SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1994 Commission file number 0-18694
CATELLUS DEVELOPMENT
CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2953477
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Mission Street,
San Francisco, California 94105
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(415) 974-4500
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
As of July 15, 1994, there were 72,967,236 issued and outstanding
shares of the registrant's common stock, $.01 par value per share.
CATELLUS DEVELOPMENT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheet-Historical
Cost Basis at June 30, 1994 and
December 31, 1993 2
Consolidated Statement of Income -
Historical Cost Basis for the three
months and six months ended June 30, 1994
and 1993 3
Condensed Consolidated Statement of Cash
Flows - Historical Cost Basis for the
six months ended June 30, 1994 and 1993 4
Notes to Condensed Consolidated Financial
Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION 13
SIGNATURES 15
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET - HISTORICAL COST BASIS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Developable properties $ 619,168 $ 592,497
Income producing properties 562,164 552,387
Surplus developable properties 73,372 75,078
Agricultural and other properties 12,580 12,198
Less accumulated depreciation (150,141) (140,328)
----------- -----------
1,117,143 1,091,832
Other assets and deferred charges 50,582 51,207
Notes receivable 8,850 9,579
Accounts receivable, less allowances 8,091 7,195
Restricted cash and investments - 67,410
Cash and cash equivalents 63,632 146,604
----------- -----------
Total $ 1,248,298 $ 1,373,827
=========== ===========
Liabilities and stockholders' equity
Mortgage and other debt $ 543,285 $ 663,764
Accounts payable and accrued expenses 40,753 47,585
Deferred credits and other liabilities 24,229 22,200
Deferred income taxes 117,921 114,329
Stockholders' equity
Preferred stock - $0.01 par value;
50,000,000 shares authorized;
3,449,999 $3.75 Series A cumulative
convertible shares and 3,000,000
$3.625 Series B cumulative convertible
exchangeable shares outstanding 322,500 322,500
Common stock - $0.01 par value;
150,000,000 shares authorized;
72,967,236 shares outstanding 730 730
Paid-in capital 244,151 244,151
Accumulated deficit (45,271) (41,432)
----------- -----------
Total stockholders' equity 522,110 525,949
----------- -----------
Total $ 1,248,298 $ 1,373,827
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF INCOME - HISTORICAL COST BASIS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
1994 1993 1994 1993
-------- --------- -------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue
Property sales $ 15,272 $ 7,247 $ 17,576 $ 13,097
Rental
Commercial and industrial 26,069 27,450 51,060 53,053
Agricultural and other 28 212 445 506
Interest income 716 997 1,824 1,762
Equity in earnings of joint
ventures 5,027 1,317 6,236 1,548
Other -- net 1,401 845 5,388 1,407
--------- --------- --------- ---------
48,513 38,068 82,529 71,373
--------- --------- --------- ---------
Costs and expenses
Cost of property sold 10,329 4,214 12,435 6,606
Operating and maintenance 6,546 7,884 13,983 15,144
Depreciation 6,510 6,878 13,028 13,553
General and administrative 3,127 2,767 7,284 5,994
Taxes other than income 4,500 5,215 9,264 10,160
Interest 6,020 10,357 12,503 21,956
--------- --------- --------- ---------
37,032 37,315 68,497 73,413
--------- --------- --------- ---------
Non-recurring expense
Conversion of debenture - - - 29,552
--------- --------- --------- ---------
Income (loss) before taxes 11,481 753 14,032 (31,592)
Income taxes (benefit) 4,883 353 5,965 (2,204)
--------- --------- --------- ---------
Net income (loss) $ 6,598 $ 400 $ 8,067 $ (29,388)
Preferred stock dividends 5,953 3,234 11,906 6,612
--------- --------- --------- ---------
Net income (loss) applicable
to common stockholders $ 645 $ (2,834) $ (3,839) $ (36,000)
========= ========= ========= =========
Net income (loss) per share
of common stock $ 0.01 $ (0.04) $ (0.05) $ (0.52)
========= ========= ========= =========
Average number of common
shares 72,967 72,967 72,967 68,666
======== ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS HISTORICAL COST BASIS
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
1994 1993
---------- ---------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 8,067 $ (29,388)
Non-cash items included in net income (loss):
Non-recurring expense related to conversion
of debenture - 29,552
Depreciation 13,028 13,553
Deferred income taxes 3,592 (2,204)
Interest accrued on convertible debenture - 1,665
Amortization of deferred loan fees and other
costs 1,396 2,462
Equity in earnings of joint ventures (6,236) (1,548)
Cost of land sold 3,671 3,995
Loss (gain) on sale of income producing
properties 1,677 (356)
Other--net 2,012 589
Changes in operating assets and liabilities 1,864 (4,113)
--------- ---------
