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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 0-18694
CATELLUS DEVELOPMENT
CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-2953477
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
201 Mission Street
San Francisco, California 94105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(415) 974-4500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, $.01 par value per share New York, Pacific, Chicago Stock
Exchanges
$3.75 Series A Cumulative Convertible New York Stock Exchange
Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No _
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $846 million on March 24, 1997.
As of March 24, 1997, there were 89,500,428 issued and outstanding shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
Catellus Development Corporation (the "Company") is a diversified real
estate operating company that owns, manages and develops real estate for its
account and others. As of December 31, 1996 its portfolio included approximately
837,000 acres of land, 16.4 million square feet of income-producing property,
5,300 acres of land leases and interests in twelve joint ventures. Approximately
76% (by square feet) of the Company's industrial property, 85% of its retail
property and 65% of its office property are located in California, with the
balance mainly concentrated in metropolitan Texas, Illinois and Arizona. In
addition, 30% of the Company's industrial land holdings, and all of its resource
group portfolio and major mixed-use projects are located in California.
The Company was originally organized in the state of Delaware in 1984 as an
indirect, wholly-owned subsidiary of Santa Fe Pacific Corporation to conduct the
non-railroad real estate activities of Santa Fe Industries and Southern Pacific
Company. The largest single shareholder of the Company is the California Public
Employees' Retirement System ("CALPERS"), which, as of December 31, 1996, owned
approximately 41.7% of the common stock.
The Company's principal office is located at 201 Mission Street, San
Francisco, California 94105; its telephone number is (415) 974-4500.
COMPANY STRATEGIES -- OVERVIEW
Prior to 1996, the aggregate cash requirements associated with fixed
charges and leasing costs exceeded the Company's operating income from recurring
sources. The Company relied primarily on proceeds from asset sales and the
issuances of debt and preferred stock to meet its operating deficits. During
1995 and 1996, the Company focused on improving operating income, and, as a
result, the deficits were eliminated in 1996 (see detailed financial results
under Liquidity and Capital Resources section in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this Form 10-K).
The more significant steps taken were as follows:
o In October 1995, the Company established a goal to sell $100 million of
non-strategic land assets over the 15-month period ended December 31, 1996.
Total program sales for the 15 months equaled $123.7 million, exceeding the goal
by $23.7 million. In addition, $9.1 million in other non-strategic property
sales occurred in 1996. Proceeds from these sales were used primarily for debt
reduction and to fund the Company's development activities.
o The Company continued to place a greater emphasis on increasing its
development activity:
- During 1996, the Company commenced construction on 3.3 million
square feet of new development, compared to 900,000 square feet
in 1995, and completed 1.6 million square feet
compared to 600,000 for 1995.
- In March 1996, the Company acquired The Akins Companies (now the
Catellus Residential Group), a residential developer based in
Southern California, to place the Company in a better position to
pursue residential opportunities on certain existing land
holdings. In addition, the Company intends to grow this business
to opportunities on land not currently owned.
- In addition to non-strategic land sales, the Company closed $62.5
million in property sales related to industrial, residential and
mixed-use land development. These sales contributed $15.6 million
to 1996 earnings compared to $1.0 million in 1995.
o The Company continued to grow its fee businesses. Development and
management fee income (net) increased to $3.4 million during 1996 from $1.9
million in 1995. This increase was primarily from "design build" fee income
for the 500,000-square-foot Metropolitan Water District's headquarters at
Los Angeles Union Station, residential development fee income and
management fees from the Burlington Northern Santa Fe management contract.
2
o During 1996, the Company applied $83.3 million of the proceeds from
non-strategic land sales to debt reduction in order to reduce interest
expense. In addition, debt increased by $83.9 million which financed the
construction of primarily pre-leased industrial buildings, residential
development and the redemption of preferred stock. It is expected that
future cash flow will be improved by the interest savings on the $83.3
million of debt reduction, reduced dividend requirements, cash flow from
completed buildings and residential development, less the interest related
to the $83.9 million of debt incurred to fund these activities.
o In order to reduce its preferred dividends, the Company issued two calls
in 1996 and two calls in early 1997 for the redemption of preferred stock:
- In July 1996, the Company called for redemption of 950,000 shares
or approximately $50 million of its $3.75 Series A Cumulative
Convertible Preferred Stock (Series A Preferred Stock). The
redemption date was September 13, 1996. The results were the
conversion of 441,887 shares into 2,438,641 shares of common stock
and the redemption of 508,113 shares at a cost of approximately
$26.7 million.
- In December 1996, the Company called for redemption an additional
475,000 shares or approximately $25 million of its Series A
Preferred Stock. The redemption date was January 31, 1997. The
results were the conversion of 471,730 shares into 2,603,168
shares of common stock and the redemption of the remaining shares
at a cost of $175,000.
- On February 5, 1997, the Company called for redemption an
additional 1,720,000 shares or approximately $90 million of its
Series A Preferred Stock. The redemption date was March 24, 1997.
The results were the conversion of 99.8% of the shares into
9,469,015 shares of common stock and the redemption of the
remaining 4,163 shares at a cost of $220,000.
- On March 24, 1997, the Company called for redemption of the
remaining outstanding 250,000 shares, or approximately $13
million, of its Series A Preferred Stock and 1,470,000 shares, or
approximately $75 million, of its $3.625 Series B Cumulative
Convertible Exchangeable Preferred Stock. The redemption date on
this call is May 1, 1997.
As a result of these four calls, the Company's annual preferred dividend
requirement will be decreased by approximately $18.1 million. Assuming the
market conditions remain favorable, the Company expects to make additional
redemption calls in 1997.
o The Company has an ongoing strategy to review its major land development
projects with the goal of increasing profitability, minimizing up-front
capital requirements and shortening the time required to develop the
properties. As a result of these reviews, decisions have been and continue
to be made to modify certain of the entitlements or abandon or sell
properties that management believes cannot be developed in a reasonable
time frame. For a discussion of specific projects, see Portfolio Summary.
The combination of the above actions and other operating results resulted
in the Company reporting $19.9 million in "Income from property operations,
development and management activities after adjustment for general and
administrative expense, fixed charges and leasing costs" compared to a deficit
of $8.3 million in 1995 and a deficit of $24.5 million in 1994 (see Liquidity
and Capital Resources section in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Form 10-K).
With the elimination of its historic operating deficits, the Company
expects to aggressively pursue development activities beyond those associated
with its current land holdings, as well as other opportunities to increase cash
flow.
PORTFOLIO SUMMARY
The following tables provide information on the Company's income-producing
assets, land assets, and joint venture investments:
3
PORTFOLIO BY ASSET CATEGORY
INCOME-PRODUCING PROPERTIES
AS OF DECEMBER 31,
------------------------------------------- PROPERTY
NUMBER OF PROPERTIES SQUARE FEET OWNED OPERATING INCOME(1)
------------------- -------------------- -----------------------
1996 1996 1995 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Industrial....... 53 12,606 11,424 $ 41,851 $ 39,523
Retail........... 12 928 957 8,839 8,423
Office........... 14 1,683 1,687 15,746 16,483
Land leases...... 54 N/A N/A 6,705 6,171
--- ------ ------ -------- --------
Total....... 133 15,217* 14,068 $ 73,141 $ 70,600
=== ====== ====== ======== ========
* Does not include approximately 1,200,000 square feet of buildings located
on major mixed-use projects.
LAND DEVELOPMENT AND LAND HOLDINGS
AS OF DECEMBER 31,
----------------------------------------------------- Property
Acres Catellus Net Book Value Operating Income (1)
------------------------ --------------------------- -------------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ------------ ------------- ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Major mixed use projects........ 1,171 1,156 $323,134 $317,727 $3,337 $1,578
Industrial development.......... 1,838 1,671 93,783 76,170 (964) (1,111)
Retail and office development
and other land................ 1,209 6,086 61,902 59,647 (459) 391
Residential properties.......... 1,955 550 44,939 14,522 (86) (197)
Resource group portfolio........ 789,899 833,844 2,299 1,788 (615) (936)
Properties held for sale........ 41,323 11,863 37,223 84,232 (1,600) (2,018)
------- ------- -------- -------- ------- --------
Total................. 837,395 855,170 $563,280 $554,086 $(387) $ (2,293)
======= ======= ======== ======== ======= ========
JOINT VENTURES
COMPANY
SHARE OF INCOME
---------------
1996 1995
---- ----
(IN THOUSANDS)
Hotels................ $6,571 $6,355
Land.................. 130 1,373
Residential........... 797 --
Office and apartments. (747) (693)
------ ------
Total....... $6,751 $7,035
====== ======
Notes:
(1) Property operating income represents rental revenue less property
operating costs.
4
The following summarizes leasing statistics for the Company's operating
properties (square feet in thousands):
DECEMBER 31,
---------------------
1996 1995 1994
---- ---- ----
Industrial buildings
Square feet owned.......... 12,606 11,424 10,985
Square feet leased......... 12,345 10,945 10,432
Percent leased............. 97.9% 95.8% 95.0%
Office buildings
Square feet owned.......... 1,683 1,687 1,687
Square feet leased......... 1,460 1,553 1,618
Percent leased............. 86.7% 92.1% 95.9%
Retail buildings
Square feet owned.......... 928 957 837
Square feet leased......... 874 883 777
Percent leased............. 94.2% 92.3% 92.8%
Land development*
Square feet owned.......... 1,231 100 100
Square feet leased......... 1,129 100 100
Percent leased............. 91.7% 100.0% 100.0%
Total
Square feet owned.......... 16,448 14,168 13,609
Square feet leased......... 15,808 13,481 12,927
Percent leased............. 96.1% 95.1% 95.0%
- ----------
* 1996 increase reflects the inclusion of income from Mission Bay which was
previously excluded because of capitalization of revenues and expenses.
