<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 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 (IRS 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 October 15, 1996, there were 76,986,486 issued and outstanding shares
of the registrant's common stock, $.01 par value per share.
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<PAGE>
CATELLUS DEVELOPMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet at September 30, 1996
and December 31, 1995.................................. 2
Consolidated Statement of Operations for the
three months and nine months ended
September 30, 1996 and 1995............................ 3
Consolidated Statement of Cash Flows for the nine
months ended September 30, 1996 and 1995............... 4
Notes to Consolidated Financial Statements.............. 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 8
PART II. OTHER INFORMATION........................................ 18
SIGNATURES......................................................... 19
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Properties ....................................... $1,215,892 $1,191,679
Less accumulated depreciation .................... (204,377) (184,228)
---------- ----------
1,011,515 1,007,451
Other assets and deferred charges ................ 48,058 44,530
Notes receivable ................................. 4,462 7,550
Accounts receivable, less allowances.............. 11,077 10,330
Cash and cash equivalents......................... 21,632 27,743
---------- ----------
Total...................................... $1,096,744 $1,097,604
========== ==========
Liabilities and stockholders' equity
Mortgage and other debt........................... $ 500,862 $ 496,180
Accounts payable and accrued expenses............. 42,119 33,913
Deferred credits and other liabilities............ 39,371 34,367
Deferred income taxes............................. 99,033 90,270
---------- ----------
Total liabilities.......................... 681,385 654,730
---------- ----------
Commitments and contingencies (Note 8)
Stockholders' equity
Preferred stock................................... 275,000 322,500
Common stock - 76,959 and 72,967 shares issued at
September 30, 1996 and December 31, 1995........ 769 730
Paid-in capital................................... 219,285 196,525
Accumulated deficit............................... (79,695) (76,881)
---------- ----------
Total stockholders' equity........................ 415,359 442,874
---------- ----------
Total.................................... $1,096,744 $1,097,604
========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
-------------------- -------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Rental revenues .......................................... $ 29,619 $ 27,179 $ 89,671 $ 80,910
Property operating costs ................................. (12,078) (9,683) (35,437) (28,531)
Gain on sales of property ................................ 4,076 1,703 21,090 8,902
Equity in earnings of joint ventures ..................... 1,172 565 4,418 4,917
Management and development fee income .................... 1,182 589 1,995 1,572
General and administrative expense ....................... (1,661) (2,783) (5,718) (9,222)
Interest expense ......................................... (10,536) (6,414) (32,316) (19,554)
Depreciation and amortization ............................ (7,550) (6,765) (22,654) (20,629)
Litigation, environmental and restructuring .............. 50 (643) 950 (2,177)
Other, net ............................................... 375 913 439 2,693
-------- -------- -------- --------
Income before income taxes ............................... 4,649 4,661 22,438 18,881
Income taxes ............................................. (1,897) (1,905) (9,155) (7,624)
-------- -------- -------- --------
Net income ............................................... 2,752 2,756 13,283 11,257
Preferred stock dividends ........................... (5,215) (5,953) (17,121) (17,859)
Premium on redemption of preferred stock ............ (1,334) - (1,334) -
-------- -------- -------- --------
Net loss applicable to common stockholders .......... $ (3,797) $ (3,197) $ (5,172) $ (6,602)
======== ======== ======== ========
Net loss per share of common stock .................. $ (0.05) $ (0.04) $ (0.07) $ (0.09)
======== ======== ======== ========
Average number of common shares outstanding ......... 75,002 72,967 74,251 72,967
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1996 1995
---------- ----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 13,283 $ 11,257
Non-cash items included in net income:
Depreciation and amortization............................. 22,654 20,629
Deferred income taxes..................................... 8,764 6,989
Amortization of deferred loan fees and other costs........ 2,562 1,812
Equity in earnings of joint ventures...................... (4,418) (4,917)
Cost of land and development properties sold.............. 35,986 3,063
Gain on sale of investment and other properties........... (4,706) -
Other--net................................................ 2,123 3,727
Changes in operating assets and liabilities.................. 2,911 (466)
-------- --------
Net cash provided by operating activities....................... 79,159 42,094
-------- --------
Cash flows from investing activities:
Capital expenditures......................................... (62,049) (44,541)
Distributions from joint ventures, net....................... 7,941 4,000
Net proceeds from sale of investment and other properties.... 7,459 -
Reduction in short-term investments and
restricted cash............................................ - 35,067
-------- --------
Net cash used in investing activities........................... (46,649) (5,474)
-------- --------
Cash flows from financing activities:
Borrowings................................................... 58,200 61,120
Repayment of borrowings...................................... (52,220) (54,911)
Dividends paid............................................... (18,011) (17,859)
Redemption of preferred stock................................ (26,739) -
Proceeds from issuance of common stock....................... 149 -
-------- --------
Net cash used in financing activities........................... (38,621) (11,650)
-------- --------
Net (decrease) increase in cash and cash equivalents............ (6,111) 24,970
Cash and cash equivalents at beginning of period................ 27,743 16,920
-------- --------
Cash and cash equivalents at end of period...................... $ 21,632 $ 41,890
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized)...................... $ 29,819 $ 17,294
Income taxes.............................................. $ 868 $ 245
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1. DESCRIPTION OF BUSINESS
Headquartered in San Francisco, Catellus Development Corporation (the
Company) is a full service real estate company that manages and develops real
estate for its own account and others. The Company's portfolio of industrial,
retail, residential and office projects, undeveloped land and joint venture
interests are located in major markets in California and 10 other states. The
Company's operating properties consist of industrial facilities, office and
retail buildings located in California, Arizona, Illinois, Texas, Colorado and
Oregon. The Company also has substantial undeveloped land holdings primarily in
these same states.