Net cash provided by operating activities 29,071 14,207
--------- ---------
Cash flows from investing activities:
Capital expenditures for developable and
income producing properties (41,060) (31,167)
Net proceeds from sale of income producing
properties 4,865 696
Distributions from/contributions to joint
ventures, net (169) 79
Changes in notes receivables, net 371 50
--------- ---------
Net cash used for investing activities (35,993) (30,342)
--------- ---------
Cash flows from financing activities:
Borrowings 302,462 8,673
Repayment of borrowings (423,629) (75,076)
Dividends paid (12,238) (3,378)
Proceeds from issuance of preferred stock - 172,500
Stock issuance costs (55) (7,566)
Investment in restricted cash for future
reduction of debt 67,410 (50,201)
Redemption premium on early retirement of debt (10,000) -
--------- ---------
Net cash provided by (used for) financing
activities (76,050) 44,952
--------- ---------
Net increase (decrease) in cash and cash
equivalents (82,972) 28,817
Cash and cash equivalents at beginning of period 146,604 14,730
--------- ---------
Cash and cash equivalents at end of period $ 63,632 $ 43,547
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 12,596 $ 18,320
Income taxes $ 16 $ 29
</TABLE>
See notes to condensed consolidated financial statements.
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994
NOTE 1. DESCRIPTION OF BUSINESS
Catellus Development Corporation (the Company) is a diversified
real estate company which owns substantial property interests principally
in California, and in 10 other states in the West, Southwest and Midwest.
The Company develops and manages its income producing properties which
consist primarily of industrial facilities and a limited number of office
and retail buildings located in California, Illinois and Texas. The
Company has substantial undeveloped land holdings primarily in
California, Texas, New Mexico and Utah.
NOTE 2. INTERIM FINANCIAL DATA
The accompanying condensed consolidated financial statements
should be read in conjunction with the Company's 1993 Annual Report on
Form 10-K (the Form 10-K) as filed with the Securities and Exchange
Commission. In the opinion of management, the accompanying financial
information includes all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position, results
of operations and cash flows for the interim periods.
The Form 10-K includes a supplemental current value basis balance
sheet in addition to historical cost basis financial statements. The
current value basis balance sheet will continue to be an integral part
of the Company's annual report to stockholders. However, current value
information will not be presented as part of the Company's interim
financial information. The extensive market research, financial analysis
and testing of results required to produce reliable current value
information make it impractical to report this information on an interim
basis.
NOTE 3. CAPITAL STRUCTURE
Prior to December 29, 1989, the Company was wholly owned by Santa
Fe Pacific Corporation (SFP). On December 29, 1989, the Company issued
19.9% of its common stock to Bay Area Real Estate Investment Associates
L.P. (BAREIA) for $398 million cash. In connection with the stock
issuance, BAREIA also purchased from the Company, at par, a $75 million
convertible debenture (the Debenture). BAREIA is a California limited
partnership whose general partner is JMB/Bay Area Partners and whose
limited partner is the California Public Employees' Retirement System.
On December 4, 1990, SFP distributed, in the form of a stock dividend,
its remaining 80.1% interest in the Company to its stockholders.
On February 11, 1993, BAREIA converted the Debenture (which then
had an accreted value of $111.4 million) into common stock with a value
of $141 million. This is treated as a non-cash item in the statement of
cash flows. After the conversion, BAREIA owned 40.7% of the outstanding
common stock. At that time, the Company incurred a non-recurring, non-
cash expense of $29.6 million ($28.3 million, net of income tax benefit),
representing the excess of the value of the common stock issued over the
accreted value of the Debenture at the date of conversion. Concurrently
with the conversion of the Debenture, the Company issued 3,449,999 shares
(of a total 3,500,000 authorized) of $3.75 Series A Cumulative
Convertible Preferred Stock (Series A preferred stock) for $172.5
million, of which BAREIA purchased 1,405,702 shares (approximately 40.7%
of the total). The Series A preferred stock has an annual dividend of
$3.75 per share, a stated value of $50 per share and a liquidation
preference of $50 per share plus accrued and unpaid dividends. It is
convertible into common stock at a price of $9.06 per share, subject to
adjustment in certain events. It is also redeemable, at the option of
the Company, at any time after February 16, 1996, at $52.625 per share
and thereafter at prices declining to $50 per share on or after February
16, 2003.
