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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 March 31, 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 May 7, 2001, there were 100,324,038 issued and outstanding shares of
the Registrant's Common Stock.
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CATELLUS DEVELOPMENT CORPORATION
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet as of March 31, 2001 and December 31, 2000......... 2
Consolidated Statement of Operations for the three months ended
March 31, 2001 and 2000...................................................... 3
Consolidated Statement of Cash Flows for the three months ended
March 31, 2001 and 2000...................................................... 4
Notes to Consolidated Financial Statements.................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................... 28
PART II. OTHER INFORMATION................................................................. 29
SIGNATURES.................................................................................. 30
EXHIBIT INDEX............................................................................... 31
1
PART I
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
March 31, December 31,
2001 2000
---------- ------------
(Unaudited)
Assets
Properties............................................................................ $2,050,716 $2,025,813
Less accumulated depreciation......................................................... (329,041) (320,275)
---------- ----------
1,721,675 1,705,538
Other assets and deferred charges, net................................................ 128,828 121,033
Notes receivable, less allowance...................................................... 31,156 36,119
Accounts receivable, less allowance................................................... 21,990 30,816
Restricted cash and investments....................................................... 39,934 45,478
Cash and cash equivalents............................................................. 377,855 336,558
---------- ----------
Total......................................................................... $2,321,438 $2,275,542
========== ==========
Liabilities and stockholders' equity
Mortgage and other debt............................................................... $1,135,377 $1,134,563
Accounts payable and accrued expenses................................................. 106,777 96,274
Deferred credits and other liabilities................................................ 126,071 58,722
Deferred income taxes................................................................. 259,662 247,975
---------- ----------
Total liabilities................................................................ 1,627,887 1,537,534
---------- ----------
Commitments and contingencies (Notes 8 and 9)
Minority interests.................................................................... 52,094 54,763
---------- ----------
Stockholders' equity
Common stock, 108,241 and 108,088 shares issued and 102,085 and 106,091
shares outstanding at March 31, 2001 and December 31, 2000, respectively.......... 1,083 1,081
Paid-in capital..................................................................... 496,245 493,420
Treasury stock, at cost (6,156 and 1,997 shares at March 31, 2001 and December 31,
2000, respectively)............................................................... (99,483) (28,660)
Accumulated earnings................................................................ 243,612 217,404
---------- ----------
Total stockholders' equity....................................................... 641,457 683,245
---------- ----------
Total......................................................................... $2,321,438 $2,275,542
========== ==========
See notes to consolidated financial statements
2
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
Three Months Ended
March 31,
2001 2000
---- ----
(Unaudited)
Rental properties
Rental revenue................................................... $ 55,811 $ 49,918
Property operating costs......................................... (14,120) (12,658)
Equity in earnings of operating joint ventures, net.............. 3,164 3,638
-------- --------
44,855 40,898
-------- --------
Property sales and fee services
Sales revenue.................................................... 57,896 76,021
Cost of sales.................................................... (35,051) (56,138)
-------- --------
Gain on property sales................................... 22,845 19,883
Equity in earnings of development joint ventures, net............ 7,795 1,131
-------- --------
Total gain on property sales............................. 30,640 21,014
Management and development fees.................................. 1,180 3,269
Selling, general and administrative expenses..................... (9,583) (9,923)
Other, net....................................................... 5,659 1,403
-------- --------
27,896 15,763
-------- --------
Interest expense................................................... (14,693) (9,819)
Depreciation and amortization...................................... (12,934) (10,870)
Corporate administrative costs..................................... (5,545) (4,260)
Gain on non-strategic asset sales.................................. 1,747 27,667
Other, net......................................................... 4,227 136
-------- --------
Income before minority interests and income taxes................ 45,553 59,515
Minority interests................................................. (1,871) (1,603)
-------- --------
Income before income taxes....................................... 43,682 57,912
-------- --------
Income tax expense
Current.......................................................... (5,361) (6,524)
Deferred......................................................... (12,113) (16,650)
-------- --------
(17,474) (23,174)
-------- --------
Net income....................................................... $ 26,208 $ 34,738
======== ========
Net income per share
Basic......................................................... $ 0.25 $ 0.32
======== ========
Assuming dilution............................................. $ 0.24 $ 0.32
======== ========
Average number of common shares outstanding - basic.............. 104,854 107,292
======== ========
Average number of common shares outstanding - diluted............ 107,697 108,900
======== ========
See notes to consolidated financial statements
3
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
2001 2000
-------- --------
(Unaudited)
Cash flows from operating activities:
Net income.................................................................. $ 26,208 $ 34,738
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................................. 12,934 10,870
Deferred income taxes..................................................... 12,113 16,650
Amortization of deferred loan fees and other costs........................ 1,147 1,351
