<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended Commission file number
March 31, 2000 0-18694
CATELLUS DEVELOPMENT
CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2953477
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
201 Mission Street
San Francisco, California 94105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(415) 974-4500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of May 9, 2000, there were 106,858,536 issued and outstanding shares of
the Registrant's Common Stock.
================================================================================
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of March 31, 2000, and December 31, 1999.... 2
Consolidated Statement of Operations for the three months ended
March 31, 2000 and 1999................................................ 3
Consolidated Statement of Cash Flows for the three months ended
March 31, 2000 and 1999................................................ 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 12
PART II. OTHER INFORMATION................................................................... 26
SIGNATURES.................................................................................... 27
EXHIBIT INDEX................................................................................. 28
</TABLE>
<PAGE>
PART I
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
(Unaudited)
<S> <C> <C>
Assets
Properties.......................................................... $1,995,482 $1,944,017
Less accumulated depreciation....................................... (304,329) (294,846)
---------- ----------
1,691,153 1,649,171
Other assets and deferred charges, net.............................. 97,151 93,021
Notes receivable, less allowance.................................... 16,680 32,890
Accounts receivable, less allowance................................. 24,271 24,820
Restricted cash and investments..................................... 66,934 19,565
Cash and cash equivalents........................................... 18,003 35,410
---------- ----------
Total....................................................... $1,914,192 $1,854,877
========== ==========
Liabilities and stockholders' equity
Mortgage and other debt............................................. $ 887,188 $ 875,564
Accounts payable and accrued expenses............................... 99,475 92,791
Deferred credits and other liabilities.............................. 53,932 58,751
Deferred income taxes............................................... 201,516 185,592
---------- ----------
Total liabilities.............................................. 1,242,111 1,212,698
---------- ----------
Commitments and contingencies (Note 8)
Minority interests.................................................. 50,338 51,207
---------- ----------
Stockholders' equity
Common stock, 107,549 and 107,185 shares issued at March 31, 2000,
and December 31, 1999, respectively.............................. 1,076 1,072
Paid-in capital................................................... 487,108 483,503
Treasury stock, at cost (615 shares at March 31, 2000)............ (7,576) --
Accumulated earnings.............................................. 141,135 106,397
---------- ----------
Total stockholders' equity..................................... 621,743 590,972
---------- ----------
Total....................................................... $1,914,192 $1,854,877
========== ==========
</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
March 31,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Rental properties
Rental revenue.................................................... $ 49,918 $ 41,479
Property operating costs.......................................... (12,658) (11,508)
Equity in earnings of operating joint ventures, net............... 3,638 3,436
-------- --------
40,898 33,407
-------- --------
Property sales and fee services
Sales revenue..................................................... 76,021 73,639
Cost of sales..................................................... (56,138) (55,722)
-------- --------
Gain on property sales......................................... 19,883 17,917
Management and development fees................................... 3,269 2,836
Equity in earnings of development joint ventures, net............. 1,131 132
Selling, general and administrative expenses...................... (9,923) (5,560)
Other, net........................................................ 1,403 98
-------- --------
15,763 15,423
-------- --------
Interest expense.................................................... (9,819) (9,406)
Depreciation and amortization....................................... (10,870) (9,162)
Corporate administrative costs...................................... (4,260) (3,844)
Gain on non-strategic asset sales................................... 27,667 986
Other, net.......................................................... 136 34
-------- --------
Income before minority interests and income taxes................. 59,515 27,438
Minority interests.................................................. (1,603) 9
-------- --------
Income before income taxes........................................ 57,912 27,447
-------- --------
Income tax expense
Current........................................................... (6,524) (4,897)
Deferred.......................................................... (16,650) (6,170)
-------- --------
(23,174) (11,067)
-------- --------
Net income........................................................ $ 34,738 $ 16,380
======== ========
Net income per share
Basic.......................................................... $ 0.32 $ 0.15
======== ========
Assuming dilution.............................................. $ 0.32 $ 0.15
======== ========
Average number of common shares outstanding--basic................ 107,292 106,832
======== ========
Average number of common shares outstanding--diluted.............. 108,900 109,238
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 34,738 $ 16,380
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 10,870 9,162
Deferred income taxes........................................ 16,650 6,170
Amortization of deferred loan fees and other costs........... 1,351 1,027
Equity in earnings of joint ventures......................... (4,769) (3,568)
Operating distributions from joint ventures.................. 2,139 20,961
Gain on sale of investment property.......................... -- (10,270)
Cost of properties and non-strategic assets sold............. 51,704 26,023
Expenditures for development properties...................... (43,922) (51,596)
Other, net................................................... 509 1,498
Change in operating assets and liabilities.................... 3,959 (5,010)
-------- --------
Net cash provided by operating activities....................... 73,229 10,777
-------- --------
Cash flows from investing activities:
Proceeds from sale of investment property..................... -- 13,926
Property acquisitions......................................... -- (16,623)
Capital expenditures for investment properties................ (41,631) (43,547)
Tenant improvements........................................... (1,835) (538)
Contributions to joint ventures............................... (4,260) (7,854)
Restricted cash............................................... (47,369) (11,336)
-------- --------
Net cash used in investing activities........................... (95,095) (65,972)
-------- --------
Cash flows from financing activities:
Borrowings.................................................... 41,289 71,711
Repayment of borrowings....................................... (29,665) (42,765)
Distributions to minority partners............................ (2,472) (100)
Repurchase of common stock.................................... (7,576) --
Proceeds from issuance of common stock........................ 2,883 324
-------- --------
Net cash provided by financing activities....................... 4,459 29,170
-------- --------
Net decrease in cash and cash equivalents....................... (17,407) (26,025)
Cash and cash equivalents at beginning of period................ 35,410 52,975
-------- --------
Cash and cash equivalents at end of period...................... $ 18,003 $ 26,950
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)......................... $ 8,576 $ 8,307
Income taxes................................................. $ 2,634 $ 63
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(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 other projects (owned directly or through joint ventures) is
located mainly in major markets in California, Illinois, Texas, Colorado, and
Oregon. Additional projects are located in Arizona and Oklahoma. 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 plus
Ohio and Kentucky. The Company has additional 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 1999 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 have been reclassified to conform
with the current period presentation.
In October, 1999, the Company's Board of Directors authorized a share
repurchase program for up to $50 million of the outstanding common stock. The
timing of purchases under the program will be at the discretion of the Company.
