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) 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. Reference is made to Items 1 and 2 above for additional information on environmental matters, which information is incorporated herein by reference.
CITY OF RICHMOND, ET AL. V. UNITED STATES OF AMERICA, ET AL. (United States District Court, Northern District of California; filed August 1989) is an action brought by the City of Richmond and Richmond Redevelopment Agency (collectively, "Richmond") and various developers against the Company and others, claiming that property, formerly Richmond Shipyard Number 2, purchased by Richmond in 1977 from the Company's predecessor, Santa Fe Land Improvement Company ("SFLI"), is contaminated. The United States and United States Maritime Administration are also named defendants. By third-party complaint, the Company has sued Kaiser Aluminum and Chemical Corporation ("Kaiser") and James L. Ferry & Son, Inc. ("Ferry") for indemnity.
The plaintiffs seek damages exceeding $48.6 million for environmental response costs, natural resources damages and declaratory relief under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), compensatory damages under state law theories of negligence and strict liability, compensatory and punitive damages for alleged fraudulent concealment and indemnity, and also seek declaratory relief. The plaintiffs estimate that their environmental response costs will total approximately $16 million.
Evidence to date indicates that the contamination at the property was the result of World War II shipbuilding operations by Kaiser between approxi- mately 1941 and 1945. As the owner of the property at that time, the Company is a potential responsible party ("PRP") under CERCLA, as is Kaiser, the tenant and operator on the property. The United States also may be considered a PRP inasmuch as Kaiser's wartime operations on the property were apparently controlled by the government. Richmond and the plaintiff developers are PRPs because they currently own and operate the property, and Ferry, a Richmond dredging contractor, may be considered a PRP because it was responsible for spreading contaminated soils on the site.
The Company has substantial defenses to state common law claims, including the fraudulent concealment claim, and also believes that it has substantial contribution and indemnity claims against Kaiser and Ferry.
The California Environmental Protection Agency's Department of Toxic Substances Control has issued a remedial action plan regarding the clean-up activities at this property. The plan contains a preliminary non-binding allocation of responsibility allocating an 11 percent share to the Company.
Plaintiffs recently reached a settlement agreement in principle with the United States. The terms of the settlement have not been disclosed. Settlement discussions between plaintiffs and the Company have occurred over a period of more than one year and are expected to resume after terms of the settlement with the United States have been revealed.
The Company estimates that it will recoup all or some portion of its costs and damages through its contribution and indemnity claims. However, it is not possible now to predict reliably the amount of the Company's recovery.
The Company tendered defense of this action to its insurer, Employers Casualty Insurance Company (Employers). On November 16, 1993, Employers filed a declaratory relief action in Contra Costa Superior Court against the Company, seeking a declaration that it has no duty to defend or indemnify with respect to the
contamination at issue. The Company removed the action to federal court and filed a counterclaim and motion for summary judgment on December 20, 1993. Subsequently, Employers placed $1.3 million into escrow, the approximate amount of the Company's claimed past defense costs, some or all of which may be paid to the Company. 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 will receive $300,000 of the escrow fund and the receiver and Employers stipulate that the Company has a valid claim for an additional $700,000 for past defense costs against Employers' assets in the receivership. The agreement is subject to receivership court approval. 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.
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 litigants claim title to a 550 foot by 75 foot strip of property located on and along the Santa Fe Depot site in downtown San Diego. 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 has 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 have appealed all other aspects of the judgment. The cases are awaiting oral argument before the California Court of Appeal.
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST V. CATELLUS DEVELOPMENT CORPORATION, ET AL. (United States District Court, Northern District of California; filed February 1993) is an action brought by Grubb & Ellis Realty Income Trust, Liquidating Trust ("Grubb & Ellis"), against the Company, among others, to recover the costs of environmental investigation and cleanup and other compensatory damages at the Livermore Arcade Shopping Center located in Northern California.
Grubb & Ellis, the current owner of the site, claims that perchlorethylene (PCE) was released to soil and groundwater from a leaking sewer pipe carrying discharge from the operations of a dry cleaning establishment, whose tenancy at the shopping center includes a period when the property was owned by a predecessor of the Company. In February 1994, the Company reached a settlement with plaintiffs and all of the other defendants in this action pursuant to which the Company will pay $67,650 into a fund to cover certain past and future remediation costs in exchange for a qualified release of liability.
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 $441,780.87 in damages and $7.6 million in punitive damages. The Company believes these verdicts are 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.
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. As described above, the Company's insurer in this matter, Employers, has filed for receivership. At this time, the Company is unable to ascertain what impact, if any, the receivership will have upon the Company's coverage for indemnification and defense costs in this matter.
ITEM 4.
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, 1993.
EXECUTIVE OFFICERS OF THE COMPANY - --------------------------------- The following persons are the executive officers of Catellus.
NAME AGE POSITION - ---- --- --------
Vernon B. Schwartz 43 Chairman, President and Chief Executive Officer James G. O'Gara 44 Senior Vice President David A. Smith 49 Senior Vice President and Chief Financial Officer James W. Augustino 45 Vice President Development J. Todd Bender 37 Vice President Development Faye A. Beverett 36 Vice President Financial Planning and Analysis Mary Burczyk 40 Vice President Corporate Communications Thomas W. Gille 45 Vice President Asset Management Daniel M. Gonzales 48 Vice President Human Resources and Administration John W. Greer 38 Vice President Development Jeffrey K. Gwin 55 Vice President Development William C. Matheson 41 Vice President Sales and Land Management Douglas B. Stimpson 37 Vice President Finance Maureen Sullivan 39 Vice President Law, General Counsel and Secretary Theodore L. Tanner 46 Vice President Development David M. Perna 41 Controller
Additional information concerning the business background of each executive officer of Catellus is set forth below:
Mr. Schwartz has served as President and Chief Executive Officer and a Director of Catellus since April 1989, and as Chairman since December 1989. Prior to joining Catellus, Mr. Schwartz served for eight years as the Executive Vice President and Chief Operating Officer of The Hahn Company, a major real estate developer. Mr. Schwartz has resigned from the Company effective June 30, 1994. The Board of Directors has undertaken a search for his successor.
Mr. O'Gara was elected Senior Vice President in September 1992. He had served as Senior Vice President Development from December 1989 and Vice President Special Real Estate Projects of Catellus from 1984.
Mr. Smith was elected Senior Vice President and Chief Financial Officer in March 1993. From November 1990 to March 1993, he was Vice President and Chief Financial Officer. Mr. Smith served as Vice President Finance from November 1989 to November 1990. Prior to that, he was Assistant Vice President Finance and Director of Finance for SFP.
Mr. Augustino was elected Vice President Development in February 1990. For more than five years prior to such time, he served as Project Director and Assistant Vice President Special Projects of Catellus.
Mr. Bender was elected Vice President Development in April 1990. Mr. Bender joined Catellus as Director of Development in July 1989. For more than five years prior to such time, he served as Vice President Development of Fifield Development Corporation, a Chicago-based real estate development firm.
Ms. Beverett was elected Vice President Financial Planning and Analysis in February 1994. From April 1990 through January 1994, Ms. Beverett served as Director of Financial Analysis. For four years prior to that, she was a manager in the real estate consulting division of Deloitte, Haskins, & Sells in San Francisco.
Ms. Burczyk was elected Vice President Corporate Communications in March 1990. From 1986 through March 1990, she was Senior Vice President of OLC Corporation, a Chicago-based investor relations consulting firm.
Mr. Gille was elected Vice President Asset Management in April 1990. For more than five years prior to such time, he was Senior Vice President of Hogland, Bogart and Bertero, a commercial property management and consulting firm in San Francisco.
Mr. Gonzales was elected Vice President Human Resources and Administration in April 1990. Mr. Gonzales served as Catellus' Director of Administration & Human Resources from May 1988 and its Director of Human Resources from September 1984.
Mr. Greer was elected Vice President Development in February 1994. From January 1990 through January 1994, Mr. Greer served as Director of Development of Catellus. Prior to joining Catellus, he was Development Partner in the Industrial Division of Lincoln Properties, a real-estate development firm in Foster City, California.
Mr. Gwin was elected Vice President Development in June 1988. From January 1985 through May 1988, Mr. Gwin served as a Regional Director of Catellus.
Mr. Matheson was elected Vice President Sales and Land Management in April 1990. Mr. Matheson served as Catellus' Director of Sales & Land Management from July 1989; Regional Manager, Property Sales from November 1986; and Director of Outlying Lands from January 1985.