Equity in earnings of joint ventures...................................... (10,959) (4,769)
Operating distributions from joint ventures............................... 18,798 2,139
Cost of development properties and non-strategic assets sold.............. 33,639 51,704
Capital expenditures for development properties........................... (6,050) (43,922)
Other, net................................................................ 954 509
Change in deferred credits and other liabilities........................... 67,349 (4,819)
Change in other operating assets and liabilities........................... 17,127 8,778
-------- --------
Net cash provided by operating activities.................................... 173,260 73,229
-------- --------
Cash flows from investing activities:
Capital expenditures for investment properties............................. (65,856) (41,631)
Tenant improvements........................................................ (294) (1,835)
Contributions to joint ventures............................................ -- (4,260)
Restricted cash............................................................ 5,544 (47,369)
-------- --------
Net cash used in investing activities........................................ (60,606) (95,095)
-------- --------
Cash flows from financing activities:
Borrowings................................................................. 33,495 41,289
Repayment of borrowings.................................................... (31,043) (29,665)
Distributions to minority partners......................................... (4,540) (2,472)
Repurchase of common stock................................................. (70,823) (7,576)
Proceeds from issuance of common stock..................................... 1,554 2,883
-------- --------
Net cash (used in) provided by financing activities.......................... (71,357) 4,459
-------- --------
Net increase (decrease) in cash and cash equivalents......................... 41,297 (17,407)
Cash and cash equivalents at beginning of period............................. 336,558 35,410
-------- --------
Cash and cash equivalents at end of period................................... $377,855 $ 18,003
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)...................................... $ 14,303 $ 8,576
Income taxes.............................................................. $ 45 $ 2,634
See notes to consolidated financial statements
4
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 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. The
Company's rental properties consist primarily of industrial facilities, along
with a number of office and retail buildings, located primarily in the same
states.
These consolidated statements include the assets and liabilities of
Catellus Development Corporation and its consolidated subsidiaries, whether
wholly or partially owned, and whether directly or indirectly owned, by Catellus
Development Corporation, each of which is a separate legal entity. In the
absence of specific contractual arrangements, none of the assets of any of 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 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 $39.9 million at March 31,
2001 and $45.5 million at December 31, 2000, $32.1 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 March 31, 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 pre-paid 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 March 31,
------------------------------------------------------------------
2001 2000
------------------------------- --------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
-------- ------- --------- ------ ------- -------
(In thousands, except per share data)
Net income........................................... $26,208 104,854 $0.25 $34,738 107,292 $0.32
===== =====
Effect of dilutive securities: stock options/(1)/.... -- 2,843 -- 1,608
------- ------- ------- -------
Net income assuming dilution......................... $26,208 107,697 $0.24 $34,738 108,900 $0.32
======= ======= ===== ======= ======= =====
/(1)/ Includes Directors stock units
NOTE 5. MORTGAGE AND OTHER DEBT
Mortgage and other debt at March 31, 2001, and December 31, 2000, are
summarized as follows:
March 31, December 31,
2001 2000
---------- ------------
(In thousands)
First mortgage loans.................................................... $ 618,741 $ 621,182
Collateralized term loan................................................ 311,316 309,837
Construction loans-collateralized....................................... 109,585 88,292
Acquisition collateralized promissory notes............................. 40,955 43,273
Assessment district bonds............................................... 25,827 26,116
Collateralized promissory notes......................................... 18,960 21,360
Industrial capital lease................................................ 889 15,336
Other loans............................................................. 9,104 9,167
---------- ----------
Total mortgage and other debt.......................................... $1,135,377 $1,134,563
========== ==========
Due within one year..................................................... $ 50,558 $ 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. These loans had a combined outstanding balance of $31.7 million
at March 31, 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
Interest costs relating to mortgage and other debt for the three-month period
ended March 31, 2001 and 2000, are summarized as follows:
Three Months Ended
March 31,
2001 2000
------- -------
(In thousands)
Total interest incurred.................................................. $20,975 $15,807
Interest capitalized..................................................... (6,282) (5,988)
------- -------
Interest expensed........................................................ $14,693 $ 9,819
======= =======
Previously capitalized interest included in cost of sales................ $ 1,728 $ 2,554
======= =======
NOTE 6. PROPERTIES
Book value by property type at March 31, 2001 and December 31, 2000,
consisted of the following:
March 31, December 31,
2001 2000
---------- ------------
(In thousands)
Rental properties:
Industrial buildings.................................................... $ 896,145 $ 874,168
Office buildings........................................................ 221,284 205,179
Retail buildings........................................................ 92,564 94,085
Land and land leases.................................................... 94,002 92,803
Investment in operating joint ventures.................................. (15,398) (16,092)
---------- ----------
1,288,597 1,250,143
---------- ----------
Developable properties:
Commercial.............................................................. 168,821 177,635
Residential............................................................. 62,170 64,479
Urban development....................................................... 374,989 366,136
