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 March 31, 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 April 15, 1994, there were 72,967,236 issued and outstanding
shares of the registrant's common stock, $.01 par value per share.
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Consolidated Balance Sheet - Historical Cost
Basis at March 31, 1994 and December 31,
1993. . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Income - Historical
Cost Basis for the three months ended
March 31, 1994 and 1993 . . . . . . . . . . . . . . . 3
Condensed Consolidated Statement of Cash Flows -
Historical Cost Basis for the three months ended
March 31, 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. . . . . . . . . . . . . . . . . . . . 12
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET HISTORICAL COST BASIS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---------- ------------
<S> <C> <C> <C>
(Unaudited)
Assets
Developable properties. . . . . . $ 604,488 $ 592,497
Income producing properties . . . 560,889 552,387
Surplus developable properties. . 74,660 75,078
Agricultural and other properties 12,258 12,198
Less accumulated depreciation . . (146,629) (140,328)
--------- ---------
1,105,666 1,091,832
Other assets and deferred charges 56,025 51,207
Notes receivable. . . . . . . . . . . 9,461 9,579
Accounts receivable, less allowances 7,838 7,195
Restricted cash and investments . . . - 67,410
Cash and cash equivalents . . . . 75,469 146,604
---------- ----------
Total. . . . . . . . . . . . . $1,254,459 $1,373,827
========== ==========
Liabilities and stockholders' equity
Mortgage and other debt . . . . . $ 547,588 $ 663,764
Accounts payable and
accrued expenses. . . . . . . . 45,189 47,585
Deferred credits and
other liabilities . . . . . . . 25,251 22,200
Deferred income taxes . . . . . . 114,966 114,329
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. . . . . . . (45,916) (41,432)
---------- ----------
Total stockholders' equity . . . 521,465 525,949
---------- ----------
Total. . . . . . . . . . . . . $1,254,459 $1,373,827
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF INCOME HISTORICAL COST BASIS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1994 1993
----------- ----------
<S> <C> <C> <C>
(Unaudited)
Revenue
Property sales. . . . . . . . . . . . . $ 2,304 $ 5,850
Rental
Commercial and industrial. . . . . . . 24,991 25,603
Agricultural and other . . . . . . . . 417 294
Interest income . . . . . . . . . . . . 1,108 765
Equity in earnings of joint ventures. . 1,209 231
Other -- net. . . . . . . . . . . . . . 3,987 562
---------- ----------
34,016 33,305
Costs and expenses
Cost of property sold . . . . . . . . . 2,106 2,392
Operating and maintenance . . . . . . . 7,437 7,260
Depreciation. . . . . . . . . . . . . . 6,518 6,675
General and administrative. . . . . . . 4,157 3,227
Taxes other than income . . . . . . . . 4,764 4,945
Interest. . . . . . . . . . . . . . . . 6,483 11,599
---------- ----------
31,465 36,098
Non-recurring expense
Conversion of debenture. . . . . . . . - 29,552
---------- ----------
Income (loss) before taxes . . . . . . . . . 2,551 (32,345)
Income taxes (benefit) . . . . . . . . . . . 1,082 (2,557)
---------- ----------
Net income (loss). . . . . . . . . . . . . . $ 1,469 $ (29,788)
Preferred stock dividends. . . . . . . 5,953 3,378
---------- ----------
Net loss applicable to common
stockholders . . . . . . . . . . . . $ (4,484) $ (33,166)
========== ==========
Net loss per share of common stock. . $ (0.06) $ (.52)
========== ==========
Average number of common shares. . . . 72,967 64,105
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS HISTORICAL COST BASIS
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1994 1993
--------- ---------
<S> <C> <C> <C>
(Unaudited)
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . $ 1,469 $ (29,788)
Non-cash items included in net
income (loss):
Non-recurring expense related to
conversion of debenture . . . . . . . . - 29,552
Depreciation . . . . . . . . . . . . . . . 6,518 6,675
Deferred income taxes. . . . . . . . . . . 637 (2,557)
Interest accrued on convertible debenture . - 1,665
Amortization of deferred loan fees and
other costs . . . . . . . . . . . . . . . 604 1,028
Equity in earnings of joint ventures . . . (1,209) (231)
Cost of land sold. . . . . . . . . . . . . 1,372 1,174
Other--net . . . . . . . . . . . . . . . . 643 (36)
Changes in operating assets and
liabilities. . . . . . . . . . . . . . . . 4,183 1,773
---------- ----------
Net cash provided by operating activities . . . 14,217 9,255
Cash flows from investing activities:
Capital expenditures for developable and
income producing properties. . . . . . . . (18,682) (17,532)
Distributions from/contributions to
joint ventures, net. . . . . . . . . . . . (928) (125)
---------- ----------
