================================================================================
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 June 30, 2001 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 (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 August 2, 2001, there were 99,155,580 issued and outstanding shares
of the Registrant's Common Stock.
================================================================================
CATELLUS DEVELOPMENT CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet as of June 30, 2001 and December 31, 2000........ 2
Condensed Consolidated Statement of Operations for the three months and
six months ended June 30, 2001 and 2000............................................. 3
Condensed Consolidated Statement of Cash Flows for the six months ended
June 30, 2001 and 2000.............................................................. 4
Notes to Condensed Consolidated Financial Statements.................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 32
PART II. OTHER INFORMATION............................................................................. 33
SIGNATURES.............................................................................................. 34
EXHIBIT INDEX........................................................................................... 35
1
PART I
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CATELLUS DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
Assets
Properties............................................................................ $2,111,305 $2,025,813
Less accumulated depreciation......................................................... (339,594) (320,275)
---------- ----------
1,771,711 1,705,538
Other assets and deferred charges, net................................................ 118,642 121,033
Notes receivable, less allowance...................................................... 20,554 36,119
Accounts receivable, less allowance................................................... 24,535 30,816
Restricted cash and investments....................................................... 64,482 45,478
Cash and cash equivalents............................................................. 446,941 336,558
---------- ----------
Total....................................................................... $2,446,865 $2,275,542
========== ==========
Liabilities and stockholders' equity
Mortgage and other debt............................................................... $1,257,062 $1,134,563
Accounts payable and accrued expenses................................................. 85,616 96,274
Deferred credits and other liabilities................................................ 148,595 58,722
Deferred income taxes................................................................. 272,667 247,975
---------- ----------
Total liabilities................................................................ 1,763,940 1,537,534
---------- ----------
Commitments and contingencies (Notes 8 and 9)
Minority interests.................................................................... 53,685 54,763
---------- ----------
Stockholders' equity
Common stock, 108,484 and 108,088 shares issued and 100,050 and 106,091 shares
outstanding at June 30, 2001 and December 31, 2000, respectively.................. 1,085 1,081
Paid-in capital..................................................................... 499,850 493,420
Treasury stock, at cost (8,434 and 1,997 shares at June 30, 2001 and December 31,
2000, respectively)............................................................... (137,478) (28,660)
Accumulated earnings................................................................ 265,783 217,404
---------- ----------
Total stockholders' equity....................................................... 629,240 683,245
---------- ----------
Total....................................................................... $2,446,865 $2,275,542
========== ==========
See notes to condensed consolidated financial statements
2
CATELLUS DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited)
Rental properties
Rental revenue................................................... $ 57,098 $ 50,738 $112,909 $ 100,656
Property operating costs......................................... (14,088) (13,731) (28,208) (26,389)
Equity in earnings of operating joint ventures, net.............. 2,669 2,951 5,833 6,589
-------- -------- -------- ---------
45,679 39,958 90,534 80,856
-------- -------- -------- ---------
Property sales and fee services
Sales revenue.................................................... 67,966 106,978 125,862 182,999
Cost of sales.................................................... (41,824) (64,244) (76,875) (120,382)
-------- -------- -------- ---------
Gain on property sales......................................... 26,142 42,734 48,987 62,617
Equity in earnings of development joint ventures, net............ 332 1,715 8,127 2,846
-------- -------- -------- ---------
Total gain on property sales................................... 26,474 44,449 57,114 65,463
Management and development fees.................................. 1,374 3,324 2,554 6,593
Selling, general and administrative expenses..................... (8,475) (9,409) (18,058) (19,332)
Other, net....................................................... 2,901 (6,323) 8,560 (4,920)
-------- -------- -------- ---------
22,274 32,041 50,170 47,804
-------- -------- -------- ---------
Interest expense................................................... (15,017) (10,753) (29,710) (20,572)
Depreciation and amortization...................................... (12,932) (11,379) (25,866) (22,249)
Corporate administrative costs..................................... (5,062) (3,460) (10,607) (7,720)
Gain (loss) on non-strategic asset sales........................... 1,389 (198) 3,136 27,469
Other, net......................................................... 2,479 (888) 6,706 (752)
-------- -------- -------- ---------
Income before minority interests and income taxes................ 38,810 45,321 84,363 104,836
Minority interests................................................. (1,841) (1,871) (3,712) (3,474)
-------- -------- -------- ---------
Income before income taxes....................................... 36,969 43,450 80,651 101,362
-------- -------- -------- ---------
Income tax expense
Current.......................................................... (1,382) (3,353) (6,743) (9,877)
Deferred......................................................... (13,416) (14,030) (25,529) (30,680)
-------- -------- -------- ---------
(14,798) (17,383) (32,272) (40,557)
-------- -------- -------- ---------
Net income....................................................... $ 22,171 $ 26,067 $ 48,379 $ 60,805
======== ======== ======== =========
Net income per share
Basic.......................................................... $0.22 $0.24 $0.47 $0.57
======== ======== ======== =========
Assuming dilution.............................................. $0.21 $0.24 $0.46 $0.56
======== ======== ======== =========
Average number of common shares outstanding - basic.............. 100,469 106,837 102,649 107,068
======== ======== ======== =========
Average number of common shares outstanding - diluted............ 103,324 108,713 105,522 108,794
======== ======== ======== =========
See notes to condensed consolidated financial statements
3
CATELLUS DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Six Months Ended
June 30,
2001 2000
---- ----
(Unaudited)
Cash flows from operating activities:
Net income............................................................... $ 48,379 $ 60,805
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................ 25,866 22,249
Deferred income taxes................................................ 25,529 30,680
Amortization of deferred loan fees and other costs................... 2,344 2,887
Equity in earnings of joint ventures................................. (13,960) (9,435)
Operating distributions from joint ventures.......................... 20,265 6,518
Gain on sale of investment property.................................. -- (20,614)
Cost of development properties and non-strategic assets sold......... 65,264 90,729
Capital expenditures for development properties...................... (24,032) (99,413)
Other, net............................................................... (687) 1,634
Change in deferred credits and other liabilities......................... 89,873 (10,900)
Change in other operating assets and liabilities......................... 31,136 20,984
--------- ---------
Net cash provided by operating activities.................................... 269,977 96,124
--------- ---------
Cash flows from investing activities:
Proceeds from sale of investment property................................ -- 34,680
Property acquisitions.................................................... (5,069) (9,724)
Capital expenditures for investment properties........................... (139,399) (98,927)
Tenant improvements...................................................... (1,244) (3,977)
Contributions to joint ventures.......................................... -- (5,179)
Restricted cash.......................................................... (19,004) (85,711)
--------- ---------
Net cash used in investing activities........................................ (164,716) (168,838)
--------- ---------
Cash flows from financing activities:
Borrowings............................................................... 297,891 156,442
Repayment of borrowings.................................................. (183,755) (81,154)
Distributions to minority partners....................................... (4,790) (2,842)
Repurchase of common stock............................................... (108,818) (18,864)
Proceeds from issuance of common stock................................... 4,594 5,559
--------- ---------
Net cash provided by financing activities.................................... 5,122 59,141
--------- ---------
Net increase (decrease) in cash and cash equivalents......................... 110,383 (13,573)
Cash and cash equivalents at beginning of period............................. 336,558 35,410
--------- ---------
Cash and cash equivalents at end of period................................... $ 446,941 $ 21,837
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)................................. $ 27,545 $ 16,599
Income taxes......................................................... $ 673 $ 16,693
Non-cash financing activities:
Seller-financed acquisitions, net.................................... $ 8,363 $ 1,702
See notes to condensed consolidated financial statements
4
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(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 those of others. Interests of
third parties in entities controlled and consolidated by the Company are
separately reflected as minority interests in the accompanying balance sheet.
The Company's rental properties and 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.
These condensed 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 the
subsidiary 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 condensed consolidated financial statements should be read
in conjunction with the Company's 2000 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 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 to the current period presentation.
NOTE 3. RESTRICTED CASH AND INVESTMENTS
Of the total restricted cash and investments of $64.5 million at June 30,
2001 and $45.5 million at December 31, 2000, $56.7 million and $38.1 million,
respectively, represent 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 June 30, 2001 and December 31, 2000, represent
certificates of deposits used to guarantee lease performance for certain
properties that secure debt and $0.7 million and $0.3 million, respectively,
represent prepayments for future leasing commissions.
5
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).