Investment in development joint ventures................................ 37,714 46,256
---------- ----------
643,694 654,506
---------- ----------
Work-in-process:
Commercial.............................................................. 65,958 50,098
Commercial--capital lease............................................... 20,129 37,415
Residential............................................................. 1,150 4,883
Corporate/(1)/.......................................................... 2,217 --
---------- ----------
89,454 92,396
---------- ----------
Furniture and equipment.................................................... 26,777 26,599
Other...................................................................... 2,194 2,169
---------- ----------
Gross book value........................................................... 2,050,716 2,025,813
Accumulated depreciation................................................... (329,041) (320,275)
---------- ----------
Net book value............................................................. $1,721,675 $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 is as follows:
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- ------
(In thousands)
Three Months Ended March 31, 2001
Rental properties:
Rental revenue........................................... $ 52,688 /(1)/ $ -- /(2)/ $ 3,123 $ -- $ 55,811
Property operating costs................................. (12,717) -- /(2)/ (1,403) -- (14,120)
Equity in earnings of operating joint ventures, net...... 3,164 -- -- -- 3,164
-------- -------- ------- ------- --------
43,135 -- 1,720 -- 44,855
-------- -------- ------- ------- --------
Property sales and fee services:
Sales revenue............................................ 33,986 14,010 9,900 -- 57,896
Cost of sales............................................ (18,161) (10,957) (5,933) -- (35,051)
-------- -------- ------- ------- --------
Gain on property sales................................. 15,825 3,053 3,967 -- 22,845
Equity in earnings of development joint ventures, net.... -- 7,795 -- -- 7,795
-------- -------- ------- ------- --------
Total gain on property sales........................... 15,825 10,848 3,967 -- 30,640
Management and development fees.......................... 1,058 51 71 -- 1,180
Selling, general and administrative expenses............. (3,717) (4,589) (1,277) -- (9,583)
Other.................................................... 1,732 457 3,470 /(3)/ -- 5,659
-------- -------- ------- ------- --------
14,898 6,767 6,231 -- 27,896
-------- -------- ------- ------- --------
Interest expense......................................... (16,861) -- 20 2,148 (14,693)
Corporate administrative costs........................... -- -- -- (5,545) (5,545)
Minority interests....................................... (1,604) (267) -- -- (1,871)
Other.................................................... -- -- -- 4,227 4,227
Depreciation recapture................................... (2,740) -- -- -- (2,740)
-------- -------- ------- ------- --------
Pre-tax EBDDT.......................................... $ 36,828 $ 6,500 $ 7,971 $ 830 52,129
======== ======== ======= =======
Current taxes............................................ (5,361)
--------
EBDDT.................................................... 46,768
Depreciation and amortization............................ (12,934)
Deferred taxes........................................... (12,113)
Gain on non-strategic asset sales........................ 1,747
Depreciation recapture................................... 2,740
--------
Net Income............................................. $ 26,208
========
/(1)/ Includes $0.3 million ground lease rent from Cisco Systems. Cisco
Systems prepaid approximately $68 million of the expected ground rent
in the first quarter, which is recorded as part of deferred credits and
other liabilities in the accompanying consolidated balance sheet. The
final installment of $35.2 million is expected in mid-2001. The prepaid
rent will be 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)/ Lease termination fee related to a former tenant at the Mission Bay
project.
9
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- -----------
(In thousands)
Three Months Ended March 31, 2000
Rental properties:
Rental revenue....................................... $ 45,883 $ 245 $ 3,790 $ -- $ 49,918
Property operating costs............................. (11,007) -- (1,651) -- (12,658)
Equity in earnings of operating joint ventures,
net................................................. 3,638 -- -- -- 3,638
-------- -------- ------- -------- --------
38,514 245 2,139 -- 40,898
-------- -------- ------- -------- --------
Property sales and fee services:
Sales revenue........................................ 31,211 44,810 -- -- 76,021
Cost of sales........................................ (19,552) (36,586) -- -- (56,138)
-------- -------- ------- -------- --------
Gain on property sales............................. 11,659 8,224 -- -- 19,883
Equity in earnings of development joint
ventures, net....................................... 19 1,112 -- -- 1,131
-------- -------- ------- -------- --------
Total gain on property sales....................... 11,678 9,336 -- -- 21,014
Management and development fees...................... 2,736 240 293 -- 3,269
Selling, general and administrative expenses......... (3,905) (5,530) (488) -- (9,923)
Other................................................ 947 500 (44) -- 1,403
-------- -------- ------- -------- --------
11,456 4,546 (239) -- 15,763
-------- -------- ------- -------- --------
Interest expense..................................... (10,577) (16) (256) 1,030 (9,819)
Corporate administrative costs....................... -- -- -- (4,260) (4,260)
Minority interests................................... (1,554) (49) -- -- (1,603)
Other................................................ -- -- -- 136 136
Depreciation recapture............................... (192) -- -- -- (192)
-------- -------- ------- -------- --------
Pre-tax EBDDT...................................... $ 37,647 $ 4,726 $ 1,644 $ (3,094) 40,923
======== ======== ======= ========
Current taxes........................................ (6,524)
--------
EBDDT................................................ 34,399
Depreciation and amortization........................ (10,870)
Deferred taxes....................................... (16,650)
Gain on non-strategic asset sales.................... 27,667
Depreciation recapture............................... 192
--------
Net Income......................................... $ 34,738
========
10
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 March 31, 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 $25.6 million to $39.5
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 three months ended March 31,
2001 totaled $0.6 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 the 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 $25.6 million to $39.5 million of future
costs of remediation above.
