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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------- ------------------------------
Common Stock, $.01 par value per share New York, Pacific, Chicago Stock
Exchanges
$3.75 Series A Cumulative Convertible New York Stock Exchange
Preferred Stock
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ___ No X
---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $356,000,000 on March 15, 1996.
As of March 15, 1996, there were 74,498,115 issued and outstanding shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1996 Annual Meeting of
Stockholders are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
Catellus Development Corporation (the Company) was organized in the state of
Delaware in 1984 as an indirect, wholly-owned subsidiary of Santa Fe Pacific
Corporation (SFP) to conduct the non-railroad real estate activities of Santa Fe
Industries and Southern Pacific Company. In December 1989, SFP sold 19.9% of
the Company to Bay Area Real Estate Investment Associates, L.P. (BAREIA), a
California limited partnership whose general partner was JMB/Bay Area Partners
and whose limited partner was the California Public Employees' Retirement System
(CALPERS). In December 1990, SFP distributed its remaining 80.1% interest in
the Company to its stockholders in the form of a stock dividend. In November
1995, BAREIA was liquidated and CALPERS became the sole holder of BAREIA's
stock. As of December 31, 1995, CALPERS owns 41.1% of the Company's common
stock and 40.7% of the Company's Series A preferred stock.
The Company's principal office is located at 201 Mission Street, San
Francisco, California, 94105; its telephone number is (415) 974-4500.
The Company is a full service real estate company that, as of December 31,
1995 owned 855,170 acres of land, 14.1 million square feet of income producing
property, 5,400 acres of land leases and interests in eight joint ventures.
Approximately 80% of the Company's assets are located in California, with the
balance mainly concentrated in Dallas, metropolitan Chicago and Phoenix.
COMPANY STRATEGIES - OVERVIEW
During late 1994 and continuing in 1995, the Company undertook a
comprehensive review of its operations and activities with the primary goals
being to increase cash flow and return on stockholders' equity. In particular,
the Company focused its efforts on reducing costs, selling non-strategic land
assets, reducing debt, increasing development activity, increasing third party
fee management revenue and minimizing the development costs and time frames for
its major development projects. The Company has taken the following specific
actions:
. In November 1994, the Company implemented significant staff reductions to
reduce costs and reorganized to focus on increasing operating earnings. These
reductions, when combined with other cost-reduction measures, resulted in
annual cost savings for 1995 of approximately $10.1 million. General and
administrative costs declined by $3.7 million; overhead associated with
operating the portfolio declined by $3.4 million and overhead associated with
selling properties declined by $1.5 million. In addition, the Company has
benefited by a $1.5 million reduction in overhead costs associated with the
Company's development activities.
. In October 1995, the Company began the process of substantially increasing its
asset sales activity, with the primary focus on its non-strategic land assets.
Sales proceeds will be applied to a combination of debt reduction, in order to
reduce interest costs, and reinvestment in activities that could generate
increased operating earnings. The Company's goal is to sell $100 million of
non-strategic land assets over a 15-month period ending December 31, 1996.
Sales totaling $47.1 million closed in the fourth quarter of 1995.
. During 1995, the Company reduced its total debt by a net $34.5 million. This
net reduction represents the difference between $68.5 million of principal
reductions on existing borrowings and $34 million of new borrowings which
funded the development of pre-leased industrial and retail buildings. It is
expected that the debt service on the new borrowings will be covered by the
cash flow from the completed buildings; therefore, the Company's future
operations should be improved by the interest savings on the $68.5 million of
principal reductions.
2
. During 1995 and continuing into 1996, the Company has placed a greater
emphasis on increasing its development and fee development businesses. During
1995, the Company commenced construction on 910,000 square feet of new
development, compared to 381,000 in 1994. In addition, at December 31, 1995,
the Company had signed leases for new development totalling 648,000 square
feet for which construction will commence in 1996. In March 1996, the Company
acquired The Akins Companies to better position itself to pursue existing
residential development opportunities on certain of its land holdings, as well
as to pursue fee development opportunities on land not currently owned by the
Company.
. During 1995 and continuing into 1996, the Company has also placed a greater
emphasis on increasing its third party management business. In January 1996,
the Company announced a new five-year contract to manage the non railroad real
estate assets for the Burlington Northern Santa Fe Corporation.
. Beginning in 1994 and continuing throughout 1995, the Company undertook a
review of its major land development projects with the goal of increasing
profitability, minimizing up front capital requirements and shortening the
time required to develop the properties. As a result of this review, the
decision was made to modify certain of the entitlements, abandon others and
sell one property that management believed could not be developed in a
reasonable time frame. It is management's expectation that these decisions
will both accelerate the time frame in which the projects will be developed
and minimize the up front cash requirements associated with development.
The Company's long-term financial goal is to increase its return on
stockholder equity. In order to accomplish this, the Company will continue with
the revenue enhancement and cost reduction initiatives discussed above and will
seek opportunities to reduce its capital commitment to projects through joint
ventures, where the Company would seek financial partners to participate in some
of its more capital intensive businesses. In addition, as the Company completes
its disposition program of non-strategic land assets, it will evaluate
opportunities to increase stockholder returns through strategic reinvestment
and/or stock repurchases.
PORTFOLIO SUMMARY
- -----------------
The following tables provide information on the Company's income producing
assets, land assets and joint venture investments. In addition, supplemental
current value information is provided for the Company's land assets and joint
venture investments. Current value information is provided in recognition of
the significance of the Company's land assets in relation to its total assets
and the lack of traditional cash flow or earnings measures available to evaluate
the land portfolio. Current value does not represent the net realizable value
of the Company's portfolio as a whole, nor does it contemplate liquidation or a
distressed sale of the Company's assets. Current value accounting continues to
represent an experimental approach; authoritative criteria have not been
established for its preparation and presentation. The Company engaged Landauer
and Associates to provide a concurring appraisers report on its estimate of
values, which is included in an exhibit to this 10-K.
3
PORTFOLIO BY ASSET CATEGORY
INCOME PRODUCING PROPERTIES
AS OF DECEMBER 31, 1995
-------------------------------------- NET OPERATING INCOME/(1)/
NUMBER OF BUILDINGS SQUARE --------------------------
ACRES OR LEASES FEET 1995 1994
------- ------------------- ------ ------------- -----------
(in thousands) (in thousands)
INDUSTRIAL
Buildings and associated land... 606 163 11,424 $39,704 $38,813
Land leases..................... 5,239 17 - 1,746 1,743
RETAIL
Buildings and associated land... 76 29 957 8,423 5,024
Land leases..................... 53 16 - 1,721 2,018
OFFICE
Buildings and associated land... 76 32 1,687 16,483 18,399
Land leases..................... 106 21 - 2,707 2,616
----- --- ------ ------- -------
Total......................... 6,156 278 14,068 $70,784 $68,613
===== === ====== ======= =======
JOINT VENTURES
CATELLUS SHARE OF CURRENT VALUE/(3)/
----------------------------------
12/31/95 12/31/94 /(2)/
--------- --------------
(in thousands)
Hotels.......................... $ 77,276 $65,430
Land............................ 26,157 17,760
Other........................... 850 3,165
-------- -------
Total......................... $104,283 $86,355
======== =======
LAND DEVELOPMENT AND LAND HOLDINGS
CURRENT VALUE/(3)/ NET OPERATING INCOME/(1)/
------------------------ ------------------------------
ACRES 12/31/95 12/31/94/(2)/ 1995 1994
------- -------- ------------- ------- -------
(in thousands) (in thousands)
Major mixed-use projects........ 1,156 $310,040 $305,205 $ 1,576 $ 963
Industrial development.......... 1,671 125,121 134,674 (1,111) (1,350)
Retail and office development
and other land................. 6,086 145,151 159,051 393 656
Residential development......... 550 45,986 48,847 (197) (140)
Natural resource land........... 833,844 176,892 165,123 (936) (1,463)
Held for sale................... 11,863 131,211 137,243 (2,017) (2,596)
------- -------- -------- ------- -------
Total......................... 855,170 $934,401 $950,143 $(2,292) $(3,930)
======= ======== ======== ======= =======
Notes:
- ------
(1) Net operating income represents rental revenue, less property operating
costs.
(2) Current value at December 31, 1994 represents the value of those assets
still owned at December 31, 1995.
4
Notes (cont.)
- ---------------
(3) The Company estimates the current value of its land assets primarily using
the direct sales comparison method. However, in cases where relevant comparable
sales data is not available, current value is estimated using the residual land
analysis method. Under the direct sales comparison approach, recent sales of
similar properties are used as a basis for estimated current value. Current
value estimates for large contiguous parcels include a discount to reflect
current market absorption rates for undeveloped land. Under the residual land
analysis approach, current value is derived based on anticipated future cash
flows associated with the Company's intended development plan. Infrastructure
costs, development costs (including costs to remediate known environmental
contamination), operating cash flow and residual sales amounts are projected
over an assumed period of development and operation. These amounts are
discounted to the balance sheet date using a discount rate the Company believes
is appropriate given the level of project risk. Current values for investments
in joint ventures represent the Company's proportionate equity in the underlying
net assets of the ventures. The current values of assets and liabilities of
joint ventures were based on methods and assumptions similar to those used to
estimate the current values of similar assets and liabilities of the Company.
Current values calculated using the above methods are adjusted to reflect the
estimated costs to remediate known environmental contamination.
The following summarizes leasing statistics for the Company's operating
properties (square feet in thousands).
DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
Industrial buildings
Square feet owned 11,424 10,985 10,809
Square feet leased 10,945 10,432 10,389
Percent leased 95.8% 95.0% 96.1%
Office buildings
Square feet owned 1,687 1,687 1,806
Square feet leased 1,553 1,618 1,654
Percent leased 92.1% 95.9% 91.6%
Retail buildings
Square feet owned 957 837 652
Square feet leased 883 777 540
Percent leased 92.3% 92.8% 82.8%
Land development
Square feet owned 100 100 100
Square feet leased 100 100 100
Percent leased 100.0% 100.0% 100.0%
Total*
Square feet owned 14,168 13,609 13,367
Square feet leased 13,481 12,927 12,683
Percent leased 95.1% 95.0% 94.9%
* Square feet owned and occupied, as well as net operating income, excludes
approximately 1.4 million square feet of existing buildings, primarily at
Mission Bay. These buildings will be razed as development proceeds.
5
For the five years from 1996 through 2000, leases for 20.1%, 14.0%, 7.4%,
8.7%, and 10.1% of total rentable square footage are scheduled to expire.
INDUSTRIAL INCOME PRODUCING PROPERTIES
- --------------------------------------
As of the end of 1995, the Company's industrial income producing portfolio
included 11.4 million square feet in 163 buildings. At the year end, these
buildings were 95.8% leased. The portfolio also included 5,239 acres of land
leased for industrial uses.
At the end of 1995, the Company also had 642,000 square feet under
construction and leases signed for an additional 648,000 square feet to be
constructed in 1996. When these buildings are completed, the Company's
industrial income producing portfolio will be expanded to 12.7 million square
feet and 169 buildings.
Net Operating Income - The net operating income for the industrial
portfolio increased from $40.6 million in 1994 to $41.5 million in 1995. This
increase resulted primarily from the addition of new industrial buildings. The
decrease in 1994 compared to 1993 was due to the sale of 1.1 million square feet
of properties near the end of 1993 and in 1994. The following table summarizes
net operating income for the industrial portfolio (in thousands):
1995 1994 1993
--------- --------- -------
Industrial buildings $39,704 $38,813 $38,890
Industrial land leases 1,746 1,743 2,227
------- ------- -------
$41,450 $40,556 $41,117
======= ======= =======
Location - The following table summarizes the Company's industrial
buildings by region as of December 31, 1995.
NUMBER OF
BUILDINGS SQUARE FEET
--------- -----------
(in thousands)
Metro Chicago 4 791
Dallas 5 555
Phoenix 6 685
Southern California 117 7,088
Northern California 17 1,360
Other 14 945
--- ------
Total 163 11,424
=== ======
Lease Expirations - The following table summarizes the lease expirations
in the industrial portfolio as of December 31, 1995.
1996 1997 1998 1999 2000 2001 2002 2003 Thereafter
----- ----- ---- ----- ----- ----- ---- ---- ----------
Percent 20% 13% 8% 9% 11% 11% 3% 3% 22%
Square feet (in thousands) 2,164 1,426 840 1,002 1,207 1,258 310 277 2,461
Leases totalling 20% of the Company's industrial square footage expire in
1996. Of this, 38% are located in Southern California, where economic
conditions continue to improve, 20% represent month to month leases in multi-
tenant buildings, 17% are located in Phoenix, Arizona, and the balance is spread
throughout the portfolio.
6
RETAIL INCOME PRODUCING PROPERTIES
- ----------------------------------
As of the end of 1995, the Company's retail income producing portfolio
consisted of 957,000 square feet of existing buildings and 53.3 acres of land
leased for retail uses. The existing income-producing retail portfolio
consisted of 29 buildings which were 92.3% leased as of December 31, 1995.
The Company's retail properties are located primarily in Northern and
Southern California with one complex each in Colorado and Oregon. The largest
retail project, East Baybridge Center, is located on 40 acres just across the
Bay from San Francisco in the cities of Emeryville and Oakland. The 270,000
square foot Phase I of this project opened in mid-1994 and was pre-leased to
such national retailers as Home Depot, Sportmart, OfficeMax, Safeway's Pak 'n
Save and CompUSA. A 117,000 square foot building for Kmart was added to the
center in 1995.
Net Operating Income - Net operating income for the Company's retail
building portfolio rose from $5.0 million in 1994 to $8.4 million in 1995, due
to the East Baybridge Center in Emeryville, California. The following table
summarizes net operating income for the retail portfolio (in thousands):
1995 1994 1993
-------- ------- -------
Retail buildings $ 8,423 $5,024 $4,450
Retail land leases 1,721 2,019 2,037
------- ------ ------
$10,144 $7,043 $6,487
======= ====== ======
Location - The following table summarizes the Company's retail buildings by
region as of December 31, 1995.
NUMBER OF
BUILDINGS SQUARE FEET
--------- -----------
(in thousands)
Southern California 13 358
Northern California 9 461
Colorado 5 100
Oregon 2 38
-- ---
Totals 29 957
== ===
Lease expirations - The following table summarizes the lease expirations
in the retail portfolio as of December 31, 1995.
1996 1997 1998 1999 2000 2001 2002 2003 THEREAFTER
---- ---- ---- ---- ---- ---- ---- ---- ----------
Percent 18% 6% 5% 8% 8% 1% 0% 4% 50%
Square feet (in thousands) 160 50 46 69 69 11 0 35 443
Development - The following table summarizes the Company's retail
development completed during the past three years.
1995 1994 1993
---- ---- ----
Completed projects (square feet) 117,000 269,310 -
7
OFFICE INCOME PRODUCING PROPERTIES
- ----------------------------------
At the end of 1995, the Company's office income producing portfolio
consisted of 1.7 million square feet of office buildings and 105.9 acres of
land leased for office purposes. At year-end 1995, this portfolio of 32 office
buildings was 92.1% leased. The most significant office projects owned by the
Company are the South Bay Center in San Jose, California, 424,192 square feet,
and the Railway Exchange Building in Chicago, Illinois, 374,929 square feet.
Net Operating Income - The Company experienced a decline in net operating
income from office buildings in 1995. This decline is related primarily to the
Railway Exchange Building in Chicago, Illinois. An increase in property taxes
in Chicago and the replacement of a major tenant with lower rent tenants caused
the building to contribute less to office net operating income than in previous
years. The following table summarizes net operating income for the office
portfolio (in thousands):
1995 1994 1993
------- ------- --------
Office buildings $16,483 $18,399 $17,407
Office land leases 2,707 2,616 2,717
------- ------- -------
$19,190 $21,015 $20,124
======= ======= =======
Location - The following table summarizes the Company's office property by
region as of December 31, 1995.