Share purchases under the program may be made on the open market or in privately
negotiated transactions. The program has been authorized for a period of one
year. As of March 31, 2000, the Company repurchased 614,700 shares at a cost
$7.6 million. The Company's repurchases are reflected as treasury stock
utilizing the cost method of accounting and are presented as a reduction to
consolidated stockholders' equity.
NOTE 3. RESTRICTED CASH AND INVESTMENTS
Of the total restricted cash and investments of $66.9 million at March 31,
2000, $59.8 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 $7.1 million at March 31, 2000, represent certificates
of deposits used to guarantee lease performance for certain properties that
secure debt.
5
<PAGE>
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 March 31,
--------------------------------------------------------------------------
2000 1999
-------------------------------------- --------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------------ --------- ------------ -------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net income........................................... $34,738 107,292 $0.32 $16,380 106,832 $0.15
===== =====
Net effect of dilutive securities: stock options..... -- 1,608 -- 2,406
------- ------- ------- -------
Net income assuming dilution......................... $34,738 108,900 $0.32 $16,380 109,238 $0.15
======= ======= ===== ======= ======= =====
</TABLE>
NOTE 5. MORTGAGE AND OTHER DEBT
Mortgage and other debt at March 31, 2000, and December 31, 1999, are
summarized as follows:
<TABLE>
March 31, December 31,
2000 1999
-------------- -------------
(In thousands)
<S> <C> <C>
First mortgage loans.................................................... $596,539 $589,056
Secured revolving credit line........................................... 38,135 48,135
Acquisition secured promissory notes.................................... 43,531 44,022
Unsecured revolving credit lines........................................ 36,000 36,000
Construction and acquisition loans-secured.............................. 84,248 83,266
Assessment district bonds............................................... 24,616 24,845
Term loan-secured....................................................... 12,568 12,612
Secured promissory notes................................................ 21,360 21,360
Industrial capital lease................................................ 20,868 6,852
Other loans............................................................. 9,323 9,416
-------- --------
Total mortgage and other debt.......................................... $887,188 $875,564
======== ========
Due within one year..................................................... $ 84,986 $132,317
======== ========
</TABLE>
In January 2000, the Company closed a $9.6 million first mortgage loan
bearing interest at 7.29% (7.37% effective rate when considering financing
costs), maturing in January 2008. The entire amount was outstanding at March 31,
2000.
In February 2000, the Company's residential subsidiary increased the
capacity of its unsecured credit line from $80 million to $100 million and
extended the maturity date to October 1, 2001. Based on the residential
subsidiary's collateral base available at March 31, 2000, the Company can borrow
$42.3 million of which $36.0 million is outstanding as of March 31, 2000.
In March 2000, the Company closed a variable rate (LIBOR plus 2.00%)
secured construction loan with a total capacity of $9.0 million. This loan had
an outstanding balance of $5.7 million at March 31, 2000, and matures in April
2002.
6
<PAGE>
Interest costs relating to mortgage and other debt for the three-month
periods ended March 31, 2000 and 1999, are summarized as follows:
Three Months Ended
March 31,
----------------------------
2000 1999
------------ -----------
(In thousands)
Total interest incurred.................. $15,807 $15,300
Interest capitalized..................... (5,988) (5,894)
------- -------
Interest expensed...................... $ 9,819 $ 9,406
======= =======
NOTE 6. PROPERTIES
Book value by property type at March 31, 2000, and December 31, 1999,
consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ------------
(In thousands)
<S> <C> <C>
Rental properties:
Industrial buildings.................................................... $ 764,944 $ 739,158
Office buildings........................................................ 202,587 200,760
Retail buildings........................................................ 93,200 92,946
Land and land leases/(1)/............................................... 61,885 64,071
Investment in operating joint ventures.................................. (190) (2,916)
---------- ----------
1,122,426 1,094,019
---------- ----------
Developable properties:
Industrial.............................................................. 196,666 193,520
Residential............................................................. 95,198 116,118
Urban development....................................................... 328,021 323,859
Investment in development joint ventures................................ 59,826 47,925
---------- ----------
679,711 681,422
---------- ----------
Work-in-process:
Industrial.............................................................. 36,190 52,207
Industrial--capital lease............................................... 38,192 13,038
Residential............................................................. 79,841 65,154
---------- ----------
154,223 130,399
---------- ----------
Resources.................................................................. 3,979 4,952
Properties held for sale................................................... 7,382 7,471
Other...................................................................... 27,761 25,754
---------- ----------
Gross book value........................................................... 1,995,482 1,944,017
Accumulated depreciation................................................... (304,329) (294,846)
---------- ----------
Net book value............................................................. $1,691,153 $1,649,171
========== ==========
</TABLE>
________________
/(1)/ This category includes $27.9 million of land which the Company intends to
sell.
7
<PAGE>
NOTE 7. SEGMENT REPORTING
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting which disaggregates its
business by type. The Company has four reportable segments: Commercial,
Residential, Urban Development, and Corporate. The Commercial segment leases and
manages the Company-owned commercial buildings and land leases, develops real
estate for the Company's own account or for third parties, and acquires and
sells developable land and commercial buildings. The Residential segment is
involved in home-building, community development and project management
activities (see additional discussion regarding the potential sale of the
Merchant Housing business at Page 15). The Urban Development segment entitles
and develops major mixed-use development sites, which include development for
residential, office, retail, and entertainment purposes. The Corporate segment
consists of administrative and other services.
Inter-segment gains and losses are not recognized. Debt and interest-
bearing assets are allocated to segments based upon the grouping of the
underlying assets. All other assets and liabilities are specifically identified.
Each segment has a separate operating management structure.
The Company uses a supplemental performance measure, Earnings Before
Depreciation and Deferred Taxes ("EBDDT"), along with net income, to report
operating results. EBDDT is not a measure of operating results or cash flows
from operating activities as defined by generally accepted accounting
principles. Further, 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. The Company believes that EBDDT provides relevant
information about operations and is useful, along with net income, for an
understanding of the Company's operating results.
EBDDT is calculated by making various adjustments to net income.
Depreciation, amortization, and deferred income taxes are added back to net
income as they represent non-cash charges. Since depreciation expense is added
back to net income in arriving at EBDDT, the portion of gain on property sales
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. A reconciliation from EBDDT to net income
is also provided.