As of March 31, 2001, the Company has outstanding standby letters of credit
and surety bonds in the amount of $177.9 million in favor of local
municipalities or financial institutions to guarantee performance on
construction of real property improvements or financial obligations.
Additionally, the Company guarantees a portion of the debt and interest of
certain of its joint ventures. At March 31, 2001, these guarantees totaled $35
million and 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.
11
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 1,270,100 shares at a cost of $20.8 million through March 31, 2001.
Subsequent to March 31, 2001, the Company purchased additional 1,777,300 shares
at a cost of $29.2 million.
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's repurchases are reflected as treasury stock at cost and are
presented as a reduction to consolidated stockholders' equity.
12
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 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 Consolidated Financial
Statements.)
Summary EBDDT and reconciliation to net income for the three months ended March
31, 2001 and 2000
Three Months Ended
March 31,
Difference
2001 2000 2001/2000
---- ---- ---------
(In thousands)
Pre-tax EBDDT
Commercial....................................... $ 36,828 $ 37,647 $ (819)
Residential...................................... 6,500 4,726 1,774
Urban Development................................ 7,971 1,644 6,327
Corporate........................................ 830 (3,094) 3,924
-------- -------- ----------
Total pre-tax EBDDT............................... 52,129 40,923 11,206
Current tax...................................... (5,361) (6,524) 1,163
-------- -------- ----------
EBDDT............................................. 46,768 34,399 12,369
Depreciation and amortization.................... (12,934) (10,870) (2,064)
Deferred taxes................................... (12,113) (16,650) 4,537
Gain on non-strategic asset sales................ 1,747 27,667 (25,920)
Depreciation recapture........................... 2,740 192 2,548
-------- -------- ----------
Net income........................................ $ 26,208 $ 34,738 $ (8,530)
======== ======== ==========
13
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
March 31,
Difference
2001 2000 2001/2000
---- ---- ---------
(In thousands)
Rental properties
Rental revenue.................................................. $ 52,688 $ 45,883 $ 6,805
Property operating costs........................................ (12,717) (11,007) (1,710)
Equity in earnings of operating joint ventures, net............. 3,164 3,638 (474)
-------- -------- ----------
43,135 38,514 4,621
-------- -------- ----------
Property sales and fee services
Sales revenue................................................... 33,986 31,211 2,775
Cost of sales/(1)/.............................................. (20,901) (19,744) (1,157)
-------- -------- ----------
Gain on property sales.................................... 13,085 11,467 1,618
Equity in earnings of development joint ventures, net........... -- 19 (19)
-------- -------- ----------
Total gain on property sales.............................. 13,085 11,486 1,599
Management and development fees................................. 1,058 2,736 (1,678)
Selling, general and administrative expenses.................... (3,717) (3,905) 188
Other........................................................... 1,732 947 785
-------- -------- ----------
12,158 11,264 894
-------- -------- ----------
Interest expense.................................................. (16,861) (10,577) (6,284)
Minority interests................................................ (1,604) (1,554) (50)
-------- -------- ----------
Pre-tax EBDDT............................................. $ 36,828 $ 37,647 $ (819)
======== ======== ==========
Rental building occupancy
(In thousands of square feet, except percentages)
Owned............................................................. 29,212 25,535 3,677
Occupied.......................................................... 27,147 24,116 3,031
Occupancy percentage.............................................. 92.9% 94.4% (1.6%)
___________
/(1)/ Cost of sales for three months ended March 31, 2001 and 2000 includes
$2.7 million and $0.2 million, respectively, of depreciation recapture,
which is included in net income, but not EBDDT.
14
Rental Revenue less Property Operating Costs
Rental revenue less property operating costs has increased mainly because of
additions of buildings, land subject to 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 April 2000 to March 2001, we added from our own
development projects, a net 3.7 million square feet to our rental portfolio.
Rental revenue less operating costs for the three months ended March 31, 2001
and 2000 are summarized as follows:
Three Months Ended
March 31,
Difference
2001 2000 2001/2000
-------- -------- ---------
(In thousands)
Rental revenue less operating costs:
Same Space.................................. $ 29,196 $ 28,069 $ 1,127
Properties added to portfolio............... 6,766 1,473 5,293
Properties sold from portfolio.............. 258 1,830 (1,572)
Land and land leases........................ 3,751 3,504 247
-------- -------- ---------
$ 39,971 $ 34,876 $ 5,095
======== ======== =========
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 rental 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 $0.5
million for the three months ended March 31, 2001 over the same period in 2000
primarily because of higher interest expense due to a refinancing at a joint
venture in 2000.