Net cash used for investing activities. . . (19,610) (17,657)
Cash flows from financing activities:
Borrowings. . . . . . . . . . . . . . . . . 293,172 5,296
Repayment of borrowings . . . . . . . . . . (410,036) (69,970)
Dividends paid. . . . . . . . . . . . . . . (6,285) -
Proceeds from issuance of preferred stock. . - 172,500
Stock issuance costs. . . . . . . . . . . . (3) (6,144)
Investment in restricted cash for
future reduction of debt. . . . . . . . . . 67,410 (49,993)
Redemption premium on early
retirement of debt. . . . . . . . . . . . . (10,000) -
---------- ----------
Net cash provided by (used for)
financing activities. . . . . . . . . . . . . (65,742) 51,689
---------- ----------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . . . (71,135) 43,287
Cash and cash equivalents at
beginning of period . . . . . . . . . . . . . 146,604 14,730
---------- ----------
Cash and cash equivalents at end of period. . . $ 75,469 $ 58,017
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) . . . $ 6,552 $ 8,992
Income taxes . . . . . . . . . . . . . . . $ 8 $ 10
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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
(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 re-
quired 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
(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 (accreted value
of $111.4 million) into common stock with a value of $141 million. This is
treated as a non-cash item in the statement of cash flows. After the conver-
sion, BAREIA owned 40.7% of the outstanding common stock. At that time, the
Company incurred a non-recurring, non-cash expense of $29.6 million ($28.3
million, net of income tax benefit), representing the excess of the value of
the common stock issued over the accreted value of the Debenture at the date
of conversion. Concurrently with the conversion of the Debenture, the
Company issued 3,449,999 shares (of a total 3,500,000 authorized) of $3.75
Series A Cumulative Convertible Preferred Stock (Series A preferred stock)
for $172.5 million, of which BAREIA purchased 1,405,702 shares (approxi-
mately 40.7% of the total). The Series A preferred stock has an annual
dividend of $3.75 per share and a stated value and liquidation preference
of $50 per share plus accrued and unpaid dividends. It is convertible into
common stock at a price of $9.06 per share, subject to adjustment in certain
events. It is also redeemable, at the option of the Company, at any time
after February 16, 1996, at $52.625 per share and thereafter at prices
declining to $50 per share on or after February 16, 2003.
<PAGE>
The net proceeds of the Series A preferred stock issuance were used
to repay $69 million of the working capital facility and to invest
$50 million in securities to be held for the benefit of The Prudential
Insurance Company of America (Prudential) and committed to the paydown
and refinancing of the Company's $388.2 million first mortgage loan with
Prudential (Note 5). The balance of the proceeds were invested in short-
term marketable securities.
On November 4, 1993, the Company sold, in a private placement,
3,000,000 shares (of a total 4,600,000 authorized) of $3.625 Series B
Cumulative Convertible Exchangeable Preferred Stock (Series B preferred
stock) for $150 million. The Series B preferred stock has an annual
dividend of $3.625 per share and a stated value and liquidation preference
of $50 per share plus accrued and unpaid dividends. It is convertible into
the Company's common stock at a price of $9.80 per share, subject to
adjustment in certain events. The Series B preferred stock is exchangeable,
at the Company's option, at any time after November 15, 1995, into 7.25%
Convertible Subordinated Debentures due November 15, 2018, at a rate of $50
principal amount of debentures for each share of Series B preferred stock.
It is also redeemable, at the option of the Company, at any time after
November 15, 1996, at $52.5375 per share and 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 March 31, 1994 and December 31, 1993
is summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---------- ------------
<S> <C> <C> <C>
First mortgage loan - Prudential $ 280,000 $ 388,150
First mortgage loans 117,192 118,457
Term loan - unsecured 22,000 22,000
Construction loans - secured 42,094 46,968
Intermediate term loans - secured 66,645 69,045
Other mortgage loans 442 463
Assessment district bonds 19,215 18,681
---------- ----------
Total mortgage and other debt $ 547,588 $ 663,764
========== ==========
Due in one year $ 96,701 $ 313,427
========== ==========
</TABLE>
The Company refinanced its $388.2 million loan with The Prudential
Insurance Company of America (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 continuing discussions with the
lender regarding renewal of this facility. 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.
