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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 September 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 November 6, 2001, there were 96,873,253 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)
Condensed Consolidated Balance Sheet as of
September 30, 2001 and December 31, 2000 ................................... 2
Condensed Consolidated Statement of Operations for the three months and
nine months ended September 30, 2001 and 2000 .............................. 3
Condensed Consolidated Statement of Cash Flows for the nine months ended
September 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)
September 30, December 31,
2001 2000
------------ ------------
Assets
Properties ................................................................................... $ 2,196,142 $ 2,025,813
Less accumulated depreciation ................................................................ (342,677) (320,275)
----------- -----------
1,853,465 1,705,538
Other assets and deferred charges, net ....................................................... 107,878 121,033
Notes receivable, less allowance ............................................................. 31,988 36,119
Accounts receivable, less allowance .......................................................... 30,430 30,816
Restricted cash and investments .............................................................. 28,558 45,478
Cash and cash equivalents .................................................................... 469,274 336,558
----------- -----------
Total ......................................................................... $ 2,521,593 $ 2,275,542
=========== ===========
Liabilities and stockholders' equity
Mortgage and other debt ...................................................................... $ 1,301,316 $ 1,134,563
Accounts payable and accrued expenses ........................................................ 106,968 96,274
Deferred credits and other liabilities ....................................................... 146,912 58,722
Deferred income taxes ........................................................................ 282,718 247,975
----------- -----------
Total liabilities .................................................................. 1,837,914 1,537,534
----------- -----------
Commitments and contingencies (Notes 8 and 9)
Minority interests ........................................................................... 55,114 54,763
----------- -----------
Stockholders' equity
Common stock, 109,547 and 108,088 shares issued and 98,694 and 106,091
shares outstanding at September 30, 2001 and December 31, 2000, respectively ......... 1,096 1,081
Paid-in capital ......................................................................... 513,620 493,420
Treasury stock, at cost (10,853 and 1,997 shares at September 30, 2001 and
December 31, 2000, respectively) ..................................................... (180,580) (28,660)
Accumulated earnings .................................................................... 294,429 217,404
----------- -----------
Total stockholders' equity ......................................................... 628,565 683,245
----------- -----------
Total ......................................................................... $ 2,521,593 $ 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
Rental properties
Rental revenue ................................................ $ 59,116 $ 52,523 $ 172,025 $ 153,179
Property operating costs ...................................... (17,390) (14,251) (45,598) (40,640)
Equity in earnings of operating joint ventures, net ........... 1,184 1,324 7,017 7,913
--------- --------- --------- ---------
42,910 39,596 133,444 120,452
--------- --------- --------- ---------
Property sales and fee services
Sales revenue ................................................. 64,324 213,190 190,186 396,189
Cost of sales ................................................. (36,609) (172,512) (113,484) (292,894)
--------- --------- --------- ---------
Gain on property sales .................................... 27,715 40,678 76,702 103,295
Equity in earnings of development joint ventures, net ......... 13,489 9,238 21,616 12,084
--------- --------- --------- ---------
Total gain on property sales .......................... 41,204 49,916 98,318 115,379
Management and development fees ............................... 1,266 2,749 3,820 9,342
Selling, general and administrative expenses .................. (6,373) (14,249) (21,953) (33,581)
Other, net .................................................... (127) (3,043) 5,955 (7,963)
--------- --------- --------- ---------
35,970 35,373 86,140 83,177
--------- --------- --------- ---------
Interest expense ................................................... (13,895) (12,957) (43,605) (33,529)
Depreciation and amortization ...................................... (12,877) (11,661) (38,743) (33,910)
Corporate administrative costs ..................................... (4,685) (3,656) (15,292) (11,376)
Gain on non-strategic asset sales .................................. 765 18,662 3,901 46,131
Other, net ......................................................... 1,152 (743) 7,858 (1,495)
--------- --------- --------- ---------
Income before minority interests and income taxes ............. 49,340 64,614 133,703 169,450
Minority interests ................................................. (1,604) (5,294) (5,316) (8,768)
--------- --------- --------- ---------
Income before income taxes .................................... 47,736 59,320 128,387 160,682
--------- --------- --------- ---------
Income tax expense
Current ....................................................... (5,343) (2,378) (12,086) (12,255)
Deferred ...................................................... (13,747) (21,338) (39,276) (52,018)
--------- --------- --------- ---------
(19,090) (23,716) (51,362) (64,273)
--------- --------- --------- ---------
Net income .................................................... $ 28,646 $ 35,604 $ 77,025 $ 96,409
========= ========= ========= =========
Net income per share
Basic ..................................................... $ 0.29 $ 0.34 $ 0.76 $ 0.90
========= ========= ========= =========
Assuming dilution ......................................... $ 0.28 $ 0.33 $ 0.74 $ 0.89
========= ========= ========= =========
Average number of common shares outstanding - basic ........... 99,290 106,039 101,518 106,723
========= ========= ========= =========
Average number of common shares outstanding - diluted ......... 102,178 109,398 104,389 108,884
========= ========= ========= =========
See notes to condensed consolidated financial statements
3
CATELLUS DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
Nine Months Ended
September 30,
2001 2000
---------- ---------
Cash flows from operating activities:
Net income ............................................................. $ 77,025 $ 96,409
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ...................................... 38,743 33,910
Deferred income taxes .............................................. 39,276 52,018
Amortization of deferred loan fees and other costs ................. 3,779 4,822
Equity in earnings of joint ventures ............................... (28,633) (19,997)
Operating distributions from joint ventures ........................ 29,781 8,167
Gain on sale of investment property ................................ (25,433) (20,614)
Cost of development properties and non-strategic assets sold........ 87,999 270,236
Capital expenditures for development properties .................... (45,910) (132,358)
Other, net ........................................................... 1,431 5,866
Change in deferred credits and other liabilities ..................... 88,190 (11,903)
Change in other operating assets and liabilities ..................... 28,800 2,140
--------- ---------
Net cash provided by operating activities ................................. 295,048 288,696
--------- ---------
Cash flows from investing activities:
Proceeds from sale of investment property ............................ 38,016 34,680
Property acquisitions ................................................ (46,888) (34,969)
Capital expenditures for investment properties ....................... (184,731) (164,301)
Tenant improvements .................................................. (1,832) (4,824)
Distributions from joint ventures .................................... -- 15,600
Contributions to joint ventures ...................................... -- (6,699)
Restricted cash ...................................................... 16,920 (66,824)
--------- ---------
Net cash used in investing activities ..................................... (178,515) (227,337)
--------- ---------
Cash flows from financing activities:
Borrowings ........................................................... 369,873 291,935
Repayment of borrowings .............................................. (211,483) (245,034)
Distributions to minority partners ................................... (4,965) (7,121)
Repurchase of common stock ........................................... (151,920) (28,660)
Proceeds from issuance of common stock ............................... 14,678 7,500
--------- ---------
Net cash provided by financing activities ................................. 16,183 18,620
--------- ---------
Net increase in cash and cash equivalents ................................. 132,716 79,979
Cash and cash equivalents at beginning of period .......................... 336,558 35,410
--------- ---------
Cash and cash equivalents at end of period ................................ $ 469,274 $ 115,389
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) ............................... $ 39,639 $ 27,733
Income taxes ....................................................... $ 3,874 $ 18,049
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
September 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.