NUMBER OF
BUILDINGS SQUARE FEET
--------- -------------
(in thousands)
Southern California 13 578
Northern California 10 521
Metro Chicago 2 473
Other 7 115
-- -----
Totals 32 1,687
== =====
Lease expirations - The following table summarizes the lease expirations in
the office portfolio as of December 31, 1995.
1996 1997 1998 1999 2000 2001 2002 2003 THEREAFTER
---- ---- ---- ---- ---- ---- ---- ---- ----------
Percent 25% 27% 7% 7% 5% 10% 8% 3% 8%
Square feet (in thousands) 381 416 115 103 79 161 130 45 123
LAND DEVELOPMENT - MIXED USE PROJECTS
- -------------------------------------
The Company's land portfolio includes four major mixed use development
sites consisting of 1,156 acres which had a current value of $310 million at
December 31, 1995. An additional site located in Santa Fe, New Mexico was sold
to the City of Santa Fe in 1995.
Mission Bay, San Francisco, CA. The Company's property in San Francisco is
part of a 313 acre mixed-used development which was the subject of a 1991
Development Agreement between Catellus and the City and County of San
Francisco. After a thorough analysis of the 1991 Development Agreement in light
of current and anticipated market conditions, management terminated this
agreement and decided to seek a revised entitlement package.
8
The revised plan will include more housing and retail and less office
space; a phased development approach which would include less upfront
investment; and the use of tax increment financing, as provided by redevelopment
law. As a result of this decision, the Company took an $84.8 million charge
against fourth quarter earnings. (See "Managements Discussion and Analysis of
Financial Condition and Results of Operations," and Note 7 to the Consolidated
Financial Statements).
Pacific Commons, Fremont, CA. In March 1995, the Company announced its
intention to pursue a retail, industrial and commercial development rather than
a previously proposed golf course residential community on its 600-acre vacant
site bordering Interstate 880 in Fremont, California. These are uses which were
called for by the City's General Plan designation prior to the approval of the
golf course residential project, and they are consistent with the current land
uses of adjacent property.
The Company has moved to re-entitle Pacific Commons to include
approximately 700,000 square feet of "power center" retail and more than 7.5
million square feet of office, R&D, industrial and warehouse product. The
vacancy rate of these uses continues to decline in Fremont and the inventory of
land for development is low.
Union Station, Los Angeles, CA. The Company owns 51 acres which surround
and include the historic Los Angeles Union Station. The Company completed the
acquisition of this site in early 1990 and is proceeding with plans to develop
it as a regional transportation center and mixed-use complex of office buildings
and retail space. Amtrak, the region's commuter rail system, suburban bus lines
and the City's new subway system serve this station daily. The site currently
is entitled for government uses. A revised entitlement package is being
processed which will allow a total of 7 million square feet of office
development but has the flexibility to substitute other uses such as retail, a
sports arena and housing based upon an impacts "equivalency" formula.
Construction of the first building on the site, the 626,000 square foot
headquarters facility owned and occupied by the Metropolitan Transportation
Authority (MTA), was started in 1993 and completed in late 1995. In addition,
the innovative multi-modal Patsaouras Transit Plaza which now serves as the
center for bus and rail service to downtown Los Angeles, was completed in 1995.
The MTA building and the Patsaouras Transit Plaza were the first two components
of Gateway Center (part of the Union Station project), a multi-phased project
that consists of two office towers comprising over 1.2 million square feet, the
3.5-acre regional public transit center and bus plaza, 20,000 square feet of
service retail, an underground parking garage and a new transit concourse
connecting the bus and train terminals.
Union Station has also been selected as the site of the new headquarters
facility for the Metropolitan Water District (MWD). An agreement has been
signed under which Catellus will sell a 4.2 acre site to MWD and construct a
550,000 square foot, 12 story office building for the MWD on the site.
Construction is scheduled to begin in mid-1996 with building completion and
occupancy targeted for late 1998.
Santa Fe Depot, San Diego, CA. The Company owns 17 acres on the waterfront
in downtown San Diego, California. The site is currently entitled for a mixture
of office, hotel, retail and housing development. Management is re-evaluating
the approved plan in light of current and projected market conditions.
INDUSTRIAL DEVELOPMENT
- ----------------------
The Company's plans call for expanding development activity beyond the
levels of the last two years. Approximately 1,700 acres in 15 separate locations
will be retained which will support the development of over 30 million square
feet of industrial development. The Company's goal is to develop approximately
20 million square feet over the next 5 to 7 years. The balance of the acreage
will be reserved for sale.
In 1995, the Company completed approximately 490,000 square feet of
industrial construction. At December 31, 1995, Catellus had 692,000 square feet
under construction and had signed leases for 648,000 square
9
feet of new industrial development. This backlog will be enhanced during 1996
by the Company's efforts to obtain additional build-to-suit opportunities and
limited speculative development, in order to take advantage of local market
conditions.
Property - The following table summarizes selected industrial development
properties, including some held for sale at December 31, 1995:
POTENTIAL SQUARE FEET OF
LOCATION ACRES ENTITLEMENTS (IN MILLIONS)
- -------- ------- --------------------------
Phoenix, Arizona 214.3 4.4
Dallas, Texas
Coppell 215.8 3.4
Garland 284.0 4.5
Chicago, Illinois
International Centre 655.7 9.6
Romeoville 118.2 1.4
Northern California
Fremont 46.5 .6
Southern California
Anaheim 18.8 .3
City of Industry 68.3 1.0
La Mirada 40.8 .6
Ontario 289.5 4.5
Rancho Cucamonga 32.6 .5
Santa Ana 32.6 .5
Santa Fe Springs 12.5 .2
Vernon 14.7 .2
Oklahoma City, Oklahoma 281.7 1.5
------- ----
Total 2,326.0 33.2
======= ====
Development - The following table summarizes the Company's industrial
development activities, in square feet, during the past three years.
1995 1994 1993
--------- --------- ---------
Under construction, beginning of period 337,136 307,000 487,023
Construction starts 792,818 381,136 363,420
Completion (487,854) (351,000) (543,443)
-------- -------- --------
Under construction, end of period 642,100 337,136 307,000
======== ======== ========
10
RESIDENTIAL DEVELOPMENT
- -----------------------
In March 1996, the Company concluded the acquisition of The Akins
Companies, a residential real estate company, consisting of a diversified group
of entities involved in home building, community development and project
management services. The Akins Companies have developed more than 10,000 homes
throughout Southern California in the past 47 years.
The new entity, now called the Catellus Residential Group, will develop the
Company's residential land holdings, projects previously started by Akins and
new development activities on property owned by others.
The Company formed an Urban Housing division in 1995 to develop rental
housing with an affordable component on urban in-fill locations in California.
The new urban housing team within Catellus Residential Group gives the Company
the core competencies that will allow it to pursue additional higher yielding
development opportunities.
Property - The following table summarizes the Company's residential properties,
including those acquired as part of the Akins acquisition:
CITY ACRES POTENTIAL # OF UNITS
- ---- ----- --------------------
Northern California
. Union City (1) 108 600
. Tracy (1) 680 1,800
. Stockton (1) 392 1,740
Southern California
. Buena Park (1) 70 350
. Oxnard (3) 20 198
. Ridgemoor, Rowland Heights (2) 277 510
. Rancho San Pasquale, San Diego (2) 872 580
. Kentwood Collection, Westchester (3) 11 49
. Chino Hills (2) 278 350
. Ocean Ridge, Newport Beach (3) 11 30
----- -----
Total 2,719 6,207
===== =====
Notes:
- -----
(1) Owned
(2) Managed
(3) Joint venture
11
JOINT VENTURES AND OTHER INVESTMENTS
- ------------------------------------
The Company's joint venture interests provided net distributions to the
Company of $8.3 million in 1995 and had a current value at December 31, 1995 of
$104.3 million. Joint ventures will continue to play an important role in
allowing the Company to accelerate the development of its land assets without
having to fund 100% of the required capital. In addition to its joint ventures,
the Company owns Golden Gate Fields, a racetrack leased to Ladbroke Racing.
Operating Properties Location Type
- -------------------- -------- ----
New Orleans Hilton New Orleans, Louisiana Hotel
San Diego Embassy Suites San Diego, California Hotel
Park del Amo Torrance, California Office
Seabridge Apartments San Diego, California Residential
Pacific Design Center West Hollywood, California Furniture mart
Golden Gate Fields Albany, California Racetrack
Land Type
- ---- ----
Dallas, Texas Industrial development
New Orleans, Louisiana Hotel development
La Mirada, California Industrial development
Collinsville, California Dredge disposal
West Hollywood, California Entertainment/retail development
The following is a description of some of the Company's joint ventures and
other investments:
New Orleans Hilton. The Company owns a 25.2% interest in the 1,602-room New
Orleans Hilton Hotel. This property is strategically located between the dock
for the Flamingo Riverboat Casino and the land based Harrahs Casino.
San Diego Embassy Suites. The Company owns a 50% interest in this 337-room
hotel overlooking the San Diego Bay near the convention center. The property
generates positive cash flow, however the existing loan requires substantial
principal paydown and prohibits cash flow distributions to the partners.
Negotiations are underway to refinance the property.
Seabridge Apartments. The Company owns a 50% interest in this 387-unit
apartment building located one block east of the San Diego Bay. Although the
property is performing well (occupancy is consistently in the 95% range), it is
substantially overleveraged which results in nominal cash flow.
Golden Gate Fields. The Company owns 100% of this 230-acre race track
property in Albany, California, across the Bay from San Francisco, and leases it
to the Ladbroke Racing Company. Discussions are underway to either split cash
flow 50/50, including the card club revenue, or sell the property while
retaining the right to participate in future cash flow.
La Mirada. CDC owns a 37.8% interest in this master planned business park
located on a major distribution artery. Thirty acres from the 82-acre
development remain available for build-to-suit or sale. Recent activity
includes a 278,000 square foot build-to-suit for lease on 10.4 acres of land and
a sale of 3.3 acres of land. Land sales are expected to be completed in 1997
with build-to-suit leases providing ongoing cash flow.
12
NATURAL RESOURCE LAND
- ---------------------
Catellus owns more than 790,000 acres of land in the Southern California
desert regions of Los Angeles, Kern, San Bernardino, Riverside, and Imperial
Counties, and more than 25,000 acres in the state's Central Valley.
The Company plans to aggressively maximize the value of its "outlying"
lands. The Catellus Resources Group was created in 1995 to focus on the
potential represented by the desert and Central Valley portfolios.
The hydrology, climate, geology and location of certain of these properties
may afford substantial water marketing, agricultural, telecommunications,
energy, and waste management opportunities for Catellus. In addition, a major
portion of the land is well suited for environmental mitigation purposes and for
strategic trades with federal and state entities to favorably enhance the
Company's development options with other locations.
The Resources Group will also coordinate the Company's in-house
environmental cost recovery, remediation and management activities.
Consistent with Catellus' commitment to leverage its core competencies
beyond increasing the value of its current assets, the Resources Group will
spearhead efforts to identify additional environmentally-related business
opportunities.
REAL ESTATE SERVICES
- --------------------
Management Services
Catellus, through its wholly owned subsidiary Catellus Management
Corporation (CMC), has entered into a five year contract with the Burlington
Northern Santa Fe Corporation (BNSF), which owns the nation's largest railroad,
to provide management and disposition services for their real property assets.
The assets include approximately 19,000 leases and are located in 28 states and
2 Canadian provinces.
The Company intends to aggressively pursue additional management service
agreements to increase recurring earnings.
Design Build Services
Catellus was the developer on a "design build" basis in partnership with
Charles Pankow Builders, for the construction of the MTA Headquarters building
and the multi-model Patsaouras Transit Plaza at Los Angeles Union Station. The
Company intends to pursue additional design build opportunities to increase
recurring earnings. The Company is concluding final documentation with the
Metropolitan Water District for the development of their new headquarters
facility on a design build basis, again in partnership with Charles Pankow
Builders.
PROPERTY SALES
- --------------
Historically, the Company has sold land to cover some of the costs
associated with pre-development, operating and holding the Company's substantial
real estate assets and paying preferred stock dividends. Sales included
mountain, desert, agricultural and other non-strategic lands, as well as lands
that the Company feels might be developable in the future. The Company has also
sold income-producing properties to cover such costs. The Company's sales
consisted of the following over the past three years (in thousands):
13
1995 1994 1993
-------- ------- -------
Non-strategic land
Sales.................. $62,199 $32,298 $26,444
Cost of sales.......... 29,410 22,024 15,993
------- ------- -------
Gain $32,789 $10,274 $10,451
======= ======= =======
Development properties
Sales.................. $ 3,224 $ - $ -
Cost of sales.......... 2,271 - -
------- ------- -------
Gain $ 953 $ - $ -
======= ======= =======
Buildings
Sales.................. $ - $21,330 $30,157
Cost of sales.......... - 18,411 21,547
------- ------- -------
Gain $ - $ 2,919 $ 8,610
======== ======= =======
Ground leases
Sales.................. $ - $ 142 $15,968
Cost of sales.......... - 28 1,864
------- ------- -------
Gain $ - $ 114 $14,104
======== ======= =======
Total
Sales.................. $65,423 $53,770 $72,569
Cost of sales.......... 31,681 40,463 39,404
------- ------- -------
Gain $33,742 $13,307 $33,165
======= ======= =======
In September 1995, the Company established a goal of selling $200 million
of non-strategic land assets within a 30-month period. Proceeds would be applied
to a combination of debt reduction, in order to reduce interest costs, and
reinvestment in activities that could generate increased operating earnings. The
Company's goal is to complete $100 million of these sales by December 31, 1996.
Sales totaling $47.1 million closed in the fourth quarter of 1995.
ENVIRONMENTAL MATTERS
- ---------------------
Various federal, state and local laws and regulations covering the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, may affect the Company's operations and costs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Environmental Matters." Such regulations can increase the cost of
planning, designing, developing, managing and maintaining the Company's
properties. The Company has expended and will continue to expend significant
financial and managerial resources to comply with environmental regulations and
local permitting requirements. While the Company or outside consultants have
evaluated the environmental liabilities associated with most of the Company's
properties, any evaluation necessarily is based upon then prevailing law and
identified site conditions. In addition, many of the Company's properties are
in the early stages of development and the environmental studies and
investigations which have been performed are preliminary. It is possible that
significant unknown costs and liabilities may arise in the future relating to
these properties and that certain development projects may be significantly
delayed, modified or cancelled as a result of associated remediation costs. In
addition, other properties presently or formerly owned by the Company or its
corporate predecessors have required or may require remediation. Although there
can be no assurance, the Company does not believe that such costs will have a
material adverse effect on its business, financial condition or results of
operations.
The Company has been or may be named a defendant or a potentially
responsible party ("PRP") under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA"), or analogous
state statutes. At the Marina Bay site in the City of Richmond, the Company
has been sued by the City of Richmond and others in a CERCLA cost recovery
action. This action is more fully described in Item 3 "Legal
14
Proceedings". With respect to a site in Livermore, California, the Regional
Water Quality Control Board has issued a Tentative Site Cleanup Order naming the
Company as one of 11 responsible parties. In February 1994, the Company reached
a settlement with plaintiffs and all of the other potentially responsible
parties pursuant to which the Company paid $67,650 into a fund covering certain
past and future remediation costs in exchange for a qualified release of
liability. The Company has been named a PRP with respect to several additional
sites. Remediation of those sites has been completed by the Company or is being
completed by third parties at their expense. The Company does not expect to
incur material additional costs with respect to those sites.