Mr. Stimpson was elected Vice President Finance in February 1992. Mr. Stimpson served as Assistant Vice President Finance from February 1990; Director of Finance and Planning from June 1988; and Director of Planning from February 1986.
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. Tanner was elected Vice President Development in February 1992. Mr. Tanner served as Director of Development from September 1989 to February 1992. From March 1988 through August 1989, he was Vice President of Cal Fed Enterprises, a real estate subsidiary of Cal Fed, Inc. Mr. Tanner served as Regional Project Manager of Catellus from February 1986 through March 1988.
Mr. Perna joined Catellus as Controller in March 1990. He had served as Director of Internal Audit for SFP from 1988 to 1990, and as Audit Manager for SFP from 1985 to 1988.
PART II
ITEM 5.
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 Midwest 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.
No cash dividends were paid in 1993 or 1992 on the Company's common stock and the Company does not anticipate paying any cash dividends on its common stock in the foreseeable future.
At March 1, 1994, there were approximately 64,995 holders of record of common stock.
ITEM 6.
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, 1993 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 1993, 1992 and 1991.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
COMPANY STRATEGIES The Company's operations are guided by two key strategies: converting its land portfolio into operating properties and cash and creating maximum cash flow from the Company's existing income properties. A major advantage in pursuing these strategies is that a significant portion of the Company's undeveloped land is unleveraged and a significant portion of its developable holdings are fully entitled. This provides considerable flexibility in the timing of development activities.
Catellus has limited its speculative development, focusing instead on built-to-suit opportunities. In 1991, 90% of all construction starts were build- to-suit, reaching 100% in 1992 and 1993. While Catellus expects the focus on build-to-suit to continue for the near term, it could return to speculative development if the market conditions warrant. In 1992, Catellus also began to pursue "build-to-sell" opportunities with building users or pre-arranged investors. These arrangements allow the Company to monetize the value of the land and receive a development fee.
Property sales have consisted principally of surplus properties, and have also included selected income producing and developable properties. The level of sales and revenue generated by these sales fluctuates from period to period and cannot be predicted with certainty. Due to the lack of demand caused by a weak real estate market in California and the difficulty in obtaining financing for land acquisitions, land sales have declined over the past three years. Over that period, the Company has increased its sales of income producing properties and developable land. Income producing properties are often subject to debt, and the sale of such properties therefore generates relatively low cash flow because of the required debt paydowns. Overall, property sales represent a key element of the Company's cash flow, and provide flexibility necessary to respond to continued tightness in credit markets and the increased equity required in financings. The Company currently expects property sales of $50 million to $100 million for 1994; actual sales will depend on prevailing market conditions and the Company's anticipated level of capital expenditures. Any significant decrease in the sales level or cash flow generated by sales could impact the Company's ability to meet its obligations for fixed charges, capital expenditures and preferred stock dividends.
Cash flow from operations is used to support income producing proper- ties, including improvements to these properties which are not financed. It also supports corporate activities and pre-development work. Catellus' financial strategy is to increase operating cash flow so that, combined with the proceeds from the sale of income producing properties, it will continue to cover all operating activities and unfinanced investing activities. The Company's objective is for future cash flow to also cover the equity required for construction and long-term financing.
Development activities require significant investments of capital. In 1993, 1992 and 1991, the Company's capital expenditures for developable and income producing properties were $61.1 million, $87.9 million and $150.7 million. This capital comes from various sources, including funds provided by operating properties, financing activities, build-to-sell projects and property sales. Funds generated by operating properties, excluding property sales, have increased each year since 1991 as the Company has developed properties and increased its total leased square footage. Although credit markets have tightened increasingly over the past few years, and the Company must now contribute more cash equity for new development and refinancings, Catellus has been able to finance its requirements at reasonable terms.
In response to the changing real estate markets, the Company has been reducing capital expenditures, generally limiting development projects to build-to-suit and build-to-sell projects, and providing funding for pre-devel- opment of selected long-term mixed-use projects. The Company believes that capital spending could be reduced further if, for a limited period of time, Catellus were unable to generate sufficient funds from property sales to cover planned expenditures.
COMPARISON OF 1993, 1992 AND 1991
Cash provided by operating activities decreased $26.4 million from 1991 to 1993. The key factors in the decline were an overall decrease in net cash from surplus property sales, offset in part by an overall improvement in operating results of the Company's rental operations. Net cash from sales of land was $18.9 million, $48.1 million and $55.9 million in 1993, 1992 and 1991. These amounts do not reflect the net proceeds from the sale of income producing properties (including joint ventures) totalling $45 million and $30.7 million in 1993 and 1992. The increase in cash from rental operations is due principally to higher occupancy, as well as slightly higher average rental rates, from existing buildings. Although average rental rates are higher because of scheduled rent increases, rates on releasing and to new tenants are lower than existing rates. Although it is difficult to make meaningful direct comparisons of portfolio-wide rental rates because of the numerous factors affecting rates, including the term of each lease, rental concessions, size of space and the disparity among the Company's various markets, rental rates in 1993 for renewal leases and new tenants in existing industrial buildings were generally 10% to 15% below the final rate on the former lease for the same space. At December 31, 1993, the Company's total building portfolio was 93.6% leased compared to 90.9% and 85.1% at December 31, 1992 and 1991. For the four years from 1994 through 1997, leases for 11.1%, 11.1%, 18.1%, and 10.8% of total square footage is scheduled to expire.
Net cash used for investing activities was $15 million, $55.6 million and $150.4 million in 1993, 1992 and 1991. The decrease in 1993 results from a $26.8 million reduction in capital expenditures and a $14.3 million increase in the net proceeds from the sale of income producing properties. The decrease in 1992 reflects both a $62.8 million decrease in capital expenditures and net proceeds from the sale of income producing properties and a joint venture interest of $30.7 million.
In 1993, the Company invested $61.1 million to develop its land and improve its income producing properties. These funds were used for building construction and improvements, as well as entitlement efforts and pre-constru- ction activities. They were financed through borrowings from revolving construction facilities, property sales, funds generated from operations and cash on hand. During 1993, the Company completed 392,000 square feet for two build-to-suit projects that were 100% pre-leased and an additional 151,000 square feet that was built for and sold to users. In addition, the Company had under construction an additional 577,000 square feet which is 92.6% pre-leased.
Net cash provided by financing activities was $120.2 million, $7.7 million and $100.9 million in 1993, 1992 and 1991, respectively. The 1993 amounts reflect principally the net proceeds from the Series A and B preferred stock offerings. These amounts also reflect the use of a portion of those proceeds to repay debt, to purchase investments held for future repayment of the $388.2 million mortgage loan with The Prudential Insurance Company of America (Prudential), and to pay dividends on the Series A preferred stock.
In 1993, the Company renewed an unsecured revolving facility as a two-year $75 million unsecured revolving facility and a three-year $46 million unsecured term facility. The Company also renewed its construction facility for a one-year revolving period, with maximum borrowings at any time of $75.5 million. The Company also obtained a separate two-year $25.4 million con- struction facility for the East Baybridge Center project.
CONVERSION OF DEBENTURE AND ISSUANCE OF SERIES A AND SERIES B PREFERRED STOCK
During 1993, the Company completed a major restructuring of its debt with Bay Area Real Estate Investment Associates L.P. (BAREIA). On February 11, 1993, BAREIA converted a convertible debenture (accreted value of $111.4 million) into common stock with a value of $141 million. Concurrently with the conversion, the Company issued 3,449,999 shares of Series A preferred stock for $172.5 million. BAREIA purchased 40.7% of the Series A preferred stock sold, the same percentage as its common stock ownership.
The net proceeds of the Series A preferred stock issuance were approximately $164.4 million. These proceeds were used to repay $69 million of an unsecured revolving credit facility and to invest $50 million in
securities which were held for the benefit of The Prudential Insurance Company of America (Prudential) and committed to the paydown and refinancing of the Company's $388.2 million loan with Prudential. The balance of the proceeds were invested in short-term marketable securities until February 1994 when the refinancing of this loan with Prudential was completed.
On November 4, 1993, the Company completed a private placement of 3,000,000 shares of Series B preferred stock for $150 million. The net proceeds of $143.5 million were used to repay $24 million of an unsecured term facility, with the remainder to be used to repay debt that matures from 1994 through 1997, and for general corporate purposes.
The conversion of the debenture and the application of the net proceeds of the preferred stock issuances significantly reduced the Company's debt. The Company believes that the increased equity provided by the conversion of the debenture and the issuance of the Series A and Series B preferred stock will significantly increase its financial flexibility.