8
<PAGE>
Financial data by reportable segment is as follows:
<TABLE>
<CAPTION>
Urban
Commercial Residential Development Corporate Total
----------- ----------- ----------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 2000
Rental properties:
Rental revenue....................................... $ 45,883 $ 245 $ 3,790 $ -- $ 49,918
Property operating costs............................. (11,007) -- (1,651) -- (12,658)
Equity in earnings of operating joint ventures,
net................................................. 3,638 -- -- -- 3,638
-------- -------- ------- -------- --------
38,514 245 2,139 -- 40,898
-------- -------- ------- -------- --------
Property sales and fee services:
Sales revenue........................................ 31,211 44,810 -- -- 76,021
Cost of sales........................................ (19,552) (36,586) -- -- (56,138)
-------- -------- ------- -------- --------
Gain on property sales............................. 11,659 8,224 -- -- 19,883
Management and development fees...................... 2,736 240 293 -- 3,269
Equity in earnings of development joint
ventures, net....................................... 19 1,112 -- -- 1,131
Selling, general and administrative expenses......... (3,905) (5,530) (488) -- (9,923)
Other................................................ 947 500 (44) -- 1,403
-------- -------- ------- -------- --------
11,456 4,546 (239) -- 15,763
-------- -------- ------- -------- --------
Interest expense..................................... (10,577) (16) (256) 1,030 (9,819)
Corporate administrative costs....................... -- -- -- (4,260) (4,260)
Minority interests................................... (1,554) (49) -- -- (1,603)
Other................................................ -- -- -- 136 136
Depreciation recapture............................... (192) -- -- -- (192)
-------- -------- ------- -------- --------
Pre-tax EBDDT...................................... $ 37,647 $ 4,726 $ 1,644 $(3,094) 40,923
======== ======== ======= ========
Current taxes........................................ (6,524)
--------
EBDDT................................................ 34,399
Depreciation and amortization........................ (10,870)
Deferred taxes....................................... (16,650)
Non-strategic asset sales............................ 27,667
Depreciation recapture............................... 192
--------
Net Income......................................... $ 34,738
========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 1999
Rental properties:
Rental revenue....................................... $ 38,422 $ 81 $ 2,976 $ -- $ 41,479
Property operating costs............................. (9,843) -- (1,665) -- (11,508)
Equity in earnings of operating joint ventures,
net................................................. 3,436 -- -- -- 3,436
---------- ----------- ----------- --------- ---------
32,015 81 1,311 -- 33,407
---------- ----------- ----------- --------- ---------
Property sales and fee services:
Sales revenue........................................ 58,173 15,466 -- -- 73,639
Cost of sales........................................ (45,228) (10,494) -- -- (55,722)
---------- ----------- ----------- --------- ---------
Gain on property sales............................. 12,945 4,972 -- -- 17,917
Management and development fees...................... 2,662 126 48 -- 2,836
Equity in earnings of development joint
ventures, net....................................... (23) 155 -- -- 132
Selling, general and administrative expenses......... (2,266) (3,149) (145) -- (5,560)
Other................................................ (47) 188 (43) -- 98
---------- ----------- ----------- --------- ---------
13,271 2,292 (140) -- 15,423
---------- ----------- ----------- --------- ---------
Interest expense..................................... (10,864) (1) (177) 1,636 (9,406)
Corporate administrative costs....................... -- -- -- (3,844) (3,844)
Minority interests................................... -- 9 -- -- 9
Other................................................ -- -- -- 34 34
---------- ----------- ----------- --------- ---------
Pre-tax EBDDT...................................... $ 34,422 $ 2,381 $ 994 $ (2,174) 35,623
========== =========== =========== =========
Current taxes........................................ (4,897)
---------
EBDDT................................................ 30,726
Depreciation and amortization........................ (9,162)
Deferred taxes....................................... (6,170)
Non-strategic asset sales............................ 986
---------
Net Income......................................... $ 16,380
=========
</TABLE>
10
<PAGE>
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company is a party to a number of legal actions arising in the ordinary
course of business. The Company cannot predict with certainty the final outcome
of these proceedings. Considering current insurance coverages and the
substantial legal defenses available, however, management believes that none of
these actions, when finally resolved, will have a material adverse effect on the
consolidated financial position, results of operations, or cash flows of the
Company. Some of the legal actions to which we are a party seek to restrain
actions related to the development process. Typically, such actions, if
successful, would not result in significant financial liability for us but might
instead prevent the completion of the development process or the completion of
the development process as originally planned.
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. 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 potentially responsible parties, and the extent to which such costs are
recoverable from insurance. Also, the Company does not generally have access to
properties sold in the past that could create environmental liabilities.
At March 31, 2000, management estimates that future costs for remediation
of identified or suspected environmental contamination on operating properties
and properties previously sold approximate $7.7 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 $10.6 million to $24.7
million. These amounts will be capitalized as components of development costs
when incurred, which is anticipated to be over a period of twenty years, or will
be deferred and charged to cost of sales when the properties are sold. The
Company's estimates were developed based on reviews which took place over
several years based upon then-prevailing law and identified site conditions.
Because of the breadth of its portfolio, and past sales, the Company is unable
to review each property extensively on a regular basis. Such estimates are not
precise and are always subject to the availability of further information about
the prevailing conditions at the site, the future requirements of regulatory
agencies, and the availability and ability of other parties to pay some or all
of such costs.
As of March 31, 2000, the Company has outstanding standby letters of credit
and surety bonds in the amount of $130.8 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 $38.4 million
as of March 31, 2000.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of financial condition and EBDDT, as
defined, should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our 1999
Form 10-K.
Summary EBDDT for the three months ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Ended Urban Total Pre-Tax Current
March 31, Commercial Residential Development Corporate EBDDT Tax EBDDT
- ------------------------- ---------- ----------- ------------ ------------ ------------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2000..................... $37,647 $4,726 $1,644 $(3,094) $40,923 $(6,524) $34,399
1999..................... $34,422 $2,381 $ 994 $(2,174) $35,623 $(4,897) $30,726
</TABLE>
Commercial:
The Commercial segment acquires and develops suburban commercial business
parks for our own account and the account of others. EBDDT primarily consists of
rental income for buildings owned and sales gains from properties sold.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Difference
2000 1999 2000/1999
-------- -------- ----------
(In thousands)
<S> <C> <C> <C>
Rental properties:
Rental revenue.................................... $ 45,883 $ 38,422 $ 7,461
Property operating costs.......................... (11,007) (9,843) (1,164)
Equity in earnings of operating joint ventures,
net.............................................. 3,638 3,436 202
-------- -------- ---------
38,514 32,015 6,499
-------- -------- ---------
Property sales and fee services:
Sales revenue..................................... 31,211 58,173 (26,962)
Cost of property sold/(1)/........................ (19,744) (45,228) 25,484
-------- -------- ---------
Gain on property sales.......................... 11,467 12,945 (1,478)
Management and development fees................... 2,736 2,662 74
Equity in earnings of development joint ventures,
net.............................................. 19 (23) 42
Selling, general and administrative expenses...... (3,905) (2,266) (1,639)
Other............................................. 947 (47) 994
-------- -------- ---------
11,264 13,271 (2,007)
-------- -------- ---------
Interest expense.................................. (10,577) (10,864) 287
Minority interests................................ (1,554) -- (1,554)
-------- -------- ---------
Pre-tax EBDDT................................ $ 37,647 $ 34,422 $ 3,225
======== ======== =========
Rental Building Occupancy:
(In thousands and square feet, except percentages)
Owned............................................. 25,535 20,206
Occupied.......................................... 24,116 18,850
Occupancy percentage.............................. 94.4% 93.3%
</TABLE>
- ------------------
/(1)/ Included in 2000 cost of property sold is $0.2 million of depreciation
recapture, which is included in net income, but not EBDDT.
