Form 10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2002

 

Commission file number 1-10622

 

CATELLUS DEVELOPMENT

CORPORATION

(Exact name of Registrant as specified in its charter)

 

Delaware

 

94-2953477

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

201 Mission Street

San Francisco, California 94105

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code:

(415) 974-4500

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class


 

Name of each exchange on which registered


Common Stock, $.01 par value per share

 

New York and Chicago Stock Exchanges,

and Pacific Exchange

Preferred Share Purchase Rights

   

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x    No ¨

 

The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $1.746 million on March 10, 2003.

 

As of March 10, 2003, there were 87,275,712 issued and outstanding shares of the Registrant’s Common Stock.

 


 


PART I

 

Item 1.    Business

 

Catellus Development Corporation (“Catellus” or the “Company”) is a publicly traded real estate operating company with a significant portfolio of rental properties and developable land. Operations consist primarily of the management, acquisition, development, and sale of real estate. At December 31, 2002, we owned a significant portfolio of income producing properties, including approximately 37 million square feet of rental property, 32 million square feet of which is industrial space. Our rental properties provide us with a relatively consistent source of earnings. Additionally, Catellus owns a portfolio of developable land intended for future development activities. Our development activities provide cash flow through sales of land or the conversion of our developable land to property that is either added to our rental portfolio or sold to tenants, developers, or other users. We invest in new land to ensure our potential for growth.

 

We have four primary groups: (1) Asset Management, which provides management and leasing services for our rental portfolio; (2) Suburban Commercial, which acquires and develops suburban commercial business parks for our own rental portfolio or for sale to third parties; (3) Suburban Residential, which develops suburban residential communities and sells finished lots to homebuilders; and (4) Urban, which focuses on developing three large, urban mixed-use projects for our own rental portfolio or for sale to third parties.

 

Catellus was formed to conduct the non-railroad real estate activities of the Santa Fe Pacific Corporation and was spun off to stockholders effective in 1990. Our railroad heritage gave us a diverse base of developable properties located near transportation corridors in major western United States markets. This land has proven suitable for the development of a variety of product types, including industrial, retail, office, and residential. Over time, we have expanded our business by acquiring land suitable for primarily industrial development in many of the same suburban locations where we have an established presence.

 

Our principal office is located at 201 Mission Street, San Francisco, California 94105; our telephone number at that location is (415) 974-4500; and our website address is www.catellus.com. This annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports are available free of charge through our website as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

 

Recent Developments

 

On March 3, 2003, we announced that our Board of Directors (“Board”) has authorized us to restructure our business operations to qualify as a real estate investment trust (“REIT”), effective January 1, 2004, subject to stockholder and Board approvals. The Company has spent the past several years profitably transforming what was one of the country’s largest land portfolios into predominantly industrial rental property and capital that has been reinvested back into our business. We are now embarking upon a transition period to restructure our operations and change our business strategy to focus increasingly on industrial development and reducing focus on other product types.

 

In anticipation of the REIT conversion, the Company will take steps during 2003 to better position its businesses for operation as a REIT. This will include looking for ways to operate more efficiently, consistent with a focus of new development on industrial product. We plan to continue our Urban mixed–use projects that are underway, but do not plan to seek new ones. Since the Urban Group (see Urban Group below) will no longer be pursuing new activities, and given the considerable progress made on existing projects, it is anticipated that the scope of activities will be reduced, resulting in a reduction in work force over 2003 and 2004. The Urban Group projects will be operated in a taxable REIT subsidiary (“TRS”), and the Company expects to recycle surplus capital from the Urban Group projects through continuing development with greater emphasis on third party parcel sales, land leases, and joint ventures. During 2003, the Suburban Residential Group (see Suburban Residential Group below) projects will be positioned for sale and any remaining assets will be operated in a TRS.

 

2


 

We plan to present the REIT conversion to our shareholders for approval at our annual meeting, which is expected to be held in the third quarter of 2003. If the REIT conversion is consummated, Catellus will operate as an umbrella partnership real estate investment trust, with wholly owned taxable REIT subsidiaries. As part of the REIT conversion, we will provide to shareholders a one-time distribution of pre-REIT earnings and profits, in compliance with the requirements to elect REIT status. Furthermore, subject to final Board approval, we anticipate that we will begin paying a quarterly dividend commencing with a payment of $0.30 per common share for the third quarter of 2003. A copy of the press release announcing the REIT conversion and other relevant documents are available free of charge at the SEC’s website (www.sec.gov) or can be obtained by directing a request to us at 201 Mission Street, Second Floor, San Francisco, California 94105, Attn.: Director of Investor Relations, or by telephone at (415) 974-4649, or email at InvestorRelations@catellus.com. We will soon file a preliminary proxy statement/prospectus with the Securities and Exchange Commission that will provide important information, including detailed risk factors, regarding the proposed transaction. There is no assurance that the proposed REIT conversion will be consummated or that the terms of the REIT conversion or the timing or effects thereof will not differ materially from those described in the press release and other relevant documents.

 

Property Portfolio

 

Rental Portfolio

 

Our income-producing portfolio is comprised of commercial rental property, ground leases and other properties, and interests in several joint ventures. We own 37 million square feet of commercial rental property of which 89.1% is industrial, 8.6% is office, and 2.3% is retail. Since the end of 1995, our portfolio has expanded by more than 22.9 million square feet (163%), primarily through our development activities. Approximately 35% of the rental property, by square footage, is located in Southern California, 19% in Northern California, 18% in Illinois, 11% in Texas, 7% in Colorado, 3% in Arizona, and 3% in Oregon, with the remaining 4% located in six other states. We also own approximately 8,000 acres of land subject to ground leases, approximately 755,000 square feet of other rent generating properties that are located at our urban development projects, the majority of which is projected to be converted to future redevelopment opportunities, and joint ventures interests in two hotels and two office buildings.

 

The following table provides information on our income-producing portfolio:

 

    

Number of

Buildings


  

Square Feet Owned


  

Net Book Value


 
    

December 31,


  

December 31,


  

December 31,


 
    

2002


  

2001


  

2000


  

2002


  

2001


 

2000


  

2002


   

2001


    

2000


 
         

(In thousands)

  

(In thousands)

 

Rental Portfolio

                                                      

Industrial

  

196

  

187

  

198

  

32,944

  

27,594

 

26,251

  

$

1,134,890

 

 

$

943,340

 

  

$

874,168

 

Office

  

32

  

27

  

24

  

3,164

  

2,442

 

1,625

  

 

409,339

 

 

 

297,707

 

  

 

205,179

 

Retail

  

22

  

19

  

21

  

868

  

864

 

880

  

 

100,882

 

 

 

96,263

 

  

 

94,085

 

Ground leases and other properties

  

—  

  

—  

  

—  

  

—  

  

—  

 

—  

  

 

139,886

 

 

 

138,708

 

  

 

79,950

 

Operating joint ventures

  

—  

  

—  

  

—  

  

—  

  

—  

 

  —  

  

 

(10,920

)

 

 

(13,026

)

  

 

(16,092

)

    
  
  
  
  
 
  


 


  


Subtotal

  

250

  

233

  

243

  

36,976

  

30,900

 

28,756

  

 

1,774,077

 

 

 

1,462,992

 

  

 

1,237,290

 

    
  
  
  
  
 
                         

Accumulated depreciation

                               

 

(366,772

)

 

 

(325,130

)

  

 

(287,039

)

                                 


 


  


Total

                               

$

1,407,305

 

 

$

1,137,862

 

  

$

950,251

 

                                 


 


  


 

3


 

Developable Land Inventory

 

We have developable land capable of supporting up to an estimated 38.1 million square feet of commercial development and approximately 9,300 units of residential development as of December 31, 2002. Substantially all of our commercial and residential developable land is entitled. Approximately 67% of the total commercial development potential by square footage is located in California: San Francisco, Silicon Valley, San Francisco’s East Bay area, Los Angeles County, Orange County, the Inland Empire (San Bernadino and Riverside counties), and the City of San Diego; approximately 14% in Texas; approximately 11% in Illinois; with the remaining 8% located in four other states. In terms of residential lots, approximately 59% of the residential land for potential development is located in Northern California, 18% is in Southern California, and 23% is in Colorado.

 

The following table summarizes the estimated development potential of our land inventory as of December 31, 2002:

 

    

Commercial


    

Residential


  

Hotel


    

(Square feet)

    

(Lots or units)

  

(Rooms)

Commercial

  

25,907,000

    

—  

  

—  

Residential

  

—  

    

5,789

  

—  

Urban

  

12,226,000

    

3,548

  

500

    
    
  

Total

  

38,133,000

    

9,337

  

500

    
    
  

Entitled

  

36,806,000

    

9,223

  

500

Entitlements/approvals in progress

  

1,327,000

    

114

  

—  

 

The following table shows the net book value of our developable land inventory for the years presented:

 

    

Net Book Value


 
    

December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Commercial

  

$

171,924

 

  

$

188,527

 

  

$

174,329

 

Residential

  

 

52,850

 

  

 

52,108

 

  

 

64,479

 

Residential joint ventures

  

 

37,918

 

  

 

74,721

 

  

 

46,245

 

Urban

  

 

279,495

 

  

 

258,504

 

  

 

366,136

 

    


  


  


Subtotal

  

 

542,187

 

  

 

573,860

 

  

 

651,189

 

Accumulated depreciation

  

 

(10,699

)

  

 

(9,888

)

  

 

(15,819

)

    


  


  


Total

  

$

531,488

 

  

$

563,972

 

  

$

635,370

 

    


  


  


 

Asset Management Group

 

The Asset Management Group manages our rental portfolio of industrial, office, retail, ground lease properties, and operating of properties for joint ventures. The group provides the following services: (1) leasing and management services; (2) acquisition of properties for, and sale of certain rental properties from, our portfolio; and (3) management and disposition services for our other land holdings. The Asset Management Group provided ground lease management services for a third party before the contract expired in 2000.

 

4


 

The following table summarizes our rental portfolio property operating income by property type:

 

    

Property Operating Income(1)


 
    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Rental Portfolio

                          

Industrial

  

$

125,744

 

  

$

111,409

 

  

$

98,831

 

Office

  

 

31,650

 

  

 

24,362

 

  

 

20,228

 

Retail

  

 

10,725

 

  

 

9,778

 

  

 

10,511

 

Ground leases

  

 

21,271

 

  

 

20,237

 

  

 

14,724

 

Other properties

  

 

6,488

 

  

 

6,432

 

  

 

7,196

 

Equity in earnings of operating joint ventures

  

 

8,277

 

  

 

8,833

 

  

 

9,809

 

    


  


  


Subtotal

  

 

204,155

 

  

 

181,051

 

  

 

161,299

 

Less: Discontinued operations

  

 

(486

)

  

 

(1,816

)

  

 

(2,267

)

    


  


  


Total property operating income

  

$

203,669

 

  

$

179,235

 

  

$

159,032

 

    


  


  



(1)   Property operating income is rental revenue less property operating costs plus equity in earnings of operating joint ventures.

 

Building Portfolio

 

The following table summarizes our building portfolio, by year built, as of December 31, 2002:

 

   

City


  

State


 

Rentable

Square Feet


 

Year Built


 

Major Tenant


 

RSF Occupied


 

YR End Vacancy


    

Year-End Building Occupancy %


 
   

Industrial Property:

                            

1

 

Minooka

  

IL

 

1,034,200

 

2002

 

Kellogg’s USA, Inc.

 

1,034,200

 

—  

    

100

%

2

 

Ontario

  

CA

 

830,000

 

2002

 

Exel, Inc.

 

830,000

 

—  

    

100

%

3

 

Manteca

  

CA

 

608,860

 

2002

 

Ford Motor Company

 

608,860

 

—  

    

100

%

4

 

Ontario

  

CA

 

607,320

 

2002

 

Specialty Merchandise Corporation

 

607,320

 

—  

    

100

%

5

 

Rancho Cucamonga

  

CA

 

449,370

 

2002

 

Ford Motor Company

 

449,370

 

—  

    

100

%

6

 

Romeoville

  

IL

 

421,361

 

2002

 

APL Logistics Warehouse Mgmt.
    Svcs., Inc

 

421,361

 

—  

    

100

%

7

 

Grand Prairie

  

TX

 

398,364

 

2002

 

Lagasse Bros., Inc.

 

105,918

 

292,446

    

27

%

8

 

Shepherdsville

  

KY

 

382,800

 

2002

 

APL Logistics Warehouse Mgmt.     Svcs., Inc

 

193,800

 

189,000

    

51

%

9

 

Denver

  

CO

 

314,978

 

2002

 

Ford Motor Company

 

200,689

 

114,289

    

64

%

10

 

Ft Worth

  

TX

 

252,000

 

2002

 

Ford Motor Company

 

252,000

 

—  

    

100

%

11

 

Denver

  

CO

 

144,511

 

2002

 

Keebler Company

 

81,487

 

63,024

    

56

%

12

 

Fremont

  

CA

 

105,700

 

2002

 

Tranax Technologies, Inc.

 

41,232

 

64,468

    

39

%

13

 

Denver

  

CO

 

89,739

 

2002

 

Colorado Health Systems, Inc.

 

58,050

 

31,689

    

65

%

14

 

Denver

  

CO

 

360,118

 

2001

 

Aspen Pet Products, Inc.

 

360,118

 

—  

    

100

%

15

 

Denver

  

CO

 

350,969

 

2001

 

United Stationers Supply Co.

 

350,969

 

—  

    

100

%

16

 

Woodridge

  

IL

 

167,529

 

2001

 

Metro Exhibit Corporation

 

167,529

 

—  

    

100

%

17

 

Denver

  

CO

 

161,511

 

2001

 

Loving-Kayman, LLC

 

161,511

 

—  

    

100

%

18

 

Rancho Cucamonga

  

CA

 

120,620

 

2001

 

Scripto-Tokai Corporation

 

120,620

 

—  

    

100

%

19

 

Fremont

  

CA

 

100,528

 

2001

 

Vacant

 

—  

 

100,528

    

0

%

20

 

Fremont

  

CA

 

65,332

 

2001

 

Vacant

 

—  

 

65,332

    

0

%

21

 

Woodridge

  

IL

 

513,674

 

2000

 

Prairie Packaging, Inc.

 

513,674

 

—  

    

100

%

22

 

Ontario

  

CA

 

504,530

 

2000

 

New Balance Athletic Shoe, Inc.

 

504,530

 

—  

    

100

%

23

 

Grand Prairie

  

TX

 

450,864

 

2000

 

Quaker Sales & Distribution, Inc.

 

450,864

 

—  

    

100

%

 

5


   

City


 

State


  

Rentable

Square Feet


 

Year Built


 

Major Tenant


 

RSF Occupied


 

YR End Vacancy


    

Year-End Building Occupancy %


 

24

 

Rancho Cucamonga

 

CA

  

443,190

 

2000

 

APL Logistics Warehouse Mgmt.     Svcs., Inc

 

443,190

 

—  

    

100

%

25

 

Rancho Cucamonga

 

CA

  

441,970

 

2000

 

APL Logistics Warehouse Mgmt.     Svcs., Inc

 

441,970

 

—  

    

100

%

26

 

Grand Prairie

 

TX

  

422,622

 

2000

 

APL Logistics Warehouse Mgmt.     Svcs., Inc

 

422,622

 

—  

    

100

%

27

 

Ontario

 

CA

  

373,283

 

2000

 

The Hain Food Group

 

373,283

 

—  

    

100

%

28

 

Woodridge

 

IL

  

367,999

 

2000

 

Central American Distribution &     Transpor

 

367,999

 

—  

    

100

%

29

 

Ontario

 

CA

  

359,996

 

2000

 

The Gillette Company

 

359,996

 

—  

    

100

%

30

 

Woodridge

 

IL

  

263,007

 

2000

 

Corporate Express Office Products, Inc.

 

211,949

 

51,058

    

81

%

31

 

Oakland

 

CA

  

147,500

 

2000

 

United States Postal Service

 

147,500

 

—  

    

100

%

32

 

Rancho Cucamonga

 

CA

  

56,490

 

2000

 

Carpenter Technology Corporation

 

56,490

 

—  

    

100

%

33

 

Romeoville

 

IL

  

532,560

 

1999

 

The Gillette Co.

 

532,560

 

—  

    

100

%

34

 

Grand Prairie

 

TX

  

423,700

 

1999

 

APL Logistics Warehouse Mgmt.     Svcs., Inc

 

423,700

 

—  

    

100

%

35

 

Romeoville

 

IL

  

402,266

 

1999

 

APL Logistics Warehouse Mgmt.     Svcs., Inc

 

402,266

 

—  

    

100

%

36

 

Woodridge

 

IL

  

396,489

 

1999

 

Central American Warehouse Co.

 

396,489

 

—  

    

100

%

37

 

Woodridge

 

IL

  

351,799

 

1999

 

United States Intermodal Services, LLC

 

351,799

 

—  

    

100

%

38

 

Grand Prairie

 

TX

  

343,200

 

1999

 

APL Logistics Warehouse Mgmt.     Svcs., Inc

 

343,200

 

—  

    

100

%

39

 

Fremont

 

CA

  

187,168

 

1999

 

Peripheral Computer Support

 

187,168

 

—  

    

100

%

40

 

Portland

 

OR

  

180,000

 

1999

 

Spicers, Inc.

 

180,000

 

—  

    

100

%

41

 

Louisville

 

KY

  

166,600

 

1999

 

Clark Material Handling Company

 

166,600

 

—  

    

100

%

42

 

Woodridge

 

IL

  

165,173

 

1999

 

Samuel Manu-Tech, Inc.

 

165,173

 

—  

    

100

%

43

 

Portland

 

OR

  

165,000

 

1999

 

Synetics Solutions, Inc.

 

165,000

 

—  

    

100

%

44

 

Denver

 

CO

  

156,139

 

1999

 

Marriott Distribution Services

 

156,139

 

—  

    

100

%

45

 

Woodridge

 

IL

  

114,591

 

1999

 

Packaging Consultants, Inc.

 

114,591

 

—  

    

100

%

46

 

Portland

 

OR

  

103,500

 

1999

 

Kinco International, Inc.

 

103,500

 

—  

    

100

%

47

 

Richmond

 

CA

  

88,845

 

1999

 

Kaiser Foundation Health Plan, Inc.

 

88,845

 

—  

    

100

%

48

 

Fremont

 

CA

  

60,000

 

1999

 

Fiberstars, Inc.

 

60,000

 

—  

    

100

%

49

 

Fremont

 

CA

  

53,395

 

1999

 

Sonic Manufacturing Technologies, Inc.

 

53,395

 

—  

    

100

%

50

 

Richmond

 

CA

  

42,500

 

1999

 

Kaiser Foundation Health Plan, Inc.

 

42,500

 

—  

    

100

%

51

 

Ontario

 

CA

  

526,408

 

1998

 

Sweetheart Holdings, Inc.

 

526,408

 

—  

    

100

%

52

 

Stockton

 

CA

  

500,199

 

1998

 

Kellogg’s USA Inc.

 

500,199

 

—  

    

100

%

53

 

Denver

 

CO

  

325,999

 

1998

 

Quantum Logistics, Inc.

 

325,999

 

—  

    

100

%

54

 

Woodridge

 

IL

  

240,280

 

1998

 

APL Logistics Warehouse Mgmt. Svcs.,     Inc

 

240,280

 

—  

    

100

%

55

 

Industry

 

CA

  

183,855

 

1998

 

Liberty Glove, Inc.

 

183,855

 

—  

    

100

%

56

 

Oakland

 

CA

  

176,826

 

1998

 

Public Storage Pick-Up & Delivery, Inc.

 

176,826

 

—  

    

100

%

57

 

Woodridge

 

IL

  

158,871

 

1998

 

Rock-Tenn Converting Company

 

124,742

 

34,129

    

79

%

58

 

Industry

 

CA

  

140,380

 

1998

 

Graybar Electric Company, Inc.

 

140,380

 

—  

    

100

%

59

 

Industry

 

CA

  

138,124

 

1998

 

Unipac Shipping Co./Continental Agency

 

138,124

 

—  

    

100

%

60

 

Denver

 

CO

  

129,442

 

1998

 

Callisto Corporation

 

129,442

 

—  

    

100

%

61

 

Industry

 

CA

  

109,448

 

1998

 

Playhut, Inc.

 

109,448

 

—  

    

100

%

62

 

Fremont

 

CA

  

102,626

 

1998

 

Mouse Systems

 

102,626

 

—  

    

100

%

63

 

Fremont

 

CA

  

476,177

 

1997

 

Office Depot, Inc.

 

476,177

 

—  

    

100

%

64

 

Aberdeen

 

MD

  

470,707

 

1997

 

Saks & Company

 

470,707

 

—  

    

100

%

65

 

Industry

 

CA

  

298,050

 

1997

 

Viewsonic Corporation

 

298,050

 

—  

    

100

%

66

 

Union City

 

CA

  

234,588

 

1997

 

Spicers Paper, Inc.

 

234,588

 

—  

    

100

%

67

 

Garland

 

TX

  

227,023

 

1997

 

Interceramic, Inc.

 

227,023

 

—  

    

100

%

68

 

Garland

 

TX

  

226,906

 

1997

 

Ascendant Solutions

 

226,906

 

—  

    

100

%

69

 

Ontario

 

CA

  

180,608

 

1997

 

Tyco Healthcare Group, LLP

 

180,608

 

—  

    

100

%

70

 

Fremont

 

CA

  

174,460

 

1997

 

Galgon Industries, Inc.

 

126,400

 

48,060

    

72

%

71

 

Anaheim

 

CA

  

130,466

 

1997

 

Anixter Inc.

 

130,466

 

—  

    

100

%

72

 

Fremont

 

CA

  

127,452

 

1997

 

Victron, Inc.

 

127,452

 

—  

    

100

%

73

 

Ontario

 

CA

  

37,000

 

1997

 

Los Angeles Times Communications,     LLC

 

37,000

 

—  

    

100

%

 

6


   

City


 

State


 

Rentable

Square Feet


 

Year Built


 

Major Tenant


 

RSF Occupied


 

YR End Vacancy


    

Year-End Building Occupancy %


 

74

 

Industry

 

CA

 

230,992

 

1996

 

Owens & Minor West, Inc.

 

230,992

 

—  

    

100

%

75

 

Ontario

 

CA

 

201,454

 

1996

 

McLane Company, Inc.

 

201,454

 

—  

    

100

%

76

 

Fremont

 

CA

 

158,400

 

1996

 

Home Depot USA, Inc.

 

158,400

 

—  

    

100

%

77

 

Oklahoma City

 

OK

 

124,905

 

1996

 

Pollock Investments Inc.

 

60,000

 

64,905

    

48

%

78

 

Fremont

 

CA

 

114,948

 

1996

 

Menlo Logistics, Inc.

 

114,948

 

—  

    

100

%

79

 

Fremont

 

CA

 

94,080

 

1996

 

Galgon Industries, Inc.

 

58,368

 

35,712

    

62

%

80

 

Vernon

 

CA

 

41,712

 

1996

 

Lucky Brand Dungarees, Inc.

 

41,712

 

—  

    

100

%

81

 

Vernon

 

CA

 

27,798

 

1996

 

Vacant

 

—  

 

27,798

    

0

%

82

 

Ontario

 

CA

 

300,136

 

1995

 

Dunlop Tire Corp.

 

300,136

 

—  

    

100

%

83

 

Santa Fe Springs

 

CA

 

100,000

 

1995

 

Spicers Paper, Inc.

 

100,000

 

—  

    

100

%

   
     
     
 
 
    

   

Subtotal 1995-2002

     

21,954,180

     

(83 buildings)

 

20,771,742

 

1,182,438

    

95

%

   
     
     
 
 
    

1

 

Grove City

 

OH

 

300,211

 

1994

 

Vista Packaging, Inc.

 

300,211

 

—  

    

100

%

2

 

Garland

 

TX

 

262,000

 

1994

 

Interceramic, Inc

 

262,000

 

—  

    

100

%

3

 

Fullerton

 

CA

 

100,000

 

1994

 

Adams Rite Aerospace, Inc.

 

100,000

 

—  

    

100

%

4

 

Anaheim

 

CA

 

17,575

 

1994

 

Los Angeles Times Communications     LLC

 

17,575

 

—  

    

100

%

5

 

Grove City

 

OH

 

360,412

 

1993

 

McKesson Medical-Surgical     Minnesota Inc.

 

331,052

 

29,360

    

92

%

6

 

Grove City

 

OH

 

305,268

 

1993

 

McGraw Hill

 

305,268

 

—  

    

100

%

7

 

Woodridge

 

IL

 

261,400

 

1993

 

Dollar Tree Stores, Inc.

 

261,400

 

—  

    

100

%

8

 

Ontario

 

CA

 

149,406

 

1992

 

THMX Holdings, LLC

 

149,406

 

—  

    

100

%

9

 

Livermore

 

CA

 

148,440

 

1992

 

Owens & Minor West

 

148,440

 

—  

    

100

%

10

 

Woodridge

 

IL

 

148,416

 

1992

 

Multifoods Distribution Group, Inc.

 

148,416

 

—  

    

100

%

11

 

Anaheim

 

CA

 

130,595

 

1992

 

Micro Technology, Inc.

 

130,595

 

—  

    

100

%

12

 

Anaheim

 

CA

 

79,846

 

1992

 

Partition Installations, Inc.

 

79,846

 

—  

    

100

%

13

 

Vernon

 

CA

 

47,000

 

1992

 

John S. Dull & Associates, Inc.

 

47,000

 

—  

    

100

%

14

 

Anaheim

 

CA

 

36,800

 

1992

 

SCP Superior Acquisition Company,     LLC.

 

36,800

 

—  

    

100

%

15

 

Anaheim

 

CA

 

26,200

 

1992

 

S-B Power Tool Company

 

26,200

 

—  

    

100

%

16

 

Industry

 

CA

 

449,049

 

1991

 

Circuit City Stores, Inc.

 

449,049

 

—  

    

100

%

17

 

Woodridge

 

IL

 

265,057

 

1991

 

Sportmart, Inc.

 

265,057

 

—  

    

100

%

18

 

Woodridge

 

IL

 

116,544

 

1991

 

Argo Turboserve Corporation

 

116,544

 

—  

    

100

%

19

 

Union City

 

CA

 

105,408

 

1991

 

Anixter Bros, Inc.

 

46,848

 

58,560

    

44

%

20

 

Vernon

 

CA

 

49,250

 

1991

 

Brambles Info. Mgmt., Inc.

 

49,250

 

—  

    

100

%

21

 

Santa Fe Springs

 

CA

 

42,890

 

1991

 

Highlight Graphics

 

35,990

 

6,900

    

84

%

22

 

Santa Fe Springs

 

CA

 

37,268

 

1991

 

Hotchkis Performance

 

37,268

 

—  

    

100

%

23

 

Santa Fe Springs

 

CA

 

31,638

 

1991

 

Polestar, Inc.

 

31,638

 

—  

    

100

%

24

 

Vernon

 

CA

 

30,840

 

1991

 

Monami Textile, Inc.

 

30,840

 

—  

    

100

%

25

 

Vernon

 

CA

 

30,840

 

1991

 

Alto Products

 

30,840

 

—  

    

100

%

26

 

Santa Fe Springs

 

CA

 

11,929

 

1991

 

Marinco Electric Inc.

 

7,994

 

3,935

    

67

%

27

 

Santa Fe Springs

 

CA

 

11,045

 

1991

 

Dover Resources Inc

 

9,750

 

1,295

    

88

%

28

 

Ontario

 

CA

 

412,944

 

1990

 

Cott Beverages USA, Inc.

 

412,944

 

—  

    

100

%

29

 

Santa Fe Springs

 

CA

 

237,814

 

1990

 

La Salle Paper Company, Inc.

 

237,814

 

—  

    

100

%

30

 

Garland

 

TX

 

200,000

 

1990

 

Sears Logistics Services, Inc.

 

200,000

 

—  

    

100

%

31

 

Tempe

 

AZ

 

165,646

 

1990

 

Vacant

 

—  

 

165,646

    

0

%

32

 

Ontario

 

CA

 

141,150

 

1990

 

H. Tedmori, Inc.

 

141,150

 

—  

    

100

%

33

 

Livermore

 

CA

 

131,128

 

1990

 

Nature Kist

 

131,128

 

—  

    

100

%

34

 

Union City

 

CA

 

116,993

 

1990

 

Tyco Printed Circuit Group LLP

 

116,993

 

—  

    

100

%

35

 

Vernon

 

CA

 

48,187

 

1990

 

Mister S

 

48,187

 

—  

    

100

%

36

 

Vernon

 

CA

 

26,923

 

1990

 

Barth and Dreyfuss Of California

 

26,923

 

—  

    

100

%

37

 

Vernon

 

CA

 

26,653

 

1990

 

Maruhana U.S.A., Corp.

 

26,653

 

—  

    

100

%

   
     
     
 
 
    

   

Subtotal 1990-1994

     

5,062,765

     

(37 buildings)

 

4,797,069

 

265,696

    

95

%

   
     
     
 
 
    

1

 

Stockton

 

CA

 

435,609

 

1989

 

Ralphs Grocery Co.

 

435,609

 

—  

    

100

%

2

 

Ontario

 

CA

 

405,864

 

1989

 

Exel Inc.

 

405,864

 

—  

    

100

%

3

 

Anaheim

 

CA

 

39,285

 

1989

 

V & M Restoration

 

39,285

 

—  

    

100

%

4

 

Anaheim

 

CA

 

28,185

 

1989

 

Shaxon Industries

 

28,185

 

—  

    

100

%

5

 

Santa Ana

 

CA

 

24,968

 

1989

 

Severn Trent Laboratories, Inc.

 

24,968

 

—  

    

100

%

6

 

Anaheim

 

CA

 

24,955

 

1989

 

Specification Seals Co.

 

24,955

 

—  

    

100

%

 

7


   

City


  

State


 

Rentable

Square Feet


 

Year Built


 

Major Tenant


 

RSF Occupied


 

YR End Vacancy


    

Year-End Building Occupancy %


 

7

 

Anaheim

  

CA

 

20,705

 

1989

 

Automation Products

 

20,705

 

—  

    

100

%

8

 

Phoenix

  

AZ

 

206,263

 

1988

 

Freeport Logistics Inc.

 

206,263

 

—  

    

100

%

9

 

Vernon

  

CA

 

137,307

 

1988

 

Pepboys Of California

 

137,307

 

—  

    

100

%

10

 

Tempe

  

AZ

 

133,291

 

1988

 

Eagle Global Logistics

 

133,291

 

—  

    

100

%

11

 

Carson

  

CA

 

133,240

 

1988

 

F.R.T. International, Inc.

 

133,240

 

—  

    

100

%

12

 

Carson

  

CA

 

118,545

 

1988

 

Expeditors International

 

118,545

 

—  

    

100

%

13

 

Union City

  

CA

 

115,200

 

1988

 

California Equipment Distributors, Inc.

 

115,200

 

—  

    

100

%

14

 

Livermore

  

CA

 

92,022

 

1988

 

Trans Western Polymers, Inc.

 

92,022

 

—  

    

100

%

15

 

Vernon

  

CA

 

85,349

 

1988

 

Rayem Investments, Inc.

 

85,205

 

144

    

100

%

16

 

Union City

  

CA

 

82,944

 

1988

 

Orthopedic Systems, Inc.

 

82,944

 

—  

    

100

%

17

 

Union City

  

CA

 

77,760

 

1988

 

National Retail Transportation, Inc.

 

77,760

 

—  

    

100

%

18

 

Livermore

  

CA

 

76,800

 

1988

 

Trans Western Polymers, Inc.