At December 31, 1993, cash and cash equivalents totalled $146.6 million and restricted cash totalled $67.4 million. Assuming the refinancing and paydown of the Prudential loans, as described below, cash and cash equivalents at December 31, 1993 would have totalled $85.8 million. In addition, the Company had available $69.3 million under its working capital facility, $68.5 million under its construction facilities, and $1.9 million under its intermediate term loan facilities.
REFINANCING OF PRUDENTIAL MORTGAGE LOAN
On February 18, 1994, the Company refinanced its $388.2 million mortgage loan with Prudential with a $280 million mortgage loan due March 1, 2004 and bearing an average interest rate of 8.71%. The new loan reflects a paydown of $108.2 million, of which $81 million was required to meet current loan underwriting standards and $27.2 million was paid to release selected properties from the loan. In connection with this refinancing, the Company also paid down $10 million of another mortgage loan with 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 redemption premium paid to Prudential and the write-off of deferred financing costs associated with the $388.2 million loan.
COMPARISON OF 1993 TO 1992
The Company had a 1993 net loss of $52.8 million, after non-recurring expenses, property write-downs and extraordinary expense. The 1993 net loss per share was $.97 after preferred stock dividends of $16.1 million. This compares to net income of $1.2 million or $.02 per share in 1992.
Before non-recurring expenses, property write-downs and extraordinary expense, the Company had 1993 net income of $7.7 million after tax, or a net loss of $.12 per share (after preferred stock dividends of $16.1 million). This compares to net income of $1.2 million, or $.02 per share, in 1992. Income before taxes was $17 million (before the non-recurring expenses, property write- downs and extraordinary expense) in 1993 compared to $2.4 million in 1992.
The significant improvement in 1993 operating performance is due to a combination of factors. Income from operating properties increased, interest income increased from investments of the cash proceeds from equity offerings, and interest expense decreased from conversion of the Debenture and repayment of debt. This was partially offset by lower gross profit from property sales. Net income for 1993 also reflects a $3 million charge for income taxes related to the 1993 increase in the federal corporate tax rate.
The decrease in gross profit from property sales resulted from a combination of lower sales and higher cost basis in properties sold. Property sales in 1993 included $46.9 million from sales of income producing properties, which generated gross profit of $23 million. For 1992, gross profit included $14.9 million from the sale of income producing properties and a $6.4 million loss on the sale of a joint venture interest. The income producing properties were sold in 1993 in conjunction with the Company's build-to-sell activities and the Prudential refinancing. The Prudential refinancing allowed the Company to sell certain buildings and ground leases which were subject to the mortgage, without paying a prepayment penalty. Land sales have decreased since 1992 because of a lack of demand caused by a weak real estate market in California and the limited financing available for land acquisitions. Property sales and related gross profit will continue to fluctuate from period to period. This fluctuation results from both
changing market conditions and the Company's approach to selling property when it can obtain attractive prices. The factors in the decision to sell property include the attractiveness of the price, the property's future value potential and, in the case of income producing properties, the loss of rental revenue. Cost of sales may also vary widely because it is determined by the Company's historical cost basis in the underlying land sold.
Income from operating properties increased 18% due to higher rental revenue coupled with only a slight increase in operating expenses. Nearly 85% of the growth in rental revenue came from existing properties, with the remainder coming from rents from buildings completed over the past twelve months. Over 80% of the increase in rental revenue from existing buildings was the result of higher occupancy and the remainder from higher rental rates. The increase in rental rates is from automatic rental increases, offset in part by decreases in rates for renewal leases and new tenants. The increase in taxes other than income resulted primarily from increases in property taxes from completed buildings and improvements, coupled with a reduction of property taxes in 1992 due to a reassessment of the Chicago Railway Exchange office building.
The increase in interest income resulted from the investment of the net proceeds of the Series A and Series B preferred stock issuances. The increase in equity in earnings of joint ventures in 1993 was caused primarily by the suspension in recording losses incurred by Pacific Design Center. The suspension of losses began when the Company's interest in cumulative losses of that joint venture exceeded its interest in cumulative earnings. The equity in earnings of joint ventures was also affected by the 1992 sale of the Company's interest in a joint venture in a San Francisco office building. The Company's other joint ventures, as a group, are performing well and showed an overall improvement in operating results compared to 1992. Other revenue was lower than 1992 mainly due to the receipt of a non-refundable option deposit and an arbitration settlement in 1992. This was partially offset by increased revenue from early lease terminations and developers' fees earned in 1993. Interest expense decreased as a result of the conversion of the Debenture as well as paydowns on the working capital facility. This decrease, however, was partially offset by borrowings on intermediate secured term loans and by reduced capitalized interest due mainly to decreased construction activity.
In 1993, the Company recorded a $32.5 million ($19.5 million net of income tax benefits) write-down of certain properties where carrying costs exceeded estimated net realizable value.
As required by SFAS No. 109, the Company increased its tax expense and related deferred tax liability by $3 million during the third quarter of 1993 as a result of legislation enacted on August 10, 1993 increasing the federal corporate tax rate from 34% to 35% effective January 1, 1993. Excluding this, tax expense before the extraordinary item decreased $12.2 million due to lower pre-tax income ($21.2 million), offset by charges attributable to the conversion of the Debenture ($9 million).
COMPARISON OF 1992 TO 1991
The Company had 1992 net income of $1.2 million, or $.02 per share, compared to $5 million, or $.09 per share, in 1991. Income before taxes was $2.4 million in 1992 compared to $8.3 million in 1991. The declines in 1992 were due to increases in interest and depreciation expenses and lower income from property sales. These increases were only partially offset by higher income from operating properties.
The decrease in gross profit from property sales was due to an overall increase in the cost basis of properties sold in 1992 and a $6.4 million loss on the sale of a joint venture interest. The loss resulted from a decline in the value of the office building held by the venture and the Company's high cost basis in the interest sold. In addition to the joint venture sale, property sales in 1992 included $18.5 million from the sale of income producing properties which generated gross profit of $14.9 million, the sale of land and easements to the Southern California Rapid Transit District, and a number of smaller transactions, including the recognition of previously deferred revenue from installment sales. As described above, property sales and cost of sales will fluctuate from period to period.
Income from operating properties increased 29% due to higher rental revenue, offset slightly by a marginal increase in operating expenses. Higher rental revenue from existing buildings contributed two-thirds of this increase, with the remainder from rents on buildings completed during 1992. Almost 60% of the increase in rental revenue from existing buildings was the result of higher occupancy. The rest came from higher rental rates. The increase in rental rates in existing buildings resulted from automatic increases in leases, offset in part by decreases in rates for renewal leases and new tenants. The increase in taxes other than income resulted principally from supplemental property tax billings for improvements on certain Southern California properties and for properties acquired in 1991 through a land exchange program with The Atchison, Topeka and Santa Fe Railway Company. These increases were partially offset by the reduction in property taxes due to a reassessment of an office building the Company owns in Chicago.
Equity in losses of joint ventures increased due principally to higher losses from the Pacific Design Center. The Company's other joint ventures, as a group, performed well and had improved operating results compared to 1991. A reduction in general and administrative expenses resulted mainly from staff reductions and lower cost of outside professional services. The increased depreciation expense is due to buildings placed in service during 1992 and new tenant improvements in existing buildings. Interest expense increased as a result of lower interest capitalized due to reduced capital expenditures and compounding interest on the Debenture and new borrowings.
Income tax expense decreased $2.1 million in 1992 primarily as a result of lower pre-tax income.
INCOME TAXES
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 1, 1993. This Statement supersedes SFAS No. 96, "Accounting for Income Taxes," which was adopted by the Company in 1989. Adoption of SFAS No. 109 required no adjustment to the Company's balance sheet or statement of income.
At December 31, 1993, the Company had gross deferred tax assets total- ling $83 million. This included $20 million relating to net operating loss carryforwards (NOLs) of $21.3 million, $16.9 million and $13.3 million, which expire in 2006, 2007 and 2008, respectively. The Company's other deferred tax assets of $63 million relate primarily to differences between book and tax basis of properties. These deferred tax assets are not subject to expiration and will 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 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 many properties may have been leased to commercial or industrial tenants who may have discharged hazardous materials. From 1991 to 1993, expensed and capitalized environmental costs, including legal fees, totalled $19.4 million. The Company expects to spend $5.9 million for environmental investigation and remediation costs in 1994, including related legal costs. The Company's environmental remediation costs are expected to increase as the Company develops its major mixed-use projects.
While the Company or outside consultants have evaluated the environmental liabilities associated with most of the Company's properties, 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. Since the Company generally takes properties from an undeveloped to developed state, it may be obligated to achieve compliance with environmental laws only as they apply to the undeveloped property. Further remediation would only be required if the property were to be developed. The property would not be developed unless the scope and potential value justified the clean-up costs.