NOTE 2. INTERIM FINANCIAL DATA
The accompanying consolidated financial statements should be read in
conjunction with the Company's 1995 Annual Report on Form 10-K/A 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. Certain
prior period financial data has been reclassified to conform with the current
period presentation.
NOTE 3. EARNINGS PER SHARE
Net income (loss) per share of common stock is computed by dividing net
income (loss), after reduction for preferred stock dividends and premium on
redemption of preferred stock, 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 would be anti-dilutive for all relevant periods.
NOTE 4. ACQUISITION
In March 1996, the Company acquired The Akins Companies (Akins), a
residential real estate company involved in home building, community development
and project management services, primarily in Southern California. Akins was
acquired in exchange for 1,528,421 shares of the Company's common stock in a
transaction that qualifies for the pooling of interest method of accounting.
However, prior year financial statements have not been restated because Akins is
not material to the financial position, results of operations or cash flows of
the Company.
5
<PAGE>
NOTE 5. MORTGAGE AND OTHER DEBT
Mortgage and other debt at September 30, 1996 and December 31, 1995 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -----------
<S> <C> <C>
First mortgage loan - Prudential $261,179 $267,260
First mortgage loans 67,581 70,770
Intermediate term loans - secured 66,400 71,800
Construction loans - secured 58,884 52,851
Assessment district bonds 21,413 23,283
Term loan - unsecured 23,000 7,000
Other loans 2,405 3,216
-------- --------
Total mortgage and other debt $500,862 $496,180
======== ========
Due in one year $157,285 $ 85,094
======== ========
</TABLE>
On October 28, 1996, the Company entered into an agreement for a new $240
million credit line (Note 10).
Interest costs relating to mortgage and other debt for the three and nine
months ended September 30, 1996 and 1995 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross interest incurred $10,790 $12,351 $33,134 $ 36,863
Interest capitalized (254) (5,937) (818) (17,309)
------- ------- ------- --------
Interest expense $10,536 $ 6,414 $32,316 $ 19,554
======= ======= ======= ========
</TABLE>
NOTE 6. PROPERTIES
Net book value by property type at September 30, 1996 and December 31, 1995
consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Income producing properties:
Industrial buildings $ 291,916 $ 279,838
Office buildings 110,597 113,095
Retail buildings 86,304 84,595
Land development 318,104 317,727
Land leases 6,638 10,069
---------- ----------
813,559 805,324
---------- ----------
Land holdings:
Developable properties 166,655 150,339
Natural resources 1,926 1,788
Properties held for sale 62,993 84,232
---------- ----------
231,574 236,359
---------- ----------
Other (including proportionate
share of joint ventures' net
deficits of $41,218 and $41,066) (33,618) (34,232)
---------- ----------
$1,011,515 $1,007,451
========== ==========
</TABLE>
6
<PAGE>
NOTE 7. INCOME TAXES
The Company's effective tax rate for the nine months ended September 30,
1996 was 40.8%, a .6% increase over the Company's 40.2% rate for 1995 due to the
effect of state income taxes.
NOTE 8. COMMITMENTS AND 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, results of operations or cash flows of the Company.