Lease Expiration -- The following table summarizes the lease expirations in
the total portfolio as of December 31, 1996:
1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
---- ---- ---- ---- ---- ---- ---- ---- ---- ----------
Percent..................... 19.1% 8.3% 10.0% 10.1% 17.4% 5.9% 4.2% 5.6% 6.3% 13.1%
Square feet (in thousands).. 3,026 1,312 1,584 1,602 2,746 930 665 889 991 2,063
Of the 3.0 million of leased square feet that is scheduled to expire in
1997, approximately 385,000 square feet represent month-to-month leases.
INDUSTRIAL INCOME-PRODUCING PROPERTIES
At the end of 1996, the Company's industrial income-producing portfolio
included 12.6 million square feet in 53 properties. At the year-end, these
buildings were 97.9% leased.
At the end of 1996, the Company also had 2.3 million square feet under
construction and leases signed for an additional 43,000 square feet to be
constructed in 1997.
Property Operating Income -- Property operating income for the industrial
portfolio increased from $39.5 million in 1995 to $41.9 million in 1996. This
increase resulted primarily from the addition of new industrial buildings
totaling 1.7 million square feet that were completed in late 1995 and 1996. The
increase in 1995 compared to 1994 was due to the completion of six new buildings
totaling 532,000 square feet in 1995 and the
5
fourth quarter of 1994, and was partially offset by reduced rentals from
existing properties. The following table summarizes property operating income
for the industrial portfolio (in thousands):
1996 1995 1994
---- ---- ----
Industrial buildings....... $ 41,851 $ 39,523 $ 38,813
======== ======== ========
Location -- The following table summarizes the Company's industrial
buildings by region as of December 31, 1996:
NUMBER OF NUMBER OF
BUILDINGS PROPERTIES SQUARE FEET
------------ ---------- --------------
(IN THOUSANDS)
Arizona.................. 12 5 1,194
Northern California...... 20 4 1,727
Southern California...... 125 34 7,868
Illinois................. 4 1 791
Oklahoma & Kansas........ 4 4 406
Texas.................... 7 5 620
--- --- ------
Total.......... 172 53 12,606
=== === ======
Lease Expiration -- The following table summarizes the lease expirations in
the industrial portfolio as of December 31, 1996:
1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
---- ---- ---- ---- ---- ---- ---- ---- ---- ----------
Percent....................... 17.8% 6.8% 10.6% 11.0% 18.6% 4.8% 4.3% 6.3% 7.3% 12.5%
Square feet (in thousands).... 2,194 836 1,313 1,358 2,301 598 527 776 899 1,543
Leases totaling 2.2 million square feet of the Company's total industrial
square footage expire in 1997. Of this, 52% are located in Southern California,
where economic conditions have improved, 16% are located in Arizona, and the
balance is spread throughout the portfolio. Of the 2.2 million of leased square
feet that is scheduled to expire in 1997, approximately 133,000 square feet
represent month-to-month leases.
INDUSTRIAL DEVELOPMENT
The Company's plans call for continuing to expand industrial development
activity. Approximately 1,866 acres of the Company's industrial land in 15
separate locations would support the development of approximately 26 million
square feet of industrial development.
In 1996, the Company commenced construction on 3.3 million square feet of
new industrial development and completed approximately 1.6 million square feet
of industrial construction. As of December 31, 1996, the Company had 2.3 million
square feet under construction and had signed leases for 43,000 square feet of
new industrial development. In 1997, the Company intends to seek additional
build-to-suit opportunities and will engage in speculative development, in order
to take advantage of local market conditions.
6
Property -- The following table summarizes selected industrial development
properties:
POTENTIAL
Square Feet of
ENTITLEMENTS
LOCATION ACRES (IN MILLIONS)
----- -------------
Phoenix, Arizona................... 214.3 3.6
Dallas, Texas
Coppell.......................... 171.6 3.0
Garland.......................... 72.8 1.4
Chicago, Illinois
International Centre, Woodridge.. 436.1 5.5
Romeoville....................... 140.5 2.0
Northern California
Richmond......................... 50.9 0.6
Fremont*......................... 134.1 2.3
Southern California
Anaheim.......................... 11.5 0.2
City of Industry................. 36.2 0.7
La Mirada (held in joint venture) 30.4 0.6
Ontario.......................... 248.6 4.0
Rancho Cucamonga................. 32.6 0.6
Santa Fe Springs................. 12.5 0.2
Oklahoma City, Oklahoma............ 274.5 1.2
------- ----
Total.................... 1,866.6 25.9
======= ====
* Includes estimated industrial development on 127.5 acres of the Company's
840-acre mixed-use project, Pacific Commons in Fremont. The remainder of the
developable acreage at Pacific Commons will be R&D, flex-tech, office and
retail.
Development -- The following table summarizes the Company's industrial
development activities, in square feet, during the past three years:
1996 1995 1994
---- ---- ----
Under construction, beginning of period...... 641,128 337,136 307,000
Construction starts.......................... 3,259,308 791,846 381,136
Completion................................... (1,613,475) (487,854) (351,000)
--------- ------- -------
Under construction, end of period............ 2,286,961 641,128 337,136
========= ======= =======
Sales -- The following table summarizes the Company's sales of industrial
development property:
1996 1995 1994
---- ---- ----
Industrial Development Property: (in thousands)
Sales............ $ 27,375 $ 3,224 $ --
Cost of sales.... 18,596 2,271 --
-------- ------- ----
Gain........ $ 8,779 $ 953 $ --
======== ======= ====
7
RETAIL INCOME-PRODUCING PROPERTIES
As of the end of 1996, the Company's retail income-producing portfolio
totalled 928,000 square feet consisting of 24 buildings at 12 locations,
which were 94.2% leased as of December 31, 1996.
The Company's retail properties are located primarily in Northern and
Southern California, with one complex in each of Colorado and Oregon. The
largest retail project, East Baybridge Center, is located on 40 acres near San
Francisco in the cities of Emeryville and Oakland. The 269,000-square-foot Phase
I of this project opened in mid-1994 and was pre-leased to such national
retailers as Home Depot, Sportmart, OfficeMax, Safeway's Pak 'n Save, and
CompUSA. A 117,000-square-foot building for Kmart was added to the center in
late 1995.
Property Operating Income -- Property operating income for the Company's
retail building portfolio rose from $8.4 million in 1995 to $8.8 million in
1996, because of the addition of the Kmart building to East Baybridge Center.
Operating income increased by $3.4 million from 1994 to 1995 primarily because
of the completion of the East Baybridge Center in late 1994. The
following table summarizes property operating income for the retail portfolio
(in thousands):
1996 1995 1994
---- ---- ----
Retail buildings.... $8,839 $8,423 $5,024
====== ====== ======
Location -- The following table summarizes the Company's retail buildings
by region as of December 31, 1996:
NUMBER OF NUMBER OF
BUILDINGS PROPERTIES SQUARE FEET
--------- ---------- -----------
(IN THOUSANDS)
Northern California..... 9 3 460
Southern California..... 12 7 330
Colorado................ 1 1 100
Oregon.................. 2 1 38
-- -- ---
Total 24 12 928
== == ===
Lease expirations -- The following table summarizes the lease expirations
in the retail portfolio as of December 31, 1996:
1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
---- ---- ---- ---- ---- ---- ---- ---- ---- ----------
Percent................... 11.9% 6.8% 4.0% 10.8% 6.8% 0.1% 4.0% 10.3% 0.6% 44.7%
Square feet (in thousands) 104 59 35 95 59 1 35 90 5 391
Development -- The following table summarizes the Company's retail
development completed during the past three years:
1996 1995 1994
---- ---- ----
Completed projects (square feet). -- 117,000 269,310
==== ======= =======
OFFICE INCOME-PRODUCING PROPERTIES
At the end of 1996, the Company's office income-producing portfolio
consisted of approximately 1.7 million square feet of office buildings. At
year-end 1996, this portfolio of 34 office buildings was 86.7% leased. The most
significant office projects owned by the Company are the South Bay Center in San
Jose, California (424,192 square feet) and the Railway Exchange Building in
Chicago, Illinois (374,929 square feet).
Property Operating Income -- The Company experienced a decrease in property
operating income from office buildings in 1996. This decrease is related to an
increase in vacancy primarily in one building. The decrease from 1994 to 1995 is
related primarily to the Railway Exchange Building in Chicago, Illinois. An
increase in property taxes in Chicago and the replacement of a major tenant with
tenants paying lower rates caused
8
the building to contribute less to office property operating income than in
1994. The following table summarizes property operating income for the office
portfolio (in thousands):
1996 1995 1994
---- ---- ----
Office buildings... $15,746 $16,483 $18,399
======= ======= =======
Location -- The following table summarizes the Company's office property by
region as of December 31, 1996:
Number of Number of
BUILDINGS PROPERTIES SQUARE FEET
--------- ---------- -----------
(IN THOUSANDS)
Northern California..... 11 3 521
Southern California..... 14 7 573
Illinois................ 2 2 473
Oregon.................. 1 1 56
Texas................... 6 1 60
-- -- -----
Totals........ 34 14 1,683
=== == =====
Lease Expirations -- The following table summarizes the lease expirations
in the office portfolio as of December 31, 1996:
1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
---- ---- ---- ---- ---- ---- ---- ---- ---- ----------
Percent................... 14.6% 8.5% 12.1% 6.0% 20.3% 21.2% 7.0% 1.5% 0.0% 8.8%
Square feet (in thousands) 213 124 177 87 296 309 102 23 0 129
Of the 213,000 square feet of leased space that is scheduled to expire in
1997, approximately 2,400 square feet represent month-to-month leases.