COMPETITION
- ------------
Real estate markets are regional, and levels of competition vary by market.
The Company encounters significant competition for leasing and sales of real
estate in each of its market areas, but no one competitor is dominant. The
Company is not dependent on any one customer for a significant portion of its
revenues.
EMPLOYEES
- ----------
At December 31, 1995, the Company had 121 employees, including 22 employees
of the management subsidiary which now manages certain BNSF properties.
The Company engages third parties to manage properties in locations which
are not in close proximity to the Company's regional or field offices. In
addition, the Company engages outside consultants such as architects and design
firms in connection with its pre-development activities. The Company also
employs third party contractors on development projects for infrastructure and
building construction.
RISK FACTORS
- ------------
This Annual Report on Form 10-K contains statements which, to the extent
that they are not recitations of historical fact, constitute "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934. All forward looking
statements involve risks and uncertainties. The forward looking statements in
this document are intended to be subject to the safe harbor protection provided
by Sections 27A and 21E. Factors that most typically impact the Company's
operating results include (i) changes in general economic conditions in regions
in which the Company's projects are located, (ii) the availability and cost of
capital and project financing, (iii) the receipt of government approvals and
entitlements for development projects, (iv) land and building material costs,
(v) supply and demand for office, industrial and residential space, (vi)
competition from other property managers, (vii) liability for environmental
remediation at the Company's properties, (viii) ability to sell non-strategic
land assets, and (ix) ability to increase development fees. For discussions
identifying other important factors that could cause actual results to differ
materially from those anticipated in the forward looking statements, see the
Company's Securities and Exchange Commission filings; "Managements's Discussion
and Analysis of Financial Condition and Results of Operations" of this Form 10-K
and Note 14 to the Consolidated Financial Statements included in this Form 10-K.
ITEM 2. PROPERTIES
The Company's real estate projects are generally described in Item 1 above,
which descriptions are incorporated in this Item by reference. Catellus'
principal executive office is located in San Francisco, and it has regional or
field offices in 6 other locations in the United States. Catellus believes that
its property and equipment are generally well maintained, in good condition and
adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
Catellus, its subsidiaries and other related companies are named defendants
in several lawsuits arising from normal business activities, are named parties
in certain governmental proceedings (including environmental actions)
15
and are the subject of various environmental remediation orders of local
governmental agencies arising in the ordinary course of its business. The
matters described below may involve substantial claims for damages. While the
outcome of these lawsuits or other proceedings against the Company and the cost
of compliance with any governmental order cannot be predicted with certainty,
management does not expect any of these matters to have a material adverse
effect on the business or financial condition of the Company.
In City of Richmond, et al. v. United States of America, et al. (United
------------------------------------------------------------
States District Court, Northern District of California; filed August 1989) the
City of Richmond and Richmond Redevelopment Agency (collectively, "Richmond")
and various developers sued the Company and others for more than $48.6 million
in environmental cleanup costs, other damages and related relief arising out of
contamination at property formerly owned by the Company's predecessor, Santa Fe
Land Improvement Company. The United States and United States Maritime
Administration were also named defendants and Kaiser Aluminum & Chemical
Corporation ("Kaiser") and James L. Ferry & Son, Inc. ("Ferry") were named as
third party defendants. All parties asserted indemnity claims against each
other.
In 1992, plaintiffs also filed a related action regarding the same
property, seeking similar relief on similar grounds from Kaiser: The City of
-----------
Richmond, et al. v. Kaiser Aluminum & Chemical Corp., (United States District
- -----------------------------------------------------
Court, Northern District of California). Again, all parties asserted indemnity
claims against each other.
Prior to trial, plaintiffs reached a settlement agreement with the United
States pursuant to which the United States agreed to pay $3.6 million plus 35%
of future cleanup costs.
Trial began March 17, 1995 and concluded on April 28, 1995. On April 13,
1995, the Company reached a settlement agreement with plaintiffs whereby
plaintiffs agreed to release all claims against the Company in exchange for
$3.25 million to be paid over time with the final payment to be made by July 15,
1997.
On December 7, 1995, the Court issued a Final Judgment awarding plaintiffs
$1,703,780 on their claims against Kaiser for past costs and declaring that
Kaiser is liable to plaintiffs for 50% of certain future cleanup costs. The
Court also awarded the Company $506,654 plus attorneys' fees associated with
its contractual indemnity claim against Kaiser. The Court did not grant relief
on any other claim.
On January 8, 1996, the Company filed an appeal of the judgment, and Kaiser
cross-appealed shortly thereafter. On February 5, 1996, the Company filed a
motion to fix the amount of attorney's fees recoverable from Kaiser. It is not
possible now to predict reliably the outcome of either the appeal or the
attorneys' fees motion. Settlement discussions with Kaiser are on-going.
The Company tendered defense of this action to its insurer, Employers
Casualty Insurance Company (Employers). However, on January 6, 1994, Employers
was placed into receivership. The Company, Employers and its receiver entered
into a settlement agreement pursuant to which the Company has received $300,000
and the receiver and Employers stipulated that the Company has a valid claim for
an additional $700,000 for past defense costs against Employers' assets in the
receivership. The Company does not know the extent of other claims which will
be made against the assets in receivership or the extent of the assets which
will be available to satisfy such claims. Therefore, the Company does not know
how much, if any, of the $700,000 or future defense costs will be paid out of
the assets in receivership.
Efforts are being made to recover additional sums from other insurers,
including those who provided excess coverage and insurers who issued policies to
the Company's former tenants, which policies named the Company's predecessor as
an additional insured. The Company has received from insurers payments totaling
$2,635,689 plus commitments to pay 100% of future litigation defense costs. It
is not clear at this time whether or how much additional monies will be obtained
from insurers. Negotiations are continuing.
16
The Atchison, Topeka & Santa Fe Railway Co. v. The Testate and Intestate
------------------------------------------------------------------------
Successors of Grace Richards, et al. (Superior Court of California, County of
- ------------------------------------
San Diego; filed May 1983) and Herbert Lincoln Hubbard, et al. v. The Atchison,
------------------------------------------------
Topeka & Santa Fe Railway Company, Santa Fe Land Improvement Company, et al.
- ----------------------------------------------------------------------------
(Superior Court of California, County of San Diego; filed January 1988) are
consolidated cases in which both the Company and the opposing litigants claim
title to a 550 foot by 75 foot strip of property located on the Santa Fe Depot
site in San Diego, CA. The opposing litigants also seek damages for alleged
fraud, interference with prospective economic advantage, and inverse
condemnation. The trial court ruled that the Company and some of the opposing
litigants each own an undivided one-half fee interest in the property, subject
to a perpetual railroad easement in favor of The Atchison, Topeka & Santa Fe
Railway Company. The trial court also rejected all of the opposing litigants'
damage claims.
The Company appealed the portion of the trial court's judgment granting the
opposing litigants a one-half undivided fee interest in the property and the
opposing litigants appealed all other aspects of the judgment. In July, 1995
the California Court of Appeal ruled for the Company on every issue.
Specifically, the Court of Appeals determined that the Company's predecessor-in-
interest had acquired fee title to the property in the original condemnation
proceeding (which occurred in 1886). This ruling eliminated the opposing
litigants' claim that the Company's predecessor-in-interest had lost its right
of way by abandonment or extinguishment and this had no interest left to convey
to the Company.
The opposing litigants petitioned the California Supreme Court for review,
which was granted in October, 1995. The Supreme Court has deferred any briefing
and has not scheduled a hearing.
Khachaturian v. Catellus Development Corporation, et al. (Superior Court of
--------------------------------------------------------
California, County of Alameda; filed April 1991) is an action by an auto dealer
who contracted to purchase land from the Company in an auto mall in Fremont,
California, in June 1990. The complaint alleged the Company had reneged on an
oral agreement to pay the plaintiff a 3% commission on each land transaction in
the auto mall, and stated breach of contract, fraud, false promise, bad faith
denial of contract, and quantum meruit causes of action. The Company asserted,
among other things, that no such agreement existed and that it denied
plaintiff's claim in good faith and with probable cause.
In November 1993, a jury found for plaintiff on his breach of contract and
bad faith denial claims, awarding him $441,781 in compensatory damages and $7.6
million in punitive damages on the bad faith claim. The Company believed these
verdicts were not supported by the evidence or the law, and that numerous errors
at trial substantially prejudiced it. The Company filed its notice of appeal on
February 3, 1994, and briefing was completed on February 7, 1995. In September,
the California Supreme Court, in an unrelated lawsuit in which the Company filed
an amicus brief, repudiated California's tort of bad faith denial of contract,
on which punitive damages against the Company were premised.
The parties recently agreed to a settlement pursuant to which the Company
has paid plaintiff $850,000 in complete settlement of all issues.
Truck Insurance Exchange v. City of Ontario, et al. (Superior Court of
---------------------------------------------------
California, San Bernardino County, Case No. RCY050056) involves a subrogation
claim by insurance companies for the Ontario Auto Center dealerships against
adjacent property owners, including the Company, for damages of approximately
$4.5 million caused by sand blowing onto auto dealers' properties. The parties
reached agreement upon a settlement pursuant to which Santa Fe Pacific
Corporation has paid plaintiffs the total amount of $25,000, which represents
the amount of the self-insured retention under the Employers' policy, in
exchange for a release and dismissal of this lawsuit against Santa Fe Pacific
Corporation and the Company.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1995.
EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------
The following persons are the executive officers of Catellus.
NAME AGE POSITION
- ---- --- --------
Corporate officers
- ------------------
Nelson C. Rising 54 President and Chief Executive Officer
Stephen P. Wallace 41 Senior Vice President and Chief Financial Officer
Timothy J. Beaudin 37 Senior Vice President Property Operations
Maureen Sullivan 41 Vice President Law, General Counsel and Secretary
Paul A. Lockie 35 Vice President and Controller
Operating officers who are considered
executive officers
- --------------------------------------
Ted Antenucci 31 Vice President
David Friedman 39 President Catellus Resources Group
Don Parker 51 Vice President Bay Area Development
Douglas B. Stimpson 39 Vice President and Chief Financial Officer
Bay Area Development
Ira Yellin 55 Senior Vice President Southern California Development
Additional information concerning the business background of each executive
officer of Catellus is set forth below:
Mr. Rising has served as President and Chief Executive Officer and a
Director of Catellus since September 1994. For more than five years prior to
joining Catellus, Mr. Rising was a Senior Partner with Maguire Thomas Partners,
a Los Angeles-based commercial developer with projects in Southern California,
Dallas and Philadelphia.
Mr. Wallace was elected as Senior Vice President and Chief Financial
Officer in July 1995. Mr. Wallace was previously the Senior Vice President and
Chief Financial Officer at Castle & Cooke Homes, Inc. from May 1993. Prior to
that Mr. Wallace served as the Chief Financial Officer at A.M. Homes in Newport
Beach, California.
Mr. Beaudin was elected Senior Vice President Property Operations in
January 1996. Prior to this appointment, Mr. Beaudin served as Vice President
Property Operations since February 1995. For more than five years prior to
that, Mr. Beaudin served as Senior Vice President - Managing Officer of the
Financial Services Group at CB Commercial Real Estate Group, a national real
estate brokerage firm.
Ms. Sullivan was elected Vice President Law, General Counsel and Secretary
in March 1990. For five years prior to that, Ms. Sullivan was a partner in the
real estate department of the law firm of Brobeck, Phleger and Harrison.
Mr. Lockie joined Catellus as Vice President and Controller in February
1996. Prior to joining Catellus Mr. Lockie served as the Chief Financial Officer
for Kimball Small Properties, Inc., a San Jose, California real estate
development and management company.
Mr. Antenucci was elected Vice President of Catellus in October 1995. Prior
to joining Catellus, Mr. Antenucci served as Vice President at Omnitrax, a
shortline rail carrier, for two years and as Vice President - Industrial Sales
for CB Commercial Real Estate Group, Inc. for more than seven years.
Mr. Friedman has served as President of Catellus Resources Group since
February 1996. For more than five years prior to joining Catellus, Mr. Friedman
was an Associate Attorney and Partner in the Los Angeles law firm of Tuttle &
Taylor representing, among other clients, major agriculture and resource
interests and was a consultant specializing in California economic development
research.
Mr. Parker was elected Vice President Bay Area Development in March 1995.
From January 1994 to March 1995, Mr. Parker was the Executive Director of the
Alameda Reuse and Redevelopment Authority for the conversion of the naval air
station. For more than five years prior to that, Mr. Parker was a partner and
project director of the Marina Village Mixed-Use Community in Alameda,
California.
Mr. Stimpson was elected Vice President and Chief Financial Officer for Bay
Area Development in January 1996. Prior to this appointment Mr. Stimpson served
as Vice President Finance from February 1992; Assistant Vice President Finance
from February 1990; and Director of Finance and Planning from June 1988.
Mr. Yellin joined Catellus in February 1996, as the Senior Vice President,
Southern California Development. For more than five years prior to joining
Catellus, Mr. Yellin served as President of the Yellin Company, a Los Angeles
real estate investment, development and management company involved in the
acquisition, restoration and redevelopment of historic buildings in the Historic
Core of Downtown Los Angeles.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock commenced trading on December 5, 1990 and is traded on the
New York Stock Exchange, the Chicago Stock Exchange and the Pacific Stock
Exchange under the symbol "CDX." The following table sets forth the high and low
sale prices of the common stock, as reported on the New York Stock Exchange
Composite Tape, during the periods indicated.
High Low
------- -------
1990
Fourth Quarter (from December 5, 1990)... $10 3/4 $ 8 1/2
1991
First Quarter............................ $15 $ 8 3/4
Second Quarter........................... 14 1/4 11 7/8
Third Quarter............................ 12 3/8 10
Fourth Quarter........................... 10 1/4 7 3/4
1992
First Quarter............................ $11 3/4 $ 9 1/2
Second Quarter........................... 10 3/4 7 7/8
Third Quarter............................ 8 3/8 6 1/8
Fourth Quarter........................... 6 7/8 6 1/8
1993
First Quarter............................ $ 8 1/4 $ 6 3/8
Second Quarter........................... 7 1/8 5 3/4
Third Quarter............................ 8 1/8 6 3/8
Fourth Quarter........................... 9 1/8 7 3/8
1994
First Quarter............................ $ 8 1/2 $ 6 1/4
Second Quarter........................... 7 5/8 6 1/8
Third Quarter............................ 7 7/8 6 1/4
Fourth Quarter........................... 7 1/4 5 3/8
1995
First Quarter............................ $ 6 1/8 $ 5 1/8
Second Quarter........................... 6 7/8 5 1/2
Third Quarter............................ 6 7/8 6 1/8
Fourth Quarter........................... 6 5/8 5 3/8
No cash dividends have been paid on the Company's common stock and the
Company does not anticipate paying any cash dividends on its common stock in the
foreseeable future. The most restrictive of the Company's loan agreements limit
dividends to $27.6 million per year.
At March 15, 1996, there were approximately 38,271 holders of record of the
Company's common stock.