Three Months Ended June 30,
---------------------------------------------------------------
2001 2000
------------------------------- ------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- -------- ---------- ---------- ---------
(In thousands, except per share data)
Net income........................................... $22,171 100,469 $0.22 $26,067 106,837 $0.24
======== ========
Effect of dilutive securities: stock options......... -- 2,855 -- 1,876
--------- --------- ---------- ----------
Net income assuming dilution......................... $22,171 103,324 $0.21 $26,067 108,713 $0.24
========= ========= ======== ========== ========== =========
Six Months Ended June 30,
---------------------------------------------------------------
2001 2000
------------------------------- ------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- --------- -------- ---------- ---------- ---------
(In thousands, except per share data)
Net income........................................... $48,379 102,649 $0.47 $60,805 107,068 $0.57
======== =========
Effect of dilutive securities: stock options......... -- 2,873 -- 1,726
--------- --------- ---------- ----------
Net income assuming dilution......................... $48,379 105,522 $0.46 $60,805 108,794 $0.56
========= ========= ======== ========== ========== =========
NOTE 5. MORTGAGE AND OTHER DEBT
Mortgage and other debt at June 30, 2001, and December 31, 2000, are
summarized as follows:
June 30, December 31,
2001 2000
------------- --------------
(In thousands)
Fixed rate mortgage loans............................................... $ 816,104 $ 621,182
Floating rate mortgage loans............................................ 262,518 309,837
Construction loans...................................................... 51,357 88,292
Land acquisition and development loans.................................. 44,662 37,062
Assessment district bonds............................................... 34,692 26,116
Capital leases.......................................................... 14,934 15,336
Other loans............................................................. 32,795 36,738
------------- --------------
Total mortgage and other debt.......................................... $1,257,062 $1,134,563
============= ==============
Due within one year..................................................... $ 22,454 $ 27,150
============= ==============
In January and February 2001, the Company closed five variable rate (LIBOR
plus 2.0% to LIBOR plus 2.75%) collateralized construction loans with a total
capacity of $63.9 million, maturing at various dates from October 2002 through
December 2003. In the second quarter of 2001, two of these loans with a
capacity of $24.2 million were paid off and the remaining loans had a combined
outstanding balance of $24.1 million as of June 30, 2001.
In April and May 2001, the Company closed six variable rate (LIBOR plus
1.8% to LIBOR plus 2.1%) collateralized construction loans with a total capacity
of $187.7 million, maturing at various dates from January 2002 through October
2003. These loans had a combined outstanding balance of $22.5 million at June
30, 2001.
In April 2001, the Company closed a $200 million mortgage loan which bears
interest at 7.25% (7.30% effective rate considering financing costs) and is
amortized over 30 years with a maturity of 15 years. Of the loan proceeds,
$145.4 million was used to pay off existing variable rate construction debt and
related interest at closing. This loan is collateralized by certain of the
Company's operating properties and by assignment of rents generated by the
underlying properties. Under certain conditions, this loan has a yield
maintenance premium if paid prior to maturity.
6
In June 2001, the Company issued a $10 million uncollateralized promissory
note in connection with the acquisition of a 50% interest in a residential
development partnership. The note matures on June 1, 2003 and bears interest at
6% for the first year if paid on or before the first anniversary date and 8% for
the second year if paid on or before the second anniversary date.
Interest costs relating to mortgage and other debt for the three-month and
six-month periods ended June 30, 2001 and 2000, are summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- --------- -----------
(In thousands) (In thousands)
Total interest incurred.................................. $20,991 $16,514 $ 41,966 $ 32,321
Interest capitalized..................................... (5,974) (5,761) (12,256) (11,749)
-------- -------- --------- -----------
Interest expensed........................................ $15,017 $10,753 $ 29,710 $ 20,572
======== ======== ========= ===========
Previously capitalized interest included in cost
of sales.............................................. $ 666 $ 3,422 $ 2,394 $ 5,976
======== ======== ========= ===========
NOTE 6. PROPERTIES
Book value by property type at June 30, 2001 and December 31, 2000,
consisted of the following:
June 30, December 31,
2001 2000
------------ -------------
(In thousands)
Rental properties:
Industrial buildings..................................................... $ 910,094 $ 874,168
Office buildings......................................................... 221,548 205,179
Retail buildings......................................................... 92,287 94,085
Land and land leases..................................................... 113,519 92,803
Investment in operating joint ventures................................... (14,205) (16,092)
------------ -------------
1,323,243 1,250,143
------------ -------------
Developable properties:
Commercial............................................................... 172,894 177,635
Residential.............................................................. 59,922 64,479
Urban development........................................................ 334,595 366,136
Investment in development joint ventures................................. 62,344 46,256
------------ -------------
629,755 654,506
------------ -------------
Work-in-process:
Commercial............................................................... 55,441 50,098
Commercial--capital lease................................................ 32,572 37,415
Residential.............................................................. 1,861 4,883
Urban development........................................................ 32,349 --
Corporate (1)............................................................ 3,834 --
------------ -------------
126,057 92,396
------------ -------------
Furniture and equipment..................................................... 28,259 26,599
Other....................................................................... 3,991 2,169
------------ -------------
Gross book value............................................................ 2,111,305 2,025,813
Accumulated depreciation.................................................... (339,594) (320,275)
------------ -------------
Net book value.............................................................. $1,771,711 $1,705,538
============ =============
(1) Corporate work-in-process represents capitalization of interest on
qualifying assets of the Residential and Urban Development segments which
provided for capitalization of more interest than directly incurred by the
segments.
7
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 Company-owned commercial buildings and land, 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 community development, project management, and, historically, home building
activities. The Urban Development segment entitles and develops major mixed-use
development sites, which includes development for residential, office, retail,
biotechnology, multimedia and entertainment purposes. The Corporate segment
consists of administrative and other services.
Inter-segment gains and losses, if any, 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.
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
Financial data by reportable segment are as follows:
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- ---------
(In thousands)
Three Months Ended June 30, 2001
Rental properties:
Rental revenue....................................... $ 53,084 (1) $ -- (2) $ 4,014 $ -- $ 57,098
Property operating costs............................. (12,455) -- (2) (1,633) -- (14,088)
Equity in earnings of operating joint ventures, net.. 2,669 -- -- -- 2,669
-------- ------- -------- ------- --------
43,298 -- 2,381 -- 45,679
-------- ------- -------- ------- --------
Property sales and fee services:
Sales revenue........................................ 28,613 12,566 26,787 -- 67,966
Cost of sales........................................ (14,508) (7,510) (19,806) -- (41,824)
-------- ------- -------- ------- --------
Gain on property sales............................. 14,105 5,056 6,981 -- 26,142
Equity in earnings of development joint ventures, net -- 681 -- (349) 332
-------- ------- -------- ------- --------
Total gain on property sales....................... 14,105 5,737 6,981 (349) 26,474
Management and development fees...................... 986 388 -- -- 1,374
Selling, general and administrative expenses......... (2,922) (4,412) (1,141) -- (8,475)
Other, net........................................... 2,371 301 229 -- 2,901
-------- ------- -------- ------- --------
14,540 2,014 6,069 (349) 22,274
-------- ------- -------- ------- --------
Interest expense..................................... (16,737) -- (76) 1,796 (15,017)
Corporate administrative costs....................... -- -- -- (5,062) (5,062)
Minority interests................................... (1,604) (237) -- -- (1,841)
Other, net........................................... -- -- -- 2,479 2,479
Depreciation recapture............................... (512) -- -- -- (512)
-------- ------- -------- ------- --------
Pre-tax EBDDT...................................... $ 38,985 $ 1,777 $ 8,374 $(1,136) 48,000
======== ======= ======== =======
Current taxes........................................ (1,382)
--------
EBDDT................................................ 46,618
Depreciation and amortization........................ (12,932)
Deferred taxes....................................... (13,416)
Gain on non-strategic asset sales.................... 1,389
Depreciation recapture............................... 512
--------
Net Income......................................... $ 22,171
========
(1) Includes $0.5 million ground lease rent from a major tenant. The tenant
prepaid approximately $68 million and $36.8 million of the expected ground
rent in the first and second quarters, respectively, which is recorded as
part of deferred credits and other liabilities in the accompanying condensed
consolidated balance sheet. The prepaid rent is being amortized over the
lease term of 34 years.
(2) All residential asset management responsibilities have been transferred to
the Commercial segment and the corresponding results are now classified
under "Commercial."