Environmental costs incurred in connection with income producing properties and properties previously sold are expensed. Costs relating to undeveloped properties are capitalized as part of development costs. At December 31, 1993, the Company's estimate of its potential liability for identified environmental costs ranged from $2 million to $24 million for properties where costs would be charged to operations. These costs are expected to be incurred over an estimated ten-year period, with a substantial portion incurred over the next five years. At December 31, 1993, the Company's estimate of its potential liability for identified environmental costs relating to developable properties ranged from $18 million to $63 million. These costs generally will be capitalized as they are incurred, over the course of the estimated development period of approximately 20 years.
The Company maintains a reserve for the known, probable costs of environmental remediation to be incurred in connection with income producing properties and properties previously sold. 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 condition. See Note 4 to the Consolidated Financial Statements.
SUPPLEMENTAL CURRENT VALUE
Since management believes that the current value of its properties is an important financial measure, the Company annually provides a current value balance sheet. Presented in addition to historical cost financial statements, the Company believes current value provides meaningful information regarding the financial condition and the value of its properties in today's real estate market. Current value does not contemplate liquidation or a distressed sale of the Company's assets. It is a measure of the value in the intended use of the property. It is determined through analyzing the economy, market trends and operating results affecting each property, direct sales comparisons and discussions with knowledgeable independent real estate professionals. Therefore, aggregate current value of the Company's assets will reflect increases and declines in the value of the Company's portfolio, which are not reflected in historical cost accounting. Management determines the valuation methods used to develop the current value balance sheets. These methods, as well as other relevant information, are discussed in Note 2 to the Consolidated Financial Statements.
At December 31, 1993, stockholders' equity on a current value basis was $1 billion or $9.31 per share, compared to $964 million or $14.52 per share at December 31, 1992, after giving effect in each year to the 1993 conversion of the convertible debenture and the issuance of Series A and B preferred stock. Also assuming conversion of all Series A and B preferred stock in each year, at their respective $9.06 and $9.80 conversion prices, stockholders' equity per share on a current value basis would have been $9.34 and $12.88 at December 31, 1993 and 1992.
At December 31, 1993, the current value of the Company's real estate assets was $1.7 billion, compared to $2.1 billion and $2.5 billion in 1992 and 1991. These represent declines of $411.6 million (19.4%) and $364.6 million (14.7%) in 1993 and 1992. Both the 1993 and 1992 declines were largely the result of a general decline in real estate values, particularly with respect to land held for development.
The table below identifies the components of the change in current value, by property type, from December 31, 1992 to December 31, 1993:
VALUE CHANGE BY COMPONENT AND PROPERTY TYPE (IN MILLIONS)
The value of the developable portfolio declined 20.5% overall in 1993. The portfolio declined 19.5% solely as the result of market conditions caused by decreased demand for new real estate product. Continued poor economic conditions in the western United States has further reduced demand for new commercial real estate. This lack of demand has depressed rental rates for new development and in turn, resulted in falling land values in most markets.
The value of income producing properties decreased 17.2% overall, again due to a general decline in real estate values. Approximately 11.5% of the decline was market related, after adjusting for sales, exchanges and trans- fers. This decline in value was caused principally by a general decline in the economy which reduced rents and increased investor yield requirements. Two other factors which affected value were sales of certain ground leases and buildings, offset by transfers of completed buildings from the developable portfolio.
The value of surplus developable properties decreased 38%, of which 32.9% was market related, after adjusting for sales, exchanges and transfers. The value of agricultural and other properties declined 7.7%, of which 2% was related to current market conditions only, with the remaining decline due to sales and exchanges.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 will be included in the Company's definitive Proxy Statement ("1994 Proxy Statement") which will be filed with the Securities and Exchange Commission in connection with the 1994 Annual Meeting of Stockholders.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the section captioned "Election of Directors" in the 1994 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 1994 Proxy Statement is incorporated herein by reference.
The information in the section captioned "Security Ownership of Certain Beneficial Owners" in the 1994 Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information in the sections captioned "Election of Directors-- Directors' Compensation" and "Compensation of Executive Officers" included in the 1994 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the sections captioned "Security Ownership of Directors and Officers" and "Security Ownership of Certain Beneficial Owners" in the 1994 Proxy Statement are incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section captioned "Certain Transactions" in the 1994 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
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 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 * 3.3 Form of Certificate of Designations, Preferences and Rights of $3.25 Series A Cumulative Convertible Preferred Stock (2) 3.4 Form of Restated By-Laws (3) 3.5 Form of Certificate of Designations, Preferences and Rights of $3.625 Series B Cumulative Convertible Exchangeable Preferred Stock (9) 4.1 Form of stock certificate representing Common Stock (1) 4.2 13 1/2% Convertible Debenture of the Registrant due December 28, 1994 (4) 4.3 Credit Agreement dated December 17, 1988, as amended December 28, 1989, between the Registrant and The Prudential Insurance Company of America ("Prudential") (1) 4.4 Term Loan Agreement dated December 6, 1988 between Security Pacific National Bank ("Security Pacific") and the Registrant (1) 4.5 Revolving Credit Agreement dated as of December 6, 1988 between Security Pacific and the Registrant (1) 4.6 Loan Agreement dated as of December 29, 1989 between the Registrant and The Chase Manhattan Bank, N.A. ("Chase") (1) 4.7 Amended and Restated Loan Agreement dated December 31, 1990 between Chase and the Registrant (5) 4.8 Extension and Modification Agreement dated November 6, 1991 between Chase and the Registrant (6) 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 * 4.11 Loan Agreement dated as of February 16, 1994 between the Registrant and Prudential ** 10.1 Exploration Agreement and Option to Lease dated December 28, 1989 between the Registrant and Santa Fe Pacific Minerals Corporation (1) 10.2 Agreement to Exchange Real Property dated as of December 29, 1989 ("Exchange Agreement") between the Registrant and The Atchison, Topeka and Santa Fe Railway Company ("ATSF") (1) 10.2A First Amendment to Exchange Agreement dated December 4, 1990 between the Registrant and ATSF (5) 10.3 Long-Term Stockholders Agreement dated as of December 29, 1989 among the Registrant, Bay Area Real Estate Investment Associates L.P. ("BAREIA"), Olympia & York SF Holdings Corporation ("O&Y") and Itel Corporation ("Itel") (1) 10.4 Registration Rights Agreement dated as of December 29, 1989 among the Registrant, BAREIA, O&Y and Itel (1) 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)
Exhibit No. Exhibits - ------- --------
10.7 State Tax Allocation and Indemnity Agreement dated December 29, 1989 among the Registrant and certain of its subsidiaries and SFP (1) 10.8 Executive Employment Agreement dated April 1, 1989 between Vernon B. Schwartz and the Registrant(4) 10.9 Registrant's Annual Performance Bonus Program (4) 10.10 Registrant's Stock Purchase Program (4) 10.11 Registrant's Profit Sharing & Savings Plan and Trust (4) 10.12 Registrant's Long-Term Incentive Compensation Program (4) 10.12A Registrant's Long-Term Incentive Compensation Program, as amended and restated effective February 27, 1992 (3) 10.13 Registrant's Incentive Stock Compensation Plan (4) 10.14 Management Agreement between ATSF and Catellus Management Corporation dated December 1, 1990 (5) 10.15 Termination, Substitution and Guarantee Agreement between ATSF and the Registrant dated December 21, 1990 (5) 10.16 Registrant's Stock Option Plan (5) 10.17 Development Agreement dated April 1, 1991 between the Registrant and the San Francisco Board of Supervisors (7) 10.18 Development Agreement dated May 9, 1983, by and between the City of San Diego and the Registrant (5) 10.19 Owner Participation Agreement dated June 16, 1983, by and between Redevelopment Agency of The City of San Diego and the Registrant (5) 10.20 Development Agreement dated October 30, 1991, by and between The Southern California Rapid Transit District and the Registrant (6) 10.21 Executive Stock Option Plan (3) 10.21A Amended and Restated Executive Stock Option Plan * 10.22 Amended and Restated Development Agreement between the City of Fremont and the Registrant effective March 19, 1992 (3) 10.22A First Amendment to Amended and Restated Development Agreement between the City of Fremont and the Registrant effective July 1, 1993 * 10.23 First Amendment to Development Agreement between the Southern California Rapid Transit District ("RTD") and the Registrant (3) 10.24 Letter Agreement dated June 30, 1992 between RTD and the Registrant (3) 10.25 Agreement dated as of January 14, 1993 between the Registrant and BAREIA (8) 10.26 Form of First Amendment to Registration Rights Agreement among the Registrant, BAREIA, O&Y and Itel(8) 10.27 Form of Stockholders Agreement among the Registrant, BAREIA, O&Y and Itel (8) 10.28 Agreement dated February 22, 1994 between Registrant and Vernon B. Schwartz * 21.1 Subsidiaries of Registrant (3) 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 *
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 consoli- dated basis. The Registrant agrees to furnish a copy of such instrument to the Commission upon request.