19
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected income statement and balance sheet data with respect
to each of the years in the five-year period ended December 31, 1995 have been
derived from the annual Consolidated Financial Statements. The operating and
cash flow data have been derived from the Company's underlying financial and
management records and are unaudited. This information should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of results of operations for 1995, 1994
and 1993.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- ---------- -------- --------
RENTAL REVENUE.......................................... $ 108,068 $104,432 $ 109,544 $ 99,471 $ 88,096
PROPERTY OPERATING COSTS................................ 39,576 39,749 41,499 42,806 43,600
GAIN ON SALES OF PROPERTY............................... 33,742 13,307 33,165 40,204 43,661
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures................... 7,035 7,982 1,818 (2,016) (539)
Management and development fee income.................. 1,924 2,151 2,260 1,733 3,654
General and administrative expense..................... (11,841) (15,550) (13,143) (12,876) (14,333)
Interest expense, net.................................. (21,988) (20,932) (39,839) (52,063) (42,975)
Depreciation and amortization.......................... (27,990) (28,577) (31,117) (29,437) (24,540)
Adjustment to carrying value of property............... (102,400) (24,100) (32,500) - -
Other, net............................................. (1,494) (2,770) (42,049) 175 (1,142)
--------- -------- --------- -------- --------
(156,754) (81,796) (154,570) (94,484) (79,875)
--------- -------- --------- -------- --------
INCOME (LOSS) BEFORE TAXES AND EXTRAORDINARY EXPENSE.... (54,520) (3,806) (53,360) 2,385 8,282
Income taxes (benefit).................................. (21,518) (1,359) (8,008) 1,208 3,259
--------- -------- --------- -------- --------
Income (loss) before extraordinary expense.............. (33,002) (2,447) (45,352) 1,177 5,023
Extraordinary expense related to early retirement
of debt, net of income tax benefits (1)............... - - (7,401) - -
--------- -------- --------- -------- --------
NET INCOME (LOSS) (1)................................... $ (33,002) $ (2,447) $ (52,753) $ 1,177 $ 5,023
Preferred stock dividends............................. (23,813) (23,813) (16,132) $ - -
--------- -------- --------- -------- --------
Net income (loss) applicable to common stockholders... $ (56,815) $(26,260) $ (68,885) $ 1,177 $ 5,023
========= ======== ========= ======== ========
Earnings (loss) per share of common stock:
Before extraordinary expense......................... $(.78) $(.36) $(.87) $.02 $.09
Extraordinary expense (1)............................ - - (.10) - -
--------- -------- --------- -------- --------
Net income (loss).................................... $(.78) $(.36) $(.97) $.02 $.09
========= ======== ========= ======== ========
Average number of common shares outstanding.......... 72,967 72,967 70,834 53,976 53,973
========= ======== ========= ======== ========
20
AS OF DECEMBER 31,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
BALANCE SHEET DATA:
Total properties............................... $1,007,451 $1,087,119 $1,091,832 $1,129,634 $1,108,263
Total assets................................... 1,097,604 1,207,363 1,373,827 1,208,887 1,189,029
Mortgage and other debt........................ 496,180 530,641 663,764 887,185 862,557
Stockholders' equity........................... 442,874 499,689 525,949 145,923 144,686
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
CASH FLOW DATA:
Cash provided by (used for):
Operating activities.......................... $ 93,579 $ 51,089 $ 26,643 $ 51,551 $ 53,075
Investing activities.......................... (22,072) (80,389) (14,981) (55,612) (150,422)
Financing activities.......................... (60,684) (100,384) 120,212 7,664 100,866
---------- ---------- ---------- ---------- ----------
Total........................................ $ 10,823 $ (129,684) $ 131,874 $ 3,603 $ 3,519
========== ========== ========== ========== ==========
Capital expenditures:
Financed...................................... $ 20,601 $ 12,616 $ 2,171 $ 22,201 $ 65,103
Not financed.................................. 24,363 37,235 33,296 36,364 49,618
Capitalized interest.......................... 23,559 24,049 25,593 29,337 35,949
---------- ---------- ---------- ---------- ----------
Total....................................... $ 68,523 $ 73,900 $ 61,060 $ 87,902 $ 150,670
========== ========== ========== ========== ==========
OPERATING DATA:
Buildings owned (square feet)(2)............... 14,168 13,609 13,367 14,183 13,190
Leased percentage.............................. 95.1% 95.0% 94.9% 90.4% 84.3%
- -----------------
(1) Net income in 1993 reflects extraordinary expense relating to a redemption
premium paid to a lender and write-off of deferred financing costs on the
Company's $388.2 million first mortgage loan.
(2) Square feet owned excludes approximately 1.4 million square feet of existing
buildings, primarily at Mission Bay. These buildings will be razed as
development proceeds.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Historically, the aggregate costs of holding and operating the Company's real
estate assets and paying preferred stock dividends have exceeded revenue from
property operations, development and other recurring sources. In addition, the
Company's cash requirements have been increased by the funds necessary to
support the predevelopment and entitlement efforts for its major land
development projects. The resulting cash flow deficits have been funded by
borrowings, the issuance of preferred stock and the sale of sufficient assets to
meet the Company's overall cash requirements.
The Company's short term financial goal is to eliminate the cash flow deficits
resulting from interest and preferred stock dividends exceeding operating cash
flow by the fourth quarter of 1996. To do this, the Company has taken the
following steps:
. In November 1994, the Company implemented significant staff reductions to
reduce costs and reorganized to focus on increasing operating earnings.
These reductions, when combined with other cost-reduction measures, resulted
in annual cost savings for 1995 of approximately $10.1 million. General and
administrative costs declined by $3.7 million; overhead associated with
operating the portfolio declined by $3.4 million and overhead associated with
selling properties declined by $1.5 million. In addition, the Company has
benefited by a $1.5 million reduction in overhead costs associated with the
Company's development activities.
. In October 1995, the Company began the process of substantially increasing
its asset sales activity, with the primary focus on its non-strategic land
assets. Sale proceeds will be applied to a combination of debt reduction, in
order to reduce interest costs, and reinvestment in activities that could
generate increased operating earnings. The Company's goal is to sell $100
million of non-strategic land assets over a 15-month period ending December
31, 1996. Sales totaling $47.1 million closed in the fourth quarter of 1995.
. During 1995, the Company reduced its total debt by a net $34.5 million. This
net reduction represents the difference between $68.5 million of principal
reductions on existing borrowings and $34 million of new borrowings which
funded the development of pre-leased industrial and retail buildings. It is
expected that the debt service on the new borrowings will be covered by the
cash flow from the completed buildings; therefore, the Company's future
operations should be improved by the interest savings on the $68.5 million of
principal reductions.
. During 1995 and continuing into 1996, the Company has placed a greater
emphasis on increasing its development and fee development businesses.
During 1995, the Company commenced construction on 910,000 square feet of new
development, compared to 381,000 in 1994. In addition, at December 31, 1995,
the Company had signed leases for new development totalling 648,000 square
feet for which construction will commence in 1996. In March 1996, the
Company acquired The Akins Companies to better position itself to pursue
existing residential development opportunities on certain of its land
holdings, as well as to pursue fee development opportunities on land not
currently owned by the Company.
. During 1995 and continuing into 1996, the Company has also placed a greater
emphasis on increasing its third party management business. In January 1996,
the Company announced a new five-year contract to manage the non-railroad
real estate assets for the Burlington Northern Santa Fe Corporation.
. Beginning in 1994 and continuing throughout 1995, the Company undertook a
review of its major land development projects with the goal of increasing
profitability, minimizing up front capital requirements and shortening the
time required to develop the properties. As a result of this review, the
decision was made to
22
modify certain of the entitlements, abandon others and sell one property that
management believed could not be developed in a reasonable time frame. It is
management's expectation that these decisions will both accelerate the time
frame in which the projects will be developed and minimize the up front cash
requirements associated with development.
The Company's long-term financial goal is to increase its return on
stockholder equity. In order to accomplish this, the Company will continue with
the revenue enhancement and cost reduction initiatives discussed above and will
seek opportunities to reduce its capital commitment to projects through joint
ventures, where the Company would seek financial partners to participate in some
of its more capital intensive businesses. In addition, as the Company
completes its disposition program of non-strategic land assets, it will evaluate
opportunities to increase stockholder returns through strategic reinvestment
and/or stock repurchases.
RESULTS OF OPERATIONS
The following table (in thousands) summarizes the Company's operating deficit
after adjustment for fixed charges, leasing costs and joint venture cash flow.
The Company believes that this presentation is meaningful in order to understand
its progress in achieving its near-term goal of eliminating operating cash flow
deficits by the fourth quarter of 1996.
1995 1994 1993
---------- ---------- ----------
Operating income
Rental revenue $108,068 $104,432 $109,544
Property operating costs (39,576) (39,749) (41,499)
Equity in earnings of joint ventures 7,035 7,982 1,818
Management and development fee income 1,924 2,151 2,260
General and administrative expenses (11,841) (15,550) (13,143)
Gain on sale of development properties 953 - -
-------- -------- --------
66,563 59,266 58,980
Fixed charges - interest and dividends
Total interest costs, net of interest income (45,547) (44,981) (65,432)
Preferred dividends (23,813) (23,813) (16,132)
Add back non-cash components of interest expense 2,861 3,559 7,834
-------- -------- --------
(66,499) (65,235) (73,730)
Leasing costs
Depreciation on tenant improvements (7,146) (8,198) (9,373)
Amortization of lease commissions (2,504) (2,758) (3,044)
-------- -------- --------
(9,650) (10,956) (12,417)
Difference between earnings and net cash
distributions from joint ventures 1,297 (7,596) (748)
-------- -------- --------
Operating deficit after adjustment for fixed charges,
leasing costs and joint venture cash flow $ (8,289) $(24,521) $(27,915)
======== ======== ========
23
Comparison of 1995 to 1994
The Company had 1995 operating income of $66.6 million compared to $59.3
million for 1994. This improvement resulted primarily from the overhead
reduction program initiated at the end of 1994, as well as increased rental
revenue.
The more significant changes in rental revenue and property operating costs
are summarized below (in millions):
Change
-----------------------
Rental Operating
revenue costs
-------- ----------
Industrial buildings $ .1 $ (.8)
Retail buildings 4.0 .6
Office buildings (1.0) 1.0
Other income producing properties .5 -
Land holdings - (1.0)
----- -----
Total change $ 3.6 $ (.2)
===== =====
The increase in revenue for industrial buildings was due to new buildings
completed in 1995 and the fourth quarter of 1994, and was partially offset by
reduced rentals from existing properties. Operating costs for the industrial
portfolio decreased due to the staff reductions described earlier. The increase
in revenue and costs for retail buildings was primarily due to the completion of
the East Baybridge shopping center in late 1994. Rental revenue for the
Company's office portfolio decreased primarily due to the expiration of an above
market lease in one building and a reduction in occupancy from 96% at the end of
1994 to 92% at the end of 1995. In addition, the Company's operating costs for
its office portfolio increased $1 million due to increased property taxes
resulting from the reassessment of an office building.
Land holding costs decreased due to the sale of $62.2 million of non-
strategic land assets and the overhead reduction program described above.
Joint venture earnings decreased $.9 million. The decrease consists
principally of $2.5 million in land sales in 1994 from one joint venture,
partially offset by significantly improved operating results from a hotel joint
venture.
General and administrative costs decreased in 1995 due to the staff
reductions described earlier.
Net interest costs increased $.6 million, representing the net effect of
additional borrowings which funded the Company's development activity offset by
a reduction in interest rates in 1995 as compared to 1994. As described
earlier, the Company's future operations should be improved in 1996 by the
interest savings on $68.5 million of principal reductions, $58 million of which
occurred at year-end.
During 1995, the Company capitalized $23.6 million of interest compared to
$24 million in 1994. Of the interest capitalized in 1995, $16.3 million related
to the Company's Mission Bay project. As described below, the Company took an
$84.8 million charge in 1995 resulting from its decision to terminate the
Development Agreement for Mission Bay. In the future, the Company will not
capitalize interest and property taxes relating to Mission Bay until it has
received revised entitlements and commences development.
In October 1995, the Company announced a goal of selling $100 million of
non-strategic land assets over a 15 month period ending December 31, 1996.
Sales totalling $47.1 million closed in the fourth quarter, and the Company had
contracts for the sale of an additional $23.6 million at December 31, 1995.
(One contract for $8 million was cancelled subsequent to year-end; however, the
Company does not believe this will have a material
24
impact on its ability to meet its sales goals). Total asset sales in 1995 were
$65.4 million, consisting of $62.2 million of non-strategic land assets and $3.2
million of developed industrial property. In 1994, total asset sales were $53.8
million, and included $21.5 million of income producing properties. In addition
to its non-strategic land assets, the Company had open contracts for the sale of
$21.1 million of other properties at December 31, 1995.
During 1995, the Company took a non-cash, pre-tax charge of $102.4 million
to adjust the carrying value of certain property, which included $84.8 million
resulting from the Company's decision to terminate the 1991 Development
Agreement for its Mission Bay project in San Francisco. This agreement provided
for the development of 4.8 million square feet of office space, market rate and
affordable housing, retail and industrial uses. The Company completed an
analysis of the implications of the 1991 Development Agreement in light of
current and anticipated market conditions and projected construction costs and
concluded that the financial obligations imposed by that agreement render the
project uneconomic. Management therefore elected to terminate the 1991
Development Agreement and seek approval of a revised entitlement package which
would include: more housing and retail and less office space; a phased
development approach which would require less upfront investment; and the use of
tax increment financing, as provided by redevelopment law, to finance a
significant portion of the public infrastructure and affordable housing.
The Company has taken an additional charge against earnings of $17.6
million relating to other property where the carrying costs exceed what
management expects to recover through the anticipated sale of such property.
In addition to the charge against earnings discussed above, the 1995
results include income of $6.5 million for the favorable reversal of a
litigation award and a $7.4 million charge to environmental expense as a result
of management's reassessment of potential environmental exposures. The 1994
results included a $3.1 million restructuring charge and a $24.1 million
property write-down.
Comparison of 1994 to 1993
The Company had 1994 operating income of $59.3 million compared to $59
million for 1993. This improvement resulted from increased joint venture
earnings, offset by higher overhead costs.
The more significant changes in rental revenue and property operating costs
are summarized below:
Change
---------------------
Rental Operating
revenue costs
-------- ----------
Industrial buildings $ (.4) $ (.3)
Office buildings 1.1 .2
Retail buildings .6 -
Land leases (.9) (.3)
Other income producing properties (.8) .2
Land holdings (4.7) (1.6)
----- -----
Total change $(5.1) $(1.8)
===== =====
Rental revenue for the income producing portfolio decreased primarily due
to the sale of 1.1 million square feet of industrial buildings, .2 million
square feet of office buildings, .1 million square feet of retail buildings and
12 land leases in late 1993 and in 1994. Together, these sales had the impact of
reducing rental income $5.3 million in 1994. The reductions were partially
offset by rental income from industrial and retail buildings completed in 1994
and by an increase in occupancy from 91.6% at the end of 1993 to 95.9% at the
end of 1994 in the office portfolio. Property operating costs for the income
producing portfolio declined slightly due to the building and land lease sales
referred to above.
25
Rental revenue from land holdings decreased principally due to leases for
temporary rentals in 1993 that expired in 1994. Related operating costs
decreased due to the sale of $32.3 million of non-strategic land assets.
Joint venture earnings increased significantly in 1994 as a result of
property sales by one joint venture and improved operating results of a hotel
joint venture. The increase in general and administrative expenses was caused
by executive severance and search costs, as well as increased use of outside
professional services. Interest expense decreased principally because of the
refinancing of the Prudential loan at a lower interest rate, as well as paydown
of other loans and the conversion of the debenture.
The decrease in the gain on property sales resulted from both lower sales
and higher cost basis in properties sold. Property sales in 1994 included $21.5
million from sales of buildings and land leases, which generated gross profit of
$3 million, and land sales of $32.3 million which generated gross profit of
$10.3 million. For 1993, sales and gross profit for buildings and land leases
were $46.1 million and $22.7 million; land sales of $26.4 million generated
gross profit of $10.5 million.
During 1994, the Company also took a non-cash $24.1 million adjustment to
the carrying value of property and a non-cash $3.1 million restructuring
charge. The 1993 results included a $29.6 million charge for the conversion of
a convertible debenture into common stock, an $11.9 million extraordinary
expense in connection with the Prudential refinancing, an $8.3 million reserve
for a litigation award, and a $32.5 million adjustment to the carrying value of
property.