<PAGE>
Interest costs relating to mortgage and other debt for the three months
ended March 31, 1994 and 1993 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------
1994 1993
----------- ----------
<S> <C> <C>
Interest expensed $ 6,483 $ 11,599
Interest capitalized 5,864 7,119
----------- ----------
Total interest cost $ 12,347 $ 18,718
=========== ==========
</TABLE>
NOTE 6. PROPERTY
Property and capitalized property costs at March 31, 1994 and
December 31, 1993 consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---------- ------------
<S> <C> <C>
Land and improvements $ 542,211 $ 525,843
Buildings 435,476 440,583
Construction in progress 49,229 45,715
Capitalized interest and property taxes 232,130 225,660
Other (including proportionate share
of joint ventures' net deficits of
$34,229 and $38,372) (6,751) (5,641)
---------- ----------
1,252,295 1,232,160
Less accumulated depreciation (146,629) (140,328)
---------- ----------
$1,105,666 $1,091,832
========== ==========
</TABLE>
NOTE 7. INCOME TAXES
The Company's effective tax rate for the three months ended March 31,
1994 was 42.4%, a 4.9% increase over the Company's 37.5% 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. The Company recognized a tax benefit of $1.3 million in February
1993 for tax deductions related to the 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 sub-
stantial 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 with a high degree of accuracy due to such factors as
the unknown magnitude of possible contamination, the unknown timing and ex-
tent 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 March 31, 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 $25 million. It is anticipated that such costs
will be incurred over the next ten years. At March 31, 1994, and
December 31, 1993, the Company had a reserve of $5.9 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.
<PAGE>
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 being
build-to-suits. While the Company expects the focus on build-to-suit to
continue for the near term, it could return to 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
Cash provided by operating activities, including funds generated by
sales of land, was $14.2 million, or $5.0 million more than in the first
three months of 1993. This increase was primarily attributable to lower
interest paid and the proceeds of a favorable environmental litigation
settlement, which were offset in part by a decrease in cash provided by
property sales due to a lower level of sales in 1994 and a decrease in
cash provided by operating properties as a result of income producing
property sales in 1993. Excluding such sales from 1993, cash provided
by operating properties increased approximately 3% over 1993. At March 31,
1994, the Company's total building portfolio was 94.4% leased, compared to
91.3% at March 31, 1993.
Property sales have consisted principally of surplus properties, and
have also included selected income producing and developable properties.
The level of sales and revenue generated by 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 in obtaining
financing for land acquisitions. As a result, the Company has in the past
increased sales of income producing and developable properties. The Company
currently expects property sales of $50 million to $100 million for 1994;
actual sales will depend on prevailing market conditions and the Company's
anticipated level of capital expenditures. Any significant decrease in the
sales level or cash flow generated by sales could impact the Company's
ability to meet its obligations for fixed charges, capital expenditures
and preferred stock dividends.
The Company invested $18.7 million to develop its land and income
producing properties in the first three months 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, funds generated from operations,
and cash on hand. Fixed commitments for all capital expenditures, primarily
for entitlements and construction of infrastructure and buildings, totalled
approximately $36 million at March 31, 1994; the majority of this amount
relates to building construction at two large projects in Emeryville/Oakland
and Fremont, California.
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.
During the first quarter of 1994, the Company also closed a $5.8 million
eight-year and a $3.2 million fifteen-year mortgage loan for previously
financed projects; proceeds from these loans were used to reduce amounts
outstanding under the construction facility.
The revolving period of the Company's $75 million construction facility
expired on March 31, 1994. The Company is in continuing discussions wit
the lender regarding renewal of this facility. 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.
At March 31, 1994, the Company had total outstanding debt of $547.6
million, of which 73% was non-recourse to the Company and secured by the
underlying property only. During the next twelve months, $96.7 million of
debt matures. Of the $96.7 million due within one year, 90.6% is
construction financing or intermediate term loans, which are expected to
be extended or refinanced and converted into permanent loans or repaid.
At March 31, 1994, cash and cash equivalents totalled $75.5 million.
In addition, the Company had available $25.7 million under its construction
facilities, $1.9 million under its secured term loan facilities, and $66.3
million under its unsecured revolving facility.