LAND LEASES
As of the end of 1996, the Company's land lease income-producing portfolio
included 54 leases on 5,339 acres.
Property Operating Income -- Property operating income for the land lease
portfolio has remained stable since 1994. The following table summarizes
operating income for the land lease portfolio (in thousands):
1996 1995 1994
---- ---- ----
Land leases........... 6,705 6,171 6,377
===== ===== =====
Location -- The following table summarizes the Company's land leases by
region as of December 31, 1996:
NUMBER OF
LEASES ACRES
------ -----
Arizona......................... 4 16
Northern California............. 5 24
Southern California............. 44 5,294
Texas........................... 1 5
-- -----
Total................. 54 5,339
== =====
9
LAND DEVELOPMENT -- MIXED USE PROJECTS
The Company's land portfolio includes four major mixed-use development
sites.
Mission Bay, San Francisco, CA. The Company owns 166.9 acres of
property in San Francisco which is part of a 313-acre mixed-use development
known as Mission Bay. The balance of the property is primarily owned by various
public entities. The property is subject to easements or other encumbrances in
favor of public utilities or public entities, leases, exchange agreements
between the Company and the various public entities and specific plan and zoning
requirements regarding further development. The Company's property was the
subject of a 1991 Development Agreement between the Company and the City and
County of San Francisco that was terminated by the Company in February 1996. As
a result of this decision, the Company took an $84.8 million charge against
fourth quarter earnings in 1995. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 6 to the Consolidated
Financial Statements).
During 1996, the Company reached an agreement in principle with the
City of San Francisco for a 65-acre portion of the 313-acre project. The
entitlement process to implement that agreement in principle is underway and
will continue into 1998. The revised plan for this project will include 2,400
market-rate units, up to 350,000 square feet of entertainment retail and up to
250,000 square feet of neighborhood and community-serving retail. Under this
agreement in principle, incremental tax revenue generated by the project will be
available to finance infrastructure. It is not feasible to estimate the cost of
this development until entitlements have been obtained.
In March 1997, the University of California at San Francisco ("UCSF")
entered into an exclusive negotiation period with the Company to pursue an
agreement, subject to the receipt of the necessary entitlements and other
conditions, to locate a planned expansion of UCSF's campus on the Mission Bay
project. There can be no assurances, however, that the necessary entitlements
will be obtained, that the timing of entitlements, if obtained, will meet
marketing needs, or that the other conditions will be met. Negotiations are
expected to continue throughout much, if not all, of 1997.
As of December 31, 1996, approximately one million square feet of
buildings and approximately 20 land leases were held for lease at Mission Bay
and the buildings were approximately 92% occupied. These operating assets
represent interim uses of the property and are not expected to be part of any
final project. Rental revenue from the buildings was $4.5 million during 1996,
resulting in property operating income of $3.2 million. Rental revenue from
these land leases was approximately $1.6 million during 1996, resulting in
property operating income of $600,000. This project is not currently security
for borrowings of the Company.
Pacific Commons, Fremont, CA. Pacific Commons Business Park is located
on an 840-acre site bordering Interstate 880 in Fremont, California, a part of
the San Jose/Silicon Valley area.
In September 1996, the Company received entitlements from the City of
Fremont for 8.5 million square feet of development, upon compliance with the
certified environmental impact report and applicable laws. The development would
include 7.8 million square feet of research and development, light industrial,
warehouse-distribution and corporate campus space and 700,000 square feet of
retail. In accordance with the environmental impact report and applicable law,
the Company is working with the City, state and federal government agencies to
address the impact of the park on wetlands and special status species. There can
be no assurances that the necessary government approvals will be obtained, or
that the timing of approvals, if obtained, will meet marketing needs.
In the fourth quarter of 1996, the Company began construction on its
first build-to-suit development at Pacific Commons. The 375,000-square-foot
warehouse/distribution facility is expected to be completed by the end of 1997.
Union Station, Los Angeles, CA. The Company owns approximately 47 acres
which surround and include the historic Los Angeles Union Station. The Company
completed acquisition of the site in 1990. In 1996, the City awarded the Company
a flexible entitlement package permitting seven million square feet of
development which could include office, hotel, housing, sports and entertainment
facilities.
10
In 1996, the Company sold a 4.2-acre portion of the Union Station
property to Metropolitan Water District ("MWD") as the site of MWD's new
headquarters facility. This sale generated proceeds of $13.2 million and a gain
of $5.0 million. The Company has commenced construction of the
500,000-square-foot, 12-story headquarters facility on behalf of MWD. Completion
is scheduled for late 1998, with occupancy to occur in 1999.
Santa Fe Depot, San Diego, CA. The Company owns approximately 17 acres
near the waterfront in downtown San Diego, California. The Depot is served daily
by intercity rail lines (Amtrak), a commuter rail line (Coaster), and the City's
growing trolley system. The site is currently entitled for a mixture of office,
hotel, retail and housing development. Management is reevaluating the approved
specific plan in light of current and projected market conditions, and is
working with the U.S. Navy, Port Commission, and City and County agencies on a
master plan for the entire North Embarcadero portion of the waterfront, which
would require additional entitlements. The site is also one of three in the
greater San Diego area under consideration for a new San Diego Padres baseball
stadium, which would require reevaluation of the specific plan, which in turn
would require additional entitlements. There can be no assurances that any
necessary entitlements will be obtained, or that the timing of entitlements, if
obtained, will meet marketing needs.
RESIDENTIAL DEVELOPMENT
In March 1996, the Company concluded the acquisition of The Akins
Companies, a residential real estate company, consisting of a diversified group
of entities involved in home-building, community development and project
management services. Since 1950, the Akins Companies have developed more than
10,000 homes throughout Southern California.
The acquired business, now called the Catellus Residential Group
("CRG"), develops the Company's residential land, as well as projects previously
started by Akins, and will undertake new development activities. In addition,
Catellus Residential Group includes an urban housing division formed by the
Company in 1995 to develop rental housing with an affordable component on urban
in-fill locations in California.
Property -- The following table summarizes the Company's residential
properties, including those acquired as part of the Akins acquisition:
POTENTIAL LOTS OR UNITS
-------------------------------
COMMUNITY MERCHANT URBAN
DEVELOPMENT HOUSING HOUSING ESTIMATED
DIVISION DIVISION DIVISION START
LOCATION ACRES (LOTS) (UNITS) (UNITS) DATE
- -------- ----- ------ ------- --------- --------
Owned Projects
Texas
Oak Cliff/Dallas, TX...................... 113 400 After 1998
Clodine, TX............................... 877 2,100 After 1998
Northern California
Bear Creek/Stockton, CA................... 392 800 After 1998
Tracy, CA................................. 445 2,400 After 1998
Mission Bay/San Francisco, CA*............ 22 2,400 Mid 1998-Early 1999
Union City, CA............................ 58 86 100 Under development
Southern California
Lakeside/Buena Park, CA................... 70 258 92 Late 1997
Joint Venture Projects
Bridgecourt Apts/Emeryville, CA........... 4 220 Under development
Kentwood Collection/Los Angeles, CA....... 11 23 Under development
Signature Collection/Newport Coast, CA.... 25 30 Under development
Stevenson Ranch/Santa Clarita, CA......... 11 55 Under development
Management Projects
University Hills/Irvine, CA............... 22 150 Under development
Canyon Hills/Orange, CA................... 4 74 Under development
Ridgemoor/Rowland Heights, CA............. 123 228 Under development
Marabella Golf Villas/San Juan
Capistrano, CA............................ 2 24 Under development
----- ----- --- ----
TOTALS . . . . . . . . . . . . . . . . . . . . . 2,179 6,044 626 2,770
===== ===== === =====
* Represents 21.9 acres in the 65-acre portion of Mission Bay located north of
the channel, which the CRG's Urban Housing Division will develop in conjunction
with the Bay Area Development Group.
11
Sales - The following table summarizes the Company's sales of
residential development property:
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
Residential Development Property:
Sales.............................. $ 21,945 $ -- $ --
Cost of sales...................... 20,138 -- --
-------- ----- -----
Gain............................ $ 1,807 $ -- $ --
======== ===== =====
JOINT VENTURES
The Company's joint venture interests provided net distributions to the
Company of $10.2 million in 1996. The Company owns an interest in the following
properties:
OPERATING PROPERTIES LOCATION TYPE
- -------------------- -------- ----
New Orleans Hilton New Orleans, LA Hotel
San Diego Embassy Suites San Diego, CA Hotel
Park del Amo Torrance, CA Office
Seabridge Apartments San Diego, CA Residential
Pacific Design Center West Hollywood, CA Furniture mart
LAND TYPE
- ---- ----
Dallas, Texas Industrial development
New Orleans, Louisiana Hotel development
La Mirada, California Industrial development
West Hollywood, California Entertainment/retail development
RESIDENTIAL PROPERTIES LOCATION TYPE
- ---------------------- -------- ----
Kentwood Collection Los Angeles, CA Residential
Signature Collection Newport Coast, CA Residential
Stevenson Ranch Santa Clarita, CA Residential
Bridgecourt Apts. Emeryville, CA Residential
The Company is engaged in discussions concerning the possible sale of
certain interests. The Company expects to participate in additional joint
ventures in connection with future development opportunities.
