 1999, include the closings of the sales of 609,000 square feet of
new industrial building space that was completed this year and 19.6 acres
of land capable of supporting 0.4 million square feet of commercial development,
compared to the sales of 0.8 million square feet of 1998 completed industrial
building space and 71.9 acres capable of supporting 1.2 million square feet of
development for the same period in 1998. The 1999 commercial sales also include
the sales of 190.6 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
September 30, 1999, include the closings of 124 homes, as compared to 6 homes
and 19 lots for the same period in 1998. The increase in gain from the
residential sales is primarily because of the higher sales volume in 1999.
We expect there will be significant variability in income generated
from our other property activities (see Variability in Results section below).
Development and management fee income, net, decreased by $1.0 million
for the three months ended September 30, 1999 compared to the same period in
1998. Over the previous two years a major source of fee income was a contract to
manage and sell the non-railroad real estate assets of a major railroad company.
As anticipated, most of the inventory of managed assets has been sold in
accordance with the customer's goals and we expect that future management fee
income will decrease.
Equity in earnings of development joint ventures increased by $1.8
million for the three months ended September 30, 1999 compared to the same
period in 1998. The increase is primarily because of the increased lot sales at
a residential project in El Dorado County near Sacramento, California.
Residential joint ventures closed 234 lots and 9 units during the three months
ended September 30, 1999, compared to 17 units during the same period of 1998.
Other Items on the Statement of Operations. Interest expense increased
- -------------------------------------------
approximately $1.4 million for the three months ended September 30, 1999
compared to the same period in 1998; total interest incurred increased $1.7
million. Increased interest expense attributable to higher acquisitions (see
Liquidity and Capital Resources section) and additions to the rental portfolio
was partly offset by the increase in capitalized interest related to development
activity and lower interest rates resulting from a major refinancing completed
in 1998.
Following is a summary of interest incurred:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------
1999 1998 Difference
-------------- ------------ --------------
<S> <C> <C> <C>
(In thousands)
Total interest incurred............................................... $ 16,777 $ 15,104 $ 1,673
Interest capitalized.................................................. (6,373) (6,061) (312)
-------------- ------------ --------------
Interest expensed..................................................... $ 10,404 $ 9,043 $ 1,361
============== ============ ==============
</TABLE>
General and administrative expense increased by $0.7 million for the
three months ended September 30, 1999 as compared to the same period in 1998
primarily because of the increase in our overall activities.
15
<PAGE>
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 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 and
some within the last few 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. Since depreciation expense is excluded from
EBDDT, the portion of property sales gain attributable to depreciation recapture
is excluded from EBDDT. 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 Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(In thousands) (In thousands)
Net income applicable to common stockholders.................... $ 19,126 $ 11,395 $ 53,313 $ 31,051
Depreciation and amortization................................ 10,039 8,230 28,623 25,001
Deferred income taxes........................................ 10,922 6,929 24,800 16,476
Gain on non-strategic asset sales............................ (2,529) (2,858) (6,419) (7,228)
Depreciation recapture....................................... (4,290) -- (4,290) --
Extraordinary item........................................... -- 3,307 -- 3,307
------------ ------------ ------------ ------------
Earnings before depreciation and deferred taxes................. $ 33,268 $ 27,003 $ 96,027 $ 68,607
============ ============ ============ ============
Average number of common shares outstanding - basic............. 107,085 106,747 106,964 106,660
============ ============ ============ ============
Average number of common shares outstanding - diluted........... 109,266 109,190 109,261 109,570
============ ============ ============ ============
</TABLE>
For changes in EBDDT, see discussions on Results of Operations above.
16
<PAGE>
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 nine months ended September 30, 1999 and 1998
was $98.1 million and $(8.5) million, respectively. The change is primarily
because of an increase in sales of commercial, residential, and other properties
to $243.1 million in 1999 from $99.7 million in 1998, and an increase in
operating distributions from joint ventures to $32.5 million, in 1999 from $8.5
million in 1998, 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.
Cash flows from investing activities
Net cash used in investing activities reflected in the statement of
cash flows for the nine months ended September 30, 1999 and 1998 was $190.3
million and $136.4 million, respectively. The increase between 1999 and 1998 is
because of a $17.1 million increase in commercial property acquisitions, a $79.8
million increase in capital expenditures (primarily attributable to $48.8
million for construction and building improvements, $5.1 million for capitalized
interest and property taxes, and $29.3 million for infrastructure and other),
and a $4.1 million increase in contributions to joint ventures. The increase is
also due to a $6.7 million increase in short-term investments and restricted
cash in 1999 compared to a decrease in restricted cash of $31.2 million in 1998.
Included in the restricted cash and investment balance is $32.9 million of
proceeds from property sales held in separate accounts at trust companies 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.