15
Sales Revenue
Our Commercial segment has increased gain from property sales for the three
months ended March 31, 2001 compared to the same period in 2000. Gain on
property sales was $13.1 million and $11.5 million for the three months ended
March 31, 2001 and 2000, respectively, summarized as follows:
Three Months Ended
March 31,
Difference
2001 2000 2001/2000
-------- -------- ---------
Commercial property sales (In thousands)
Building sales:
Sales proceeds.............................. $ 17,981 $ 9,977 $ 8,004
Cost of sales............................... (13,334) (8,031) (5,303)
-------- -------- ---------
Gain....................................... 4,647 1,946 2,701
-------- -------- ---------
Land sales:
Sales proceeds.............................. 14,506 20,012 (5,506)
Cost of sales............................... (6,599) (10,840) 4,241
-------- -------- ---------
Gain....................................... 7,907 9,172 (1,265)
-------- -------- ---------
Other sales:
Sales proceeds.............................. 1,499 1,222 277
Cost of sales............................... (968) (873) (95)
-------- -------- ---------
Gain....................................... 531 349 182
-------- -------- ---------
Gain on property sales..................... 13,085 11,467 1,618
Equity in earnings of development joint
ventures, net.............................. -- 19 (19)
-------- -------- ---------
Total gain on property sales............... $ 13,085 $ 11,486 $ 1,599
======== ======== =========
In the first quarter of 2001, commercial property sales include the
closings of 153,000 square feet of new industrial building space and the
associated land, 1,962 acres of improved land capable of supporting 0.3 million
square feet of commercial development, and 134,000 square feet of existing
operating properties. For the same period in 2000, commercial property sales
include the closings of 41.9 acres of improved land capable of supporting 0.8
million square feet of commercial development, and 267,000 square feet of
development industrial building space.
"Other sales" in the table above include the sales of land subject to
leases totaling 113.3 acres in 2001 and 83 acres in 2000 that we had acquired
during 1998.
Following is a summary of property sales under contract but not closed:
March 31,
-------------------
2001 2000
-------- --------
(In thousands)
Sales under contract, but not closed............. $ 19,605 $ 56,388
======== ========
Management and Development Fees
Over the 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 $1.7
million during the first three months of 2001 from the same period in 2000.
16
Other
"Other" increased by $0.8 million in 2001 primarily because of interest
income from restricted cash generated by tax-deferred exchanges.
Interest
Interest expense increased $6.3 million in 2001 primarily because of new
mortgages placed on completed buildings added to our portfolio. Increases in
interest capitalized in 2001 are due to higher levels of development activity.
Following is a summary of interest incurred:
Three Months Ended
March 31,
Difference
2001 2000 2001/2000
-------- -------- ---------
(In thousands)
Total interest incurred.......................... $ 20,406 $ 13,591 $ 6,815
Interest capitalized............................. (3,545) (3,014) (531)
-------- -------- ---------
Interest expensed................................ $ 16,861 $ 10,577 $ 6,284
======== ======== =========
Previously capitalized interest included in cost
of sales....................................... $ 1,118 $ 471 $ 647
======== ======== =========
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.
17
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 its activities also included home building, however,
these assets were sold as discussed further below. Other than the deferred gain
from BHC, LLC (below), from the fourth quarter of 2000 forward EBDDT consists
primarily of gains from the sale of finished lots to homebuilders.
Three Months Ended
March 31,
Difference
2001 2000 2001/2000
-------- -------- ----------
(In thousands)
Rental properties income...................................... $ -- $ 245 $ (245)
-------- -------- --------
Property sales and fee services
Sales revenue.............................................. 14,010 44,810 (30,800)
Cost of sales.............................................. (10,957) (36,586) 25,629
-------- -------- --------
Gain on property sales 3,053 8,224 (5,171)
Equity in earnings of development joint ventures, net...... 7,795 1,112 6,683
-------- -------- --------
Total gain on property sales............................ 10,848 9,336 1,512
Management and development fees............................ 51 240 (189)
Selling, general and administrative expenses............... (4,589) (5,530) 941
Other...................................................... 457 500 (43)
-------- -------- --------
6,767 4,546 2,221
-------- -------- --------
Interest expense.............................................. -- (16) 16
Minority interests............................................ (267) (49) (218)
-------- -------- --------
Pre-tax EBDDT........................................... $ 6,500 $ 4,726 $ 1,774
======== ======== ========
Sales Revenue
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
$6.2 million during the first three months of 2001.