9
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- ---------
(In thousands)
Three Months Ended June 30, 2000
Rental properties:
Rental revenue......................................... $ 47,182 $ (58) $ 3,614 $ -- $ 50,738
Property operating costs............................... (11,886) (5) (1,840) -- (13,731)
Equity in earnings of operating joint ventures, net.... 2,951 -- -- -- 2,951
-------- -------- ------- -------- --------
38,247 (63) 1,774 -- 39,958
-------- -------- ------- -------- --------
Property sales and fee services:
Sales revenue.......................................... 59,291 47,687 -- -- 106,978
Cost of sales.......................................... (30,161) (34,083) -- -- (64,244)
-------- -------- ------- -------- --------
Gain on property sales............................... 29,130 13,604 -- -- 42,734
Equity in earnings of development joint ventures, net.. (5) 1,720 -- -- 1,715
-------- -------- ------- -------- --------
Total gain on property sales......................... 29,125 15,324 -- -- 44,449
Management and development fees........................ 2,771 228 325 -- 3,324
Selling, general and administrative expenses........... (3,806) (5,045) (558) -- (9,409)
Other, net............................................. 909 (7,232) -- -- (6,323)
-------- -------- ------- -------- --------
28,999 3,275 (233) -- 32,041
-------- -------- ------- -------- --------
Interest expense....................................... (11,201) (6) (498) 952 (10,753)
Corporate administrative costs......................... -- -- -- (3,460) (3,460)
Minority interests..................................... (1,550) (321) -- -- (1,871)
Other, net............................................. -- -- -- (888) (888)
Depreciation recapture................................. (10,005) -- -- -- (10,005)
-------- -------- ------- -------- --------
Pre-tax EBDDT........................................ $ 44,490 $ 2,885 $ 1,043 $(3,396) 45,022
======== ======== ======= ========
Current taxes.......................................... (3,353)
--------
EBDDT.................................................. 41,669
Depreciation and amortization.......................... (11,379)
Deferred taxes......................................... (14,030)
Loss on non-strategic asset sales...................... (198)
Depreciation recapture................................. 10,005
--------
Net Income........................................... $ 26,067
========
10
Urban
Commercial Residential Development Corporate Total
---------- ------------ ------------ ------------- ----------
(In thousands)
Six Months Ended June 30, 2001
Rental properties:
Rental revenue....................................... $105,772 (1) $ -- (2) $ 7,137 $ -- $112,909
Property operating costs............................. (25,172) -- (2) (3,036) -- (28,208)
Equity in earnings of operating joint ventures, net.. 5,833 -- -- -- 5,833
---------- ------------ ------------ ------------- ----------
86,433 -- 4,101 -- 90,534
---------- ------------ ------------ ------------- ----------
Property sales and fee services:
Sales revenue........................................ 62,599 26,576 36,687 -- 125,862
Cost of sales........................................ (32,669) (18,467) (25,739) -- (76,875)
---------- ------------ ------------ ------------- ----------
Gain on property sales............................. 29,930 8,109 10,948 -- 48,987
Equity in earnings of development joint
ventures, net...................................... -- 8,476 -- (349) 8,127
---------- ------------ ------------ ------------- ----------
Total gain on property sales....................... 29,930 16,585 10,948 (349) 57,114
Management and development fees...................... 2,044 439 71 -- 2,554
Selling, general and administrative expenses......... (6,639) (9,001) (2,418) -- (18,058)
Other, net........................................... 4,103 758 3,699 (3) -- 8,560
---------- ------------ ------------ ------------- ----------
29,438 8,781 12,300 (349) 50,170
---------- ------------ ------------ ------------- ----------
Interest expense..................................... (33,598) -- (56) 3,944 (29,710)
Corporate administrative costs....................... -- -- -- (10,607) (10,607)
Minority interests................................... (3,208) (504) -- -- (3,712)
Other, net........................................... -- -- -- 6,706 6,706
Depreciation recapture............................... (3,252) -- -- -- (3,252)
---------- ------------ ------------ ------------- ----------
Pre-tax EBDDT...................................... $ 75,813 $ 8,277 $ 16,345 $ (306) 100,129
========== ============ ============ =============
Current taxes........................................ (6,743)
----------
EBDDT................................................ 93,386
Depreciation and amortization........................ (25,866)
Deferred taxes....................................... (25,529)
Gain on non-strategic asset sales.................... 3,136
Depreciation recapture............................... 3,252
----------
Net Income......................................... $ 48,379
==========
(1) Includes $0.8 million ground lease rent from a major tenant. The tenant
prepaid $104.8 million of ground rent in the first six months, which is
recorded as part of deferred credits and other liabilities in the
accompanying condensed consolidated balance sheet. The prepaid rent is being
amortized over the lease term of 34 years.
(2) All residential asset management responsibilities have been transferred to
the Commercial segment and the corresponding results are now classified
under "Commercial."
(3) Includes $3.4 million of lease termination payment related to a former
tenant at the Mission Bay project.
11
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- ---------
(In thousands)
Six Months Ended June 30, 2000
Rental properties:
Rental revenue......................................... $ 93,065 $ 187 $ 7,404 $ -- $ 100,656
Property operating costs............................... (22,893) (5) (3,491) -- (26,389)
Equity in earnings of operating joint ventures, net.... 6,589 -- -- -- 6,589
-------- -------- ------- ------ ---------
76,761 182 3,913 -- 80,856
-------- -------- ------- ------ ---------
Property sales and fee services:
Sales revenue.......................................... 90,502 92,497 -- -- 182,999
Cost of sales.......................................... (49,713) (70,669) -- -- (120,382)
-------- -------- ------- ------ ---------
Gain on property sales............................... 40,789 21,828 -- -- 62,617
Equity in earnings of development joint ventures, net.. 14 2,832 -- -- 2,846
-------- -------- ------- ------ ---------
Total gain on property sales......................... 40,803 24,660 -- -- 65,463
Management and development fees........................ 5,507 468 618 -- 6,593
Selling, general and administrative expenses........... (7,711) (10,574) (1,047) -- (19,332)
Other, net............................................. 1,856 (6,733) (43) -- (4,920)
-------- -------- ------- ------ ---------
40,455 7,821 (472) -- 47,804
-------- -------- ------- ------ ---------
Interest expense....................................... (21,778) (22) (754) 1,982 (20,572)
Corporate administrative costs......................... -- -- -- (7,720) (7,720)
Minority interests..................................... (3,104) (370) -- -- (3,474)
Other, net............................................. -- -- -- (752) (752)
Depreciation recapture................................. (10,197) -- -- -- (10,197)
-------- -------- ------- ------ ---------
Pre-tax EBDDT........................................ $ 82,137 $ 7,611 $ 2,687 $(6,490) 85,945
======== ======== ======= =======
Current taxes.......................................... (9,877)
---------
EBDDT.................................................. 76,068
Depreciation and amortization.......................... (22,249)
Deferred taxes......................................... (30,680)
Gain on non-strategic asset sales...................... 27,469
Depreciation recapture................................. 10,197
---------
Net Income........................................... $ 60,805
=========
12
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, indemnifications,
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. Where appropriate, the Company has established reserves
for potential liabilities related to legal actions or threatened legal actions.
These reserves are necessarily based on estimates and probabilities of the
occurrence of events and therefore are subject to revision from time to time.
Some of the legal actions to which the Company is a party seek to restrain
actions related to the development process or challenge title to or possession
of the Company's properties. Typically, such actions, if successful, would not
result in significant financial liability for the Company 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 potential 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 June 30, 2001, management estimates that future costs for remediation of
environmental contamination on operating properties and properties previously
sold approximate $9.8 million, and has provided a reserve for that amount. It is
anticipated that such costs will be incurred over the next several years.
Management also estimates that similar costs relating to the Company's
properties to be developed or sold may range from $25.4 million to $40.4
million. These amounts will be capitalized as components of development costs
when incurred, which is anticipated to be over a period of approximately twenty
years, or will be deferred and charged to cost of sales when the properties are
sold. Environmental costs capitalized during the six months ended June 30, 2001
totaled $0.9 million. 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.
In connection with the acquisition in 2000 of a property known to have
environmental problems, an indirect subsidiary of the Company has entered into
an agreement with the California Department of Toxic Substance Control to
perform certain work to investigate and remedy hazardous materials left behind
by previous operators of the site. The Company has guaranteed completion of the
work with a limited liability of $20 million. The Company has entered into a
$15 million fixed price contract for the completion of the work and obtained
insurance to cover various cost overruns; this fixed price contract amount is
included in our estimated range of $25.4 million to $40.4 million of future
costs of remediation above.
As of June 30, 2001, the Company has outstanding standby letters of credit
and surety bonds in the aggregate amount of $195.2 million in favor of local
municipalities or financial institutions to guarantee performance on
construction of real property improvements or financial obligations. The Company
guarantees a portion of the debt and interest of certain of its joint ventures.
At June 30, 2001, these guarantees totaled $35.5 million. In addition, the
Company has guaranteed debt service of $4.4 million for a residential project.
In some cases, other parties have jointly and severally guaranteed these
obligations.
13
In June 2001, $101 million of Community Facility District ("CFD") bonds
were sold to finance public infrastructure improvements at Mission Bay in San
Francisco and Pacific Commons in Fremont. Bonds totaling $71 million were
issued for Mission Bay, of which $17 million have a floating rate of interest
initially set at 2.85% with the remaining $54 million at a fixed rate of 6.02%.