 

76,800

 

—  

    

100

%

19

 

Tustin

  

CA

 

69,763

 

1988

 

Terumo Medical Corporation

 

69,763

 

—  

    

100

%

20

 

Tustin

  

CA

 

59,505

 

1988

 

GE Medical Systems Info Technologies,     Inc

 

59,505

 

—  

    

100

%

21

 

Orange

  

CA

 

54,177

 

1988

 

Freedom Communications Inc.

 

54,177

 

—  

    

100

%

22

 

Santa Ana

  

CA

 

36,225

 

1988

 

Applied Industrial Technology, Inc.

 

36,225

 

—  

    

100

%

23

 

Los Angeles

  

CA

 

31,311

 

1988

 

Tanimura Distributing

 

31,311

 

—  

    

100

%

24

 

Rancho Cucamonga

  

CA

 

419,064

 

1987

 

Weingart Foundation

 

419,064

 

—  

    

100

%

25

 

Stockton

  

CA

 

314,392

 

1987

 

Ralphs Grocery Co.

 

314,392

 

—  

    

100

%

26

 

Phoenix

  

AZ

 

221,116

 

1987

 

Huhtamaki Plastics, Inc.

 

221,116

 

—  

    

100

%

27

 

Santa Fe Springs

  

CA

 

98,882

 

1987

 

Galleher Hardwood Company

 

98,882

 

—  

    

100

%

28

 

Union City

  

CA

 

88,704

 

1987

 

Am-Pac Tire Distribution, Inc.

 

88,704

 

—  

    

100

%

29

 

Union City

  

CA

 

86,496

 

1987

 

Logitech, Inc.

 

86,496

 

—  

    

100

%

30

 

Santa Fe Springs

  

CA

 

70,756

 

1987

 

Atlantic, Inc.

 

70,756

 

—  

    

100

%

21

 

Anaheim

  

CA

 

52,965

 

1987

 

Mintek Digital, Inc.

 

52,965

 

—  

    

100

%

32

 

Anaheim

  

CA

 

51,153

 

1987

 

Meiho Technology, Inc.

 

51,153

 

—  

    

100

%

33

 

Union City

  

CA

 

44,909

 

1987

 

Exp Pharmaceutical Waste Management,     Inc

 

44,909

 

—  

    

100

%

34

 

Anaheim

  

CA

 

43,428

 

1987

 

United Media Services, Inc.

 

43,428

 

—  

    

100

%

35

 

Anaheim

  

CA

 

32,074

 

1987

 

Saint-Gobain Industrial Ceramics, Inc.

 

32,074

 

—  

    

100

%

36

 

Los Angeles

  

CA

 

30,104

 

1987

 

Tanimura Distributing

 

30,104

 

—  

    

100

%

37

 

La Mirada

  

CA

 

220,000

 

1986

 

Mohawk Industries, Inc.

 

220,000

 

—  

    

100

%

38

 

Union City

  

CA

 

126,144

 

1986

 

Runco International, Inc.

 

47,852

 

78,292

    

38

%

39

 

Orange

  

CA

 

108,222

 

1986

 

Data Aire, Inc.

 

108,222

 

—  

    

100

%

40

 

Tempe

  

AZ

 

101,601

 

1986

 

Triumph / Stolper

 

101,601

 

—  

    

100

%

41

 

Tempe

  

AZ

 

93,366

 

1986

 

Southern Wine and Spirits

 

93,366

 

—  

    

100

%

42

 

Vernon

  

CA

 

77,184

 

1986

 

Jade Apparel, Inc.

 

77,184

 

—  

    

100

%

43

 

Tustin

  

CA

 

75,226

 

1986

 

Scan-Tron Corporation

 

75,226

 

—  

    

100

%

44

 

Orange

  

CA

 

42,918

 

1986

 

Mailing and Marketing, Inc.

 

42,918

 

—  

    

100

%

45

 

Orange

  

CA

 

35,000

 

1986

 

Cano Container Corporation

 

35,000

 

—  

    

100

%

46

 

Vernon

  

CA

 

28,875

 

1986

 

Master Knits USA, Inc.

 

28,875

 

—  

    

100

%

47

 

Fullerton

  

CA

 

50,000

 

1985

 

Sonic Air Systems, Inc.

 

50,000

 

—  

    

100

%

48

 

Anaheim

  

CA

 

20,769

 

1985

 

Fremont Investment & Loan

 

20,769

 

—  

    

100

%

   
      
     
 
 
    

   

Subtotal 1985-1989

      

5,022,621

     

(48 buildings)

 

4,944,185

 

78,436

    

98

%

   
      
     
 
 
    

1

 

Sacramento

  

CA

 

46,500

 

1983

 

Competition Parts Warehouse

 

46,500

 

—  

    

100

%

2

 

Sacramento

  

CA

 

21,976

 

1983

 

Competition Parts Warehouse

 

21,976

 

—  

    

100

%

3

 

Sacramento

  

CA

 

21,000

 

1983

 

American River Flood Control

 

21,000

 

—  

    

100

%

4

 

Sacramento

  

CA

 

21,000

 

1983

 

American River Flood Control

 

21,000

 

—  

    

100

%

5

 

Fullerton

  

CA

 

97,056

 

1980

 

Modular Systems Services, Inc.

 

97,056

 

—  

    

100

%

6

 

Vernon

  

CA

 

10,600

 

1980

 

U.S. Filter Distribution Group

 

10,600

 

—  

    

100

%

7

 

Phoenix

  

AZ

 

78,327

 

1976

 

Willey Brothers, Inc.

 

50,913

 

27,414

    

65

%

8

 

Tustin

  

CA

 

65,910

 

1975

 

ADC Telecommunications, Inc.

 

65,910

 

—  

    

100

%

9

 

Houston

  

TX

 

57,058

 

1975

 

Insituform Technologies, Inc.

 

57,058

 

—  

    

100

%

10

 

San Diego

  

CA

 

32,905

 

1971

 

Michael Culleton

 

32,905

 

—  

    

100

%

 

8


   

City


 

State


 

Rentable

Square Feet


 

Year Built


 

Major Tenant


 

RSF Occupied


 

YR End Vacancy


    

Year-End Building Occupancy %


 

11

 

San Diego

 

CA

 

21,507

 

1971

 

Refrigeration Supplies Dist.

 

21,507

 

—  

    

100

%

12

 

San Diego

 

CA

 

18,001

 

1971

 

Ljungquist Enterprises, Inc.

 

18,001

 

—  

    

100

%

13

 

San Diego

 

CA

 

14,401

 

1971

 

Oceanus Press

 

14,401

 

—  

    

100

%

14

 

San Diego

 

CA

 

14,000

 

1971

 

California Board Sports

 

14,000

 

—  

    

100

%

15

 

San Diego

 

CA

 

12,822

 

1971

 

Transwestern Publishing

 

12,822

 

—  

    

100

%

16

 

San Diego

 

CA

 

12,801

 

1971

 

Aquatic Design System

 

12,801

 

—  

    

100

%

17

 

San Diego

 

CA

 

12,599

 

1971

 

Nico & Associates, Inc.

 

12,599

 

—  

    

100

%

18

 

San Diego

 

CA

 

11,200

 

1971

 

Insight Systems LLC

 

11,200

 

—  

    

100

%

19

 

San Diego

 

CA

 

9,928

 

1971

 

Vacant

 

—  

 

9,928

    

0

%

20

 

San Diego

 

CA

 

9,600

 

1971

 

Smalley & Company

 

9,600

 

—  

    

100

%

21

 

San Diego

 

CA

 

9,599

 

1971

 

Environmental Spray, Inc.

 

9,599

 

—  

    

100

%

22

 

San Diego

 

CA

 

8,400

 

1971

 

Taiwanese—American Foundation

 

8,400

 

—  

    

100

%

23

 

Tustin

 

CA

 

39,600

 

1966

 

Action Wholesale Products, Inc.

 

39,600

 

—  

    

100

%

24

 

Phoenix

 

AZ

 

83,317

 

1950

 

Reliant Building Products, Inc

 

83,317

 

—  

    

100

%

25

 

Phoenix

 

AZ

 

40,495

 

1950

 

Reliant Building Products, Inc

 

40,495

 

—  

    

100

%

26

 

Vernon

 

CA

 

15,288

 

1940

 

A. Rudin, Inc.

 

15,288

 

—  

    

100

%

27

 

Vernon

 

CA

 

48,315

 

1937

 

Griffith Micro Science, Inc.

 

48,315

 

—  

    

100

%

28

 

Topeka

 

KS

 

70,266

 

1931

 

Capital Label, LLC

 

26,896

 

43,370

    

38

%

   
     
     
 
 
    

   

Subtotal Pre-1985

     

904,471

     

(28 buildings)

 

823,759

 

80,712

    

91

%

   
     
     
 
 
    

   

Total Industrial

     

32,944,037

     

(196 buildings-Average Age 6.5 Years)

 

31,336,755

 

1607,282

    

95

%

   
     
     
 
 
    

   

Office Property:

                                

1

 

San Francisco

 

CA

 

282,773

 

2002

 

The Gap, Inc.

 

282,773

 

—  

    

100

%

2

 

Westminster

 

CO

 

151,040

 

2002

 

CSG Systems, Inc.

 

87,468

 

63,572

    

58

%

3

 

Glenview

 

IL

 

116,015

 

2002

 

AC Neilson Company

 

18,499

 

97,516

    

16

%

4

 

Coppell

 

TX

 

101,844

 

2002

 

Washington Mutual Bank

 

101,844

 

—  

    

100

%

5

 

Westminster

 

CO

 

121,461

 

2001

 

American Skandia Life Assurance

 

121,461

 

—  

    

100

%

6

 

Woodridge

 

IL

 

97,964

 

1991

 

Argonne National Laboratory

 

97,964

 

—  

    

100

%

7

 

Anaheim

 

CA

 

94,086

 

1990

 

Fremont Investment & Loan

 

86,479

 

7,607

    

92

%

8

 

Corona

 

CA

 

61,724

 

1990

 

Centex Real Estate Corp

 

60,013

 

1,711

    

97

%

9

 

Santa Ana

 

CA

 

66,106

 

1989

 

County Of Orange

 

66,106

 

—  

    

100

%

10

 

Northridge

 

CA

 

56,964

 

1988

 

101 Communications LLC

 

56,964

 

—  

    

100

%

11

 

Northridge

 

CA

 

53,292

 

1988

 

Washington Mutual

 

53,292

 

—  

    

100

%

12

 

Northridge

 

CA

 

43,117

 

1988

 

Synergistic Systems Inc.

 

43,117

 

—  

    

100

%

13

 

San Jose

 

CA

 

70,903

 

1986

 

Aon Service Corporation

 

59,003

 

11,900

    

83

%

14

 

San Jose

 

CA

 

69,956

 

1986

 

Puma Technology Inc.

 

69,956

 

—  

    

100

%

15

 

Northridge

 

CA

 

60,175

 

1986

 

Washington Mutual Bank

 

59,971

 

204

    

100

%

16

 

Orange

 

CA

 

40,000

 

1986

 

Control Air Corporation

 

40,000

 

—  

    

100

%

17

 

San Jose

 

CA

 

77,092

 

1985

 

MCI Worldcom Communications, Inc.

 

70,924

 

6,168

    

92

%

18

 

San Jose

 

CA

 

71,514

 

1985

 

Parametric Technology Corporation

 

63,261

 

8,253

    

88

%

19

 

San Jose

 

CA

 

69,952

 

1985

 

Porter Novelli Inc.

 

65,924

 

4,028

    

94

%

20

 

San Jose

 

CA

 

67,317

 

1985

 

MCI Worldcom Communications, Inc.

 

44,447

 

22,870

    

66

%

   
     
     
 
 
    

   

Subtotal 1985-2002

     

1,773,295

     

(20 buildings)

 

1,549,466

 

223,829

    

87

%

   
     
     
 
 
    

1

 

Santa Ana

 

CA

 

52,133

 

1983

 

Nations Direct Lender & Ins.

 

45,938

 

6,195

    

88

%

2

 

Portland

 

OR

 

56,934

 

1979

 

Anesthesiologists Assoc. Inc.

 

49,437

 

7,497

    

87

%

3

 

Irving

 

TX

 

69,049

 

1978

 

General Motors Corporation

 

67,310

 

1,739

    

97

%

4

 

Dallas

 

TX

 

473,090

 

1975

 

J. C. Penney Company, Inc.

 

434,582

 

38,508

    

92

%

5

 

Dallas

 

TX

 

224,211

 

1975

 

J. C. Penney Company, Inc.

 

224,211

 

—  

    

100

%

6

 

Sacramento

 

CA

 

24,671

 

1975

 

Community Health Charities

 

9,931

 

14,740

    

40

%

7

 

Sacramento

 

CA

 

11,542

 

1975

 

Cal Assoc. For Local Econ Dev.

 

11,542

 

—  

    

100

%

8

 

Sacramento

 

CA

 

7,987

 

1975

 

Law Offices Of W. Scott De Bie

 

5,946

 

2,041

    

74

%

9

 

Sacramento

 

CA

 

53,696

 

1974

 

Volunteers Of America

 

41,173

 

12,523

    

77

%

10

 

Newport Beach

 

CA

 

24,018

 

1972

 

Express Capital Lending

 

21,815

 

2,204

    

91

%

11

 

Newport Beach

 

CA

 

22,727

 

1972

 

United Auto Credit Corporation

 

20,524

 

2,204

    

90

%

12

 

Chicago

 

IL

 

370,263

 

1903

 

Skidmore, Owings & Merrill LLP

 

325,357

 

44,906

    

88

%

   
     
     
 
 
    

   

Subtotal Pre-1985

     

1,390,321

     

(12 buildings)

 

1,257,765

 

132,556

    

90

%

   
     
     
 
 
    

   

Total Office

     

3,163,616

     

(32 buildings)

 

2,807,231

 

356,385

    

89

%

   
     
     
 
 
    

 

9


   

City


 

State


 

Rentable

Square Feet


 

Year Built


 

Major Tenant


 

RSF Occupied


 

YR End Vacancy


    

Year-End Building Occupancy %


 
   

Retail Property:

                                

1

 

Tucson

 

AZ

 

51,242

 

2002

 

Fleming Companies, Inc.

 

51,242

 

—  

    

100

%

2

 

Tucson

 

AZ

 

12,414

 

2002

 

Curves for Women

 

3,505

 

8,909

    

28

%

3

 

Tucson

 

AZ

 

5,840

 

2002

 

Ole Mexican Grille

 

3,450

 

2,390

    

59

%

4

 

Tucson

 

AZ

 

4,950

 

2002

 

Top 10 Nails

 

1,950

 

3,000

    

39

%

5

 

Emeryville

 

CA

 

23,923

 

2001

 

Michaels Stores, Inc.

 

23,923

 

—  

    

100

%

6

 

Emeryville

 

CA

 

117,000

 

1994

 

Home Depot USA, Inc.

 

117,000

 

—  

    

100

%

7

 

Emeryville

 

CA

 

102,501

 

1994

 

Home Depot USA, Inc.

 

102,501

 

—  

    

100

%

8

 

Emeryville

 

CA

 

96,954

 

1994

 

Sportmart, Inc.

 

96,954

 

—  

    

100

%

9

 

Emeryville

 

CA

 

59,195

 

1994

 

Pak ‘N Save

 

59,195

 

—  

    

100

%

10

 

Emeryville

 

CA

 

4,897

 

1994

 

Mattress Discounters Corporation

 

4,897

 

—  

    

100

%

11

 

Emeryville

 

CA

 

3,561

 

1994

 

Designs CMAL Store Inc.

 

3,561

 

—  

    

100

%

12

 

Emeryville

 

CA

 

3,537

 

1994

 

Walker, Robin M. and Swarm, Ezel N.

 

3,537

 

—  

    

100

%

13

 

Anaheim

 

CA

 

12,307

 

1985

 

Auto Insurance Spclsts-L.B Inc

 

7,039

 

5,268

    

57

%

14

 

Anaheim

 

CA

 

10,668

 

1985

 

Koosharem Corp

 

5,002

 

5,666

    

47

%

   
     
     
 
 
    

   

Subtotal 1985-2002

     

508,989

     

(14 buildings)

 

483,756

 

25,233

    

95

%

   
     
     
 
 
    

1

 

Woodland Hills

 

CA

 

72,765

 

1973

 

Toys R Us Inc.

 

72,765

 

—  

    

100

%

2

 

Woodland Hills

 

CA

 

11,317

 

1973

 

Shelley’S Stereo

 

11,317

 

—  

    

100

%

3

 

Denver

 

CO

 

99,627

 

1971

 

King Soopers Inc.

 

91,672

 

7,955

    

92

%

4

 

Livermore

 

CA

 

69,224

 

1970

 

Lucky Stores, Inc

 

59,412

 

9,812

    

86

%

5

 

Tustin

 

CA

 

39,600

 

1968

 

Micro Center

 

39,600

 

—  

    

100

%

6

 

Portland

 

OR

 

25,284

 

1968

 

Bank Of The West

 

15,186

 

10,098

    

60

%

7

 

Portland

 

OR

 

11,998

 

1968

 

Hollywood Video

 

10,610

 

1,388

    

88

%

8

 

Woodland Hills

 

CA

 

29,071

 

1965

 

Strouds The Linen Experts

 

28,927

 

144

    

100

%

   
     
     
 
 
    

   

Subtotal Pre-1985

     

358,886

     

(8 buildings)

 

329,489

 

29,397

    

92

%

   
     
     
 
 
    

   

Total Retail

     

867,875

     

(22 buildings)

 

813,245

 

54,630

    

94

%

   
     
     
 
 
    

   

Grand Total

     

36,975,528

     

(250 buildings)

 

34,957,231

 

2,018,297

    

95

%

   
     
     
 
 
    

 

Building Occupancy

 

The rental buildings were 94.5% leased as of December 31, 2002. Sixty-two percent of the total square footage of the rental buildings in our portfolio was constructed between 1995 and 2002, 15% between 1990 and 1994, 16% between 1985 and 1989, and the remaining 7% prior to 1985. Our goal is to continually upgrade the quality of our portfolio; correspondingly, certain older buildings and other properties are likely to be sold over time.

 

Leasing.    The following table summarizes our leasing statistics for our rental portfolio:

 

    

As of December 31,


 
    

2002


    

2001


    

2000


 
    

(Square feet in thousands)

 

Industrial Buildings

                    

Square feet owned

  

32,944

 

  

27,594

 

  

26,251

 

Square feet leased

  

31,337

 

  

26,103

 

  

25,143

 

Percent leased

  

95.1

%

  

94.6

%

  

95.8

%

Office Buildings

                    

Square feet owned

  

3,164

 

  

2,442

 

  

1,625

 

Square feet leased

  

2,807

 

  

2,260

 

  

1,513

 

Percent leased

  

88.7

%

  

92.5

%

  

93.1

%

Retail Buildings

                    

Square feet owned

  

868

 

  

864

 

  

880

 

Square feet leased

  

813

 

  

820

 

  

856

 

Percent leased

  

93.7

%

  

94.9

%

  

97.3

%

Total

                    

Square feet owned

  

36,976

 

  

30,900

 

  

28,756

 

Square feet leased

  

34,957

 

  

29,183

 

  

27,512

 

Percent leased

  

94.5

%

  

94.4

%

  

95.7

%

 

10


 

Lease Expirations.    The following table summarizes our lease expirations in our rental portfolio as of December 31, 2002:

 

    

2003


    

2004


    

2005


    

2006


    

2007


    

2008


    

2009


    

2010


    

2011


      

Thereafter


 

Percent

  

12.2

%

  

10.5

%

  

15.0

%

  

9.0

%

  

9.9

%

  

2.5

%

  

7.0

%

  

6.5

%

  

4.6

%

    

22.8

%

Square feet (in thousands)

  

4,252

 

  

3,673

 

  

5,249

 

  

3,156

 

  

3,461

 

  

874

 

  

2,430

 

  

2,270

 

  

1,602

 

    

7,990

 

 

Approximately 127,000 square feet of month-to-month leases are shown as expiring in 2003.

 

Rental Portfolio

 

Following is a discussion of our rental portfolio by property type:

 

Industrial Buildings

 

The following table summarizes the industrial buildings in our rental portfolio as of, or for, the year ended December 31, 2002:

 

      

Number

of Buildings


  

Square Feet


  

Revenues


  

Property

Operating

Costs


  

Property

Operating

Income


      

(In thousands, except for number of buildings)

Southern California

    

99

  

12,200

  

$

62,952

  

$

11,484

  

$

51,468

Northern California

    

39

  

5,773

  

 

35,550

  

 

7,915

  

 

27,635

Illinois

    

18

  

5,921

  

 

25,799

  

 

6,873

  

 

18,926

Texas

    

11

  

3,264

  

 

11,995

  

 

2,872

  

 

9,123

Colorado

    

9

  

2,033

  

 

10,095

  

 

2,590

  

 

7,505

Arizona

    

9

  

1,123

  

 

4,042

  

 

1,901

  

 

2,141

Maryland

    

1

  

471

  

 

3,402

  

 

296

  

 

3,106

Ohio

    

3

  

966

  

 

2,960

  

 

567

  

 

2,393

Oregon

    

3

  

449

  

 

2,898

  

 

529

  

 

2,369

Kentucky

    

2

  

549

  

 

1,141

  

 

169

  

 

972

Other

    

2

  

195

  

 

302

  

 

196

  

 

106

      
  
  

  

  

Total

    

196

  

32,944

  

$

161,136

  

$

35,392

  

$

125,744

      
  
  

  

  

 

The following table summarizes the lease expirations for our industrial buildings as of December 31, 2002:

 

    

2003


    

2004


    

2005


    

2006


    

2007


    

2008


    

2009


    

2010


    

2011


      

Thereafter


 

Percent

  

12.2

%

  

10.4

%

  

14.6

%

  

9.4

%

  

9.4

%

  

2.1

%

  

7.0

%

  

7.1

%

  

4.6

%

    

23.2

%

Square feet (in thousands)

  

3,838

 

  

3,258

 

  

4,560

 

  

2,961

 

  

2,935

 

  

645

 

  

2,184

 

  

2,239

 

  

1,450

 

    

7,267

 

 

Of the 3.8 million square feet of leased industrial space that is scheduled to expire in 2003, 46% is located in Southern California, 16% in Northern California, 16% in Ohio, 13% in Illinois, and the remaining 9% in three other states. Approximately 116,000 square feet of month-to-month leases are shown as expiring in 2003.

 

In 2002, we completed, and added to our rental portfolio 5.6 million square feet of industrial buildings. In addition, during the year, we purchased 0.4 million square feet and sold 0.7 million square feet of industrial buildings.

 

11


 

Office Buildings

 

The following table summarizes the office buildings in our rental portfolio as of, or for, the year ended December 31, 2002:

 

      

Number

of Buildings


  

Square Feet


  

Revenues


  

Property

Operating

Costs


  

Property

Operating

Income


      

(In thousands, except for number of buildings)

Northern California

    

11

  

808

  

$

15,851

  

$

4,550

  

$

11,301

Southern California

    

11

  

574

  

 

9,250

  

 

4,273

  

 

4,977

Texas

    

4

  

868

  

 

11,153

  

 

5,337

  

 

5,816

Illinois

    

3

  

584

  

 

13,109

  

 

6,599

  

 

6,510

Colorado

    

2

  

273

  

 

4,486

  

 

1,860

  

 

2,626

Oregon

    

1

  

57

  

 

981

  

 

561

  

 

420

      
  
  

  

  

Totals

    

32

  

3,164

  

$

54,830

  

$

23,180

  

$

31,650

      
  
  

  

  

 

The following table summarizes the lease expirations for our office buildings as of December 31, 2002:

 

    

2003


    

2004


    

2005


    

2006


    

2007


    

2008


    

2009


    

2010


    

2011


    

Thereafter


 

Percent

  

12.8

%

  

10.8

%

  

23.0

%

  

4.6

%

  

18.1

%

  

6.4

%

  

4.7

%

  

0.0

%

  

4.6

%

  

15.0

%

Square feet (in thousands)

  

359

 

  

304

 

  

644

 

  

130

 

  

508

 

  

181

 

  

132

 

  

1

 

  

128

 

  

420

 

 

Of the 359,000 square feet of leased office space scheduled to expire in 2003, 42% is located in Illinois, 32% in Northern California, and 18% in Southern California. Approximately 11,000 square feet of month-to-month leases are shown as expiring in 2003.

 

In 2002, we completed the development of and added to our rental portfolio four office buildings totaling 650,000 square feet and purchased one office building totaling 69,000 square feet.

 

Retail Buildings

 

The following table summarizes the retail buildings in our rental portfolio as of, or for, the year ended December 31, 2002:

 

      

Number

of Buildings


    

Square Feet


  

Revenues


  

Property

Operating

Costs


  

Property

Operating

Income


      

(In thousands, except for number of buildings)

Northern California

    

9

    

481

  

$

8,981

  

$

2,783

  

$

6,198

Southern California

    

6

    

176

  

 

3,816

  

 

965

  

 

2,851

Arizona

    

4

    

74

  

 

446

  

 

84

  

 

362

Oregon

    

2

    

37

  

 

565

  

 

247

  

 

318

Colorado

    

1

    

100

  

 

1,480

  

 

484

  

 

996

      
    
  

  

  

Totals

    

22

    

868

  

$

15,288

  

$

4,563

  

$

10,725

      
    
  

  

  

 

The following table summarizes the lease expirations for our retail buildings as of December 31, 2002:

 

    

2003


    

2004


    

2005


    

2006


    

2007


    

2008


    

2009


    

2010


    

2011


    

Thereafter


 

Percent

  

6.8

%

  

13.6

%

  

5.5

%

  

8.0

%

  

2.2

%

  

5.9

%

  

14.0

%

  

3.7

%

  

3.0

%

  

37.3

%

Square feet (in thousands)

  

55

 

  

111

 

  

45

 

  

65

 

  

18

 

  

48

 

  

114

 

  

30

 

  

24

 

  

303

 

 

Of the 55,000 square feet of leased retail space scheduled to expire in 2003, 85% is located in Southern California and 15% is in Colorado. In 2002, we completed and added to our portfolio 72,000 square feet of retail buildings and sold an older 70,000 square foot retail building.

 

12


Ground Leases and Other Properties

 

Ground Leases

 

We own approximately 8,000 acres of ground leases, of which approximately 1,200 acres are being marketed for sale.

 

The following table summarizes our ground leases for the year ended December 31, 2002:

 

    

Revenues


  

Property

Operating

Costs


  

Property

Operating

Income


    

(In thousands)

Southern California

  

$

11,184

  

$

1,279

  

$

9,905

Northern California

  

 

8,121

  

 

633

  

 

7,488

Other states

  

 

5,800

  

 

1,922

  

 

3,878

    

  

  

Totals

  

$

25,105

  

$

3,834

  

$

21,271

    

  

  

 

Other Properties

 

In addition to 37 million square feet of buildings in our rental portfolio, we also own other income generating properties at our Urban Group projects that we intend to convert to land development. As of December 31, 2002, our other property portfolio included 15 buildings aggregating approximately 755,000 square feet, that were 84.8% leased, and several parking lots. We expect that the level of income generated from this category will decline as development occurs over the next several years.

 

The following table summarizes our other property portfolio as of, or for, the year ended December 31, 2002:

 

      

Number of

Buildings


  

Square

Feet (1)


  

Revenues


  

Property

Operating

Costs


  

Property

Operating

Income


      

(In thousands, except for number of buildings)

Northern California

    

10

  

628

  

$

5,409

  

$

1,164

  

$

4,245

Southern California

    

5

  

127

  

 

6,039

  

 

3,796

  

 

2,243

      
  
  

  

  

Totals

    

15

  

755

  

$

11,448

  

$

4,960

  

$

6,488

      
  
  

  

  


(1)   Other properties are not included in the total square feet of rental portfolio.

 

Operating Joint Venture Portfolio

 

The Asset Management Group had direct or indirect equity interests in four joint ventures that owned rental properties during the year. The joint ventures provided us with cash distributions of $6.1 million and earnings of $8.3 million for the year ended December 31, 2002.

 

We owned joint venture interests in the following operating properties for the years presented.

 

      

No. of

Ventures


  

Size


  

Ownership

Interest


    

Equity in Earnings


 
               

Year Ended December 31,


 
               

2002


  

2001


  

2000


 
                       

(In thousands)

 

Hotel(1)

    

3

  

1,937 rooms

  

25-50

%

  

$

8,213

  

$

8,570

  

$

9,835

 

Office

    

1

  

202,000 sq. ft.

  

67

%

  

 

64

  

 

263

  

 

(26

)

      
              

  

  


Total

    

4

              

$

8,277

  

$

8,833

  

$

9,809

 

      
              

  

  



(1)   Includes a hotel parking lot joint venture.

 

 

13


Sales

 

During 2002, we sold property from our rental portfolio. Of the sales revenue in 2002, approximately $11.7 million came from the sale to tenants of older buildings totaling 227,000 square feet; approximately $22.5 million from the sale to investors of buildings totaling 542,000 square feet that were built in the 1970s and 1980s; and approximately $9 million from the sale of approximately 1,100 acres of land subject to ground leases.

 

The following table summarizes the sales of our rental properties, before the adjustments for discontinued operations for the years presented:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Total sales:

                          

Sales revenue

  

$

43,184

 

  

$

71,818

 

  

$

89,323

 

    


  


  


Cost of sales

  

 

(14,256

)

  

 

(30,744

)

  

 

(46,410

)

    


  


  


Gain on property sales

  

$

28,928

 

  

$

41,074

 

  

$

42,913

 

    


  


  


 

See Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for more information regarding our sales activity.

 

Other Land Holdings

 

As of December 31, 2002, we own approximately 256,000 acres of land in the Southern California desert. The ownership of these desert properties is the result of historical land grants to our railroad predecessors. Because of its location, lack of contiguity among parcels, and other factors, much of this land is not currently suitable for traditional development activities. We have assessed the desert portfolio to explore the potential for agricultural, mineral, water, telecommunications, energy, and waste management uses for these properties and concluded that the land, although valuable, does not fit within our overall corporate strategy.

 

Since December 31, 1998, our portfolio of desert holdings has declined from approximately 784,000 to 256,000 acres, primarily as a result of sales activity. In 2000, we sold approximately 437,000 acres of desert holdings and 20,000 acres of severed mineral rights to the federal government, through an agreement with The Wildlands Conservancy (“TWC”), for $45.1 million. In late 2001, we amended our agreement with TWC to provide for additional, future sales of up to approximately 170,000 acres of desert land for approximately $13.6 million. We closed on the sale of approximately 94,000 acres of these lands to the federal government in 2002 at a price of $7.5 million. We anticipate closing on approximately 62,000 acres at a price of $5.0 million in March 2003 and on approximately 8,000 acres at a price of $0.7 million in June 2003. The closing of these sales would conclude our current agreement with TWC.

 

Upon completion of TWC related sales, we will own approximately 186,000 acres of desert land. We are currently in negotiations with the federal government regarding an option agreement that would cover the sale of up to 100,000 acres as mitigation for impacts on threatened and endangered species of the proposed expansion of a Department of Defense installation in the California desert. An additional 30,000 acres are contemplated for disposition through an exchange with the federal government. The remaining 56,000 acres are being marketed for sale to private parties on a portfolio and individual property basis.

 

We will continue to pursue sale, lease, and exchange opportunities involving public and private buyers, as well as other arrangements to maximize the value of this land. These transactions are often complicated and, therefore, may take a significant amount of time to complete. No binding agreements have been entered on any of the major dispositions of the remaining 186,000 acres and no assurance can be made that the dispositions will occur as outlined.

 

14


 

See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Gain on Non-Strategic Asset Sales of this Form 10-K for information regarding the aggregate total of non-strategic asset sales.