MANAGEMENT'S CONTRACTS AND COMPENSATORY PLANS - Exhibits 10.9, 10.11, 10.12, 10.13, 10.16, 10.21A and 10.28 are current management contracts or compensatory plans.
(b) Reports on Form 8-K
During the quarter ended December 31, 1993, the Registrant filed a Current Report on Form 8-K dated October 19, 1993 to file, under Item 5, the Company's earnings release for the quarter and nine months ended September 30, 1993.
- --------------- * Filed with this report on Form 10-K. ** To be filed by amendment. (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 Registration Statement on Form S-3 (Commission File No. 33-56082) as filed with the Commission on December 21, 1992 ("Form S-3"). (4) 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. (5) Incorporated by reference to Exhibit of the same number on the Form 10-K for the year ended December 31, 1990. (6) Incorporated by reference to Exhibit of the same number on the Form 10-K for the year ended December 31, 1991. (7) 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". (8) 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. (9) Incorporated by reference to Exhibit of the same number on the Form 10-Q for the quarter ended September 30, 1993.
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 /s/ Vernon B. Schwartz ------------------------------ Vernon B. Schwartz Chairman, President and Chief Executive Officer
Dated: March 25, 1994
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 - --------- ----- -----
/s/Vernon B. Schwartz Chairman, President, March 25, 1994 - -------------------------- Chief Executive Vernon B. Schwartz Officer and Director Principal Executive Officer
/s/ David A. Smith Senior Vice President and March 25, 1994 - -------------------------- Chief Financial Officer David A. Smith Principal Financial Officer
/s/ David M. Perna Controller March 25, 1994 - -------------------------- Principal Accounting David M. Perna Officer
Signature Title Date - --------- ----- -----
* Director - -------------------------- Joseph F. Alibrandi
* Director - -------------------------- Darla Totusek Flanagan
* Director - -------------------------- Gary M. Goodman
* Director - -------------------------- Robert D. Krebs
* Director - -------------------------- Judd D. Malkin
* Director - -------------------------- John E. Neal
* Director - -------------------------- Joseph R. Seiger
* Director - -------------------------- Jacqueline R. Slater
* Director - -------------------------- Tom C. Stickel
* Director - -------------------------- John E. Zuccotti
By /s/ David M. Perna March 25, 1994 -------------------------- David M. Perna Attorney-in-fact
AND FINANCIAL STATEMENT SCHEDULES (ITEM 14(A)(1) AND (A)(2))
Page ----
(A)(1) FINANCIAL STATEMENTS
Report of Independent Accountants dated February 18, 1994, Report of Independent Real Estate Appraisers dated February 17, 1994 Consolidated Balance Sheet - Historical Cost Basis and Supplemental Current Value Basis at December 31, 1993 and 1992 Consolidated Statement of Income - Historical Cost Basis for the years ended December 31, 1993, 1992 and 1991 Consolidated Statement of Stockholders' Equity - Historical Cost Basis for the years ended December 31, 1993, 1992 and 1991 Consolidated Statement of Cash Flows - Historical Cost Basis for the years ended December 31, 1993, 1992 and 1991 Consolidated Statement of Changes in Revaluation Equity-Supplemental Current Value Basis for the years ended December 31, 1993 and 1992 Notes to Consolidated Financial Statements Summarized Quarterly Results (Unaudited)
(A)(2) FINANCIAL STATEMENT SCHEDULES
Page ---- Report of Independent Accountants dated February 18, 1994 S-1 Schedule V - Property, Plant and Equipment S-2 Schedule VI - Accumulated Depreciation, Depletion and Amortization S-3 Schedule VII - Guarantees of Securities of Other Issuers S-4 Schedule VIII - Valuation and Qualifying Accounts S-5 Schedule IX - Short-Term Borrowings S-6 Schedule X - Supplementary Income Statement Information S-7 Schedule XI - Real Estate and Accumulated Depreciation S-8 Attachment A to Schedule XI S-9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Catellus Development Corporation
We have audited the accompanying historical cost basis consolidated balance sheet of Catellus Development Corporation and its subsidiaries (the Company) as of December 31, 1993 and 1992, and the related historical cost basis consolidated statements of income, of stockholders' equity and of cash flows for each of the three years in the period ended December 31, 1993. We have also audited the supplemental current value basis consolidated balance sheet of the Company as of December 31, 1993 and 1992 and the related supplemental current value basis consolidated statement of changes in revaluation equity for the years ended December 31, 1993 and 1992. These 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the historical cost basis consolidated financial statements referred to above present fairly, in all material respects, the financial position of Catellus Development Corporation and its subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.
As described in Note 2, the supplemental current value basis consoli- dated balance sheets have been prepared by management to present relevant financial information that is not provided by the historical cost basis finan- cial statements and are not intended to be a presentation in conformity with generally accepted accounting principles. In addition, the supplemental current value basis consolidated balance sheets do not purport to present net realiz- able, liquidation, or market value of the Company as a whole.
Current values of real estate are estimated by management in accor- dance with the procedures described in Note 2, which included receipt of an appraisers' concurrence report from Landauer Associates, Inc. We have tested the procedures used by management in arriving at their estimate of current value and have tested the underlying documentation. In the circumstances, we believe the procedures are reasonable and the documentation appropriate. Because of the subjectivity inherent in any estimate of current value of real estate, and because, generally, the Company's real estate assets are held for long-term operation and appreciation and thus are not presently for sale, amounts realized by the Company from the operation and ultimate disposition of real estate assets may vary significantly from the current values presented.
In our opinion, the supplemental consolidated current value basis financial statements referred to above present fairly, in all material re- spects, the information set forth therein on the basis of accounting described in Note 2.
/s/ Price Waterhouse
Price Waterhouse San Francisco, CA February 18, 1994
REPORT OF INDEPENDENT REAL ESTATE APPRAISERS
To the Board of Directors and Stockholders of Catellus Development Corporation and Price Waterhouse
We have reviewed the estimate of aggregate current value of the portfolio of real estate holdings of Catellus Development Corporation (the Company) as of December 31, 1993 and 1992. The property interests at December 31, 1993 include approximately 277 income producing buildings; approximately 7,811 acres of land planned for near-term development; approximately 20,485 acres of land held for long-term development or sale; 73 ground lease positions; approximately 16,130 acres of agricultural land; approximately 857,185 acres of mountain and desert land; and 9 joint venture interests. The property interests were valued subject to tenants' leases, but before debt.
The aggregate current value of the interests, estimated by the Company as of December 31, 1993 and 1992, was $1,712,217,000 and $2,123,816,000, respectively. These totals represent the Company's estimate of the aggregate current value of the interests in the entire property portfolio and assume that the individual assets are marketable and would be disposed of in an orderly manner, allowing a sufficient time period for exposure of each property interest to potential purchasers. The current valuation of the portfolio has applied neither a premium nor a discount with regard to a bulk sale of the entire portfolio.
Based upon our review, we concur with the Company's estimates of aggregate current value of the portfolio. By this we mean it is our opinion that the current value estimates by the Company are within ten percent (10%) of the aggregate value which we would estimate in a full and complete appraisal of the same interests. A variation of less than ten percent (10%) between apprais- ers implies substantial agreement as to the most probable current value of such property interests.
The data used in our review were supplied to us in summary form by the Company. We have had complete and unrestricted access to all underlying documents. We have relied upon the Company's interpretation and summaries of leases, operating agreements, estimate of environmental remediation costs, etc. During 1992 and 1993, we physically inspected Company properties with combined individual current value estimates representing approximately 86% of the aggregate current value estimate.
We certify that neither Landauer Associates, Inc. nor the undersigned have any present or prospective interest in the Company's properties, and we have no personal interest or bias with respect to the parties involved. To the best of our knowledge and belief, the facts upon which the analysis and conclu- sion were based are materially true and correct. No one other than the under- signed, assisted by members of our staff, performed the analyses and reached the conclusions resulting in the opinion expressed in this letter. Our fee for this assignment was not contingent on any action or event resulting from the analy- ses, opinions, or conclusions in, or the use of, this review.