17
<PAGE>
Capital expenditures include the following:
<TABLE>
<CAPTION>
Nine Months Ended Sepember 30,
-------------------------------------------
1999 1998 Difference
------------- ------------- -------------
<S> <C> <C> <C>
(In thousands)
Capital Expenditures From Operating Activities and Non-Cash Acquisitions (1)
Capital expenditures for residential and industrial development properties.............. $ 133,316 $112,544 $ 20,772
Residential property acquisitions....................................................... 36,945 18,709 18,236
Capitalized interest and property tax................................................... 13,135 8,102 5,033
------------- ------------- -------------
Expenditures for development properties.............................................. 183,396 139,355 44,041
Other property acquisitions............................................................. 289 10,467 (10,178)
------------- ------------- -------------
Capital expenditures in cash flows for operating activities.......................... 183,685 149,822 33,863
Seller-financed acquisitions............................................................ 7,127 41,378 (34,251)
------------- ------------- -------------
Total capital expenditures in operating activities................................... 190,812 191,200 (388)
------------- ------------- -------------
Capital Expenditures From Investing Activities and Non-Cash Activities (2)
Construction and building improvements.................................................. 74,721 47,643 27,078
Capital lease construction and building improvements.................................... 21,761 -- 21,761
Predevelopment.......................................................................... 9,241 12,710 (3,469)
Infrastructure and other................................................................ 31,828 2,485 29,343
Capitalized interest and property tax................................................... 10,706 5,586 5,120
------------- ------------- -------------
Capital expenditures for investment properties....................................... 148,257 68,424 79,833
Commercial property acquisitions........................................................ 50,290 33,230 17,060
Tenant improvements..................................................................... 1,851 2,001 (150)
------------- ------------- -------------
Capital expenditures in investing activities......................................... 200,398 103,655 96,743
------------- ------------- -------------
Seller-financed acquisition............................................................. 14,000 -- 14,000
------------- ------------- -------------
Total capital expenditures.............................................................. $ 405,210 $ 294,855 $ 110,355
============= ============= =============
</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 nine months ended September 30, 1999, we started construction
on 378 residential units and completed 186 units compared to 264 starts and 61
completions during the same period in 1998 including our consolidated joint
venture projects.
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>
Nine Months Ended September 30,
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
(In square feet)
Under construction, beginning of period..................................... 5,036,500 3,774,000
Construction starts......................................................... 3,067,000 2,613,000
Completed - retained in portfolio........................................... (2,760,000) (240,000)
Completed - design/build or sold............................................ (1,701,000) (1,227,000)
---------------- ---------------
Under construction, end of period........................................... 3,642,500 4,920,000
================ ===============
Contracts signed, construction not started.................................. 581,000 258,000
================ ===============
</TABLE>
18
<PAGE>
Property Acquisitions--For the nine months ended September 30, 1999
and 1998, we invested approximately $108.7 million and $103.8 million,
respectively, in the acquisition of new property directly or through joint
ventures.
. Residential Acquisitions--For the nine months ended September 30, 1999, we
invested approximately $42.9 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 by CRG.
. Commercial Acquisitions--For the nine months ended September 30, 1999, we
invested approximately $64.4 million in the acquisitions of entitled
commercial development land, and four completed industrial buildings. These
acquisitions added approximately 1.3 million square feet of potential
industrial development in Grand Prairie, Texas, 1.0 million square feet of
potential office development in Westminster, Colorado, and 0.9 and 0.3
million square feet in the commercial portfolio in Ohio and Illinois,
respectively. 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, including 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 commercial 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.
Cash flows from financing activities
Net cash provided by financing activities reflected in the statement
of cash flows decreased by $72.2 million in 1999 compared to 1998. This decrease
is primarily because of a $129.2 million decrease in net borrowing in 1999, as
compared to 1998. This was offset by $46.9 million 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.
Capital commitments
As of September 30, 1999, we had outstanding standby letters of credit
and surety bonds in the amount of $125.4 million in favor of local
municipalities or financial institutions to guarantee performance on
construction of real property improvements or financial obligations.
As of September 30, 1999, we had approximately $79.8 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 September 30, 1999, we had $46.4 million in cash and cash
equivalents, and $42.6 million in restricted cash and investments. In addition,
we had available $125.4 million under our revolving credit facility and
construction line of credit.
19
<PAGE>
CRG has an $80 million line of credit facility at September 30, 1999.
The borrowing capacity at any point in time varies as property and homes are
acquired, built and sold. At September 30, 1999, the capacity was $62.9 million,
of which $54.3 million was drawn. Consequently, an additional $17.1 million of
liquidity was 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 property, and non-strategic assets, and
(3) additional debt. As noted above, lines of credit are currently 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.
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 $437 million,
and require that we maintain certain other specified financial ratios. We were
in compliance with all such covenants at September 30, 1999.