Inherent in the operations of the real estate business is the possibility
that environmental pollution conditions may relate to properties owned or
previously owned. The Company may be required in the future to take action to
correct or reduce the environmental effects of prior disposal or release of
hazardous substances by third parties, the Company, or its corporate
predecessors. Future environmental costs are difficult to estimate due to such
factors as the unknown magnitude of possible contamination, the unknown timing
and extent of the corrective actions which may be required, the determination of
the Company's liability in proportion to other responsible parties, and the
extent to which such costs are recoverable from insurance.
Costs of environmental remediation incurred in connection with operating
properties and properties previously sold are expensed. At September 30, 1996,
management estimates that future costs for remediation of identified or
suspected environmental contamination which will be treated as an expense will
be approximately $13.8 million, and has provided a reserve for that amount. It
is anticipated that such costs will be incurred over the next ten years.
Management also estimates that similar costs relating to the Company's
properties to be developed or sold may range from $14 million to $41 million.
These amounts will be capitalized as components of development costs when
incurred, which is anticipated to be over a period of twenty years, or will be
deferred and charged to cost of sales when the properties are sold. These
estimates were developed based on extensive reviews which took place over
several years based upon then prevailing law and identified site conditions.
Because of the breadth of its portfolio, the Company is unable to review
extensively each property on a regular basis. Such estimates are not precise
and are always subject to the availability of further information about the
prevailing conditions at the site, the future requirements of regulatory
agencies and the availability of other parties to pay some or all of such costs.
NOTE 9. PREFERRED STOCK CONVERSION/REDEMPTION
In July 1996, the Company called for redemption approximately $50 million
of its $3.75 Series A Cumulative Preferred Stock. In September 1996, of the
950,000 preferred shares called, 441,887 shares were converted into 2,438,641
common shares and 508,113 shares were redeemed at $52.625 per share plus accrued
and unpaid dividends at a cost of approximately $26.7 million. This preferred
stock redemption led to a $.7 million decrease in preferred dividends for the
third quarter 1996.
NOTE 10. SUBSEQUENT EVENTS
On October 28, 1996, the Company entered into an agreement for a new $240
million credit line which replaces six existing credit lines or term facilities.
On the date of funding, $134.6 million was drawn to pay loan fees and repay and
terminate the six credit lines and term facilities. As of October 28, 1996, the
Company had $86 million available on this new credit line after fees and
repayments. The interest rate structure on the new credit line is on a floating
rate basis. The maturity date of this new credit line is November 1, 1998.
7
<PAGE>
ITEM 2. 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/A.
OVERVIEW
Prior to 1996, the aggregate costs of holding and operating the Company's
real estate assets and paying preferred stock dividends 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 sufficient to meet the Company's overall
cash requirements. In order to eliminate these historical deficits, the Company
has initiated the following:
. In October 1995, the Company began the process of substantially increasing its
asset sales activity, with the primary focus on its non-strategic land assets.
Sale proceeds were applied to a combination of debt reduction, in order to
reduce interest costs, and reinvestment in activities that could generate
increased operating earnings. Sales of non-strategic land totaling $35.8
million closed in the first nine months of 1996 and the Company has now sold
$82.9 million of non-strategic land in the twelve months following the
announcement of its goal.
. The Company closed $27.4 million of development property sales in the
first nine months of 1996, including $6.7 million in the third quarter.
. Total net debt reduction since the beginning of 1995 through the third quarter
of 1996 is $29.7 million ($122 million in debt repayment less $92.3 million of
new borrowings.) During the first nine months of 1996, the Company increased
its total debt by a net $4.8 million. This net increase represents the
difference between $53.5 million of principal reductions on existing
borrowings, $58.3 million of new borrowings which funded the construction of
pre-leased industrial buildings, other development and the redemption of
preferred stock. It is expected that the debt service on new borrowings will
be covered by the cash flow from the completed buildings and/or reduced
dividend requirements on outstanding preferred shares; therefore, the
Company's future operations should be improved by the interest savings on
principal reductions.
. In July 1996, the Company called for redemption approximately $50 million or
950,000 shares of its Series A Preferred Stock. The results were the
conversion of 441,887 shares into 2,438,641 of common stock and the redemption
of 508,113 shares at a cost of approximately $26.7 million. As a result, the
Company's annual preferred dividend requirement will decrease by approximately
$3.6 million.