LIQUIDITY AND FINANCIAL RESOURCES
Cash flow from operating activities
Cash provided by operating activities reflected in the statement of cash
flows in 1995, 1994 and 1993 was $93.6 million, $51.1 million and $26.6 million.
The increase in 1995 is primarily due to a higher level of land sales, an
increase in cash from rental operations, and lower general and administrative
costs. The increase in 1994 is primarily attributable to a decrease in interest
costs from refinancing of the Company's debt.
Cash generated from sales of land was $55.3 million, $21.5 million and
$17.8 million in 1995, 1994 and 1993. Cash generated from rental operations
increased principally because of new buildings. For the five years from 1996
through 2000, leases for 20.1%, 14.0%, 7.4%, 8.7% and 10.1% of total square
footage are scheduled to expire.
Cash flow from investing activities
Net cash flow from investing activities reflected in the statement of cash
flows increased $58.3 million from 1994 to 1995 and decreased $65.4 million from
1993 to 1994. The increase in 1995 resulted primarily from the conversion of
short-term commercial paper and government securities into cash, offset by lower
cash generated by the sale of investment and other properties. The decrease in
1994 is primarily attributable to the investment of cash into short-term
commercial paper and government securities, a reduction in proceeds from sales
of operating properties and an increase in capital expenditures. Net cash used
for investing activities included the following capital expenditures (in
millions):
1995 1994 1993
------ ------ ------
Construction and building improvements $16.5 $31.2 $16.6
Tenant improvements 2.4 4.0 3.5
Predevelopment, infrastructure, acquisitions and other 23.5 12.2 12.7
Capitalized interest and property taxes 26.1 26.5 28.3
----- ----- -----
$68.5 $73.9 $61.1
===== ===== =====
26
Cash flow from financing activities
Net cash used by financing activities reflected in the statement of cash
flows in 1995 and 1994 was $60.7 million and $100.4 million; net cash provided
by financing activities in 1993 was $120.2 million. These amounts reflect
borrowing and repayment activity relating to operating properties (including
principal amortization), capital expenditures and general corporate purposes.
In 1995, the Company closed a $47 million secured term loan to refinance
properties which were previously financed by loans which matured. The Company
also closed a $33 million secured term loan which refinanced an existing
maturing construction loan and reimbursed the Company for previously expended
costs. In addition, the Company closed construction loans totalling $18.7
million. The 1994 and 1993 amounts reflect principally the net proceeds from
the Series A and B preferred stock offerings, and the use of a part of those
proceeds to repay debt, as described below.
At December 31, 1995, the Company had total outstanding debt of $496.2
million, of which 73% was non-recourse to the Company and secured by the
underlying property only, 25% was recourse to the Company and also secured by
underlying property, and 2% was unsecured. During the next twelve months, $85.1
million of debt matures; 77% of this amount is construction financing or
intermediate term loans, which are expected to be extended, refinanced and
converted into permanent loans or repaid.
Refinancing of Prudential Mortgage Loan
In February 1994, the Company refinanced its $388.2 million mortgage loan
from The Prudential Insurance Company of America with cash generated from the
issuance of preferred stock and a $280 million mortgage loan due March 1, 2004.
In connection with this refinancing, the Company also paid down $10 million of
another mortgage loan from Prudential due January 1, 1996, and incurred an
extraordinary expense of $11.9 million ($7.4 million, net of income tax
benefits). This extraordinary expense consisted of a $10 million redemption
premium paid to Prudential and the write-off of deferred financing costs
associated with the $388.2 million loan. The reduced interest resulting from
the above debt paydowns, as well as other debt paydowns in 1993 and 1994, was
partially offset by the increased dividend requirements of the preferred stock
sold in 1993.
Debt covenants
Certain of the Company's loan agreements contain restrictive financial
covenants and several agreements are cross-defaulted. The most restrictive
covenants limit annual dividends to $27.6 million and require stockholders'
equity to be no less than $425 million. The stockholders' equity covenant was
amended effective December 31, 1995, changing the requirement from $475 million
to $425 million. As a result, at December 31, 1995, the Company had a cushion
of $17.9 million under that covenant.
Cash balances and available borrowings
At December 31, 1995, cash and cash equivalents totalled $27.7 million. In
addition, the Company had available $48 million under its working capital
facility, $33.2 million under its construction facilities, and $.5 million under
its secured term loan facilities.
In December 1995, the Company renewed its unsecured revolving facility
which was due to expire on December 31, 1995. Upon renewal, the facility was
reduced to $48 million from $62.5 million ($75 million at December 31, 1994) and
the revolving period was extended to December 31, 1996.
In January 1995, the Company entered into an $85 million revolving
construction line of credit and in July 1995 increased the line an additional
$15 million. This credit facility renews and increases a $75.5 million credit
line. In July 1995, the Company entered into another $25 million revolving
construction line of credit. The credit facility will be used to fund new
Company development in twelve states in the Southwest.
27
Income Taxes
At December 31, 1995, the Company's deferred tax liability consisted of
deferred tax assets totalling $136 million and deferred tax liabilities of $226
million. Deferred tax assets included $13 million relating to net operating
loss carryforwards (NOLs) of $35.8 million. NOLs of $12.1 million, $16.9
million, $6.5 million and $.3 million expire in 2006, 2007, 2008 and 2009. The
Company's other deferred tax assets of $123 million relate primarily to
differences between book and tax basis of properties. These deferred tax assets
are not subject to expiration and will likely be realized at the time of taxable
dispositions of the properties. Deferred tax liabilities in excess of deferred
tax assets are often associated with the same property, with the result that the
deferred tax asset will likely be realized in a taxable disposition, without
regard to other taxable income. The Company believes it is more likely than not
that it will realize the benefit of its deferred tax assets, and that no
valuation allowance is required. In making this determination, the Company
considered: the nature of its deferred tax assets (and liabilities); the amounts
and expiration dates of its NOLs; the historical levels of taxable income; the
significant unrealized appreciation of its properties, including surplus
properties likely to be sold during the NOL carryforward periods; and its
ability to control the timing of property sales in order to assure that deferred
tax assets will be offset by deferred tax liabilities or realized appreciation.
ENVIRONMENTAL MATTERS
Many of the Company's properties are in urban and industrial areas and may
have been leased to commercial or industrial tenants who may have discharged
hazardous materials. From 1993 to 1995, expensed and capitalized environmental
costs, including legal fees, totalled $22.5 million. The Company expects to
spend $6.7 million for such costs in 1996. These costs may increase as the
Company develops its major projects.
Future environmental costs are difficult to estimate with certainty. The
Company and outside consultants have evaluated the environmental liabilities
associated with most of the Company's properties, however any evaluation
necessarily is based on the prevailing law and identified site conditions at
that time. Although the Company closely monitors its environmental costs, the
size of the portfolio precludes extensive review of every property on a regular
basis.
Environmental costs incurred in connection with operating properties and
properties previously sold are expensed. At December 31, 1995, management has
provided a reserve of $13.8 million for such costs. These costs are expected to
be incurred over an estimated ten-year period, with a substantial portion
incurred over the next five years.
Costs incurred for properties to be sold are deferred and will be charged
to cost of sales when the properties are sold. Costs relating to undeveloped
properties are capitalized as part of development costs. At December 31, 1995,
the Company's estimate of its potential liability for identified environmental
costs relating to properties to be developed or sold ranged from $18 million to
$59 million. These costs generally will be capitalized as they are incurred,
over the course of the estimated development period of approximately 20 years.
Although an unexpected event could have a material impact on the results of
operations for any period, the Company does not believe that such costs for
identified liabilities will have a material adverse effect on its financial
position, results of operations or cash flow. See Note 2 to the Consolidated
Financial Statements.
SUPPLEMENTAL CURRENT VALUE
Historically, the Company has provided an annual supplemental current value
balance sheet in addition to historical cost financial statements. The Company
discontinued this practice in 1995. In the past, this disclosure was an
attempt to address the difference between the low historical cost of the
Company's assets and their current value. However, the current value process is
expensive and has significant limitations. In particular, short-term values can
fluctuate resulting from changes in interest rates, capitalization rates and
development assumptions that
28
are not necessarily indicative of the long term value of the Company's
portfolio. Management believes that, over time, a more relevant measure of the
long-term value of the Company is its growth in cash flow.
For 1995, the Company has provided supplemental current value information
on land assets and joint venture investments (along with an appraiser's opinion)
and has also provided expanded financial data so that investors can better
evaluate the performance of its income producing assets. In future years, the
Company expects to discontinue current value reporting altogether.
As of December 31, 1995, the Company's land portfolio and joint venture
portfolio had a current value of $1.039 billion compared to $1.037 billion for
the same assets in 1994. Although the total value was relatively unchanged, the
Company experienced increased values for its joint venture investments and
portions of its industrial development portfolio. These increases were
partially offset by reductions in certain of the Company's larger land parcels.
RISK FACTORS
The statements contained herein which are not historical facts are forward-
looking statements based on economic forecasts, strategic plans and other
factors which, by their nature, involve risk and uncertainties. In particular,
among the factors that could cause actual results to differ materially are the
following: business conditions and general economy; competitive factors;
political decisions affecting land use permits, interest rates and other risks
inherent in the real estate business. For further information on factors which
could impact the Company and the statements, reference is made to the Company's
filings with the Securities and Exchange Commission.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules required under Regulation S-X
promulgated under the Securities Act of 1933 are identified in Item 14 and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
PART III
Except for the information relating to the executive officers of the
Company set forth in Part I of this Annual Report on Form 10-K, the information
required by the following items in this Part III is hereby incorporated by
reference to the relevant sections contained in the Company's definitive Proxy
Statement ("1996 Proxy Statement") which will be filed with the Securities and
Exchange Commission in connection with the 1996 Annual Meeting of Stockholders.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the section captioned "Election of Directors" in the
1996 Proxy Statement is incorporated herein by reference.
The information in the section captioned "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the 1996 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the sections captioned "Election of Directors--
Directors' Compensation," "Employment and Severance Agreements" and
"Compensation of Executive Officers" included in the 1996 Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the sections captioned "Security Ownership of Directors,
Nominees and Executive Officers" and "Security Ownership of Certain Beneficial
Owners" in the 1996 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section captioned "Certain Transactions" in the 1996
Proxy Statement is incorporated herein by reference.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) AND (A)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See Index to Financial Statements and Financial Statement Schedules at F-1
herein.
All other Schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(A)(3) EXHIBITS
Exhibit
No.
- -------
3.1 Form of Restated Certificate of Incorporation of the Registrant (1)
3.1A Amendment to Restated Certificate of Incorporation of the Registrant (8)
3.3 Form of Certificate of Designations, Preferences and Rights of $3.25
Series A Cumulative Convertible Preferred Stock (2)
3.4 By-Laws, as amended*
3.5 Form of Certificate of Designations, Preferences and Rights of $3.625
Series B Cumulative Convertible Exchangeable Preferred Stock (8)
4.1 Form of stock certificate representing Common Stock (1)
4.9 Form of stock certificate representing $3.75 Series A Cumulative
Convertible Preferred Stock (2)
4.10 Form of stock certificate representing $3.625 Series B Cumulative
Convertible Exchangeable Preferred Stock (8)
4.11 Loan Agreement dated as of February 16, 1994 between the Registrant and
The Prudential Insurance Company of America (9)
10.1 Exploration Agreement and Option to Lease dated December 28, 1989
between the Registrant and Santa Fe Pacific Minerals Corporation (1)
10.4 Registration Rights Agreement dated as of December 29, 1989 among the
Registrant, BAREIA, O&Y and Itel (1)
10.4A Letter Agreement dated November 14, 1995 between the Registrant and
California Public Employees' Retirement System
10.6 Restated Tax Allocation and Indemnity Agreement dated December 29, 1989
among the Registrant and certain of its subsidiaries and Santa Fe
Pacific Corporation ("SFP") (1)
10.7 State Tax Allocation and Indemnity Agreement dated December 29, 1989
among the Registrant and certain of its subsidiaries and SFP (1)
10.13 Registrant's Incentive Stock Compensation Plan (3)
10.14 Management Agreement between ATSF and Catellus Management Corporation
dated October 15, 1994 (10)
10.15 Termination, Substitution and Guarantee Agreement between ATSF and the
Registrant dated December 21, 1990 (4)
10.16 Registrant's Stock Option Plan (4)
10.17 Development Agreement dated April 1, 1991 between the Registrant and
the San Francisco Board of Supervisors (5)
10.21 Amended and Restated Executive Stock Option Plan (8)
10.26 Form of First Amendment to Registration Rights Agreement among the
Registrant, BAREIA, O&Y and Itel (6)
10.29 Amended and Restated Executive Employment Agreement dated as of November
29, 1995 between the Registrant and Nelson C. Rising*
32
10.30 Executive Employment Agreement dated February 10, 1995 between the
Registrant and Timothy J. Beaudin (10)
10.31 Amended and Restated Stock Option Agreement dated March 22, 1996 between
the Registrant and Joseph R. Seiger*
10.32 Special Severance Pay Plan and Summary Plan Description (10)
10.33 Form of Memorandum Regarding Reduction-In-Force Program (10)
10.34 Consulting Agreement dated December 23, 1994 between the Registrant and
James G. O'Gara (10)
10.35 Memorandum of Understanding dated December 22, 1994, addressed to James
W. Augustino (10)
10.36 Memorandum of Understanding dated December 19, 1994, addressed to Thomas
W. Gille (10)
10.37 Employment Agreement dated July 24, 1996 between the Registrant and
Stephen P. Wallace*
10.38 Letter Agreement dated March 24, 1995 between the Registrant and Donald
M. Parker*
10.39 Stock Option Award Agreement dated as of January 1, 1996 between the
Registrant and Joseph R. Seiger*
10.40 Revised Memorandum of Understanding dated November 15, 1995 between the
Registrant and Theodore L. Tanner*
10.41 Memorandum of Understanding dated February 16, 1996 between the
Registrant and Jeffrey K. Gwin*
10.42 Consulting Agreement dated February 25, 1996, between the Registrant and
Jeffrey K. Gwin*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Independent Accountants*
23.2 Consent of Independent Real Estate Appraisers*
24.1 Powers of Attorney from directors with respect to the filing of the
Form 10-K*
27 Financial Data Schedule*
99.1 Report of the Independent Real Estate Appraisers dated March 12, 1996
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.
(b) Reports on Form 8-K
None.
- -----------
* Filed with this report on Form 10-K.
(1) Incorporated by reference to Exhibit of the same number of the Registration
Statement on Form 10 (Commission File No. 0-18694) as filed with the
Commission on July 18, 1990 ("Form 10").
(2) Incorporated by reference to Exhibit of the same number on the Form 8
constituting a Post-Effective Amendment No. 1 to the Form 8-A as filed with
the Commission on February 19, 1993.
(3) Incorporated by reference to Exhibit of the same number of the Form 8
constituting Post-Effective Amendment No. 1 to the Form 10 as filed with the
Commission on November 20, 1990.
(4) Incorporated by reference to Exhibit of the same number on the Form 10-K for
the year ended December 31, 1990.
(5) Incorporated by reference to Exhibit of the same number on the Form 10-K for
the year ended December 31, 1990, referred to therein as "Development
Agreement dated February 19, 1991 between the Registrant and the San
Francisco Board of Supervisors".
(6) Incorporated by reference to Exhibit of the same number of Amendment No. 2
to Form S-3 as filed with the Commission on February 4, 1993.
(7) Incorporated by reference to Exhibit of the same number on the Form 10-Q for
the quarter ended September 30, 1993.
(8) Incorporated by reference to Exhibit of the same number on the Form 10-K for
the year ended December 31, 1993.