The Company has issued a letter of credit totaling $17 million in support of the
floating rate bond issued for Mission Bay. At Pacific Commons, $30 million of
bonds were issued and have a weighted average fixed interest rate of 6.20%.
These bonds have a series of maturities up to thirty years and no amounts were
funded to the Company from either issuances at June 30, 2001.
Upon completion of the infrastructure improvements at Mission Bay for which
the $71 million CFD bonds were issued, the improvements will be transferred to
the City of San Francisco. Therefore, the reimbursement of the infrastructure
costs from the bonds will be reflected as a receivable.
The Company will retain the infrastructure improvements at Pacific Commons,
for which the $30 million CFD bonds were issued, until the land is sold.
Therefore, as the construction for improvements proceeds, the corresponding
asset will be capitalized and the liability of the CFD bonds will be recorded.
14
NOTE 9. STOCK REPURCHASE PROGRAMS
In October 1999, the Company's Board of Directors authorized a stock
repurchase program for up to $50 million of the outstanding common stock. Stock
purchases under the program were made on the open market. The program was
authorized for a period of one year. Under the program, the Company repurchased
1,997,300 shares at a cost of $28.7 million.
In December 2000, the Company's Board of Directors authorized a stock
repurchase program for up to $50 million of the outstanding stock through the
end of 2001. Stock purchases under the program were made on the open market.
The Company purchased 2,888,900 shares at a cost of $49.9 million under this
program.
In March 2001, the Company received from its Board of Directors
authorization for an additional $50 million for stock repurchases. The Company
purchased 3,047,400 shares at a cost of $50 million on the open market.
In May 2001, the Company's Board of Directors authorized an additional $50
million for the stock repurchase program. Under the newly authorized program,
purchases can be made on the open market or in privately negotiated
transactions. The Company purchased 500,000 shares at a cost of $8.8 million
through June 30, 2001. Subsequent to June 30, 2001, the Company purchased an
additional 1,311,600 shares at a cost of $23.6 million.
In July 2001, the Company's Board of Directors authorized an additional $50
million for the stock repurchase program. Under the newly authorized program,
purchases can be made on the open market or in privately negotiated
transactions. There were no repurchases under this program as of August 2, 2001.
The Company's repurchases are reflected as treasury stock at cost and are
presented as a reduction to consolidated stockholders' equity.
15
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 the Condensed Consolidated Financial
Statements and related Notes appearing elsewhere in this Form 10-Q. This
discussion and analysis covers each of our four business segments: Commercial,
Residential, Urban Development, and Corporate. This analysis of EBDDT by segment
is used in internal reporting to management and, we believe, provides an
effective means of understanding our business and corporate structure. (For
definition of EBDDT, see Note 7 of the accompanying Condensed Consolidated
Financial Statements.)
Summary EBDDT and reconciliation to net income for the three and six months
ended June 30, 2001 and 2000
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
---------- ---------- ---------- ---------- ---------- ----------
(In thousands) (In thousands)
Pre-tax EBDDT
Commercial.................................... $ 38,985 $ 44,490 $(5,505) $ 75,813 $ 82,137 $ (6,324)
Residential................................... 1,777 2,885 (1,108) 8,277 7,611 666
Urban Development............................. 8,374 1,043 7,331 16,345 2,687 13,658
Corporate..................................... (1,136) (3,396) 2,260 (306) (6,490) 6,184
-------- -------- ------- -------- -------- --------
Total pre-tax EBDDT............................ 48,000 45,022 2,978 100,129 85,945 14,184
Current tax................................... (1,382) (3,353) 1,971 (6,743) (9,877) 3,134
-------- -------- ------- -------- -------- --------
EBDDT.......................................... 46,618 41,669 4,949 93,386 76,068 17,318
Depreciation and amortization................. (12,932) (11,379) (1,553) (25,866) (22,249) (3,617)
Deferred taxes................................ (13,416) (14,030) 614 (25,529) (30,680) 5,151
Gain (loss) on non-strategic asset sales...... 1,389 (198) 1,587 3,136 27,469 (24,333)
Depreciation recapture........................ 512 10,005 (9,493) 3,252 10,197 (6,945)
-------- -------- ------- -------- -------- --------
Net income..................................... $ 22,171 $ 26,067 $(3,896) $ 48,379 $ 60,805 $(12,426)
======== ======== ======= ======== ======== ========
16
Commercial:
The Commercial segment acquires and develops suburban commercial business
parks for our own account and the account of others. EBDDT consists primarily of
rental property operating income for buildings owned and sales gains from
properties sold.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
--------- --------- ---------- --------- --------- ----------
(In thousands) (In thousands)
Rental properties:
Rental revenue....................................... $ 53,084 $ 47,182 $ 5,902 $105,772 $ 93,065 $ 12,707
Property operating costs............................. (12,455) (11,886) (569) (25,172) (22,893) (2,279)
Equity in earnings of operating joint ventures, net.. 2,669 2,951 (282) 5,833 6,589 (756)
-------- -------- -------- -------- -------- --------
43,298 38,247 5,051 86,433 76,761 9,672
-------- -------- -------- -------- -------- --------
Property sales and fee services:
Sales revenue........................................ 28,613 59,291 (30,678) 62,599 90,502 (27,903)
Cost of property sold/(1)/........................... (15,020) (40,166) 25,146 (35,921) (59,910) 23,989
-------- -------- -------- -------- -------- --------
Gain on property sales............................. 13,593 19,125 (5,532) 26,678 30,592 (3,914)
Equity in earnings of development joint ventures, net -- (5) 5 -- 14 (14)
-------- -------- -------- -------- -------- --------
Total gain on property sales....................... 13,593 19,120 (5,527) 26,678 30,606 (3,928)
Management and development fees...................... 986 2,771 (1,785) 2,044 5,507 (3,463)
Selling, general and administrative expenses......... (2,922) (3,806) 884 (6,639) (7,711) 1,072
Other................................................ 2,371 909 1,462 4,103 1,856 2,247
-------- -------- -------- -------- -------- --------
14,028 18,994 (4,966) 26,186 30,258 (4,072)
-------- -------- -------- -------- -------- --------
Interest expense..................................... (16,737) (11,201) (5,536) (33,598) (21,778) (11,820)
Minority interests................................... (1,604) (1,550) (54) (3,208) (3,104) (104)
-------- -------- -------- -------- -------- --------
Pre-tax EBDDT................................... $ 38,985 $ 44,490 $ (5,505) $ 75,813 $ 82,137 $ (6,324)
======== ======== ======== ======== ======== ========
Rental Building Occupancy: June 30,
(In thousands of square feet, except percentages) 2001 2000 Difference
-------- -------- ----------
Owned................................................ 29,736 26,127 3,609
Occupied............................................. 28,033 24,981 3,052
Occupancy percentage................................. 94.3% 95.6% (1.4%)
------------------
/(1)/ Cost of sales for the three and six months ended June 30, 2001, includes
$0.5 million and $3.3 million, respectively, and for the three and six
months ended June 30, 2000, excludes $10 million and $10.2 million,
respectively, of depreciation recapture, which is included in net income
but not EBDDT.
17
Rental Revenue less Property Operating Costs
Rental revenue less property operating costs has increased $5.3 million and
$10.4 million for the three and six months ended June 30, 2001, respectively, as
compared to the same periods in 2000, mainly because of additions of buildings,
an increase in revenue from ground leases, and rental increases on Same Space
(properties that were owned and operated for the entire current year and the
entire immediately preceding year are referred to as "Same Space"), partially
offset by properties sold. From July 2000 to June 2001, we added from our own
development projects, a net 3.6 million square feet to our rental portfolio.
Rental revenue less operating costs for the three and six months ended June 30,
2001 and 2000 are summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
-------- -------- ---------- -------- -------- ----------
(In thousands) (In thousands)
Rental revenue less property operating costs:
Same Space.......................................... $28,910 $27,878 $ 1,032 $58,100 $55,270 $ 2,830
Properties added to portfolio....................... 7,259 2,977 4,282 14,078 4,450 9,628
Properties sold from portfolio...................... 310 1,493 (1,183) 795 3,652 (2,857)
Ground leases....................................... 4,150 2,948 1,202 7,627 6,800 827
------- ------- ------- ------- ------- -------
$40,629 $35,296 $ 5,333 $80,600 $70,172 $10,428
======= ======= ======= ======= ======= =======
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 changes in
rental income from our Same Space rental portfolio. Rather, we expect growth in
overall portfolio income will result primarily from new properties we add to our
rental portfolio over time.
Equity in Earnings of Operating Joint Ventures
Equity in earnings of operating joint ventures, net, decreased by $0.3
million and $0.8 million for the three and six months ended June 30, 2001 over
the same periods in 2000 primarily because of higher interest expense due to a
refinancing at a joint venture in 2000. (See Variability in Results section.)