12
<PAGE>
Rental Revenue Less Property Operating Costs
Rental revenue less operating costs has increased $6.3 million for the
three months ended March 31, 2000, over the same period in 1999 mainly because
of additions of buildings, land and land leases, and rental increases on Same
Space partially offset by properties sold. We added a net 0.8 million square
feet in the current quarter and 5.1 million square feet in 1999 to our rental
portfolio. Properties that were owned and operated for the entire current period
and the immediate preceding year are referred to as "Same Space." The rental
revenue less operating costs for the three months ended March 31, 2000 and 1999,
is summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Difference
2000 1999 2000/1999
------- ------- ----------
(In thousands)
<S> <C> <C> <C>
Rental revenue less
operating costs:
Same Space............................. $25,942 $23,631 $ 2,311
Properties added to portfolio.......... 5,297 827 4,470
Properties sold from portfolio......... 134 501 (367)
Land and land leases................... 3,503 3,620 (117)
------- ------- ----------
$34,876 $28,579 $ 6,297
======= ======= ==========
</TABLE>
Generally, because of the long-term nature of our leases and the
historically low growth in rental rates for our product, we do not expect
substantial increases in rental income from our existing rental portfolio.
Rather, we expect growth in overall portfolio rental income as new properties
are added to our rental portfolio over time.
Sales Revenue
Our commercial development business has decreased gain from property sales
for the three months ended March 31, 2000, over the same period in 1999 (see
construction activity chart for 2000 and 1999 at page 22). Gain on property
sales was $11.5 million in 2000 and $12.9 million in 1999 summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Difference
2000 1999 2000/1999
-------- -------- ----------
(In thousands)
<S> <C> <C> <C>
Commercial sales:
Building sales:
Sales proceeds.............................. $ 9,977 $ 11,703 $ (1,726)
Cost of sales............................... (8,031) (10,585) 2,554
-------- -------- ----------
Gain....................................... 1,946 1,118 828
-------- -------- ----------
Land sales:
Sales proceeds.............................. 20,012 4,397 15,615
Cost of sales............................... (10,840) (2,295) (8,545)
-------- -------- ----------
Gain....................................... 9,172 2,102 7,070
-------- -------- ----------
Other sales:
Sales proceeds.............................. 1,222 42,073 (40,851)
Cost of sales............................... (873) (32,348) 31,475
-------- -------- ----------
Gain....................................... 349 9,725 (9,376)
-------- -------- ----------
Total gain on property sales............. $ 11,467 $ 12,945 $ (1,478)
======== ======== ==========
</TABLE>
The commercial property sales for the three months ended March 31, 2000,
include the closings of the sale of 267,000 square feet of new industrial
building space and 41.9 acres of improved land capable of supporting 0.8 million
square feet of commercial development. The commercial sales for the three months
ended March 31, 1999, include the closing of 100,000 square feet of building
space and 21.9 acres of land capable of supporting 0.5 million square feet of
commercial development.
13
<PAGE>
"Other sales" in the table above includes a sale by one of our joint ventures
of an apartment project in San Diego, California, in 1999; there were no
property sales from our operating joint ventures in 2000. The 2000 "Other sales"
includes the sale of 83 acres of leased land that we had acquired during 1998.
Following is a summary of property sales under contract but not closed:
<TABLE>
<CAPTION>
March 31,
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Sales under contract, but not closed................................. $56,388 $81,376
======= =======
</TABLE>
Management and Development Fees
In past 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 railroad's inventory of managed assets has been sold in accordance
with the customer's goals and it is expected that future management fees will
decrease.
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses of $1.6 million
for the three months ended March 31, 2000, as compared to the same period in
1999, primarily from the additional staffing required to pursue new
development activities, increased sales activity, and financing activities.
Other
Other increased by $1.0 million for the three months ended March 31, 2000, as
compared to the same period in 1999, primarily because of interest income from
restricted cash generated by tax-deferred exchanges.
Interest
Interest expense decreased $0.3 million for the three months ended March 31,
2000, as compared to the same period in 1999, primarily because of lower
outstanding debt.
Following is a summary of interest incurred:
<TABLE>
<CAPTION>
Three Ended March 31, Difference
2000 1999 2000/1999
------- ------- ----------
(In thousands)
<S> <C> <C> <C>
Total interest incurred.......................... $13,591 $14,297 $ (706)
Interest capitalized............................. (3,014) (3,433) 419
------- ------- ----------
Interest expensed................................ $10,577 $10,864 $ (287)
======= ======= ==========
Previously capitalized interest included in cost
of sales........................................ $ 471 $ 255 $ 216
======= ======= ==========
</TABLE>
Minority Interests
In June 1999, we formed a consolidated venture and sold 10% of this
consolidated venture's stock to a minority investor.