33
(9) Incorporated by reference to Exhibit of the same number of Amendment No. 1
to the Form 10-K for the year ended December 31, 1993.
(10) Incorporated by reference to Exhibit of the same number on the Form 10-K
for the year ended December 31, 1994.
34
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
By _______________________________
Nelson C. Rising
President and Chief
Executive Officer
Dated: March 30, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Catellus
Development Corporation and in the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
___________________________ President, Chief Executive March 30, 1996
Nelson C. Rising Officer and Director
Principal Executive
Officer
___________________________ Senior Vice President March 30, 1996
Stephen P. Wallace and Chief Financial Officer
Principal Financial
Officer
____________________________ Vice President and Controller March 30, 1996
Paul A. Lockie Principal Accounting
Officer
35
Signature Title Date
- --------- ----- ----
* Director March 30, 1996
- -----------------------------
Joseph F. Alibrandi
* Director
- -----------------------------
Daryl J. Carter
* Director
- -----------------------------
Christine Garvey
* Chairman of the Board,
- ----------------------------- Director
Joseph R. Seiger
* Director
- -----------------------------
Jacqueline R. Slater
* Director
- -----------------------------
Thomas M. Steinberg
* Director
- -----------------------------
Tom C. Stickel
* Director
- -----------------------------
Beverly Benedict Thomas
By __________________________
Paul A. Lockie March 30, 1996
Attorney-in-fact
36
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT
SCHEDULES (ITEMS 14(a)(1) AND (a)(2))
-------------------------------------
Page
----
(a)(1) FINANCIAL STATEMENTS
Report of Independent Accountants dated February 12, 1996 F-2
Consolidated Balance Sheet at December 31, 1995 and 1994 F-3
Consolidated Statement of Operations
for the years ended December 31, 1995, 1994 and 1993 F-4
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-8
Summarized Quarterly Results (Unaudited) F-22
(a)(2) FINANCIAL STATEMENT SCHEDULES
Page
----
Report of Independent Accountants dated February 12, 1996 S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedule III - Real Estate and Accumulated Depreciation S-3
Attachment A to Schedule III S-4
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Catellus Development Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Catellus Development Corporation and its subsidiaries at December 31, 1995 and
1994 and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. The financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Francisco, California
February 12, 1996
F-2
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
---------------------------
1995 1994
------------ ------------
ASSETS
Properties.................................... $1,191,679 $1,248,398
Less accumulated depreciation................. (184,228) (161,279)
---------- ----------
1,007,451 1,087,119
Other assets and deferred charges............. 44,530 49,584
Notes receivable.............................. 7,550 7,961
Accounts receivable, less allowances.......... 10,330 10,712
Restricted cash and short-term investments.... - 35,067
Cash and cash equivalents..................... 27,743 16,920
---------- ----------
Total................................. $1,097,604 $1,207,363
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage and other debt....................... $ 496,180 $ 530,641
Accounts payable and accrued expenses......... 33,913 38,876
Deferred credits and other liabilities........ 34,367 25,495
Deferred income taxes......................... 90,270 112,662
Commitments and contingencies (Note 14)
Stockholders' equity
Preferred stock............................. 322,500 322,500
Common stock, 72,967,236 shares issued at
December 31, 1995 and 1994.............. 730 730
Paid-in capital............................. 196,525 220,338
Accumulated deficit......................... (76,881) (43,879)
---------- ----------
Total stockholders' equity.................. 442,874 499,689
---------- ----------
Total................................. $1,097,604 $1,207,363
========== ==========
See notes to consolidated financial statements.
F-3
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
RENTAL REVENUE...................................... $ 108,068 $ 104,432 $109,544
PROPERTY OPERATING COSTS............................ 39,576 39,749 41,499
GAIN ON SALES OF PROPERTY........................... 33,742 13,307 33,165
OTHER INCOME (EXPENSE)
Equity in earnings of joint ventures............... 7,035 7,982 1,818
Management and development fee income.............. 1,924 2,151 2,260
General and administrative expense................. (11,841) (15,550) (13,143)
Interest expense, net.............................. (21,988) (20,932) (39,839)
Depreciation and amortization...................... (27,990) (28,577) (31,117)
Adjustment to carrying value of property........... (102,400) (24,100) (32,500)
Other, net......................................... (1,494) (2,770) (42,049)
--------- --------- --------
(156,754) (81,796) (154,570)
--------- --------- --------
LOSS BEFORE TAXES AND EXTRAORDINARY EXPENSE......... (54,520) (3,806) (53,360)
Income taxes (benefit)
Current............................................ 1,014 186 42
Deferred........................................... (22,532) (1,545) (8,050)
--------- --------- --------
(21,518) (1,359) (8,008)
--------- --------- --------
Loss before extraordinary expense................... (33,002) (2,447) (45,352)
Extraordinary expense related to early retirement
of debt, net of income tax benefit of $4,535...... - - (7,401)
--------- --------- --------
NET LOSS............................................ $ (33,002) $ (2,447) $(52,753)
Preferred stock dividends........................ (23,813) (23,813) (16,132)
--------- --------- --------
Net loss applicable to common stockholders....... $ (56,815) $ (26,260) $(68,885)
========= ========= ========
Loss per share of common stock:
Loss before extraordinary expense.............. $(.78) $(.36) $(.87)
Extraordinary expense.......................... - - (.10)
--------- --------- --------
Net loss....................................... $(.78) $(.36) $(.97)
========= ========= ========
Average number of common shares outstanding..... 72,967 72,967 70,834
========= ========= ========
See notes to consolidated financial statements.
F-4
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
RETAINED
PREFERRED STOCK COMMON STOCK EARNINGS
------------------ ------------------ PAID-IN (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT)
------ --------- ------ --------- ---------- ----------
Balance at December 31, 1992.............. - $ - 53,977 $ 540 $117,930 $27,453
Issuance of common stock............... - - 18,990 190 140,810 -
Issuance of Series A preferred stock... 3,450 172,500 - - (8,089) -
Issuance of Series B preferred stock... 3,000 150,000 - - (6,500) -
Series A preferred stock dividends..... - - - - - (13,081)
Series B preferred stock dividends..... - - - - - (3,051)
Net loss............................... - - - - - (52,753)
----- -------- ------ ------- -------- --------
Balance at December 31, 1993.............. 6,450 322,500 72,967 730 244,151 (41,432)
Series A preferred stock dividends..... - - - - (12,938) -
Series B preferred stock dividends..... - - - - (10,875) -
Net loss............................... - - - - - (2,447)
----- -------- ------ ------- -------- --------
Balance at December 31, 1994.............. 6,450 322,500 72,967 730 220,338 (43,879)
Series A preferred stock dividends..... - - - - (12,938) -
Series B preferred stock dividends..... - - - - (10,875) -
Net loss............................... - - - - - (33,002)
----- -------- ------ ------- -------- --------
Balance at December 31, 1995.............. 6,450 $322,500 72,967 $ 730 $196,525 $(76,881)
===== ======== ====== ======= ======== ========
See notes to consolidated financial statements.
F-5
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $(33,002) $ (2,447) $(52,753)
Non-cash items included in net loss:
Extraordinary expense related to early retirement of debt,
before income tax benefit................................... - - 11,936
Expense related to conversion of debenture................... - - 29,552
(Recovery) accrual related to litigation..................... (6,450) - 8,300
Adjustment to carrying value of property..................... 102,400 24,100 32,500
Depreciation and amortization................................ 27,990 28,577 31,117
Deferred income taxes........................................ (22,392) (1,667) (12,584)
Interest accrued on convertible debenture.................... - - 1,665
Amortization of deferred loan fees and other costs........... 2,743 2,940 5,560
Equity in earnings of joint ventures......................... (7,035) (7,982) (1,818)
Cost of land sold............................................ 21,617 10,768 9,624
Gain on sale of investment and other properties.............. (953) (3,201) (22,999)
Other-net.................................................... 8,674 3,963 2,925
Changes in:
Accounts and notes receivable................................ 1,306 (2,248) (2,534)
Other assets and deferred charges............................ (5,652) (8,014) (12,693)
Accounts payable and accrued expenses........................ 850 3,145 (1,066)
Other........................................................ 3,483 3,155 (89)
-------- -------- --------
Net cash provided by operating activities 93,579 51,089 26,643
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... (68,523) (73,900) (61,060)
Net proceeds from sale of investment and other properties..... 3,052 28,192 45,009
Distributions from joint ventures............................. 9,906 7,114 1,324
Contributions to joint ventures............................... (1,574) (6,728) (254)
Reduction (investment) in short-term investments and
restricted cash............................................. 35,067 (35,067) -
-------- -------- --------
Net cash used for investing activities......................... $(22,072) $(80,389) $(14,981)
-------- -------- --------
See notes to consolidated financial statements.
F-6
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS-(CONTINUED)
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings............................................... $ 99,013 $ 328,408 $ 15,493
Repayment of borrowings.................................. (135,884) (462,002) (126,533)
Dividends paid........................................... (23,813) (24,145) (9,847)
Proceeds from issuance of preferred stock................ - - 322,500
Stock issuance costs..................................... - (55) (13,991)
Investment in restricted cash used for reduction of debt. - 67,410 (67,410)
Redemption premium on early retirement of debt........... - (10,000) -
--------- --------- ---------
Net cash provided by (used for) financing activities........ (60,684) (100,384) 120,212
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 10,823 (129,684) 131,874
Cash and cash equivalents at beginning of year.............. 16,920 146,604 14,730
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 27,743 $ 16,920 $ 146,604
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)....................... $ 23,208 $ 22,895 $ 36,901
Income taxes............................................... $ 444 $ 324 $ 38
See notes to consolidated financial statements.
F-7
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
Headquartered in San Francisco, Catellus Development Corporation (the
Company) is a full service real estate company that manages and develops real
estate for its own account and others. The Company's portfolio of industrial,
retail and office projects, undeveloped land and joint venture interests are
located in major markets in California and 10 other states. The Company's
operating properties consist primarily of industrial facilities, along with a
number of office and retail buildings located in California, Arizona, Illinois,
Texas, Colorado and Oregon. The Company also has substantial undeveloped land
holdings primarily in these same states.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The accompanying financial statements include
the accounts of the Company and investees over 50% owned which are controlled by
the Company. All other investees are accounted for using the equity method.
Revenue recognition - Rental revenue, in general, is recognized when due
from tenants; however, revenue from leases with rent concessions is recognized
on a straight-line basis over the initial term of the lease. Direct costs of
negotiating and consummating a lease are deferred and amortized over the initial
term of the related lease.
The Company recognizes revenue from the sale of properties using the
accrual method. Sales not qualifying for full recognition at the time of sale
are accounted for under the installment method. In general, specific
identification is used to determine the cost of sales. Estimated future costs
to be incurred by the Company after completion of each sale are included in cost
of sales.
Cash, restricted cash and short-term investments - The Company considers
all highly liquid investments with a maturity of three months or less at time of
purchase to be cash equivalents. Restricted cash in 1994 represents amounts
held in escrow in connection with a property transaction. Short-term
investments in 1994 represent primarily commercial paper and government
securities which mature within one year from time of purchase and had an average
yield of 5.42%.
Financial instruments - The cost basis of the Company's notes receivable
and debt approximate fair value, based upon current market rates for commercial
real estate loans of similar risks and maturities.
Property and deferred costs - Real estate is stated at the lower of cost or
estimated fair value. In cases where the Company determines that the carrying
costs for properties held for sale exceeds estimated fair value, or that an
impairment has been sustained, a write-down to estimated fair value is recorded.
A property is considered impaired when the property's estimated undiscounted
future cash flow, before interest charges, is less than its book value. This
evaluation is made on a property by property basis. The evaluation of fair
value and undiscounted cash flow requires significant judgement; it is
reasonably possible that a change in the estimate could occur. The adoption of
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" had
no impact on the Company's financial statements.
The Company capitalizes construction and development costs. Costs
associated with financing or leasing projects are also capitalized and amortized
over the period benefitted by those expenditures.
F-8
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation is computed using the straight-line method. Buildings and
improvements are depreciated using lives of between 20 and 40 years. Tenant
improvements are depreciated over the primary terms of the leases (generally 3-
15 years), while furniture and equipment are depreciated using lives ranging
between 3 and 10 years.
Maintenance and repair costs are charged to operations as incurred, while
significant improvements, replacements and major renovations are capitalized.
Allowance for uncollectible accounts - Accounts receivable are net of an
allowance for uncollectible accounts totalling $1.8 million and $1.9 million at
December 31, 1995 and 1994. The provision for uncollectible accounts in 1995,
1994 and 1993 totalled $.5 million, $1.0 million and $.1 million.
Environmental costs - The Company incurs on-going environmental remediation
costs, including clean-up costs, consulting fees for environmental studies and
investigations, monitoring costs, and legal costs relating to clean-up,
litigation defense, and the pursuit of responsible third parties. Costs
incurred in connection with operating properties and properties previously sold
are expensed. Costs relating to undeveloped land are capitalized as part of
development costs. Costs incurred for properties to be sold are deferred and
will be charged to cost of sales when the properties are sold. Environmental
costs charged to operations, including amounts charged to cost of sales, for
1995, 1994 and 1993 totalled $8.1 million, $4.6 million and $5.5 million.
Environmental costs capitalized in 1995, 1994 and 1993 were $1.7 million, $1.2
million and $1.4 million. The Company maintains a reserve, included in the
caption "deferred credits and other liabilities", for known, probable costs of
environmental remediation to be incurred in connection with operating properties
and properties previously sold. This reserve was $13.8 million and $8.4 million
at December 31, 1995 and 1994. When there is a legal requirement for
environmental remediation of developable land, the Company will accrue for the
estimated cost of remediation and capitalize that amount. Where there is no
legal requirement for remediation, costs will be capitalized, as incurred, as
part of the project costs.
Income taxes - Income taxes are recorded based on the future tax effects of
the difference between the tax and financial reporting basis of the Company's
assets and liabilities. In estimating future tax consequences, expected future
events are considered except for potential income tax law or rate changes.
Loss per share - Net loss per share of common stock is computed by dividing
net loss, after reduction for preferred stock dividends, by the weighted average
number of shares of common stock outstanding during the year. Fully diluted
earnings per share amounts have not been presented because assumed conversion of
the Series A and Series B preferred stock would be anti-dilutive for all
relevant periods. Assuming conversion of the Debenture on January 1, 1993, the
net loss and loss before extraordinary item for 1993 would have been $.93 and
$.84 per share.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenue and expenses. Actual results could differ from
those estimates.
Reclassifications - Certain prior year amounts have been reclassified to
conform with the current year financial statement presentation.
F-9
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. RESTRUCTURING OF OPERATIONS
In November 1994, the Company announced a major restructuring to refocus
the Company and to improve the Company's long-term cash position. This
restructuring, which was implemented in 1995, resulted in a $3.1 million non-
recurring operating expense in 1994. Costs associated with the restructuring
included $1.9 million related to employee termination benefits, $.8 million
related to lease cancellation fees and costs attributable to permanently idle
leased facilities, and $.4 million for the consolidation of operations. As of
December 31, 1995, $3 million of the restructuring charges had been paid.