18
Sales Revenue
Our Commercial segment has decreased gain from property sales for the three
and six months ended June 30, 2001 compared to the same periods in 2000. Gain
on property sales was $13.6 million and $26.7 million for the three and six
months ended June 30, 2001, respectively, as compared to $19.1 million and $30.6
million for the three and six months ended June 30, 2000, respectively,
summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
-------- -------- ---------- -------- -------- ----------
(In thousands) (In thousands)
Commercial sales:
Building sales:
Sales proceeds........................................... $ 1,155 $ 49,216 $(48,061) $ 19,136 $ 59,193 $(40,057)
Cost of sales............................................ (371) (32,859) 32,488 (13,705) (40,890) 27,185
-------- -------- -------- -------- -------- --------
Gain................................................... 784 16,357 (15,573) 5,431 18,303 (12,872)
-------- -------- -------- -------- -------- --------
Land sales:
Sales proceeds........................................... 23,829 8,891 14,938 38,335 28,904 9,431
Cost of sales............................................ (12,290) (6,415) (5,875) (18,889) (17,255) (1,634)
-------- -------- -------- -------- -------- --------
Gain................................................... 11,539 2,476 9,063 19,446 11,649 7,797
-------- -------- -------- -------- -------- --------
Other sales:
Sales proceeds........................................... 3,629 1,184 2,445 5,128 2,405 2,723
Cost of sales............................................ (2,359) (892) (1,467) (3,327) (1,765) (1,562)
-------- -------- -------- -------- -------- --------
Gain................................................... 1,270 292 978 1,801 640 1,161
-------- -------- -------- -------- -------- --------
Gain on property sales................................. 13,593 19,125 (5,532) 26,678 30,592 (3,914)
Equity in earnings of development joint ventures, net...... -- (5) (5) -- 14 (14)
-------- -------- -------- -------- -------- --------
Total gain on property sales........................... $ 13,593 $ 19,120 $ (5,527) $ 26,678 $ 30,606 $ (3,928)
======== ======== ======== ======== ======== ========
The commercial property sales for the three months ended June 30, 2001,
include 76.7 acres of improved land capable of supporting 0.8 million square
feet of commercial development, as compared to 27.2 acres of improved land
capable of supporting 0.5 million square feet of commercial development for the
three months ended June 30, 2000. No significant building sales occurred for the
three months ended June 30, 2001, as compared to the closing of the sale of
836,000 square feet of industrial building space and associated land in the same
period in 2000.
For the six months ended June 30, 2001, commercial property sales include
the closings of 291,000 square feet of industrial building space and the
associated land, and 2,038.7 acres of improved land capable of supporting 1.0
million square feet of commercial development. For the same period in 2000, the
commercial property sales include the closings of 69.1 acres of improved land
capable of supporting 1.4 million square feet of commercial development, and 1.1
million square feet of industrial building space. (See Variability in Results
section.)
"Other sales" in the table above include the sales of land subject to
leases that we had acquired during 1998. These sales totaled 373.3 acres and
486.6 acres for the three and six months ended June 30, 2001, respectively, and
458.4 acres and 541.2 acres for the three and six months ended June 30, 2000,
respectively.
Following is a summary of property sales under contract but not closed:
June 30,
-----------------------
2001 2000
------- -------
(In thousands)
Sales under contract, but not closed................................. $56,100 $55,827
======= =======
19
Management and Development Fees
In past years, a major source of management 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. We decided not to pursue renewal of
this contract when it expired on December 31, 2000. Consequently, we expect
management fees and the related selling, general and administrative expenses to
decline in 2001. Management and development fees decreased by $1.8 million and
$3.5 million for the three and six months ended June 30, 2001, respectively,
from the same periods in 2000.
Selling, General and Administrative Expenses
The decreases in the three and six months ended June 30, 2001 in selling,
general and administrative expenses of $0.9 million and $1.1 million are
primarily due to decreases of $2.1 million and $3.2 million during the same
periods in non-compensation related administrative and office expenses offset
by increases in the three and six months ended June 30, 2001 of $1.2 million
and $2.1 million, respectively, in employee related expenses due to higher
selling activities, staffing to pursue new development activities and manage
additions to the portfolio, and expenses incurred on lost opportunities.
Other
"Other" increased by $1.5 million and $2.2 million for the three and six
months ended June 30, 2001, respectively, as compared to the same periods in
2000, primarily because of interest income from restricted cash generated by
tax-deferred exchanges.
Interest
Interest expense increased $5.5 million and $11.8 million for the three and
six months ended June 30, 2001, respectively, as compared to the same periods in
2000, primarily because of new mortgages placed on completed buildings added to
our portfolio. The increases in capitalized interest in the six months ended
June 30, 2001 are due to higher levels of development activity. (See Note 6 of
the accompanying Condensed Consolidated Financial Statements.)
Following is a summary of interest incurred:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
------- ------- ---------- ------- ------- ----------
(In thousands) (In thousands)
Total interest incurred............................ $20,034 $14,117 $ 5,917 $40,440 $27,708 $12,732
Interest capitalized............................... (3,297) (2,916) (381) (6,842) (5,930) (912)
------- ------- ------- ------- ------- -------
Interest expensed.................................. $16,737 $11,201 $ 5,536 $33,598 $21,778 $11,820
======= ======= ======= ======= ======= =======
Previously capitalized interest included in cost
of sales........................................... $ 303 $ 1,740 $(1,437) $ 1,421 $ 2,211 $ (790)
======= ======= ======= ======= ======= =======
We expect interest expense to increase in 2001 as a result of new debt
associated with and collateralized by the newly completed and retained
buildings.
20
Residential:
The Residential segment acquires and develops land primarily for single-family
residential property via direct investment or through joint ventures. Through
the third quarter of 2000, the residential segment activities also included home
building; however, these assets were sold as discussed below.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
------- -------- ---------- -------- -------- ----------
(In thousands) (In thousands)
Rental properties income (loss)....................... $ -- $ (63) $ 63 $ -- $ 182 $ (182)
------- -------- -------- -------- -------- --------
Property sales and fee services:
Sales revenue......................................... 12,566 47,687 (35,121) 26,576 92,497 (65,921)
Cost of property sold................................. (7,510) (34,083) 26,573 (18,467) (70,669) 52,202
------- -------- -------- -------- -------- --------
Gain on property sales.............................. 5,056 13,604 (8,548) 8,109 21,828 (13,719)
Equity in earnings of development joint ventures, net. 681 1,720 (1,039) 8,476 2,832 5,644
------- -------- -------- -------- -------- --------
Total gain on property sales........................ 5,737 15,324 (9,587) 16,585 24,660 (8,075)
Management and development fees....................... 388 228 160 439 468 (29)
Selling, general and administrative expenses.......... (4,412) (5,045) 633 (9,001) (10,574) 1,573
Other................................................. 301 (7,232) 7,533 758 (6,733) 7,491
------- -------- -------- -------- -------- --------
2,014 3,275 (1,261) 8,781 7,821 960
------- -------- -------- -------- -------- --------
Interest expense...................................... -- (6) 6 -- (22) 22
Minority interests.................................... (237) (321) 84 (504) (370) (134)
------- -------- -------- -------- -------- --------
Pre-tax EBDDT..................................... $ 1,777 $ 2,885 $ (1,108) $ 8,277 $ 7,611 $ 666
======= ======== ======== ======== ======== ========
Sales Revenue
Gain from residential property sales for the three and six months ended
June 30, 2001, as compared to the same periods in 2000 decreased primarily
because of the sale of our home-building assets in 2000. Gain on residential
property sales for the three months ended June 30, 2001, resulted from the
closings of 117 lots and 7 homes, compared to the closings of 20 lots and 128
homes for the three months ended June 30, 2000. Gain on residential property
sales for the six months ended June 30, 2001 of $8.1 million is primarily from
the closings of 227 lots and 55 homes, compared to the closings of 38 lots and
279 homes during the same period in 2000.
In July 2000, we sold a majority of our home-building assets to a newly
formed limited liability company managed by Brookfield Homes of California, Inc.
for $139 million in cash and a retained interest in the new company ("BHC, LLC")
at an agreed-upon value of $22.5 million. In addition, we are entitled to a
preferred return on the retained interest and 35% of additional profits from
BHC, LLC operations. The deferred gain related to the retained interest as well
as our 35% share of profits from BHC, LLC's operations are recorded as part of
"Equity in earnings of development joint ventures, net" as homes/lots are sold.
Of the $22.5 million retained interest, we recognized $8.3 million in 2000 and
another $6.2 million during the first six months of 2001. (See Variability in
Results section.)