Environmental Matters
Many of our properties are in urban and industrial areas and may be
leased to or 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. At September
30, 1999, management has provided a reserve for estimates of future costs for
remediation of identified or suspected environmental contamination on operating
and previously sold properties. 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
September 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 $28.0 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 1999 totaled 0.9
million.
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.
20
<PAGE>
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 and substantially completed 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 all phases of the Program for I.S. Since
January 1997, we have ensured that all regularly scheduled I.S. replacements and
upgrades are Year 2000 compliant. From January 1, 1997, through September 30,
1999, we spent approximately $1.5 million on I.S. improvements, upgrades and
replacements. Additionally, for the remainder of 1999, we may spend up to
approximately $90,000 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 spent approximately
$150,000 on testing and upgrades specifically related to the Year 2000 issue.
No significant planned I.S. projects were deferred because of the Program.
We believe that, with these improvements, upgrades and replacements, the
Year 2000 problem will not significantly affect I.S. Nevertheless, we have
developed contingency plans for I.S. to address unforeseen problems, such as by
creating backup copies of year-end data.
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
21
<PAGE>
systems, fire-life safety systems, and other automated building systems, which
could affect use and access to buildings and emergency response capabilities.
We have substantially completed all phases of the Program for Embedded
Technology. In December 1998, we completed an inventory of Embedded Technology
in those systems for which we are responsible in our approximately 250
buildings. In the first half of 1999, we engaged an engineering firm to conduct
an analysis of embedded technology in our higher risk buildings nationwide, at a
total cost of approximately $650,000, including costs of remediation and
testing. This analysis identified a small number of systems that require
further remediation, none of which entails a material risk and the aggregate
effect of which is expected to be immaterial. We have developed contingency
plans for those noncompliant systems, such as alternate arrangements for access
to buildings and scheduling personnel to manually reset calendars. 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. We have conducted more detailed evaluations of the most critical Third
Parties. We have not yet identified any Third Party for whom the Year 2000
problem is likely to have an impact such that it may materially affect our
business. 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. Our efforts in this area are ongoing as we continue to follow up
with those Third Parties that have not responded to our inquiries; none of those
that have not responded is critical to our business. 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 has been undertaken by our employees and has not
involved significant additional expenditures, nor delayed any of our other work
significantly.
Summary. 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 our results of operations, liquidity,
or financial condition. We believe that the Program has significantly reduced
the risk of interruption of our business operations.
22
<PAGE>
PART II. OTHER INFORMATION
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: November 15, 1999 By: /s/ C. William Hosler
--------------------- --------------------------------
C. William Hosler
Senior Vice President
Chief Financial Officer
Principal Financial Officer
Date: November 15, 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 (11)
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 (10)
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 (1)
4.3 Loan Agreement dated as of October 28, 1996 between the Registrant and
Bank of America National Trust and Savings Association (8)
10.1 Exploration Agreement and Option to Lease dated December 28, 1989
between the Registrant and Santa Fe Pacific Minerals Corporation (1)
10.2A Registration Rights Agreement dated as of December 29, 1989 among the
Registrant, BAREIA, O&Y and Itel (1)
10.2B First Amendment to Registration Rights Agreement among the Registrant,
BAREIA, O&Y and Itel (5)
10.2C Letter Agreement dated November 14, 1995 between the Registrant and
California Public Employees' Retirement System (7)
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 (9)
10.8 Registrant's amended and Restated Executive Stock Option Plan (9)
25
<PAGE>
10.9 Amended and Restated Executive Employment Agreement dated as of
November 29, 1995 between the Registrant and Nelson C. Rising (7)
10.11A Employment Agreement dated July 24, 1996 between the Registrant and
Stephen P. Wallace (7)
10.11B Letter Agreement dated November 16, 1996 between the Registrant and
Steve Wallace (10)
10.12 Registrant's Amended and Restated 1995 Stock Option Plan (9)
10.13 Registrant's Amended and Restated 1996 Performance Award Plan (11)
10.14 Amended and Restated Employment Agreement dated September 16, 1997
between the Registrant and Kathleen Smalley (11)
10.15 Office lease dated November 22, 1996 between Bradbury Associates, L.P.
and the Registrant (10)
10.16 Registrant's Deferred Compensation Plan (11)
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 the Form 10-K for the year ended December 31,
1995.
(8) Incorporated by reference to the Form 10-K for the year ended December 31,
1996.
(9) Incorporated by reference to the Form 10-K for the year ended December 31,
1997.
(10) Incorporated by reference to the Form 10-K for the year ended December 31,
1998.
(11) Incorporated by reference to the Form 10-Q for the quarter ended March 31,
1999.
(12) Incorporated by reference to the Form 10-Q for the quarter ended June 30,
1999.
26
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