The net proceeds of the Series A preferred stock issuance were
used to repay $69 million of the working capital facility and to invest
$50 million in securities to be held for the benefit of The Prudential
Insurance Company of America (Prudential) and committed to the paydown
and refinancing of the Company's $388.2 million first mortgage loan with
Prudential (Note 5). The balance of the proceeds were invested in short-
term marketable securities.
On November 4, 1993, the Company sold, in a private placement,
3,000,000 shares (of a total 4,600,000 authorized) of $3.625 Series B
Cumulative Convertible Exchangeable Preferred Stock (Series B preferred
stock) for $150 million. The Series B preferred stock has an annual
dividend of $3.625 per share, a stated value of $50 per share and a
liquidation preference of $50 per share plus accrued and unpaid
dividends. It is convertible into the Company's common stock at a price
of $9.80 per share, subject to adjustment in certain events. The Series
B preferred stock is exchangeable, at the Company's option, at any time
after November 15, 1995, into 7.25% Convertible Subordinated Debentures
due November 15, 2018, at a rate of $50 principal amount of debentures
for each share of Series B preferred stock. It is also redeemable, at
the option of the Company, at any time after November 15, 1996, at
$52.5375 per share and thereafter at prices declining to $50 per share
on or after November 15, 2003. The proceeds of the Series B preferred
stock issuance have been and will be used to repay debt that matures in
1994 through 1997 and for general corporate purposes.
NOTE 4. EARNINGS PER SHARE
Net income (loss) per share of common stock is computed by
dividing net income (loss), after reduction for preferred stock
dividends, by the weighted average number of shares of common stock
outstanding during the period. Fully diluted earnings per share amounts
have not been presented because assumed conversion of the Series A and
Series B preferred stock is anti-dilutive for all relevant periods.
NOTE 5. MORTGAGE AND OTHER DEBT
Mortgage and other debt at June 30, 1994 and December 31, 1993 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
------------ ------------
<S> <C> <C> <C>
First mortgage loan - Prudential $ 278,296 $ 388,150
First mortgage loans 115,747 118,457
Term loan - unsecured 22,000 22,000
Construction loans - secured 50,398 46,968
Intermediate term loans - secured 57,905 69,045
Other mortgage loans 428 463
Assessment district bonds 18,511 18,681
---------- ----------
Total mortgage and other debt $ 543,285 $ 663,764
========== ==========
Due in one year $ 88,962 $ 313,427
========== ==========
</TABLE>
The Company refinanced its $388.2 million loan with Prudential on
February 18, 1994 into a $280 million mortgage loan due March 1, 2004 and
bearing an average interest rate of 8.71%. The new loan reflects a
paydown of $108.2 million, of which $81 million was required to meet
current loan underwriting standards and $27.2 million was paid to release
selected properties from the loan. In connection with this refinancing,
the Company recorded an extraordinary expense in the fourth quarter of
1993 of $11.9 million ($7.4 million, net of income tax benefits). This
extraordinary expense consisted primarily of a redemption premium paid
to Prudential and the write-off of deferred financing costs associated
with the $388.2 million loan.
The revolving period of the Company's $75 million construction
facility expired on March 31, 1994. The Company is in discussions with
the lender and anticipates that this facility will be renewed. If this
facility is not renewed, the Company expects that it would finance future
construction projects through individual construction loans, available
cash or other means.