18
Gain on property sales for the three months ended March 31, 2001 of $3.1
million is primarily from the closings of 110 lots and 48 homes compared to the
closings of 18 lots and 151 homes during the same period in 2000.
Three Months Ended
March 31,
Difference
2001 2000 2001/2000
--------- --------- ----------
(In thousands)
PROPERTY SALES
Sales proceeds-Owned projects and consolidated JVs $ 14,010 $ 44,810 $ (30,800)
Cost of sales......................................... (10,957) (36,586) 25,629
--------- --------- ---------
Gain............................................... 3,053 8,224 (5,171)
--------- --------- ---------
Sales proceeds-Unconsolidated JVs..................... 53,269 28,041 25,228
Cost of sales......................................... (49,540) (20,761) (28,779)
--------- --------- ---------
Gain............................................... 3,729 7,280 (3,551)
Joint venture partners interest...................... 4,066 (6,168) 10,234
--------- --------- ---------
Unconsolidated JV income........................ 7,795 1,112 6,683
--------- --------- ---------
Total gain on property sales......................... $ 10,848 $ 9,336 $ 1,512
========= ========= =========
Following is a summary of property sales under contract but not closed:
Three Months Ended
March 31,
2001 2000
------- -------
Owned projects and consolidated joint ventures: (In thousands)
Units.......................................... $ 859 $90,653
======= =======
Lots........................................... $12,317 $24,395
======= =======
Joint venture projects/(1)/...................... $44,598 $ 8,080
======= =======
__________
/(1)/ The amounts shown are 100% of the gross sales price; we are entitled to
receive from 30% to 67% of the net profits from these joint ventures.
Note that the term "joint venture" as used herein means that two or more
parties own an interest and not that a joint venture is the legal term of
obligation.
Equity in earnings of development joint ventures, net, increased $6.7
million in the first quarter of 2001 compared to the same period in 2000. Of the
$6.7 million increase, $6.2 million was attributable to BHC, LLC, as mentioned
above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.9 million for
the three months ended March 31, 2001 as compared to the same period in 2000.
The decrease in 2001 is primarily attributable to the sale of the home-building
assets to BHC, LLC during 2000. However, a $0.8 million charge related to
modification of stock options was recorded in 2001. We expect selling, general
and administrative expenses to decrease in 2001 as a result of the sale of
home-building assets compared to 2000.
19
Interest
Following is a summary of interest incurred:
Three Months Ended
March 31,
Difference
2001 2000 2001/2000
-------- -------- ----------
(In thousands)
Total interest incurred.................... $ 247 $ 2,875 $ (2,628)
Interest capitalized....................... (247) (2,859) 2,612
------- -------- ---------
Interest expensed.......................... $ -- $ 16 $ (16)
======= ======== =========
Previously capitalized interest included
in cost of sales......................... $ 610 $ 2,084 $ (1,474)
======= ======== =========
Interest incurred and capitalized decreased primarily because of the sale of the
home-building assets in July 2000.
\
20
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
March 31,
Difference
2001 2000 2001/2000
------- ------- ----------
(In thousands)
Rental properties
Rental revenue............................. $ 3,123 $ 3,790 $ (667)
Property operating costs................... (1,403) (1,651) 248
------- ------- ----------
1,720 2,139 (419)
------- ------- ----------
Property sales and fee services
Sales revenue.............................. 9,900 -- 9,900
Cost of sales.............................. (5,933) -- (5,933)
------- ------- ----------
Total gain on property sales............. 3,967 -- 3,967
Management and development fees............... 71 293 (222)
Selling, general and administrative expenses (1,277) (488) (789)
Other......................................... 3,470 (44) 3,514
------- ------- ----------
6,231 (239) 6,470
------- ------- ----------
Interest expense.............................. 20 (256) 276
------- ------- ----------
Pre-tax EBDDT............................... $ 7,971 $ 1,644 $ 6,327
======= ======= ==========
Rental building occupancy
(In thousands of square feet, except
percentages)
Owned......................................... 913 1,156 (243)
Occupied...................................... 733 1,067 (334)
Occupancy percentage.......................... 80.3% 92.3% 13.0%
Rental Revenue less Property Operating Costs
The decrease in rental revenue less property operating costs for the three
months ended March 31, 2001 as compared to 2000 was primarily because of the
demolition of two properties at Mission Bay in preparation for development.
Income provided from interim rental uses in this segment will decrease as
development occurs on these sites. We plan 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:
March 31,
2001 2000
-------- --------
(In thousands)
Sales under contract, but not closed................................................... $ 39,500 $ --
======== ========
Property Sales
The gain resulted from a land sale of approximately 1.4 acres of land at
Mission Bay.
Management and Development Fees
Management and development fees decreased $0.2 million in 2001 primarily
because development management activities related to the Dodger Stadium
renovation were completed in 2000.
21
Selling, General and Administrative Expenses
The increase of $0.8 million in 2001 is primarily attributable to changes
in overall staffing to accommodate increased activity associated with all of the
projects of the Urban Development segment, especially Mission Bay.