21
Equity in Earnings of Development Joint Ventures, Net:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
-------- ------- ---------- -------- -------- ----------
(In thousands) (In thousands)
Sales proceeds-unconsolidated JVs............... 43,134 20,936 22,198 96,403 48,977 47,426
Cost of sales.................................. (40,827) (15,906) (24,921) (90,367) (36,667) (53,700)
------- ------- ------- ------- ------- -------
Gain.......................................... 2,307 5,030 (2,723) 6,036 12,310 (6,274)
Joint Venture partners interest................. (1,626) (3,310) 1,684 2,440 (9,478) 11,918
------- ------- ------- ------- ------- -------
Equity in earnings of development joint
ventures, net................................. 681 1,720 (1,039) 8,476 2,832 5,644
======= ======= ======= ======= ======= =======
Equity in earnings of development joint ventures, net, decreased $1.0
million for the three months ended June 30, 2001 but increased $5.6 million for
the first six months of 2001 as compared to the same periods in 2000. The
decrease for the three months ended June 30, 2001 was primarily due to decreased
sales margins at our Serrano project and decreased sales volume at our Talega
project. The increase for the six months of 2001 was primarily attributable to
the income of $6.2 million form BHC, LLC during the first quarter this year. No
income was accrued from BHC, LLC for the three months ended June 30, 2001. (See
Variability in Results section.)
22
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.6 million and
$1.6 million for the three and six months ended June 30, 2001, respectively, as
compared to the same periods in 2000. The decrease in 2001 is primarily
attributable to the sale of the home-building assets to BHC, LLC during 2000. We
expect selling, general and administrative expenses to decrease in 2001 compared
to 2000 as a result of the sale of home-building assets.
Other
"Other" increased for the three and six months ended June 30, 2001, as
compared to the same periods in 2000, due to a $7.0 million reserve provided for
certain losses related to cost overruns on a fixed price contract for a
development project in 2000.
Interest
Following is a summary of interest incurred:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
-------- ------- ---------- -------- -------- ----------
(In thousands) (In thousands)
Total interest incurred...................... $ 119 $ 2,851 $(2,732) $ 366 $ 5,726 $(5,360)
Interest capitalized......................... (119) (2,845) 2,726 (366) (5,704) 5,338
----- ------- ------- ----- ------- -------
Interest expensed............................ $ -- $ 6 $ (6) $ -- $ 22 $ (22)
===== ======= ======= ===== ======= =======
Previously capitalized interest included
in cost of sales........................... $ 363 $ 1,681 $(1,318) $ 973 $ 3,765 $(2,792)
===== ======= ======= ===== ======= =======
Interest incurred and capitalized decreased for three and six months ended
June 30, 2001 is primarily because of the sale of the home-building assets in
July 2000.
23
Urban Development:
The Urban Development segment entitles and develops urban mixed-use sites
in San Francisco, Los Angeles, and San Diego. The principal active project of
the segment is Mission Bay in San Francisco.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
-------- ------- ---------- -------- -------- ----------
(In thousands) (In thousands)
Rental properties:
Rental revenue................................. $ 4,014 $ 3,614 $ 400 $ 7,137 $ 7,404 $ (267)
Property operating costs....................... (1,633) (1,840) 207 (3,036) (3,491) 455
-------- ------- -------- -------- ------- --------
2,381 1,774 607 4,101 3,913 188
-------- ------- -------- -------- ------- --------
Property sales and fee services:
Sales revenue.................................. 26,787 -- 26,787 36,687 -- 36,687
Cost of sales.................................. (19,806) -- (19,806) (25,739) -- (25,739)
-------- ------- -------- -------- ------- --------
Total gain on property sales.................. 6,981 -- 6,981 10,948 -- 10,948
Management and development fees................ -- 325 (325) 71 618 (547)
Selling, general and administrative expenses... (1,141) (558) (583) (2,418) (1,047) (1,371)
Other.......................................... 229 -- 229 3,699 (43) 3,742
-------- ------- -------- -------- ------- --------
6,069 (233) 6,302 12,300 (472) 12,772
-------- ------- -------- -------- ------- --------
Interest expense............................... (76) (498) 422 (56) (754) 698
-------- ------- -------- -------- ------- --------
Pre-tax EBDDT................................. $ 8,374 $ 1,043 $ 7,331 $ 16,345 $ 2,687 $ 13,658
======== ======= ======== ======== ======= ========
Rental Building Occupancy: June 30,
(In thousands of square feet, except percentages) 2001 2000 Difference
-------- ------- ----------
Owned.............................................. 811 1,003 (192)
Occupied........................................... 728 953 (225)
Occupancy percentage............................... 89.8% 95.0% (5.5%)
Rental Revenue less Property Operating Costs
The increase in rental revenue less property operating costs for the three
and six months ended June 30, 2001, as compared to the same periods in 2000, was
primarily due to the commencement of rent in December 2000 from two ground
leases and lower repairs and maintenance expenses. Income provided from interim
rental uses in this segment will decrease as development occurs on these sites.
We will continue to generate future income in the Urban Development segment from
development activities, rental income, and sales gains.
Following is a summary of property sales under contract but not closed:
June 30,
2001 2000
------- ------------
(In thousands)
Sales under contract, but not closed................................. $13,000 $ --
======= =========
Property Sales
The gain resulted from land sales of approximately 2.4 acres and 3.7 acres
of land at Mission Bay for the three and six months ended June 30, 2001,
respectively. (See Variability section).
Management and Development Fees
Management and development fees decreased $0.3 million and $0.5 million for
the three and six months ended June 30, 2001, respectively, as compared to the
same periods of 2000, primarily because development management activities
related to the Dodger Stadium renovation were completed in 2000.
24
Selling, General and Administrative Expenses
The increase of $0.6 million and $1.4 million for the three and six months
ended June 30, 2001, respectively, as compared to the same periods in 2000, is
primarily attributable to changes in overall staffing to accommodate increased
activity associated with all of the projects of the Urban Development segment.
Other
The increase in "other" of $3.7 million for the six months ended June 30,
2001 was primarily because of a lease termination payment related to a former
tenant at the Mission Bay project.
Interest
Following is a summary of interest incurred:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
-------- ------- ---------- -------- -------- ----------
(In thousands) (In thousands)
Total interest incurred...................... $ 668 $ 498 $ 170 $ 920 $ 870 $ 50
Interest capitalized......................... (592) -- (592) (864) (116) (748)
----- ----- ----- ----- ----- -----
Interest expensed............................ $ 76 $ 498 $(422) $ 56 $ 754 $(698)
===== ===== ===== ===== ===== =====
The decrease in interest expense is attributable to the increased
capitalization of interest as the result of higher development activities at our
Mission Bay project in San Francisco.
Corporate:
Corporate consists of administrative costs and interest contra-expense for
interest capitalized on a consolidated basis but not attributed to an operating
segment.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 Difference 2001 2000 Difference
-------- ------- ---------- -------- -------- ----------
(In thousands) (In thousands)
Interest (contra-expense)................... $ 1,796 $ 952 $ 844 $ 3,944 $ 1,982 $ 1,962
Corporate administrative costs.............. (5,062) (3,460) (1,602) (10,607) (7,720) (2,887)
Other....................................... 2,130 (888) 3,018 6,357 (752) 7,109
------- ------- ------- -------- ------- -------
Pre-tax EBDDT............................ $(1,136) $(3,396) $ 2,260 $ (306) $(6,490) $ 6,184
======= ======= ======= ======== ======= =======
Interest (contra-expense)
Corporate interest consists primarily of interest contra-expense because
the Residential and Urban Development segments had qualifying assets under
development that provided for the capitalization of more interest than was
directly incurred by these segments. As a result, the Corporate segment
capitalized interest during the period, and, as the qualifying assets are sold,
the corresponding capitalized interest is reflected as cost of sales in the
Corporate segment. As of June 30, 2001, $349,000 of cost of sales is included in
"other". We expect the interest contra-expense to continue to increase in 2001
because of the increase in business activities at our Mission Bay project in San
Francisco.
Corporate Administrative Costs
Corporate administrative costs consist primarily of general and
administrative expenses. General and administrative expenses increased by $1.6
million and $2.9 million for the three and six months ended June 30, 2001,
respectively, as compared to the same periods in 2000, primarily because of the
increase in our overall activities.
Other
The increase in "other" income for the three and six months ended June 30,
2001 is primarily attributable to higher interest income generated from a higher
balance of short-term investments.
25
Items Not Included in EBDDT by Segment
See comparative presentation of reconciliation from EBDDT to net income at Note
7 of the accompanying Condensed Consolidated Financial Statements.
Depreciation and Amortization Expense
The increases in depreciation and amortization expense of $1.6 million and
$3.6 million for the three and six months ended June 30, 2001, respectively, as
compared to the same periods in 2000, are primarily attributable to the new
buildings added to the portfolio between July 2000 and June 2001.