. The Company continues to place a greater emphasis on increasing its
development and fee development businesses. During the first nine months of
1996, the Company commenced construction on approximately 1,812,300 square
feet of new development, and signed leases for new development totaling
844,600 square feet for which construction will commence in the latter part of
1996 or in early 1997. In March 1996, the Company acquired The Akins Companies
to better position itself to pursue existing residential development
opportunities on certain of its land holdings, as well as to pursue fee
development opportunities on land not currently owned by the Company.
. The Company also continues to place a greater emphasis on increasing its third
party management business. Management and fee income for the first nine months
of 1996 increased to $2.0 million from $1.6 million for the first nine months
of 1995. This increase was due largely to income from the contract to manage
the non-
8
<PAGE>
railroad real estate assets for the Burlington Northern Santa Fe Corporation
combined with "design-build" fees from the Metropolitan Water Districts
corporate headquarters at Los Angeles Union Station.
. The Company has an ongoing strategy to undertake a review of its major land
development projects with the goal of increasing profitability, minimizing up
front capital requirements and shortening the time required to develop the
properties. As a result of these reviews, decisions are made to attempt to
modify certain of the entitlements or to abandon or sell properties that
management believes can not be developed in a reasonable time frame. It is
management's expectation that these decisions will both accelerate the time
frame in which the projects will be developed and minimize the up front cash
requirements associated with development.
The Company's long-term financial goal is to increase its return on
stockholders' equity. In order to accomplish this, the Company will continue
with the revenue enhancement and cost reduction initiatives discussed above and
will seek opportunities to reduce its capital commitment to projects through
joint ventures, where the Company would seek financial partners to participate
in some of its more capital intensive businesses. In addition, as the Company
completes the above programs, it will evaluate opportunities to increase
stockholder returns through strategic reinvestment and/or stock repurchases,
including the redemption and/or conversion of additional outstanding preferred
stock.
RESULTS OF OPERATIONS
Comparison of nine months ended September 30, 1996 and 1995
The more significant changes in rental revenue and property operating costs
are summarized below ( in millions):
<TABLE>
<CAPTION>
Change
----------------------
Property
Rental operating
revenue costs
-------- ---------
<S> <C> <C>
Industrial buildings $ 3.1 $ 2.4
Office buildings (0.2) 0.1
Retail buildings 1.6 1.4
Land holdings (0.3) (0.2)
Other income producing properties 4.6 3.2
----- -----
Total change $ 8.8 $ 6.9
===== =====
</TABLE>
Of the increase in revenue from industrial buildings, $2.1 million was
attributable to seven new buildings totaling 1,287,000 square feet that were
completed in 1995 and 1996. Operating costs for the industrial portfolio
increased due, in part, to new buildings completed and higher overhead and
maintenance and repairs. The increase in revenue and costs for retail buildings
was due to the fact that the East Baybridge shopping center, completed in late
1994, was more fully leased in the nine months of 1996 than in 1995. Rental
revenue for the Company's office portfolio decreased $.2 million due to a
decrease in occupancy compared to the same period in 1995.
The increase in revenue and costs from other income producing properties
resulted in large part from the Company's December 31, 1995 announcement that it
would discontinue the practice of capitalizing revenue and operating costs (as
well as interest expense) for Mission Bay and certain other properties because
the related entitlements are not complete and development has not commenced.
Rental revenue and property operating cost increases attributable to these
properties were $4.5 million and $2.5 million, respectively, in the first nine
months of 1996.
9
<PAGE>
The Company completed sales of non-strategic land assets totaling $35.8
million in the first nine months of 1996 compared to $15.1 million in the
comparable period in 1995. This increase is attributable to one of the primary
goals of the Company which is to sell $100 million of non-strategic land assets
over a 15 month period ending December 31, 1996. The Company sold $82.9 million
of non-strategic land during the twelve months following the announcement of
this goal. Additionally, the Company sold $34.9 million of other assets and
development properties during the first nine months of 1996. There were no sales
of other assets or development properties for the comparable period in 1995. At
September 30, 1996, the Company had contracts outstanding for the sale of an
additional $16.7 million of non-strategic land assets and $11.7 million of
development properties.
The Company recognized $4.4 million in income from its joint ventures in
the first nine months of 1996, and received $6.2 million cash distributions
related to income during the period. Joint venture earnings decreased $.5
million from the first nine months of 1995. The decrease consists principally of
lower land sales in 1996 by a joint venture.
During 1995, the Company experienced significant staff reductions and
realignment of responsibilities. In connection with these changes, the Company
refined its overhead allocation to more closely align certain common costs with
the underlying activity. This had the result of increasing property operating
costs and reducing general and administrative expense in 1996 when compared to
1995.