14
<PAGE>
Residential:
The Residential segment acquires and develops mainly single-family residential
property. EBDDT primarily consists of gains from sales of lots and completed
homes.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Difference
2000 1999 2000/1999
-------- -------- ----------
(In thousands)
<S> <C> <C> <C>
Rental properties income........................ $ 245 $ 81 $ 164
-------- -------- ----------
Property sales and fee services:
Sales revenue................................... 44,810 15,466 29,344
Cost of property sold........................... (36,586) (10,494) (26,092)
-------- -------- ----------
Gain on property sales....................... 8,224 4,972 3,252
Management and development fees................. 240 126 114
Equity in earnings of development joint
ventures, net................................. 1,112 195 917
Selling, general and administrative
expenses...................................... (5,530) (3,149) (2,381)
Other........................................... 500 148 352
-------- -------- ----------
4,546 2,292 2,254
-------- -------- ----------
Interest expense................................ (16) (1) (15)
Minority interests.............................. (49) 9 (58)
-------- -------- ----------
Pre-tax EBDDT............................. $ 4,726 $ 2,381 $ 2,345
======== ======== ==========
</TABLE>
Our Residential segment has increased gain from property sales for the three
months ended March 31, 2000, as compared to the same period in 1999. Gain on
residential property sales in 2000 resulted from the closings of 151 homes and
18 lots, compared to the closings of 42 homes in 1999. The increase in gain in
2000 was primarily attributable to the higher sales volume.
During the first quarter, we announced that we intend to evaluate strategic
alternatives for the Merchant Housing business. We are currently pursuing the
sale of certain Merchant Housing assets with a book value of approximately $110
million and we expect to close on a transaction this year. The remaining
Merchant Housing assets, with a book value of approximately $40 million, are
expected to be developed or sold over time.
15
<PAGE>
Equity in earnings of development joint ventures, net, increased by $1.0
million for the three months ended March 31, 2000, as compared to the same
period in 1999. The increase was primarily because of the increased sales volume
at a residential joint venture project in San Clemente, California. The joint
ventures closed 303 lots thus far in 2000, as compared to 167 lots and 6 homes
in 1999.
<TABLE>
<CAPTION>
March 31, Difference
2000 1999 2000/1999
-------- -------- ----------
PROPERTY SALES: (In thousands)
<S> <C> <C> <C>
Wholly Owned
Homes:
Sales proceeds....................................... $ 32,211 $ 15,253 $ 16,958
Cost of sales........................................ (29,988) (10,494) (19,494)
-------- -------- ----------
Gain................................................ $ 2,223 4,759 (2,536)
-------- -------- ----------
Lots:
Sales proceeds....................................... 2,137 213 1,924
Cost of sales........................................ (575) -- (575)
-------- -------- ----------
Gain................................................ 1,562 213 1,349
-------- -------- ----------
Joint Ventures--Consolidated
Homes:
Sales proceeds....................................... 10,462 -- 10,462
Cost of sales........................................ (6,023) -- (6,023)
-------- -------- ----------
Gain................................................ 4,439 -- 4,439
-------- -------- ----------
Total gain on property sales.......................... $ 8,224 $ 4,972 $ 3,252
======== ======== ==========
EQUITY IN EARNINGS OF DEVELOPMENT JOINT VENTURES:
Homes:
Sales proceeds....................................... $ -- $ 3,328 $ (3,328)
Cost of sales........................................ -- (2,588) 2,588
-------- -------- ----------
Gain................................................ -- 740 (740)
-------- -------- ----------
Lots:
Sales proceeds....................................... 28,041 30,894 (2,853)
Cost of sales........................................ (20,761) (23,482) 2,721
-------- -------- ----------
Gain................................................ 7,280 7,412 (132)
-------- -------- ----------
Gain from development joint ventures.................. 7,280 8,152 (872)
Less: ventures partners' interest..................... (6,168) (7,997) 1,829
-------- -------- ----------
Total equity in earnings of development joint
ventures............................................. $ 1,112 $ 155 $ 957
======== ======== ==========
</TABLE>
Following is a summary of property sales under contract but not closed:
<TABLE>
<CAPTION>
March 31,
2000 1999
------- -------
Owned projects and consolidated joint ventures: (In thousands)
<S> <C> <C>
Units.......................................... $90,653 $42,250
======= =======
Lots........................................... $24,395 $ 8,348
======= =======
Unconsolidated joint venture projects/(1)/.......
Units.......................................... $ -- $12,064
======= =======
Lots........................................... $ 8,082 $ --
======= =======
</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 joint ventures.
16
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expense increase of $2.4 million for the
three months ended March 31, 2000, as compared to the same period in 1999, was
primarily attributable to an increase in selling activity as noted above.
Interest
Following is a summary of interest incurred:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Difference
2000 1999 2000/1999
------- ------ ----------
(In thousands)
<S> <C> <C> <C>
Total interest incurred......................... $ 2,875 $ 744 $ 2,131
Interest capitalized............................ (2,859) (743) (2,116)
------- ------ ----------
Interest expensed............................... $ 16 $ 1 $ 15
======= ====== ==========
Previously capitalized interest included in cost
of sales....................................... $ 2,084 $1,141 $ 943
======= ====== ==========
</TABLE>
The increase in interest incurred was offset by an increase in capitalized
interest related to higher development activity. For the three months ended
March 31, 2000, the Residential segment started construction on 203 residential
units, as compared to 79 units during the same period in 1999 from its owned and
consolidated joint venture projects.
17
<PAGE>
Urban Development:
The Urban Development segment entitles and develops urban mixed-use sites in
San Francisco, Los Angeles, and San Diego.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Difference
2000 1999 2000/1999
------- ------- ----------
(In thousands)
<S> <C> <C> <C>
Rental properties:
Rental revenue............................. $ 3,790 $ 2,976 $ 814
Property operating costs................... (1,651) (1,665) 14
------- ------- ----------
2,139 1,311 828
------- ------- ----------
Property sales and fee services:
Management and development fees............ 293 48 245
Selling, general and administrative
expenses................................. (488) (145) (343)
Other...................................... (44) (43) (1)
------- ------- ----------
(239) (140) (99)
------- ------- ----------
Interest expense.............................. (256) (177) (79)
------- ------- ----------
Pre-tax EBDDT.............................. $ 1,644 $ 994 $ 650
======= ======= ==========
Rental Building Occupancy:
(In thousands and square feet, except
percentages)
Owned......................................... 1,156 1,205
Occupied...................................... 1,067 1,101
Occupancy percentage.......................... 92.3% 91.4%
</TABLE>
Rental Revenue less Property Operating Costs
Rental revenue less property operating costs from this segment is primarily
generated from interim income-producing uses of properties intended for mixed-
use development. Income provided from this pool of interim rental uses will
decrease as development occurs on these sites. Future income from the Urban
Development segment will be generated from development activities and will
include rental income and sales gains. Such income will commence in late 2000 or
early 2001.
Management and Development Fees
Management and development fees increased $0.2 million for the three months
ended March 31, 2000, as compared to the same period in 1999. The increase is
primarily attributable to a higher level of development management activities.