NOTE 4. MORTGAGE AND OTHER DEBT
Mortgage and other debt at December 31, 1995 and 1994 consisted of the
following (in thousands):
1995 1994
--------- ---------
First mortgage loan, interest at an average rate of 8.71%, due at
various dates through March 1, 2004(a)............................ $267,260 $274,776
First mortgage loans, interest at 7.625% to 10.05%, due at
various dates through March 1, 2009(b)............................ 70,770 115,193
Intermediate secured term loans, interest variable (7.44%
to 9.0% at December 31, 1995), due at various dates
through June 1, 1997(c)........................................... 71,800 64,378
Term loan, unsecured, interest variable (7.75% to 7.94% at
December 31, 1995), due December 31, 1996(d)...................... 7,000 22,000
Construction loans, interest variable (7.28% to 9.0% at
December 31, 1995), due at various dates through
November 8, 1996(e)............................................... 52,851 29,425
Assessment district bonds, interest at 5.0% to 10.43%, due at
various dates through April 10, 2021(f)........................... 23,283 24,492
Other loans, interest at 8.0% to 8.88%, due at various dates
through August 1, 1998............................................ 3,216 377
-------- --------
$496,180 $530,641
======== ========
(a) The Company refinanced its $388.2 million first mortgage loan with The
Prudential Insurance Company of America (Prudential) on February 18, 1994
with a $280 million first mortgage loan. In connection with this
refinancing, the Company incurred an extraordinary expense of $11.9 million
($7.4 million, net of income tax benefits). This extraordinary expense,
which was recognized in 1993, consisted primarily of a redemption premium
paid to Prudential and the write-off of deferred financing costs associated
with the $388.2 million loan. The loan is collateralized by a majority of
the Company's operating properties and by an assignment of rents generated
by the underlying properties. This loan has a penalty if paid prior to
maturity.
(b) These first mortgage loans are collateralized by certain of the Company's
operating properties and by an assignment of rents generated by the
underlying properties. A majority of these loans have penalties if paid
prior to maturity.
(c) The Company's secured term loans are collateralized by certain operating
properties and by an assignment of rents generated by the underlying
properties. At December 31, 1995, $.5 million was available for future
borrowings.
F-10
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(d) The Company has a $48 million unsecured revolving facility and a $7 million
unsecured term facility. In December 1995, the Company renewed its
unsecured revolving facility which was due to expire on December 31, 1995.
Upon renewal, the facility was reduced to $48 million from $62.5 million
($75 million at December 31, 1994) and the revolving period was extended to
December 31, 1996. As of December 31, 1995, nothing was outstanding under
the revolving facility, leaving the entire $48 million available for future
borrowings.
(e) The Company's construction loans are used to finance development projects
and are secured by the related land and buildings and by an assignment of
rents generated by the underlying properties. In January 1995, the Company
entered into an $85 million revolving construction line of credit and in
July 1995 increased the line an additional $15 million. This credit
facility renews and increases a $75.5 million credit line. In July 1995,
the Company entered into another $25 million revolving construction line of
credit. The credit facility will be used to fund new Company development
in twelve states in the Southwest. At December 31, 1995, $33.2 million was
available for future borrowings under all construction lines.
(f) The assessment district bonds are issued through local municipalities to
fund the construction of public infrastructure and improvements which
benefit the Company's properties. These bonds are secured by certain of
the Company's properties.
Certain loan agreements contain restrictive financial covenants. The most
restrictive covenants limit annual dividends to $27.6 million and require
stockholders' equity to be no less than $425 million. Other covenants
accelerate payment upon certain change of control events and contain negative
pledges with respect to certain of the Company's properties. The Company was in
compliance with all such covenants at December 31, 1995.
The maturities of mortgage and other debt outstanding as of December 31,
1995 are summarized as follows:
1996 $ 85,094
1997 72,052
1998 20,427
1999 9,011
2000 10,089
Thereafter 299,507
--------
$496,180
========
Interest costs incurred during 1995, 1994 and 1993 relating to mortgage and
other debt totalled $46.5 million, $45.8 million and $64 million. Total
interest costs, which also includes loan fee amortization and other interest
costs, amounted to $49.3 million, $48.7 million and $69.6 million in 1995, 1994
and 1993. Of these amounts, $23.6 million, $24 million and $25.6 million were
capitalized during 1995, 1994 and 1993.
F-11
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 5. INCOME TAXES
Total income taxes (benefit) reflected in the consolidated statement of
operations differs from the amounts computed by applying the federal statutory
rate of 35% to income (loss) before extraordinary item as follows (in
thousands):
1995 1994 1993
---------- --------- ---------
Federal income tax at statutory rate................. $(19,082) $(1,332) $(18,676)
Increase (decrease) in taxes resulting from:
State income taxes, net of federal impact.......... (2,460) 72 (1,318)
Non-recurring expense related to conversion
of a debenture................................... - - 9,013
Increase in federal rate applied to prior years'
temporary differences............................ - - 2,970
Other 24 (99) 3
-------- ------- --------
$(21,518) $(1,359) $ (8,008)
======== ======= ========
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities and for operating loss and tax credit carryforwards. Significant
components of the Company's net deferred tax liability as of December 31, 1995
and 1994 are as follows (in thousands):
DECEMBER 31,
--------------------
1995 1994
-------- ---------
Deferred tax liabilities:
Involuntary conversions (condemnations) of property... $ 91,226 $ 84,354
Capitalized interest and taxes........................ 93,135 87,341
Like-kind property exchanges.......................... 20,169 20,319
Investments in partnerships........................... 16,599 12,135
Other................................................. 5,219 5,038
-------- --------
226,348 209,187
-------- --------
Deferred tax assets:
Operating loss carryforwards.......................... 13,257 17,230
Intercompany transactions (prior to spin-off)......... 16,522 16,644
Capitalized rent...................................... 23,194 20,543
Adjustment to carrying value of property.............. 63,376 22,692
Depreciation and amortization......................... 7,028 6,376
Environmental reserve................................. 4,687 2,560
Other................................................. 8,014 10,480
-------- --------
136,078 96,525
Deferred tax assets valuation allowance............... - -
-------- --------
136,078 96,525
-------- --------
Net deferred tax liability............................ $ 90,270 $112,662
======== ========
During 1994 and 1993, the Company generated net operating loss
carryforwards of $.3 million and $6.5 million for tax purposes which expire in
2009 and 2008. Deferred income tax expense was reduced to reflect the benefit
of these amounts.
F-12
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The Company increased its tax expense and related deferred tax liability by
$3 million in 1993 as a result of legislation enacted in August 1993 increasing
the federal tax rate from 34% to 35% commencing January 1, 1993.
NOTE 6. JOINT VENTURE INVESTMENTS
The Company is involved in a variety of real estate-oriented joint venture
activities. At December 31, 1995, these included two hotels, one office
building, a 900,000 square foot trade mart center for the contract and home
furnishing industries, an apartment complex and other projects in the early
stages of development.
The Company had a loan outstanding to one of its joint ventures in the
amount of $1.7 million at December 31, 1995 and 1994. The loan bears interest
at one percentage point over the rate payable under the joint venture's note to
its creditor bank (10.25% at December 31, 1995) and is secured by a second lien
on the joint venture property. Principal and interest were due on or before
February 1, 1996. The Company expects to convert this note to joint venture
equity. At December 31, 1993, the Company had outstanding a loan and related
accrued interest to a joint venture partner in the aggregate amount of $.6
million. During 1994, this amount was exchanged for additional ownership in the
related joint venture.
The Company guarantees a portion of the debt and interest of certain of its
joint ventures. At December 31, 1995, these guarantees totalled $8.9 million.
The condensed combined balance sheets and statements of income of the joint
ventures, along with the Company's proportionate share, are summarized as
follows (in thousands):
COMBINED PROPORTIONATE SHARE
------------------------ -----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Assets, primarily real estate.............. $ 304,018 $320,270 $127,181 $130,669
========= ======== ======== ========
Liabilities, primarily debt................ $ 415,775 $408,802 $168,247 $170,986
Venturers' deficit......................... (111,757) (88,532) (41,066) (40,317)
--------- -------- -------- --------
Total liabilities and venturers' deficit... $ 304,018 $320,270 $127,181 $130,669
========= ======== ======== ========
The Company's proportionate share of venturers' deficit is an aggregate
amount for all ventures. Because the Company's ownership percentage differs
from venture to venture, and certain ventures have accumulated deficits while
others have accumulated equity, the Company's percentage of venturers' deficit
is not reflective of the Company's ownership percentage of the ventures.
COMBINED PROPORTIONATE SHARE
------------------------------ ---------------------------
1995 1994 1993 1995 1994 1993
-------- -------- -------- ------- ------- -------
Revenue........................... $133,413 $138,810 $114,353 $35,410 $36,941 $30,561
Operating and interest expenses... 109,401 113,487 95,337 24,629 25,067 24,823
Depreciation and amortization..... 14,287 15,583 15,595 3,746 3,892 3,920
-------- -------- -------- ------- ------- -------
Net earnings before taxes......... $ 9,725 $ 9,740 $ 3,421 $ 7,035 $ 7,982 $ 1,818
======== ======== ======== ======= ======= =======
F-13
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. PROPERTY
Net book value by property type at December 31, 1995 and 1994 consisted of
the following (in thousands):
1995 1994
------------ ------------
Income producing properties:
Industrial buildings $ 279,838 $ 281,891
Office buildings 113,095 122,106
Retail buildings 84,595 85,100
Land development 317,727 377,506
Land leases 10,069 10,123
---------- ----------
805,324 876,726
Land holdings:
Developable properties 150,339 145,744
Natural resources 1,788 8,658
Properties held for sale 84,232 92,048
---------- ----------
236,359 246,450
Other (including proportionate share
of joint ventures' net deficits of
$41,066 and $40,317) (34,232) (36,057)
---------- ----------
$1,007,451 $1,087,119
========== ==========
During 1995, the Company took a charge of $102.4 million to adjust the
carrying value of certain property, which included $84.8 million resulting from
the Company's decision to terminate the 1991 Development Agreement for its
Mission Bay project in San Francisco. The Company completed an analysis of the
implications of the 1991 Development Agreement in light of current and
anticipated market conditions and projected construction costs and concluded
that the financial obligations imposed by that agreement render the project
uneconomic. Management therefore elected to terminate the 1991 Development
Agreement and seek approval of a revised entitlement package. The revised
carrying value of Mission Bay represents management's best estimate of its fair
value, assuming the Company is successful in re-entitling the property, and
approximates the amount included in the Company's current value reporting for
December 31, 1994, less anticipated costs of obtaining new entitlements.
The Company has taken an additional charge against earnings of $17.6
million relating to other property where the carrying value exceeded what
management expects to recover through the anticipated sale of such property.
The Company also took charges of $24.1 million and $32.5 million in 1994
and 1993 to adjust the carrying value of certain property.
F-14
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. LEASES
The Company, as lessor, has entered into noncancelable operating leases
expiring at various dates through 2052. Rental revenue under these leases
totalled $106.8 million in 1995, $102.3 million in 1994 and $105.1 million in
1993. Included in this revenue are rentals contingent on lease operations of
$2.1 million in 1995, $2.8 million in 1994 and $3.2 million in 1993. Future
minimum rental revenue under existing noncancelable operating leases as of
December 31, 1995 are summarized as follows (in thousands):
1996......... $ 78,138
1997......... 64,777
1998......... 54,958
1999......... 47,877
2000......... 41,035
Thereafter... 322,268
--------
$609,053
========
The book value of the Company's properties under operating leases or held
for rent are summarized as follows (in thousands):
DECEMBER 31,
-----------------------
1995 1994
---------- ----------
Buildings....................... $ 501,030 $ 475,615
Land and improvements........... 164,492 164,719
--------- ---------
665,522 640,334
Less accumulated depreciation... (172,934) (149,237)
--------- ---------
$ 492,588 $ 491,097
========= =========
The Company, as lessee, has entered into noncancelable operating leases
expiring at various dates through 2023. Rental expense under these leases
totalled $1.7 million in 1995 and $2.8 million in 1994, rental expense and
related sublease income totalled $4 million and $1.3 million in 1993. Future
minimum lease payments as of December 31, 1995 are summarized as follows (in
thousands):
MINIMUM
PAYMENTS
--------
1996......... $1,051
1997......... 939
1998......... 772
1999......... 694
2000......... 687
Thereafter... 3,638
------
$7,781
======
F-15
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. RENTALS, COSTS AND NET OPERATING INCOME BY PROPERTY TYPE
Net operating income before interest and depreciation is summarized by
property type as follows (in thousands):
NET
RENTAL PROPERTY OPERATING
1995 REVENUE OPERATING COSTS INCOME
--------- ---------------- ----------
Income producing properties
Industrial buildings........ $ 50,716 $(11,012) $39,704
Office buildings............ 28,662 (12,179) 16,483
Retail buildings............ 11,363 (2,940) 8,423
Land development............ 4,886 (3,310) 1,576
Land leases................. 7,200 (1,026) 6,174
-------- -------- -------
102,827 (30,467) 72,360
Land holdings
Developable properties...... 2,770 (3,685) (915)
Natural resources........... 1,320 (2,256) (936)
Properties held for sale.... 1,151 (3,168) (2,017)
-------- -------- -------
5,241 (9,109) (3,868)
-------- -------- -------
$108,068 $(39,576) $68,492
======== ======== =======
NET
RENTAL PROPERTY OPERATING
1994 REVENUE OPERATING COSTS INCOME
--------- --------------- ---------
Income producing properties
Industrial buildings........ $ 50,650 $(11,837) $38,813
Office buildings............ 29,619 (11,220) 18,399
Retail buildings............ 7,339 (2,315) 5,024
Land development............ 4,164 (3,201) 963
Land leases................. 7,414 (1,037) 6,377
-------- -------- -------
99,186 (29,610) 69,576
Land holdings
Developable properties...... 3,133 (3,967) (834)
Natural resources........... 911 (2,374) (1,463)
Properties held for sale.... 1,202 (3,798) (2,596)
-------- -------- -------
5,246 (10,139) (4,893)
-------- -------- -------
$104,432 $(39,749) $64,683
======== ======== =======
F-16
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NET
RENTAL PROPERTY OPERATING
1993 REVENUE OPERATING COSTS INCOME
--------- ---------------- ----------
Income producing properties
Industrial buildings........ $ 51,003 $(12,113) $38,890
Office buildings.......... 28,470 (11,063) 17,407
Retail buildings.......... 6,748 (2,298) 4,450
Land development.......... 5,010 (2,939) 2,071
Land leases............... 8,362 (1,381) 6,981
-------- -------- -------
99,593 (29,794) 69,799
Land holdings
Developable properties.... 3,493 (3,916) (423)
Natural resources......... 3,352 (3,981) (629)
Properties held for sale.. 3,106 (3,808) (702)
-------- -------- --------
9,951 (11,705) (1,754)
-------- -------- -------
$109,544 $(41,499) $68,045
======== ======== =======
NOTE 10. PROPERTY SALES
The Company's sales consist of the following (in thousands):
1995 1994 1993
--------- ---------------- ----------
Non-strategic land
Sales...................... $ 62,199 $ 32,298 $26,444
Cost of sales.............. 29,410 22,024 15,993
-------- -------- -------
Gain $ 32,789 $ 10,274 $10,451
======== ======== =======
Development properties
Sales....................... $ 3,224 $ - $ -
Cost of sales............... 2,271 - -
-------- -------- -------
Gain $ 953 $ - $ -
======== ======== =======
Buildings
Sales....................... $ - $ 21,330 $30,157
Cost of sales............... - 18,411 21,547
-------- -------- -------
Gain $ - $ 2,919 $ 8,610
======== ======== =======
Ground leases
Sales....................... $ - $ 142 $15,968
Cost of sales............... - 28 1,864
-------- -------- -------
Gain $ - $ 114 14,104
======== ======== =======
Total
Sales....................... $ 65,423 $ 53,770 $72,569
Cost of sales............... 31,681 40,463 39,404
-------- -------- -------
Gain $ 33,742 $ 13,307 $33,165
======== ======== =======
F-17
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 11. OTHER INCOME (EXPENSE)
Other income (expense) is summarized as follows (in thousands):
1995 1994 1993
-------- -------- --------
Litigation recovery (accrual)........... $ 6,450 $ - $ (8,300)
Environmental (expense) recovery, net... (7,411) 246 (4,337)
Restructuring costs..................... - (3,100) -
Conversion of debenture................. - - (29,552)
All other............................... (533) 84 140
------- ------- --------
$(1,494) $(2,770) $(42,049)
======= ======= =========
NOTE 12. EMPLOYEE BENEFIT AND STOCK OPTION PLANS
The Company has a profit sharing and savings plan for all employees.