This review has been prepared in conformity with the Code of Ethics and Standards of Professional Practice of the Appraisal Institute. As of the date of this letter, James C. Kafes has completed the requirements of the continuing education program of the Appraisal Institute.
Respectfully submitted, Landauer Associates, Inc. Real Estate Counselors
/s/ James C. Kafes /s/ John F. Brengelman James C. Kafes, MAI, CRE John F. Brengelman Managing Director Senior Vice President New York, NY February 17, 1994
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET -- HISTORICAL COST BASIS AND SUPPLEMENTAL CURRENT VALUE BASIS (IN THOUSANDS, EXCEPT SHARE DATA)
See notes to consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF INCOME -- HISTORICAL COST BASIS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF INCOME -- HISTORICAL COST BASIS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
See notes to consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY -- HISTORICAL COST BASIS (IN THOUSANDS)
See notes to consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS -- HISTORICAL COST BASIS (IN THOUSANDS)
See notes to consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS -- HISTORICAL COST BASIS--(CONTINUED) (IN THOUSANDS)
See notes to consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN REVALUATION EQUITY - SUPPLEMENTAL CURRENT VALUE BASIS (IN THOUSANDS)
See notes to consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
Catellus Development Corporation (the Company) is a diversified real estate company which owns substantial property interests principally in Califor- nia, and in 10 other states in the West, Southwest and Midwest. The Company develops and manages its income producing properties which consist primarily of industrial facilities and a limited number of office and retail buildings located in California, Illinois and Texas. The Company has substantial undevel- oped land holdings primarily in California, Texas, New Mexico and Utah.
NOTE 2. CURRENT VALUE PRESENTATION
CURRENT VALUE REPORTING
Current value basis consolidated balance sheets presented as of December 31, 1993 and 1992 provide supplemental information about the economic condition of the Company. Because of the low historical cost basis of the Company's real estate assets, management believes that the historical cost basis presentation used in customary financial statements does not reflect the true economic value of the Company's holdings. Current value reporting provides recognition that, over time, real property generally appreciates in value, and that value may be realized through the development process and effective management of income producing assets. It does not represent the net realizable value of the Company as a whole, nor does it contemplate liquidation or a distressed sale of the Company's assets. Management believes that current value information provides meaningful information regarding the Company's economic condition and the value of its holdings in today's real estate market.
Current value accounting continues to represent an experimental ap- proach; authoritative criteria have not been established for its preparation and presentation. As experimentation continues, preparation and presentation methods may be modified in future reporting periods.
BASIS OF VALUATION
The following methods for estimating current value are based on management's best judgments regarding the economy, market trends and operating results. Such factors, along with the capitalization or discount rates used to estimate current values, cannot be precisely quantified and verified. In addition, they may change based on ongoing evaluation of future economic trends.
DEVELOPABLE PROPERTIES--These properties, which have been designated by the Company for development, are located primarily in the San Francisco, Los Angeles, San Diego and Chicago metropolitan areas. Estimates of current value are made primarily using the direct sales comparison method. However, in cases where relevant comparable sales data is not available, current value is estimat- ed using the residual land analysis method.
Under the direct sales comparison approach, recent sales of similar properties are used as a basis for estimating current value. The resulting values are adjusted to reflect the estimated costs to remediate known environ- mental contamination. In 1993, current value estimates for large contiguous parcels include a discount to reflect current market absorption rates for undeveloped land; no such discount was included in the corresponding 1992 values.
Under the residual land analysis approach, current value is derived based on anticipated future cash flows associated with the Company's intended development plan, which considers the needs and opportunities of the market. Infrastructure costs, development costs (including costs to remediate known environmental contamination), operating cash flow and a residual sales amount are projected over an assumed period of development and operation. Such amounts are then discounted to the balance sheet date using a discount rate the Company believes is appropriate given the level of project risk.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME PRODUCING PROPERTIES (BUILDINGS)--The Company estimates the current value of buildings, which are located primarily in California, Arizona and Illinois, using the discounted cash flow method.
Operating cash flows were projected based on current lease terms and management's estimate of potential future rents, operating costs, tenant improvement costs, leasing commissions and structural repairs. Buildings were assumed sold after 10 to 16 years; sales prices were determined using direct capitalization at capitalization rates ranging from 9% to 13% in 1993 and 9% to 14.5% in 1992. Operating cash flows and cash from property sales were discount- ed back to the balance sheet date at discount rates ranging from 10% to 14% in 1993 and a discount rate of 11.5% in 1992.
INCOME PRODUCING PROPERTIES (GROUND LEASES)--The majority of the Company's land under lease is located in California. The Company generally estimates current value using discounted cash flow where annual cash flows are calculated based on existing lease agreements. In 1993, land subject to ground leases was assumed sold at conclusion of the existing lease and renewal options. Land values were based on the direct sales comparison approach and were project- ed to increase at an annual rate of 3% through the date of sale.
In 1992, land subject to ground leases expiring within 10 years was assumed sold at conclusion of the existing lease. Land values were based on the direct sales comparison approach and were projected to increase at an annual rate of 4% through the date of sale. Existing leases with terms greater than 10 years were assumed to be renewed and the underlying land sold at the end of 20 years. Land values were based on direct capitalization of income projected for the year following sales using a rate of 9%.
The projected cash flow for each lease together with the projected sales price, less estimated costs to ready the property for sale, were discount- ed back to the balance sheet date using a discount rate of 10% for both 1993 and 1992.
INCOME PRODUCING PROPERTIES (JOINT VENTURE INVESTMENTS)--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.
SURPLUS DEVELOPABLE PROPERTIES--These are properties which have development potential but are not currently scheduled for development. The Company estimates current values using direct sales comparisons. The properties are located primarily in California, New Mexico, Utah and Texas.
AGRICULTURAL AND OTHER PROPERTIES--The Company's agricultural property holdings, which are in the process of being sold, are located in the San Joaquin Valley of California. Current values for these properties were determined using direct sales comparisons. Other properties consist of mountain and desert lands located in California. Current values for these properties were determined using direct sales comparisons supplemented by estimates made by management.
ESTIMATED DISPOSITION COSTS--Selling commissions and other estimated disposition costs have been provided at 2.5% of the current value of the Company's properties and joint venture investments.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEFERRED INCOME TAXES--Deferred income taxes on a current value basis represent the present value of estimated income tax payments based on projec- tions of taxable income through the year 2028. The differences between the current value and historical cost bases of the Company's properties should be realized over an extended, indefinite period of time through future operations or sales. The Company has no current intention of selling any significant portion of its operating properties and fully expects that current values will be realized through operations. The projections of taxable income are based on cash flow assumptions and include anticipated sales of currently owned proper- ties, as well as projected investment in properties currently planned for development. The projections reflect deductions for anticipated depreciation on developed properties and other holding costs. These projections are based on the current provisions of the Internal Revenue Code. The discount rate used to compute the present value of income taxes is similar to the rate used to compute the current values of real estate assets which are the source of the taxable income.
OTHER ASSETS AND LIABILITIES--Certain deferred assets and liabilities have been excluded from the current value balance sheet because they are already considered in the current value of real estate assets or have no current value. The remaining other assets and liabilities are carried in the current value balance sheet at historical costs which approximate current value. Projected property tax assessments for municipal debt are reflected in the current values of related properties. As a result, current value has been reduced by the municipal debt principal and no current value amount has been reflected in the caption "mortgage and other debt."
REVALUATION EQUITY--The difference between the current value basis and historical cost basis of the Company's assets and liabilities is reported as revaluation equity in the stockholders' equity section of the consolidated current value basis balance sheet. The components of revaluation equity at December 31, 1993 and 1992 are as follows (in thousands):
NOTE 3. CAPITAL STRUCTURE
Prior to December 29, 1989, the Company was wholly owned by Santa Fe Pacific Corporation (SFP). On December 29, 1989, the Company issued 19.9% of its common stock to Bay Area Real Estate Investment Associates L.P. (BAREIA) for $398 million cash. In connection with the stock issuance, BAREIA also purchased from the
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company, at par, a $75 million convertible debenture (Debenture). BAREIA is a California limited partnership whose general partner is JMB/Bay Area Partners and whose limited partner is the California Public Employees' Retirement System. On December 4, 1990, SFP distributed, in the form of a stock dividend, its remaining 80.1% interest in the Company to its stockholders (Distribution).