Interest costs relating to mortgage and other debt for the three and
six months ended June 30, 1994 and 1993 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
--------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest expensed $ 6,020 $ 10,357 $ 12,503 $ 21,956
Interest capitalized 6,011 6,533 11,875 13,652
-------- -------- -------- --------
Total interest cost $ 12,031 $ 16,890 $ 24,378 $ 35,608
======== ======== ======== ========
</TABLE>
NOTE 6. PROPERTY
Property and capitalized property costs at June 30, 1994
and December 31, 1993 consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
------------ -------------
<S> <C> <C>
Land and improvements $ 541,337 $ 525,843
Buildings 432,019 440,583
Construction in progress 57,296 45,715
Capitalized interest and property taxes 237,840 225,660
Other (including proportionate share of
joint ventures' net deficits of $29,798
and $38,372) (1,208) (5,641)
------------ -----------
1,267,284 1,232,160
Less accumulated depreciation (150,141) (140,328)
------------ -----------
$ 1,117,143 $ 1,091,832
============ ===========
</TABLE>
NOTE 7. INCOME TAXES
The Company's effective tax rate for the six months ended June 30,
1994 was 42.5%. The effective tax rate for fiscal 1993, before the non-
recurring expense related to conversion of the Debenture (Note 3) and
before the effect of the 1% increase in the federal corporate tax rate,
was 37.5%. Income taxes in 1993 reflect a tax benefit of $1.3 million
for tax deductions related to the $29.6 million non-recurring expense.
The Company also increased its tax expense and related deferred tax
liability by $3 million in 1993 as a result of the legislation increasing
the corporate federal tax rate from 34% to 35%.
NOTE 8. CONTINGENCIES
The Company is a party to a number of legal actions arising in the
ordinary course of business. While the Company cannot predict with
certainty the final outcome of these proceedings, considering the
substantial legal defenses available, management believes that none of
these actions, when finally resolved, will have a material adverse effect
on the consolidated financial position or results of operations of the
Company.
Inherent in the operations of the real estate business is the
possibility that environmental pollution conditions may exist on or
relate to properties owned or previously owned. The Company may be
required in the future to take action to correct or reduce the effects
on the environment of prior disposal or release of hazardous substances
by third parties, the Company, or its corporate predecessors. The amount
of such future cost is difficult to estimate due to such factors as the
unknown magnitude of possible contamination, the unknown timing and
extent of the corrective actions which may be required, the determination
of the Company's liability in proportion to other responsible parties,
and the extent to which such costs are recoverable from insurance.
Costs of environmental remediation incurred in connection with
income producing properties and properties sold are expensed. At June
30, 1994, management estimates that future costs for remediation of
identified or suspected environmental contamination which will be treated
as an expense may be in the range of $2 to $24 million. It is
anticipated that such costs will be incurred over the next ten years.
At June 30, 1994, and December 31, 1993, the Company had a reserve of
$6.1 million and $5.6 million for such costs. Management also estimates
that similar costs relating to the Company's developable properties may
range from $18 million to $63 million. These amounts generally will be
capitalized as components of development costs when incurred. It is
anticipated that environmental remediation costs related to property
developments will be incurred over a period of twenty years.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in the Company's Form 10-K.
Catellus' Strategies
The Company's operations are guided by two key strategies:
converting its land portfolio into operating properties and cash and
generating cash flow from its existing income producing properties.
The Company has limited speculative development, focusing instead
on build-to-suit opportunities, with 100% of construction starts in 1993
and 1994 being build-to-suits. While the Company expects its current
focus on build-to-suit projects to continue for the near term, it may
consider more speculative development if market conditions warrant. In
1992, the Company began to pursue "build-to-sell" opportunities with
building users or pre-arranged investors. These arrangements allow the
Company to monetize the value of its land and receive a development fee.
Liquidity and Capital Resources
Operating activities
Cash provided by operating activities, including funds generated by
operating properties and sales of land, was $29.1 million, or $14.9
million more than in the first six months of 1993. This increase was
primarily attributable to lower interest paid and the proceeds of two
favorable environmental litigation settlements. Cash provided by
operating properties increased slightly, notwithstanding the negative
impact of sales of several income producing properties near the end of
1993. Excluding these sales, cash provided by operating properties
increased approximately 5% over 1993. At June 30, 1994, the Company's
total building portfolio was 94.9% leased, compared to 91.6% at June 30,
1993.