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 $28.6 million at
September 30, 2001 and $45.5 million at December 31, 2000, $20.8 million and
$38.1 million, respectively, represent proceeds from property sales being held
in separate cash accounts at a trust company 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 September 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 September 30,
----------------------------------------------------------------------
2001 2000
----------------------------------- ----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
--------- -------- --------- -------- -------- ---------
(In thousands, except per share data)
Net income .......................................... $ 28,646 99,290 $ 0.29 $ 35,604 106,039 $ 0.34
======== =======
Effect of dilutive securities: stock options ........ -- 2,888 -- 3,359
-------- -------- -------- --------
Net income assuming dilution ........................ $ 28,646 102,178 $ 0.28 $ 35,604 109,398 $ 0.33
======== ======== ======== ======== ======== =======
Nine Months Ended September 30,
----------------------------------------------------------------------
2001 2000
----------------------------------- ----------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
-------- -------- --------- -------- -------- ---------
(In thousands, except per share data)
Net income .......................................... $ 77,025 101,518 $ 0.76 $ 96,409 106,723 $ 0.90
======== =======
Effect of dilutive securities: stock options ........ -- 2,871 -- 2,161
-------- -------- -------- --------
Net income assuming dilution ........................ $ 77,025 104,389 $ 0.74 $ 96,409 108,884 $ 0.89
======== ======== ======== ======== ======== =======
NOTE 5. MORTGAGE AND OTHER DEBT
Mortgage and other debt at September 30, 2001, and December 31, 2000,
are summarized as follows:
September 30, December 31,
2001 2000
------------ ------------
(In thousands)
Fixed rate mortgage loans ................................................ $ 826,108 $ 621,182
Floating rate mortgage loans ............................................. 274,391 309,837
Construction loans ....................................................... 85,039 88,292
Land acquisition and development loans ................................... 42,343 37,062
Assessment district bonds ................................................ 34,563 26,116
Capital leases ........................................................... 7,290 15,336
Other loans .............................................................. 31,582 36,738
----------- -----------
Total mortgage and other debt ......................................... $ 1,301,316 $ 1,134,563
=========== ===========
Due within one year ...................................................... $ 39,232 $ 27,150
=========== ===========
During the nine months ended September 30, 2001, the Company closed
fourteen variable rate collateralized construction loans. As of September 30,
2001, twelve of these variable rate (LIBOR plus 1.8% to LIBOR plus 2.75%) loans,
with a combined balance of $80.5 million, were outstanding with a total
remaining capacity of $181.3 million, maturing at various dates from January
2002 through February 2004. Subsequent to September 30, 2001, one of the twelve
variable rate collateralized construction loans with an outstanding balance of
$2.2 million and a capacity of $69.8 million was repaid.
During the nine months ended September 30, 2001, the Company closed two
fixed rate mortgage loans for a total of $213 million. The first was for $200
million, which bears interest at 7.25% (7.3% effective rate considering
financing costs) and is amortized over 30 years with a maturity of 15 years. Of
the loan proceeds, $145.5 million was used to pay off existing variable rate
construction debt and related interest at closing. The second was for $13.0
million, which bears interest at 9.34% (9.54% effective rate considering
financing costs) and is amortized over 15 years with a maturity of 5 years.
These loans are collateralized by certain of the Company's operating properties
and by assignment of rents generated by the underlying properties. Under certain
conditions, these loans have a yield maintenance premium if paid prior to
maturity.
6
In June 2001, the Company issued a $10.0 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.
In July 2001, the Company closed a $28.0 million floating rate mortgage
loan (LIBOR plus 2.25%) that is amortized over 25 years with a maturity of 5
years. This loan is collateralized by one of the Company's operating properties
and by assignment of rents generated by the underlying property. Under certain
conditions, this loan has a yield maintenance premium if paid prior to maturity.
Interest costs relating to mortgage and other debt for the three-month
and nine-month periods ended September 30, 2001 and 2000, are summarized as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands) (In thousands)
Total interest incurred ............ $ 20,751 $ 16,422 $ 62,717 $ 48,743
Interest capitalized ............... (6,856) (3,465) (19,112) (15,214)
------------ ---------- ---------- ----------
Interest expensed .................. $ 13,895 $ 12,957 $ 43,605 $ 33,529
========== ========== ========== ==========
7
NOTE 6. PROPERTIES
Book value by property type at September 30, 2001, and December 31, 2000,
consisted of the following:
September 30, December 31,
2001 2000
------------- ------------
(In thousands)
Rental properties:
Industrial buildings ....................... $ 907,042 $ 874,168
Office buildings ........................... 261,550 205,179
Retail buildings ........................... 96,138 94,085
Land and land leases ....................... 105,003 92,803
Investment in operating joint ventures ..... (14,336) (16,092)
----------- -----------
1,355,397 1,250,143
----------- -----------
Developable properties:
Commercial ................................. 178,818 177,635
Residential ................................ 64,806 64,479
Urban development .......................... 342,452 366,136
Investment in development joint ventures ... 72,919 46,256
----------- -----------
658,995 654,506
----------- -----------
Work-in-process:
Commercial ................................. 92,627 50,098
Commercial--capital lease .................. 27,630 37,415
Residential ................................ 1,947 4,883
Urban development .......................... 27,882 --
----------- -----------
150,086 92,396
----------- -----------
Furniture and equipment ........................ 28,380 26,599
Other .......................................... 3,284 2,169
----------- -----------
Gross book value ............................... 2,196,142 2,025,813
Accumulated depreciation ....................... (342,677) (320,275)
----------- -----------
Net book value ................................. $ 1,853,465 $ 1,705,538
=========== ===========
8
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,
and biotechnology 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.