Interest expense increased $12.8 million primarily as a result of
discontinuing the practice of capitalizing interest on Mission Bay and certain
other properties as described above. During the first nine months of 1995, the
Company capitalized $17.3 million of interest compared to $.8 million in the
first nine months of 1996. However, total interest incurred was $3.7 million
lower in the first nine months of 1996 compared to the same period in 1995 due
to net debt reduction in the first nine months of 1996 and late 1995.
Litigation, environmental and restructuring costs decreased $3.1 million.
The $.9 million income in the first nine months of 1996 represents monies
received from settlement proceeds in an environmental matter, with no offsetting
costs being incurred. The $2.2 million expense in the first nine months of 1995
represents actual costs incurred in regard to operating properties.
Other, net decreased $2.3 million primarily as a result of lower interest
income of $1.7 million and $.6 million of costs incurred in regard to the
acquisition of the Akins Companies on March 15, 1996.
In July 1996, the Company called for redemption 950,000 shares or
approximately $50 million of its $3.75 Series A Cumulative Convertible Preferred
Stock. On the redemption date, September 13, 1995, 508,113 shares were redeemed
at $52.625 per share plus accrued and unpaid dividends and 441,887 shares were
converted into 2,438,641 common shares. Earnings applicable to common
stockholders were reduced by $1.3 million for the first nine months of 1996 as a
result of the premium paid on the redemption of the preferred stock.
Additionally, the preferred stock redemption led to a $.7 million decrease in
preferred dividends paid for the first nine months of 1996.
Comparison of three months ended September 30, 1996 and 1995
The more significant changes in rental revenue and property operating costs
are summarized below ( in millions):
<TABLE>
<CAPTION>
Change
----------------------
Property
Rental operating
revenue costs
-------- ---------
<S> <C> <C>
Industrial buildings $ 1.4 $ 0.9
Office buildings (0.3) 0.2
Retail buildings 0.2 0.3
Land holdings - (0.1)
Other income producing properties 1.1 1.1
----- -----
Total change $ 2.4 $ 2.4
</TABLE>
Of the increase in revenue from industrial buildings, $.9 million was
attributable to seven new buildings totaling 1,287,000 square feet that were
completed during the last twelve months. Operating costs for the industrial
10
<PAGE>
portfolio increased due to new buildings completed and higher overhead and
maintenance and repairs. The increase in revenue and costs for retail buildings
was primarily due to the fact that the East Baybridge shopping center, completed
in late 1994, was more fully leased in the third quarter of 1996 than in the
third quarter of 1995. Rental revenue for the Company's office portfolio
decreased $.3 million due to decreased occupancy.
The increase in revenue and costs from other income producing properties
resulted in large part from the Company's December 31, 1995 announcement that it
would discontinue the practice of capitalizing revenue and operating costs (as
well as interest expense) for Mission Bay and certain other properties because
the related entitlements are not complete and development has not commenced.
Rental revenue and property operating cost increases attributable to these
properties were $1.5 million and $.9 million, respectively, in the third quarter
1996.
The Company completed sales of non-strategic land assets totaling $12.9
million in the third quarter of 1996 compared to sales of $3.3 million for the
same period in 1995. The increase in sales of non-strategic land and
development properties is primarily attributable to the $100 million non-
strategic land sales program. Additionally, the Company sold $6.8 million of
development properties during the third quarter of 1996. There were no
development property sales for the third quarter of 1995.
The Company recognized $1.2 million in income from its joint ventures in
the third quarter of 1996, and received $2.5 million cash distributions related
to income during the quarter. Joint venture earnings increased $.6 million from
the third quarter of 1995. The increase consists of higher overall results for
each of the Company's joint venture investments.
Interest expense increased $4.1 million primarily as a result of
discontinuing the practice of capitalizing interest on Mission Bay and certain
other properties as described above. During the third quarter of 1995, the
Company capitalized $5.9 million of interest compared to $.3 million in the
third quarter of 1996. However, total interest incurred was $1.6 million lower
in the third quarter of 1996 compared to the same period in 1995 due to net debt
reduction in the first nine months of 1996 and late 1995.
Litigation, environmental and restructuring improved $.7 million due to
lower environmental costs incurred in regard to operating properties.
Other, net decreased $.5 million primarily as a result of lower interest
income.