Selling, General and Administrative Expenses
The increase of $0.3 million for the three months ended March 31, 2000, as
compared to the same period in 1999. The increase is primarily attributable to
changes in overall staffing.
Corporate:
Corporate items consist of certain interest and administrative costs reduced
by costs capitalized or allocated to other business segments.
18
<PAGE>
Interest
Corporate interest consists primarily of contra-interest expense resulting
from the fact that the Residential segment had qualifying assets which provided
for the capitalization of more interest than directly incurred by that segment.
This resulted in the capitalization of interest incurred by other segments.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Difference
2000 1999 2000/1999
------- ------- ----------
(In thousands)
<S> <C> <C> <C>
Interest expense.............................. $ 1,030 $ 1,636 $ (606)
Corporate administrative costs................ (4,260) (3,844) (416)
Other......................................... 136 34 102
------- ------- ----------
Pre-tax EBDDT.............................. $(3,094) $(2,174) $ (920)
======= ======= ==========
</TABLE>
Corporate Administrative Costs
Corporate administrative costs consist primarily of general and administrative
expenses. General and administrative expenses for the three months ended March
31, 2000 increased by $0.4 million as compared to the same period in 1999
primarily because of the increase in our overall activities.
Items Not Included in EBDDT by Segment
Gain on Sales of Non-Strategic Assets
Gain on sales of non-strategic assets was $27.7 million and $1.0 million for
the three months ended March 31, 2000 and 1999, respectively. The increase is
because of the closing of the first phase of the The Wildlands Conservancy
("TWC") transaction, as described in detail below.
From 1995 through March 31, 2000, we sold $300 million of non-strategic assets
as part of a program of selling non-strategic assets, with the proceeds used to
pay down a portion of existing debt and fund new development. At quarter end,
the most significant remaining non-strategic asset is our desert portfolio of
approximately 543,000 acres.
In early 1999, we signed an agreement with TWC, a non-profit conservation
group, to convey 437,000 acres of desert land for a total cash consideration of
$54.6 million to be paid by TWC and the federal government, subject to funding
by the government and TWC. Since that time, the total purchase price for that
land has been reduced to $48.6 million as a result of negotiations over the
amount of Federal funding. We recently granted TWC an option to purchase an
additional 42,900 acres of desert land for $4.8 million if the sale of 437,000
acres is closed by January 2001. Proceeds for the 479,900 acres would be $53.4
million.
The first phase of the TWC transaction, approximately 225,000 acres, closed on
January 18, 2000. Based on the appraised value of the property, we are entitled
to a tax deduction for the discounted sales price of this land of $8.8 million.
An additional $23.6 million is needed to close the remaining portion of the
initial TWC transaction. TWC is exploring both federal and private funding to
complete this transaction.
19
<PAGE>
We recently exchanged 12,000 acres of our desert land in the Black Mountain
Wilderness near Barstow for 4,150 acres of desert land owned by the Bureau of
Land Management ("BLM") of equal value, $3.7 million. We plan to exchange up to
an additional 100,500 acres of our land (in at least two separate exchanges) for
17,385 acres of BLM land of equal value in order to consolidate our remaining
desert land holdings.
Variability in Results
We expect the variability of our quarterly and annual EBDDT and net income to
continue. The timing of development sales and sales of non-strategic assets have
resulted in significant variability in our historic operating results,
particularly on a quarterly basis. Many of the company's projects require a
lengthy process to complete the development cycle before they are sold. Sales of
real estate assets 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 a year. In addition, gross margins vary significantly as the mix of
properties varies. The cost basis of the properties sold varies because a number
of properties have been owned for many decades while some properties were
acquired within the last ten to fifteen years; because properties are owned in
various geographical locations; and because development projects have varying
infrastructure and build-out periods.
Liquidity and Capital Resources
Cash flows from operating activities
Cash provided by operating activities reflected in the statement of cash flows
for the three months ended March 31, 2000 and 1999, was $73.2 million and $10.8
million, respectively. The increase in 2000 consists primarily of an increase of
$54.2 million in proceeds from sales of development and other properties, a $7.5
million increase is rental properties results, a $7.7 million decrease in
expenditures for development properties, and $8.0 million change in operating
assets and liabilities and other operating activities partially offset by $18.9
million lower operating distributions from joint ventures.
Cash flows from investing activities
Net cash used in investing activities reflected in the statement of cash flows
for the three months ended March 31, 2000 and 1999, was $95.1 million and $66.0
million, respectively. The increase in 2000 consists primarily of an increase of
$36.0 million in short-term investments and restricted cash, a $13.9 million
decrease in net proceeds from sales of other assets offset by a decrease of
$16.6 million in property acquisitions, and a $4.3 million decrease in other
investing activities.
20
<PAGE>
Capital expenditures reflected in the statement of cash flows include the
following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------- --------
(In thousands)
<S> <C> <C>
Capital Expenditures from Operating Activities/(1)/
Construction of development properties................................ $31,017 $ 26,641
Capitalized interest and property tax................................. 2,960 3,151
------- --------
Capital expenditures for development properties....................... 33,977 29,792
Property acquisitions................................................. 9,945 21,804
------- --------
Capital expenditures in cash flows for operating activities......... 43,922 51,596
------- --------
Capital Expenditures from Investing Activities/(2)/
Construction and building improvements................................ 8,087 14,459
Capital lease construction and building improvements.................. 16,741 8,546
Predevelopment........................................................ 1,312 1,899
Infrastructure and other.............................................. 11,611 14,376
Capitalized interest and property tax................................. 3,880 4,267
------- --------
Capital expenditures for investment properties...................... 41,631 43,547
Commercial property acquisitions...................................... -- 16,623
Tenant improvements................................................... 1,835 538
------- --------
Capital expenditures in investing activities........................ 43,466 60,708
------- --------
Total capital expenditures......................................... $87,388 $112,304
======= ========
</TABLE>
- ------------------
/(1)/ This category includes capital expenditures for properties we intend to
build to sell.
/(2)/ This category includes capital expenditures for properties we intend to
hold for our own account.
Capital expenditures for development properties--This item relates to the
development of residential and commercial for-sale development properties. The
increase from 1999 to 2000 is primarily because of the increase in both
residential and commercial for-sale development activity.
21
<PAGE>
For the three-month period ended March 31, 2000, we started construction
on 203 residential units and completed 101 units compared to 79 starts and 50
completions during the same period in 1999.