9
Financial data by reportable segment are as follows:
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- ---------
(In thousands)
Three Months Ended September 30, 2001
Rental properties:
Rental revenue ........................................ $ 55,078 $ -- $ 4,038 $ -- $ 59,116
Property operating costs .............................. (15,949) -- (1,441) -- (17,390)
Equity in earnings of operating joint ventures, net ... 1,184 -- -- -- 1,184
-------- -------- -------- -------- --------
40,313 -- 2,597 -- 42,910
-------- -------- -------- -------- --------
Property sales and fee services:
Sales revenue ......................................... 49,173 2,045 13,106 -- 64,324
Cost of sales ......................................... (24,115) (681) (11,598) (215) (36,609)
-------- -------- -------- -------- --------
Gain on property sales ........................... 25,058 1,364 1,508 (215) 27,715
Equity in earnings of development joint ventures, net.. -- 14,420 -- (931) 13,489
-------- -------- -------- -------- --------
Total gain on property sales ..................... 25,058 15,784 1,508 (1,146) 41,204
Management and development fees ....................... 874 (5) 397 -- 1,266
Selling, general and administrative expenses .......... (3,324) (1,812) (1,237) -- (6,373)
Other, net ............................................ (317) (786) 976 -- (127)
-------- -------- -------- -------- --------
22,291 13,181 1,644 (1,146) 35,970
-------- -------- -------- -------- --------
Interest expense ...................................... (16,230) -- -- 2,335 (13,895)
Corporate administrative costs ........................ -- -- -- (4,685) (4,685)
Minority interests .................................... (1,604) -- -- -- (1,604)
Other, net ............................................ -- -- -- 1,152 1,152
Depreciation recapture ................................ (8,176) -- -- -- (8,176)
-------- -------- -------- -------- --------
Pre-tax EBDDT .................................... $ 36,594 $ 13,181 $ 4,241 $ (2,344) $ 51,672
======== ======== ======== ========
Current taxes ......................................... (5,343)
--------
EBDDT ................................................. 46,329
Depreciation and amortization ......................... (12,877)
Deferred taxes ........................................ (13,747)
Gain on non-strategic asset sales ..................... 765
Depreciation recapture ................................ 8,176
--------
Net Income ....................................... $ 28,646
========
10
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- -----
(In thousands)
Three Months Ended September 30, 2000
Rental properties:
Rental revenue ............................................. $ 49,050 $ -- $ 3,473 $ -- $ 52,523
Property operating costs ................................... (12,267) -- (1,984) -- (14,251)
Equity in earnings of operating joint ventures, net ........ 1,324 -- -- -- 1,324
--------- --------- -------- ------- ---------
38,107 -- 1,489 -- 39,596
--------- --------- -------- ------- ---------
Property sales and fee services:
Sales revenue .............................................. 30,468 182,722 -- -- 213,190
Cost of sales .............................................. (17,752) (154,760) -- -- (172,512)
--------- --------- -------- ------- ---------
Gain on property sales ................................ 12,716 27,962 -- -- 40,678
Equity in earnings of development joint ventures, net ...... -- 9,238 -- -- 9,238
--------- --------- -------- ------- ---------
Total gain on property sales .......................... 12,716 37,200 -- -- 49,916
Management and development fees ............................ 2,647 89 13 -- 2,749
Selling, general and administrative expenses ............... (3,730) (9,981) (538) -- (14,249)
Other, net ................................................. 1,318 (4,426) 65 -- (3,043)
--------- --------- -------- ------- ---------
12,951 22,882 (460) -- 35,373
--------- --------- -------- ------- ---------
Interest expense ........................................... (12,113) (581) (136) (127) (12,957)
Corporate administrative costs ............................. -- -- -- (3,656) (3,656)
Minority interests ......................................... (1,551) (3,743) -- -- (5,294)
Other, net ................................................. -- -- -- (743) (743)
Depreciation recapture ..................................... (4,289) -- -- -- (4,289)
--------- --------- -------- ------- ---------
Pre-tax EBDDT ......................................... $ 33,105 $ 18,558 $ 893 $(4,526) 48,030
========= ========= ======== =======
Current taxes .............................................. (2,378)
---------
EBDDT ...................................................... 45,652
Depreciation and amortization .............................. (11,661)
Deferred taxes ............................................. (21,338)
Gain on non-strategic asset sales .......................... 18,662
Depreciation recapture ..................................... 4,289
---------
Net Income ............................................ $ 35,604
=========
11
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- -----
(In thousands)
Nine months ended September 30, 2001
Rental properties:
Rental revenue .............................................. $ 160,850 $ -- $ 11,175 $ -- $ 172,025
Property operating costs .................................... (41,121) -- (4,477) -- (45,598)
Equity in earnings of operating joint ventures,net .......... 7,017 -- -- -- 7,017
--------- --------- -------- -------- --------
126,746 -- 6,698 -- 133,444
--------- --------- -------- -------- -------
Property sales and fee services:
Sales revenue ............................................... 111,772 28,621 49,793 -- 190,186
Cost of sales ............................................... (56,784) (19,148) (37,337) (215) (113,484)
--------- --------- -------- -------- --------
Gain on property sales ................................. 54,988 9,473 12,456 (215) 76,702
Equity in earnings of development joint ventures, net ....... -- 22,896 -- (1,280) 21,616
--------- --------- -------- -------- --------
Total gain on property sales ........................... 54,988 32,369 12,456 (1,495) 98,318
Management and development fees ............................. 2,918 434 468 -- 3,820
Selling, general and administrative expenses ................ (9,963) (8,335) (3,655) -- (21,953)
Other, net .................................................. 3,786 (2,506) 4,675 -- 5,955
--------- --------- -------- -------- --------
51,729 21,962 13,944 (1,495) 86,140
--------- --------- -------- -------- --------
Interest expense ............................................ (49,828) -- (56) 6,279 (43,605)
Corporate administrative costs .............................. -- -- -- (15,292) (15,292)
Minority interests .......................................... (4,812) (504) -- -- (5,316)
Other, net .................................................. -- -- -- 7,858 7,858
Depreciation recapture ...................................... (11,428) -- -- -- (11,428)
--------- --------- -------- -------- --------
Pre-tax EBDDT .......................................... $ 112,407 $ 21,458 $ 20,586 $ (2,650) 151,801
========= ========= ======== ========
Current taxes ............................................... (12,086)
--------
EBDDT ....................................................... 139,715
Depreciation and amortization ............................... (38,743)
Deferred taxes .............................................. (39,276)
Gain on non-strategic asset sales ........................... 3,901
Depreciation recapture ...................................... 11,428
--------
Net Income ............................................. $ 77,025
========
12
Urban
Commercial Residential Development Corporate Total
---------- ----------- ----------- --------- -----
(In thousands)
Nine months ended September 30, 2000
Rental properties:
Rental revenue ............................................... $ 142,115 $ 187 $ 10,877 $ -- $ 153,179
Property operating costs ..................................... (35,160) (5) (5,475) -- (40,640)
Equity in earnings of operating joint ventures, net ......... 7,913 -- -- -- 7,913
--------- --------- --------- --------- ---------
114,868 182 5,402 -- 120,452
--------- --------- --------- --------- ---------
Property sales and fee services:
Sales revenue ................................................ 120,970 275,219 -- -- 396,189
Cost of sales ................................................ (67,465) (225,429) -- -- (292,894)
--------- --------- --------- --------- ---------
Gain on property sales................................... 53,505 49,790 -- -- 103,295
Equity in earnings of development joint ventures, net ........ 14 12,070 -- -- 12,084
--------- --------- --------- --------- ---------
Total gain on property sales ............................ 53,519 61,860 -- -- 115,379
Management and development fees .............................. 8,154 557 631 -- 9,342
Selling, general and administrative expenses ................. (11,441) (20,555) (1,585) -- (33,581)
Other, net ................................................... 3,174 (11,159) 22 -- (7,963)
--------- --------- --------- --------- ---------
53,406 30,703 (932) -- 83,177
--------- --------- --------- --------- ---------
Interest expense ............................................. (33,891) (603) (890) 1,855 (33,529)
Corporate administrative costs ............................... -- -- -- (11,376) (11,376)
Minority interests ........................................... (4,655) (4,113) -- -- (8,768)
Other, net ................................................... -- -- -- (1,495) (1,495)
Depreciation recapture ....................................... (14,486) -- -- -- (14,486)
--------- --------- --------- --------- ---------
Pre-tax EBDDT ........................................... $ 115,242 $ 26,169 $ 3,580 $ (11,016) 133,975
========= ========= ========= =========
Current taxes ................................................ (12,255)
---------
EBDDT ........................................................ 121,720
Depreciation and amortization ................................ (33,910)
Deferred taxes ............................................... (52,018)
Gain on non-strategic asset sales ............................ 46,131
Depreciation recapture ....................................... 14,486
---------
Net Income .............................................. $ 96,409
=========
13
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. 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 may 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 operation of a 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 September 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 $24.8 million to
$44.3 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 nine months
ended September 30, 2001 totaled $1.8 million. The Company's estimates were
developed based on reviews that took place over several years based upon
then-prevailing law and identified site conditions. Because of the breadth of
its portfolio, and past sales, the Company is unable to review each property
extensively on a regular basis. Such estimates are not precise and are always
subject to the availability of further information about the prevailing
conditions at the site, the future requirements of regulatory agencies, and the
availability and ability of other parties to pay some or all of such costs.