 

Sales

 

The following table summarizes our sales of other land holdings for the periods presented:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Sales

  

$

8,373

 

  

$

4,161

 

  

$

50,759

 

Cost of sales

  

 

(1,109

)

  

 

(252

)

  

 

(4,480

)

    


  


  


Gain

  

$

7,264

 

  

$

3,909

 

  

$

46,279

 

    


  


  


 

Suburban Commercial Group

 

The Suburban Commercial Group develops suburban commercial business parks comprised of predominantly industrial buildings on land we have acquired or that is included in our historic portfolio. Our suburban commercial development activities include: (1) the acquisition and entitlement of commercial land sites; (2) the construction of predominantly industrial pre-leased buildings and non pre-leased buildings to be added to our rental portfolio, some of which may be subject to tenant purchase options; (3) the construction of predominantly industrial buildings on land we own, for sale to users; (4) the construction of predominantly industrial buildings for sale to investors; and (5) the sale of land to third parties for their own development. In certain instances, we have generated development and management fees from design-build services and construction management services.

 

In 2002, the Suburban Commercial Group commenced construction on 3.3 million square feet of commercial development. It completed approximately 6.1 million square feet of construction, all of which were added to our rental portfolio. As of December 31, 2002, the group had approximately 3.3 million square feet under construction, 1.9 million square feet of which are scheduled to be added to our rental portfolio upon completion, although certain of these properties may be sold.

 

Sales

 

During 2002, we sold improved land capable of supporting 3.8 million square feet of commercial development.

 

The following table summarizes sales of our commercial development properties in the periods presented:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Sales

  

$

52,966

 

  

$

75,686

 

  

$

68,951

 

Cost of sales

  

 

(42,689

)

  

 

(50,896

)

  

 

(52,415

)

    


  


  


Gain on property sales

  

 

10,277

 

  

 

24,790

 

  

 

16,536

 

Equity in earnings of development joint ventures

  

 

—  

 

  

 

9

 

  

 

13

 

    


  


  


Total gain on property sales

  

$

10,277

 

  

$

24,799

 

  

$

16,549

 

    


  


  


 

The 2002 gain came from land sales to developers and other users in our suburban business parks.

 

See Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K for more information regarding our sales activity.

 

15


 

Suburban Commercial Developable Land Inventory

 

Our existing developable land can support an estimated 25.9 million square feet of new development based upon current entitlements.

 

In 2002, we invested approximately $8 million in the acquisition of land capable of supporting approximately 3 million square feet of commercial development.

 

The following table summarizes our commercial developable land inventory activity by location as of, or for, the year ended December 31, 2002:

 

Region/State/City


    

Potential Development

12/31/01


  

Revisions/

Transfers

(1)


      

Acquisitions


  

Ground Leases

and

Sales


    

Development


    

Potential Development

12/31/02


    

% of

Total


    

Book

Value


 
      

(Square feet in thousands)

    

(000’s)

 

Southern California

                                                         

Rancho Cucamonga

    

812

  

(2

)

    

—  

  

(24

)

  

(468

)

  

318

 

         

$

3,560

 

Ontario

    

2,016

  

—  

 

    

—  

  

—  

 

  

—  

 

  

2,016

 

         

 

3,609

 

Anaheim

    

44

  

13

 

    

—  

  

(13

)

  

—  

 

  

44

 

         

 

2,810

 

Northridge

    

44

  

—  

 

    

—  

  

(44

)

  

—  

 

  

—  

 

         

 

—  

 

Fontana (Kaiser)

    

7,563

  

(238

)

    

—  

  

(2,933

)

  

(1,178

)

  

3,214

 

         

 

29,997

 

      
  

    
  

  

  

  

  


Subtotal Southern California

    

10,479

  

(227

)

    

—  

  

(3,014

)

  

(1,646

)

  

5,592

 

  

22

%

  

 

39,976

 

      
  

    
  

  

  

  

  


Northern California

                                                         

Alameda

    

1,300

  

—  

 

    

—  

  

—  

 

  

—  

 

  

1,300

(2)

         

 

8,458

 

Richmond

    

89

  

—  

 

    

—  

  

 

  

—  

 

  

89

 

         

 

833

 

Fremont

    

3,755

  

(84

)

    

—  

  

(37

)

  

—  

 

  

3,634

 

         

 

20,921

 

Stockton

    

—  

  

 

    

2,000

  

—  

 

  

—  

 

  

2,000

 

         

 

2,571

 

Manteca

    

542

  

144

 

    

—  

  

—  

 

  

—  

 

  

686

 

         

 

3,420

 

      
  

    
  

  

  

  

  


Subtotal Northern California

    

5,686

  

60

 

    

2,000

  

(37

)

  

—  

 

  

7,709

 

  

30

%

  

 

36,203

 

      
  

    
  

  

  

  

  


Total in California

    

16,165

  

(167

)

    

2,000

  

(3,051

)

  

(1,646

)

  

13,301

 

  

51

%

  

 

76,179

 

      
  

    
  

  

  

  

  


Illinois

                                                         

Woodridge

    

976

  

—  

 

    

—  

  

—  

 

  

—  

 

  

976

 

         

 

7,678

 

Glenview

    

680

  

—  

 

    

—  

  

(243

)

  

—  

 

  

437

(3)

         

 

(2,451

)

Romeoville

    

448

  

—  

 

    

—  

  

—  

 

  

(346

)

  

102

 

         

 

(596

)

Minooka

    

1,710

  

—  

 

    

588

  

—  

 

  

—  

 

  

2,298

(4)

         

 

5,595

 

Joliet

    

370

  

—  

 

    

—  

  

—  

 

  

—  

 

  

370

 

         

 

85

 

      
  

    
  

  

  

  

  


Subtotal Illinois

    

4,184

  

—  

 

    

588

  

(243

)

  

(346

)

  

4,183

 

  

16

%

  

 

10,311

 

      
  

    
  

  

  

  

  


Texas

                                                         

Coppell

    

1,120

  

—  

 

    

—  

  

—  

 

  

—  

 

  

1,120

 

         

 

12,914

 

Garland

    

983

  

—  

 

    

—  

  

(220

)

  

—  

 

  

763

 

         

 

2,312

 

Grand Prairie

    

814

  

—  

 

    

—  

  

—  

 

  

—  

 

  

814

 

         

 

2,599

 

Houston

    

1,969

  

—  

 

    

—  

  

—  

 

  

—  

 

  

1,969

 

         

 

1,254

 

Ft. Worth

    

—  

  

—  

 

    

356

  

—  

 

  

(252

)

  

104

 

         

 

1,425

 

Plano

    

368

  

—  

 

    

35

  

—  

 

  

—  

 

  

403

 

         

 

1,171

 

      
  

    
  

  

  

  

  


Subtotal Texas

    

5,254

  

—  

 

    

391

  

(220

)

  

(252

)

  

5,173

 

  

20

%

  

 

21,675

 

      
  

    
  

  

  

  

  


Other

                                                         

Denver, CO

    

925

  

—  

 

    

—  

  

(145

)

  

(171

)

  

609

 

         

 

23,690

 

Westminster, CO

    

685

  

—  

 

    

—  

  

—  

 

  

—  

 

  

685

 

         

 

21,649

 

Oklahoma, OK

    

300

  

—  

 

    

—  

  

—  

 

  

—  

 

  

300

 

         

 

46

 

Louisville, KY

    

545

  

—  

 

    

—  

  

—  

 

  

—  

 

  

545

 

         

 

1,633

 

Gresham/Portland, OR

    

1,459

  

—  

 

    

—  

  

(148

)

  

(200

)

  

1,111

 

  

—  

 

  

 

7,554

 

      
  

    
  

  

  

  

  


Subtotal Other

    

3,914

  

—  

 

    

—  

  

(293

)

  

(371

)

  

3,250

 

  

13

%

  

 

54,572

 

      
  

    
  

  

  

  

  


Total Outside of California

    

13,352

  

—  

 

    

979

  

(756

)

  

(969

)

  

12,606

 

  

49

%

  

 

86,559

 

      
  

    
  

  

  

  

  


Total Entitlements

    

29,517

  

(167

)

    

2,979

  

(3,807

)

  

(2,615

)

  

25,907

 

  

100.0

%

  

 

162,737

 

      
  

    
  

  

  

  

  


Approvals in progess (included in total entitlements)

    

1,327

                              

1,327

 

               

Other

                                                   

 

9,187

 

                                                     


Total

                                                   

$

171,924

 

                                                     



(1)   Includes revisions to estimates of potential development or transfers of property between commercial development and other categories of property.
(2)   See summary of Alameda, California project following this section.
(3)   Included in this balance is 425,000 square feet that is under option.
(4)   Excluded from this balance is approximately 4.8 million square feet that is under option.

 

16


 

The following is a brief summary of some of the significant suburban commercial development projects and development activities.

 

Pacific Commons, Fremont, California.    This is one of our largest development projects and also one of the largest planned business parks in Silicon Valley. The project, which is adjacent to Interstate 880 sixteen miles north of San Jose, consists of 900 acres, of which approximately 375 acres are planned and an additional 8.3 million square feet have been designated for development. Since inception, we have developed, constructed, sold, or leased approximately 4.7 million square feet of R&D, light industrial, and warehouse properties at Pacific Commons. In 2002, we sold approximately 37,000 square feet, leaving 3.6 million square feet or 118.4 net acres available for future development.

 

Kaiser Commerce Center, Fontana, California.    In 2000, one of our wholly owned subsidiaries acquired this former steel mill site in Fontana, California, located in the heart of one of the nation’s most active distribution centers near the intersection of Interstates 15 and 10. The property is served by both Union Pacific and Burlington Northern Santa Fe railroads and is 6 miles from the Ontario International Airport. Plans for the development include a 9 million-square-foot industrial park. At, or as of, December 31, 2002, approximately 1.4 million square feet had been completed, 1.2 million square feet are under construction, and 2.9 million square feet had been sold, leaving approximately 3.2 million square feet, or 191.9 net acres, available for development.

 

Alameda, California.    In 1998, we were selected by the city of Alameda, California, as the master developer for the former 145-acre U.S. Navy Fleet Industrial Supply Center, Alameda Annex, and the adjacent 70-acre portion of the former Alameda Naval Air Station. In June 2000, we were granted entitlements to develop up to 1.3 million square feet of office commercial space and approximately 500 single-family homes.

 

The commercial portion of the Alameda development is divided into six land purchase phases of approximately 14 acres each. Under the agreement, the city of Alameda must deliver the land with environmental remediation and demolition of existing structures completed, and the city of Alameda must build all backbone infrastructures. Until Alameda satisfies all of these obligations, Catellus is not obligated to purchase the land. Purchases are staged every two years, but can be delayed by poor market conditions like the ones we are currently experiencing. Catellus has not purchased any of the lots as of the end of 2002.

 

Robert Mueller Municipal Airport, Austin, Texas.    In April 2002, we were selected by the City Council of Austin, Texas, as the master developer for the redevelopment of the Robert Mueller Municipal Airport in Austin. The 709-acre former airport site is located adjacent to Interstate 35 near the campus of the University of Texas and is less than three miles from the state capitol in downtown Austin. The site was decommissioned as Austin’s primary passenger airport in May of 1999.

 

The Redevelopment and Reuse Plan for the Mueller Airport includes plans for 5 million square feet of commercial development and 4,000 residential units. Catellus is now engaged in exclusive negotiations with the city of Austin over a Development Agreement for the project.

 

Suburban Residential Group

 

The Suburban Residential Group develops large-scale suburban residential communities and sells finished lots to homebuilders. Property is either acquired directly or through a joint venture with a third party.

 

From 1996 through mid-2000, the Suburban Residential Group was actively involved in the merchant housing (homebuilding) business. Because of competitive forces and the high-volume, low-margin nature of the homebuilding industry, we determined that the homebuilding business was not part of our ongoing corporate strategy. As a result, we sold a majority of our merchant housing assets in July 2000, to a newly formed joint venture. In 2001, we sold our residual interest in the joint venture that bought the merchant housing assets.

 

17


 

The description of the business of Suburban Residential Group below is as of December 31, 2002. See Recent Developments above for a discussion of the effect of the proposed REIT conversion on the business of the Suburban Residential Group.

 

Sales

 

The following table summarizes the sale of residential development property, which includes lots and housing units. The sales shown below are for properties that we own, as well as consolidated joint ventures for the periods presented:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Sales

  

$

59,107

 

  

$

48,507

 

  

$

292,822

 

Cost of sales

  

 

(28,862

)

  

 

(30,202

)

  

 

(238,930

)

    


  


  


Gain

  

$

30,245

 

  

$

18,305

 

  

$

53,892

 

    


  


  


 

Unconsolidated Joint Venture Sales

 

We also participate in development joint venture projects in which we do not own a controlling interest and for which we recognize income using the equity method. For the year ending December 31, 2002, our interests in these development joint ventures provided us with cash distributions of $80.1 million and earnings of $29.2 million. The following table summarizes sales of our residential development property in these unconsolidated joint venture projects:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Sales

  

$

278,226

 

  

$

215,402

 

  

$

316,523

 

Cost of sales

  

 

(197,178

)

  

 

(184,122

)

  

 

(260,975

)

    


  


  


Gain

  

 

81,048

 

  

 

31,280

 

  

 

55,548

 

Venture partners’ interest

  

 

(47,985

)

  

 

(3,610

)

  

 

(27,781

)

    


  


  


Equity in earnings of unconsolidated joint ventures

  

$

33,063

 

  

$

27,670

 

  

$

27,767

 

    


  


  


 

 

18


Suburban Residential Land Inventory

 

The following table summarizes our residential land inventory activity as of, or for, the year ending December 31, 2002:

 

    

Total Lots/

Homes

1/1/02


  

Controlled/

Acquired


  

Home

Closings


    

Lot

Closings


      

Transfers & Adjustments


    

12/31/02


    

Ownership

or Controlled

Interest


   

Book

Value


                                                  

(000’s)

Land Development (lots)

                                                    

Colorado

                                                    

Commerce City

  

—  

  

2,149

  

—  

 

  

—  

 

    

—  

 

  

2,149

    

100

%

 

$

10,430

Northern California

                                                    

Alameda

  

492

  

—  

  

—  

 

  

—  

 

    

(7

)

  

485

    

100

%

 

 

2,260

Hercules

  

415

  

—  

  

—  

 

  

(456

)

    

63

 

  

22

    

100

%

 

 

1,997

Serrano—Sacramento

  

2,182

  

—  

  

—  

 

  

(940

)

    

(52

)

  

1,190

    

50

%

 

 

15,619

Parkway—Sacramento

  

1,437

  

—  

  

—  

 

  

(822

)

    

(77

)

  

538

    

50

%

 

 

11,570

Southern California

                                                    

Talega—San Clemente

  

2,144

  

—  

  

—  

 

  

(772

)

    

(146

)

  

1,226

    

30

%

 

 

6,896

West Bluffs—Playa del Rey (1)

  

114

  

—  

  

—  

 

  

—  

 

    

—  

 

  

114

    

100

%

 

 

34,973

Other (2)

  

—  

  

—  

  

—  

 

  

—  

 

    

—  

 

  

—  

    

—  

 

 

 

3,190

    
  
  

  

    

  
          

Subtotal Land Development

  

6,784

  

2,149

  

—  

 

  

(2,990

)

    

(219

)

  

5,724

          

 

86,935

    
  
  

  

    

  
          

Home Building (units)

                                                    

Southern California

                                                    

Talega Village—San Clemente

  

183

  

—  

  

(118

)

  

—  

 

    

—  

 

  

65

    

50

%

 

 

3,833

    
  
  

  

    

  
          

Subtotal Home Building Housing

  

183

  

—  

  

(118

)

  

—  

 

    

—  

 

  

65

          

 

3,833

    
  
  

  

    

  
          

Total Entitilements

  

6,967

  

2,149

  

(118

)

  

(2,990

)

    

(219

)

  

5,789

          

$

90,768

    
  
  

  

    

  
          

Approvals in progress (included in total entitlements)(1)

  

114

                              

114

              

(1)   We have entitlements for this project; however, the entitlements are being challenged under the California Environmental Quality Act and the California Coastal Act.
(2)   Included in “Other” is a 5-block parcel of land, which has not been subdivided.

 

The following is a brief summary of our most significant residential projects:

 

Talega, San Clemente, California.    In 1997, we acquired an approximately one-third interest (later decreased to thirty percent) in a joint venture project that owns a 3,470-acre, 4,000-lot residential land development site in the Talega Valley in San Clemente, California. This master-planned project includes a variety of attached and detached homes; an 18-hole championship golf course; a seniors community; an elementary/middle school; community parks; and an 82-acre, 1.5 million-square-foot mixed-use commercial area. The partnership closed on the sale of 772 lots during 2002 leaving 1,226 lots to be developed and sold.

 

Serrano, El Dorado Hills, California.    In 1998, we acquired a two-thirds interest (later decreased to fifty percent) in a 3,500-acre, 4,000-lot master planned community in El Dorado Hills, California, which is located 30 miles east of Sacramento, California. A significant amount of infrastructure was in place and approximately 800 lots were sold or developed prior to the acquisition of our interest in the project. The project includes a variety of attached and detached homes; an 18-hole executive golf course; a private 18-hole Championship Golf Course and Country Club; elementary, intermediate, and high schools; and a retail commercial area. The partnership closed on the sale of 940 lots during 2002 leaving 1,190 lots to be developed and sold.

 

Victoria By the Bay, Hercules, California.    In 1997, Catellus participated in a joint venture that acquired the Pacific Refinery at Hercules, California. We entered into an agreement to provide entitlement services to the joint venture; in return for an option to buy the property after defined environmental remediation work was completed. The development has received approval for up to 880 residential units, a school, commercial space,

 

19


and public parks. In 2001, we received a “no further action” letter from the Regional Water Quality Control Board (“RWQCB”), clearing the last significant hurdle prior to the sale of the remaining lots of this project. During 2002, the partnership closed on the sale of 456 lots leaving 22 residential lots and one commercial space to be sold.

 

The Parkway, Folsom, California.    In June 2001, we acquired a 50% interest in the Parkway Venture, a 600-acre, master-planned community in Folsom, California, which is located 20 miles east of Sacramento, California. The development has received approvals for 1,600 units that will include a variety of single and multi-unit homes, a neighborhood retail commercial area, and wetlands. The partnership sold 822 lots during 2002 leaving approximately 538 multi-unit home lots to be developed and sold.

 

Alameda, California.    In 1998, we were selected by the City of Alameda, California, as the master developer for the former 145-acre U.S. Navy Fleet Industrial Supply Center, Alameda Annex, and the adjacent 70-acre portion (“East Housing”) of the former Alameda Naval Air Station. In June of 2000, we were granted entitlements to develop up to approximately 500 single-family homes and up to 1.3 million square feet of office and research and development space on the site.

 

The residential development acreage will be purchased in phases commencing in the second quarter of 2003. A minimum of 75 single-family lots must be purchased annually. Under the agreement, the City of Alameda must deliver the land with environmental remediation and demolition of existing structures completed, and must build all backbone infrastructure. Under a separate agreement with the city of Alameda, we are performing these required duties for a fee.

 

Demolition of the East Housing structures commenced in February 2002. Construction of the first phase of backbone infrastructure improvements is planned to begin in April 2003. We anticipate the start of construction of the homes and associated site improvements in the third quarter of 2003.

 

20


 

Urban Group

 

The Urban Group focuses exclusively on three large, urban mixed-use projects that include development potential for residential, office, biotech, retail, and hotel product types.

 

As of December 31, 2002, we had 773,000 square feet of development under construction at Mission Bay in San Francisco, California, including a 695,000-square-foot mixed-use project, through an agreement with an unconsolidated joint venture, containing 595 residential units that comprise 568,000 square feet, and 127,000 square feet of retail/office space. In addition, we have under construction at Mission Bay a 78,000-square-foot mixed-use building containing 34 condominium units that comprise 45,000 square feet, and 33,000 square feet of office/retail space.

 

The description of the business of the Urban Group below is as of December 31, 2002. See Recent Developments above for a discussion of the effect of the proposed REIT conversion on the business of the Urban Group.

 

Sales

 

During 2002, we sold a 1.6-acre, 275-unit condominium site in San Diego, California, for $14.5 million.

 

The following table summarizes our sales of property in the periods presented:

 

    

Year Ended December 31,


    

2002


    

2001


    

2000


    

(In thousands)

Sales

  

$

14,500

 

  

$

49,793

 

  

$

—  

Cost of sales

  

 

(11,154

)

  

 

(37,337

)

  

 

—  

    


  


  

Gain

  

$

3,346

 

  

$

12,456

 

  

$

—  

    


  


  

 

Urban Land Inventory

 

Our existing entitled Urban Group land inventory can support an estimated 12.2 million square feet of new development, more than 3,500 residential units, and a 500-room hotel. The chart below summarizes the estimated development potential of our current Urban Group development land inventory as of December 31, 2002:

 

    

Office


  

Retail


  

Residential


  

Hotel


  

Book

Value


    

(Net Rentable Sq. Ft.)

  

(Units)

  

(Rooms)

  

(000’s)

Mission Bay (San Francisco, California)

  

4,537,000

  

548,000

  

3,263

  

500

  

$

213,979

Union Station (Los Angeles, California)

  

5,175,000

  

675,000

  

—  

  

—  

  

 

55,344

Santa Fe Depot (San Diego, California)

  

1,021,000

  

270,000

  

285

  

—  

  

 

10,172

    
  
  
  
  

Total

  

10,733,000

  

1,493,000

  

3,548

  

500

  

$

279,495

    
  
  
  
  

 

Following is a summary of our Urban Group projects:

 

Mission Bay, San Francisco, California.    This project encompasses approximately 300 acres adjacent to downtown San Francisco. Catellus is the primary owner of developable land in the project; other owners include the City and County of San Francisco (“the City”), the Port of San Francisco, and the Regents of the University of California for the benefit of the University of California, San Francisco (“UCSF”).

 

In the years leading up to 1999, we obtained entitlement and redevelopment plans for Mission Bay, and in 1999, we closed land transfers among the City, the Port of San Francisco, the California State Lands Commission, UCSF, and Catellus which resulted in the ownership described above. We also received regulatory approvals from the U.S. Army Corps of Engineers and the California Regional Water Quality Control Board in 2000. Additional permits and approvals are required for the development of individual projects at Mission Bay, including, for office projects, allocation (“Proposition M Allocation”) of square footage from a limited allowance of office space that the City permits to be developed at any given time.

 

21


 

The following table summarizes total development entitlements at Mission Bay. We retain ownership of a large portion of these entitlements, but portions of the entitlements belong to the City, a Catellus joint venture, or other third parties.

 

Total Mission Bay Entitlements

As of December 31, 2002

 

    

Completed Construction


  

100% Catellus Owned


  

JV/Owned by Others


  

Total


    

Catellus


  

Others


        

Residential (units):

                        

Market Rate

  

—  

  

229

  

3,110

  

961

  

4,300

Affordable

  

—  

  

121

  

187

  

1,392

  

1,700

    
  
  
  
  

Total Residential

  

—  

  

350

  

3,297

  

2,353

  

6,000

    
  
  
  
  

Commercial (rentable square feet):

                        

R&D, Biotech, and Office

  

283,000

  

—  

  

4,537,000

  

180,000

  

5,000,000

Retail and Entertainment

  

—  

  

22,000

  

581,000

  

167,000

  

770,000

    
  
  
  
  

Total Commercial

  

283,000

  

22,000

  

5,118,000

  

347,000

  

5,770,000

    
  
  
  
  

Other:

                        

UCSF Campus (gross square feet) (1)

  

—  

  

434,000

  

—  

  

2,216,000

  

2,650,000

Hotel (rooms)

  

—  

  

—  

  

500

  

—  

  

500


Notes:

(1)   Total entitlements for UCSF Campus are stated in gross square feet.

 

Mission Bay North, the 65-acre portion of Mission Bay, north of Mission Creek, is being developed adjacent to Pacific Bell Park (home of the San Francisco Giants baseball team). The San Francisco Redevelopment Agency completed construction of a 100-unit affordable housing project in September 2002, and AvalonBay Communities, Inc. commenced phased occupancy of a 250-unit apartment project in November 2002. We are proceeding with construction of a mixed-use project directly across from Pacific Bell Park, which was started in December 2001 and includes approximately 33,000 square feet of office/retail space and 34 condominium units. The Signature/Riding Group started construction of a 100-unit condominium project in June 2002 on a 1.0-acre site, which we sold to Signature/Riding in April 2001. Third & King Investors, LLC (a joint venture between Catellus Development Corporation and Federal Street Operating, LLC) is proceeding with the construction of a mixed-use project, that broke ground in September 2001 and includes 595 apartments, 127,000 square feet of office/retail space, and approximately 945 parking stalls.

 

Mission Bay South, the 238-acre portion of Mission Bay, south of Mission Creek, will be developed around UCSF’s new 2.7 million-gross-square-foot biotech/research expansion campus. In accordance with agreements among Catellus, the Regents of the University of California, and the City, UCSF is locating its expansion campus on a portion of Mission Bay South. We donated approximately 18 acres and agreed to donate approximately 11 additional acres in the future for the campus, and the City has contributed or has agreed to contribute an additional 13.3 acres. Contractors selected by UCSF will build the UCSF campus. UCSF completed its first building, a 434,000-gross-square-foot research facility, in October 2002 and took occupancy of the building in January 2003. UCSF is proceeding on the construction of its second and third buildings, 172,000-gross-square-foot and 153,000-gross-square-foot biomedical research facilities, which broke ground in August 2001 and July 2002, respectively. Pile-driving activities for UCSF’s fourth building, a 167,000-gross-square-foot community center, began in September 2002. In October 2002, we completed construction of a 283,000-square-foot office building, which is fully leased to the Gap, Inc. In addition, construction of a 180,000-square-footresearch facility by the Gladstone Institutes on a 1.37-acre site, which Catellus sold to Gladstone in March 2001, started in February 2003.

 

22


 

Approximately $63 million in Community Facility District bonds were issued in 2002 to finance the initial phases of public infrastructure at Mission Bay, and approximately $71 million of Community Facility District bonds were issued in 2001. Upon completion of the infrastructure improvements, the improvements will be transferred to the City. (See Note 15 of the accompanying notes to Consolidated Financial Statements in this Form 10-K.)

 

The following table summarizes commercial and residential development activities at Mission Bay. Because these activities require participation of a number of private parties and public agencies, scheduled development activities are subject to change:

 

Mission Bay Project

Schedule of Activity

As of December 31, 2002

 

    

Commercial Development (in rentable square feet)


  

Residential Development (in units)


Project


  

Completed


  

Under Construction


  

In Planning


  

Total


  

Completed


    

Under Construction


  

In Planning


 

Total


Catellus 100% Owned

                                        

Office

  

283,000

  

—  

  

—  

  

283,000

  

—  

    

—  

  

—  

 

—  

Condominiums/Retail

  

—  

  

33,000

  

—  

  

33,000

  

—  

    

34

  

—  

 

34

    
  
  
  
  
    
  
 

Total Catellus 100% Owned

  

283,000

  

33,000

  

—  

  

316,000

  

—  

    

34

  

—  

 

34

    
  
  
  
  
    
  
 

Catellus Joint Venture

                                        

Apartments/Retail

  

—  

  

127,000

  

—  

  

127,000

  

—  

    

568

  

—  

 

568

Affordable Housing

  

—  

  

—  

  

—  

  

—  

  

—  

    

27

  

—  

 

27

    
  
  
  
  
    
  
 

Total Catellus Joint Venture

  

—  

  

127,000

  

—  

  

127,000

  

—  

    

595

  

—  

 

595

    
  
  
  
  
    
  
 

Development by Others

                                        

UCSF:

                                        

Biotech

  

434,000

  

325,000

  

—  

  

759,000

  

—  

    

—  

  

—  

 

—  

Campus Center

  

—  

  

167,000

  

—  

  

167,000

  

—  

    

—  

  

—  

 

—  

    
  
  
  
  
    
  
 

Total UCSF (1):

  

434,000

  

492,000

  

—  

  

926,000

  

—  

    

—  

  

—  

 

—  

Apartments/Retail

  

12,000

  

—  

  

10,000

  

22,000

  

229

    

—  

  

293

 

522

Condominiums

  

—  

  

—  

  

—  

  

—  

  

—  

    

100

  

—  

 

100

Affordable Housing/Retail

  

10,000

  

—  

  

—  

  

10,000

  

121

    

—  

  

160

 

281

Biotech

  

—  

  

—  

  

180,000

  

180,000

  

—  

    

—  

  

—  

 

—  

    
  
  
  
  
    
  
 

Total Development by Others:

  

456,000

  

492,000

  

190,000

  

1,138,000

  

350

    

100

  

453

 

903

    
  
  
  
  
    
  
 

Total Project

  

739,000

  

652,000

  

190,000

  

1,581,000

  

350

    

729

  

453

 

1,532

    
  
  
  
  
    
  
 

Notes:

(1)   UCSF development activity square footage amounts reflect gross square feet.

 

Summary of our Urban Group projects—continued

 

Union Station, Los Angeles, California. We own approximately 43 acres surrounding and including the historic Los Angeles Union Station. Located in downtown Los Angeles, Union Station is a transportation hub with commuter rail lines (Metrolink) serving the surrounding five-county region, Amtrak rail service, and Los Angeles’ subway and surface light rail systems operated by the Metropolitan Transportation Authority. In 1999, we completed a development plan intended to maximize the potential of the site given current and projected market conditions.

 

 

23


Santa Fe Depot, San Diego, California. This project encompasses approximately 15 acres near the waterfront in downtown San Diego, California, including the Santa Fe Depot train station. Amtrak, a commuter rail line (Coaster), and San Diego’s expanding trolley system serve the site daily. In accordance with a Development Agreement executed with the City of San Diego, the site is currently entitled for a mixture of office, hotel, retail, and housing development. During 1999 we revised the plan to respond better to recovering markets in San Diego. In addition to two development sites (each 1.4 acres in size) that were sold in 2001, a 1.6-acre, 275-unit condominium site was sold in November 2002 for $14.5 million.

 

Other Items

 

Environmental Matters

 

For information about environmental matters, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K.

 

Competition

 

The real estate industry is generally fragmented and characterized by significant competition. Numerous developers, owners of industrial, office, and retail properties, and managers compete with us in seeking properties for acquisition, development, and management opportunities, tenants, and purchasers for homes, and for non-strategic assets. There are competitors in each area in which we operate that have greater capital resources than we. There can be no assurance that the existence of such competition will not have a material adverse effect on our business, operations, and cash flow.

 

Employees, Contractors, and Consultants

 

At December 31, 2002, we had 296 employees in our consolidated company. We engage third parties to manage multi-tenant properties and properties in locations that are not in close proximity to our regional or field offices. The Company’s employees are not represented by a collective bargaining agreement, and management considers its relations with employees to be good. In addition, we engage outside consultants such as architects and design firms in connection with our pre-development activities. We also employ third-party contractors on development projects for infrastructure and building construction, and retain consultants to assist us in a variety of areas at the project and corporate levels.

 

Working with organized labor is a critical component of many of our projects. With the high volume of construction activity in many of our markets, labor shortages and costs could significantly influence the success of projects. In addition, organized labor often plays a key role in community organizations and discretionary land use decisions concerning entitlements.

 

Segments

 

For information about the Company’s reportable segments, see Note 13 to the Notes to Consolidated Financial Statements attached to this Form 10-K.

 

24


 

Item 2.    Properties

 

Our real estate projects are generally described in Item 1 above, which descriptions are incorporated in this Item by reference. Our principal executive office is located in San Francisco, California, and we have regional or field offices in eleven other locations in the United States. We believe that our property and equipment are generally well maintained, in good condition, and adequate for our present needs.