Property sales have consisted principally of surplus properties and
selected income producing and developable properties. The level of sales
and revenue generated by such sales fluctuates from period to period and
cannot be predicted with certainty. On an ongoing basis, the Company
reviews its property portfolio to assess sales potential in light of
current real estate markets. Overall, property sales represent a key
element of the Company's cash flow, and provide flexibility necessary to
respond to continued tightness in credit markets and the increased equity
required in financings. However, the tightness of the credit markets may
result in lower sales of land because of the difficulty potential buyers
may have in obtaining financing for land acquisitions. As a result, the
Company has increased sales of income producing and developable
properties. The Company currently expects property sales of $50 million
to $60 million for 1994; actual sales will depend on prevailing market
conditions and the Company's anticipated level of capital expenditures.
Any significant decrease in the sales level or cash flow generated by
sales could impact the Company's ability to meet its obligations for
fixed charges, capital expenditures and preferred stock dividends.
Investing activities
Cash used for investing activities consists of capital expenditures
and joint venture contributions, reduced by joint venture distributions
and proceeds from the sales of income producing properties. The Company
invested $41.1 million to develop its land and income producing
properties in the first half of 1994. These funds were used for building
construction and improvements, as well as entitlement efforts and pre-
construction activities, and were financed through borrowings from
construction facilities, property sales and funds generated from
operations. Fixed commitments for all capital expenditures, primarily
for entitlements and construction of infrastructure and buildings,
totalled approximately $30 million at June 30, 1994. The majority of
this amount relates to building construction at two large projects in
Emeryville/Oakland and Fremont, California.
Financing activities
Cash provided by or used for financing activities include debt and
equity transactions, as well as dividends paid on preferred stock. On
February 18, 1994, the Company refinanced its $388.2 million mortgage
loan with Prudential with a $280 million mortgage loan due March 1, 2004
and bearing an average interest rate of 8.71%. The new loan reflects a
paydown of $108.2 million, of which $81 million was required to meet
current loan underwriting standards and $27.2 million was paid to release
selected properties from the loan. In connection with this refinancing,
the Company also paid down $10 million of another mortgage loan with
Prudential due January 1, 1996. Additionally, the Company recorded an
extraordinary expense in 1993 of $11.9 million which consisted of a
redemption premium paid to Prudential and the write-off of deferred
financing costs associated with the $388.2 million loan. The reduced
interest resulting from the above debt paydowns, as well as other debt
paydowns in 1993 and 1994, was partially offset by the increased dividend
requirements from the Series A and B preferred stock offerings in 1993.
During the first quarter of 1994, the Company also closed a $5.8
million eight-year mortgage loan and a $3.2 million fifteen-year mortgage
loan for previously financed projects. Proceeds from these loans were
used to repay construction loans.
The revolving period of the Company's $75 million construction
facility expired on March 31, 1994. The Company is in discussions with
the lender and anticipates that this facility will be renewed. If this
facility is not renewed, the Company expects that it would finance future
construction projects through individual construction loans, available
cash or other means.
Debt and cash balances
At June 30, 1994, the Company had total outstanding debt of $543.3
million, of which 73% was non-recourse to the Company and secured by the
underlying property only. During the next twelve months, $89 million of
debt matures. Of the $89 million due within one year, 89.4% is
construction financing or intermediate term loans, which are expected to
be extended, refinanced and converted into permanent loans or repaid.
At June 30, 1994, cash and cash equivalents totalled $63.6 million.
In addition, the Company had available $16.5 million under its
construction facilities, $1.5 million under its secured term loan
facilities, and $68.1 million under its unsecured revolving facility.