As of September 30, 2001, the Company has outstanding standby letters
of credit and surety bonds in the aggregate amount of $224.7 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 September 30, 2001, these guarantees totaled $35.7 million. In addition, the
Company has guaranteed debt service of $3.2 million for a residential project.
In some cases, other parties have jointly and severally guaranteed these
obligations.
14
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. At September 30,
2001, for Mission Bay $1.6 million of the $17 million floating rate bonds and
$2.7 million of the $54 million fixed rate bonds were funded; for Pacific
Commons, approximately $0.1 million was funded.
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 expected reimbursement
of the infrastructure costs from the bonds is 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 construction of the improvements proceeds, the costs
incurred are capitalized and the liability of the CFD bonds has been recorded.
NOTE 9. STOCK REPURCHASE PROGRAMS
From October 1999 through July 2001, under various stock repurchase
programs the Company's Board of Directors has authorized a total of $250 million
in repurchases of the Company's Common Stock. $21.3 million of the $250 million
total authorized amount has expired. Through June 30, 2001, the Company
purchased 8,433,600 shares at a cost of $137.5 million. During the third quarter
of 2001, the Company purchased an additional 2,419,197 shares at a cost of $43.1
million. All purchases were made on the open market. Subsequent to September 30,
2001, through November 6, 2001, the Company purchased an additional 2,194,300
shares at a cost of $37.4 million. After previous purchases and expirations,
$10.7 remains authorized for additional purchases 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.
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 nine months
ended September 30, 2001 and 2000.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
--------- --------- ---------- --------- --------- ----------
(In thousands) (In thousands)
Pre-tax EBDDT
Commercial ................................... $ 36,594 $ 33,105 $ 3,489 $ 112,407 $ 115,242 $ (2,835)
Residential .................................. 13,181 18,558 (5,377) 21,458 26,169 (4,711)
Urban Development ............................ 4,241 893 3,348 20,586 3,580 17,006
Corporate .................................... (2,344) (4,526) 2,182 (2,650) (11,016) 8,366
--------- --------- --------- --------- --------- ---------
Total pre-tax EBDDT ............................ 51,672 48,030 3,642 151,801 133,975 17,826
Current tax .................................. (5,343) (2,378) (2,965) (12,086) (12,255) 169
--------- --------- --------- --------- --------- ---------
EBDDT .......................................... 46,329 45,652 677 139,715 121,720 17,995
Depreciation and amortization ................ (12,877) (11,661) (1,216) (38,743) (33,910) (4,833)
Deferred taxes ............................... (13,747) (21,338) 7,591 (39,276) (52,018) 12,742
Gain on non-strategic asset sales ............ 765 18,662 (17,897) 3,901 46,131 (42,230)
Depreciation recapture ....................... 8,176 4,289 3,887 11,428 14,486 (3,058)
--------- --------- --------- --------- --------- ---------
Net income ..................................... $ 28,646 $ 35,604 $ (6,958) $ 77,025 $ 96,409 $ (19,384)
========= ========= ========= ========= ========= =========
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 Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
---------- ---------- ----------- ---------- -------- ----------
(In thousands) (In thousands)
Rental properties:
Rental revenue ...................................... $ 55,078 $ 49,050 $ 6,028 $ 160,850 $ 142,115 $ 18,735
Property operating costs ............................ (15,949) (12,267) (3,682) (41,121) (35,160) (5,961)
Equity in earnings of operating joint
ventures, net ....................................... 1,184 1,324 (140) 7,017 7,913 (896)
--------- --------- --------- --------- --------- ---------
40,313 38,107 2,206 126,746 114,868 11,878
--------- --------- --------- --------- --------- ---------
Property sales and fee services:
Sales revenue ....................................... 49,173 30,468 18,705 111,772 120,970 (9,198)
Cost of sales/(1/) .................................. (32,291) (22,041) (10,250) (68,212) (81,951) 13,739
--------- --------- --------- --------- --------- ---------
Gain on property sales ......................... 16,882 8,427 8,455 43,560 39,019 4,541
Equity in earnings of development joint
ventures, net ....................................... -- -- -- -- 14 (14)
--------- --------- --------- --------- --------- ---------
Total gain on property sales ................... 16,882 8,427 8,455 43,560 39,033 4,527
Management and development fees ..................... 874 2,647 (1,773) 2,918 8,154 (5,236)
Selling, general and administrative expenses ........ (3,324) (3,730) 406 (9,963) (11,441) 1,478
Other ............................................... (317) 1,318 (1,635) 3,786 3,174 612
--------- --------- --------- --------- --------- ---------
14,115 8,662 5,453 40,301 38,920 1,381
--------- --------- --------- --------- --------- ---------
Interest expense .................................... (16,230) (12,113) (4,117) (49,828) (33,891) (15,937)
Minority interests .................................. (1,604) (1,551) (53) (4,812) (4,655) (157)
--------- --------- --------- --------- --------- ---------
Pre-tax EBDDT ............................. $ 36,594 $ 33,105 $ 3,489 $ 112,407 $ 115,242 $ (2,835)
========= ========= ========= ========= ========= =========
Rental Building Occupancy: September 30,
(In thousands of square feet, except percentages) 2001 2000 Difference
----- ------ ----------
Owned ............................................. 30,254 26,371 3,883
Occupied .......................................... 28,483 25,491 2,992
Occupancy percentage .............................. 94.1% 96.7% (2.7%)
__________
(1) For purposes of this segment disclosure, cost of sales for the three and
nine months ended September 30, 2001, includes depreciation recapture of $8.2
million and $11.4 million, respectively, and for the three and nine months ended
September 30, 2000, includes depreciation recapture of $4.3 million and $14.5
million, respectively. Depreciation recapture is included in net income but not
EBDDT.