CATELLUS RESOURCES GROUP PORTFOLIO
The Company owns more than 790,000 acres of land in the Southern
California desert regions of Los Angeles, Kern, San Bernardino, Riverside and
Imperial Counties and the state's Central Valley. Because of its location, lack
of contiguity among parcels and other factors, this land is not currently
suitable for traditional development activities. As a result, a new division of
the Company, the Catellus Resources Group, was created in 1995 to explore the
potential for agricultural, minerals, water, telecommunications, energy, and
waste management uses for this property. In addition, Catellus Resources
Group will explore possible exchanges with various governmental agencies. There
can be no assurances that any of these prospects or opportunities will be
realized by the Company.
DEBT SECURED BY PROPERTIES
Of the Company's $496.7 million in outstanding debt at December 31,
1996, $496.2 million represents loans secured by a majority of the Company's
income-producing properties and certain of its land under development.
Approximately $347 million of the Company's debt secured by income-producing
properties has penalties if paid before maturity. Information regarding interest
rates and principal maturities is provided in Note 3 to the consolidated
financial statements.
12
DEVELOPMENT AND MANAGEMENT SERVICES
Development Services
The Company is currently the developer on a "design build" basis, in
partnership with Charles Pankow Builders, for the Metropolitan Water District
headquarters facility. The Company intends to pursue additional design build
opportunities in order to increase recurring earnings.
Management Services
The Company's wholly-owned subsidiary Catellus Management Corporation
("CMC") has entered into a contract with the Burlington Northern Santa Fe
Corporation ("BNSF"), which owns one of the nation's largest railroads, to
provide management and disposition services for BNSF's real property assets. The
assets include approximately 17,000 leases and are located in 27 states and two
Canadian provinces. In November 1996, CMC executed a new contract with BNSF to
provide management services for BNSF's existing portfolio of approximately
115,000 permits and to handle BNSF's issuance of new permits. The Catellus
Residential Group also generates management fees in regard to its joint venture
developments and third party arrangements.
The Company intends to pursue additional management service agreements
aggressively to increase recurring earnings.
PROPERTY SALES
Before 1996, the Company sold land to provide cash for costs associated
with pre-development, operating and holding the Company's substantial real
estate assets and paying interest on debt and dividends on preferred stock.
Sales included mountain, desert, agricultural and other non-strategic lands, as
well as lands that the Company might develop in the future. The Company also
sold income-producing properties to cover such costs. In October 1995, the
Company announced a goal of selling $200 million of non-strategic land assets by
March 1998, including $100 million by December 31, 1996. After announcing this
goal, the Company sold $47.1 million in the fourth quarter of 1995 and $76.6
million in 1996, bringing the total sales to $123.7 million through December 31,
1996. In addition, during 1996 the Company determined that approximately $30
million of assets had residential and other development potential and,
therefore, reduced the goal of $200 million to $170 million. The Company expects
the remaining $46.3 million of non-strategic land assets to be sold during 1997
and 1998. Over the past three years, the Company's sales (in thousands)
consisted of the following:
1996 1995 1994
---- ---- ----
NON-STRATEGIC LAND AND OTHER ASSETS:
Non-strategic land:
Sales.................................... $76,553 $62,199 $32,298
Cost of sales............................ 56,894 29,410 22,024
------- ------- -------
Gain................................... 19,659 32,789 10,274
------- ------- -------
Other:
Sales.................................... 9,125 -- 21,472
Cost of sales............................ 4,379 -- 18,439
------- ------- -------
Gain................................... 4,746 -- 3,033
------- ------- -------
Total non-strategic land and other assets
Sales.................................... 85,678 62,199 53,770
Cost of sales............................ 61,273 29,410 40,463
------- ------- -------
Gain................................... $24,405 $32,789 $13,307
======= ======= =======
ENVIRONMENTAL MATTERS
Various federal, state, and local laws and regulations covering the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, may affect the Company's operations and costs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Environmental Matters." Such regulations can increase the cost of
planning, designing, developing, managing and
13
maintaining the Company's properties. The Company has expended and will continue
to expend significant financial and managerial resources to comply with
environmental regulations and local permitting requirements. While the Company
or outside consultants have evaluated the environmental liabilities associated
with most of the Company's properties, any evaluation necessarily is based upon
then-prevailing law and identified site conditions. In addition, many of the
Company's properties are in the early stages of development, and the
environmental studies and investigations which have been performed are
preliminary. It is possible that significant unknown costs and liabilities may
arise in the future relating to these properties and that certain development
projects may be significantly delayed, modified, or canceled as a result of
associated remediation costs. In addition, other properties presently or
formerly owned by the Company or its corporate predecessors have required or may
require remediation. Although there can be no assurance, the Company does not
believe that such costs will have a material adverse effect on its business,
financial condition or results of operations.
The Company has been or may be named a defendant or a potentially
responsible party ("PRP") under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA"), or analogous
state statutes. With respect to a site in Livermore, California, the Regional
Water Quality Control Board has issued a Tentative Site Cleanup Order naming the
Company as one of eleven responsible parties. In February 1994, the Company
reached a settlement with plaintiffs and all of the other potentially
responsible parties pursuant to which the Company paid $67,650 into a fund
covering certain past and future remediation costs in exchange for a qualified
release of liability. The Company has been named a PRP with respect to several
additional sites. Remediation of those sites has been completed by the Company
or is being completed by third parties at their expense. The Company does not
expect to incur material additional costs with respect to those sites.
COMPETITION
Real estate markets are regional, and levels of competition vary by
market. The Company encounters significant competition for leasing and sales of
real estate in each of its market areas, but no one competitor is dominant. The
Company is not dependent on any one customer for a significant portion of its
revenues.
EMPLOYEES
At December 31, 1996, the Company had 304 employees, including 56
employees of the management subsidiary which now manages certain BNSF
properties, and 106 employees of the residential subsidiary.
The Company engages third parties to manage multi-tenant properties and
properties in locations which are not in close proximity to the Company's
regional or field offices. In addition, the Company engages outside consultants
such as architects and design firms in connection with its pre-development
activities. The Company also employs third party contractors on development
projects for infrastructure and building construction.
RISK FACTORS
It is the Company's belief that this Annual Report on Form 10-K may
contain statements which, to the extent that they are not recitations of
historical fact, may constitute "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
and Exchange Act of 1934. All forward looking statements involve risks and
uncertainties. The forward looking statements in this document are intended to
be subject to the safe harbor protection provided by Sections 27A and 21E.
Factors that most typically affect the Company's operating results and financial
condition include (i) changes in general economic conditions in regions in which
the Company's projects are located, (ii) supply and demand for office,
industrial, and residential space, (iii) the delay in receipt of or the denial
of government approvals and entitlements for development projects, (iv) other
public and private development activity in the areas in which the Company owns
property, (v) land and building material costs, (vi) the availability and cost
of project financing, (vii) competition from other property owners, (viii)
liability for environmental remediation at the Company's properties, (ix) the
Company's ability to increase development fees, (x) the Company's ability to
sell non-strategic assets, (xi) changes in the capital markets affecting the
ability of the Company to minimize its interest and preferred dividends, (xii)
the Company's ability to control the timing of the recognition of deferred tax
liability, (xiii) the impact of discretionary government actions, (xiv) the
exposure of the Company's assets to natural occurrences, such as earthquakes,
tornadoes, and similar events, and (xv) changes in the legal and regulatory
environment, including the tax treatment of the Company's activities and assets.
For discussions identifying other important factors that
14
could cause actual results to differ materially from those anticipated in the
forward looking statements, see the Company's Securities and Exchange Commission
filings, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of this Form 10-K and Note 14 to the Consolidated
Financial Statements included in this Form 10-K.
ITEM 2. PROPERTIES
The Company's real estate projects are generally described in Item 1
above, which descriptions are incorporated in this Item by reference. The
Company's principal executive office is located in San Francisco, California,
and it has regional or field offices in seven other locations in the United
States. The Company believes that its property and equipment are generally well
maintained, in good condition, and adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
The Company, 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 for which the
Company could be liable. 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, financial
condition or liquidity of the Company.
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 Co., Santa Fe Land Improvement Company, et
al. (Superior Court of California, County of San Diego; filed January 1988) are
consolidated cases in which both the Company and the opposing litigants claim
title to a 550 foot by 75 foot strip of property located on the Santa Fe Depot
site in San Diego, CA. The opposing litigants also seek damages for alleged
fraud, interference with prospective economic advantage, and inverse
condemnation.
After trial and several appellate proceedings, the courts have rejected
the damages claims of the opposing litigants and held that the Company on the
one hand and the opposing litigants on the other each own an undivided one-half
fee interest in the disputed strip of property. The opposing litigants have
filed a petition for review with the California Superior Court, and the outcome
of this petition and any further appeals cannot be predicted.
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, 1996.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are listed below. There were no
family relationships among any executive officers and directors of the Company.
All officers serve at the pleasure of the Board of Directors of the Company,
subject to compliance with various employment agreements to which the Company
and the officers are parties.