Other
The increase in "other" was because of a lease termination fee related to a
former tenant at the Mission Bay project.
Interest
Following is a summary of interest incurred:
Three Months Ended
March 31,
Difference
2001 2000 2001/2000
----- ----- ----------
(In thousands)
Total interest incurred....................... $ 252 $ 372 $ (120)
Interest capitalized.......................... (272) (116) (156)
----- ----- ----------
Interest expensed............................. $ (20) $ 256 $ (276)
===== ===== ==========
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
March 31,
Difference
2001 2000 2001/2000
------- ------- ----------
(In thousands)
Interest (contra-expense)..................... $ 2,148 $ 1,030 $ 1,118
Corporate administrative costs................ (5,545) (4,260) (1,285)
Other......................................... 4,227 136 4,091
------- ------- ----------
Pre-tax EBDDT.............................. $ 830 $(3,094) $ 3,924
======= ======= ==========
Interest (contra expense)
Corporate interest consists primarily of interest contra-expense because
the Residential and Urban Development segments had qualifying assets which
provided for the capitalization of more interest than directly incurred by these
segments. As a result, the Corporate segment capitalized interest during the
period. 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 $1.3
million in the first three months of 2001 primarily because of the increase in
our overall activities.
Other
The increase in "other" income in 2001 is primarily attributable to higher
interest income from greater short-term investments.
22
Items Not Included in EBDDT by Segment
See comparative presentation of reconciliation from EBDDT to net income at page
13.
Depreciation and Amortization Expense
The increase in depreciation and amortization expense of $2.1 million for
the three months ended March 31, 2001 as compared to the same period in 2000 is
primarily attributable to the new buildings added to the portfolio between April
2000 and March 2001.
Gain on Non-Strategic Asset Sales
Gain on sales of non-strategic assets was $1.7 million and $27.7 million
for the three months ended March 31, 2001 and 2000, respectively.
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 Consolidated
Financial Statements). The increase of $2.5 million in depreciation recapture
for the three months ended March 31, 2001 over the same period in 2000 is
because of higher sales volume of older properties in 2001 as compared to 2000.
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 three months ended March 31, 2001 and 2000, was $173.3 million and
$73.2 million, respectively. The increase in 2001 consists primarily of a $72.2
million change in deferred credits and other liabilities, a $37.9 million
decrease in capital expenditures for development properties, a $16.7 million
increase in operating distributions, and a $4.4 million increase in rental
properties results. The change of $72.2 million in deferred credits and other
liabilities is primary because of a $68 million prepayment (one of two
installments) of rent associated with a 34-year ground lease at our Pacific
Commons project. The remaining $8.3 million change in other operating assets
and liabilities is attributed to our normal operations. The $37.9 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. The increase is primarily offset by $45.7 million
decrease in proceeds from property sales.
23
Cash flows from investing activities
Net cash used in investing activities reflected in the statement of
cash flows for the three months ended March 31, 2001 and 2000, was $60.6 million
and $95.1 million, respectively. The decrease in 2001 consists primarily of a
$52.9 million net decrease in restricted cash, a $4.3 million decrease in
contributions to joint ventures, and $1.5 million decrease in tenant
improvements. These were offset by a $24.2 million increase in capital
expenditures for investment properties.
Capital expenditures reflected in the statement of cash flows include
the following:
Three Months Ended
March 31,
2001 2000
------- -------
(In thousands)
Capital Expenditures from Operating Activities/(1)/
Capital expenditures for residential and commercial development
properties.......................................................... $ 4,599 $31,017
Capitalized interest and property tax................................. 1,451 2,960
------- -------
Capital expenditures in cash flows for operating activities........... 6,050 33,977
Other acquisitions.................................................... -- 9,945
------- -------
Total capital expenditures in operating activities................. 6,050 43,922
------- -------
Capital Expenditures from Investing Activities/(2)/
Construction and building improvements................................ 32,578 24,828
Predevelopment........................................................ 13,454 1,312
Infrastructure and other.............................................. 13,421 11,611
Capitalized interest and property tax................................. 6,403 3,880
------- -------
Capital expenditures for investment properties........................ 65,856 41,631
Tenant improvements................................................... 294 1,835
------- -------
Total capital expenditures in investing activities................. 66,150 43,466
------- -------
Total capital expenditures......................................... $72,200 $87,388
======= =======
------------------
/(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).
Other acquisitions--For the three months ended March 31, 2000, we invested
approximately $9.9 million in the acquisition of properties either directly or
through joint ventures.
24
Capitalized interest and property taxes-This item represents interest and
property taxes capitalized as part of our development projects. The increase in
2001 compared to 2000 is primarily attributable to the increase in our Mission
Bay development activities.