As a result of the redemption of preferred stock discussed above, earnings
applicable to common stockholders were reduced by $1.3 million for the third
quarter of 1996. Additionally, the preferred stock redemption led to a $.7
million decrease in preferred stock dividends paid for the third quarter of
1996.
LIQUIDITY AND FINANCIAL RESOURCES
Historically, the aggregate cash requirements associated with fixed charges
and leasing costs have exceeded the Company's operating income from recurring
sources. The Company has relied primarily on proceeds from asset sales to meet
the resulting operating deficits. During 1996, the Company has focused on
improving operating income through the development and operation of new
buildings, the reduction of property and administrative costs, the expansion of
management and development activities, and reducing interest cost through debt
reduction.
The following table (in thousands) 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 that this presentation is meaningful in
understanding the improvement the Company has made in reducing its historical
deficits.
11
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
PROPERTY OPERATIONS, DEVELOPMENT AND
MANAGEMENT ACTIVITIES
Rental revenues $ 29,619 $ 27,179 $ 89,671 $ 80,910
Property operating costs (12,078) (9,683) (35,437) (28,531)
Distributions from joint ventures, net 2,491 1,363 6,195 4,000
Management and development fee income 1,182 589 1,995 1,572
Gain on sale of development properties 2,747 - 9,315 -
-------- -------- -------- --------
23,961 19,448 71,739 57,951
-------- -------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSES (1,661) (2,783) (5,718) (9,222)
-------- -------- -------- --------
FIXED CHARGES - INTEREST AND DIVIDENDS
Total interest costs, net of interest income (10,436) (11,597) (32,016) (33,959)
Preferred dividends (5,215) (5,953) (17,121) (17,859)
Add back non-cash components of
interest expense 1,093 717 2,839 2,173
-------- -------- -------- --------
(14,558) (16,833) (46,298) (49,645)
-------- -------- -------- --------
LEASING COSTS
Depreciation on tenant improvements (1,637) (1,639) (5,127) (5,179)
Amortization of lease commissions (785) (609) (2,194) (1,872)
-------- -------- -------- --------
(2,422) (2,248) (7,321) (7,051)
-------- -------- -------- --------
$ 5,320 $ (2,416) $ 12,402 $ (7,967)
======== ======== ======== ========
</TABLE>
Cash flow from operating activities
Cash provided by operating activities reflected in the statement of cash
flows in the first nine months of 1996 and 1995 was $79.2 million and $42.1
million, respectively. The increase in 1996 is primarily attributable to higher
cash generated from land sales and lower general and administrative costs
partially offset by the increase in interest expense.
Cash generated from sales of non-strategic land was $27.1 million and $12.8
million in the first nine months of 1996 and 1995. In addition, cash from sales
of development properties was $26.4 million during the first nine months of
1996. It is anticipated that the level of sales (and the related gain or loss)
realized by the Company will vary significantly from quarter to quarter,
depending on market conditions, book value of assets sold and other factors.
Cash paid for interest, net of amount capitalized, increased from $17.3
million for the nine month period in 1995 to $29.8 million for 1996. This
increase resulted from the discontinuance of capitalizing interest on Mission
Bay and certain other projects as described above.
Cash flow from investing activities
Net cash flow used in investing activities reflected in the statement of
cash flows increased $41.2 million from 1995 to 1996. The increase in 1996 is
primarily attributable to the fact that 1995 includes a conversion of short-term
commercial paper and government securities into cash and cash equivalents of
$35.1 million and an increase in capital expenditures of $17.5 million. This
was partially offset by $7.5 million in proceeds from the
12
<PAGE>
sale of investment and other properties and a $3.9 million increase in net
distributions from joint ventures. Capital expenditures totaling $62.0 million
and $44.5 million in the first nine months of 1996 and 1995 include capitalized
interest and property taxes totaling $1.1 million and $19.2 million.
Cash flow from financing activities
Net cash used in financing activities reflected in the statement of cash
flows for the first nine months of 1996 was $38.6 million compared to $11.7
million for the 1995 period. This net increase of $26.9 million is the result
of principal reductions on existing borrowings above the recurring amortization
repayments in accordance with the corporate goal of reducing debt, and the
redemption of preferred stock, offset by borrowings attributable to increased
development activity.
At September 30, 1996, the Company had total outstanding debt of $500.9
million, of which 70% was non-recourse to the Company and secured by the
underlying property, 25% was recourse to the Company and also secured by
underlying property, and 5% was unsecured. During the next twelve months, $157.3
million of debt matures consisting of construction financing, term loans or
first mortgage loans. On October 28, 1996, as a result of receiving a new $240
million line of credit, the Company repaid $132 million of the $157.3 million of
debt maturing in the 12 months subsequent to September 30, 1996. All remaining
debt is expected to be extended, refinanced, converted into permanent loans or
repaid.