15
Name Age Position
- ---- --- --------
CORPORATE OFFICERS
Nelson C. Rising 55 President and Chief Executive Officer
Stephen P. Wallace 42 Senior Vice President and Chief Financial Officer
Timothy J. Beaudin 38 Senior Vice President Property Operations
Kathleen Smalley 39 Senior Vice President, General Counsel and Secretary
Paul A. Lockie 38 Vice President and Controller
OPERATING OFFICERS WHO ARE CONSIDERED EXECUTIVE OFFICERS
Ted R. Antenucci 32 Vice President
David B. Friedman 40 President Catellus Resources Group
Don M. Parker 52 Vice President Bay Area Development
Ira E. Yellin 56 Senior Vice President Southern California Development
Additional information concerning the business background of each
executive officer of the Company is set forth below:
MR. RISING has served as President and Chief Executive Officer and a
Director of the Company since September 1994. For more than five years prior to
joining the Company, Mr. Rising was a Senior Partner with Maguire Thomas
Partners, a Los Angeles-based commercial developer with projects in Southern
California, Dallas and Philadelphia.
MR. WALLACE was elected as Senior Vice President and Chief Financial
Officer in July 1995. Mr. Wallace was previously the Senior Vice President and
Chief Financial Officer at Castle & Cooke Homes, Inc. from May 1993. Before that
Mr. Wallace served as the Chief Financial Officer at A.M. Homes in Newport
Beach, California.
MR. BEAUDIN was elected Senior Vice President Property Operations in
January 1996. Before this appointment, Mr. Beaudin served as Vice President
Property Operations since February 1995. For more than five years before that,
Mr. Beaudin served as Senior Vice President -- Managing Officer of the Financial
Services Group at CB Commercial Real Estate Group, a national real estate
brokerage firm.
MS. SMALLEY joined the Company as Senior Vice President, General
Counsel, and Secretary on January 1, 1997. For more than five years before
joining the Company, Ms. Smalley was General Counsel and Investment Manager of
Crow Family Holdings ("CFH"), an investment management company that manages
assets, including real estate and related businesses, throughout the United
States and abroad. Ms. Smalley also currently holds an appointment to Harvard
Law School, where she lectures in the real estate field.
CFH, during Ms. Smalley's employment, managed investments in thousands
of entities holding real estate. In connection with her duties as General
Counsel and Investment Manager for CFH, Ms. Smalley managed both legal functions
and a number of special assignments. Among those special assignments was the
management of the bankruptcy of approximately 55 affiliated entities in two
jointly administered proceedings. Ms. Smalley was not involved in the ownership
or management (other than as described below) of the properties owned by the
affected debtors before the debt restructuring negotiations and related filing
of bankruptcy petitions. In addition, there were approximately 35 other entities
affiliated with CFH that filed for protection under federal bankruptcy laws. In
connection with her employment by CFH, Ms. Smalley served as an officer of the
direct or indirect general partner of some of these entities.
MR. LOCKIE joined the Company as Vice President and Controller in February
1996. Before joining the Company, Mr. Lockie served as the Chief Financial
Officer for Kimball Small Properties, Inc. ("KSP"), a San Jose, California real
estate development and management company.
Mr. Lockie, in connection with his duties as Chief Financial Officer
for KSP, also served as Cheif Financial Officer of several companies affiliated
with KSP, including Techmart Properties, Inc., the indirect
16
general partner of a real estate partnership that filed for protection under
federal bankruptcy laws in September , 1992. In September, 1995, a final decree
was entered closing the case.
MR. ANTENUCCI was elected Vice President of the Company in October 1995.
Before joining the Company, Mr. Antenucci served as Vice President at Omnitrax,
a shortline rail carrier, for two years and as Vice President -- Industrial
Sales for CB Commercial Real Estate Group, Inc. for more than seven years.
DR. FRIEDMAN has served as President of Catellus Resources Group since
February 1996. For more than five years before joining the Company, Dr. Friedman
was an Associate Attorney and Partner in the Los Angeles law firm of Tuttle &
Taylor representing, among other clients, major agriculture and resource
interests and was a consultant specializing in California economic development
research.
MR. PARKER was elected Vice President Bay Area Development in March 1995.
From January 1994 to March 1995, Mr. Parker was the Executive Director of the
Alameda Reuse and Redevelopment Authority for the conversion of the naval air
station. For more than five years before that, Mr. Parker was a partner and
project director of the Marina Village Mixed-Use Community in Alameda,
California.
MR. YELLIN joined the Company in February 1996, as the Senior Vice
President, Southern California Development. For more than five years before
joining the Company, Mr. Yellin served as President of the Yellin Company, a Los
Angeles real estate investment, development and management company involved
primarily in the acquisition, restoration and redevelopment of historic
buildings in the Historic Core of Downtown Los Angeles.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock commenced trading on December 5, 1990 and is traded on
the New York Stock Exchange, the Chicago Stock Exchange, and the Pacific Stock
Exchange under the symbol "CDX." The following table sets forth the high and low
sale prices of the common stock, as reported on the New York Stock Exchange
Composite Tape, during the periods indicated:
High Low
1995
First Quarter................ $ 6 1/8 $ 5 1/8
Second Quarter............... 6 7/8 5 1/2
Third Quarter................ 6 7/8 6 1/8
Fourth Quarter............... 6 5/8 5 3/8
1996
First Quarter................ $ 8 1/4 $ 6 1/8
Second Quarter............... 9 3/4 7 7/8
Third Quarter................ 9 7/8 8 1/4
Fourth Quarter............... 11 3/8 9 3/4
No cash dividends have been paid on the Company's common stock and the
Company does not anticipate paying any cash dividends on its common stock in the
foreseeable future.
On March 14, 1996, there were approximately 35,080 holders of record of
the Company's common stock.
17
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following income statement and selected balance sheet data with
respect to each of the years in the five-year period ended December 31, 1996
have been derived from the annual Consolidated Financial Statements. The
operating 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 1996, 1995
and 1994.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
INCOME PRODUCING PROPERTIES
Rental revenue................................. $ 115,886 $ 102,828 $ 99,183 $ 107,625 $ 96,496
Property operating costs....................... (39,408) (30,650) (29,609) (38,708) (37,670)
Equity in earnings of joint ventures........... 5,993 5,826 4,240 1,878 (1,991)
--------- --------- --------- --------- ---------
82,471 78,004 73,814 70,795 56,835
--------- --------- --------- --------- ---------
DEVELOPMENT ACTIVITIES AND FEE SERVICES
Gain on development property sales............. 15,623 953 -- -- --
Development and management fee income, net..... 3,432 1,924 2,151 2,260 1,733
Equity in earnings of joint ventures........... 758 1,209 3,742 (60) (25)
Land holding costs, net........................ (3,724) (3,871) (4,891) (872) (2,161)
--------- --------- --------- --------- ---------
16,089 215 1,002 1,328 (453)
--------- --------- --------- --------- ---------
Interest expense.................................. (42,521) (25,757) (24,671) (43,959) (53,221)
Depreciation and amortization..................... (30,561) (27,990) (28,577) (31,117) (29,437)
General and administrative expense................ (8,019) (10,924) (14,818) (13,143) (12,876)
Gain on non-strategic land and other asset sales.. 24,405 32,789 13,307 33,165 40,204
Adjustment to carrying value of property.......... -- (102,400) (24,100) (32,500) --
Litigation, environmental and restructuring costs. 1,093 (961) (2,854) (12,637) (1,888)
Other, net........................................ (19) 2,504 3,091 (25,292) 3,221
--------- --------- --------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY EXPENSE......... 42,938 (54,520) (3,806) (53,360) 2,385
Income tax (expense) benefit (17,537) 21,518 1,359 8,008 (1,208)
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) BEFORE
EXTRAORDINARY EXPENSE............... 25,401 (33,002) (2,447) (45,352) 1,177
Extraordinary expense related to early
retirement of debt, net of income tax
benefit (1)................................ -- -- -- (7,401) --
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS)............................ 25,401 (33,002) (2,447) (52,753) 1,177
Preferred stock dividends.................... (22,173) (23,813) (23,813) (16,132) --
Premium on redemption of preferred stock..... (1,334) -- -- -- --
--------- --------- --------- --------- ---------
NET EARNINGS (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS................ $ 1,894 $ (56,815) $ (26,260) $ (68,885) $ 1,177
========= ========= ========= ========= =========
Net earnings (loss) per share of common stock:
Before extraordinary expense................ $ 0.03 $ (0.78) $(0.36) $ (0.87) $ 0.02
Extraordinary expense (1)................... -- -- -- (0.10) --
--------- --------- --------- --------- ---------
Net earnings (loss) after extraordinary expense $ 0.03 $ (0.78) $(0.36) $ (0.97) $ 0.02
========== ========= ========== ======== =========
Average number of common shares outstanding 74,947 72,967 72,967 70,834 53,976
========== ======== ========= ======== ========
18
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Earnings before depreciation and
deferred taxes (EBDDT)............ $ 25,852 $ 18,254 $ 19,665 $ <16,931> $ <9,466>
NOTE: The Company uses a supplemental performance measure called Earnings Before Depreciation and Deferred Taxes (EBDDT) in order to
better understand its operating results. EBDDT is calculated by taking net earnings (loss) and making various adjustments.
Depreciation, amortization and provision for deferred income taxes are excluded as they represent non-cash charges. In addition,
gains on sale of non-strategic and other assets, adjustments to carrying value of property, and premiums on the redemption of
preferred stock more closely reflect investment activities, not operating activities, and are also excluded from the EBDDT
calculation.
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Balance sheet data:
Total properties.................. $1,024,102 $1,007,451 $1,087,119 $1,091,832 $1,129,634
Total assets...................... 1,123,118 1,097,604 1,207,363 1,373,827 1,208,887
Mortgage and other debt........... 496,742 496,180 530,641 663,764 887,185
Stockholders' equity.............. 422,453 442,874 499,689 525,949 145,923
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating Data:
Buildings owned (square feet)(2).. 16,449 14,168 13,609 13,367 14,183
Leased percentage................. 96.1% 95.1% 95.0% 94.9% 90.4%
- ----------
(1) Net income in 1993 reflects extraordinary expense relating to a redemption
premium paid to a lender and write-off of deferred financing costs on the
Company's $388.2 million first mortgage loan.