<TABLE>
Results of Operations
(in thousands)
<CAPTION>
Three months ended
March 31,
---------------------------
1994 1993
---------- ----------
<S> <C> <C> <C> <C>
Property sales
Sales . . . . . . . . . . . . . $ 2,304 $ 5,850
Cost of sales . . . . . . . . . 2,106 2,392
---------- ----------
Gross profit on sales . . . . $ 198 $ 3,458
========== ==========
Gross profit percentage . . . . 8.6% 59.1%
========== ==========
Operating properties
Rentals
Commercial and industrial. . . $ 24,991 $ 25,603
Agricultural and other . . . . 417 294
---------- ----------
25,408 25,897
---------- ----------
Expenses
Operating and maintenance. . . 7,437 7,260
Taxes other than income. . . . 4,764 4,945
---------- ----------
12,201 12,205
---------- ----------
Income from operating properties . . . $ 13,207 $ 13,692
========== ==========
Income as a percentage of rentals. . . 52.0% 52.9%
========== ==========
</TABLE>
<PAGE>
Comparison of three months ended March 31, 1994 and 1993
The Company had net income of $1.5 million, or a net loss of $.06 per
common share (after preferred stock dividends of $6.0 million), for the first
quarter of 1994. This compared to a net loss of $29.8 million, or $.52 per
common share (after preferred stock dividends of $3.4 million), for the first
quarter of 1993. Before a $29.6 million non-recurring expense in 1993, the
Company had a net loss of $1.5 million for the first quarter of 1993. Income
before taxes was $2.6 million in 1994 compared to a loss of $2.8 million
(before the non-recurring expense) in 1993. The increase in 1994 resulted
from a significant decrease in interest expense and the favorable settlement
of several environmental litigation matters, partially offset by lower gross
profit from property sales.
The decrease in gross profit from property sales is due to significantly
lower sales, coupled with 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 to sell property when it can obtain attractive prices.
Income from operating properties decreased 3.5% due to sales of
income producing properties in 1993 and a property contribution to a joint
venture in the first quarter of 1994. Before reductions caused by the 1993
income producing property sales and the 1994 property contribution, income
from rental operations increased 5.5% over 1993 due mainly to higher rental
revenue. Almost two-thirds 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
and lower rental rates on releasing. Operating and maintenance expense
increased marginally because of higher environmental remediation costs.
Taxes other than income dropped slightly due mainly to income producing
property sales in 1993.
The increase in interest income was caused principally by interest
earned from increased cash available for investment from the net proceeds
of the Series A and Series B preferred stock issuances. Equity in earnings
of joint ventures increased in 1994 due mainly to the suspension of recording
losses incurred by Pacific Design Center. The suspension of recording
such losses began 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.
Interest expense decreased as a result of the 1993 conversion of the 13.5%
convertible debenture and lower principal balances caused by repayments and
refinancings, partially offset by reduced capitalized interest due to the
postponed development of our San Diego mixed-use project. Other revenue was
notably higher because of the favorable settlement of several environmental
litigation matters.
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 three months of
1994 and 1993 totalled $1.5 million and $.6 million. Environmental costs
capitalized for the first three months of 1994 and 1993 totalled $.2 million
in each period.
At March 31, 1994, the Company's estimate of its potential liability
for identified environmental costs ranged from $2 million to $25 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 March 31, 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 20 years.
The Company maintains a reserve for known, probable costs of environ-
mental 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 environ-
mental 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
Catellus Development Corporation, et al. v. Mobil Oil Corporation,
et al. (California Superior Court, Monterey County, filed March 1990) is
an action brought by the Company to recover costs and damages resulting
from the contamination of the Company's property at Monterey, California,
following unsuccessful efforts to obtain the cooperation of Mobil Oil
Corporation ("Mobil") and other former operators and tenants in the re-
mediation of the property. Mobil cross-complained against ten other
parties, including adjacent property owners, alleging that they played
some role in causing the contamination. Mobil and the other defendants
continued to deny their own liability and refused to fund or take respon-
sibility for the cleanup.
In March 1994, a settlement was reached pursuant to which the Company
received $4.25 million from Mobil, consisting of $3.5 million that was paid
directly to the Company and $750,000 that was deposited in an escrow account
to be disbursed to the Company upon completion of the cleanup to the
satisfaction of regulatory agencies. The Company also received settlement
payments on behalf of two other defendants totalling $150,000. The Company
previously had settled with the cross-defendants named by Mobil for
additional settlement payments of $277,000, bringing the total amount to be
paid to the Company in settlement of this action to $4,677,000.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
During the quarter ended March 31, 1994, the Registrant filed a Current
Report on Form 8-K, dated February 22, 1994, reporting the resignation of
the Company's chief executive officer effective June 30, 1994. The Form 8-K
also reported that two of the Company's board members had resigned.
<PAGE>
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 April 29, 1994 By Vernon B. Schwartz
---------------------
Vernon B. Schwartz
President and Chief
Executive Officer
Date April 29, 1994 By David M. Perna
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David M. Perna
Controller