Capital Commitments
At September 30, 1996, the Company had $20.4 million in capital expenditure
commitments. As of September 30, 1996, the Company had 1,466,900 square feet of
new development under construction and 844,600 square feet under contract, but
not yet started.
Cash balances and available borrowings
At September 30, 1996, cash and cash equivalents totaled $21.6 million. On
October 28, 1996, the Company entered into an agreement for a new $240 million
credit line which replaces six existing credit lines or term facilities. On the
date of funding, $134.6 million was drawn to pay loan fees and repay and
terminate the six credit lines and term facilities. The interest rate structure
on the new credit line is tiered with the majority of the loan balance at 7.125%
and the remaining portion at prime rate. The maturity date of this credit line
is November 1, 1998.
At September 30, 1996, the Company had available $23.6 million under its
construction facilities and $32 million under its unsecured revolving facility.
However, on October 28, 1996, the Company entered into a new $240 million credit
line. As a result, on October 28, 1996, after repayment and termination of the
six previously existing credit lines or term facilities, the Company had $86
million available under secured revolving credit facilities and $8.3 million
under its construction facilities.
The Company's short-term and long-term liquidity requirements will
essentially be provided from four sources: operating income, proceeds from land
and development property sales, development and management fee income, and
available borrowing capacity. As indicated above, as of October 28, 1996, the
Company had $86 million in a secured revolving line of credit. Additionally,
the Company will utilize third party borrowing for development projects to the
extent practical.
13
<PAGE>
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
which 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. At September 30, 1996, management has provided a
reserve of $13.8 million for such costs. These costs are expected to be
incurred over an estimated ten-year period, with a substantial portion incurred
over the next five years.
Costs incurred for properties to be sold are deferred and will be charged
to cost of sales when the properties are sold. Costs relating to undeveloped
properties are capitalized as part of development costs. At September 30, 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
$41 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 the first nine months of 1996 and 1995
totaled $2.0 million and $1.0 million.
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.
RISK FACTORS
It is the Company's belief that this quarterly report on Form 10-Q 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. Any forward looking statements in this document are intended to
be subject to the safe harbor protection provided by Section 27A and 21E.
Factors that most typically impact the Company's operating results include (i)
changes in general economic conditions in regions in which the Company's
projects are located, (ii) supply and demand for office, industrial and
residential space, (iii) the receipt of government approvals and entitlements
for development projects, (iv) land and building material costs, (v) the
availability and cost of capital and project financing, (vi) competition from
other property managers, (vii) liability for environmental remediation at the
Company's properties, (viii) ability to increase development fees, and (ix)
ability to sell non-strategic land assets. For discussions identifying other
important factors that could cause actual results to differ materially from
those anticipated in the forward looking statements, see the Company's
Securities and Exchange Commission filings; "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this Form 10-Q and
the Company's Form 10-K/A for the year ended December 31, 1995, and Note 8 to
the Consolidated Financial Statements included in Form 10-Q and Note 15 to the
Consolidated Financial Statements included in the Company's Form 10-K/A for the
year ended December 31, 1995.
14
<PAGE>
ADDITIONAL INFORMATION
The Company believes that the following additional information is helpful
in understanding its property operations, development and sales activities.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
1996 1995 1996 1995
------- ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
PROPERTY OPERATING INCOME BY PROPERTY TYPE/(1)/
(IN THOUSANDS)
Income producing properties
Industrial buildings $10,406 $ 9,854 $30,849 $30,135
Office buildings 3,644 4,187 12,266 12,601
Retail buildings 2,238 2,313 6,693 6,458
Land development 743 661 2,311 1,458
Ground leases 1,623 1,646 5,034 4,510
------- ------- ------- -------
18,654 18,661 57,153 55,162
------- ------- ------- -------
Land holding costs
Developable properties (591) (372) (1,167) (440)
Natural resources (170) (369) (490) (859)
Properties held for sale (352) (424) (1,262) (1,484)
------- ------- ------- -------
(1,113) (1,165) (2,919) (2,783)
------- ------- ------- -------
Total $17,541 $17,496 $54,234 $52,379
======= ======= ======= =======
</TABLE>
(1) Represents rental revenue less property operating costs.