 

Item 3.    Legal Proceedings

 

On March 12, 2002, the Department of Toxics and Substance Control of the State of California (“DTSC”) notified the Company of an investigation of the Company, its general contractors, and sub-contractors working for such general contractors, concerning the Mission Bay project. The investigation, which is ongoing, focuses on whether individuals and companies hauling soil within and from Mission Bay satisfied certain hazardous waste license/certification hauling requirements. The DTSC issued notices of violation, without fines or penalties, to the Company and one subcontractor on May 23, 2002, citing the subcontractor’s failure to qualify as a registered hazardous waste hauler. The Company, including its subsidiaries, is cooperating fully with the investigation, which is still continuing. The Company does not anticipate that this investigation or any proceeding that may result from this investigation will have a material adverse impact on the Mission Bay project.

 

The Company owns approximately 47 acres located in the Westchester-Playa Del Rey area of Los Angeles, California, adjacent to the Pacific Ocean and Ballona Wetlands (“West Bluffs”), which are entitled for the development of 114 single-family homes but subject to two legal actions. On October 6, 2000, a lawsuit (the “Coastal Act Lawsuit”) was filed by the Sierra Club et al. against the California Coastal Commission and the Company as a real party in interest in San Francisco Superior Court challenging approvals issued by the California Coastal Commission for the development of the project. This suit was subsequently consolidated with an additional suit filed on February 9, 2001. On December 13, 2000, the trial court denied petitioner’s request for a preliminary injunction. On January 11, 2001, petitioners appealed the trial court’s ruling, which resulted in the Court of Appeal enjoining any construction activity in the portion of the project within the coastal zone. This stay was dissolved on October 10, 2001, when the case was remanded to the trial court. On June 7, 2002, the trial court ruled in favor of the Company on the merits denying the petitioner’s request for writ of mandate and for injunction. The petitioners subsequently filed a motion to stay construction in the coastal zone pending petitioner’s filing of an appeal of the trial court’s decision, which was granted on August 13, 2002. The petitioners filed an appeal and have obtained a stay from the Court of Appeal pending resolution of the appeal. The appeal is fully briefed and a hearing is scheduled for March 26, 2003.

 

On October 26, 2000, the Coalition for Concerned Communities, Inc. et. al. (“Appellants”) filed a lawsuit (“CEQA Lawsuit”) against the Company and The City of Los Angeles in the Los Angeles Superior Court alleging land use and California Environmental Quality Act violations. On January 18, 2001, the Los Angeles Superior Court denied Appellant’s petition. On March 23, 2001, Appellants filed a notice of appeal in the Second District Court of Appeal. On July 15, 2002, the petitioners filed a motion in the Second District Court of Appeal to stop the development of the West Bluffs project until the final decision, which was denied by the Court on July 30, 2002. The Second District Court of Appeal held the hearing on the merits on September 17, 2002. The Second District Court of Appeal recently decided to postpone rendering its decision until the Court of Appeal in San Francisco rendered its decision regarding challenges to the approvals for development issued by the California Coastal Commission. A decision may be rendered by the Second District Court of Appeal in late 2003 or early 2004.

 

The litigation process will delay the previously planned start of infrastructure construction, and the Company is unable to predict the length of such delay at this time. The Company does not believe that the litigation process will permanently prevent the Company from completing the West Bluffs project; however, there can be no assurance in that regard or that further delays will not result.

 

See Note 15, Commitments and Contingencies of the accompanying Consolidated Financial Statements.

 

Item 4.    Submission of Matters to a Vote of Security Holders

 

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2002.

 

25


 

Part II

 

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

 

The Company’s common stock commenced trading on December 5, 1990, and is listed on the New York Stock Exchange, the Pacific Exchange, and the Chicago Stock Exchange under the symbol “CDX”. The following table sets forth for the periods indicated the high and low sale prices of the Company’s common stock as reported by Bloomberg Financial Markets:

 

    

Common Stock

Price


    

High


  

Low


Year ended December 31, 2001

             

First Quarter

  

$

18.17

  

$

15.63

Second Quarter

  

$

18.35

  

$

16.00

Third Quarter

  

$

18.80

  

$

16.11

Fourth Quarter

  

$

18.50

  

$

16.73

Year ended December 31, 2002

             

First Quarter

  

$

19.67

  

$

18.02

Second Quarter

  

$

21.10

  

$

19.67

Third Quarter

  

$

20.79

  

$

17.12

Fourth Quarter

  

$

19.85

  

$

16.85

 

The Company has never declared or paid any cash dividends on its common stock. If the REIT conversion is approved at the annual meeting of shareholders, we expect to commence the payment of dividends beginning the third quarter of 2003. See Item. 1 Business-Recent Developments.

 

On March 10, 2003, there were approximately 21,242 holders of record of the Company’s common stock.

 

26


 

Item 6.    Selected Financial Data

 

The following income statement and selected balance sheet data with respect to each of the years in the five-year period ended December 31, 2002, have been derived from our annual Consolidated Financial Statements. The operating data have been derived from our underlying financial and management records and are unaudited. This information should be read in conjunction with the Consolidated Financial Statements and related Notes. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K for a discussion of results of operations for 2002, 2001, and 2000.

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(In thousands, except per share data)

 

Statement of Operations Data:

                                            

Rental properties

                                            

Rental revenue

  

$

266,951

 

  

$

232,106

 

  

$

203,691

 

  

$

169,286

 

  

$

146,011

 

Property operating costs

  

 

(71,559

)

  

 

(61,704

)

  

 

(54,468

)

  

 

(46,054

)

  

 

(41,071

)

Equity in earnings of operating joint ventures, net

  

 

8,277

 

  

 

8,833

 

  

 

9,809

 

  

 

10,668

 

  

 

9,368

 

    


  


  


  


  


    

 

203,669

 

  

 

179,235

 

  

 

159,032

 

  

 

133,900

 

  

 

114,308

 

    


  


  


  


  


Property sales and fee services

                                            

Sales revenue

  

 

139,604

 

  

 

245,804

 

  

 

451,096

 

  

 

347,005

 

  

 

206,441

 

Cost of sales

  

 

(89,661

)

  

 

(149,698

)

  

 

(337,755

)

  

 

(259,157

)

  

 

(154,903

)

    


  


  


  


  


Gain on property sales

  

 

49,943

 

  

 

96,106

 

  

 

113,341

 

  

 

87,848

 

  

 

51,538

 

Equity in earnings of development joint ventures, net

  

 

29,232

 

  

 

25,978

 

  

 

27,780

 

  

 

10,152

 

  

 

6,627

 

    


  


  


  


  


Total gain on property sales

  

 

79,175

 

  

 

122,084

 

  

 

141,121

 

  

 

98,000

 

  

 

58,165

 

Management and development fees

  

 

7,088

 

  

 

6,000

 

  

 

15,460

 

  

 

14,968

 

  

 

16,792

 

Selling, general and administrative expenses

  

 

(25,990

)

  

 

(26,570

)

  

 

(45,801

)

  

 

(31,727

)

  

 

(22,232

)

Other, net

  

 

16,087

 

  

 

6,211

 

  

 

(9,351

)

  

 

(5,495

)

  

 

(662

)

    


  


  


  


  


    

 

76,360

 

  

 

107,725

 

  

 

101,429

 

  

 

75,746

 

  

 

52,063

 

    


  


  


  


  


Interest expense

  

 

(60,188

)

  

 

(56,753

)

  

 

(49,975

)

  

 

(38,246

)

  

 

(36,109

)

Depreciation and amortization

  

 

(63,149

)

  

 

(51,891

)

  

 

(45,939

)

  

 

(38,639

)

  

 

(33,464

)

Corporate administrative costs

  

 

(17,705

)

  

 

(19,256

)

  

 

(15,675

)

  

 

(14,760

)

  

 

(15,303

)

Gain on non-strategic asset sales

  

 

7,264

 

  

 

3,909

 

  

 

46,279

 

  

 

6,803

 

  

 

18,929

 

Other, net

  

 

957

 

  

 

5,660

 

  

 

940

 

  

 

(4,253

)

  

 

(184

)

    


  


  


  


  


Income before minority interests, income taxes, discontinued operations, and extraordinary items.

  

 

147,208

 

  

 

168,629

 

  

 

196,091

 

  

 

120,551

 

  

 

100,240

 

Minority interests

  

 

(6,106

)

  

 

(6,142

)

  

 

(10,701

)

  

 

(3,247

)

  

 

(674

)

    


  


  


  


  


Income before income taxes, discontinued operations, and extraordinary items

  

 

141,102

 

  

 

162,487

 

  

 

185,390

 

  

 

117,304

 

  

 

99,566

 

    


  


  


  


  


Income tax expense

                                            

Current

  

 

(32,567

)

  

 

(16,367

)

  

 

(12,254

)

  

 

(17,097

)

  

 

(11,739

)

Deferred

  

 

(21,385

)

  

 

(49,499

)

  

 

(62,556

)

  

 

(30,351

)

  

 

(28,366

)

    


  


  


  


  


    

 

(53,952

)

  

 

(65,866

)

  

 

(74,810

)

  

 

(47,448

)

  

 

(40,105

)

    


  


  


  


  


Income from continuing operations

  

 

87,150

 

  

 

96,621

 

  

 

110,580

 

  

 

69,856

 

  

 

59,461

 

    


  


  


  


  


Discontinued operations, net of tax

                                            

Gain from disposal of discontinued operations

  

 

13,748

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

Loss (gain) from discontinued operations

  

 

(242

)

  

 

(100

)

  

 

427

 

  

 

364

 

  

 

442

 

    


  


  


  


  


Gain (loss) from discontinued operations

  

 

13,506

 

  

 

(100

)

  

 

427

 

  

 

364

 

  

 

442

 

    


  


  


  


  


Income before extraordinary items

  

 

100,656

 

  

 

96,521

 

  

 

111,007

 

  

 

70,220

 

  

 

59,903

 

Extraordinary items

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

26,652

 

  

 

(25,165

)

Net income

  

$

100,656

 

  

$

96,521

 

  

$

111,007

 

  

$

96,872

 

  

$

34,738

 

    


  


  


  


  


Net income per share—assuming dilution:

                                            

Income from continuing operations

  

$

0.97

 

  

$

0.94

 

  

$

1.02

 

  

$

0.64

 

  

$

0.55

 

Income from discontinued operations

  

 

0.16

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

    


  


  


  


  


Before extraordinary items

  

 

1.13

 

  

 

0.94

 

  

 

1.02

 

  

 

0.64

 

  

 

0.55

 

Extraordinary items

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

0.25

 

  

 

(0.23

)

    


  


  


  


  


Net income per share after extraordinary items—assuming dilution

  

$

1.13

 

  

$

0.94

 

  

$

1.02

 

  

$

0.89

 

  

$

0.32

 

    


  


  


  


  


Average number of common shares outstanding—assuming dilution

  

 

89,463

 

  

 

102,685

 

  

 

109,017

 

  

 

109,146

 

  

 

109,420

 

    


  


  


  


  


 

27


 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 
    

(In thousands, except percentages)

 

Balance Sheet Data:

                                            

Total properties, net

  

$

2,048,158

 

  

$

1,921,951

 

  

$

1,705,538

 

  

$

1,649,171

 

  

$

1,402,496

 

Total assets

  

$

2,695,449

 

  

$

2,415,515

 

  

$

2,274,416

 

  

$

1,853,106

 

  

$

1,623,719

 

Mortgage and other debt

  

$

1,500,955

 

  

$

1,310,457

 

  

$

1,134,563

 

  

$

875,564

 

  

$

873,207

 

Total stockholders’ equity

  

$

545,969

 

  

$

435,257

 

  

$

683,245

 

  

$

590,972

 

  

$

490,229

 

Cash Flow Data:

                                            

Net cash provided by operating activities

  

$

187,146

 

  

$

341,764

 

  

$

296,013

 

  

$

183,864

 

  

$

120,706

 

Net cash used in investing activities

  

$

(333,285

)

  

$

(267,553

)

  

$

(224,161

)

  

$

(238,388

)

  

$

(275,342

)

Net cash provided by (used in) financing activities

  

$

198,371

 

  

$

(188,074

)

  

$

229,296

 

  

$

36,959

 

  

$

190,317

 

Other Operating Data:

                                            

EBDDT (1)

  

$

178,599

 

  

$

183,141

 

  

$

159,270

 

  

$

128,628

 

  

$

103,394

 

Buildings owned (square feet)

  

 

36,976

 

  

 

30,900

 

  

 

28,756

 

  

 

24,743

 

  

 

19,657

 

Leased percentage

  

 

94.5

%

  

 

94.4

%

  

 

95.7

%

  

 

93.6

%

  

 

94.9

%

Debt to total market capitalization(2)

  

 

46.5

%

  

 

45.1

%

  

 

37.9

%

  

 

38.9

%

  

 

36.4

%

Capital investments(3)

  

$

391,411

 

  

$

448,676

 

  

$

450,040

 

  

$

540,024

 

  

$

459,783

 

Other Data:

                                            

Total market capitalization(4)

  

$

3,231,000

 

  

$

2,903,000

 

  

$

2,991,000

 

  

$

2,249,000

 

  

$

2,402,000

 


(1)   We have historically used a supplemental performance measure called Earnings Before Depreciation and Deferred Taxes (“EBDDT”), along with net income, to report our operating results. EBDDT is not a measure of operating results or cash flows from operating activities as defined by generally accepted accounting principles. Further, EBDDT is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to cash flows as a measure of liquidity. EBDDT provides relevant information about our operations and is useful, along with net income, for an understanding of our operating results.

EBDDT is calculated by making various adjustments to net income. Depreciation, amortization, and deferred income taxes are added back to net income as they represent non-cash charges. Since depreciation expense is added back to net income in arriving at EBDDT, the portion of gain on property sales attributable to depreciation recapture is excluded from EBDDT. In addition, gains on the sale of non-strategic assets and extraordinary items, including their current tax effect, represent unusual and/or non-recurring items and are excluded from the EBDDT calculation.

Commencing with the first quarter of 2002, we no longer use EBDDT as a supplemental earnings measure; however, for comparative purposes, we continue to provide EBDDT data in 2002.

(2)   Represents the ratio of total debt to equity market capitalization (based on the number of common shares outstanding at the end of the period indicated multiplied by the closing stock price for each respective period) plus total debt.
(3)   Represents expenditures for commercial and residential development for projects to be developed and sold or held for rental. See Managements Discussion and Analysis of Financial Condition and Results of Operations—Cash Flows From Investing Activities in this Form 10-K.
(4)   Represents the number of common shares outstanding multiplied by the closing stock price at the end of the period indicated plus mortgage and other debt.

 

28


 

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The Company:

 

Catellus Development Corporation is a publicly traded real estate operating company with a significant portfolio of rental properties and developable land. Catellus specializes in developing, managing, and investing in a broad range of product types including industrial, office, residential, retail, and major urban development projects. It owns a portfolio of rental properties totaling 37.0 million square feet and one of the largest supplies of developable land in the western United States capable of supporting more than 38 million square feet of new commercial development and an estimated 9,300 residential lots and units.

 

On March 3, 2003, we announced that our Board of Directors (“Board”) has authorized us to restructure our business operations in order to qualify as a real estate investment trust (“REIT”), effective January 1, 2004. The REIT conversion is subject to a shareholder approval process, which is expected to conclude in the third quarter of 2003, as well as final Board approval. This announcement has no material effect on the financial statements as of, or for the year ended December 31, 2002; however, it will likely have an impact on future operating results in the following areas, if approved by the shareholder vote:

 

  ·   A one-time distribution of pre-REIT earnings and profits, currently projected to be approximately $100 million in cash and $200 million in common stock, will be declared in the fourth quarter and be paid in the first quarter of 2004, this distribution is subject to approval by the Internal Revenue Service.

 

  ·   Commencing as of the third quarter of 2003, a quarterly dividend of approximately $0.30 per existing share of common stock will be paid.

 

  ·   Conversion and related restructure costs are currently estimated to be $15 million.

 

  ·   Certain deferred tax liabilities associated with assets in the REIT would be reversed through income and result in a one-time increase in income currently estimated in the $200 to $250 million range.

 

We will soon file a preliminary proxy statement/prospectus with Securities and Exchange Commission that will provide important information, including detailed risk factors, regarding the proposed transaction.

 

Following is a brief summary of the fourth quarter and year-end 2002 to date activity:

 

  ·   Construction completions during the quarter totaled 501,000 square feet in three buildings, at a cost of $115.8 million and a projected return on cost, when the buildings are fully leased, of 12.4 percent. The three buildings, all of which have been added to Catellus’ rental portfolio, are currently 68 percent leased.

 

  ·   Construction completions during the year totaled 6.4 million square feet in 21 buildings, at a cost of $345.5 million and a projected return on cost, when the buildings are fully leased, of 11.3 percent. The 21 buildings, all of which have been added to Catellus’ rental portfolio, are currently 86 percent leased.

 

  ·   At December 31, 2002, the rental portfolio totaled 37.0 million square feet, which represents a net increase of 6.1 million square feet from December 31, 2001. The net increase to the portfolio during 2002 reflects 6.4 million square feet of development that was completed, 488,000 square feet that was acquired, and 771,000 square feet that was sold.

 

  ·   At December 31, 2002, the rental portfolio occupancy was 94.5 percent, as compared to 94.4 percent at the end of the third quarter 2002, and 94.4 percent at December 31, 2001.

 

  ·   For the fourth quarter of 2002, net operating income from the rental portfolio, including equity in earnings of operating joint ventures, increased 14.2 percent to $53.9 million, from $47.2 million for the same period in 2001. For the year 2002, net operating income from the rental portfolio, including equity in earnings of operating joint ventures, increased 13.7 percent to $203.7 million, from $179.2 million for the year 2001.

 

29


 

  ·   During the fourth quarter of 2002, Catellus completed lease transactions on 556,000 square feet of second-generation space. For the year 2002, Catellus completed lease transactions on 4.1 million square feet of second-generation space at an average rental rate increase of 6.6 percent on a GAAP basis.

 

  ·   Construction starts during the fourth quarter of 2002 totaled 1.4 million square feet in three buildings: a 578,000 square foot building in Fontana, California, that will be added to Catellus’ rental portfolio and is leased to Exel Logistics, a 600,000 square foot build-to-suit-for-sale, also in Fontana, for CB Richard Ellis Investors, and a 200,000 square foot build-to-suit-for-sale in Gresham, Oregon, for Staples, Inc.

 

  ·   At December 31, 2002, total construction in progress was 4.1 million square feet, of which 1.9 million square feet will be added to the rental portfolio; 1 million square feet will be owned in joint ventures; 845,000 square feet will be sold upon completion; and 330,000 square feet is being developed for a fee on land sold to others.

 

  ·   For the 1.9 million square feet that is currently under construction and will be added to Catellus’ rental portfolio upon completion, the projected total cost is $79.3 million. These buildings are 82 percent preleased and, when fully leased, are projected to yield a return on cost of approximately 10.4 percent.

 

  ·   Residential lot and home closings during the quarter, in direct sales and through joint ventures, totaled 952. This included 132 lots at Victoria by the Bay in Hercules, California; 175 lots at Serrano in El Dorado Hills, a suburb of Sacramento, California; 252 lots at The Parkway in Folsom, California, also a suburb of Sacramento; 328 lots at Talega and 65 homes at Talega Village in San Clemente, California.

 

  ·   At December 31, 2002, cash of $311.5 million, including $36.6 million of restricted cash.

 

  ·   Debt to total market capitalization ratio of 46.5 percent.

 

General

 

Our reportable segments are based on our method of internal reporting, which disaggregates our business by type and before the adjustments for discontinued operations. We have five reportable segments: Asset Management; Suburban, which includes two reportable segments, Commercial and Residential; Urban; and Corporate.

 

Business Segment Descriptions:

 

Asset Management:

 

The Asset Management segment consists of the rental activities of our assets, our share of income from operating joint ventures, and activity related to our desert portfolio. Growth in this segment is attributed primarily to the transfer of property developed by the Suburban-Commercial and Urban segments that we intend to hold and operate. Revenue consists of rental property operations and gains from the sale of rental properties (See Note 17 of the accompanying Consolidated Financial Statements for a discussion of discontinued operations).

 

    

Year Ended December 31,


    

Difference 2002/2001


    

Difference 2001/2000


 
    

2002


    

2001


    

2000


       

Rental building occupancy

  

(In thousands of square feet, except percentages)

Owned(1)

  

36,976

 

  

30,900

 

  

28,756

 

  

6,076

 

  

2,144

 

Occupied(1)

  

34,957

 

  

29,183

 

  

27,512

 

  

5,774

 

  

1,671

 

Occupancy percentage

  

94.5

%

  

94.4

%

  

95.7

%

  

0.1

%

  

(1.3

%)


(1)   New buildings are added to our rental portfolio at the earlier of twelve months after completion of the shell, or commencement of rent on 50% of the space. Space is considered “Occupied” upon commencement of rent.

 

30


 

The table below provides the rental portfolio rental revenue less property operating costs for the year ended December 31, 2002, and square feet by state at December 31, 2002:

 

Rental Revenue less Property Operating Costs by State

 

    

Industrial


    

Office


    

Retail


    

Total


 
    

Rental Revenue less Property Operating Expenses


    

% of Total


    

Rental Revenue less Property Operating Expenses


  

% of Total


    

Rental Revenue less Property Operating Expenses


  

% of Total


    

Rental Revenue less Property Operating Expenses


    

% of Total


 
    

(In thousands, except percentages)

 

Southern California

  

$

51,468

 

  

25.2

%

  

$

4,977

  

2.5

%

  

$

2,851

  

1.3

%

  

$

59,296

 

  

29.0

%

Northern California

  

 

27,635

 

  

13.5

%

  

 

11,301

  

5.5

%

  

 

6,198

  

3.0

%

  

 

45,134

 

  

22.0

%

Illinois

  

 

18,926

 

  

9.3

%

  

 

6,510

  

3.2

%

  

 

—  

  

—  

 

  

 

25,436

 

  

12.5

%

Texas

  

 

9,123

 

  

4.5

%

  

 

5,816

  

2.8

%

  

 

—  

  

—  

 

  

 

14,939

 

  

7.3

%

Colorado

  

 

7,505

 

  

3.7

%

  

 

2,626

  

1.3

%

  

 

996

  

0.5

%

  

 

11,127

 

  

5.5

%

Maryland

  

 

3,106

 

  

1.5

%

  

 

—  

  

—  

 

  

 

—  

  

—  

 

  

 

3,106

 

  

1.5

%

Oregon

  

 

2,369

 

  

1.1

%

  

 

420

  

0.2

%

  

 

318

  

0.2

%

  

 

3,107

 

  

1.5

%

Arizona

  

 

2,141

 

  

1.0

%

  

 

—  

  

—  

 

  

 

362

  

0.2

%

  

 

2,503

 

  

1.2

%

Ohio

  

 

2,393

 

  

1.2

%

  

 

—  

  

—  

 

  

 

—  

  

—  

 

  

 

2,393

 

  

1.2

%

Kentucky

  

 

972

 

  

0.5

%

  

 

—  

  

—  

 

  

 

—  

  

—  

 

  

 

972

 

  

0.5

%

Oklahoma

  

 

110

 

  

0.1

%

  

 

—  

  

—  

 

  

 

—  

  

—  

 

  

 

110

 

  

0.1

%

Kansas

  

 

(4

)

  

—  

 

  

 

—  

  

—  

 

  

 

—  

  

—  

 

  

 

(4

)

  

—  

 

    


  

  

  

  

  

  


  

Subtotal

  

$

125,744

 

  

61.6

%

  

$

31,650

  

15.5

%

  

$

10,725

  

5.2

%

  

$

168,119

 

  

82.3

%

    


  

  

  

  

  

               

Ground Leases

                                              

 

21,271

 

  

10.4

%

Other Properties

                                              

 

6,488

 

  

3.2

%

Equity in Earnings of Operating Joint Ventures

                                              

 

8,277

 

  

4.1

%

                                                


  

Total(1)

                                              

$

204,155

 

  

100

%

                                                


  


(1)   Includes discontinued operations

 

Square Feet by State

 

    

Industrial


    

Office


      

Retail


    

Total


 
    

Square Feet


  

% of Total


    

Square Feet


  

% of Total


      

Square Feet


  

% of Total


    

Square Feet


  

% of Total


 
    

(In thousands, except percentages)

 

Southern California

  

12,200

  

33.0

%

  

574

  

1.5

%

    

176

  

0.5

%

  

12,950

  

35.0

%

Northern California

  

5,773

  

15.6

%

  

808

  

2.2

%

    

481

  

1.3

%

  

7,062

  

19.1

%

Illinois

  

5,921

  

16.0

%

  

584

  

1.6

%

    

—  

  

—  

 

  

6,505

  

17.6

%

Texas

  

3,264

  

8.8

%

  

868

  

2.4

%

    

—  

  

—  

 

  

4,132

  

11.2

%

Colorado

  

2,033

  

5.6

%

  

273

  

0.7

%

    

100

  

0.2

%

  

2,406

  

6.5

%

Arizona

  

1,123

  

3.0

%

  

—  

  

—  

 

    

74

  

0.2

%

  

1,197

  

3.2

%

Ohio

  

966

  

2.6

%

  

—  

  

—  

 

    

—  

  

—  

 

  

966

  

2.6

%

Kentucky

  

549

  

1.5

%

  

—  

  

—  

 

    

—  

  

—  

 

  

549

  

1.5

%

Oregon

  

449

  

1.2

%

  

57

  

0.2

%

    

37

  

0.1

%

  

543

  

1.5

%

Maryland

  

471

  

1.3

%

  

—  

  

—  

 

    

—  

  

—  

 

  

471

  

1.3

%

Oklahoma

  

125

  

0.3

%

  

—  

  

—  

 

    

—  

  

—  

 

  

125

  

0.3

%

Kansas

  

70

  

0.2

%

  

—  

  

—  

 

    

—  

  

—  

 

  

70

  

0.2

%

    
  

  
  

    
  

  
  

Total

  

32,944

  

89.0

%

  

3,164

  

8.6

%

    

868

  

2.3

%

  

36,976

  

100

%

    
  

  
  

    
  

  
  

 

31


 

Suburban Commercial:

 

The Suburban Commercial segment acquires and develops suburban commercial business parks for our own account and the account of others. Net income consists primarily of sales gains from development properties sold and construction management, developer, and loan guarantee fees.

 

The table below provides the development potential, by square feet, of our Suburban Commercial land portfolio:

 

           

December 31, 2002


 

Project Name


  

City


    

Square feet

 
           

(In thousands)

 

Southern California

             

Kaiser Commerce Center

  

Fontana

    

3,214

 

Crossroads Business Park

  

Ontario

    

2,016

 

Rancho Pacific Distribution Centre

  

Rancho Cucamonga

    

318

 

Pacific Center

  

Anaheim

    

44

 

           

Subtotal Southern Calif.

         

5,592

 

           

Northern California

             

Pacific Commons

  

Fremont

    

3,634

 

Duck Creek

  

Stockton

    

2,000

 

Alameda FISC (controlled)

  

Alameda

    

 1,300

(1)

Spreckels Business Park

  

Manteca

    

686

 

Regatta Business Park

  

Richmond

    

89

 

           

Subtotal Northern Calif.

         

7,709

 

           

Total California

         

13,301

 

           

Illinois

             

Minooka

  

Minooka

    

 2,298

(2)

Internationale Centre

  

Woodridge

    

976

 

Prairie Glen Corporate Campus

  

Glenview

    

 437

(3)

Joliet

  

Joliet

    

370

 

International Centre West

  

Romeoville

    

102

 

           

Subtotal Illinois

         

4,183

 

           

Texas

             

Hobby Business Park

  

Houston

    

1,969

 

Gateway Corporate Center

  

Coppell

    

1,120

 

Stellar Way Business Park

  

Grand Prairie

    

814

 

Gateway East Business Park

  

Garland

    

763

 

Plano

  

Plano

    

403

 

Ft. Worth

  

Ft. Worth

    

104

 

           

Subtotal Texas

         

5,173

 

           

Other

             

South Shore Corp. Park

  

Gresham/Portland, OR

    

1,111

 

Circle Point Corporate Center

  

Westminster, CO

    

685

 

Stapleton Business Park

  

Denver, CO

    

609

 

Cedar Grove Business Park

  

Louisville, KY

    

545

 

Santa Fe Industrial Center

  

Oklahoma, OK

    

300

 

           

Subtotal Other

         

3,250

 

           

Total Outside California

         

12,606

 

           

Total Suburban Commercial Inventory

         

25,907

 

           

 

(1)   See summary of Almeda, California project under Item 1. Business—Suburban Commercial Group.
(2)   Excluded from this balance is approximately 4.8 million square feet that is under option.
(3)   Included in this balance is 425,000 square feet that is under option.

 

32


 

Suburban Residential:

 

The Suburban Residential segment acquires and develops land primarily for single-family residential property, via direct investment or through joint ventures, and sells finished lots to homebuilders. This segment also owns an interest in a joint venture that develops senior housing.

 

The table below provides the development potential, by lots/homes, of our Suburban Residential land portfolio:

 

      

Ownership Interest


      

Lots/Units at December 31, 2002


Colorado

               

Vista Range, Commerce City

    

100

%

    

2,149

               

Northern California

               

Alameda—(controlled)

    

100

%

    

485

Hercules

    

100

%

    

22

Serrano, Sacramento

    

50

%

    

1,190

Parkway, Sacramento (multi-family)

    

50

%

    

538

               
               

2,235

               

Southern California

               

Talega Seniors, San Clemente

    

50

%

    

65

Talega, San Clemente

    

30

%

    

1,226

Westbluffs, Playa del Rey (1)

    

100

%

    

114

               
               

1,405

               

Total

             

5,789

               

(1)   We have entitlements for this project; however, the entitlements are being challenged under the California Environmental Quality Act and the California Coastal Act (see Legal Proceedings section).

 

Urban:

 

The Urban segment entitles and develops urban mixed-use sites in San Francisco, Los Angeles, and San Diego. The principal active project of the segment is Mission Bay in San Francisco.

 

The table below provides the development potential of our Urban land portfolio:

 

    

R&D, Biotech & Office


  

CBD Office


  

Retail/ Entertainment


  

Residential


  

Hotel


    

(Net rentable square feet)

  

(units)

  

(rooms)

Mission Bay (SF, CA)

  

4,537,000

  

—  

  

548,000

  

3,263

  

500

Union Station (LA, CA)

  

—  

  

5,175,000

  

675,000

  

—  

  

—  

Santa Fe Depot (SD, CA)

  

—  

  

1,021,000

  

270,000

  

285

  

—  

    
  
  
  
  

Total

  

4,537,000

  

6,196,000

  

1,493,000

  

3,548

  

500

    
  
  
  
  

 

Corporate:

 

Corporate consists primarily of administrative costs and interest contra-expense. Corporate interest (contra-expense) represents required capitalized interest, on qualifying assets in the Suburban and Urban segments, in excess of interest directly incurred by these segments. As these qualifying assets are sold, the corresponding capitalized interest is reflected as cost of sales in the Corporate segment or, for those assets transferred to Asset Management, as the assets are placed in service the corresponding interest capitalized is added to the cost basis of the asset and depreciated over the life of the building.

 

33


 

Critical Accounting Policies

 

Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, impairment of real estate assets, capitalization of costs, allowances for doubtful accounts, environmental and legal reserves, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of the consolidated financial statements.

 

Revenue recognition

 

Our revenue is primarily derived from two sources: rental revenue from our rental portfolio and property sales.