17
Rental Revenue less Property Operating Costs
Rental revenue less property operating costs has increased $2.3 million and
$12.8 million for the three and nine months ended September 30, 2001,
respectively, as compared to the same periods in 2000, mainly because of
additions of buildings and an increase in revenue from ground leases, partially
offset by properties sold. From October 2000 to September 2001, we added,
primarily from our own development projects, a net 3.9 million square feet to
our rental portfolio. The decrease in rental revenue less property operating
costs from same space for the three months ended September 30, 2000 was
primarily attributable to higher non-recurring expenses, such as painting and
parking lot repairs, that were not passed through to tenants, and lower
occupancy. The increases in rental revenue less property operating costs from
ground leases for the three and nine months ended September 30, 2001 as compared
to the same periods in 2000 were primarily attributable to the ground lease from
a major tenant. The tenant prepaid approximately $104.8 million ground rent in
2001. The prepayment 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. Rental revenue
less operating costs for the three and nine months ended September 30, 2001 and
2000 are summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
---- ---- ---------- ---- ---- ----------
(In thousands) (In thousands)
Rental revenue less property operating costs:
Same Space ................................ $ 26,270 $ 28,049 $ (1,779) $ 83,354 $ 82,596 $ 758
Properties added to portfolio ............. 8,035 4,068 3,967 21,782 8,518 13,264
Properties sold from portfolio ............ (43) 940 (983) 1,741 5,523 (3,782)
Ground leases ............................. 4,867 3,726 1,141 12,852 10,318 2,534
--------- --------- --------- --------- --------- ---------
$ 39,129 $ 36,783 $ 2,346 $ 119,729 $ 106,955 $ 12,774
========= ========= ========= ========= ========= =========
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 $0.1
million and $0.9 million for the three and nine months ended September 30, 2001,
over the same periods in 2000, primarily because of higher interest expense due
to a refinancing at a joint venture in 2000 and lower occupancy in 2001. (See
Variability in Results section).
18
Gain on Property Sales
Our Commercial segment increased gain from property sales for the three and
nine months ended September 30, 2001, compared to the same periods in 2000. Gain
on property sales was $16.9 million and $43.6 million for the three and nine
months ended September 30, 2001, respectively, as compared to $8.4 million and
$39.0 million for the three and nine months ended September 30, 2000,
respectively, summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
-------- -------- ------------ ------ ------ ------------
Commercial sales: (In thousands) (In thousands)
Building sales:
Sales proceeds ............................ $ 38,635 $ 13,349 $ 25,286 $ 57,771 $ 72,542 $(14,771)
Cost of sales ............................. (23,962) (9,574) (14,388) (37,667) (50,464) 12,797
-------- -------- -------- -------- -------- --------
Gain ................................... 14,673 3,775 10,898 20,104 22,078 (1,974)
-------- -------- -------- -------- -------- --------
Land sales:
Sales proceeds ............................ 8,663 15,428 (6,765) 46,998 44,331 2,667
Cost of sales ............................. (7,104) (11,193) 4,089 (25,993) (28,448) 2,455
-------- -------- -------- -------- -------- --------
Gain ................................... 1,559 4,235 (2,676) 21,005 15,883 5,122
-------- -------- -------- -------- -------- --------
Other sales:
Sales proceeds ............................ 1,875 1,691 184 7,003 4,097 2,906
Cost of sales ............................. (1,225) (1,274) 49 (4,552) (3,039) (1,513)
-------- -------- -------- -------- -------- --------
Gain ................................... 650 417 233 2,451 1,058 1,393
-------- -------- -------- -------- -------- --------
Gain on property sales ......................... 16,882 8,427 8,455 43,560 39,019 4,541
Equity in earnings of development joint
ventures, net .................................. -- -- -- -- 14 (14)
-------- -------- -------- -------- -------- --------
Total gain on property sales ........... $ 16,882 $ 8,427 $ 8,455 $ 43,560 39,033 $ 4,527
======== ======== ======== ======== ======== ========
For the three months ended September 30, 2001, commercial sales include the
closings of 244,000 square feet of industrial building space with associated
land and 52.0 acres of improved land capable of supporting 400,000 square feet
of commercial development, as compared to 218,000 square feet of industrial
building space with associated land and 132.9 acres of improved land capable of
supporting 2.6 million square feet of commercial development for the three
months ended September 30, 2000.
For the nine months ended September 30, 2001, commercial sales include the
closings of 535,000 square feet of industrial building space with associated
land and 2,091 acres of improved land capable of supporting 3.1 million square
feet of commercial development. For the same period in 2000, the commercial
sales include the closings of 202.0 acres of improved land capable of supporting
4.0 million square feet of commercial development and 1.2 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 in 1998. These sales totaled 308.7 acres and 795.3
acres for the three and nine months ended September 30, 2001, respectively, and
121.2 acres and 662 acres for the three and nine months ended September 30,
2000, respectively.
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 was 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 expected
management fees and the related selling, general and administrative expenses to
decline in 2001. Management and development fees decreased by $1.8 million and
$5.2 million for the three and nine months ended September 30, 2001,
respectively, from the same periods in 2000.
Selling, General and Administrative Expenses
The decreases in the three and nine months ended September 30, 2001, in
selling, general and administrative expenses of $0.4 million and $1.5 million
are primarily due to decreases of $0.6 million and $2.7 million during the same
periods in non-compensation related administrative and office expenses, offset
by the increases of $0.2 million and $1.2 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" decreased by $1.6 million for the three months ended September 30,
2001, as compared to the same period in 2000, primarily because of the expense
of certain predevelopment costs previously capitalized. "Other" increased by
$0.6 million for the nine months ended September 30, 2001 as compared to the
same period in 2000, primarily because of interest income, from a higher balance
of short-term investments, partially offset by the expense of certain
predevelopment costs previously capitalized.