On February 11, 1993, BAREIA converted the Debenture (accreted value of $111.4 million) into common stock with a value of $141 million. This is treated as a non-cash item in the statement of cash flows. After the conver- sion, BAREIA owned 40.7% of the outstanding common stock. At that 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. Concurrently with the conversion of the Debenture, the Company issued 3,449,999 shares (of a total 3,500,000 authorized) of $3.75 Series A Cumulative Convertible Preferred Stock (Series A preferred stock) for $172.5 million, of which BAREIA purchased 1,405,702 shares (approximately 40.7% of the total). The Series A preferred stock has an annual dividend of $3.75 per share and a stated value and liquidation preference of $50 per share (plus accrued and unpaid dividends). It is convertible into common stock at a price of $9.06 per 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.
The net proceeds of the Series A preferred stock issuance were used to repay $69 million of the working capital facility and to invest $50 million in securities to be held for the benefit of The Prudential Insurance Company of America (Prudential) and committed to the paydown and refinancing of the Company's $388.2 million first mortgage loan with Prudential (Note 5). The balance of the proceeds were invested in short-term marketable securities.
On November 4, 1993, the Company sold, in a private placement, 3,000,000 shares (of a total 4,600,000 authorized) of $3.625 Series B Cumulative Convertible Exchangeable Preferred Stock (Series B preferred stock) for $150 million. The Series B preferred stock has an annual dividend of $3.625 per share and a stated value and 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 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 principal amount 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 thereaf- ter at prices declining to $50 per share on or after November 15, 2003. The proceeds of the Series B preferred stock issuance will be used to repay debt that matures from 1994 through 1997, and for general corporate purposes.
The Company has reserved 19,039,735 and 15,306,000 shares of common stock for issuance on conversion of the Series A and Series B preferred stock, respectively, and 2,400,000 shares for issuance pursuant to various compensation programs.
NOTE 4. 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.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION--Rental revenue, in general, is recognized when due from tenants; however, revenue from leases with rent concessions are recog- nized 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 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 identi- fication 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 EQUIVALENTS--The Company considers all highly liquid investments with a maturity of three months or less at time of purchase to be cash equiva- lents.
PROPERTY AND DEFERRED COSTS--Real estate is stated at the lower of cost or estimated net realizable value. In cases where the Company determines that the carrying costs for properties held for sale exceeds estimated net realizable value, or an impairment has been sustained, a write-down to estimated net realizable value is recorded. A property is considered impaired when it is probable that the property's estimated undiscounted future cash flow is less than its book value. 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.
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 capital- ized.
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS--Accounts receivable are present- ed net of an allowance for uncollectible accounts totalling $1.9 million and $3.3 million at December 31, 1993 and 1992. The provision for uncollectible accounts in 1993, 1992 and 1991 totalled $.1 million, $.9 million and $2.0 million, respectively.
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 income producing properties and properties previous- ly sold are expensed. Costs relating to undeveloped properties are capitalized as part of development costs. Environmental costs charged to operations for 1993, 1992 and 1991 were $5.5 million, $4.9 million and $3.5 million. Environ- mental costs capitalized in 1993, 1992 and 1991 were $1.4 million, $2.2 million and $2.5 million. The Company maintains a reserve for known, probable costs of environmental remediation to be incurred in connection with income producing properties and properties previously sold. This reserve was $5.6 million and $3.8 million at December 31, 1993 and 1992. When there is a legal requirement for environmental remediation of developable property, 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.
The Company also considers potential future costs of environmental remediation relating to individual development properties in conjunction with its analysis of current value and net realizable value. The current value of the Company's properties reflect the Company's best estimate of possible remediation costs. Based on this analysis, no loss has been recognized relating to environmental remediation because management believes that no material recoverability issues exist.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES--The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 1, 1993. This statement supersedes SFAS No. 96, "Accounting for Income Taxes," which was adopted by the Company in 1989. The primary change from SFAS No. 96 is to allow for the possible earlier recognition of tax benefits. Adoption of SFAS No. 109 required no adjustment to the Company's balance sheet or statement of income.
EARNINGS PER SHARE--Net income (loss) per share of common stock is computed by dividing net income (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.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified to conform with the current year financial statement presentation.
NOTE 5. MORTGAGE AND OTHER DEBT
Mortgage and other debt at December 31, 1993 and 1992 consisted of the following (in thousands):
(a) This first mortgage loan with The Prudential Insurance Company of America (Prudential) is collateralized by a majority of the Company's income producing properties and by an assignment of rents generated by the underlying properties. The Company refinanced this loan on February 18, 1994 with a $280 million mortgageloan due March 1, 2004 and bearing an average interest rate of 8.71%. The new loan reflects a paydown of $108.2 million, of which $81 million was required to meet current loan underwriting standards
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and $27.2 million was paid to release selected properties from the 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 consisted primarily of a redemption premium paid to Prudential and the write-off of deferred financing costs associated with the $388.2 million loan.
(b) These first mortgage loans are collateralized by certain of the Company's income producing properties and by an assignment of rents generated by the underlying properties. A majority of these loans have penalties if paid prior to maturity. In conjunction with the Prudential refinancing described in (a) above, a $10 million principal payment was made in February 1994 on a $54.4 million loan. The remaining principal balance of this loan is due January 1, 1996. Monthly payments on the remaining $64.1 million of these loans require principal payments through 2007.
(c) The Company has a three-year $24 million secured term loan agreement of which none was available for future borrowings and a two-year $46.9 million secured term loan agreement of which $1.9 million was available for future borrowings.
(d) The Company had a $155 million unsecured revolving credit agreement which allowed borrowings to be converted at either the lender's or the Company's option to a collateralized four-year term loan. Proceeds from the Series A preferred stock issuance (Note 3) were applied to reduce the amounts outstanding under the facility from $115 million to $46 million. On March 18, 1993, this facility was renewed as a $75 million unsecured revolving facility and a $46 million unsecured term facility. The term facility was paid down to $22 million in November 1993. The revolving facility expires on December 31, 1994; if the facility is not renewed by that date, the amount then outstanding will convert to a three-year term loan payable in installments. In June 1993, $5.7 million of this facility was used to provide a letter of credit, leaving $69.3 million available at December 31, 1993 for future borrowings.
(e) The Company's construction loans are used to finance development projects and are secured by the related land and buildings. On May 4, 1993, the Company renewed its $100 million construction facility for a one-year revolving period to March 31, 1994, with maximum borrowings at any time of $75.5 million. If the construction facility is not renewed, the Company will be able to borrow up to $.9 million to complete projects already approved under the facility. Based on current discussions, the Company expects that the construction facility will be renewed for a one-year revolving period with maximum borrowings at any time of approximately $75 million. At December 31, 1993, $68.5 million was available under all construction loans for future borrowings.
(f) The Debenture was convertible at any time into common stock of the Company at the market price per share when converted. Interest at the rate of 13.5% per year was compounded annually and payable at maturity. On February 11, 1993, the Debenture was converted into common stock with a value of $141 million (Note 3).
(g) The assessment district bonds are issued by 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.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Certain debt agreements include covenants which place limitations on the amount of indebtedness that may be incurred and dividends which may be paid by the Company. The Company was in compliance with all such covenants at December 31, 1993. Currently, the most restrictive of these covenants limit annual dividends to $27.6 million and total debt to $1.6 billion; up to $180 million of this debt may be for non-property related activities. Other covenants require stockholders' equity on a current value basis to be no less than $800 million and on a historical cost basis to be no less than $500 million, accelerate payment upon certain change of control events, and contain negative pledges with respect to certain of the Company's properties.
The maturities of mortgage and other debt outstanding as of December 31, 1993 and pro forma as of December 31, 1993, reflecting the paydown and refinancing of the first mortgage loans described in (a) and (b) above, are summarized as follows (in thousands):
Interest costs incurred during 1993, 1992 and 1991 relating to mortgage and other debt totalled $64.0 million, $78.3 million and $76.8 million. Total interest costs, which also includes loan fee amortization and other interest costs, amounted to $69.6 million, $82.6 million and $80.6 million in 1993, 1992 and 1991. Of these amounts, $25.6 million, $29.3 million and $35.9 million were capitalized during 1993, 1992 and 1991.
NOTE 6. INCOME TAXES
Total income taxes (benefit) reflected in the consolidated statement of income differ from the amounts computed by applying the federal statutory rate (35% in 1993 and 34% in 1992 and 1991) to income (loss) before extraordi- nary item as follows (in thousands):
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Signifi- cant components of the Company's net deferred tax liability as of December 31, 1993 are as follows (in thousands):
During 1993, 1992 and 1991, the Company generated net operating loss carryforwards of $13.3 million, $16.9 million and $21.3 million for tax purposes which expire in 2008, 2007 and 2006. Deferred income tax expense was reduced to reflect the benefit of these amounts.