 

Rental revenue is recognized when due from tenants. Revenue from leases with rent concessions or fixed escalations is recognized on a straight-line basis over the initial term of the related lease. The financial terms of leases are contractually defined. Rental revenue is not accrued when a tenant vacates the premises and ceases to make rent payments or files for bankruptcy.

 

Revenue from sales of properties is recognized using the accrual method. If a sale does not qualify for the accrual method of recognition, other deferral methods are used as appropriate including the percentage-of-completion method. In certain cases, we retain the right to repurchase property from the buyer at a specified price. These sales are not recognized until our right to repurchase expires. In other instances, when we receive an inadequate cash down payment and take a promissory note for the balance of the sale price, sale is deferred until such time as sufficient cash is received to meet minimum down payment requirements. Also, in general, specific identification and relative sales value methods are used to determine the cost of sales. Management estimates of future costs to complete infrastructure are included in cost of sales. A change in circumstances that causes the estimate of future costs to increase or decrease significantly would affect the gain or loss recognized on future sales.

 

Impairment of real estate assets

 

We assess the impairment of a real estate asset when events or changes in circumstances indicate that the net book value may not be recoverable. Indicators we consider important which could trigger an impairment review include the following:

 

  ·   significant negative industry or economic trend;

 

  ·   a significant underperformance relative to historical or projected future operating results;

 

  ·   a significant change in the manner in which an asset is used; and

 

  ·   an accumulation of costs significantly in excess of the amount originally expected to construct an asset.

 

Real estate is stated at the lower of cost or estimated fair value using the methodology described as follows: (a) for operating properties and properties held for investment, a write-down to estimated fair value is recognized when a property’s estimated undiscounted future cash flow is less than its net book value; and (b) for properties

 

34


held for sale, a write-down to estimated fair value is recorded when we determine that the net book value exceeds the estimated selling price less cost to sell. These evaluations are made on a property-by-property basis. When we determine that the net book value of an asset may not be recoverable based upon the estimated undiscounted cash flow, we measure any impairment write-down based on a projected discounted cash flow method using an estimated market discount rate. When performing impairment review, we consider capitalized interest and other expenses as costs of development in costs projections; value from comparable property sales will also be considered. The evaluation of future cash flows, discount rates, and fair value of individual properties requires significant judgment and assumptions, including estimates of market value, lease terms, development absorption, development costs, lease up costs, and financings. Significant adverse changes in circumstances affecting these judgments and assumptions in future periods could cause a significant impairment adjustment to be recorded.

 

Capitalization of costs

 

We capitalize direct construction and development costs, including predevelopment costs, property taxes, insurance, and certain indirect project costs, including a portion of our general and administrative costs that are associated with the acquisition, development, or construction of a project. Interest is capitalized in accordance with FAS 34. Costs previously capitalized related to any abandoned development opportunities are written off, if we determine such costs will not provide any future benefits. Should development activity decrease, a portion of interest, property taxes, insurance, and certain general and administrative costs would no longer be eligible for capitalization and would be expensed as incurred.

 

Allowance for doubtful accounts

 

We make estimates with respect to the collectability of our receivables and provide for doubtful accounts based on several factors, including our estimate of collectability and the age of the outstanding balances. Our estimate of collectability is based on our contacts with the debtors, collection agencies, our knowledge of the debtors’ credit and financial condition, debtors’ payment terms, and current economic trends. If a debtor becomes insolvent or files for bankruptcy, we provide an allowance for the entire outstanding amount of the debtors’ receivable. Significant judgments and estimates must be made and used in connection with establishing allowances in any accounting period. Material differences may result in the amount and timing of our allowances for any period if adverse general economic conditions cause widespread financial difficulties among our tenants.

 

Environmental and legal reserves

 

We incur 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. We maintain a reserve for estimated costs of environmental remediation to be incurred in connection with operating properties and properties previously sold; these reserves, when established, are expensed. Costs relating to undeveloped land are capitalized as part of development costs, and costs incurred for properties to be sold are deferred and charged to cost of sales when the properties are sold; these costs are anticipated to be incurred over a period of twenty years. Our estimates are developed based on reviews that took place over many years based upon then-prevailing law and identified site conditions. Because of the breadth of our portfolio, and past sales, we are unable to review each property extensively 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 and ability of other parties to pay some or all of such costs. Should a previously undetected, substantial environmental hazard be found on our properties, significant liquidity could be consumed by the resulting clean up requirements, and a material expense may be recorded.

 

We are a party to a number of legal actions arising in the ordinary course of business. We cannot predict with certainty the final outcome of the proceedings. Where appropriate, we have established reserves for potential liabilities related to legal actions or threatened legal actions. Environmental and legal reserves are established based on estimates and probabilities of the occurrence of events and therefore are subject to revision from time to time. Should the circumstances affecting these estimates change significantly, a material expense would be recognized.

 

35


 

Income taxes

 

As part of the process of preparing our consolidated financial statements, significant management judgment is required to estimate our income taxes. Our estimates are based on interpretation of tax laws. We estimate our actual current tax due and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. The temporary differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Adjustments may be required by a change in assessment of our deferred tax assets and liabilities, changes due to audit adjustments by Federal and State tax authorities, and changes in tax laws. To the extent adjustments are required in any given period we would include the adjustments within the tax provision in the statement of operations and/or balance sheet. Any applicable interest charges would be recorded as an expense. These adjustments could materially impact our statement of operations and liquidity.

 

Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes appearing elsewhere in this Form 10-K. This discussion and analysis covers our five business segments: Asset Management; Suburban, which includes a Commercial and Residential division; Urban; and Corporate.

 

In addition to net income, we have historically analyzed and discussed our financial condition and results of operations, before the adjustments for discontinued operations, based on a supplemental performance measure, Earnings Before Depreciation and Deferred Taxes (“EBDDT”). Commencing with the first quarter of 2002, we no longer use EBDDT as a supplemental earnings measure; however, for comparative purposes, we continue to provide EBDDT data in 2002. For comparative purposes only, a reconciliation between net income and EBDDT is provided for the years ended December 31, 2002, 2001, and 2000.

 

 

36


Below is a summary of Net income by segment and EBDDT for the Year Ended December 31, 2002:

 

    

Asset Management


    

Suburban


                      
       

Commercial


    

Residential


    

Urban


    

Corporate


    

Total (2)


 
    

(In thousands)

 

Rental properties:

                                                     

Rental revenue

  

$

267,807

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

267,807

 

Property operating costs

  

 

(71,929

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(71,929

)

Equity in earnings of operating joint ventures, net

  

 

8,277

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

8,277

 

    


  


  


  


  


  


    

 

204,155

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

204,155

 

    


  


  


  


  


  


Property sales and fee services:

                                                     

Gain on property sales

  

 

28,928

 

  

 

10,277

 

  

 

30,245

 

  

 

3,346

 

  

 

(601

)

  

 

72,195

 

Equity in earnings of development joint ventures, net

  

 

—  

 

  

 

—  

 

  

 

33,063

 

  

 

—  

 

  

 

(3,831

)

  

 

29,232

 

Management and development fees

  

 

42

 

  

 

2,973

 

  

 

1,516

 

  

 

2,557

 

  

 

—  

 

  

 

7,088

 

Selling, general and administrative expenses

  

 

(1,185

)

  

 

(9,576

)

  

 

(8,316

)

  

 

(6,913

)

  

 

—  

 

  

 

(25,990

)

Other, net

  

 

10,691

 

  

 

(550

)

  

 

6,075

 

  

 

(129

)

  

 

—  

 

  

 

16,087

 

    


  


  


  


  


  


    

 

38,476

 

  

 

3,124

 

  

 

62,583

 

  

 

(1,139

)

  

 

(4,432

)

  

 

98,612

 

    


  


  


  


  


  


Interest expense

  

 

(78,831

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

18,055

 

  

 

(60,776

)

Depreciation and amortization

  

 

(59,170

)

  

 

(673

)

  

 

(182

)

  

 

(1,065

)

  

 

(2,349

)

  

 

(63,439

)

Corporate administrative costs

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(17,705

)

  

 

(17,705

)

Gain on non-strategic asset sales

  

 

7,264

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

7,264

 

Other, net

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

957

 

  

 

957

 

Minority interests

  

 

(6,106

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(6,106

)

Income taxes

  

 

(40,455

)

  

 

(937

)

  

 

(23,848

)

  

 

842

 

  

 

2,092

 

  

 

(62,306

)

    


  


  


  


  


  


Net income (loss)

  

$

65,333

 

  

$

1,514

 

  

$

38,553

 

  

$

(1,362

)

  

$

(3,382

)

  

 

100,656

 

    


  


  


  


  


        

Depreciation and amortization

                                               

 

63,439

 

Depreciation recapture

                                               

 

(8,121

)

Deferred income taxes

                                               

 

29,889

 

Gain on non-strategic asset sales

                                               

 

(7,264

)

                                                 


Earnings before depreciation and deferred taxes(1)

                                               

$

178,599

 

                                                 



(1)   EBDDT is calculated by making various adjustments to net income. Depreciation, amortization, and deferred income taxes are added back to net income as they represent non-cash charges. Since depreciation expense is added back to net income in arriving at EBDDT, the portion of gain on property sales attributable to depreciation recapture is excluded from EBDDT. In addition, gains on the sale of non-strategic assets and extraordinary items, including their current tax effect, represent unusual and/or non-recurring items and are excluded from the EBDDT calculation.
(2)   As discussed in the General section of this MD&A, these amounts do not consider the effect of discontinued operations. See Note 13 to Consolidated Financial Statements for reconciliation to Statement of Operations format.

 

37


 

Below is a summary of Net income by segment and EBDDT for the Year Ended December 31, 2001:

 

    

Asset Management


    

Suburban


                      
       

Commercial


    

Residential


    

Urban


    

Corporate


    

Total (2)


 
    

(In thousands)

 

Rental properties:

                                                     

Rental revenue

  

$

234,881

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

234,881

 

Property operating costs

  

 

(62,663

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(62,663

)

Equity in earnings of operating joint ventures, net

  

 

8,833

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

8,833

 

    


  


  


  


  


  


    

 

181,051

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

181,051

 

    


  


  


  


  


  


Property sales and fee services:

                                                     

Gain on property sales

  

 

41,074

 

  

 

24,790

 

  

 

18,305

 

  

 

12,456

 

  

 

(519

)

  

 

96,106

 

Equity in earnings of development joint ventures, net

  

 

—  

 

  

 

9

 

  

 

27,670

 

  

 

—  

 

  

 

(1,701

)

  

 

25,978

 

Management and development fees

  

 

145

 

  

 

3,679

 

  

 

1,394

 

  

 

782

 

  

 

—  

 

  

 

6,000

 

Selling, general and administrative expenses

  

 

(1,235

)

  

 

(9,607

)

  

 

(11,379

)

  

 

(4,349

)

  

 

—  

 

  

 

(26,570

)

Other, net

  

 

5,518

 

  

 

(179

)

  

 

(3,868

)

  

 

4,716

 

  

 

—  

 

  

 

6,187

 

    


  


  


  


  


  


    

 

45,502

 

  

 

18,692

 

  

 

32,122

 

  

 

13,605

 

  

 

(2,220

)

  

 

107,701

 

    


  


  


  


  


  


Interest expense

  

 

(75,110

)

  

 

(7

)

  

 

—  

 

  

 

(684

)

  

 

17,656

 

  

 

(58,145

)

Depreciation and amortization

  

 

(47,925

)

  

 

(514

)

  

 

(311

)

  

 

(1,853

)

  

 

(1,855

)

  

 

(52,458

)

Corporate administrative costs

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(19,256

)

  

 

(19,256

)

Gain on non-strategic asset sales

  

 

3,909

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

3,909

 

Other, net

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

5,660

 

  

 

5,660

 

Minority interests

  

 

(6,059

)

  

 

—  

 

  

 

(83

)

  

 

—  

 

  

 

—  

 

  

 

(6,142

)

Income taxes

  

 

(41,091

)

  

 

(7,366

)

  

 

(12,861

)

  

 

(4,487

)

  

 

6

 

  

 

(65,799

)

    


  


  


  


  


  


Net income (loss)

  

$

60,277

 

  

$

10,805

 

  

$

18,867

 

  

$

6,581

 

  

$

(9

)

  

 

96,521

 

    


  


  


  


  


        

Depreciation and amortization

                                               

 

52,458

 

Depreciation recapture

                                               

 

(11,428

)

Deferred income taxes

                                               

 

49,499

 

Gain on non-strategic asset sales

                                               

 

(3,909

)

                                                 


Earnings before depreciation and deferred taxes (1)

                                               

$

183,141

 

                                                 



(1)   EBDDT is calculated by making various adjustments to net income. Depreciation, amortization, and deferred income taxes are added back to net income as they represent non-cash charges. Since depreciation expense is added back to net income in arriving at EBDDT, the portion of gain on property sales attributable to depreciation recapture is excluded from EBDDT. In addition, gains on the sale of non-strategic assets and extraordinary items, including their current tax effect, represent unusual and/or non-recurring items and are excluded from the EBDDT calculation.
(2)   As discussed in the General section of this MD&A, these amounts do not consider the effect of discontinued operations. See Note 13 to Consolidated Financial Statements for reconciliation to Statement of Operations format.

 

38


 

Below is a summary of Net income by segment and EBDDT for the Year Ended December 31, 2000:

 

    

Asset Management


    

Suburban


                      
       

Commercial


    

Residential


    

Urban


    

Corporate


    

Total (2)


 
    

(In thousands)

 

Rental properties:

                                                     

Rental revenue

  

$

206,762

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

206,762

 

Property operating costs

  

 

(55,272

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(55,272

)

Equity in earnings of operating joint ventures, net

  

 

9,809

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

9,809

 

    


  


  


  


  


  


    

 

161,299

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

161,299

 

    


  


  


  


  


  


Property sales and fee services:

                                                     

Gain on property sales

  

 

42,913

 

  

 

16,536

 

  

 

53,892

 

  

 

—  

 

  

 

—  

 

  

 

113,341

 

Equity in earnings of development joint ventures, net

  

 

—  

 

  

 

13

 

  

 

27,767

 

  

 

—  

 

  

 

—  

 

  

 

27,780

 

Management and development fees

  

 

11,814

 

  

 

999

 

  

 

1,498

 

  

 

1,149

 

  

 

—  

 

  

 

15,460

 

Selling, general and administrative expenses

  

 

(8,903

)

  

 

(9,643

)

  

 

(25,007

)

  

 

(2,248

)

  

 

—  

 

  

 

(45,801

)

Other, net

  

 

2,353

 

  

 

524

 

  

 

(12,209

)

  

 

(19

)

  

 

—  

 

  

 

(9,351

)

    


  


  


  


  


  


    

 

48,177

 

  

 

8,429

 

  

 

45,941

 

  

 

(1,118

)

  

 

—  

 

  

 

101,429

 

    


  


  


  


  


  


Interest expense

  

 

(57,832

)

  

 

(4

)

  

 

(546

)

  

 

(1,153

)

  

 

8,571

 

  

 

(50,964

)

Depreciation and amortization

  

 

(42,090

)

  

 

(747

)

  

 

(108

)

  

 

(1,684

)

  

 

(1,876

)

  

 

(46,505

)

Corporate administrative costs

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(15,675

)

  

 

(15,675

)

Gain on non-strategic asset sales

  

 

46,279

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

46,279

 

Other, net

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

940

 

  

 

940

 

Minority interests

  

 

(6,347

)

  

 

—  

 

  

 

(4,354

)

  

 

—  

 

  

 

—  

 

  

 

(10,701

)

Income tax expense

  

 

(60,320

)

  

 

(3,098

)

  

 

(16,517

)

  

 

1,596

 

  

 

3,244

 

  

 

(75,095

)

    


  


  


  


  


  


Net income (loss)

  

$

89,166

 

  

$

4,580

 

  

$

24,416

 

  

$

(2,359

)

  

$

(4,796

)

  

 

111,007

 

    


  


  


  


  


        

Depreciation and amortization

                                               

 

46,505

 

Depreciation recapture

                                               

 

(14,519

)

Deferred income taxes

                                               

 

62,556

 

Gain on non-strategic asset sales

                                               

 

(46,279

)

                                                 


Earnings before depreciation and deferred taxes(1)

                                               

$

159,270

 

                                                 



(1)   EBDDT is calculated by making various adjustments to net income. Depreciation, amortization, and deferred income taxes are added back to net income as they represent non-cash charges. Since depreciation expense is added back to net income in arriving at EBDDT, the portion of gain on property sales attributable to depreciation recapture is excluded from EBDDT. In addition, gains on the sale of non-strategic assets and extraordinary items, including their current tax effect, represent unusual and/or non-recurring items and are excluded from the EBDDT calculation.
(2)   As discussed in the General section of this MD&A, these amounts do not consider the effect of discontinued operations. See Note 13 to Consolidated Financial Statements for reconciliation to Statement of Operations format.

 

39


 

Variance Year Ended December 31, 2002 vs Year Ended December 31, 2001:

 

    

Asset Management


    

Suburban


                      
       

Commercial


    

Residential


    

Urban


    

Corporate


    

Total


 
    

(In thousands)

 

Rental properties:

                                                     

Rental revenue

  

$

32,926

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

32,926

 

Property operating costs

  

 

(9,266

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(9,266

)

Equity in earnings of operating joint ventures, net

  

 

(556

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(556

)

    


  


  


  


  


  


    

 

23,104

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

23,104

 

    


  


  


  


  


  


Property sales and fee services:

                                                     

Gain on property sales

  

 

(12,146

)

  

 

(14,513

)

  

 

11,940

 

  

 

(9,110

)

  

 

(82

)

  

 

(23,911

)

Equity in earnings of development joint ventures, net

  

 

—  

 

  

 

(9

)

  

 

5,393

 

  

 

—  

 

  

 

(2,130

)

  

 

3,254

 

Management and development fees

  

 

(103

)

  

 

(706

)

  

 

122

 

  

 

1,775

 

  

 

—  

 

  

 

1,088

 

Selling, general and administrative expenses

  

 

50

 

  

 

31

 

  

 

3,063

 

  

 

(2,564

)

  

 

—  

 

  

 

580

 

Other, net

  

 

5,173

 

  

 

(371

)

  

 

9,943

 

  

 

(4,845

)

  

 

—  

 

  

 

9,900

 

    


  


  


  


  


  


    

 

(7,026

)

  

 

(15,568

)

  

 

30,461

 

  

 

(14,744

)

  

 

(2,212

)

  

 

(9,089

)

    


  


  


  


  


  


Interest expense

  

 

(3,721

)

  

 

7

 

  

 

—  

 

  

 

684

 

  

 

399

 

  

 

(2,631

)

Depreciation and amortization

  

 

(11,245

)

  

 

(159

)

  

 

129

 

  

 

788

 

  

 

(494

)

  

 

(10,981

)

Corporate administrative costs

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

1,551

 

  

 

1,551

 

Gain on non-strategic asset sales

  

 

3,355

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

3,355

 

Other, net

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(4,703

)

  

 

(4,703

)

Minority interests

  

 

(47

)

  

 

—  

 

  

 

83

 

  

 

—  

 

  

 

—  

 

  

 

36

 

Income taxes

  

 

636

 

  

 

6,429

 

  

 

(10,987

)

  

 

5,329

 

  

 

2,086

 

  

 

3,493

 

    


  


  


  


  


  


Net income (loss)

  

$

5,056

 

  

$

(9,291

)

  

$

19,686

 

  

$

(7,943

)

  

$

(3,373

)

  

 

4,135

 

    


  


  


  


  


        

Depreciation and amortization

                                               

 

10,981

 

Depreciation recapture

                                               

 

3,307

 

Deferred income taxes

                                               

 

(19,610

)

Gain on non-strategic asset sales

                                               

 

(3,355

)

                                                 


Earnings before depreciation and deferred taxes

                                               

$

(4,542

)

                                                 


 

40


 

Variance Year Ended December 31, 2001 vs Year Ended December 31, 2000:

 

    

Asset Management


    

Suburban


                      
       

Commercial


    

Residential


    

Urban


    

Corporate


    

Total


 
    

(In thousands)

 

Rental properties:

                                                     

Rental revenue

  

$

28,119

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

28,119

 

Property operating costs

  

 

(7,391

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(7,391

)

Equity in earnings of operating joint ventures, net

  

 

(976

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(976

)

    


  


  


  


  


  


    

 

19,752

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

19,752

 

    


  


  


  


  


  


Property sales and fee services:

                                                     

Gain on property sales

  

 

(1,839

)

  

 

8,254

 

  

 

(35,587

)

  

 

12,456

 

  

 

(519

)

  

 

(17,235

)

Equity in earnings of development joint ventures, net

  

 

—  

 

  

 

(4

)

  

 

(97

)

  

 

—  

 

  

 

(1,701

)

  

 

(1,802

)

Management and development fees

  

 

(11,669

)

  

 

2,680

 

  

 

(104

)

  

 

(367

)

  

 

—  

 

  

 

(9,460

)

Selling, general and administrative expenses

  

 

7,668

 

  

 

36

 

  

 

13,628

 

  

 

(2,101

)

  

 

—  

 

  

 

19,231

 

Other, net

  

 

3,165

 

  

 

(703

)

  

 

8,341

 

  

 

4,735

 

  

 

—  

 

  

 

15,538

 

    


  


  


  


  


  


    

 

(2,675

)

  

 

10,263

 

  

 

(13,819

)

  

 

14,723

 

  

 

(2,220

)

  

 

6,272

 

    


  


  


  


  


  


Interest expense

  

 

(17,278

)

  

 

(3

)

  

 

546

 

  

 

469

 

  

 

9,085

 

  

 

(7,181

)

Depreciation and amortization

  

 

(5,835

)

  

 

233

 

  

 

(203

)

  

 

(169

)

  

 

21

 

  

 

(5,953

)

Corporate administrative costs

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(3,581

)

  

 

(3,581

)

Gain on non-strategic asset sales

  

 

(42,370

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(42,370

)

Other, net

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

4,720

 

  

 

4,720

 

Minority interests

  

 

288

 

  

 

—  

 

  

 

4,271

 

  

 

—  

 

  

 

—  

 

  

 

4,559

 

Income tax expense

  

 

19,229

 

  

 

(4,268

)

  

 

3,656

 

  

 

(6,083

)

  

 

(3,238

)

  

 

9,296

 

    


  


  


  


  


  


Net income (loss)

  

$

(28,889

)

  

$

6,225

 

  

$

(5,549

)

  

$

8,940

 

  

$

4,787

 

  

 

(14,486

)

    


  


  


  


  


        

Depreciation and amortization

                                               

 

5,953

 

Depreciation recapture

                                               

 

3,091

 

Deferred income taxes

                                               

 

(13,057

)

Gain on non-strategic asset sales

                                               

 

42,370

 

                                                 


Earnings before depreciation and deferred taxes

                                               

$

23,871

 

                                                 


 

41


 

The following is a schedule of the largest ten tenants of our rental portfolio, based on GAAP rents:

 

Customer Name


  

State


  

Type of Product

Leased


    

% of Total Base Rent as

of December 31, 2002


 

The Gap

  

CA

  

Office

    

6.8

%

APL Logistics, Inc

  

CA, IL, KY, TX

  

Industrial

    

4.7

%

Ford Motor Company

  

CA, CO, TX

  

Industrial

    

2.2

%

Kellogg’s USA, Inc.

  

CA, IL, CO

  

Industrial

    

2.0

%

J.C. Penney Company

  

TX

  

Office

    

2.0

%

Exel Corporation

  

CA

  

Industrial

    

1.9

%

Home Depot USA, Inc.

  

CA

  

Industrial/Retail

    

1.6

%

Gillette Company

  

CA, IL

  

Industrial

    

1.4

%

MCI Telecommunications(1)

  

CA, WA, IL, MN, TX, OK, OR

  

Office/Ground Leases

    

1.4

%

Office Depot, Inc.

  

CA

  

Industrial/Retail

    

1.3

%


(1)   The Company has ten leases with MCI WORLDCOM Communications, Inc. or its affiliates (“MCI”). On July 21, 2002, a group of MCI Companies filed for Chapter 11 reorganization. Pursuant to an order of the United States Bankruptcy Court, the MCI Companies have until September 22, 2003, to assume or reject the leases, but they remain obligated under the Bankruptcy Code to continue to perform their obligations under each lease in a timely manner pending the assumption or rejection of that lease. MCI has stated its intention to file a Chapter 11 plan by April 15, 2003, and will reduce some of the leased space.

 

Rental Revenue less Property Operating Costs

 

Rental revenue less property operating costs has increased since 2000 primarily because of additions of buildings, new ground leases, and rental increases from renewals on Same Space (as defined below), partially offset by properties sold. We added a net 6.1 million square feet in 2002, 2.1 million square feet in 2001, and 4.0 million square feet in 2000 to our rental portfolio. Rental revenue less operating costs for 2002, 2001, and 2000, are summarized as follows:

 

    

Year Ended

December 31,


  

Difference 2002/2001


    

Year Ended

December 31,


  

Difference 2001/2000


 
    

2002


  

2001


     

2001


  

2000


  
    

(In thousands)

 

Rental revenue less operating costs:

                                             

Same space(1)

  

$

136,494

  

$

132,212

  

$

4,282

 

  

$

110,760

  

$

110,007

  

$

753

 

Properties added to portfolio

  

 

31,768

  

 

13,458

  

 

18,310

 

  

 

34,084

  

 

14,144

  

 

19,940

 

Properties sold from portfolio

  

 

591

  

 

3,852

  

 

(3,261

)

  

 

1,784

  

 

6,599

  

 

(4,815

)

Ground leases

  

 

27,025

  

 

22,696

  

 

4,329

 

  

 

25,590

  

 

20,740

  

 

4,850

 

    

  

  


  

  

  


Total(2)(3)

  

$

195,878

  

$

172,218

  

$

23,660

 

  

$

172,218

  

$

151,490

  

$

20,728

 

    

  

  


  

  

  



(1)   Same Space properties were owned and operated for the entire current year and the entire immediate preceding year.
(2)   As discussed in the General section of this MD&A, these amounts do not consider the effect of discontinued operations. See Note 13 to Consolidated Financial Statements for reconciliation to Statement of Operations format.
(3)   Generally accepted accounting principles require rental revenue to be recognized in a straight-line basis over the initial term of the related lease. Revenue recognized may differ from cash collected from the related lease.

 

We do not expect substantial changes in rental income from our Same Space rental portfolio; rather, we expect growth in overall portfolio rental income will result primarily from new properties we will add to our rental portfolio over time.

 

The increase in rental revenue less operating costs of $23.7 million in 2002 is primarily attributable to $22.6 million from the additions of buildings and new ground leases and $4.3 million from Same Space, due to higher average rental rates from renewals, partially offset by a $3.3 million decrease from properties sold.

 

42


 

The increase in rental revenue less operating costs of $20.7 million in 2001 is primarily attributable to $24.8 million from the additions of buildings and new ground leases and $0.8 million from Same Space, due to higher average rental rates from renewals, partially offset by a $4.8 million decrease from properties sold.

 

Equity in Earnings of Operating Joint Ventures

 

Equity in earnings of operating joint ventures, net, decreased by $0.6 million and $1 million in 2002, and 2001, respectively. The decrease in 2002 was primarily because of lower occupancies in hotels owned by two joint ventures. The decrease in 2001 was primarily because of higher interest expense due to a refinancing at a joint venture in 2000 and lower occupancies in hotels owned by two joint ventures in 2001 (see Variability in Results section).

 

43


 

Gain on Property Sales:

 

Year Ended December 31, 2002

 

    

Asset Management


    

Suburban


                      
       

Commercial


    

Residential


    

Urban


    

Corporate


    

Total(1)


 
    

(In thousands)

 

Building Sales

                                                     

Sales Proceeds

  

$

34,211

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

—  

 

  

$

34,211

 

Cost of Sales

  

 

(12,534

)

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

(12,534

)

    


  


  


  


  


  


Gain

  

 

21,677

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

21,677

 

    


  


  


  


  


  


Land/Lot Sales

                                                     

Sales Proceeds

  

 

—  

 

  

 

52,563

 

  

 

57,054

 

  

 

14,500

 

  

 

—  

 

  

 

124,117

 

Cost of Sales

  

 

—  

 

  

 

(42,932

)

  

 

(28,113

)

  

 

(11,154

)

  

 

—  

 

  

 

(82,199

)

    


  


  


  


  


  


Gain

  

 

—  

 

  

 

9,631

 

  

 

28,941

 

  

 

3,346

 

  

 

—  

 

  

 

41,918

 

    


  


  


  


  


  


Ground Lease and Other Sales

                                                     

Sales Proceeds

  

 

8,973

 

  

 

403

 

  

 

2,053

 

  

 

—  

 

  

 

—  

 

  

 

11,429

 

Cost of Sales

  

 

(1,722

)

  

 

243

 

  

 

(749

)

  

 

—  

 

  

 

(601

)

  

 

(2,829

)

    


  


  


  


  


  


Gain (loss)

  

 

7,251

 

  

 

646

 

  

 

1,304

 

  

 

—  

 

  

 

(601

)

  

 

8,600

 

    


  


  


  


  


  


Total sales proceeds

  

 

43,184

 

  

 

52,966

 

  

 

59,107

 

  

 

14,500

 

  

 

—  

 

  

 

169,757

 

Total cost of sales

  

 

(14,256

)

  

 

(42,689

)

  

 

(28,862

)

  

 

(11,154

)

  

 

(601

)

  

 

(97,562

)

    


  


  


  


  


  


Total gain (loss) on property sales

  

$

28,928

 

  

$

10,277

 

  

$

30,245

 

  

$

3,346

 

  

$

(601

)

  

$

72,195

 

    


  


  


  


  


  


 

Year Ended December 31, 2001

 

    

Asset Management


    

Suburban


                      
       

Commercial


    

Residential


    

Urban


    

Corporate


    

Total(1)


 
    

(In thousands)

 

Building/Home Sales

                                                     

Sales Proceeds

  

$

37,898

 

  

$

40,697

 

  

$

9,621

 

  

$

—  

 

  

$

—  

 

  

$

88,216

 

Cost of Sales

  

 

(13,388

)

  

 

(29,846

)

  

 

(8,078

)

  

 

—  

 

  

 

—  

 

  

 

(51,312

)

    


  


  


  


  


  


Gain

  

 

24,510

 

  

 

10,851

 

  

 

1,543

 

  

 

—  

 

  

 

—  

 

  

 

36,904

 

    


  


  


  


  


  


Land/Lot Sales

                                                     

Sales Proceeds

  

 

—  

 

  

 

34,989

 

  

 

38,886

 

  

 

49,793

 

  

 

—  

 

  

 

123,668

 

Cost of Sales

  

 

—  

 

  

 

(21,050

)

  

 

(22,297

)

  

 

(37,337

)

  

 

—  

 

  

 

(80,684

)

    


  


  


  


  


  


Gain

  

 

—  

 

  

 

13,939

 

  

 

16,589

 

  

 

12,456

 

  

 

—  

 

  

 

42,984

 

    


  


  


  


  


  


Ground Lease and Other sales

                                                     

Sales Proceeds

  

 

33,920

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

33,920

 

Cost of Sales

  

 

(17,356

)

  

 

—  

 

  

 

173

 

  

 

—  

 

  

 

(519

)

  

 

(17,702

)

    


  


  


  


  


  


Gain (loss)

  

 

16,564

 

  

 

—  

 

  

 

173

 

  

 

—  

 

  

 

(519

)

  

 

16,218

 

    


  


  


  


  


  


Total sales proceeds

  

 

71,818

 

  

 

75,686

 

  

 

48,507

 

  

 

49,793

 

  

 

—  

 

  

 

245,804

 

Total cost of sales

  

 

(30,744

)

  

 

(50,896

)

  

 

(30,202

)

  

 

(37,337

)

  

 

(519

)

  

 

(149,698

)

    


  


  


  


  


  


Total gain (loss) on property sales

  

$

41,074

 

  

$

24,790

 

  

$

18,305

 

  

$

12,456

 

  

$

(519

)

  

$

96,106

 

    


  


  


  


  


  



(1)   As discussed in the General section of this MD&A, these amounts do not consider the effect of discontinued operations. See Note 13 to Consolidated Financial Statements for reconciliation to Statement of Operations format.