Interest
Interest expense increased $4.1 million and $15.9 million for the three and
nine months ended September 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
nine months ended September 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:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
---- ---- ---------- ---- ---- ----------
(In thousands) (In thousands)
Total interest incurred ................. $ 20,120 $ 15,395 $ 4,725 $ 60,560 $ 43,103 $ 17,457
Interest capitalized .................... (3,890) (3,282) (608) (10,732) (9,212) (1,520)
-------- -------- ------- --------- --------- ---------
Interest expensed ....................... $ 16,230 $ 12,113 $ 4,117 $ 49,828 $ 33,891 $ 15,937
======== ======== ======= ========= ========= =========
We expect interest expense to increase in 2001 as a result of new debt
associated with and collateralized by 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. Therefore, we
expect our residential sales activities to decrease as compared to 2000.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
---- ---- ---------- ---- ---- ----------
(In thousands) (In thousands)
Rental properties income ..................................... $ -- $ -- $ -- $ -- $ 182 $ (182)
-------- --------- -------- ------- ------- --------
Property sales and fee services:
Sales revenue ................................................ 2,045 182,722 (180,677) 28,621 275,219 (246,598)
Cost of sales ................................................ (681) (154,760) 154,079 (19,148) (225,429) 206,281
-------- --------- -------- ------- ------- --------
Gain on property sales .................................. 1,364 27,962 (26,598) 9,473 49,790 (40,317)
Equity in earnings of development joint ventures, net ........ 14,420 9,238 5,182 22,896 12,070 10,826
-------- --------- -------- ------- ------- --------
Total gain on property sales ............................ 15,784 37,200 (21,416) 32,369 61,860 (29,491)
Management and development fees .............................. (5) 89 (94) 434 557 (123)
Selling, general and administrative expenses ................. (1,812) (9,981) 8,169 (8,335) (20,555) 12,220
Other ........................................................ (786) (4,426) 3,640 (2,506) (11,159) 8,653
-------- --------- -------- ------- ------- --------
13,181 22,882 (9,701) 21,962 30,703 (8,741)
-------- --------- -------- ------- ------- --------
Interest expense ............................................. -- (581) 581 -- (603) 603
Minority interests ........................................... -- (3,743) 3,743 (504) (4,113) 3,609
-------- --------- -------- ------- ------- --------
Pre-tax EBDDT ........................................ $ 13,181 $ 18,558 $ (5,377) $21,458 $26,169 $ (4,711)
======== ========= ======== ======= ======= ========
Gain on Property Sales
Gain from residential property sales for the three and nine months ended
September 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 September 30, 2000, included $14.4
million from the sale of our home building assets to a newly formed limited
liability company managed by Brookfield Homes of California, Inc. ("BHC, LLC"),
as well as $10.2 million, before deduction of approximately $4 million in
minority interest, from the sale of an 80-lot site, and $3.4 million from the
closings of 357 lots and 82 homes. The $1.4 million gain on property sales for
the three months ended September 30, 2001 represents our portion of profit
participation related to certain properties that were sold in the prior year.
Gain on property sales of $9.5 million for the nine months ended September 30,
2001, is primarily from the closings of 227 lots and 55 homes, compared to the
$49.8 million gain from closings of 395 lots and 296 homes during the same
period in 2000.
In July 2000, we sold a majority of our home-building assets to BHC, LLC
for $139 million in cash and retained interest in BHC, LLC at an agreed-upon
value of $22.5 million. In addition, we were 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 and our 35% share of profits
from BHC, LLC's operations were recorded as part of "Equity in earnings of
development joint ventures, net" as homes/lots are sold. Of the $22.5 million
deferred gain related to the retained interest, we recognized $8.3 million in
2000 and $14.2 million during the nine months ended September 30, 2001. In
September 2001, we sold our interest in BHC, LLC for $8.2 million and recognized
the remaining deferred gain related to the retained interest. (See Variability
in Results section).
21
Equity in Earnings of Development Joint Ventures, Net:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
-------- -------- ------------ -------- -------- ------------
(In thousands) (In thousands)
Sales proceeds-unconsolidated JVs .................. $ 61,932 $ 72,491 $ (10,559) $ 158,335 $ 121,468 $ 36,867
Cost of sales ................................... (46,926) (55,600) 8,674 (137,293) (92,267) (45,026)
--------- --------- --------- --------- --------- ---------
Gain .......................................... 15,006 16,891 (1,885) 21,042 29,201 (8,159)
Joint Venture partners interest .................... (586) (7,653) 7,067 1,854 (17,131) 18,985
--------- --------- --------- --------- --------- ---------
Equity in earnings of development
joint ventures, net ................................ $ 14,420 $ 9,238 $ 5,182 $ 22,896 $ 12,070 $ 10,826
========= ========= ========= ========= ========= =========
Equity in earnings of development joint ventures, net, increased $5.2
million and $10.8 million for the three and nine months ended September 30,
2001, as compared to the same periods in 2000. The increase for the three and
nine months of 2001 was primarily attributable to the sale of our interest in
BHC, LLC as noted in the Gain on Property Sales section, and higher income from
our combined investment projects. (See Variability in Results section).
22
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $8.2 million and
$12.2 million for the three and nine months ended September 30, 2001,
respectively, as compared to the same periods in 2000. As expected, the decrease
in 2001 is primarily attributable to the related decrease of employees from the
sale of our home-building assets to BHC, LLC in 2000.
Other
"Other" increased for the three and nine months ended September 30, 2001,
as compared to the same periods in 2000, due to the $4.0 million and $11.0
million reserves, respectively, 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 Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
--------- -------- ---------- --------- -------- ----------
(In thousands) (In thousands)
Total interest incurred .................. $ 152 $ 763 $ (611) $ 518 $ 6,489 $ (5,971)
Interest capitalized ..................... (152) (182) 30 (518) (5,886) 5,368
------ ------- ------- -------- -------- --------
Interest expensed ........................ $ -- $ 581 $ (581) $ -- $ 603 $ (603)
====== ======= ======= ======== ======== ========
Interest incurred and capitalized decreased for three and nine months ended
September 30, 2001, primarily because of the sale of our home-building assets in
2000.
Minority Interest
Minority interest for the three and nine months ended September 30, 2001,
as compared to the same periods in 2000, decreased $3.7 million and $3.6
million, respectively, primarily because of the sale of an 80-lot site in San
Franciscoby a consolidated joint venture in 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 Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
-------- -------- ---------- -------- -------- ----------
(In thousands) (In thousands)
Rental properties:
Rental revenue ........................................ $ 4,038 $ 3,473 $ 565 $ 11,175 $ 10,877 $ 298
Property operating costs .............................. (1,441) (1,984) 543 (4,477) (5,475) 998
-------- -------- -------- -------- -------- --------
2,597 1,489 1,108 6,698 5,402 1,296
-------- -------- -------- -------- -------- --------
Property sales and fee services:
Sales revenue ......................................... 13,106 -- 13,106 49,793 -- 49,793
Cost of sales ......................................... (11,598) -- (11,598) (37,337) -- (37,337)
-------- -------- --------- --------- --------- ---------
Total gain on property sales ........................ 1,508 -- 1,508 12,456 -- 12,456
Management and development fees ....................... 397 13 384 468 631 (163)
Selling, general and administrative expenses .......... (1,237) (538) (699) (3,655) (1,585) (2,070)
Other ................................................. 976 65 911 4,675 22 4,653
-------- -------- -------- -------- -------- --------
1,644 (460) 2,104 13,944 (932) 14,876
-------- -------- -------- -------- -------- --------
Interest expense ...................................... -- (136) 136 (56) (890) 834
-------- -------- -------- -------- -------- --------
Pre-tax EBDDT ....................................... $ 4,241 $ 893 $ 3,348 $ 20,586 $ 3,580 $ 17,006
======== ======== ======== ======== ======== ========
Rental Building Occupancy (Interim-use properties): September 30,
(In thousands and square feet, except percentages) 2001 2000 Difference
-------- ------- ----------
Owned ........................................... 810 913 (103)
Occupied ........................................... 702 835 (133)
Occupancy percentage ............................... 86.7% 91.5% (5.2%)
Rental Revenue less Property Operating Costs
The increase in rental revenue less property operating costs for the three
and nine months ended September 30, 2001, as compared to the same periods in
2000, was primarily due to the commencement of rent from two ground leases and a
joint venture ground lease and lower property tax expense. Income provided from
interim rental uses in this segment will decrease as development occurs on these
sites.