Gain on Non-Strategic Asset Sales
Gain on sales of non-strategic assets increased $1.6 million for the three
months ended June 30, 2001 as compared to the same period in 2000. Gain on
sales of non-strategic asset sales decreased $24.3 million for the six months
ended June 30, 2001 as compared to the same period in 2000. The decrease in
2001 is primarily because of a sale of desert land to the federal government in
2000.
Depreciation Recapture
We exclude the portion of gain on property sales attributable to
depreciation recapture from EBDDT (see Note 7 of the accompanying Condensed
Consolidated Financial Statements.) The decrease of $9.5 million and $6.9
million in depreciation recapture for the three and six months ended June 30,
2001, respectively, over the same periods in 2000 is because of higher sales
volume of older properties in 2000 as compared to 2001.
Variability in Results
Although we have a large portfolio of rental properties that provides
relatively stable operating results, our earnings from period to period will be
affected by the nature and timing of acquisitions and sales of property. Many of
our projects require a lengthy process to complete the development cycle before
they are sold. Also, 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 may tend to "bunch" income in particular periods
rather than producing a more even pattern throughout the year or from year to
year. In addition, gross margins may vary significantly as the mix of property
varies. The cost basis of the properties sold varies because (i) properties have
been owned for varying periods of time; (ii) properties are owned in various
geographical locations; and (iii) development projects have varying
infrastructure costs 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 six months ended June 30, 2001 and 2000, was $270.0 million and
$96.1 million, respectively. The increase in 2001 consists primarily of a $100.8
million increase in deferred credits and other liabilities, a $75.4 million
decrease in capital expenditures for development properties, and a $13.7 million
increase in operating distributions from joint ventures. The change of $100.8
million in deferred credits and other liabilities is primarily because of a $104
million prepayment of rent associated with a 34-year ground lease at our Pacific
Commons project. The $75.4 million decrease in capital expenditures is mostly
because of the sale of our home-building assets in 2000. The increase in
operating distributions is primarily because of a joint venture investment
associated with the sale of our home-building assets in 2000.
26
Cash flows from investing activities
Net cash used in investing activities reflected in the statement of cash
flows for the six months ended June 30, 2001 and 2000, was $164.7 million and
$168.8 million, respectively. The decrease in 2001 consists primarily of a $66.7
million net decrease in restricted cash, a $4.7 million decrease in property
acquisitions, a $5.2 million decrease in contributions to joint ventures, and a
$2.7 million decrease in tenant improvements. These were offset by a $40.5
million increase in capital expenditures for investment properties and a $34.7
million decrease in proceeds from sale of investment property.
Capital expenditures reflected in the statement of cash flows include the
following:
Six Months Ended
June 30,
2001 2000
-------- --------
(In thousands)
Capital Expenditures from Operating Activities/(1)/
Capital expenditures for residential and commercial development
properties.......................................................... $ 23,666 $ 71,544
Residential property acquisitions..................................... -- 21,579
Capitalized interest and property tax................................. 366 6,290
-------- --------
Capital expenditures for operating activities......................... 24,032 99,413
Seller-financed acquisitions.......................................... 10,000 --
-------- --------
Total Capital expenditures for operating activities..... 34,032 99,413
Capital Expenditures from Investing Activities/(2)/
Construction and building improvements................................ 73,454 64,458
Predevelopment........................................................ 24,346 3,449
Infrastructure and other.............................................. 28,207 23,341
Capitalized interest and property tax................................. 13,392 7,679
-------- --------
Capital expenditures for investment properties........................ 139,399 98,927
Commercial property acquisitions...................................... 5,069 9,724
Tenant improvements................................................... 1,244 3,977
-------- --------
Capital expenditures for investment activities........................ 145,712 112,628
Seller-financed acquisitions.......................................... -- 1,702
-------- --------
Total capital expenditures in investing activities................. 145,712 114,330
-------- --------
Total capital expenditures......................................... $179,744 $213,743
======== ========
------------------
/(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 residential and commercial development
properties--This item relates to the development of residential and commercial
for-sale development properties. The decrease from 2000 to 2001 is primarily
because of the sale of home-building assets in July 2000 (see discussion of gain
on property sales in Residential section).
Residential property acquisitions--For the six months ended June 30, 2000,
we invested approximately $21.6 million in the acquisition of properties either
directly or through joint ventures.
27
Capitalized interest and property taxes--This item represents interest and
property taxes capitalized as part of our development projects. The increase is
primarily attributable to additional capitalized interest from the qualifying
assets of the Residential and Urban segments. (See additional discussion under
Corporate section.)
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:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
(In square feet) (In square feet)
Under construction, beginning of period 2,997,000 4,371,000 3,474,000 4,641,000
Construction starts 100,000 1,970,000 374,000 2,658,000
Completed--retained in portfolio (514,000) (1,379,000) (1,112,000) (2,337,000)
Completed--design/build or sold -- -- (153,000) --
--------- ---------- ---------- ----------
Under construction, end of period 2,583,000 4,962,000 2,583,000 4,962,000
========= ========== ========== ==========
Predevelopment--This item relates to amounts incurred for our urban
development projects and commercial development projects, primarily the Mission
Bay project in San Francisco, California, and the Pacific Commons project in
Fremont, California because of the increased development activities.
Infrastructure and other--This item represents primarily infrastructure
costs incurred in connection with our urban development and commercial
development projects. Infrastructure costs relate primarily to the projects at
Woodridge, Illinois; Denver, Colorado; Ontario, California; Fremont, California;
and Mission Bay, San Francisco, California.
Cash flows from financing activities
Net cash provided by financing activities reflected in the statement of
cash flows for the six months ended June 30, 2001 and 2000, was $5.1 million and
$59.1 million, respectively. The decrease in 2001 is primarily attributable to
$108.8 million expended for the purchase of 6,436,300 shares of our stock under
the share repurchase programs as compared to $18.9 million expended for the
purchase of 1,410,700 shares during the same period in 2000. Also contributing
to the decrease in 2001 were both a $1.9 million increase in distributions to
minority partners and a $1.0 million decrease in proceeds from issuance of
common stock. The overall decrease in cash provided by financing activities is
offset by an increase of $38.8 million in net borrowings.
Capital commitments
As of June 30, 2001, we had outstanding standby letters of credit and
surety bonds in the amount of $195.2 million in favor of local municipalities or
financial institutions to guarantee performance on real property improvements or
financial obligations.
As of June 30, 2001, we had approximately $153.5 million in total
commitments for capital expenditures to vendors. These commitments are primarily
contracts to construct industrial development projects, predevelopment costs,
and re-leasing costs.
28
Cash balances, available borrowings and capital resources
As of June 30, 2001, we had total cash of $511.4 million, of which $64.5
million is restricted cash. In addition to the $511.4 million cash, we had
$179.7 million in borrowing capacity under our commercial construction
facilities and $3.1 million in additional borrowing capacity under our term
loans, both available upon satisfaction of certain conditions.
Our short- and long-term liquidity and capital resources requirements will
be provided primarily from four sources: (1) cash on hand, (2) ongoing income
from rental properties, (3) proceeds from sales of developed properties, land
and non-strategic assets, and (4) additional debt. As noted above, 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, completed buildings,
acquisitions and currently unencumbered properties. There is no assurance that
we can obtain this financing or obtain this financing on favorable terms.
Stock Repurchase Program--Between October 1999 and May 2001, our Board of
Directors authorized four separate stock repurchase programs; each has a limit
of $50 million. Share purchases under these programs were made on the open
market. Through June 30, 2001, under these programs, we have repurchased a total
of 8,433,600 shares at a total cost of $137.5 million. Subsequent to June 30,
2001, we purchased an additional 1,311,600 shares at a cost of $23.6 million.
(See Note 9 of the accompanying Condensed Consolidated Financial Statements for
details.)
Debt covenants--Certain loan agreements contain restrictive financial
covenants, the most restrictive of which require our fixed charge coverage ratio
to be at least 1.60:1, require stockholders' equity to be no less than $610.8
million (as adjusted for stock repurchases), and require that we maintain
certain other specified financial ratios. We were in compliance with all such
covenants as of June 30, 2001.
Bonds--In June 2001, $101 million of Community Facility District bonds were
sold to finance public infrastructure improvements at Mission Bay in San
Francisco and Pacific Commons in Fremont. Bonds totaling $71 million were
issued for Mission Bay, of which $17 million have a floating rate of interest
initially set at 2.85% with the remaining $54 million at a fixed rate of 6.02%.
At Pacific Commons, $30 million of bonds were issued and have a weighted average
fixed interest rate of 6.2%. These bonds have a series of maturities up to
thirty years. No amounts were funded from either issuances as of June 30,
2001. (See Note 8 of the accompanying Condensed Consolidated Financial
Statement for details.)