 

44


 

Year Ended December 31, 2000

 

    

Asset Management


    

Suburban


                  
       

Commercial


    

Residential


    

Urban


  

Corporate


  

Total(1)


 
    

(In thousands)

 

Building/Home Sales

                                                 

Sales Proceeds

  

$

72,057

 

  

$

33,741

 

  

$

254,864

 

  

$

 —  

  

$

 —  

  

$

360,662

 

Cost of Sales

  

 

(35,743

)

  

 

(31,546

)

  

 

(217,171

)

  

 

—  

  

 

—  

  

 

(284,460

)

    


  


  


  

  

  


Gain

  

 

36,314

 

  

 

2,195

 

  

 

37,693

 

  

 

—  

  

 

—  

  

 

76,202

 

    


  


  


  

  

  


Land/Lot Sales

                                                 

Sales Proceeds

  

 

—  

 

  

 

35,210

 

  

 

37,958

 

  

 

—  

  

 

—  

  

 

73,168

 

Cost of Sales

  

 

—  

 

  

 

(20,869

)

  

 

(21,759

)

  

 

—  

  

 

—  

  

 

(42,628

)

    


  


  


  

  

  


Gain

  

 

—  

 

  

 

14,341

 

  

 

16,199

 

  

 

—  

  

 

—  

  

 

30,540

 

    


  


  


  

  

  


Ground Lease and Other Sales

                                                 

Sales Proceeds

  

 

17,266

 

  

 

—  

 

  

 

—  

 

  

 

—  

  

 

—  

  

 

17,266

 

Cost of Sales

  

 

(10,667

)

  

 

—  

 

  

 

—  

 

  

 

—  

  

 

—  

  

 

(10,667

)

    


  


  


  

  

  


Gain

  

 

6,599

 

  

 

—  

 

  

 

—  

 

  

 

—  

  

 

—  

  

 

6,599

 

    


  


  


  

  

  


Total sales proceeds

  

 

89,323

 

  

 

68,951

 

  

 

292,822

 

  

 

—  

  

 

—  

  

 

451,096

 

Total cost of sales

  

 

(46,410

)

  

 

(52,415

)

  

 

(238,930

)

  

 

—  

  

 

—  

  

 

(337,755

)

    


  


  


  

  

  


Total gain on property sales

  

$

42,913

 

  

$

16,536

 

  

$

53,892

 

  

$

—  

  

$

—  

  

$

113,341

 

    


  


  


  

  

  



(1)   As discussed in the General section of this MD&A, these amounts do not consider the effect of discontinued operations. See Note 13 to Consolidated Financial Statements for reconciliation to Statement of Operations format.

 

45


 

Variance Year Ended December 31, 2002 vs Year Ended December 31, 2001

 

    

Asset Management


    

Suburban


                      
       

Commercial


    

Residential


    

Urban


    

Corporate


    

Total


 
    

(In thousands)

 

Building/Home Sales

                                                     

Sales Proceeds

  

$

(3,687

)

  

$

(40,697

)

  

$

(9,621

)

  

$

—  

 

  

$

 —  

 

  

$

(54,005

)

Cost of Sales

  

 

854

 

  

 

29,846

 

  

 

8,078

 

  

 

—  

 

  

 

—  

 

  

 

38,778

 

    


  


  


  


  


  


(Loss)

  

 

(2,833

)

  

 

(10,851

)

  

 

(1,543

)

  

 

—  

 

  

 

—  

 

  

 

(15,227

)

    


  


  


  


  


  


Land/Lot Sales

                                                     

Sales Proceeds

  

 

—  

 

  

 

17,574

 

  

 

18,168

 

  

 

(35,293

)

  

 

—  

 

  

 

449

 

Cost of Sales

  

 

—  

 

  

 

(21,882

)

  

 

(5,816

)

  

 

26,183

 

  

 

—  

 

  

 

(1,515

)

    


  


  


  


  


  


Gain (loss)

  

 

—  

 

  

 

(4,308

)

  

 

12,352

 

  

 

(9,110

)

  

 

—  

 

  

 

(1,066

)

    


  


  


  


  


  


Ground Lease and Other Sales

                                                     

Sales Proceeds

  

 

(24,947

)

  

 

403

 

  

 

2,053

 

  

 

—  

 

  

 

—  

 

  

 

(22,491

)

Cost of Sales

  

 

15,634

 

  

 

243

 

  

 

(922

)

  

 

—  

 

  

 

(82

)

  

 

14,873

 

    


  


  


  


  


  


Gain (loss)

  

 

(9,313

)

  

 

646

 

  

 

1,131

 

  

 

—  

 

  

 

(82

)

  

 

(7,618

)

    


  


  


  


  


  


Total sales proceeds

  

 

(28,634

)

  

 

(22,720

)

  

 

10,600

 

  

 

(35,293

)

  

 

—  

 

  

 

(76,047

)

Total cost of sales

  

 

16,488

 

  

 

8,207

 

  

 

1,340

 

  

 

26,183

 

  

 

(82

)

  

 

52,136

 

    


  


  


  


  


  


Total gain (loss) on property sales

  

$

(12,146

)

  

$

(14,513

)

  

$

11,940

 

  

$

(9,110

)

  

$

(82

)

  

$

(23,911

)

    


  


  


  


  


  


 

Variance Year Ended December 31, 2001 vs Year Ended December 31, 2000

 

    

Asset Management


    

Suburban


                      
       

Commercial


    

Residential


    

Urban


    

Corporate


    

Total


 
    

(In thousands)

 

Building/Home Sales

                                                     

Sales Proceeds

  

$

(34,159

)

  

$

6,956

 

  

$

(245,243

)

  

$

—  

 

  

$

—  

 

  

$

(272,446

)

Cost of Sales

  

 

22,355

 

  

 

1,700

 

  

 

209,093

 

  

 

—  

 

  

 

—  

 

  

 

233,148

 

    


  


  


  


  


  


Gain (loss)

  

 

(11,804

)

  

 

8,656

 

  

 

(36,150

)

  

 

—  

 

  

 

—  

 

  

 

(39,298

)

    


  


  


  


  


  


Land/Lot Sales

                                                     

Sales Proceeds

  

 

—  

 

  

 

(221

)

  

 

928

 

  

 

49,793

 

  

 

—  

 

  

 

50,500

 

Cost of Sales

  

 

—  

 

  

 

(181

)

  

 

(538

)

  

 

(37,337

)

  

 

—  

 

  

 

(38,056

)

    


  


  


  


  


  


Gain (loss)

  

 

—  

 

  

 

(402

)

  

 

390

 

  

 

12,456

 

  

 

—  

 

  

 

12,444

 

    


  


  


  


  


  


Ground Lease and Other Sales

                                                     

Sales Proceeds

  

 

16,654

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

16,654

 

Cost of Sales

  

 

(6,689

)

  

 

—  

 

  

 

173

 

  

 

—  

 

  

 

(519

)

  

 

(7,035

)

    


  


  


  


  


  


Gain (loss)

  

 

9,965

 

  

 

—  

 

  

 

173

 

  

 

—  

 

  

 

(519

)

  

 

9,619

 

    


  


  


  


  


  


Total sales proceeds

  

 

(17,505

)

  

 

6,735

 

  

 

(244,315

)

  

 

49,793

 

  

 

—  

 

  

 

(205,292

)

Total cost of sales

  

 

15,666

 

  

 

1,519

 

  

 

208,728

 

  

 

(37,337

)

  

 

(519

)

  

 

188,057

 

    


  


  


  


  


  


Total gain (loss) on property sales

  

$

(1,839

)

  

$

8,254

 

  

$

(35,587

)

  

$

12,456

 

  

$

(519

)

  

$

(17,235

)

    


  


  


  


  


  


 

46


 

During 2002, we sold six operating properties totaling 769,000 square feet of building space, closed on the sale of improved land capable of supporting 3.8 million square feet of commercial development, and sold 1,038.7 acres of ground leases. During 2001, we sold seven existing operating properties and four newly completed commercial buildings totaling 1.1 million square feet, sold improved land capable of supporting 6.8 million square feet of commercial development, sold 1,108.2 acres of ground leases, and sold 5.1 acres of Urban land. During 2000, we sold eleven existing operating properties and three newly completed commercial buildings totaling 2.1 million square feet, closed on the sale of improved land capable of supporting 8.5 million square feet of commercial development, and sold 1,035 acres of ground leases (see Variability in Results section).

 

For the year ended December 31, 2002, we also closed on the sales of 456 residential lots, as compared to 396 residential lots and 55 homes during the same period in 2001. For the year ended December 31, 2000, the gain from Suburban Residential segment included $13.4 million from the sale of our home-building assets to a limited liability company formed in 2000 managed by Brookfield Homes of California, Inc. (“BHC, LLC”), $10.2 million from the closing of an 80-lot site in San Francisco, and $30.3 million resulting primarily from the closings of 512 lots and 347 homes (see Variability in Results section).

 

In addition, the gain for 2002 and 2001 from Suburban Residential segment included $2.1 million and $1.1 million, respectively, of our portion of profit participation related to certain properties that were sold in the prior year (see Variability in Results section).

 

Equity in Earnings of Development Joint Ventures, Net

 

Our Equity in Earnings of Development Joint Ventures, Net is generated from our Suburban-Residential investments. The tables below summarize our share of the activities of joint ventures for the years ended December 31, 2002, 2001, and 2000. The increase in 2002, as compared to 2001, in our gain from sales is primarily because of an increase in sales volume, partially offset by the sale of our investment interest in Brookfield joint venture during 2001. The decrease in 2001 as compared to 2000, in our gain from sales is primarily because of lower sales volumes from Serrano and Talega, partially offset by gain from new joint ventures Parkway and Talega Village (see Variability in Results section). As we have not entered into any significant new joint ventures in 2002, nor are many new investments anticipated, the Equity in Earnings of Development Joint Ventures, Net will likely decline beyond 2003.

 

    

Year ended December 31, 2002


  

Year ended December 31, 2001


  

Year ended December 31, 2000


Projects


  

Lots/

Homes

Sold


 

Sales


 

Cost

of

Sales


   

Gain

(loss)


  

Lots/

Homes

Sold


 

Sales


 

Cost

of

Sales


   

Gain

(loss)


  

Lots/

Homes

Sold


 

Sales


 

Cost

of

Sales


   

Gain

(loss)


    

(In thousands, except lots/homes)

Brookfield

  

—  

 

$

—  

 

$

—  

 

 

$

—  

  

524

 

$

77,013

 

$

(62,611

)

 

$

14,402

  

306

 

$

130,383

 

$

(120,253

)

 

$

10,130

Talega Village

  

118

 

 

64,973

 

 

(60,538

)

 

 

4,435

  

100

 

 

51,359

 

 

(48,566

)

 

 

2,793

  

—  

 

 

—  

 

 

—  

 

 

 

—  

Serrano

  

940

 

 

73,852

 

 

(66,955

)

 

 

6,897

  

53

 

 

35,915

 

 

(34,389

)

 

 

1,526

  

874

 

 

87,297

 

 

(74,969

)

 

 

12,328

Talega

  

772

 

 

78,143

 

 

(73,111

)

 

 

5,032

  

109

 

 

34,855

 

 

(30,945

)

 

 

3,910

  

867

 

 

98,843

 

 

(93,534

)

 

 

5,309

Parkway

  

822

 

 

61,259

 

 

(48,391

)

 

 

12,868

  

190

 

 

16,260

 

 

(12,922

)

 

 

3,338

  

—  

 

 

—  

 

 

—  

 

 

 

—  

Other

  

—  

 

 

—  

 

 

—  

 

 

 

—  

  

—  

 

 

9

 

 

—  

 

 

 

9

  

—  

 

 

13

 

 

—  

 

 

 

13

    
 

 


 

  
 

 


 

  
 

 


 

Total

  

2,652

 

$

278,227

 

$

(248,995

)

 

$

29,232

  

976

 

$

215,411

 

$

(189,433

)

 

$

25,978

  

2,047

 

$

316,536

 

$

(288,756

)

 

$

27,780

    
 

 


 

  
 

 


 

  
 

 


 

 

Management and Development Fees

 

Management and development fees primarily consist of fees earned related to development and construction management services provided to third parties as well as our joint venture projects. The increase in 2002 was primarily because of new fees included in 2002 from development management activities commenced in September 30, 2001, related to a new joint venture development at the Mission Bay project of $2.6 million, management fees related to two build-to-suit construction management contracts of $1.4 million, construction management fees related to investments in three unconsolidated joint ventures in Colorado of $1 million, and management fees from a joint venture project of $0.7 million. The decrease in management fees of $9.5 million in 2001, as compared to 2000, was primarily due to the expiration of the contract to manage and sell the non-railroad real estate assets of a major railroad company, partially offset by an increase in development and management fees related to a construction management contract with a ground lease lessee.

 

47


 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased $0.6 million in 2002 primarily due to employee-related expenses and legal expenses. Selling, general and administrative expenses decreased $19.2 million in 2001 primarily due to the decreased number of employees related to the sale of our home-building assets to BHC, LLC, in 2000.

 

Other

 

“Other” consists primarily of interest income, lease termination fees, expense of previously capitalized costs, and other miscellaneous expenses. For the year ended December 31, 2002, “Other” included interest income of $9.4 million, which is $1 million lower than 2001, because of lower short-term investments and lower interest rates; also included in 2002, were $8.3 million in lease termination fees. For the year ended December 31, 2001, “Other” included interest income of $10.4 million, which is $3.8 million higher than that of the same periods in 2000, because of higher short-term investments and higher interest rates; also included in 2001, were $3.4 million in lease termination fees, the expense of certain predevelopment costs previously capitalized of $2.5 million, and expenses related to costs overruns on a fixed price construction contract of $5.1 million. For the year ended December 31, 2000, “Other” included $11.8 million of expenses related to costs overruns on a fixed price construction contract and $2 million from a note receivable write-off; also included in 2000 was $6.6 million of interest income from short-term investments.

 

Interest

 

Following is a summary of interest:

 

    

Year Ended December 31,


    

Difference 2002/2001


  

Difference 2001/2000


 
    

2002


    

2001


    

2000


       
    

(In thousands)

 

Total interest incurred

  

$

85,156

 

  

$

83,623

 

  

$

69,620

 

  

$

1,533

  

$

14,003

 

Interest capitalized

  

 

(24,380

)

  

 

(25,478

)

  

 

(18,656

)

  

 

1,098

  

 

(6,822

)

    


  


  


  

  


Interest expensed

  

 

60,776

 

  

 

58,145

 

  

 

50,964

 

  

 

2,631

  

 

7,181

 

Less discontinued operations

  

 

(588

)

  

 

(1,392

)

  

 

(989

)

  

 

804

  

 

(403

)

    


  


  


  

  


Total interest expense

  

$

60,188

 

  

$

56,753

 

  

$

49,975

 

  

$

3,435

  

$

6,778

 

    


  


  


  

  


 

Interest incurred increased $1.5 million and $14 million for the years ended December 31, 2002 and 2001, respectively, primarily because of higher average debt balance as a result of additional debt placed on the newly completed operating rental properties. The changes in capitalized interest in 2002 and 2001, were because of changes in development activities.

 

Depreciation and Amortization Expense

 

The increases in depreciation and amortization expense of $11 million and $6 million in 2002 and 2001, respectively, are primarily attributable to the new buildings added to the portfolio. In 2002 and 2001, we added 6.1 million net square feet and 2.1 million net square feet of building space, respectively, to our portfolio. The added buildings resulted in incremental depreciation expense of $8.1 million and $4.1 million in 2002 and 2001, respectively. In addition, in 2002 we recorded a charge of $2.1 million related to assets placed in service in prior periods but not depreciated.

 

Corporate Administrative Costs

 

Corporate administrative costs consist primarily of general and administrative expenses. General and administrative expenses decreased by $1.6 million in 2002 but increased $3.6 million in 2001. The decrease in 2002 was primarily because of decreases in employee related expenses and marketing expenses. The increase in 2001 was primarily because of increases in employee related expenses.

 

48


 

Gain on Non-Strategic Asset Sales

 

Gain on sales of non-strategic assets increased $3.4 million in 2002 but decreased $42.4 million in 2001, primarily because of higher sales of remaining desert property in 2002. The decrease in 2001 was primarily because of a significant sale of desert land that was ultimately transferred to the Federal Government in 2000. We estimate the gain on non-strategic asset sales in 2003 to increase slightly over that of 2002; however, because the non-strategic asset inventory is depleting, we expect future gain on non-strategic asset sales to decrease over time (see Variability in Results section).

 

Other

 

“Other” consists primarily of interest income, consulting fees, legal reserve, and other miscellaneous expenses. For the year ended December 31, 2002, “Other” included interest income of $0.4 million, which is $12.8 million lower than that of the same periods in 2001 because of lower short-term investments as well as lower interest rates; “Other” also included a reduction in legal reserve of $0.9 million in 2002. For the year ended December 31, 2001, “Other” included interest income of $13.2 million, which is $8.6 million higher than that of the same periods in 2000 because of higher short-term investments as well as higher interest rates.

 

Minority Interests

 

In 1999, we formed a subsidiary real estate investment trust for financing purposes and sold 10% of this subsidiary’s stock to minority investors. This subsidiary is consolidated for financial reporting purposes. Subsequently to December 31, 2002, the REIT acquired the 10% interest of the minority investors, and accordingly the REIT became a wholly-owned subsidiary.

 

Income taxes

 

Income taxes decreased $3.5 million and $9.3 million in 2002 and 2001, respectively. These changes are the results of property donations at fair market value in 2002, changes in pre-tax income primarily attributed to rental income, gains from property sales, and gains on non-strategic asset sales in 2001. Property donation at fair value reflects property conveyances that qualify as charitable contributions for tax purposes. The difference between the fair value and book basis of the properties conveyed represents a tax deduction that results in a permanent reduction in income tax. The effect of deducting the excess of fair value of property over the book basis was a reduction in the effective tax rate of approximately 2% for the year ended December 31, 2002.

    

Year Ended December 31,


    

Difference 2002/2001


    

Difference 2001/2000


 
    

2002


    

2001


    

2000


       
    

(In thousands)

 

Income before income taxes and discontinued operations

  

$

162,962

 

  

$

162,320

 

  

$

186,102

 

  

$

642

 

  

$

(23,782

)

    


  


  


  


  


Income taxes:

                                            

Current taxes

  

$

32,417

 

  

$

16,300

 

  

$

12,539

 

  

$

16,117

 

  

$

3,761

 

Deferred taxes

  

 

29,889

 

  

 

49,499

 

  

 

62,556

 

  

 

(19,610

)

  

 

(13,057

)

    


  


  


  


  


Income tax expense

  

$

62,306

 

  

$

65,799

 

  

$

75,095

 

  

$

(3,493

)

  

$

(9,296

)

    


  


  


  


  


Total tax:

                                            

Current tax rate

  

 

19.9

%

  

 

10.0

%

  

 

6.7

%

  

 

9.9

%

  

 

3.3

%

Deferred tax rate

  

 

18.3

%

  

 

30.5

%

  

 

33.6

%

  

 

(12.2

)%

  

 

(3.1

)%

    


  


  


  


  


Tax rate

  

 

38.2

%

  

 

40.5

%

  

 

40.3

%

  

 

(2.3

)%

  

 

0.2

%

    


  


  


  


  


 

49


 

Current tax rates increased in 2002, as compared to 2001, primarily due to fewer tax-deferred property exchanges, a decrease in the amount of stock options exercised, and lower interest rates. Current tax rates increased in 2001, as compared to 2000, primarily due to fewer tax-deferred property exchanges and fewer tax credits in 2001. Gains from tax-deferred exchange property sales are recognized for financial reporting purposes, but the associated tax liability is not incurred for tax purposes until the replacement property is sold. All of our net operating loss carry forwards have been used. We estimate current-tax rates to be above 2002 levels; however, we anticipate that the overall tax rate in 2003 will be lower than the overall tax rate in 2002.

 

Accordingly, deferred taxes decreased in 2002, as compared to 2001, and in 2001, as compared to 2000, primarily due to decreases in the number of tax-deferred property exchanges. The decrease in 2002 also reflects fewer stock options exercised in 2002 compared to 2001.

 

The calculation of current taxes due involves the use of many estimates that are not finalized and adjusted until our final tax returns are filed, usually in September of the following year. Consequently, actual taxes paid in regard to any given year will differ from the amounts shown above; however, the differences have historically not been material and are not expected to be material in the future.

 

Variability in Results

 

Although our rental properties provide relatively stable operating results, our earnings from period to period will be affected by the nature and timing of acquisitions and sales of property. Many of our projects require a lengthy process to complete the development cycle before they are sold. Also, sales of assets are difficult to predict given fluctuating economic conditions and are generally subject to lengthy negotiations and contingencies that need to be resolved before closing. These factors may tend to “bunch” income in particular periods rather than producing a more even pattern throughout the year or from year to year. In addition, gross margins may vary significantly as the mix of property varies. The cost basis of the properties sold varies because (i) properties have been owned for varying periods of time; (ii) properties are owned in various geographical locations; and (iii) development projects have varying infrastructure costs and build-out periods.

 

Liquidity and Capital Resources

 

Off-balance sheet arrangements, contractual obligations and commitments

 

We have the following off-balance sheet arrangements, contractual obligations, and commitments, which are disclosed in various sections of the Consolidated Financial Statements, Notes to Consolidated Financial Statements, and elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. They exist in the following areas:

 

  ·   Unconsolidated real estate joint ventures:

Capital contribution requirements

Debt and debt service guarantees

 

  ·   Surety bonds, standby letters of credit and commitments

 

  ·   Executed contracts for construction and development activity

 

Unconsolidated real estate joint ventures—capital contribution requirements

 

We have investments in twelve unconsolidated real estate joint ventures. Four of the joint ventures are involved in the operation of rental real estate properties, and the remaining eight are involved in real estate development for investment or sale. We use the equity method of accounting for all of our investments in unconsolidated joint ventures.

 

We are required to make additional capital contributions to two of the unconsolidated joint ventures should additional capital contributions be necessary to fund excess costs or operating shortfall. One of the joint ventures requires capital contributions if actual development costs exceed the approved project development budget. The development budget is approximately $252.5 million and will be funded as follows: $165 million from a construction loan, which was closed in September 2002, $62.5 million from our partners, and the remaining $25 million from us. As of December 31, 2002, we had contributed $19.4 million of the $25 million. Subsequent to December 31, 2002, we contributed an additional $2.6 million, but we do not expect to fund any additional capital contributions beyond the $25 million. The second joint venture requires capital contributions to fund

 

50


operating shortfall upon written notice from the joint venture’s management committee. As of December 31, 2002, no such notice has been received.

 

We have also agreed with another of our unconsolidated joint ventures to fund up to $5.7 million for certain construction costs, if necessary. As of December 31, 2002, no additional funding is required.

 

Unconsolidated real estate joint ventures—debt and debt service guarantees

 

We have made certain debt service guarantees for six of our unconsolidated joint ventures. At December 31, 2002, based on the joint ventures’ outstanding debt balance, these debt service guarantees totaled $44.6 million. Of the total guarantees, $14.5 million relates to three unconsolidated residential development joint ventures, $22.3 million relates to two unconsolidated commercial development joint ventures, and the remaining $7.8 million relates to an unconsolidated urban development joint venture. These debt service guarantees are typical business arrangements commonly required of developers in real estate development. Examples of events that would require us to provide a cash payment pursuant to a guarantee include a loan default, which would result from failure of the primary borrower to service the debt when due, or non-compliance of the primary borrower with financial covenants and inadequacy of asset collateral. Our guarantee exposure is generally limited to situations in which the value of the collateral is not sufficient to satisfy the outstanding indebtedness. At December 31, 2002, we have not been required to satisfy any amounts pursuant to these debt and debt service guarantees.

 

Surety bonds, standby letters of credit and commitments

 

As of December 31, 2002, we have $379.6 million in surety bonds, outstanding standby letters of credit in favor of local municipalities or financial institutions, and commitments to guarantee leases, the construction of real property improvements or financial obligations. Surety bonds and commitments are to guarantee the construction of public improvements and infrastructure such as sewer, streets, traffic signals, grading, and wildlife preservations, in connection with our various development projects. Surety bonds are often required by public agencies from developers in real estate development. The surety bonds and standby letters of credit are renewable and expire upon completion of the required improvements. Standby letters of credit are a form of credit enhancement commonly required in real estate development when bonds are issued to finance public improvements.

 

Executed contracts for construction and development activity

 

At December 31, 2002, we have open construction and development contracts with vendors totaling $224.6 million related to our various projects, as compared to $273.3 million at December 31, 2001.

 

The following table summarizes our outstanding contractual obligations as of December 31, 2002 and the effect such obligations are expected to have on liquidity and cash flow in future periods:

 

    

Payments Due by Period


Contractual Obligations


  

Total


    

Due within 2003


  

Due in 2004-2006


  

Due in 2007-2008


  

Due Thereafter


    

(In thousands)

Mortgage and Other Debt

  

$

1,504,102

(1)

  

$

154,152

  

$

389,176

  

$

381,918

  

$

578,856

Operating Leases

  

 

6,954

 

  

 

2,510

  

 

4,204

  

 

30

  

 

210

Contracts

  

 

224,610

(2)

  

 

181,429

  

 

19,736

  

 

13,874

  

 

9,571

    


  

  

  

  

Total Contractual Obligations

  

$

1,735,666

 

  

$

338,091

  

$

413,116

  

$

395,822

  

$

588,637

    


  

  

  

  


(1)   Includes approximately $3.1 million of mortgage notes associated with assets held for sale that is presented as “Liabilities associated with assets held for sale” on our consolidated balance sheet.
(2)   A portion of these obligations is expected to be reimbursed by third parties, including bond proceeds.

 

51


 

The following table summarizes our outstanding commitments as of December 31, 2002, and the effect such commitments may have on liquidity and cash flow in future periods:

 

           

Amount of Commitment Expiration

Per Period


Commitments


  

Total Amounts Committed


    

Expire within 2003


  

Expire in

2004-2006


  

Expire in 2007-2008


  

Expire Thereafter


    

(In thousands)

Standby Letters of Credit, Surety Bonds and Commitments

  

$

379,628

(3)

  

$

304,032

  

$

75,596

  

$

—  

  

$

—  

Debt Guarantees of Unconsolidated JVs

  

 

44,624

 

  

 

5,000

  

 

39,624

  

 

—  

  

 

—  

    


  

  

  

  

Total Commitments

  

$

424,252

 

  

$

309,032

  

$

115,220

  

$

—  

  

$

—  

    


  

  

  

  


(3)   Includes approximately $42.4 million of commitments that have no specific expiration dates, which we have assumed to expire within one year for purposes of this table.

 

Note: The above tables do not include certain obligations made in the ordinary course of business (receivables, payables, etc.)

 

Cash flows from operating activities

 

Cash provided by operating activities reflected in the statement of cash flows for the years ended December 31, 2002, 2001, and 2000, was $187.1 million, $341.8 million, and $296.0 million, respectively.

 

The decrease of $154.7 million in 2002 was primarily attributable to the following: (1) a decrease due to the receipt of a $104.8 million prepayment of rent associated with a 34-year ground lease in 2001; (2) a decrease of $37.2 million resulting from payments made in 2002 for accrued construction costs; (3) $26.4 million due to an increase in prepayments for various expenses; (4) a decrease of $24.3 million due to higher income taxes paid in 2002; and (5) a decrease of $22.5 million in cash received from sales proceeds, partially offset by (6) an increase of $42.4 million from operating distributions, primarily from four of our unconsolidated residential joint ventures due to more lots sold; (7) $37 million due to an increase in payments received for our notes receivable; and (8) $25.4 million due to lower capital expenditures on our development property. The remaining decrease of $44.3 million was primarily due to the timing of receipts and payments from our ordinary course of business (accounts receivable, accounts payable, etc.).

 

The increase of $45.8 million in 2001 was primarily attributable to the following: (1) the receipt of $106.8 million prepayment of rent, of which approximately $104.8 million was associated with a 34-year ground lease; (2) an increase of $84.5 million due to lower capital expenditures on our development property; (3) an increase of $17.1 million due to higher distributions from our joint ventures, primarily from our unconsolidated residential joint ventures in which more homes were sold; (4) an increase of $12.6 million due to lower income taxes paid in 2001 as compared to 2000; and (5) an increase of $9.4 million due to an increase in payments received for our notes receivable, partially offset by (6) a decrease of $223.2 million in cash received from sales proceeds. The remaining increase of $38.6 million was primarily due to the timing of receipts and payments from our ordinary course of business (accounts receivable, accounts payable, etc.).

 

Cash flows from investing activities

 

Net cash used in investing activities reflected in the statement of cash flows for the years ended December 31, 2002, 2001, and 2000, was $333.3 million, $267.6 million, and $224.2 million, respectively.

 

The increase in use of $65.7 million in 2002 was attributed to the following: (1) $66.9 million in increased short-term investments and restricted cash at December 31, 2002; (2) $38.3 million due to higher reimbursable predevelopment and infrastructure costs incurred in 2002; (3) $20.7 million due to lower proceeds from the sale of investment properties; (4) $15.3 million due to higher capital contributions made to our unconsolidated joint ventures in 2002; and (5) $7 million due to higher costs incurred for tenant improvements partially offset by (6) $55.3 million due to lower property acquisitions and (7) $27.2 million due to lower capital expenditures for investment properties in 2002.

 

52


 

The increase in use of $43.4 million between 2001 and 2000 was attributed to the following: (1) $44.3 million due to higher property acquisitions; (2) $28.4 million due to higher capital expenditures for investment properties; (3) $16.8 million due to lower proceeds from the sale of investment properties; (4) $15.6 million of distributions in 2000 from the refinancing of one of our joint ventures; (5) $2.9 million due to higher reimbursable predevelopment and infrastructure costs incurred; and (6) $2 million due to the contributions made in 2001 to our joint ventures offset by (7) $63.8 million in reduced short-term investments and restricted cash and (8) $2.8 million due to lower tenant improvements.