(2) Prior to 1996, square feet owned excludes approximately 1.2 million square
feet of existing buildings, primarily at Mission Bay.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Prior to 1996, the aggregate cash requirements associated with fixed
charges and leasing costs exceeded the Company's operating income from recurring
sources. The Company relied primarily on proceeds from asset sales and the
issuances of debt and preferred stock to meet its operating deficits. During
1995 and 1996, the Company focused on improving operating income, and, as a
result, the deficits were eliminated in 1996 (see detailed financial results
under Liquidity and Capital Resources). The more significant steps taken were as
follows:
. In October 1995, the Company established a goal to sell $100 million of
non-strategic land assets over the 15-month period ended December 31, 1996.
Total program sales for the 15 months equaled $123.7 million, exceeding the
goal by $23.7 million. In addition, $9.1 million in other non-strategic
property sales occurred in 1996. Proceeds from these sales were used
primarily for debt reduction and to fund the Company's development
activities.
. The Company continued to place a greater emphasis on increasing its
development activity:
- During 1996, the Company commenced construction on 3.3 million
square feet of new development, compared to 900,000 square feet
in 1995, and completed 1.6 million square feet compared to
600,000 for 1995.
- In March 1996, the Company acquired The Akins Companies (now the
Catellus Residential Group), a residential developer based in
Southern California, to place the Company in a better position to
pursue residential opportunities on certain existing land
holdings. In addition, the Company intends to grow this business
to opportunities on land not currently owned.
- In addition to non-strategic land sales, the Company closed $62.5
million in property sales related to industrial, residential and
mixed-use land development. These sales contributed $15.6 million
to 1996 earnings compared to $1.0 million in 1995.
. The Company continued to grow its fee businesses. Development and
management fee income (net) increased to $3.4 million during 1996 from $1.9
million in 1995. This increase was primarily from "design build" fee income
for the 500,000-square-foot Metropolitan Water District's headquarters at
Los Angeles Union Station, residential development fee income and
management fees from the Burlington Northern Santa Fe management contract.
. During 1996, the Company applied $83.3 million of the proceeds from
non-strategic land sales to debt reduction in order to reduce interest
expense. In addition, debt increased by $83.9 million which financed the
construction of primarily pre-leased industrial buildings, residential
development and the redemption of preferred stock. It is expected that
future cash flow will be improved by the interest savings on the $83.3
million of debt reduction, reduced dividend requirements, cash flow from
completed buildings and residential development, less the interest related
to the $83.9 million of debt incurred to fund these activities.
. In order to reduce its preferred dividends, the Company issued two calls
in 1996 and two calls in early 1997 for the redemption of preferred stock:
- In July 1996, the Company called for redemption of 950,000 shares
or approximately $50 million of its $3.75 Series A Cumulative
Convertible Preferred Stock (Series A Preferred Stock). The
redemption date was September 13, 1996. The results were the
conversion of 441,887 shares into 2,438,641 shares of common stock
and the redemption of 508,113 shares at a cost of approximately
$26.7 million.
- In December 1996, the Company called for redemption an additional
475,000 shares or approximately $25 million of its Series A
Preferred Stock. The redemption date was
20
January 31, 1997. The results were the conversion of 471,730
shares into 2,603,168 shares of common stock and the redemption of
the remaining shares at a cost of $175,000.
- On February 5, 1997, the Company called for redemption an
additional 1,720,000 shares or approximately $90 million of its
Series A Preferred Stock. The redemption date was March 24, 1997.
The results were the conversion of 99.8% of the shares into
9,469,015 shares of common stock and the redemption of the
remaining 4,163 shares at a cost of $220,000.
- On March 24, 1997, the Company called for redemption of the
remaining outstanding 250,000 shares, or approximately $13
million, of its Series A Preferred Stock and 1,470,000 shares, or
approximately $75 million, of its $3.625 Series B Cumulative
Convertible Exchangeable Preferred Stock. The redemption date on
this call is May 1, 1997.
As a result of these four calls, the Company's annual preferred dividend
requirement will be decreased by approximately $18.1 million. Assuming the
market conditions remain favorable, the Company expects to make additional
redemption calls in 1997.
. The Company has an ongoing strategy to review its major land development
projects with the goal of increasing profitability, minimizing up-front
capital requirements and shortening the time required to develop the
properties. As a result of these reviews, decisions have been and continue
to be made to modify certain of the entitlements or abandon or sell
properties that management believes cannot be developed in a reasonable
time frame. Significant entitlement accomplishments in 1996 included:
- In the second quarter of 1996, the Company received final approval
from the City of Los Angeles for its seven million square foot
mixed-use development at Los Angeles Union Station.
- In September 1996, the Company reached an agreement in principle
with the City of San Francisco on a development proposal for a
65-acre portion of the Company's Mission Bay project. The
development proposal contains up to 3,000 housing units, a
350,000-square-foot retail/entertainment complex adjacent to the
future San Francisco Giants ball park and neighborhood and
community-serving retail of up to 250,000 square feet. In March
1997, the University of California Board of Regents entered into
an agreement with the Company for a two-month period to negotiate
exclusively with the Company to locate the proposed expansion
campus of the University of California at San Francisco on a
43-acre portion of the project located south of the Mission Creek
channel. The Company is working with the City and other government
agencies to obtain final plan approvals, however, there can be no
assurances that the necessary government approvals will be
obtained, or that the timing of approvals, if obtained, will meet
marketing needs.
- In September 1996, the Company received approvals from the City of
Fremont for its 840-acre Pacific Commons Business Park, including
a general plan amendment, development agreement, tentative tract
map and a certified environmental impact report. These approvals
are for 8.5 million square feet of development upon compliance
with the certified environmental impact report and applicable
laws. The development would include 7.8 million square feet of
research and development, light industrial, warehouse,
distribution and corporate campus space and 700,000 square feet of
retail. In accordance with the environmental impact report and
applicable law, the Company is working with the City and federal
government agencies to address the impact of Pacific Commons on
wetlands and special status species. There can be no assurances
that the necessary government approvals will be obtained, or that
the timing of approvals, if obtained, will meet marketing needs .
The combination of the above actions and other operating results
resulted in the Company reporting $19.9 million in "Income from property
operations, development and management activities after adjustment for general
and administrative expense, fixed charges and leasing costs" compared to a
deficit of $8.3 million in 1995 and a deficit of $24.5 million in 1994 (see
Liquidity and Capital Resources section).
With the elimination of its historic operating deficits, the Company
expects to aggressively pursue development activities beyond those associated
with its current land holdings, as well as other opportunities to increase cash
flow.
21
RESULTS OF OPERATIONS
Comparison of 1996 to 1995
Income Producing Properties
- ---------------------------
The changes in rental revenue and property operating costs from 1995 to
1996 are summarized below:
Increase (Decrease)
-------------------------
Property
Rental operating
Revenue costs
--------- ---------
(in millions)
Industrial buildings................................ $ 5.1 $ 2.8
Office buildings.................................... (0.2) 0.5
Retail buildings.................................... 1.9 1.5
Land development.................................... 5.7 3.9
Land leases......................................... 0.6 0.1
------ ------
Total change...................................... $ 13.1 $ 8.8
====== ======
Of the increase in revenue from industrial buildings, $3.3 million was
attributable to eleven new buildings totaling 1.7 million square feet that were
completed in late 1995 and 1996. Revenues also increased $1.2 million as a
result of higher tenant pass-through charges associated with the new
construction and higher operating costs. Operating costs for the industrial
portfolio increased, in part, because of new buildings completed and higher
overhead, maintenance and repairs.
Rental revenue for the Company's office portfolio decreased $0.2
million because of a decrease in occupancy, primarily in one building, compared
to the same period in 1995. As of the end of 1996, a majority of this office
space has been leased. Revenue and costs for retail buildings increased
primarily because a 117,000-square-foot building leased to Kmart was acquired in
December 1995 at the East Baybridge shopping center.
The increase in revenue and costs from land development properties
resulted, in large part, from determination by the Company at the end of 1995,
that Mission Bay and certain other properties no longer qualify for the
capitalization of interest expense. As a result, incremental revenue and
operating costs from interim uses, which had previously also been capitalized to
the project, were included in the consolidated statement of operations effective
January 1, 1996. Rental revenue and property operating cost increases
attributable to Mission Bay and other such properties were $6.1 million and $3.3
million, respectively, in 1996.
Development Activities and Fee Services
- ---------------------------------------
The increase in the Company's gain on development property sales from
1995 to 1996 is summarized as follows:
1996 1995 Difference
------------ ----------- --------------
(in thousands)
Development property:
Sales............................................ $ 62,470 $ 3,224 $ 59,246
Cost of sales.................................... 46,847 2,271 44,576
--------- --------- --------
Gain. . .................................... $ 15,623 $ 953 $ 14,670
========= ======= =========
The significant increase in development property sales is attributable
to improved industrial development activity ($24.1 million), residential sales
activity resulting from the acquisition of Akins ($21.9 million) and the sale of
the Metropolitan Water District site at the Company's Los Angeles Union Station
project ($13.2 million).
22
Development and management fee income (net) increased to $3.4 million
during 1996 from $1.9 million in 1995. This increase was primarily from "design
build" fee income for the 500,000 square foot Metropolitan Water District's
corporate headquarters at Los Angeles Union Station, residential development fee
income and management fees from the Burlington Northern Santa Fe management
contract.