Gain on Property Sales
The gain resulted from land sales of approximately 1.4 acres and 5.1 acres
of land at Mission Bay for the three and nine months ended September 30, 2001,
respectively. (See Variability in Results section).
24
Selling, General, and Administrative Expenses
The increase of $0.7 million and $2.1 million for the three and nine months
ended September 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 the projects of the Urban Development
segment.
Other
The increase in "other" of $0.9 million for the three months ended
September 30, 2001, was primarily because of higher interest income from
restricted cash generated by tax-deferred exchanges. The increase of $4.7
million for the nine months ended September 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 Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
------- ------ ---------- -------- -------- ----------
(In thousands) (In thousands)
Total interest incurred ..................... $ 940 $ 136 $ 804 $ 1,860 $ 1,006 $ 854
Interest capitalized ........................ (940) -- (940) (1,804) (116) (1,688)
------ ------ ------ ------- -------- -------
Interest expensed ........................... $ -- $ 136 $ (136) $ 56 $ 890 $ (834)
====== ====== ======= ======= ======== =======
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 Nine Months Ended
September 30, September 30,
2001 2000 Difference 2001 2000 Difference
------- --------- ---------- --------- -------- -----------
(In thousands) (In thousands)
Interest (contra-expense) ................... $ 2,335 $ (127) $ 2,462 $ 6,279 $ 1,855 $ 4,424
Cost of sales ............................... (1,146) -- (1,146) (1,495) -- (1,495)
Corporate administrative costs .............. (4,685) (3,656) (1,029) (15,292) (11,376) (3,916)
Other ....................................... 1,152 (743) 1,895 7,858 (1,495) 9,353
-------- -------- -------- -------- -------- --------
Pre-tax EBDDT .......................... $ (2,344) $ (4,526) $ 2,182 $ (2,650) $(11,016) $ 8,366
======== ======== ======== ======== ======== ========
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 under the
Corporate segment. 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.
Cost Of Sales
As noted above, as the qualifying assets from the Residential and Urban
Development segments are sold, the corresponding capitalized interest is
reflected as cost of sale. For the three and nine months ended September 30,
2001, cost of sales was $1.1 million and $1.5 million, respectively.
Corporate Administrative Costs
Corporate administrative costs consist primarily of general and
administrative expenses. General and administrative expenses increased by $1.0
million and $3.9 million for the three and nine months ended September 30, 2001,
respectively, as compared to the same periods in 2000, primarily because of the
increase in our overall activities.
25
Other
The increase in "other" income for the three and nine months ended
September 30, 2001 is primarily attributable to higher interest income generated
from a higher balance of short-term investments.
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 $1.2 million and
$4.8 million for the three and nine months ended September 30, 2001,
respectively, as compared to the same periods in 2000, are primarily
attributable to the new buildings added to the portfolio between October 2000
and September 2001.
Gain on Non-Strategic Asset Sales
Gain on sales of non-strategic assets decreased $17.9 million and $42.2
million for the three and nine months ended September 30, 2001, respectively, as
compared to the same periods in 2000, primarily because of sales 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 increase of $3.9 million in depreciation
recapture for the three months ended September 30, 2001, over the same period in
2000 is because of higher sales volume of older properties in the third quarter
of 2001 as compared to the third quarter of 2000. The decrease of $3.1 million
in depreciation recapture for the nine months ended September 30, 2001, over the
same period in 2000 is because of lower sales volume of older properties in the
first nine months of 2000 as compared to the first nine months of 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 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 types 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 nine months ended September 30, 2001 and 2000, was $295.1 million
and $288.7 million, respectively. The increase of $6.4 million in 2001 was
primarily attributed to a combined decrease of $86.4 million in uses offset by a
combined decrease of $80.0 million in sources. The decrease of $86.4 million in
uses was mainly because of a decrease in capital expenditures for development
properties. The decrease of $80.0 million in sources was primarily due to a
decrease of $217.2 million in proceeds from sales of development, non-strategic,
and other properties and a decrease of $4.4 million in other income offset by a
change of $126.8 million in asset and liabilities, which primarily resulted from
a $104.8 million prepayment of rent associated with a 34-year ground lease and
an increase of $21.6 million in operating distributions from joint ventures.
26
Cash flows from investing activities
Net cash used in investing activities reflected in the statement of
cash flows for the nine months ended September 30, 2001 and 2000, was $178.5
million and $227.3 million, respectively. The decrease of $48.8 million was
primarily attributed to a combined increase of $71.5 million in sources offset
by a combined increase of $22.7 million in uses. The increase of $71.5 million
in sources was due to a net increase of $83.7 million in short-term investments
and restricted cash and increase of $3.3 million in proceeds from sale of
investment property, offset by a decrease of $15.6 million in distributions from
joint ventures. The increase of $22.7 million in uses was due to an increase of
$20.4 million in capital expenditures for investment properties and a $11.9
million increase in property acquisitions, offset by a decrease of $6.7 million
in contributions to joint ventures and a decrease of $3.0 million in tenant
improvements.
Capital expenditures reflected in the statement of cash flows include
the following:
Nine Months Ended
September 30,
2001 2000
---- ----
(In thousands)
Capital Expenditures from Operating Activities/(1)/
Capital expenditures for development properties .................... $ 45,126 $ 98,831
Residential property acquisitions .................................. -- 26,464
Capitalized interest and property tax .............................. 784 7,063
-------- --------
Capital expenditures for operating activities ...................... 45,910 132,358
Seller-financed acquisitions ....................................... 10,000 --
-------- --------
Total capital expenditures for operating activities ..... 55,910 132,358
Capital Expenditures from Investing Activities (2)
Construction and building improvements ............................. 106,244 112,312
Predevelopment ..................................................... 15,545 8,430
Infrastructure and other ........................................... 44,027 32,245
Capitalized interest and property tax .............................. 18,915 11,314
-------- --------
Capital expenditures for investment properties ..................... 184,731 164,301
Investment property acquisitions ................................... 46,888 34,969
Tenant improvements ................................................ 1,832 4,824
-------- --------
Capital expenditures for investment activities ..................... 233,451 204,094
Seller-financed acquisitions ....................................... -- 1,702
-------- --------
Total capital expenditures in investing activities ............ 233,451 205,796
-------- --------
Total capital expenditures .................................... $289,361 $338,154
======== ========
__________
/(1)/ This category includes capital expenditures for properties we intend to
build to sell.
/(2)/ This category includes capital expenditures for properties we
intend to hold for our own account.
Capital expenditures for development properties--This item relates to the
development of residential and commercial for-sale development properties. The
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 nine months ended September 30, 2000,
we invested approximately $26.5 million in the acquisition of properties either
directly or through joint ventures.