 

Capital Expenditures

 

Capital expenditures reflected in the statement of cash flows include the following:

 

    

Year Ended December 31,


    

2002


  

2001


  

2000


    

(In thousands)

Capital Expenditures from Operating Activities(1)

                    

Capital expenditures for development properties

  

$

21,693

  

$

32,246

  

$

46,356

Predevelopment

  

 

4,641

  

 

1,047

  

 

98

Infrastructure and other

  

 

22,814

  

 

31,135

  

 

86,864

Residential property acquisitions

  

 

7,139

  

 

—  

  

 

26,464

Capitalized interest and property tax

  

 

668

  

 

1,849

  

 

7,738

    

  

  

Capital expenditures in cash flows for operating activities

  

 

56,955

  

 

66,277

  

 

167,520

Other property acquisitions

  

 

738

  

 

16,785

  

 

—  

Seller-financed acquisitions

  

 

—  

  

 

10,000

  

 

—  

    

  

  

Total capital expenditures in operating activities

  

 

57,693

  

 

93,062

  

 

167,520

    

  

  

Capital Expenditures from Investing Activities(2)

                    

Construction and building improvements

  

 

148,508

  

 

156,566

  

 

149,895

Predevelopment

  

 

16,149

  

 

6,326

  

 

21,698

Infrastructure and other

  

 

25,635

  

 

62,591

  

 

37,657

Other property acquisitions

  

 

9,649

  

 

1,788

  

 

2,748

Capitalized interest and property tax

  

 

27,592

  

 

27,536

  

 

14,426

    

  

  

Capital expenditures for investment properties

  

 

227,533

  

 

254,807

  

 

226,424

Commercial property acquisitions

  

 

24,449

  

 

79,782

  

 

35,471

Tenant improvements

  

 

9,945

  

 

2,893

  

 

5,767

Reimbursable construction costs

  

 

54,426

  

 

16,097

  

 

13,156

Contribution to joint ventures

  

 

17,365

  

 

2,035

  

 

—  

    

  

  

Capital expenditures in cash flows for investing activities

  

 

333,718

  

 

355,614

  

 

280,818

Seller-financed acquisitions

  

 

—  

  

 

—  

  

 

1,702

    

  

  

Total capital expenditures in investing activities

  

 

333,718

  

 

355,614

  

 

282,520

    

  

  

Total capital expenditures(3)

  

$

391,411

  

$

448,676

  

$

450,040

    

  

  


(1)   This category primarily includes capital expenditures for properties we intend to build and sell.
(2)   This category primarily includes capital expenditures for properties we intend to hold for our own account.
(3)   Total capital expenditures include capitalized general and administrative expenses of $14.7 million, $21.6 million, and $17.2 million for the years ended December 31, 2002, 2001, and 2000, respectively.

 

Capital expenditures for development properties—This item relates to the development of residential, urban, and commercial for-sale development properties. The decrease in 2002 and 2001 was primarily because of the decrease in commercial and urban development activities for properties that we intend to build and sell.

 

 

53


Construction and building improvements—This item relates primarily to development of new properties held for lease. This development activity is summarized below (in square feet):

 

    

Year Ended

December 31,


 
    

2002


    

2001


 
    

(In thousands)

 

Commercial Development

             

Wholly owned:

             

Under construction, beginning of period

  

6,143

 

  

3,474

 

Construction starts

  

2,945

 

  

4,735

 

Completed—retained in portfolio

  

(6,066

)

  

(1,465

)

Completed—design/build or sold

  

  —  

 

  

(601

)

    

  

Subtotal under construction, end of period

  

3,022

 

  

6,143

 

    

  

Joint Venture Projects:

             

Under construction, beginning of period

  

—  

 

  

—  

 

Construction starts

  

305

 

  

  —  

 

    

  

Subtotal under construction, end of period

  

305

 

  

—  

 

    

  

Total commercial development under construction, end of period

  

3,327

 

  

6,143

 

    

  

Urban Development

             

Wholly owned:

             

Under construction, beginning of period

  

361

 

  

283

 

Construction starts

  

—  

 

  

78

 

Completed—retained in portfolio

  

(283

)

  

—  

 

    

  

Subtotal under construction, end of period(1)

  

78

 

  

361

 

    

  

Joint Venture Projects:

             

Under construction, beginning of period

  

695

 

  

—  

 

Construction starts

  

—  

 

  

695

 

    

  

Subtotal under construction, end of period

  

695

 

  

695

 

    

  

Total urban development under construction, end of period

  

773

 

  

1,056

 

    

  

Total under construction, end of period

  

4,100

 

  

7,199

 

    

  


(1)   Includes approximately 45,000 square feet of residential units, which we intend to sell; excludes approximately 280,000 square feet of commercial space on which construction was started but stopped during 2001.

 

Predevelopment—This item relates to amounts incurred for our commercial, urban, and residential development projects, primarily the Mission Bay project in San Francisco, California, the Santa Fe Depot project in San Diego, California, the Vista Range residential project in Commerce City, Colorado, and the Westbluffs residential project in Playa Del Rey, California. The increase in 2002 primarily resulted from the activity for the projects in San Francisco, California; Commerce City, Colorado; and Playa Del Rey, California. For the years ended December 31, 2002, 2001, and 2000, approximately $2 million, $8.7 million, and $4.9 million, respectively, of predevelopment costs incurred at Mission Bay are reimbursable, as discussed in Reimbursable construction costs below.

 

Infrastructure and other—This item primarily represents infrastructure costs incurred in connection with our commercial, urban, and residential projects. Infrastructure costs relate primarily to the projects at San Diego, California; Woodridge, Illinois; Denver, Colorado; Ontario, California; Hercules, California; Fremont, California; and Mission Bay, San Francisco, California.

 

 

54


In 2002, approximately $54.2 million, $25.1 million, $1.2 million, and $14.5 million of infrastructure and other costs incurred at Mission Bay, Pacific Commons, Denver, and Ontario, respectively, are reimbursable, as discussed in Reimbursable construction costs below. In 2001, approximately $22 million, $4.4 million, and $0.5 million of infrastructure and other costs incurred at Mission Bay, Ontario, and Denver, respectively, are reimbursable. In 2000, approximately $7.3 million, $0.3 million, and $0.7 million of infrastructure and other costs incurred at Mission Bay, Ontario, and Denver, respectively, are reimbursable.

 

Operating property acquisitions—For the year ended December 31, 2002, we invested approximately $7.8 million in operating property acquisitions, of which $7.1 million was for the acquisition of land capable of supporting an estimated 2,149 residential units and $0.7 million for land to be sold.

 

In 2001, we invested approximately $26.8 million in property and other acquisitions; $3.8 million for the acquisition of commercial land with the intent to sell and $23 million, including a $10 million seller-financed note, for the acquisition of an ownership interest in a joint venture in Folsom, California.

 

In 2000, we invested approximately $26.5 million for the acquisitions of residential development property in California, directly or through joint ventures; these acquisitions would support up to 479 homes/lots.

 

Investing property acquisitions—For the year ended December 31, 2002, we invested approximately $34.1 million in investing property acquisitions; $16.4 million for the acquisition of commercial buildings, which added approximately 488,000 square feet to our rental portfolio; $8 million for the acquisition of commercial land, which added 3 million square feet of potential development; and $9.7 million for the acquisition of furniture, fixtures, and equipment, primarily consisting of a corporate aircraft.

 

In 2001, we invested approximately $81.6 million in property and other acquisitions; $66.6 million for the acquisition of commercial buildings, which added approximately 1.2 million square feet to our rental portfolio; $13.2 million for the acquisition of commercial land, which added about 4.2 million square feet of potential development; and $1.7 million for the acquisition of furniture, fixtures, and equipment.

 

In 2000, we invested approximately $39.9 million in property acquisitions, including a $1.7 million seller-financed note, for the acquisition of commercial and mixed-used development land which added approximately 10.2 million square feet of potential development and $2.7 million for the acquisition of furniture, fixtures, and equipment.

 

Reimbursable construction costs—For the years ended December 31, 2002, 2001, and 2000, approximately $97 million, $35.6 million, and $13.2 million, respectively, of total predevelopment and infrastructure costs incurred are reimbursable, pursuant to various Community Facility District (“CFD”) bonds issued in 2002 and 2001, various assessment district bonds, and third parties.

 

During 2002, approximately $44.7 million was reimbursed, of which, approximately $42.8 million was from CFD bonds and approximately $1.9 million was from third parties. During 2001, approximately $17.4 million was reimbursed, of which, $13.3 million was from CFD bonds and $4.1 million was from third parties. During 2000, we did not receive any reimbursements for reimbursable costs incurred.

 

Subsequent to December 31, 2002, an additional $5.7 million was reimbursed, of which, approximately $1.7 million was from CFD bonds, approximately $2.6 million was from assessment district bonds, and approximately $1.4 million was from third parties.

 

Cash flows from financing activities

 

Net cash provided by (used in) financing activities reflected in the statement of cash flows for the years ended December 31, 2002, 2001, and 2000, was $198.4 million, ($188.1) million, and $229.3 million, respectively.

 

 

55


The increase of $386.5 million in 2002 was attributed to the following: (1) an increase of $372.4 million due to no treasury stock purchases in 2002, as compared to $372.4 million expended for the purchase of 21,649,797 shares of our treasury stock under the share repurchase program during the same period in 2001; (2) an increase of $24.4 million primarily attributable to higher net borrowings; and (3) an increase of $0.6 million due to a decrease in distributions to minority partners offset by (4) a decrease of $10.9 million due to lower proceeds from the issuance of common stock primarily attributable to exercise of stock options.

 

The decrease of $417.4 million between 2001 and 2000 was primarily due to the following: (1) a decrease of $343.7 million due to $372.4 million expended for the purchase of 21,649,797 shares of our treasury stock in 2001 as compared to $28.7 million expended for the purchase of 1,997,300 shares in 2000 and (2) a decrease of $87.6 million due to lower net borrowings, offset by (3) an increase of $11.9 million due to higher proceeds from the issuance of common stock attributable to exercise of stock options and (4) an increase of $2.0 million due to lower distributions to minority partners.

 

Capital commitments

 

As of December 31, 2002, we had outstanding standby letters of credit, surety bonds, and commitments in the amount of $379.6 million to guarantee performance on real property improvements or financial obligations.

 

As of December 31, 2002, we had approximately $224.6 million in total contractual obligations for capital expenditures to vendors. These commitments are primarily contracts to construct commercial, residential, and urban development projects, predevelopment costs, and re-leasing costs.

 

As a partner in certain joint ventures, we have made certain debt guarantees totaling $44.6 million at December 31, 2002 (see Note 15 of the accompanying Consolidated Financial Statements).

 

REIT-related Distribution and Quarterly Dividends

 

As part of the proposed REIT conversion and in order to be eligible to elect REIT status (see Item 1. Business—Recent Developments), we expect to provide to stockholders a one-time distribution of pre-REIT earnings and profits (“E&P”). The distribution will be in the form of, at the election of each stockholder, cash, shares of common stock in the REIT, or a combination of both. We currently expect that the E&P distribution will be comprised of approximately $100 million cash and $200 million in stock of the REIT. In the event we receive a favorable determination from the Internal Revenue Service in connection with a ruling we are currently seeking, we will limit the amount of cash payable in the E&P distribution to $100 million. We presently do not expect to limit the total amount of cash available for distribution if we do not receive a favorable ruling. Absent such a limit, the total amount of cash distributed will depend upon the extent to which our stockholders elect to receive cash rather than shares of common stock in the REIT.

 

Also, we anticipate that we will begin to pay a quarterly dividend commencing in the third quarter of 2003 in an amount equal to $0.30 per existing share of our common stock. Following the REIT conversion, if approved, we anticipate that we will continue to pay a quarterly dividend of approximately $0.30 per existing share of our common stock. The actual amount of the dividends, however, will be as determined and declared by the board of directors and will depend on our financial condition, earnings, and other factors, many of which are beyond our control. In order to maintain its qualification as a REIT under the Internal Revenue Code, we will be required, as a REIT, to distribute at least 90% of our REIT taxable income for such year.

 

There is no assurance the proposed REIT conversion and related transactions, including the E&P distribution and the quarterly dividends, will be consummated or that the terms, the time or effects thereof will not differ materially from those described here.

 

 

56


Cash balances, available borrowings, and capital resources

 

As of December 31, 2002, we had total cash of $311.5 million, of which $36.6 million is restricted cash. In addition to the $311.5 million cash balance, we had $46.6 million in borrowing capacity under our commercial construction facilities, available upon satisfaction of certain conditions.

 

Our short-term and long-term liquidity and capital resources requirements will be provided primarily from four sources: (1) cash on hand, (2) ongoing income from our rental portfolio, (3) proceeds from sales of developed properties, land and non-strategic assets, and (4) additional debt. As noted above, existing construction loan facilities are available for meeting certain short-term liquidity requirements. Our ability to meet our mid- and long-term capital requirements is, in part, dependent upon the ability to obtain additional financing for new construction, completed buildings, acquisitions, and currently unencumbered properties. There is no assurance that we can obtain this financing or obtain this financing on favorable terms.

 

Stock Repurchases—From October 1999 through July 2001, our Board of Directors authorized five separate stock repurchase programs; each had a limit of $50 million. Share purchases under these programs were made on the open market. We purchased a total of 13,047,097 shares at a total cost of $218 million under these programs. The remaining $32 million authorized expired or was terminated.

 

In December 2001, we purchased 10.6 million shares of our common stock from the California Public Employees’ Retirement System (“CalPERS”) for $183.1 million in a privately negotiated transaction. An independent third party provided our Board of Directors with a written opinion confirming that the terms and conditions of this transaction were fair, from a financial point of view, to our stockholders other than CalPERS. Immediately prior to the transaction, CalPERS was the beneficial owner of 18.8 million shares, or approximately 19.3% of our issued and outstanding common stock. As a result of the transaction, CalPERS’ beneficial ownership was reduced to 8.2 million shares, or approximately 9.5% of our issued and outstanding common stock.

 

Debt covenants—Three of our credit agreements, totaling $135 million, contain corporate financial covenants including a minimum debt service coverage ratio of 1.6 to 1, a maximum leverage ratio of 60%, and a minimum tangible net worth of $435.2 million (subject to adjustment for stock buybacks), all terms as defined in those credit agreements. As of or for the period ending December 31, 2002, the actual results, were 1.97; 54.1%; and $546 million, respectively. Our partial guarantee of one of our joint venture’s construction loans of $165 million has the same debt service and tangible net worth covenants, but a different maximum leverage covenant definition. Under this definition our leverage ratio is 57.3% versus a covenant of 65% at a maximum. Our performance against these covenants is measured on a quarterly basis, with debt service coverage being measured on a four-quarter trailing basis. In the event we were to breach any of these covenants and were unable to negotiate satisfactory waivers or amendments, our lenders in these credit facilities could declare amounts outstanding due and payable.

 

Bonds—At December 31, 2002, we have $103.9 million of assessment district bonds recorded as part of “Mortgage and other debt” in the accompanying Consolidated Balance Sheet. Approximately $35.6 million of bonds with an estimated weighted average variable interest rate of 3.5% were issued by Traer Creek Metropolitan District to fund one of our unconsolidated joint venture investments in Avon, Colorado; $23.1 million with an estimated weighted average variable interest rate of 4.0% were issued by Stapleton Business Center Metropolitan District to fund our development project in Denver, Colorado; $15.8 million with an estimated weighted average variable interest rate of 5.3% were issued by the County of San Bernardino to fund our development project in Ontario, California; $8.6 million with an estimated weighted average variable interest rate of 6.42% were issued by Northwestern Business Center Metropolitan District to fund our development project in Westminster, Colorado; $6.8 million with an estimated weighted average variable interest rate of 6.1% were issued by the City of Rancho Cucamonga to fund our development project in Rancho Cucamonga, California; and the remaining $14 million with estimated weighted average variable interest rates ranging from 5.44% to 8.7% were issued by various districts to fund other development projects (see Note 3 of the accompanying Consolidated Financial Statements for details).

 

57


 

In addition to the above bonds, $163.3 million of Community Facility District bonds were issued as of December 31, 2002, to finance public infrastructure improvements at Mission Bay in San Francisco and Pacific Commons in Fremont, California. The bonds related to the Mission Bay and Pacific Commons were not required to be recorded in our accompanying Consolidated Balance Sheet. These bonds have a series of maturities up to thirty years. Bonds totaling $133.3 million were issued for Mission Bay, of which $16.6 million have a floating rate of interest initially set at 2.85% and at December 31, 2002, 1.35%; $23.4 million have a floating interest rate initially set at 1.85% and at December 31, 2002, 1.4%; $54 million at a fixed rate of 6.02%; and $39.3 million at an average coupon rate of 6.28%. We provided a letter of credit totaling $40 million in support of the floating rate bonds issued for Mission Bay. At Pacific Commons, $30 million of bonds were issued and have a weighted average fixed interest rate of 6.2%. Upon completion of the infrastructure improvements at Mission Bay and Pacific Commons, for which the $133.3 million and $30 million CFD bonds were issued, respectively, the improvements will be transferred to the respective cities. The expected reimbursement of the infrastructure costs from the bonds is reflected in Other Assets (see Note 15 of the accompanying Consolidated Financial Statements for details).

 

At December 31, 2002, for Mission Bay, $6.6 million of the $16.6 million floating rate bonds and $40.4 million of the $54 million fixed rate bonds were used to reimburse costs we incurred on behalf of the district. For Pacific Commons, approximately $9.1 million of the bonds were used to reimburse costs we incurred on the district’s behalf as of December 31, 2002. As of December 31, 2002, we have incurred costs of $46.1 million for Mission Bay, $16 million for Pacific Commons, $2.4 million for Denver, and $19.2 million for Ontario that have not been reimbursed from bond proceeds nor from other third parties. These costs are recorded as Other Assets in the accompanying Consolidated Balance Sheet. Subsequent to December 31, 2002, we received reimbursements of approximately $1.7 million from CFD bonds, approximately $2.6 million from assessment district bonds, and approximately $1.4 million from third parties.

 

At Mission Bay, the landowners must satisfy any shortfall in annual debt service obligations for the CFD bonds, if incremental tax revenues generated by the projects are insufficient. At Pacific Commons, developed and designated developed property is taxed first, and any shortfall in annual debt service is paid by a tax on vacant land.

 

Insurance—Changes in the insurance industry over the last year have caused the availability of certain types of coverage to decrease and the cost of available coverage to increase. In renewing our policies, we were able to essentially obtain all of our historical levels and types of insurance (although at a higher cost and, in certain instances, a higher deductible level and/or more restrictive conditions), except: (1) liability coverage for our residential business, which now has a higher deductible and a much lower policy limit and (2) terrorism insurance, which was initially excluded from our property coverage placed on October 1, 2002. However, under the United States Terrorism Risk Insurance Act of 2002, carriers are now required to offer us terrorism coverage and are allowed to charge an incremental premium for such coverage. We have elected to obtain coverage that matches the risk profile for our portfolio of properties, primarily consisting of distribution/warehouse and suburban office and retail that we consider to be relatively low-risk. It is estimated that this coverage will be in place sometime in the second quarter of 2003. We have placed a stand-alone terrorism policy for a single asset located near downtown San Francisco and expect that we may place additional, similar stand-alone policies if circumstances warrant. There can be no assurance that significant losses in excess of insurance proceeds will not occur.

 

The Company has entered into various loan documents containing customary covenants requiring the Company to maintain insurance. One or more of our lenders may take the position that the levels of terrorism coverage obtained are not adequate and is a breach of these loans and require the Company to obtain additional terrorism insurance. We do not believe such a demand would be reasonable because of the inability to obtain coverage at economically justifiable prices, and we would vigorously defend our position. If any of our lenders insist on coverage for these risks, the Company could be required to obtain additional terrorism insurance on certain assets or it could adversely affect the Company’s ability to refinance certain loans.

 

 

58


Tax Audit—In 2002, the State of California Franchise Tax Board (“FTB”) began auditing two of our joint ventures for the years 1999 and 2000. Both audits are in process, and no audit adjustments have yet been proposed. In early July of 2002, the FTB notified us that it would audit the Company’s tax returns for the years 1999 and 2000. The audit has commenced, and no audit adjustments have been proposed.

 

On March 24, 2003, we received notice from the Internal Revenue Service that it intends to audit the 1999 income tax return of Catellus. The Internal Revenue Service also advised us that it intends to audit the 1999 income tax return of a mortgage REIT subsidiary of Catellus. 

 

At this time, we do not know whether any audit will result in adjustments to the income tax returns that would require us to pay additional taxes, interest and/or penalties. If required, any such adjustments could adversely impact our liquidity, statement of operations and/or balance sheet.

 

Related party transactions

 

In 2001, we formed Third and King Investors, LLC, an unconsolidated joint venture. The joint venture is building a large mixed-use project at Mission Bay in San Francisco, California, consisting of approximately 595 apartments, 127,000 square feet of commercial space, and 945 parking stalls. As part of the transaction, a subsidiary entered into a 99-year ground lease with the venture, and we recognized $3.7 million and $1.8 million in rental income from this ground lease for the years ended December 31, 2002 and 2001, respectively. In September 2002, the joint venture closed and secured a $165 million construction loan for the project. We have also agreed with the venture to fund, on a pro-rata basis, the balance of equity capital required and certain excess costs, if actual development costs exceed the “approved development budget as set forth in the joint venture agreement”. As of December 31, 2002, we had contributed $19.4 million of the $25 million to be funded from us. Subsequent to December 31, 2002, we contributed an additional $2.6 million, and we do not expect to fund any additional capital contribution beyond the $25 million.

 

We also provide development and management services to several of our unconsolidated joint venture investments. Fees earned were $4.2 million, $1.2 million, and $0.6 million in 2002, 2001, and 2000, respectively. The increase in 2002 was primarily due to management service fees from Traer Creek and development fees from Third and King Investors, LLC. The increase in 2001 was primarily attributed to development fees from Third and King Investors, LLC.

 

We have a $4.7 million note receivable from an unconsolidated joint venture for project costs plus accrued interest at 9.0%. This note is collateralized by property owned by the venture and matures in October 2028. We also have entered into various lease agreements with this unconsolidated joint venture. We incurred rent expense of $0.1 million in each of the years 2002, 2001, and 2000; this lease will expire in November 2011.

 

As lessor, we also entered into a ground lease, which will expire in August 2054, with this unconsolidated joint venture. We recognized rental income of $0.2 million in each of the three years 2002, 2001, and 2000, and recorded a $1.8 million receivable associated with this lease. The venture’s current projection reflects approximately $0.6 million available funds, per year, from its operations to pay down our receivables.

 

New accounting standards

 

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” which addresses financial accounting and reporting for the impairment and disposal of long-lived assets. In general, sales of rental property, (a) not sold

 

59


subject to an initial tenant purchase option or, (b) explicitly built with the intention of selling, but not sold within two years of completion, are referred to as “Investment Properties” and classified as discontinued operations. Therefore, as required, gain or loss attributed to the operations and sale of Investment Properties sold or held for sale is presented in the statement of operations as discontinued operations, net of applicable income tax. Prior period statements of operations have been reclassified to reflect as discontinued operations the gain or loss related to Investment Properties that were sold or held for sale and presented as discontinued operations during the year ended December 31, 2002. Additionally, all periods presented will likely require further reclassification in future periods as additional, similar sales of Investment Properties occur.

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (see Note 15, Commitments and Contingencies, for required disclosure).

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure—An Amendment of Statement of Financial Accounting Standards No. 123.” As of December 31, 2002, the Company has not elected the fair value recognition provisions of SFAS No. 123 (see Note 2, Summary of Significant Accounting Policies, for required disclosure).

 

In January 2003, the FASB Interpretation No. 46, “Consolidation of Variable Interest Entities—an interpretation of ARB No. 51” (FIN 46). FIN 46 requires that any entity meeting certain rules relating to a company’s equity investment risk and level of financial control be consolidated as a variable interest entity. The statement is applicable to all variable interest entities created or acquired after January 31, 2003, and the first interim period beginning after June 15, 2003, for variable interest entities in which the Company holds a variable interest that is acquired before February 1, 2003. The Company plans on adopting FIN 46 in the time frames as required by the statement. Management expects no significant effect on the financial position, results of operations or cash flows of the Company as a result of the initial adoption of this standard in regard to existing variable interest entities; however, newly formed entities in 2003 could meet these requirements and will be recorded as appropriate.

 

Trading

 

Our executives from time to time in the future may enter into so-called “Rule 10b5-1 Plans.” Under an appropriate Rule 10b5-1 Plan, an executive may instruct a third party, such as a brokerage firm, to engage in specified securities transactions in the future based on a formula without further action by the executive, provided that the plan satisfies the legal requirements of Rule 10b5-1 under the Securities Exchange Act of 1934 as amended.

 

Environmental Matters

 

Many of our properties and our subsidiaries’ properties are in urban and industrial areas and may have been leased to or previously owned by commercial and industrial companies that discharged hazardous materials. We and our subsidiaries incur ongoing environmental remediation and disposal costs and legal costs relating to clean up, defense of litigation, and the pursuit of responsible third parties. Costs incurred by the consolidated group in connection with operating properties and with properties previously sold are expensed. Costs incurred for properties to be sold by us or our subsidiaries are capitalized and will be charged to cost of sales when the properties are sold (see Notes 2 and 15 of the accompanying Consolidated Financial Statements, for further discussion).

 

In recent years, certain of our subsidiaries have acquired properties with known environmental problems for cleanup and redevelopment, and we expect that we may continue to form subsidiaries to acquire such properties (or that existing subsidiaries will acquire such properties) when the potential benefits of development warrant. When our subsidiaries acquire such properties, they undertake due diligence to determine the nature of the

 

60


environmental problems and the likely cost of remediation, and they manage the risk with undertakings from third parties, including the sellers and their affiliates, remediation contractors, third party sureties, or insurers. The costs associated with environmental remediation are included in the costs estimates for properties to be developed.

 

Forward-Looking Information and Risk Factors

 

Except for historical matters, the matters discussed in this annual report are forward-looking statements that involve risks and uncertainties. We have tried, wherever practical, to identify these forward-looking statements by using words like “anticipate”, “believe”, “estimate”, “project”, “expect”, “plan”, “prospects”, and similar expressions. Forward-looking statements include, but are not limited to, statements about plans; opportunities; negotiations; markets and economic conditions; development, construction, rental, and sales activities; availability of financing; and property values.

 

We caution you not to place undue reliance on these forward-looking statements, which reflect our current beliefs and are based on information currently available to us. We do not undertake any obligation to revise these forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs.

 

These forward-looking statements are subject to risks and uncertainties that could cause our actual results, performance (including, without limitation, return on costs), or achievements to differ materially from those expressed in or implied by these statements. In particular, among the factors that could cause actual results to differ materially are:

 

  ·   Catellus’ or Catellus REIT’s ability to obtain required consents of stockholders, lenders, debt holders, and joint venture partners of Catellus and its affiliates and of other third parties in connection with the REIT conversion and to consummate all of the transaction constituting part of the REIT conversion

 

  ·   The timing of Catellus REIT’s election to be taxed as a REIT and the ability of Catellus REIT to satisfy complex rules in order to qualify for taxation as a REIT for federal income tax purposes and to operate effectively within the limitations imposed by these rules

 

  ·   Changes in the real estate market or in general economic conditions in the areas in which we own property, including the possibility of a worsening economic slowdown or recession. Such changes may result in higher vacancy rates for commercial property and lower prevailing rents, lower sales prices or slower sales, lower absorption rates, more tenant defaults and bankruptcies, and the like

 

  ·   Product and geographical concentration

 

  ·   Competition in the real estate industry

 

  ·   Unavailability of financing to meet our capital needs, the variability of interest rates, and our inability to use our collateral to secure loans

 

  ·   Changes in insurance markets, including the increased cost or unavailability of particular insurance products and the financial health of insurance companies

 

  ·   Exposure of our assets to damage from natural occurrences such as earthquakes, and weather conditions that affect the progress of construction

 

  ·   Delay in receipt of or denial of government approvals and entitlements for development projects, other political and discretionary government decisions affecting the use of or access to land, or legal challenges to the issuance of approvals or entitlements

 

  ·   Changes in the management team

 

  ·   Changes in income taxes due because of audit adjustments required by Federal and State income tax authorities, and changes in tax laws and other circumstances that affect our ability to control the timing and recognition of deferred tax liabilities

 

61


 

  ·   Liability for environmental remediation at properties owned, managed, or formerly owned or managed by us, our subsidiaries, or the predecessors of either, and changes in environmental laws and regulations

 

  ·   Failure to reach agreement with third parties on definitive terms or failure to close transactions, and failure or inability of third parties to perform their obligations under agreements, including tenants under lease or other agreements with us

 

  ·   Availability of properties for future development

 

  ·   Increases in the cost of land, infrastructure, and building materials

 

  ·   Limitations on or challenges to title to our properties

 

  ·   Risks related to the performance, interests, and financial strength of the co-owners of our joint venture projects, such as the need to satisfy debt service guaranties upon a default by one of our co-owners

 

  ·   Changes in policies and practices of organized labor groups who may work on our projects

 

  ·   Issues arising from shortages in electrical power to us or to our customers, or higher prices for power, which could affect our ability to rent or sell properties, the ability of tenants or buyers to pay for our properties or for the use of our properties, or our ability to conduct our business

 

  ·   Other risks inherent in the real estate business

 

  ·   Acts of war, other geopolitical events, and terrorist activities that could adversely affect any of the above factors

 

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

 

Our primary market risk exposure is interest rate risk as our financial instruments are not subject to foreign exchange rate risk or commodity price risk. We continuously and actively monitor and manage interest costs on our debt and may enter into interest rate-protection contracts based on changing market conditions. At December 31, 2002, we did not have any interest rate protection contracts outstanding.

 

As of December 31, 2002, approximately 80% of our debt bore interest at fixed rates and had a weighted average maturity of 7.9 years and a weighted average coupon rate of 6.56%. The interest rate risk for fixed rate debt does not have a significant impact on the Company until such debt matures and may need to be refinanced. The remainder of our debt bears interest at variable rates with a weighted average maturity of 2 years and a weighted average coupon rate of 3.49%. To the extent that we incur additional variable rate indebtedness, we increase our exposure to increases in interest rates. Since our $307.5 million of floating rate debt is largely offset by $311.5 million of cash and restricted cash balances, which are invested in floating rate money market investments, our exposure to short-term interest rate movements is not considered significant. We believe that moderate increases in interest expense as a result of inflation will not materially affect our financial position, results of operations, or cash flow.

 

Item 8.    Financial Statements and Supplementary Data

 

The financial statements and schedules required under Regulation S-X promulgated under the Securities Act of 1933 are identified in Item 15 and are incorporated herein by reference.

 

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

62


PART III

 

Item 10.    Directors and Executive Officers of the Registrant

 

Board of Directors of the Company

 

Each director is elected to serve annually until our next annual stockholders meeting and until his or her successor is elected and qualified.

 

Name of Director


  

Business Experience


  

Age


    

Year First Elected a Director


Joseph F. Alibrandi

  

Mr. Alibrandi has served as Chairman and Chief Executive Officer of Alibrandi Associates, L.L.C., a money management firm, since 2001. From 1985 until his retirement in 1999, Mr. Alibrandi served as Chairman of Whittaker Corporation, a diversified company with business activities in the aerospace and communications fields. From 1974 to 1994 and from 1996 to 1999, he also served as Chief Executive Officer of Whittaker Corporation. Mr. Alibrandi is currently a director of AeroVironment, Inc.

  

74

    

1989

Stephen F. Bollenbach

  

Mr. Bollenbach has served as President and Chief Executive Officer of Hilton Hotels Corporation since 1996. From 1995 to 1996, Mr. Bollenbach was Executive Vice President and Chief Financial Officer of The Walt Disney Company. From 1993 to 1995, he was President and Chief Executive Officer of Host Marriott Corporation. Mr. Bollenbach is currently Chairman of Park Place Entertainment Corporation, a gaming spin-off from Hilton, and a director of Hilton Group PLC and AOL/Time Warner, Inc.

  

60

    

1999

Daryl J. Carter

  

Mr. Carter has served as Co-Chairman of Capri Capital, L.P., a real estate investment company, since 1992.

  

47

    

1995

Richard D. Farman

  

Mr. Farman has served as Chairman Emeritus of Sempra Energy, an energy services holding company, since September 2000. From 1998 to 1999, he served as Chairman and CEO of Sempra Energy. From 1993 to 1998, he served as President, Chief Operating Officer, and Director of Pacific Enterprises, an energy services company. From 1993 to 1995, he was Chief Executive Officer of Southern California Gas Company, a subsidiary of Pacific Enterprises. Mr. Farman is currently a director of UnionBanCal; KCET, a nonprofit public service television station; and Executive Service Corps of Southern California, a nonprofit organization that provides management consulting to the nonprofit community.