Other Items on the Statement of Operations
- ------------------------------------------
During 1996, the Company capitalized $2.9 million of interest compared
to $23.6 million in 1995 because Mission Bay and certain other properties no
longer qualified for interest capitalization. However, total interest incurred
was $3.9 million lower in 1996 compared to the same period in 1995 because of
debt reduction in 1996 and late 1995. As a result, interest expense increased
$16.8 million.
In late 1994, the Company experienced significant staff reductions and
realignment of responsibilities. In connection with these changes, the Company
refined its general and administrative expense allocation to align certain
common costs more closely with the underlying activities. This change in
allocations had the result of increasing property operating costs and decreasing
general and administrative expense in 1996 when compared to 1995.
In October 1995, the Company announced a goal to sell $200 million of
non-strategic land assets by March 1998, including $100 million by December 31,
1996. Since announcing this goal, the Company sold $47.1 million in the fourth
quarter of 1995 and $76.6 million in 1996, bringing the total sales to $123.7
million through December 31, 1996. In addition, during 1996 the Company
determined that approximately $30 million of assets had residential and other
development potential and, therefore, reduced the $200 million goal to $170
million. The Company expects the remaining $46.3 million of non-strategic land
assets to be sold during 1997 and 1998.
In 1995, the Company took a $102.4 million charge to adjust the
carrying value of certain properties, where the carrying costs exceeded what
management expected to recover through future operations and ultimate sale of
such properties. This charge included $84.8 million resulting from the Company's
decision to terminate the 1991 Development Agreement for its Mission Bay project
in San Francisco.
Litigation, environmental and restructuring costs decreased $2.1
million. The $1.1 million income in 1996 represents monies received from
settlement proceeds in environmental matters, with no offsetting costs being
incurred. The $1.0 million expense in 1995 represents actual environmental costs
incurred in regard to operating properties, partly offset by income resulting
from the settlement of litigation in favor of the Company.
Other, net decreased by $2.5 million in 1996 as a result of lower
interest income.
As discussed above, the Company completed a preferred stock call in
September 1996. As a result, a charge of $1.3 million for the premium on that
redemption, was recognized in 1996. No preferred stock calls occurred in 1995.
23
Comparison of 1995 to 1994
Income Producing Properties
- ---------------------------
The more significant changes in rental revenue and property operating costs
are summarized below:
INCREASE (DECREASE)
---------------------------
PROPERTY
RENTAL OPERATING
REVENUE COSTS
------------ ------------
(in millions)
Industrial buildings..................... $ $0.1 $ (0.7)
Office buildings......................... (1.0) 1.0
Retail buildings......................... 4.0 0.6
Land development......................... 0.7 0.1
Land leases.............................. (0.2) --
----- -----
Total change.......................... $ 3.6 $ 1.0
===== =====
The increase in revenue for industrial buildings was due to six new
buildings totaling 532,000 square feet which were completed in 1995 and in the
fourth quarter of 1994; this increase was partially offset by reduced rentals
from existing properties. Operating costs for the industrial portfolio decreased
because of the overhead reductions described below. Rental revenue for the
Company's office portfolio decreased primarily because of the expiration of an
above-market lease in one building and a reduction in occupancy from 96% at the
end of 1994 to 92% at the end of 1995. In addition, the Company's operating
costs for its office portfolio increased $1 million because of increased
property taxes resulting from the reassessment of a building. The increase in
revenue and costs for retail buildings was primarily due to the completion of
the East Baybridge shopping center in late 1994.
Income-producing joint venture earnings increased $1.6 million. The
increase consists principally of significantly improved operating results from a
hotel joint venture.
Development Activities and Fee Services
- ---------------------------------------
The Company sold $3.2 million of development property in 1995, compared
to none in 1994, which resulted in a gain of $1.0 million in 1995. Activity was
zero in 1994 as the Company had a major reorganization.
Equity in earnings of development joint ventures decreased $2.5 million
in 1995, primarily because of decreased land sales from one joint venture.
Property operating costs associated with land holdings (primarily
property taxes and overhead) decreased because of the sale of $62.2 million of
non-strategic land assets and lower overhead.
24
Other Items on the Statement of Operations
- ------------------------------------------
Interest expense increased $1.1 million, representing the net effect of
additional borrowings to fund the Company's development activity, offset by a
reduction in interest rates in 1995 as compared to 1994.
General and administrative costs decreased $3.9 million in 1995 because
of staff reductions. Gross salaries, wages and benefits expense decreased $5.1
million and computer expenses decreased $1.0 million. These decreases were
offset by a lower level of capitalization of overhead costs to development
projects.
The Company completed sales of non-strategic land and other assets
totaling $62.2 million in 1995 compared to $53.8 million in 1994. Related gains
increased to $32.8 million in 1995 versus $13.3 million in 1994. This increase
was attributable to the Company's 1995 announcement of its goal of selling $100
million of non-strategic land over a fifteen-month period ending December 31,
1996. Non-strategic land sales in the amount of $47.1 million closed in the
fourth quarter of 1995.
Adjustment to carrying value of property in 1995 was $102.4 million
compared to $24.1 million in 1994. In 1995, the Company took a $102.4 million
charge to adjust the carrying value of certain properties for which the carrying
costs exceeded what management expected to recover through the future operations
and ultimate sale of such properties. This included $84.8 million resulting from
the Company's decision to terminate the 1991 Development Agreement for its
Mission Bay project in San Francisco.
Litigation, environmental and restructuring costs decreased $1.9
million from 1994 to 1995. This was primarily attributable to the recognition of
$3.1 million in restructuring charges in 1994 with no comparable amount in 1995,
offset by higher charges for environmental costs in 1995.
Variability in Results
The timing of development sales and non-strategic asset sales have
resulted in significant variability in the Company's historic operating results,
particularly on a quarterly basis. Many of the Company's projects require a
lengthy process to complete the development cycle before they are sold.
Non-strategic asset sales are generally subject to lengthy negotiations and
contingencies that need to be resolved prior to closing. These factors tend to
"bunch" income in particular periods rather than a more even pattern throughout
a year. In addition, gross margins vary significantly as the mix of properties
varies. The cost basis of the properties sold varies because a) a number of
properties have been owned for many decades; b) some properties were acquired
within the last ten to fifteen years; and c) properties are owned in various
geographical locations.
Earnings Before Depreciation and Deferred Taxes
The Company uses a supplemental performance measure along with net
earnings (loss) to report its operating results. This measure, Earnings Before
Depreciation and Deferred Taxes (EBDDT), is not a measure of operating results
or cash flows from operating activities as defined by generally accepted
accounting principles. Additionally, EBDDT is not necessarily indicative of cash
available to fund cash needs and should not be considered as an alternative to
cash flows as a measure of liquidity. However, the Company believes that EBDDT
provides relevant information about its operations and is necessary, along with
net earnings (loss), for an understanding of its operating results.
Depreciation, amortization and deferred income taxes are excluded from
EBDDT as they represent non-cash charges. Gains on the sale of non-strategic
land and other assets, adjustments to the carrying value of property, premiums
on the redemption of preferred stock and restructuring costs represent
non-operating, unusual and/or nonrecurring items and are therefore excluded from
EBDDT. EBDDT is reconciled to net earnings (loss) in the Three Year Summary of
Earnings Before Depreciation and Deferred Taxes from Operations and Net Earnings
(Loss) as follows:
25
Year ended December 31,
------------------------------
1996 1995 1994
-------- ---------- ----------
(In thousands)
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCKHOLDERS.......... $ 1,894 $ (56,815) $ (26,260)
Depreciation and amortization.......................... 30,561 27,990 28,577
Deferred income taxes.................................. 16,468 (22,532) (1,545)
Gain on non-strategic land and other asset sales....... (24,405) (32,789) (13,307)
Adjustment to carrying value of property............... -- 102,400 24,100
Premium on redemption of preferred stock............... 1,334 -- --
Restructuring costs.................................... -- -- 3,100
-------- ---------- ----------
EARNINGS BEFORE DEPRECIATION AND DEFERRED TAXES................ $ 25,852 $ 18,254 $ 14,665
======== ========== ==========
EARNINGS BEFORE DEPRECIATION AND DEFERRED TAXES
PER SHARE OF COMMON STOCK.............................. $ 0.34 $ 0.25 $ 0.20
======== ========== ==========
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.................... 74,947 72,967 72,967
======== ========== ==========
The increase in EBDDT in 1996 was primarily due to improved results
from the Company's income-producing properties and gains on sales of development
property.
LIQUIDITY AND CAPITAL RESOURCES
Before 1996, the aggregate amount of the Company's general and
administrative expense, interest paid, preferred stock dividend payments and
leasing costs exceeded revenue from property operations, development and
management activities. In addition, the Company's cash requirements were
increased by the funds necessary to support the predevelopment and entitlement
efforts for its major land development projects. The resulting cash flow
deficits were funded by borrowings, the issuance of preferred stock and the sale
of assets in sufficient amount to meet the Company's overall cash requirements.
Through the development and operation of new buildings, reduction of property
and administrative costs, expansion of management and development activities,
preferred stock calls and lower interest cost through debt reduction, as noted
above, the deficits were eliminated in 1996.
The following table summarizes the Company's "Income (deficit) from
property operations, development and management activities after adjustment for
general and administrative expense, fixed charges and leasing costs". The
Company believes this presentation is meaningful in understanding the
improvement the Company has made in reducing its historical deficits.