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 7. JOINT VENTURE INVESTMENTS
The Company is involved in a variety of real estate-oriented joint venture activities. At December 31, 1993, 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 loaned a total of $.3 million in 1992 and $1.9 million in 1991 to one of its joint ventures and a joint venture partner. The loans bear interest at one percentage point over the rate payable under the joint venture's note to its creditor bank (6.3% at December 31, 1993) and are secured either by a second lien on the joint venture property or by the partner's interest in the joint venture. Principal and interest are due on or before February 1, 1996 on the loan to the joint venture. The loan to the joint venture partner matured on January 28, 1993. The Company has the right to foreclose on the partner's interest in the joint venture if the loan is not repaid.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the fourth quarter of 1992, the Company sold its 50% interest in an office building joint venture. The Company recognized a $6.4 million loss on the sale, attributable to the decline in value of the building and the high cost basis in the Company's interest in the joint venture.
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):
The Company's proportionate share of venturers' deficit is an aggre- gate 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.
NOTE 8. PROPERTY
Property and capitalized property costs at December 31, 1993 and 1992 consisted of the following (in thousands):
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. LEASES
The Company, as lessor, has entered into noncancelable operating leases expiring at various dates through 2052. Rental revenue under these leases totalled $105.1 million in 1993, $94.7 million in 1992 and $83.2 million in 1991. Included in this revenue are rentals contingent on lease operations of $3.2 million in 1993, $3.9 million in 1992 and $4.2 million in 1991. Future minimum rental revenues under existing noncancelable operating leases as of December 31, 1993 are summarized as follows (in thousands):
The Company, as lessor, had income producing property under operating leases or held for rent as of December 31, 1993 and 1992 in the following amounts (in thousands):
The Company, as lessee, has entered into noncancelable operating leases expiring at various dates through 2033. Rental expense and related sublease income under these leases totalled $4 million and $1.3 million in 1993, $5.9 million and $1.9 million in 1992 and $6.1 million and $2.2 million in 1991. Future minimum lease payments as of December 31, 1993 are summarized as follows (in thousands):
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. TRANSACTIONS WITH AFFILIATES
The Company has a management agreement with The Atchison, Topeka & Santa Fe Railway Company (ATSF), a subsidiary of SFP, under which the Company acts as exclusive management and selling agent for ATSF's nonoperating railroad properties. This agreement is in effect until October 31, 1994 but is subject to termination at any time on 180 days' notice. Fees of $4.8 million, $5.7 million and $6.2 million were earned in 1993, 1992 and 1991, respectively, under this agreement.
The Company had an agreement to exchange certain desert properties for certain ATSF properties with comparable market value. The Company transferred approximately 154,000 acres ($10.3 million market value) and 174,000 acres ($12.2 million market value) of primarily desert land in exchange for five and six developable properties in 1992 and 1991, respectively. These exchanges had no impact on the historical cost of the Company's total assets. The Company concluded the exchange agreement during 1992 by selling an additional 169,000 acres of desert land and 4,000 acres of mineral rights to an affiliate of ATSF and recognized a gain of $6.3 million.
NOTE 11. 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 $.6 million, $.7 million and $.7 million in 1993, 1992 and 1991, respectively.
The Company has various plans through which employees may purchase common stock of the Company or receive common stock as incentive compensation.
The Incentive Stock Compensation Plan (Substitute Plan) was adopted to provide substitute awards to employees whose awards under certain SFP plans were forfeited as a result of the Distribution. 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 are exercis- able after March 5, 1992 and expire from 1997 through 1999. The Company also has a Stock Option Plan under which the Board of Directors may issue options to purchase up to 250,000 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 purchase up to 1,250,000 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 Direc- tors, 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. The options are exercisable in installments on a cumulative basis at a rate of 20% each year. Unless otherwise provided at the time of grant, the exercise price for all other options will be the fair market value on the date of grant, increasing 5% on each anniversary of the grant date, and the options are exercisable in full on the fifth anniversary of the grant date.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Transactions under these plans during 1992 and 1993 are summarized below:
In addition, in 1992 restrictions lapsed on a total of 4,781 shares of common stock awarded under the Substitute Plan to holders of SFP restricted stock.
Under the Long-Term Incentive Compensation Program (LICP), partici- pants will share a percentage of the increase in stockholders' equity (on a current value basis) over the five-year period ending December 31, 1996. The amount of the LICP award pool may range from one-quarter of one percent of the increase (if the annual compound growth over the period exceeds 5%) to 1% of the increase (if the annual compound growth exceeds 20%). All of the Company's executive officers are participants in the LICP. Certain executive officers will receive a portion of their awards in cash (equal to the amount of income tax payable on the award) and the balance in the Company's common stock; all other awards are payable in cash. There will be no LICP award pool if the annual compound growth is less than 5%; accordingly, there has been no accrual for the plan as of December 31, 1993.
NOTE 12. 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, totals approximately $600,000. Addition- ally, 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 intends to vigorously pursue an appeal, it has provided $8.3 million as a non-recurring expense in the consolidated statement of income for the year ended December 31, 1993.
The Company has obtained standby letters of credit and surety bonds in favor of local municipalities to guarantee performance obligations on real property improvements. As of December 31, 1993, $29.2 million was outstanding.
The Company, as a partner in certain joint ventures, has made certain financing guarantees which do not individually or collectively represent a material commitment.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 or results of operations of the Company.
Inherent in the operations of the real estate business is the possi- bility that environmental pollution conditions may exist on or relate to proper- ties owned or previously owned. The Company may be required in the future to take action to correct or reduce the effects on the environment of prior disposal or release of hazardous substances by third parties, the Company, or its corporate predecessors. The amount of such future cost is difficult to estimate with a high degree of accuracy 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.
At December 31, 1993, management estimates that future costs for remediation of identified or suspected environmental contamination which will be treated as an expense may be in the range of $2 to $24 million. It is antici- pated that such costs will be incurred over the next ten years. The Company has provided a reserve for such costs (Note 4). Management also estimates that similar costs relating to the Company's developable properties may range from $18 million to $63 million. These amounts generally will be capitalized as components of development costs when incurred. It is anticipated that environ- mental remediation costs relating to property developments will be incurred over a period of twenty years. 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.
SUMMARIZED QUARTERLY RESULTS (UNAUDITED)
The Company's earnings and cash flow are determined to a large extent by property sales. While the Company's commercial and industrial rental revenue has increased steadily, particularly in recent years, the Company's sales and net income have fluctuated significantly from quarter to quarter, as evidenced by the following summary of unaudited quarterly consolidated results of opera- tions. 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. Historically, sales in the fourth quarter have been high, reflecting the Company's experience that both buyers and sellers attempt to complete pending transactions prior to a calendar year-end.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Catellus Development Corporation
Our audits of the consolidated historical cost basis financial state- ments referred to in our report dated February 18, 1994, appearing on page 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 historical cost basis financial statements.
/s/ Price Waterhouse Price Waterhouse
San Francisco, CA February 18, 1994
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CATELLUS DEVELOPMENT CORPORATION
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT THREE YEARS ENDED DECEMBER 31, 1993 (IN THOUSANDS)
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CATELLUS DEVELOPMENT CORPORATION
SCHEDULE VI--ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION THREE YEARS ENDED DECEMBER 31, 1993 (IN THOUSANDS)
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CATELLUS DEVELOPMENT CORPORATION
SCHEDULE VII--GUARANTEES OF SECURITIES OF OTHER ISSUERS DECEMBER 31, 1993
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CATELLUS DEVELOPMENT CORPORATION
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1993 (IN THOUSANDS)
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CATELLUS DEVELOPMENT CORPORATION
SCHEDULE IX--SHORT-TERM BORROWINGS THREE YEARS ENDED DECEMBER 31, 1993 (DOLLARS IN THOUSANDS)
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CATELLUS DEVELOPMENT CORPORATION
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE THREE YEARS ENDED DECEMBER 31, 1993 (IN THOUSANDS)
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CATELLUS DEVELOPMENT CORPORATION SCHEDULE XI -- REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1993 (DOLLARS IN THOUSANDS)
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CATELLUS DEVELOPMENT CORPORATION ATTACHMENT A TO SCHEDULE XI RECONCILIATION OF COST OF REAL ESTATE AT BEGINNING OF PERIOD WITH TOTAL AT END OF PERIOD (IN THOUSANDS)
RECONCILIATION OF REAL ESTATE ACCUMULATED DEPRECIATION AT BEGINNING OF PERIOD WITH TOTAL AT END OF PERIOD (IN THOUSANDS)
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