Construction and building improvements--This item relates primarily to
development of new commercial properties held for lease and improvements to
existing buildings. This development activity is summarized below:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
-------------- ---------
(In square feet)
<S> <C> <C>
Under construction, beginning of period................................ 4,641,000 5,037,000
Construction starts.................................................... 688,000 341,000
Completed--retained in portfolio....................................... (958,000) (640,000)
Completed--design/build or sold........................................ -- (353,000)
-------------- ---------
Under construction, end of period...................................... 4,371,000/(1)/ 4,385,000
============== =========
</TABLE>
- ------------------
/(1)/ This includes 872,000 square feet of development that we expect to sell
upon completion and 3,499,000 square feet that we expect to add to our
portfolio upon completion.
Property Acquisitions--We invested approximately $9.9 million during the
first three months in 2000 and $38.4 million during the same period in 1999 in
the acquisition of new property, either directly or through joint ventures.
. Residential Acquisitions--In 2000, we invested approximately $9.9
million in the acquisition of residential development property, in
California, directly or through joint ventures. These acquisitions will
support up to 311 homes.
Infrastructure and other--These represent infrastructure costs that were
incurred in connection with our urban development and commercial development
projects. These costs primarily relate to projects at Woodridge, Illinois;
Denver, Colorado; Portland, Oregon; Rancho Cucamonga, California; and Mission
Bay, San Francisco, California.
Capitalized interest and property taxes--This item represents interest and
property taxes capitalized as part of our development projects.
Cash flows from financing activities
Net cash provided by financing activities reflected in the statement of
cash flows for the three months ended March 31, 2000, as compared to the same
period in 1999, decreased by $24.7 million. The decrease in 2000 is primarily
attributable to a net borrowing of $11.6 million as compared to a net borrowing
of $28.9 million in the same period in 1999; also contributing to the decrease
is the $7.6 million for the purchase of 614,700 shares of Treasury stock thus
far in 2000. In October 1999, the Board of Directors authorized a share
repurchase program for up to $50 million of the outstanding common stock. The
program has been authorized for a period of one year.
Capital commitments
As of March 31, 2000, we had outstanding standby letters of credit and
surety bonds in the amount of $130.8 million in favor of local municipalities or
financial institutions to guarantee performance on real property improvements or
financial obligations.
As of March 31, 2000, we had approximately $92.7 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.
22
<PAGE>
Cash balances, available borrowings, and capital resources
As of March 31, 2000, we had a total liquidity of $325.4 million, of which
$66.9 million is restricted cash. The non-restricted liquidity of $258.5 million
consists of $18.0 million in cash and cash equivalents, $231.5 million under our
credit facilities, and $9.0 million under our commercial construction
facilities.
The Company's short- and long-term liquidity and capital resources
requirements will be provided from three main sources: (1) ongoing income from
rental properties, (2) proceeds from sales of developed properties, land and
non-strategic assets, and (3) additional debt. As noted above, revolving lines
of credit and construction loan facilities are available for meeting liquidity
requirements. Our ability to meet our 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.
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 $458.8 million,
and require that we maintain certain other specified financial ratios. We were
in compliance with all such covenants at March 31, 2000.
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
discharged hazardous materials. We incur ongoing environmental remediation
costs, and legal costs relating to cleanup, 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
March 31, 2000, management has provided a reserve of $7.7 million for identified
environmental costs relating to such properties. These costs are expected to be
incurred over several years, 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 March 31, 2000, our
estimate of potential liability for identified environmental costs relating to
properties to be developed or sold ranged from $10.6 million to $24.7 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 for the three months ended March 31, 2000, totaled $0.1
million.
We or outside consultants have evaluated the environmental liabilities
associated with most of the properties we currently own; however, 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.
23
<PAGE>
Forward-Looking Information and Risk Factors
Except for historical matters, the matters discussed in this Form 10-Q are
forward-looking statements that involve risks and uncertainties. We have tried,
wherever 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; negotiations; markets and economic
conditions; development, construction, and sales activities; availability of
financing; and property values.
We caution our readers not to place undue reliance on these forward-looking
statements, which reflect our current beliefs and are based on information
currently available to us. We do not undertake any obligation to publicly
revise these forward-looking statements to reflect future events or changes in
circumstances.
These forward-looking 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. The real estate industry is by
nature cyclical, and while recent years have seen strong growth in
real estate values, occupancy rates, and transaction activity, a
downturn in the industry may occur. Moreover, we expect that a
significant portion of our Commercial Group's construction starts will
be for speculative development, which puts more of our development
revenue at risk in a downturn in general economic conditions. The
Commercial Group also anticipates greater emphasis on suburban office
development this year than in previous years, a product type that is
more complex than our industrial product.
. Product and geographical concentration. Our portfolio is largely
concentrated in industrial properties and may be vulnerable to a
downturn in that sector of the real estate industry. In addition, our
business is concentrated in the major metropolitan areas of
California. For example, a downturn in the technology industry or in
stock market values of that industry, or in the San Francisco or
Silicon Valley real estate markets, could adversely affect our
business in the affected areas.
. Competition in the real estate industry. For example, there is the
potential for overbuilding in the major metropolitan areas in
which our properties are concentrated, which could, in the long term,
adversely affect the value of our projects such as Mission Bay. The
build-out of these projects is likely to occur over a period of time
that exceeds the length of the historical real estate cycle.
Consequently, at the time of an economic downturn those projects may
still include significant undeveloped land, which may be more severely
affected by a downturn.
. Availability of financing to meet our capital needs, the variability
of interest rates, and our ability to use our collateral to secure
loans. The success of our large land development projects (such as
Mission Bay, Pacific Commons, and Stapleton Business Center) depends
in part on completing and financing their infrastructure in a timely
and cost-effective manner. In addition, although much of our financing
is currently at favorable interest rates, we expect to make
substantial borrowings in 2000 and beyond at rates that may be
substantially higher than our current financings. We may attempt to
hedge our exposure to interest rate change; nevertheless, it may not
be possible to implement hedging strategies, or the strategies, once
implemented, might not be successful.
. Delay in receipt of or denial of government approvals and entitlements
for development projects, other political and discretionary government
decisions affecting the use of or access to land, or legal challenges
to the issuance of approvals or entitlements. For example, our
development projects need project-specific approvals such as use
permits, subdivision maps, and natural resource permits. In some
cases, the law permits private parties to challenge the grant of those
approvals. We may therefore be subject to litigation that seeks to
delay or prevent development of our projects, and this litigation
could be successful.