Results of Operations
(in thousands)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, June 30,
--------------------- ------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Property sales
Sales $ 15,272 $ 7,247 $ 17,576 $ 13,097
Cost of sales 10,329 4,214 12,435 6,606
-------- -------- -------- --------
Gross profit on sales $ 4,943 $ 3,033 $ 5,141 $ 6,491
======== ======== ======== ========
Gross profit percentage 32.4% 41.9% 29.3% 49.6%
======== ======== ======== ========
Operating properties
Rentals
Commercial and industrial $ 26,069 $ 27,450 $ 51,060 $ 53,053
Agricultural and other 28 212 445 506
-------- -------- -------- --------
26,097 27,662 51,505 53,559
-------- -------- -------- --------
Expenses
Operating and maintenance 6,546 7,884 13,983 15,144
Taxes other than income 4,500 5,215 9,264 10,160
-------- -------- -------- --------
11,046 13,099 23,247 25,304
-------- -------- -------- --------
Income from operating
properties $ 15,051 $ 14,563 $ 28,258 $ 28,255
======== ======== ======== ========
Income as a percentage of
rentals 57.7% 52.6% 54.9% 52.8%
======== ======== ======== ========
</TABLE>
Comparison of six months ended June 30, 1994 and 1993
The Company had net income of $8.1 million, or a net loss of $.05
per common share (after preferred stock dividends of $11.9 million), for
the first half of 1994. This compared to a net loss of $29.4 million,
or $.52 per common share (after preferred stock dividends of $6.6
million), for the first half of 1993. Before a $29.6 million non-
recurring expense in 1993, the Company had a net loss of $1.1 million for
the first half of 1993. Income before taxes was $14 million in 1994
compared to a loss of $2 million (before the non-recurring expense) in
1993. The increase in 1994 resulted from a significant decrease in
interest expense, improved operating results from the Company's joint
ventures and the favorable settlement of two environmental litigation
matters, partially offset by lower gross profit from property sales.
The decrease in gross profit from property sales is due to an
overall higher cost basis in properties sold, including the sale of an
income producing property which generated a $3 million loss. Property
sales and related gross profit will continue to fluctuate from period to
period, reflecting general market conditions and the Company's intent and
ability to sell property when it can obtain attractive prices.
Income from operating properties remained stable despite the
sales of several income producing properties in late 1993 and the
contribution of an operating property to a joint venture in the first
quarter of 1994. Excluding the negative impact of these sales and the
contribution, income from rental operations increased 9.1% over 1993 due
to both higher rental revenue and lower expenses. Over 90% of the growth
in rental revenue came from existing properties, with the remainder
attributable to rents from buildings completed over the past twelve
months. The increase in rental revenue from existing properties was
primarily the result of higher occupancy; such rental revenue also
reflects regular rent increases in existing leases. Operating and
maintenance expenses were down because of a number of expired sub-leases.
Taxes other than income dropped slightly due mainly to reductions caused
by property reassessments.
Equity in earnings of joint ventures increased significantly in
1994 as a result of property sales by a joint venture. Also, the Company
suspended the recording of losses for one joint venture, Pacific Design
Center, in the third quarter of 1993 when the Company's interest in
cumulative losses of that joint venture exceeded its interest in
cumulative earnings. The Company's other joint ventures, as a group, are
performing well and showed improvement in operating results compared to
1993. Other revenue was notably higher because of the favorable
settlement of two environmental litigation matters and higher developers'
fees. The increase in general and administrative expenses was caused by
executive severance and search costs, as well as higher use of outside
professional services. Interest expense decreased as a result of the
1993 conversion of the 13.5% convertible debenture, lower principal
balances caused by repayments and refinancings and lower amortization of
loan fees and debt issuance costs, partially offset by reduced
capitalized interest due to the postponed development of our San Diego
mixed-use project.
Comparison of three months ended June 30, 1994 and 1993
The Company had net income of $6.6 million, or $.01 per common
share (after preferred stock dividends of $6 million), for the second
quarter of 1994. This compared to net income of $.4 million, or a net
loss of $.04 per common share (after preferred stock dividends of $3.2
million), for the second quarter of 1993. Income before taxes was $11.5
million in 1994 compared to $.8 million in 1993. The increase in 1994
resulted from a significant decrease in interest expense, higher gross
profit from property sales and improved operating results from the
Company's joint ventures.
The increase in gross profit from property sales is due to
significantly higher sales, offset by an overall higher cost basis in
properties sold. Property sales and related gross profit will continue
to fluctuate from period to period, reflecting general market conditions
and the Company's intent and ability to sell property when it can obtain
attractive prices.
Income from operating properties increased 3.4% despite the sales
of several income producing properties in late 1993 and the contribution
of an operating property to a joint venture in the first quarter of 1994.
Excluding the negative impact of these sales and the contribution, income
from rental operations increased 12.5% over 1993 due mainly to lower
expenses. Operating and maintenance expense declined because of lower
environmental remediation costs and the expiration of a number of sub-
leases. Taxes other than income dropped slightly due mainly to
reductions caused by property reassessments.