<TABLE>
<CAPTION>
Net Debt End of
Debt New (Reduction) Period
Debt reduction program (in millions) Repayment Borrowings Addition Debt
------------- ------------- --------------------------
<S> <C> <C> <C> <C>
Debt at 01/01/95 $530.6
1995 $ 68.5 $34.0 $(34.5) 496.1
First quarter 1996 8.9 3.9 (5.0) 491.1
Second quarter 1996 37.4 9.8 (27.6) 463.5
Third quarter 1996 7.2 44.6 37.4 $500.9
------ ----- ------ ------
Program to date $122.0 $92.3 $(29.7)
====== ===== ======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
As of or for the
---------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-------------------------- ------------------------
1996 1995 1996 1995
---------- -------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
DEVELOPMENT (IN SQUARE FEET)
Construction and completion
Under construction, beginning of period 1,562,636 567,854 641,128 337,136
Construction starts 689,200 201,600 1,812,308* 469,318
Completion (784,925) (450,854) (986,525) (487,854)
---------- --------- ---------- ---------
Under construction, end of period 1,466,911 318,600 1,466,911 318,600
========== ========= ========== =========
Development under contract, not started 844,600 844,600*
========== ==========
*1996 Development Goal (3 million square feet) 2,656,908
==========
SALES (IN THOUSANDS)
Closed sales
Non-strategic land $ 12,934 $ 3,349 $ 35,800 $ 15,070
Development properties 6,750 - 27,428 -
Ground leases - - 7,500 -
---------- --------- ---------- ---------
Total $ 19,684 $ 3,349 $ 70,728 $ 15,070
========== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
BACKLOG - SALES UNDER CONTRACT (IN THOUSANDS) 1996 1995
------------- ------------
<S> <C> <C>
Non-strategic land $16,687 $23,585
Development properties 11,678 13,600
Ground leases - 7,500
------- -------
Total $28,365 $44,685
======= =======
</TABLE>
16
<PAGE>
ADDITIONAL INFORMATION -- CONTINUED
<TABLE>
<CAPTION>
September 30,
-------------------
1996 1995
------ ------
(Unaudited)
<S> <C> <C>
BUILDINGS OWNED AND LEASING STATISTICS
(IN THOUSANDS, EXCEPT PERCENTAGES)
(AT QUARTER-END)
Industrial buildings
Square feet owned 12,411 11,022
Square feet leased 11,998 10,549
Percent leased 96.7% 95.7%
Office buildings
Square feet owned 1,682 1,687
Square feet leased 1,484 1,537
Percent leased 88.2% 91.1%
Retail buildings
Square feet owned 928 840
Square feet leased 871 742
Percent leased 93.8% 88.3%
Land development(1)
Square feet owned 1,232 100
Square feet leased 1,127 100
Percent leased 91.5% 100.0%
Total
Square feet owned 16,253 13,649
Square feet leased 15,480 12,928
Percent leased 95.2% 94.7%
</TABLE>
(1) Increase due to the inclusion of Mission Bay which was previously excluded
due to capitalization of revenue and expenses.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. 27 Financial Data Schedule
(b) REPORT ON FORM 8-K
Current report on Form 8-K filed July 31, 1996, report filed under
Item 5 to describe partial redemption of the Company's Series A
Cumulative Convertible Preferred Stock.
18
<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: _______________________ By: /s/ Stephen P. Wallace
------------------------------
Stephen P. Wallace
Senior Vice President and
Chief Financial Officer
Date: _______________________ By: /s/ Paul A. Lockie
------------------------------
Paul A. Lockie
Vice President and Controller
19
<PAGE>
CATELLUS DEVELOPMENT CORPORATION
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(Article 5 of Regulation S-X)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 21,632
<SECURITIES> 0
<RECEIVABLES> 18,955
<ALLOWANCES> 3,416
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,215,892
<DEPRECIATION> 204,377
<TOTAL-ASSETS> 1,096,744
<CURRENT-LIABILITIES> 0
<BONDS> 500,862
0
275,000
<COMMON> 769
<OTHER-SE> 139,590
<TOTAL-LIABILITY-AND-EQUITY> 1,096,744
<SALES> 70,728
<TOTAL-REVENUES> 168,201
<CGS> 49,638
<TOTAL-COSTS> 113,447
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,053
<INTEREST-EXPENSE> 32,316
<INCOME-PRETAX> 22,438
<INCOME-TAX> 9,155
<INCOME-CONTINUING> 13,283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,283
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