Trading
Our executives from time to time in the future may enter into so-called
"Rule 10b5-1 Plans." Under an appropriate Rule 10b5-1 Plan, an executive may
instruct a third party, such as a brokerage firm, to engage in specified
securities transactions in the future based on a formula without further action
by the stockholder provided that the plan satisfies the legal requirements of
Rule 10b5-1 under the Securities Exchange Act of 1934.
Environmental Matters
Many of our properties or those of our subsidiaries are in urban or
industrial areas and may have been leased to or previously owned by commercial
or industrial companies that discharged hazardous materials. Our subsidiaries
and we incur ongoing environmental remediation and disposal costs, legal costs
relating to clean up, defense of litigation, and the pursuit of responsible
third parties. Costs incurred by the consolidated group in connection with
operating properties and with properties previously sold are expensed. Costs
incurred for properties to be sold by our subsidiaries or us are capitalized and
will be charged to cost of sales when the properties are sold. Costs relating to
undeveloped properties held by us or our subsidiaries are capitalized as part of
development costs.
29
In recent years, certain of our subsidiaries have acquired properties with
known significant environmental issues for cleanup and redevelopment, and we
expect that we may continue to form subsidiaries to acquire such properties (or
that existing subsidiaries will acquire such properties) when the potential
benefits of redevelopment warrant. When our subsidiaries acquire such
properties, they undertake extensive due diligence to determine the nature of
environmental problems and the likely cost of remediation, and they mitigate the
risk with undertakings from third parties, including the sellers and their
affiliates, remediation contractors, third party sureties, and/or insurers. The
costs associated with such environmental costs are included in the estimates for
properties to be developed. (See Note 8 of the accompanying Condensed
Consolidated Financial Statements for further discussions.)
30
Forward-Looking Information and Risk Factors
Except for historical matters, the matters discussed in this quarterly
report 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,"
"plan," "prospects," and similar expressions. Forward-looking statements
include, but are not limited to, statements about plans; opportunities;
negotiations; markets and economic conditions; development, construction,
rental, and sales activities; availability of financing; and property values.
Also, on occasion, management makes oral statements that may include similar
forward-looking statements. Again, we try, wherever practical, to identify these
forward-looking statements with appropriate language.
We caution you 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 revise these
forward-looking statements to reflect future events, changes in circumstances,
or changes in beliefs.
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, including the possibility of a
general economic slowdown or recession. Such changes may result in
higher vacancy rates for commercial property and lower prevailing rents,
lower sales prices, lower absorption rates, more tenant defaults, and
the like
. Product and geographical concentration
. Competition in the real estate industry
. Availability of financing to meet our capital needs, the variability of
interest rates, and our ability to use our collateral to secure loans
. 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
. Changes in the management team or competition for employees
. Changes in tax laws and other circumstances that affect our ability to
control the timing and recognition of deferred tax liability
. Exposure of our assets to damage from natural occurrences such as
earthquakes, and weather conditions that affect the progress of
construction
. Liability for us or our subsidiaries for environmental remediation at
properties owned, managed, or formerly owned or managed by us, our
subsidiaries, or the predecessors of either, and changes in
environmental laws and regulations
. Failure to reach agreement with third parties on definitive terms or
failure to close transactions, and failure or inability of third parties
to perform their obligations under agreements
. Increases in the cost of land and building materials
. Tight labor markets
. Limitations on or challenges to title to our properties
. Risks related to the performance, interests, 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
. Issues arising from shortages in electrical power to us or to our
customers or from higher prices for power, which could affect our
ability to rent or sell properties, the ability of tenants or buyers to
pay for our properties or for the use of our properties, or our ability
to conduct our business
31
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risk exposure is interest rate risk. The majority of our
financial instruments are not considered market risk sensitive instruments, as
they are not subject to foreign exchange rate risk or commodity price risk. As
of June 30, 2001, we did not have any outstanding interest-protection contracts.
We intend to continually and actively monitor and manage interest costs on our
variable rate debt and may enter into interest rate-protection contracts based
on market fluctuations.
As of June 30, 2001, approximately 71.2% of our debt bore interest at fixed
rates with a weighted average maturity of approximately 8.8 years and a weighted
average coupon rate of approximately 6.65%, which is below market. Therefore,
unless there was a drastic decrease in interest rates, the fair value of our
fixed-rate debt would not be adversely affected. The remainder of our debt bears
interest at variable rates with a weighted average maturity of approximately 2.8
years and a weighted average coupon rate of approximately 6.41% at June 30,
2001. To the extent that we incur additional variable rate indebtedness, our
exposure to increases in interest rates would increase. If coupon interest rates
increased 100 basis points, the annual effect on our financial position and cash
flow would be approximately $3.6 million, based on the outstanding balance of
our debt at June 30, 2001. We believe, however, that in no event would increases
in interest expense as a result of inflation have negative effect on our
financial position, results of operations, or cash flow since our current cash
and cash equivalents balance of $446.9 million is greater than our total
variable rate indebtedness.
32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None. See Note 8, "Commitments and Contingencies," for further information.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 1, 2001,
stockholders voted as follows with respect to the election of directors:
Nominees Votes For Votes Withheld
Joseph F. Alibrandi 97,446,645 436,491
Stephen F. Bollenbach 78,022,604 19,860,532
Daryl J. Carter 97,566,899 316,237
Richard D. Farman 97,560,709 322,427
Christine Garvey 96,924,060 959,076
William M. Kahane 97,566,394 316,742
Leslie D. Michelson 86,877,041 11,006,095
Deanna W. Oppenheimer 97,538,725 344,411
Nelson C. Rising 97,565,364 317,722
Thomas M. Steinberg 97,562,382 320,754
Cora M. Tellez 97,544,383 338,753
Item 5. Other Information
None.
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.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Catellus Development Corporation has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CATELLUS DEVELOPMENT CORPORATION
Date: August 8, 2001 By: /s/ C. William Hosler
-------------------------------- --------------------------------
C. William Hosler
Senior Vice President
Chief Financial Officer
Principal Financial Officer
Date: August 8, 2001 By: /s/ Paul A. Lockie
-------------------------------- --------------------------------
Paul A. Lockie
Vice President and Controller
Principal Accounting Officer
34
EXHIBIT INDEX
Exhibit
Number
-------
3.1A Restated Certificate of Incorporation of the Registrant effective December 4, 1990, is
incorporated by reference to the exhibits 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, as
filed with the Commission along with the Form 10-K for the year ended December 31, 2000.
3.2 Amended and Restated Bylaws of the Registrant as filed with the Commission along with the Form
10-K for the year ended December 31, 2000.
4.1 Form of Certificate of Designations of Series A Junior Participating Preferred Stock is
incorporated by reference to the exhibits to the Form 8-K as filed with the Commission on December
28, 1999.
4.3 Loan Agreement by and between Catellus Finance 1, L.L.C. and Prudential Mortgage Capital Company,
Inc. dated as of October 28, 1998, is incorporated by reference to the exhibits 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 the
exhibits 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 the
exhibits 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 the exhibits 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 the exhibits 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 the exhibits 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 the
exhibits 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 the
exhibits to the Form 10-Q for the quarter ended March 31, 1999.
10.6 Registrant's 2000 Performance Award Plan is incorporated by reference to the exhibits to the
Registrant's proxy statement for the annual stockholders' meeting held on May 2, 2000.
10.7 Registrant's Deferred Compensation Plan is incorporated by reference to the exhibits to the Form
10-K for the year ended December 31, 1997.
10.8 Second Amended and Restated Employment Agreement dated as of October 1, 1999, between the
Registrant and Nelson C. Rising is incorporated by reference to the exhibits to the Form 10-K for
the year ended December 31, 1999.
35
10.8A Amendment to Second Amended and Restated Employment Agreement dated as of February 7, 2001,
between the Registrant and Nelson C. Rising as filed with the Commission along with the Form 10-K
for the year ended December 31, 2000.
10.9A Employment Agreement dated July 24, 1995, between the Registrant and Stephen P. Wallace is
incorporated by reference to the exhibits to the Form 10-K for the year ended December 31, 1995.
10.9B Letter Agreement dated November 16, 1996, between the Registrant and Stephen P. Wallace is
incorporated by reference to the exhibits to the Form 10-K for the year ended December 31, 1996.
10.10 Memorandum of Understanding regarding Employment dated February 7, 2001, between the Registrant
and Kathleen Smalley as filed with the Commission along with the Form 10-K for the year ended
December 31, 2000.
10.11 Memorandum of Understanding regarding Employment dated February 7, 2001, between the Registrant
and C. William Hosler as filed with the Commission along with the Form 10-K for the year ended
December 31, 2000.
10.12 Rights Agreement dated as of December 16, 1999, between the Registrant and American Stock Transfer
and Trust Company is incorporated by reference to the exhibits to the Form 8-K as filed with the
Commission on December 28, 1999.
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.
36