24
<PAGE>
. Changes in tax laws and other circumstances that affect our ability to
control the timing and recognition of deferred tax liability. Changes in
the tax laws could affect the tax treatment of our subsidiaries and joint
ventures. In addition, the government could challenge the treatment of
transactions for tax purposes, and the result could increase our tax
liability, including interest and penalties, and could affect our
liquidity.
. Exposure of our assets to damage from natural occurrences such as
earthquakes, and weather conditions that affect the progress of
construction. For example, our projects at Mission Bay, Pacific Commons,
and Los Angeles Union Station are all near major earthquake fault lines. In
addition, some projects are situated wholly or in part on filled land,
which may be particularly vulnerable to ground movement in an earthquake.
. Liability for environmental remediation at properties owned, managed, or
formerly owned or managed by us or our predecessors, and changes in
environmental laws and regulations. Many of our properties are in urban or
industrial areas or near existing or former rail lines and may have been
exposed to environmental contamination in the past. We could have liability
for remediation of environmental conditions on these properties, even after
we have sold them.
. Failure to reach agreement with third parties on definitive terms or
failure to close transactions. Our pursuit of new projects may involve
significant expenditures before definitive agreements are signed or the
transaction closes. Moreover, transactions that are the subject of
definitive agreements generally include a variety of contingencies and
conditions to the closing. The failure of any of these contingencies and
conditions may result in the failure to close the transaction. If we do not
sign a definitive agreement for a project, or if the transaction does not
close, our expenditures may not be recoverable.
. Increases in the cost of land and building materials. Rising real estate
prices and increasing levels of construction activity may lead to an
increase in our acquisition and construction costs, which may narrow or
eliminate our profit margins.
. Tight labor markets. Labor markets have grown increasingly tight,
especially in California, and this detracts from our ability to find,
attract, retain, and replace skilled professionals, and increases the cost
of labor.
. Limitations on or challenges to title to our properties.
. Risks related to the performance and financial strength of the co-owners of
our joint venture projects.
. Changes in policies and practices of organized labor groups who may work on
our projects.
25
<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.
26
<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: May 15, 2000 By: /s/ C. William Hosler
------------------- --------------------------------
C. William Hosler
Senior Vice President
Chief Financial Officer
Principal Financial Officer
Date: May 15, 2000 By: /s/ Paul A. Lockie
------------------- --------------------------------
Paul A. Lockie
Vice President and Controller
Principal Accounting Officer
27
<PAGE>
EXHIBIT INDEX
3.1A Restated Certificate of Incorporation of the Registrant effective December
4, 1990, is incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form 10 (Commission File No. 0-18694) as filed with the
Commission on July 18, 1990.
3.1B Amendment to Restated Certificate of Incorporation of the Registrant
effective July 13, 1993, is incorporated by reference to Exhibit 3.1B to
the Form 10-K for the year ended December 31, 1999.
3.2 Amended and Restated Bylaws of the Registrant is incorporated by reference
to Exhibit 3.2 to the Form 10-K for the year ended December 31, 1999.
4.1 Form of Certificate of Designations of Series A Junior Participating
Preferred Stock is incorporated by reference to Exhibit 4.1 to the Form 8-
K as filed with the Commission on December 28, 1999.
4.2 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, is incorporated by reference
to Exhibit 4.2 to the Form 10-K for the year ended December 31, 1998.
4.3 Loan Agreement by and between Catellus Finance 1, L.L.C. and Prudential
Mortgage Capital Company, Inc. dated as of October 26, 1998, is
incorporated by reference to Exhibit 4.3 to the Form 10-K for the year
ended December 31, 1998.
10.1 Restated Tax Allocation and Indemnity Agreement dated December 29, 1989,
among the Registrant and certain of its subsidiaries and Santa Fe Pacific
Corporation is incorporated by reference to Exhibit 10.6 to the
Registration Statement on Form 10 (Commission File No. 0-18694) as filed
with the Commission on July 18, 1990.
10.2 State Tax Allocation and Indemnity Agreement dated December 29, 1989,
among the Registrant and certain of its subsidiaries and Santa Fe Pacific
Corporation is incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form 10 (Commission File No. 0-18694) as filed
with the Commission on July 18, 1990.
10.3A Registration Rights Agreement dated as of December 29, 1989, among the
Registrant, BAREIA, O&Y and Itel is incorporated by reference to Exhibit
10.4 to the Registration Statement on Form 10 (Commission File No. 0-
18694) as filed with the Commission on July 18, 1990.
10.3B First Amendment to Registration Rights Agreement among the Registrant,
BAREIA, O&Y and Itel is incorporated by reference to Exhibit 10.26 to
Amendment No. 2 to Form S-3 as filed with the Commission on February 4,
1993.
10.3C Letter Agreement dated November 14, 1995, between the Registrant and
California Public Employees' Retirement System is incorporated by
reference to Exhibit 10.4A to the Form 10-K for the year ended December
31, 1995.
10.4 Registrant's Amended and Restated Executive Stock Option Plan is
incorporated by reference to Exhibit 10.8 to the Form 10-K for the year
ended December 31, 1997.
10.5 Registrant's Amended and Restated 1996 Performance Award Plan is
incorporated by reference to Exhibit 10.14 the Form 10-Q for the quarter
ended March 31, 1999.
28
<PAGE>
10.6 Registrant's Deferred Compensation Plan is incorporated by reference to
Exhibit 10.21 to the Form 10-K for the year ended December 31, 1997.
10.7 Second Amended and Restated Employment Agreement dated as of October 1,
1999, between the Registrant and Nelson C. Rising is incorporated by
reference to Exhibit 10.7 to the Form 10-K for the year ended December 31,
1999.
10.8A Employment Agreement dated July 24, 1995, between the Registrant and
Stephen P. Wallace is incorporated by reference to Exhibit 10.37 to the
Form 10-K for the year ended December 31, 1995.
10.8B Letter Agreement dated November 16, 1996, between the Registrant and Steve
Wallace is incorporated by reference to Exhibit 10.49 to the Form 10-K for
the year ended December 31, 1996.
10.9 Amended and Restated Employment Agreement dated September 16, 1997,
between the Registrant and Kathleen Smalley is incorporated by reference
to Exhibit 10.17 to the Form 10-K for the year ended December 31, 1997.
10.10 Rights Agreement dated as of December 16, 1999, between the Registrant and
American Stock Transfer and Trust Company is incorporated by reference to
Exhibit 4.1 to the Form 8-K as filed with the Commission on December 28,
1999.
27 Financial Data Schedule is attached.
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.
29
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