27
Capitalized interest and property taxes from operating and investing
activities--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 development 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 Nine months ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- ---------- ---------
(In square feet) (In square feet)
Under construction, beginning of period 2,866,000 4,962,000 3,474,000 4,641,000
Construction starts 2,688,000 1,204,000 3,345,000 3,862,000
Completed--retained in portfolio (192,000) (428,000) (1,304,000) (2,765,000)
Completed--design/build or sold (74,000) (80,000) (227,000) (80,000)
--------- ---------- ---------- ---------
Under construction, end of period 5,288,000 5,658,000 5,288,000 5,658,000
========= ========= ========== =========
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, an acquisition in Ontario, California, and the
Santa Fe Depot project in San Diego, California, because of 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 nine months ended September 30, 2001 and 2000, was $16.2
million and $18.6 million, respectively. The decrease in 2001 is primarily
attributable to $151.9 million expended for the purchase of 8,855,497 shares of
our stock under the share repurchase programs as compared to $28.7 million
expended for the purchase of 1,997,300 shares during the same period in 2000.
The decrease is offset by an increase of $111.5 million in net borrowings, an
increase of $7.2 million in proceeds from issuance of Common Stock, and a
decrease of $2.2 million in distributions to minority partners.
Capital commitments
As of September 30, 2001, we had outstanding standby letters of credit and
surety bonds in the amount of $224.7 million in favor of local municipalities or
financial institutions to guarantee performance on real property improvements or
financial obligations.
As of September 30, 2001, we had approximately $195.0 million in total
commitments for capital expenditures to vendors. These commitments are primarily
contracts to construct commercial development projects, predevelopment costs,
and re-leasing costs.
28
Cash balances, available borrowings and capital resources
As of September 30, 2001, we had total cash of $497.8 million, of which
$28.6 million is restricted cash. In addition to the $497.8 million cash, we had
$181.3 million in borrowing capacity under our commercial construction
facilities and $3.0 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--From October 1999 through July 2001, our Board of
Directors authorized five separate stock repurchase programs; each has a limit
of $50 million. $21.3 million of the $250 million total authorized amount has
expired. Share purchases under these programs were made on the open market.
Through September 30, 2001, under these programs, we have repurchased a total of
10,852,797 shares at a total cost of $180.6 million. Subsequent to September 30,
2001, through November 6, 2001, we purchased an additional 2,194,300 shares at a
cost of $37.4 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 $589.1
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 September 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. At September 30, 2001, for Mission Bay $1.6 million of the $17 million
floating rate bonds and $2.7 million of the $54 million fixed rate bonds were
funded. For Pacific Commons, approximately $0.1 million was funded at September
30, 2001. (See Note 8 of the accompanying Condensed Consolidated Financial
Statement for details).
Insurance
General economic conditions within the insurance and the events of
September 11, 2001, have caused significant changes in the cost and
availabilities of most types of insurance. Specifically, we renewed our
earthquake coverage as of October 1, 2001, and were able to place approximately
65% of the previous $100 million coverage level. We will continue to seek
additional earthquake coverage as market conditions allow.
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 executives provided that the plan satisfies the legal requirements of
Rule 10b5-1 under the Securities Exchange Act of 1934.
29
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.
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 discussion).
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.
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
worsening economic slowdown or recession. Such changes may result in
higher vacancy rates for commercial property and lower prevailing
rents, lower sales prices or slower sales, lower absorption rates,
more tenant defaults and bankruptcies, and the like.
. Product and geographical concentration
. Competition in the real estate industry
. Unavailability of financing to meet our capital needs, the variability
of interest rates, and our inability to use our collateral to secure
loans
. Changes in insurance markets or unavailability of particular insurance
products
. 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
. 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 or other agreements with us
. Increases in the cost of land and building materials
. 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 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
. Other risks inherent in the real estate 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 subject to foreign exchange rate risk or commodity
price risk. As of September 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 September 30, 2001, approximately 69.3% of our debt bore interest at
fixed rates with a weighted average maturity of approximately 8.6 years and a
weighted average coupon rate of approximately 6.68%, which approximates market.
Therefore, unless there were significant decreases 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 2.7 years and a weighted average coupon rate of approximately
5.64% at September 30, 2001. To the extent that we incur additional variable
rate indebtness, 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 $4.0 million, based on
the outstanding balance of our debt at September 30, 2001. This would be offset
by interest income on cash balances, which are in short-term floating rate money
market investments. We believe, however, that increase in interest expense as a
result of inflation would not have a significant effect on our financial
position, results of operations, or cash flow.
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
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.
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: November 8, 2001 By: /s/ C. William Hosler
---------------------- -------------------------------
C. William Hosler
Senior Vice President
Chief Financial Officer
Principal Financial Officer
Date: November 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 is incorporated by reference to
the exhibits to the Form 10-K for the year ended December 31, 2000.
3.2 Amended and Restated Bylaws of the Registrant is incorporated by
reference to the exhibits to 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 Amendment to Registrant's Amended and Restated 1991 Stock Option
Plan, dated as of September 26, 2001, is attached. The Amended and
Restated 1991 Stock Option Plan, as previously amended and
restated, is incorporated by reference to the exhibits to the Form
10-K for the year ended December 31, 1997.
10.5 Amendment to Registrant's Amended and Restated 1995 Stock Option
Plan, dated as of September 26, 2001, is attached. The Amended and
Restated 1995 Stock Option Plan, as previously amended and
restated, is incorporated by reference to the exhibits to the Form
10-K for the year ended December 31, 1997.
10.6 Amendment to Registrant's Amended and Restated Executive Stock
Option Plan, dated as of September 26, 2001, is attached. The
Amended and Restated Executive Stock Option Plan, as previously
amended and restated, is incorporated by reference to the exhibits
to the Form 10-K for the year ended December 31, 1997.
10.7 Amendment to Registrant's Amended and Restated 1996 Performance
Award Plan, dated as of September 26, 2001, is attached. The
Amended and Restated 1996 Performance Award Plan, as previously
amended and restated, is incorporated by reference to the exhibits
to the Form 10-Q for the quarter ended March 31, 1999.
10.8 Amendment to Registrant's 2000 Performance Award Plan, dated as of
September 26, 2001, is attached. The 2000 Performance Award Plan is
incorporated by reference to the exhibits to the Registrant's proxy
statement filed with the Commission on Schedule 14A on March 31,
2000 for the annual stockholders' meeting held on May 2, 2000.
10.9 Registrant's Deferred Compensation Plan is incorporated by
reference to the exhibits to the Form 10-K for the year ended
December 31, 1997.
10.10 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.
10.10A Amendment to Second Amended and Restated Employment Agreement dated
as of February 7, 2001, 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, 2000.
10.11 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.
10.11A 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.
10.12 Memorandum of Understanding regarding Employment dated February 7,
2001, between the Registrant and Kathleen Smalley is incorporated
by reference to the exhibits to the Form 10-K for the year ended
December 31, 2000.
10.13 Memorandum of Understanding regarding Employment dated February 7,
2001, between the Registrant and C. William Hosler is incorporated
by reference to the exhibits to the Form 10-K for the year ended
December 31, 2000.
10.14 Memorandum of Understanding regarding Employment dated February 7,
2001, between the Registrant and Timothy J. Beaudin is attached.
10.15 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.