26
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
PROPERTY OPERATIONS, DEVELOPMENT AND MANAGEMENT ACTIVITIES
Income-producing properties........................... $ 82,471 $ 78,004 $ 73,814
Development activities and fee services............... 16,089 215 1,002
Less: equity in earnings of joint ventures............ (6,751) (7,035) (7,982)
Add: distributions from joint ventures................ 8,488 8,332 386
-------- -------- --------
100,297 79,516 67,220
-------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSE............................ (8,019) (10,924) (14,818)
-------- -------- --------
FIXED CHARGES - INTEREST AND DIVIDENDS
Total interest costs, net of interest income.......... (44,165) (45,547) (44,981)
Preferred dividends................................... (22,173) (23,813) (23,813)
Add: non-cash components of interest expense.......... 3,935 2,861 3,559
-------- -------- --------
(62,403) (66,499) (65,235)
-------- -------- --------
LEASING COSTS
Depreciation on tenant improvements................... (7,048) (7,878) (8,930)
Amortization of lease commissions..................... (2,962) (2,504) (2,758)
-------- -------- --------
(10,010) (10,382) (11,688)
-------- -------- --------
INCOME (DEFICIT) FROM PROPERTY OPERATIONS, DEVELOPMENT AND
MANAGEMENT ACTIVITIES AFTER ADJUSTMENT FOR GENERAL
AND ADMINISTRATIVE EXPENSE, FIXED CHARGES AND
LEASING COSTS......................................... $ 19,865 $ (8,289) $(24,521)
======== ======== ========
Other factors which may affect liquidity are discussed below. See `Risk
Factors'.
Cash flow from operating activities
Cash provided by operating activities reflected in the statement of
cash flows in 1996, 1995 and 1994 was $111.1 million, $102.2 million and $60.4
million, respectively. The increase in 1996 is primarily the result of a
significant increase in development property and non-strategic land sales,
offset by an increase in interest expense and increased capital expenditures for
development properties. The increase in 1995 from 1994 is primarily because of a
higher level of non-strategic land sales and lower general and administrative
costs.
Cash generated from sales of non-strategic land and development
property was $113.1 million, $58.4 million and $28.0 million in 1996, 1995 and
1994, respectively. Cash generated from rental operations increased principally
because of new buildings.
Cash flow from investing activities
Net cash flow used in investing activities reflected in the statement
of cash flows increased $33.7 million from 1995 to 1996 and decreased $59.0
million from 1994 to 1995. The increase in 1996 resulted primarily from the
decrease in short-term investments and restricted cash. The decrease in 1995
resulted primarily from the conversion of short-term commercial paper and
government securities into cash, offset by lower cash generated by the sale of
other assets. Net cash used in investing activities included the following
capital expenditures:
27
1996 1995 1994
-------- -------- --------
(in millions)
Construction and building improvements................ $ 32.8 $ 14.8 $ 31.2
Acquisitions.......................................... 12.3 9.3 1.2
Predevelopment........................................ 11.1 3.7 (0.9)
Infrastructure and other.............................. 11.4 9.6 12.0
Capitalized interest and property taxes............... 2.2 26.1 26.5
-------- -------- --------
$ 69.8 $ 63.5 $ 70.0
======== ======== ========
Cash flow from financing activities
Net cash used in financing activities reflected in the statement of
cash flows in 1996, 1995 and 1994 was $50.8 million, $60.7 million and $100.4
million, respectively. The amount for 1996 is primarily preferred stock
dividends paid and the redemption of preferred stock. The 1995 amount reflects
borrowing and repayment activity relating to operating properties (including
principal amortization) and capital expenditures and preferred stock dividends
paid. The 1994 amount reflects principally the net proceeds from the Series A
and B Preferred Stock offerings and the use of a part of those proceeds to repay
debt.
At December 31, 1996, the Company had total outstanding debt of $496.7
million, of which 73.2% was non-recourse to the Company and secured by certain
property of the Company, 26.7% was recourse to the Company and also secured by
certain property, and 0.1% was unsecured. During the next twelve months, $24.2
million of debt matures, consisting of construction financing, term loans or
first mortgage loans. All maturing debt is expected to be repaid upon sale of
the property securing it, extended, refinanced, converted into permanent loans
or repaid.
Debt covenants
Certain loan agreements contain restrictive financial covenants, the
most restrictive of which allow for a maximum funded debt to net worth not
exceed 75%, require stockholders' equity to be no less than $400 million, and
require that the Company maintain certain specified financial ratios. In
addition, certain agreements restrict the level of total leverage for the
Company. The Company was in compliance with all such covenants at December 31,
1996.
Capital Commitments
At December 31, 1996, the Company had approximately $24.6 million in
capital expenditure commitments. These commitments are primarily to fund the
construction of industrial development projects, predevelopment costs and
re-leasing costs. See comments below regarding the sources of funding for
capital requirements.
Lease Expirations
For the five years from 1997 through 2001, leases for 19%, 8%, 10%, 10%
and 17% of total square footage are scheduled to expire. The 1997 lease
expirations of 19% includes 2% attributable to month-to-month leases.
Cash balances, available borrowings and capital resources
At December 31, 1996, cash and cash equivalents totaled $23.6 million.
In addition, the Company had available $121.4 million under its secured
revolving credit facilities, $4.5 million under its development construction
facilities and $25.1 million under its residential construction facilities.
28
On October 28, 1996, the Company entered into an agreement for a $240
million secured credit line which replaced six existing credit lines or term
facilities. This credit line is used to fund the Company's development projects,
interim capital requirements and to provide working capital for general
corporate purposes. At December 31, 1996, $121.4 million was available for
future borrowings. The maturity date of this credit line is November 1, 1998.
In July 1995, the Company entered into a $25 million revolving
construction line of credit which was available to fund new development in
twelve states in the Southwest. In July 1996, the Company elected not to renew
the revolving function of this facility in anticipation of closing the $240
million credit facility (described above). As of December 31,1996, one
construction project was financed under the line and $4.5 million was available
for future borrowings under this facility.
At December 31, 1996, Catellus Residential Group had six residential
construction loans and mortgage loans outstanding totaling $16.3 million. The
borrowing capacity of these loans totaled $41.4 million, leaving a balance
available for future borrowing of $25.1 million. The maturity dates of these
loans vary between 1997 and 1998.
The Company's short-and long-term liquidity and capital resources
requirements will essentially be provided from three sources: ongoing operating
income from rental properties, proceeds from asset sales, and fee services
income. As noted above, a $240 million secured revolving line of credit, a
construction line of credit and residential construction loan facilities are
available to the Company for meeting liquidity requirements. Additionally, the
Company will use third-party borrowing for development projects to the extent
practical.
Income Taxes
At December 31, 1996, the Company's deferred tax liability consisted of
deferred tax assets totaling $121.4 million and deferred tax liabilities of
$228.1 million. Deferred tax assets included $14.3 million relating to net
operating loss carryforwards (NOLs) of $40.2 million. The Company has NOLs of
$16.3 million, $16.9 million, $6.5 million, $.3 million and $.2 million which
expire in 2006, 2007, 2008, 2009 and 2011. The Company's other deferred tax
assets of $107.1 million relate primarily to differences between book and tax
basis of properties. These deferred tax assets are not subject to expiration and
will likely be realized at the time of taxable dispositions of the properties.
Deferred tax liabilities in excess of deferred tax assets are often associated
with the same property, with the result that the deferred tax asset will likely
be realized in a taxable disposition, without regard to other taxable income.
The Company believes it is more likely than not that it will realize the benefit
of its deferred tax assets, and that no valuation allowance is required. In
making this determination, the Company considered: the nature of its deferred
tax assets (and liabilities); the amounts and expiration dates of its NOLs; the
historical levels of taxable income; the significant unrealized appreciation of
its properties, including properties likely to be sold during the NOL
carryforward periods; and its ability in many cases to control the timing of
property sales in order to assure that deferred tax assets will be offset by
deferred tax liabilities or realized appreciation.
ENVIRONMENTAL MATTERS
Many of the Company's properties are in urban and industrial areas and
may have been leased to or previously owned by commercial and industrial tenants
that may have discharged hazardous materials. The Company incurs on-going
environmental remediation costs, including clean-up costs, consulting fees for
environmental studies and investigations, monitoring costs, and legal costs
relating to clean-up, litigation defense and the pursuit of responsible third
parties. Costs incurred in connection with operating properties and properties
previously sold are expensed. As of December 31, 1996, management has provided a
reserve of $13.6 million for such costs. These costs are expected to be incurred
over an estimated ten-year period, with a substantial portion incurred over the
next five years.
29
Costs incurred for properties to be sold are deferred and will be
charged to cost of sales when the properties are sold. Costs relating to
undeveloped properties are capitalized as part of development costs. At December
31, 1996, the Company's estimate of its potential liability for identified
environmental costs relating to properties to be developed or sold ranged from
$14 million to $40 million. These costs generally will be capitalized as they
are incurred over the course of the estimated development period of
approximately 20 years. Environmental costs capitalized for 1996 and 1995
totaled $2.8 million and $1.7 million, respectively.
While the Company or outside consultants have evaluated the
environmental liabilities associated with most of the Company's properties, any
evaluation necessarily is based upon then prevailing law and identified site
conditions. The Company monitors its exposure to environmental costs on a
regular basis. 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.
SUPPLEMENTAL CURRENT VALUE
In 1996, because of the significant cost and limitations involved in
estimating the current value of its real estate assets, the Company decided to
discontinue the voluntary practice of preparing a supplemental current value
balance sheet.