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
March 31,
2001 2000
-------- --------
(In square feet)
Under construction, beginning of period........... 3,474,000 4,641,000
Construction starts............................... 274,000 688,000
Completed--retained in portfolio.................. (598,000) (958,000)
Completed--design/build or sold................... (153,000) --
--------- ---------
Under construction, end of period................. 2,997,000 4,371,000
========= =========
Predevelopment-This item relates to amounts incurred in obtaining
entitlements 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.
Infrastructure and other-This item represents primarily infrastructure costs
incurred in connection with our urban development and commercial development
projects. These 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 (used in)/provided by financing activities reflected in the
statement of cash flows for the three months ended March 31, 2001 and 2000, was
($71.4) million and $4.5 million, respectively. The decrease in 2001 is
primarily attributable to $70.8 million expended for the purchase of 4,159,000
shares of our stock under the share repurchase programs. The decrease is also
attributable to a $9.2 million decrease in net borrowings, a $2.1 million
increase in distribution to minority partners, and a $1.3 million decrease in
proceeds from issuance of common stock.
Capital commitments
As of March 31, 2001, we had outstanding standby letters of credit and
surety bonds in the amount of $177.9 million in favor of local municipalities or
financial institutions to guarantee performance on real property improvements or
financial obligations.
As of March 31, 2001, we had approximately $101.0 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.
Additionally, in connection with the acquisition of property with known
environmental problems in 2000, one of our indirect subsidiaries has entered
into an agreement with the California Department of Toxic Substance Control to
perform certain work to investigate and remediate hazardous materials left
behind by the previous operators of the site. We have guaranteed completion of
the work with a limited liability of $20 million. The current estimated cost for
the work is approximately $15 million, and we have a fixed price contract for
the completion of the work and obtained insurance to cover various cost
overruns.
25
Cash balances, available borrowings and capital resources
As of March 31, 2001, we had a total cash of $417.8 million, of which $39.9
million is restricted cash. In addition to the $417.8 million cash, we had
$55.1 million in borrowing capacity under our commercial construction facilities
and $12.7 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 March 2001, our Board of
Directors authorized three separate stock repurchase programs; each has a limit
of $50 million and expires in one year. Share purchases under these programs
were made on the open market. Through March 31, 2001, under these programs, we
have repurchased a total of 6,156,300 shares at a total cost of $99.4 million.
Subsequent to March 31, 2001, we purchased an additional 1,777,300 shares at a
cost of $29.2 million. Also, in May 2001 our Board of Directors authorized an
additional $50 million stock repurchase program. (See Note 9 of the
accompanying Consolidated Financial Statements for details).
Debt covenants-Certain loan agreements contain restrictive financial
covenants, the most restrictive of which require our debt coverage ratio to be
at least 1.30:1, require stockholders' equity to be no less than $483.4 million,
and require that we maintain certain other specified financial ratios. We were
in compliance with all such covenants at March 31, 2001.
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. (See Note 8 of the accompanying Consolidated Financial
Statements for further discussions).
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 insurers. The
costs associated with such environmental costs are included in the estimates for
properties to be developed.
26
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, including tenants under lease
on other agreements with us.
. 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
27
. 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
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. At
March 31, 2001, we did not have any outstanding interest-protection contracts.
We intend to continuously and actively monitor and manage interest costs on our
variable rate debt and may enter into interest rate-protection contracts based
on market fluctuations.
At March 31, 2001, approximately 59.9% of our debt bore interest at fixed
rates with a weighted average maturity of approximately 7.2 years and a weighted
average coupon rate of approximately 6.49%, which is below market. Therefore,
unless there were 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 2.5
years and a weighted average coupon rate of approximately 7.99% at March 31,
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 $4.5 million, based on the outstanding balance of
our debt at March 31, 2001. We believe, however, that in no event would
increases in interest expense as a result of inflation significantly affect our
financial position, results of operations, or cash flow.
28
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
None.
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.
29
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange
Act of 1934, Catellus Development Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CATELLUS DEVELOPMENT CORPORATION
Date: May 14, 2001
-------------------------- By: /s/ C. William Hosler
-------------------------------
C. William Hosler
Senior Vice President
Chief Financial Officer
Principal Financial Officer
Date: May 14, 2001 By: /s/ Paul A. Lockie
-------------------------------
-------------------------- Paul A. Lockie
Vice President and Controller
Principal Accounting Officer
30
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.
4.2 Amended and Restated Line of Credit Loan Agreement among Catellus
Development Corporation, Bank of America National Trust and Savings
Association as Arranger and Administrative Agent, The First National
Bank of Chicago as Documentation Agent, and The Other Financial
Institutions Party Hereto, dated as of October 28, 1998, is
incorporated by reference to the exhibits to the exhibits to the Form
10-K for the year ended December 31, 1998.
4.3 Loan Agreement by and between Catellus Finance 1, L.L.C. and
Prudential Mortgage Capital Company, Inc. dated as of October 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.
31
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.
32