Equity in earnings of joint ventures showed a significant
increase in 1994 due mainly to property sales by a joint venture. The
performance of the Company's other joint ventures, as a group, remained
stable as compared to the 1993 second quarter. Interest expense dropped
as a result of lower principal balances caused by repayments and
refinancings, partially offset by reduced capitalized interest due to the
postponed development of the Company's San Diego mixed-use project.
Other revenue was higher because of higher developers' fees and lease
buyout revenue.
Environmental Matters
Many of the Company's properties are in urban and industrial
areas, and many properties may have been leased to commercial and
industrial tenants who may have discharged hazardous materials. The
Company incurs ongoing environmental remediation costs, including clean-
up costs, consulting fees for environmental studies and investigations,
monitoring costs, and legal costs relating to clean-up, litigation
defense and the pursuit of responsible third parties. Costs incurred in
connection with income producing properties and properties previously
sold are expensed. Costs relating to undeveloped properties are
capitalized as part of development costs. As with other capital
expenditures, these costs will be incurred as development proceeds.
Environmental costs charged to operations for the first half of 1994 and
1993 totalled $2.5 million and $2.1 million; for the second quarter of
1994 and 1993, such costs charged to operations totalled $1.0 million and
$1.5 million. Environmental costs capitalized for the first half of 1994
and 1993 totalled $.6 million and $.2 million; for the second quarter of
1994, such capitalized costs totalled $.4 million and no costs were
capitalized in the 1993 second quarter.
At June 30, 1994, the Company's estimate of its potential
liability for identified environmental costs ranged from $2 million to
$24 million for properties where costs would be charged to operations.
These costs are expected to be incurred over an estimated ten-year
period, with a substantial portion expected to be incurred over the next
five years. At June 30, 1994, the Company's estimate of its potential
liability for identified environmental costs relating to developable
properties ranged from $18 million to $63 million. These costs generally
will be capitalized as they are incurred, over the course of the
estimated development period of approximately twenty years.
The Company maintains a reserve for known, probable costs of
environmental remediation to be incurred with respect to income producing
properties and properties previously sold. See Note 8 to the Condensed
Consolidated Financial Statements.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on June
23, 1994, stockholders voted with respect to (1) the election
of directors, (2) the adoption of an amendment to the
Company's Executive Stock Option Plan (the Plan) to increase
the number of shares subject to the Plan and to limit the
number of shares of common stock that may be granted to
individual participants, and (3) the issuance of common stock
upon conversion of the Company's $3.625 Series B Cumulative
Convertible Exchangeable Preferred Stock (Series B preferred
stock). All nominees were elected, the Plan amendment was
approved and the proposal for the issuance of common stock
upon conversion of the Series B preferred stock was approved.
The votes were as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINED
---------- --------- ---------
<C> <C> <C> <C>
1. Election of Directors
Joseph F. Alibrandi 61,629,491 - 570,024
Darla Totusek Flanagan 61,619,550 - 579,965
Gary M. Goodman 61,628,003 - 571,512
Robert D. Krebs 59,864,086 - 2,335,429
Judd D. Malkin 61,635,656 - 563,859
Vernon B. Schwartz * 61,614,075 - 585,440
Joseph R. Seiger 61,620,771 - 578,744
Jacqueline R. Slater 61,633,700 - 565,815
Thomas M. Steinberg 61,621,450 - 578,065
Tom C. Stickel 61,612,566 - 586,949
John E. Zuccotti 61,640,040 - 559,475
2. Amendment to the
Company'sExecutive
Stock Option Plan 59,636,435 1,596,725 966,355
3. Issuance of the
Company's common stock
upon conversion of the
Series B preferred stock 50,180,812 901,340 2,496,736
* Vernon B. Schwartz resigned from the Board of Directors
effective June 30, 1994. Nelson C. Rising was elected as a
director by action of the Board of Directors effective July
27, 1994.
Item 6. Exhibits and Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Catellus Development Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CATELLUS DEVELOPMENT CORPORATION
Date August 10, 1994 By Joseph R. Seiger
--------------------- --------------------------
Joseph R. Seiger
Chief Executive Officer
Date August 10, 1994 By David M. Perna
--------------------- --------------------------
David M. Perna
Controller
</TABLE>