Funding consists of employee contributions along with matching and discretionary
contributions by the Company. Total expense for the Company under this plan was
$.2 million, $.6 million and $.6 million in 1995, 1994 and 1993.
The Company has various plans through which employees may purchase common
stock of the Company.
The Incentive Stock Compensation Plan (Substitute Plan) was adopted to
provide substitute awards to employees whose awards under certain plans of the
former parent company, Santa Fe Pacific Corporation (SFP) were forfeited as a
result of the Company's spin-off from SFP in 1990. The number of shares,
exercise price and expiration dates of these awards were set so the participant
retained the full unrealized potential value of the original SFP grant. Options
became exercisable after March 5, 1992 and expire from 1997 through 1999. The
Company also has two stock option plans under which the Board of Directors may
issue options to purchase up to 500,000 shares of common stock at a price not
less than the fair market value at the date of grant. Options are exercisable
no earlier than six months from the date of grant and generally expire ten years
after the date of grant. All options granted to date are exercisable in
installments on a cumulative basis at a rate of 25% each year commencing on the
first anniversary of the date of grant.
Under the Executive Stock Option Plan, the Board of Directors may issue
non-qualified stock options to officers and directors to purchase up to
4,250,000 shares of common stock at a price not less than fair market value at
the date of grant. Options are exercisable no earlier than six months from the
date of grant and generally expire ten years after the date of grant. Each non-
management director is automatically granted an option, upon initial election to
the Board of Directors, to purchase 5,000 shares of common stock at a price of
127.63% of the fair market value on the date of grant, increasing 5% on each
anniversary of the grant date commencing on the sixth anniversary. These
options are exercisable in installments on a cumulative basis at a rate of 20%
each year. The exercise price for all other options will be no less than the
fair market value on the date of grant. Certain of these options are
exercisable in increments based on stock price performance benchmarks, and
others are exercisable based upon time vesting requirements.
F-18
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Transactions under these plans during 1994 and 1995 are summarized below:
EXECUTIVE
SUBSTITUTE STOCK STOCK
PLAN OPTION PLANS OPTION PLAN
------------- ------------ -----------
Outstanding at December 31, 1993............ 385,155 74,000 1,036,000
Granted..................................... - 18,000 2,088,500
Expired..................................... (257,435) 40,500 1,524,000
------------- ------------ -----------
Outstanding at December 31, 1994............ 127,720 51,500 1,600,500
Granted..................................... - 205,886 1,099,330
Expired..................................... (2,414) (9,500) (195,500)
------------- ------------ -----------
Outstanding at December 31, 1995............ 125,306 247,886 2,504,330
============= ============ ============
Exercise price range at December 31, 1995... $10.70-$19.18 $5.475-$12.25 $5.58-$13.78
Exercisable at December 31, 1995............ 125,306 35,625 116,000
Available for grant at December 31, 1995.... - 252,114 1,745,670
The Company intends to adopt the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" beginning in 1996.
NOTE 13. CAPITAL STOCK
The Company has authorized the issuance of 50 million shares of $.01 par
value preferred stock. As of December 31, 1995 and 1994, the Company has
outstanding 3,449,999 shares of $3.75 Series A Cumulative Convertible Preferred
Stock (Series A preferred stock). The Series A preferred stock has an annual
dividend of $3.75 per share, a stated value of $50 per share and a liquidation
preference of $50 per share plus accrued and unpaid dividends. It is
convertible into common stock at a price of $9.06 per common share, subject to
adjustment in certain events. It is also redeemable, at the option of the
Company, at any time after February 16, 1996, at $52.625 per share and
thereafter at prices declining to $50 per share on or after February 16, 2003.
Concurrently with the issuance of the Series A preferred stock, the Company
converted a convertible debenture (which had an accreted value of $111.4
million) into common stock with a value of $141 million. This was treated as a
non-cash item in the 1993 statement of cash flows. At the time, the Company
incurred a non-recurring non-cash expense of $29.6 million ($28.3 million net of
income tax benefit) representing the excess of the value of the common stock
issued over the accreted value of the debenture at the date of conversion.
The Company also has outstanding 3,000,000 shares $3.625 Series B
Cumulative Convertible Exchangeable Preferred Stock (Series B preferred stock).
The Series B preferred stock has an annual dividend of $3.625 per share, a
stated value of $50 per share and a liquidation preference of $50 per share plus
accrued and unpaid dividends. It is convertible into the Company's common
stock at a price of $9.80 per common share, subject to adjustment in certain
events. The Series B preferred stock is exchangeable, at the Company's option,
at any time after November 15, 1995, into 7.25% Convertible Subordinated
Debentures due November 15, 2018, at a rate of $50 of debentures for each share
of Series B preferred stock. It is also redeemable, at the option of the
Company, at any time after November 15, 1996, at $52.5375 per share and
thereafter at prices declining to $50 per share on or after November 15, 2003.
F-19
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
The Company has authorized the issuance of 150 million shares of $.01 par
value common stock. As of December 31, 1995 and 1994, the Company has
72,967,236 shares outstanding. The Company has reserved 19,040,000 and
15,306,000 shares of common stock for conversion of the Series A and Series B
preferred stock, 8,875,000 shares pursuant to various compensation programs,
and 2,000,000 shares for acquisitions.
NOTE 14. COMMITMENTS AND CONTINGENCIES
In April 1991, a lawsuit was brought against the Company alleging breach of
contract for a finder's fee in connection with an August 1990 sale of land in
Fremont, California. On November 1, 1993, the jury returned a verdict in favor
of the plaintiff and made an award of approximately $440,000 which, together
with pre-judgment interest, totalled approximately $600,000. Additionally, the
jury awarded approximately $7.7 million in punitive damages for what it found
was the Company's bad faith denial of an alleged contract. While the Company
was vigorously pursuing an appeal, it provided $8.3 million as an other expense
in the 1993 consolidated statement of operations. In December 1995, the Company
reached a settlement with the plaintiff and reversed $7.5 million of the expense
in the 1995 consolidated statement of income.
The Company has obtained standby letters of credit and surety bonds in favor
of local municipalities or financial institutions to guarantee performance on
real property improvements or financial obligations. As of December 31, 1995,
$21.3 million was outstanding, including a $12.4 million surety bond related to
the lawsuit described above.
The Company, as a partner in certain joint ventures, has made certain
financing guarantees (Note 6).
The Company is a party to a number of legal actions arising in the ordinary
course of business. While the Company cannot predict with certainty the final
outcome of these proceedings, considering the substantial legal defenses
available, 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.
Inherent in the operations of the real estate business is the possibility
that environmental pollution conditions may relate to properties owned or
previously owned. 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 due to such
factors as the unknown magnitude of possible contamination, the unknown timing
and extent of the corrective actions which may be required, the determination of
the Company's liability in proportion to other responsible parties, and the
extent to which such costs are recoverable from insurance.
F-20
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
At December 31, 1995, management estimates that future costs for remediation
of identified or suspected environmental contamination which will be treated as
an expense will be approximately $13.8 million, and has provided a reserve for
that amount. It is anticipated that such costs will be incurred over the next
ten years. Management also estimates that similar costs relating to the
Company's properties to be developed or sold may range from $18 million to $59
million. These amounts will be capitalized as components of development costs
when incurred, which is anticipated to be over a period of twenty years, or will
be deferred and charged to cost of sales when the properties are sold. These
estimates were developed based on extensive reviews which took place over
several years based upon then prevailing law and identified site conditions.
Because of the breadth of its portfolio, the Company is unable to review
extensively each property 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 of other parties to pay some or all of such costs.
NOTE 15. SUBSEQUENT EVENT
In March 1996, the Company acquired The Akins Companies, a residential real
estate company involved in home building, community development and project
management services, primarily in Southern California. The acquisition price
will be paid in the form of Catellus common stock with a market value of
approximately $9 million, and is expected to be accounted for as a pooling of
interests.
The Company will form a new entity, Catellus Residential Group, that will
develop the Company's residential land holdings, projects previously started by
Akins, and new development activities on property owned by others.
F-21
SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The Company's earnings and cash flow are determined to a large extent by
property sales. Sales and net income have fluctuated significantly from quarter
to quarter, as evidenced by the following summary of unaudited quarterly
consolidated results of operations. Property sales fluctuate from quarter to
quarter, reflecting general market conditions and the Company's intent to sell
property when it can obtain attractive prices. Cost of sales may also vary
widely because it is determined by the Company's historical cost basis in the
underlying land.
1995 1994
--------------------------------------------- ---------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------- --------- --------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Rental revenues.................... $ 26,898 $ 26,831 $ 27,181 $ 27,158 $ 25,933 $ 26,899 $ 25,448 $ 26,152
Property operating costs........... 9,166 9,685 9,535 11,190 10,026 9,510 9,993 10,220
Gain on sales of property.......... 5,574 1,626 1,702 24,840 155 4,929 7,280 943
Adjustment to carrying value of
property.......................... - - - (102,400) - - - (24,100)
Other income (expense)............. (14,360) (13,498) (14,687) (11,809) (13,511) (10,837) (14,872) (18,476)
Net income (loss).................. 5,358 3,143 2,756 (44,259) 1,469 6,598 5,035 (15,549)
Net income (loss) per common share. $ (.01) $ (.04) $ (.04) $ (.69) $ (.06) $ .01 $ (.01) $ (.30)
F-22
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
and Stockholders of Catellus
Development Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 12, 1996, appearing on page F-2 of this Form 10-K of Catellus
Development Corporation, also included an audit of the Financial Statement
Schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these
Financial Statement Schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
Price Waterhouse LLP
San Francisco, California
February 12, 1996
S-1
CATELLUS DEVELOPMENT CORPORATION
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1995
(IN THOUSANDS)
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ----------- -----------
Year ended December 31, 1993:
Allowance for doubtful receivables... $3,349 $ 50 $ - $1,511/(1)/ $ 1,888
Reserve for abandoned projects....... 404 732 - 852/(2)/ 284
Reserve for environmental costs...... 3,836 2,272 143 632/(3)/ 5,619
Year ended December 31, 1994..........
Allowance for doubtful receivables... 1,888 1,001 - 1,026/(1)/ 1,863
Reserve for abandoned projects....... 284 732 - 39/(2)/ 977
Reserve for environmental costs...... 5,619 890 1,886 - 8,395
Year ended December 31, 1995
Allowance for doubtful receivables... 1,863 504 - 616/(1)/ 1,751
Reserve for abandoned projects....... 977 407 - 38/(2)/ 1,346
Reserve for environmental costs...... 8,395 5,389 - 5/(3)/ 13,779
- ---------------------
Notes:
(1) Balances written off as uncollectible.
(2) Costs of unsuccessful projects written off.
(3) Environmental costs incurred.
S-2
CATELLUS DEVELOPMENT CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
COST CAPITALIZED
INITIAL COST TO SUBSEQUENT
CATELLUS TO ACQUISITION
------------------------- --------------------------
BUILDINGS & CARRYING
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENTS COSTS
- ----------- ------------ --------- ------------ ------------ -----------
Income Producing Properties:
Mission Bay, San Francisco,
CA......................... $ - $ 80,587/(6)/ $ 3,952 $ (4,713)/(7)/ $ 59,282
Other properties
less than 5% of total...... 456,565 150,018 43,191 502,133 144,422
-------- -------- -------- -------- --------
456,565 230,605 47,143 497,420 203,704
-------- -------- -------- -------- --------
Land Holdings................ 29,690 152,796 11,697 44,758 30,872
-------- -------- -------- -------- --------
Total........................ $486,255 $383,401 $ 58,840 $542,178 $234,576
======== ======== ======== ======== ========
GROSS AMOUNT AT WHICH
CARRIED LIFE ON WHICH
AT CLOSE OF PERIOD DEPRECIATION
(f)(2)(3)(4) IN LATEST
-------------------------------------- DATE OF INCOME
BUILDINGS AND ACCUMULATED COMPLETION OF DATE STATEMENT IS
DESCRIPTION LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED
- ----------- --------- ------------ --------- ------------ ------------ -------- -----------
Income Producing Properties:
Mission Bay, San Francisco,
CA......................... $ 80,587 $ 58,521 $ 139,108 $ 2,527 N/A various (5)
Other properties
less than 5% of total...... 150,018 689,746 839,764 171,021 various various (5)
-------- -------- ---------- --------
230,605 748,267 978,872 173,548
-------- -------- ---------- --------
Land Holdings................ 152,796 87,327 240,123 3,764 N/A various (5)
-------- -------- ---------- --------
Total........................ $383,401 $835,594 $1,218,995 $177,312
======== ======== ========== ========
- ----------------------
Notes:
(1) A reserve of $1,346,000 against predevelopment has been established for
projects to be abandoned.
(2) The aggregate cost for Federal income tax purposes is approximately
$972,000,000.
(3) See Attachment A to Schedule III for reconciliation of beginning of period
total to total at close of period.
(4) Excludes investments in joint ventures and furniture and equipment.
(5) Reference is made to Note 2 to the Consolidated Financial Statements for
information related to depreciation.
(6) Reflects inclusion of an additional parcel into Mission Bay.
(7) Net incremental revenues.
S-3
CATELLUS DEVELOPMENT CORPORATION
ATTACHMENT A TO SCHEDULE III
RECONCILIATION OF COST OF REAL ESTATE AT BEGINNING OF PERIOD
WITH TOTAL AT END OF PERIOD
(IN THOUSANDS)
1995 1994 1993
----------- ----------- -----------
Balance at January 1............................ $1,276,955 $1,259,803 $1,276,334
---------- ---------- ----------
Additions during period:
Acquisitions through foreclosure............. - - 523
Other acquisitions........................... 9,326 - 15
Improvements................................. 58,967 71,096 57,360
Reclassification from other accounts......... 270 591 -
---------- ---------- ----------
Total additions................................. 68,563 71,687 57,898
---------- ---------- ----------
Deductions during period:
Cost of real estate sold..................... 23,716 39,883 34,554
Other:
Write-down of properties to estimated net
realizable value.......................... 102,400 11,800 32,500
Direct write-off of costs................... - - 1,261
Contribution to joint venture............... - 2,120 -
Write-down of property due to purchase
price adjustments......................... - - 2,796
Reclassification due to demolition.......... - - 1,952
Reclassification to personal property
and other accounts......................... - - 217
Increase reserve for abandoned projects..... 407 732 732
Other....................................... - - 417
---------- ---------- ----------
Total deductions.......................... 126,523 54,535 74,429
---------- ---------- ----------
Balance at December 31.......................... $1,218,995 $1,276,955 $1,259,803
========== ========== ==========
RECONCILIATION OF REAL ESTATE ACCUMULATED DEPRECIATION
AT BEGINNING OF PERIOD WITH TOTAL AT END OF PERIOD
(IN THOUSANDS)
1995 1994 1993
--------- --------- ---------
Balance at January 1.......... $154,002 $133,923 $113,055
-------- -------- --------
Additions during period:
Charged to expense......... 24,342 24,706 26,850
-------- -------- --------
Deductions during period:
Cost of real estate sold... 795 4,549 4,030
Other...................... 237 78 1,952
-------- -------- --------
Total deductions.......... 1,032 4,627 5,982
-------- -------- --------
Balance at December 31........ $177,312 $154,002 $133,923
======== ======== ========
S-4