  

67

    

1997

Christine Garvey

  

Ms. Garvey has served as Global Head of Corporate Real Estate Services at Deutsche Bank AG London since May 2001. From December 1999 until April 2001, Ms. Garvey served as Vice President, Worldwide Real Estate and Workplace Resources at Cisco Systems, Inc. From 1997 to 1998, Ms. Garvey served as Group Executive Vice President, Commercial Real Estate Services Group of Bank of America

  

57

    

1995

 

63


Name of Director


  

Business Experience


  

Age


    

Year First Elected a Director


    

NT&SA. From 1992 to 1997, Ms. Garvey served as Executive Vice President, Corporate Real Estate, Other Real Estate Owned, Sales and Property Management of Bank of America NT&SA.

           

William M. Kahane

  

Mr. Kahane served as Non-Executive Chairman of our board of directors from May 1998 until May 2000. Since April 2000, he has served as Chief Executive Officer and as a director of Peracon, Inc., an Internet platform that facilitates the purchase and sale of commercial real estate. Mr. Kahane also serves as managing director of GF Capital Management, a financial advisory, real estate and wealth management firm providing services to entrepreneurial-oriented clients worldwide. From 1981 until 1992, Mr. Kahane was in the investment banking department of Morgan Stanley & Co. Mr. Kahane has also served as Chairman of Milestone Partners Limited, a real estate investment banking company, since 1992.

  

54

    

1997

Leslie D. Michelson

  

Mr. Michelson has served as Vice Chairman and Chief Executive Officer of CaP CURE, the world’s largest private source of prostate cancer research funding, since December 2002. From May 2002 until December 2002, he served as President and Chief Executive Officer of CaP CURE. From August 2001 to May 2002, Mr. Michelson served as an investor, advisor and/or director for a portfolio of entrepreneurial health care, technology and real estate companies. From March 2000 to August 2001, Mr. Michelson served as Chief Executive Officer and as a director of Acurian, Inc., an Internet company that accelerates clinical trials for new prescription drugs. From 1999 to March 2000, Mr. Michelson served as Managing Director of Saybrook Capital, LLC, an investment bank specializing in the real estate and health care industries. From June 1998 to February 1999, Mr. Michelson served as Chairman and Co-Chief Executive Officer of Protocare, a manager of clinical trials for the pharmaceutical industry and disease management firm. From 1988 to 1998, Mr. Michelson served as Chairman and Chief Executive Officer of Value Health Sciences, Inc., an applied health services research firm.

  

52

    

1997

Deanna W. Oppenheimer

  

Ms. Oppenheimer has served as President, Banking and Financial Services of Washington Mutual, Inc., a financial services company, since December 1999. Prior to that time, she served as President, Consumer Banking of the company from July 1999 to December 1999 and Executive Vice President, Consumer Banking from 1995 to July 1999. Ms. Oppenheimer is also a trustee and Chair-Elect of the Board of Trustees of the University of Puget Sound.

  

44

    

2001

 

64


Name of Director


  

Business Experience


  

Age


    

Year First Elected a Director


Nelson C. Rising

  

Mr. Rising has served as our Chairman of Board of Directors and Chief Executive Officer since May 2000. From 1994 through May 2000, Mr. Rising served as our President and Chief Executive Officer and as a Director. Mr. Rising is also currently Chairman of the Board of Directors of the Federal Reserve Bank of San Francisco, Chairman of The Real Estate Roundtable, a federal public policy advocacy group for the real estate industry, and a member of the Executive Committee of the Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT).

  

61

    

1994

Thomas M. Steinberg

  

Mr. Steinberg has served as President of Tisch Family Interests since 1997. In this capacity, he manages and supervises investments for members of the Laurence A. Tisch and Preston R. Tisch families. From 1991 until 1997, he served as Managing Director of Tisch Family Interests. Formerly, he was a Vice President of Goldman Sachs & Co. Mr. Steinberg is currently Chairman of the Board of Directors of Gunther International, Ltd., and a director of Infonxx, Inc. and Ableco.

  

46

    

1994

Cora M. Tellez

  

Ms. Tellez served as President of the Health Plans Division of Health Net, Inc., a managed health care company from January 2001 to April 2002. In 2000, she served as President of the Western Division of Health Net, Inc., and from 1998 to 1999, she served as President and Chief Executive Officer of Health Net of California, a division of Health Net, Inc. From 1997 to 1998, Ms. Tellez served as President and Chairman of Prudential HealthCare Plan of California, Inc. and from 1994 to 1997, she served as Senior Vice President and Regional Chief Executive of the Bay Region for Blue Shield of California. Ms. Tellez is currently Chair of the Asian Pacific Fund, a non-profit organization, and a director of the S.H. Cowell Foundation and Mills College. She is also a director of the Institute for the Future, Holy Names College, and Philippine International Aid.

  

53

    

2001

 

65


 

Executive Officers of the Company

 

Our executive officers are listed below. There were no family relationships between any executive officers and directors. All executive officers serve at the pleasure of the Board of Directors, subject to compliance with various employment agreements to which the Company and the officers are parties.

 

Name and Position


  

Business Experience


  

Age


Nelson C. Rising

Chairman of the Board and

Chief Executive Officer

  

See description under Board of Directors for Mr. Rising’s business experience.

  

61

Timothy J. Beaudin

Executive Vice President

  

Mr. Beaudin was elected as Executive Vice President in September 2001. Before this election, Mr. Beaudin served as President of our Commercial Group, where he was responsible for managing our commercial development activities, asset management, property sales, and the property tax group. From January 1996 to early 1999, Mr. Beaudin served as our Senior Vice President, Property Operations.

  

44

C. William Hosler

Senior Vice President and

Chief Financial Officer

  

Mr. Hosler joined us as Senior Vice President and Chief Financial Officer in July 1999. From January 1998 to March 1999, Mr. Hosler served as the Chief Financial Officer for Capital Company of America, LLC. From 1995 to 1998, Mr. Hosler served as the Chief Financial Officer for Morgan Stanley & Co.—Morgan Stanley Real Estate Funds.

  

39

Vanessa L. Washington

Senior Vice President and

General Counsel

  

Ms. Washington joined the Company in December 2001 and has served as Senior Vice President and General Counsel since January 2002. Before joining the Company, Ms. Washington was associated with California Federal Bank from 1992 to 2001, and served as Senior Vice President, Corporate Secretary and Counsel from 1996 to 2001.

  

43

Paul A. Lockie

Vice President and Controller

  

Mr. Lockie has served as Vice President and Controller since he joined us in February 1996.

  

44

Jaime L. Gertmenian

Vice President, Human Resources and Administration

  

Ms. Gertmenian has been with us since October 1995 as Vice President of Human Resources and Administration.

  

36

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the 1934 Securities Exchange Act requires our executive officers, directors, and stockholders who own more than 10% of our stock to file reports of ownership and any changes in ownership with the Securities and Exchange Commission. Due to a courier error, a Form 5 for Christine Garvey was filed one day after the required deadline. In addition, a Form 4 for Jaime Gertmenian was filed after the required deadline, and an amended Form 5 and Form 3 was filed for Paul Lockie and Vanessa Washington, respectively, each to reflect one previously unreported option grant. Based solely on our review of copies of the Section 16(a) reports, and on written statements from our executive officers and directors, we believe that all other required reports of executive officers and directors were filed on time in 2002.

 

66


 

Item 11.    Executive Compensation

 

Directors’ Compensation

 

Each director who is not an employee of Catellus receives an annual retainer of $30,000, except Mr. Farman, our lead independent director, who receives $100,000. The chair of each committee also receives an annual retainer of $3,000. In addition, each non-employee director receives fees of: (i) $1,250 for attendance at each meeting of the board of directors, (ii) $1,200 for attendance by members of the Audit Committee at each meeting of the Audit Committee, and (iii) $1,000 for attendance at each meeting of any other board committee of which that director is a member, and, in Mr. Farman’s case, an ex officio member. Directors are also reimbursed for their out-of-pocket expenses for each board or committee meeting attended.

 

Each non-employee director also receives an automatic grant of an option to purchase 5,000 shares of common stock following each annual meeting of stockholders. The exercise price of each option is the closing stock price on the date of grant. Each option has a ten-year term and becomes exercisable in four equal installments on each of the first four anniversaries of the date of grant.

 

In addition, each non-employee director may irrevocably elect each year to defer any retainers or meeting fees for the following year and instead receive director stock units (“Director Stock Units”) in lieu of cash compensation. An election to defer must be made before the beginning of the calendar year in which the retainer or fee would otherwise be earned. The number of Director Stock Units to be credited to a director is calculated by dividing the amount of the deferred compensation by 90% of the closing price of our common stock on the date of the credit. We credit Director Stock Units on January 1 of each year for any deferred retainers, and they vest on a per diem basis over the course of that year. We credit Director Stock Units on December 31 of each year for any deferred meeting fees earned during that calendar year, and such units vest immediately. If a director dies, becomes disabled, or a change in control occurs and the director’s service as a director terminates thereafter, any unvested Director Stock Units vest immediately and all Director Stock Units are immediately distributed. Each director receives a distribution of common stock pursuant to vested Director Stock Units on the earlier of a date previously selected by the director (which may not be less than three years after the election is made) or January 1 following the director’s termination of service, except as described in the preceding sentence. We distribute common stock pursuant to Director Stock Units by issuing to the director an equivalent number of shares of our common stock, either in a lump sum or in a specified number of annual installments, as previously selected by the director. A Director Stock Unit has no voting rights until distributed as common stock.

 

67


 

COMPENSATION OF EXECUTIVE OFFICERS

 

Summary Compensation Table

 

Name and Principal Position


  

Year


  

Annual

Salary


  

Annual

Bonus(1)


    

Other Annual Compensation(2)


  

Securities Underlying Option Awards


  

All Other Compensation(3)


Nelson C. Rising

  

2002

  

$

716,625

  

$

1,885,000

    

 

—  

  

—  

  

$

131,485

Chairman and Chief Executive Officer

  

2001

  

 

682,512

  

 

1,919,530

    

 

—  

  

500,000

  

 

60,634

    

2000

  

 

650,000

  

 

1,491,750

    

 

—  

  

1,000,000

  

 

60,634

Timothy J. Beaudin

  

2002

  

 

450,000

  

 

1,094,667

    

$

16,403

  

—  

  

 

9,515

Executive Vice President

  

2001

  

 

374,554

  

 

841,500

    

 

12,930

  

—  

  

 

8,664

    

2000

  

 

325,000

  

 

737,754

    

 

13,972

  

300,000

  

 

8,264

C. William Hosler

  

2002

  

 

281,190

  

 

663,000

    

 

—  

  

—  

  

 

9,515

Senior Vice President and

  

2001

  

 

272,999

  

 

484,575

    

 

—  

  

—  

  

 

8,664

Chief Financial Officer

  

2000

  

 

260,000

  

 

507,003

    

 

—  

  

240,000

  

 

8,264

Vanessa L. Washington(4)

  

2002

  

 

250,000

  

 

410,000

    

 

58

  

—  

  

 

9,515

Senior Vice President and

  

2001

  

 

13,302

  

 

—  

    

 

—  

  

100,000

  

 

—  

General Counsel

  

2000

  

 

—  

  

 

—  

    

 

—  

  

—  

  

 

—  

Paul A. Lockie

  

2002

  

 

179,812

  

 

93,009

    

 

336

  

10,000

  

 

9,107

Vice President and Controller

  

2001

  

 

172,917

  

 

90,000

    

 

331

  

10,000

  

 

8,664

    

2000

  

 

148,750

  

 

75,000

    

 

309

  

40,000

  

 

8,239


(1)   Bonus includes (a) performance-based annual awards earned in that year whether or not paid in a subsequent year; (b) a special bonus of $166,667 paid to Mr. Beaudin in April 2002 pursuant to his memorandum of understanding discussed in “Employment Agreements” below; and (c) a hiring bonus of $130,000 paid to Ms. Washington in April 2002.
(2)   Perquisites did not, in the aggregate, exceed the lesser of $50,000 or 10% of the total of salary and bonus for each named executive. The amounts listed represent earnings in 2002 in excess of 120% of the applicable federal rate on amounts deferred by the named executive into a Declared Rate subaccount (as described below) under Catellus’ Deferred Compensation Program (as described below). Each of the named executives is eligible to participate in a non-qualified deferred compensation program (the “Deferred Compensation Program”). Under this program, an executive may elect to defer a portion of his or her base salary, and a portion or all of his or her bonus. Amounts deferred are credited to a bookkeeping account for the executive, together with the investment returns or losses (“Earnings”) that would have accrued to the account if it were invested in various investment options selected by the executive. An executive who retires at age 59½ or who has more than ten years of service will be vested in an additional 25% of positive Earnings. Amounts deferred under the program into the Declared Rate subaccount are credited with a rate (the “Declared Rate”) based on the 120 month rolling average of ten-year U.S. Treasury Notes as of August 31 of the preceding year (rate is enhanced after age 59½ or ten years of service). Amounts deferred into the other subaccounts in the Deferred Compensation Program are subject to fluctuations in value, depending on the performance of the simulated financial investments selected by the executive.
(3)   The amounts listed for 2002 represent (a) our contributions to the executives’ Profit Sharing & Savings Plan and Trust of $4,000 for each of the named executives, except Mr. Lockie who received $3,592; (b) a $5,515 matching 401(k) contribution for each named executive; and (c) for Mr. Rising, a life insurance premium of $51,970 and a one-time payment of $70,000 awarded by the Compensation and Benefits Committee that was deferred until Mr. Rising’s retirement.
(4)   Ms. Washington joined Catellus in December 2001 and was elected as Senior Vice President and General Counsel effective as of January 14, 2002.

 

68


 

Option Grants in 2002

 

Name


  

Number of

Securities

Underlying Options

Granted


    

Percent of

Total Options

Granted to

Employees

in 2002


    

Per Share

Exercise or Base Price


  

Expiration

Date


  

Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(1)


                

5%


  

10%


Nelson C. Rising

  

—  

    

—  

 

  

 

—  

  

—  

  

 

—  

  

 

—  

Timothy J. Beaudin

  

—  

    

—  

 

  

 

—  

  

—  

  

 

—  

  

 

—  

C. William Hosler

  

—  

    

—  

 

  

 

—  

  

—  

  

 

—  

  

 

—  

Vanessa L. Washington

  

—  

    

—  

 

  

 

—  

  

—  

  

 

—  

  

 

—  

Paul A. Lockie

  

10,000

    

2.23

%

  

$

18.05

  

11/24/2012

  

$

113,515

  

$

287,671


(1)   The assumed 5% and 10% rates of stock price appreciation are provided in accordance with rules of the SEC and do not represent our estimate or projection of the future price of our common stock. We do not endorse the accuracy of this model, or any other model, for valuing options. Actual gains, if any, on stock option exercises are dependent on the future performance of our common stock, overall market conditions, and the option holders’ continued employment through the vesting period. The potential realizable value calculation assumes that the option holder waits until the end of the option term to exercise the entire option. This table does not take into account any actual change in the price of our common stock from the date of grant to the current date. If the market price of our common stock does not appreciate over the option term, no value will be realized from the option grants made to the named officers.

 

Aggregated Option Exercises and

Fiscal Year-End Option Holdings

 

Name


    

Shares Acquired on Exercise


  

Value Realized


  

Number of Unexercised Options at

December 31, 2002


  

Value of Unexercised In the Money Options

at December 31, 2002


          

Exercisable


  

Unexercisable


  

Exercisable


  

Unexercisable


Nelson C. Rising

    

—  

  

—  

  

2,250,000

  

900,000

  

$

22,246,250

  

$

3,400,000

Timothy J. Beaudin

    

—  

  

—  

  

589,800

  

160,200

  

 

6,005,230

  

 

1,017,270

C. William Hosler

    

—  

  

—  

  

336,840

  

203,160

  

 

1,576,434

  

 

1,102,566

Vanessa L. Washington

    

—  

  

—  

  

25,000

  

75,000

  

 

60,000

  

 

180,000

Paul A. Lockie

    

—  

  

—  

  

22,500

  

37,500

  

 

133,100

  

 

163,300

 

The table gives information on the value (stock price less exercise price) of the options held by the named executive officers at year-end using the closing trading price ($19.85) of our common stock on December 31, 2002. An option is “in the money” if the market value of the common stock exceeds the exercise price of the options. This value does not reflect the actual value of the options using a Black-Scholes option pricing model.

 

EMPLOYMENT AGREEMENTS

 

Summarized below are the employment agreements or memoranda of understanding with our named executive officers. The Compensation and Benefits Committee may award different or additional compensation from that which is described below.

 

Employment Agreement with Mr. Rising

 

We have an employment agreement with Mr. Rising that provides that he will serve as Chairman and Chief Executive Officer until December 31, 2006, and that the board of directors will use its best efforts to cause him to continue to be elected as a member of the board throughout the term of his employment. The employment agreement provides for a minimum base salary which will be increased by 5% each year, stock option awards, as well as an annual target bonus that is approved by the Compensation and Benefits Committee.

 

69


 

Mr. Rising’s current employment agreement also provides for a retirement benefit comprised of an annual contribution (“Annual Credit”) to his account in Catellus’ Deferred Compensation Plan, to be made after the determination of his bonus for each calendar year, in an amount equal to the present value of an annuity that would (i) pay to Mr. Rising, during his lifetime, an amount equal to 5% of the sum of his average annual salary and bonus earned for the three calendar years completed immediately prior to the date on which the Annual Credit is determined and (ii) pay to Mr. Rising’s wife after his death, if she survives him, for her lifetime, one-half of the annual amount payable to Mr. Rising. In the event that Mr. Rising’s employment with Catellus terminates by reason of death, disability, constructive discharge (such as reduction in his salary or maximum bonus potential or a failure to elect him as a member of the board) or without cause, Catellus will credit Mr. Rising’s Deferred Compensation Plan account with an amount equal to the product of the Annual Credit and the number of years between January 1 of the year in which termination occurs and December 31, 2006. The agreement provides that the Annual Credit in any year will not exceed $1,000,000 and the total Annual Credits will not exceed $7,000,000. On January 1, 2002, Catellus credited Mr. Rising’s Deferred Compensation Plan account with $2,000,000 as a replacement for, and in full satisfaction of, Catellus’ obligations to provide a retirement benefit under Mr. Rising’s prior employment agreement.

 

Mr. Rising’s employment can be terminated by either party at any time, with or without cause. If Mr. Rising’s agreement is terminated for any reason other than for cause or his voluntary resignation, he will receive a pro rata share of that year’s target bonus payment. In addition, if we terminate his employment for any reason other than for cause, or in the event of his death, disability or constructive discharge, Mr. Rising is entitled to receive, over a period of up to 24 months, payments in the aggregate equal to two times his average annual salary and bonus for the three preceding years, and all of his stock options become immediately exercisable.

 

If, however, Mr. Rising is constructively discharged or terminated without cause within 12 months after a change of control of Catellus, then he will, instead, receive a lump sum payment of three times his average annual salary and bonus for the three preceding years. In addition, all of his stock options will become immediately exercisable. If Mr. Rising incurs an excise tax under Section 4999 of the Internal Revenue Code (relating to “excess parachute payments”) with respect to any payments he receives from Catellus and the acceleration of the vesting of his options, and if his “excess parachute payments” are at least 110% of the amount of the parachute payments that he could have received without being subject to any excise tax under Section 4999, we will make a “gross-up” payment to Mr. Rising to make him whole for this excise tax and any income and employment taxes which apply to the gross-up payment.

 

For these purposes, a change of control generally includes:

 

  ·   Acquisitions of 25% or more of our voting stock by one person or group;

 

  ·   Changes in membership on our board of directors such that directors who are currently on the board of directors, and those nominated by the then-current directors, are no longer a majority of the board;

 

  ·   Consummation by our stockholders of any reorganization in which our stockholders before the reorganization do not own at least 50% of the voting stock of Catellus or the surviving entity after the reorganization; or

 

  ·   Consummation by our stockholders of any complete liquidation or dissolution of Catellus, or of any sale of substantially all of our assets.

 

Pursuant to the terms of Mr. Rising’s prior employment agreement, Catellus provided him with an unsecured loan of $1,000,000 on December 22, 2000. For more information regarding this loan, see Item 13. Certain Relationships and Related Transactions on this Form 10-K.

 

Memorandum of Understanding with Mr. Beaudin

 

We have a Memorandum of Understanding (“MOU”) with Mr. Beaudin dated February 7, 2001. Mr. Beaudin was elected Executive Vice President of the Company on September 26, 2001. The MOU provides for a

 

70


minimum base salary subject to annual review, as well as an annual target bonus that is approved by the Compensation and Benefits Committee. In addition, the MOU provides that Mr. Beaudin is entitled to receive a special bonus of $166,667 on each April 6th of 2002, 2003, and 2004, if he has (i) remained continuously employed by Catellus throughout the period ending on the date the special bonus payment is otherwise due, and (ii) not sold any common stock of Catellus on or before the date the special bonus payment is otherwise due, unless that stock was acquired pursuant to the exercise of an option that was scheduled to expire by its terms within one year of the date of exercise.

 

Pursuant to the terms of his prior employment agreement, Mr. Beaudin received an interest-free loan from Catellus of $500,000 on April 6, 1999. For more information regarding this loan, see Item 13. Certain Relationships and Related Transactions on this Form 10-K.

 

Mr. Beaudin’s employment may be terminated by either party at any time, with or without cause. If we terminate his employment for any reason other than for cause, or in the event of his death or disability, or if he resigns for “good reason” (such as reduction in his salary or reduction in his responsibilities), Mr. Beaudin is entitled to receive, over a 24-month period, payments in the aggregate equal to two times his average annual salary and bonus for the three preceding years, and all of his stock options will become immediately exercisable.

 

If, however, Mr. Beaudin is terminated without cause or resigns for “good reason” within 12 months after a change of control, then he will, instead, receive a lump sum payment of three times his average annual salary and bonus for the three preceding years, and all of his stock options will become immediately exercisable. Mr. Beaudin is entitled to receive a gross-up payment for any excise tax liability he may incur, on the same terms and conditions as Mr. Rising. A change of control here has the same meaning as in Mr. Rising’s employment agreement, described above.

 

Memorandum of Understanding with Mr. Hosler

 

We have a Memorandum of Understanding with Mr. Hosler that provides that he will serve as Senior Vice President and Chief Financial Officer. The MOU provides for a minimum base salary subject to annual review, as well as an annual target bonus that is approved by the Compensation and Benefits Committee. Mr. Hosler is subject to the same termination provisions as are described with respect to Mr. Beaudin’s agreement, above.

 

Memorandum of Understanding with Ms. Washington

 

We have a Memorandum of Understanding with Ms. Washington that provides that she will serve as Senior Vice President and General Counsel. The MOU provides for a minimum base salary subject to annual review, as well as an annual target bonus that is approved by the Compensation and Benefits Committee. Ms. Washington’s employment may be terminated by either party at any time, with or without cause. If we terminate her employment for any reason other than for cause, or if she resigns for “good reason” (such as reduction in her salary or reduction in her responsibilities), Ms. Washington is entitled to receive payments in the aggregate equal to her then one year base salary and 100% of her targeted annual bonus for the calendar year, prorated for actual months of service during such year, and all of her stock options will become immediately exercisable. If, however, Ms. Washington is terminated without cause or resigns for “good reason” within 12 months after a change of control, then she will, instead, receive a lump sum payment of two times her average annual salary and bonus for the two preceding years (or, in the event of a change in control that occurs prior to December 31, 2003, two times her then annual salary and the then current annual maximum cash bonus potential for the year), and all of her stock options will become immediately exercisable. A change of control here has the same meaning as in Mr. Rising’s employment agreement, described above.

 

 

71


Compensation Committee Interlocks and Insider Participation

 

During 2002, Messrs. Alibrandi, Bollenbach, Farman, Kahane, and Michelson served as members of the Compensation and Benefits Committee. None of the members of the Compensation and Benefits Committee has ever been an employee or officer of Catellus. However, Mr. Bollenbach, a director, is President and Chief Executive Officer of Hilton Hotels Corporation, which has two hotel investments with Catellus. For more information, see Item 13. Certain Relationships and Related Transactions on this Form 10-K.

 

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

 

Security Ownership of Certain Beneficial Owners

 

The following table provides information about stockholders that beneficially own more than 5% of our common stock, based on documents filed under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934.

 

Name and Address


    

Shares of

Common Stock

Beneficially Owned


    

Percent of Class(1)


 

Harris Associates, L.P.(2).

    

8,206,177

    

9.4

%

Two North LaSalle Street, Suite 500

Chicago, Illinois 60602

               

California Public Employees’ Retirement System (CalPERS)(3)

    

8,182,276

    

9.4

%

Lincoln Plaza, 400 P Street

Sacramento, California 95814

               

Wallace R. Weitz & Company(4)

    

6,289,700

    

7.2

%

1125 South 103rd Street, Suite 600

Omaha, Nebraska 68124

               

Third Avenue Management LLC(5)

    

5,683,511

    

6.5

%

707 Third Avenue

New York, New York 10017-2023

               

Southeastern Asset Management, Inc.(6)

    

4,989,700

    

5.7

%

6410 Poplar, Suite 900

Memphis, Tennessee 38119

               

(1)   Percentage ownership is calculated using Catellus’ total issued and outstanding common stock as of March 10, 2003.
(2)   Based upon information in a Schedule 13G/A filed by Harris Associates, L.P. on February 14, 2003.
(3)   Based upon information in a Schedule 13D filed by CalPERS on December 17, 2001.
(4)   Based upon information in a Schedule 13G/A filed by Wallace R. Weitz & Company on February 4, 2002.
(5)   Based upon information in a Schedule 13G/A filed by Third Avenue Management LLC on January 29, 2003.
(6)   Based upon information in a Schedule 13G/A filed by Southeastern Asset Management, Inc. on January 10, 2003.

 

72


 

Security Ownership of Directors and Executive Officers

 

The following table shows how much of our common stock each director and named executive officer beneficially owned, and the amount owned by all current directors and executive officers as a group, as of March 11, 2003. Each person has sole voting and investment power over the shares shown unless otherwise indicated.

 

Beneficial Owner


  

Shares of

Common Stock

Beneficially

Owned(1)


    

Percent of

Common Stock

Owned


 

Joseph F. Alibrandi(2)

  

36,995

    

*

 

Stephen F. Bollenbach(3)

  

26,190

    

*

 

Daryl J. Carter(4)

  

40,643

    

*

 

Richard D. Farman(5)

  

33,643

    

*

 

Christine Garvey(6)

  

31,121

    

*

 

William M. Kahane(7)

  

40,758

    

*

 

Leslie D. Michelson(8)

  

21,744

    

*

 

Deanna W. Oppenheimer(9)

  

5,893

    

*

 

Nelson C. Rising(10)

  

2,338,673

    

2.7

%

Thomas M. Steinberg(11)

  

37,951

    

*

 

Cora M. Tellez(12)

  

12,384

    

*

 

Timothy J. Beaudin(13)

  

688,433

    

*

 

C. William Hosler(14)

  

396,097

    

*

 

Vanessa L. Washington(15)

  

25,000

    

*

 

Paul A. Lockie(16)

  

32,500

    

*

 

All current directors and executive officers as a

group (15 persons)

  

3,768,025

    

4.3

%


*   Less than one percent.
(1)   In addition to shares held directly, the number of shares shown as beneficially owned includes (i) shares subject to options that are exercisable within 60 days of March 11, 2003, and (ii) non-voting Director Stock Units which have been credited as described under “Directors’ Compensation”. All Director Stock Units have vested, unless otherwise noted below.
(2)   Mr. Alibrandi. Includes 14,971 Director Stock Units, 1,680 of which were credited on January 1, 2003 and vest on a per diem basis over the course of the year; 384 shares held in a revocable trust of which Mr. Alibrandi is trustor, trustee, and beneficiary; and 17,500 shares subject to options.
(3)   Mr. Bollenbach. Includes 13,690 Director Stock Units, 1,736 of which were credited on January 1, 2003 and vest on a per diem basis over the course of the year; and 12,500 shares subject to options.
(4)   Mr. Carter. Includes 18,143 Director Stock Units, 1,736 of which were credited on January 1, 2003 and vest on a per diem basis over the course of the year; and 22,500 shares subject to options.
(5)   Mr. Farman. Includes 5,704 Director Stock Units and 12,500 shares subject to options.
(6)   Ms. Garvey. Includes 8,621 Director Stock Units, 420 of which were credited on January 1, 2003 and vest on a per diem basis over the course of the year; and 22,500 shares subject to options.
(7)   Mr. Kahane. Includes 28,258 Director Stock Units, 1,736 of which were credited on January 1, 2003 and vest on a per diem basis over the course of the year; and 12,500 shares subject to options.
(8)   Mr. Michelson. Includes 9,244 Director Stock Units, 840 of which were credited on January 1, 2003 and vest on a per diem basis over the course of the year; and 12,500 shares subject to options.
(9)   Ms. Oppenheimer. Includes 2,143 Director Stock Units, 840 of which were credited on January 1, 2003 and vest on a per diem basis over the course of the year; and 3,750 shares subject to options.
(10)   Mr. Rising. Includes 2,250,000 shares subject to options. This figure does not include 35,000 shares held by the Rising Family Foundation, a nonprofit charitable foundation of which Mr. Rising and his wife are the sole directors, and 4,375 shares held by a trust of which Mr. Rising’s adult son, Christopher Rising, is trustee. Mr. Rising disclaims beneficial ownership of the shares held by the Rising Family Foundation and the shares held in trust by his son.

 

73


(11)   Mr. Steinberg. Includes 7,312 Director Stock Units, 840 of which were credited on January 1, 2003 and vest on a per diem basis over the course of the year; and 22,500 shares subject to options.
(12)   Ms. Tellez. Includes 6,834 Director Stock Units, 1,680 of which were credited on January 1, 2003 and vest on a per diem basis over the course of the year; and 3,750 shares subject to options.
(13)   Mr. Beaudin. Includes 659,700 shares subject to options.
(14)   Mr. Hosler. Includes 392,760 shares subject to options.
(15)   Ms. Washington. All shares are subject to options.
(16)   Mr. Lockie. All shares are subject to options.

 

Equity Compensation Plan Information

 

The following table provides information as of December 31, 2002 with respect to the shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans.

 

Plan Category


    

Number of securities to be issued upon exercise of outstanding options, warrants and rights

(a)


    

Weighted-average exercise price of outstanding options, warrants and rights

(b)


    

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column(a))

(c)


Equity compensation plans not approved by security holders

    

—  

    

 

—  

    

—  

      
    

    

Equity compensation plans approved by security holders

    

8,448,275

    

$

13.673

    

1,224,744

      
    

    

Total

    

8,448,275

    

$

13.673

    

1,224,744

      
    

    

 

Item 13.    Certain Relationships and Related Transactions

 

Mr. Bollenbach, a director, is President and Chief Executive Officer of Hilton Hotels Corporation (“Hilton”), which has common investments with Catellus in two hotels: the New Orleans Riverside Hilton Hotel, located in New Orleans, Louisiana, and the Embassy Suites Hotel located in San Diego, California. These investments pre-date both Mr. Bollenbach’s tenure as an officer of Hilton Hotels Corporation and his tenure as a member of our board of directors. Our share of the partnership distributions from these properties in 2002 totaled approximately $6.1 million.

 

The New Orleans Riverside Hilton Hotel is owned by International Rivercenter, a limited partnership, and managed by Hilton under a management contract with the partnership. Catellus owns a 25.2% general partnership interest in International Rivercenter and Hilton owns a 67.4% general partnership interest. Catellus and Hilton also each own a 38.75% partnership interest in New Orleans Rivercenter, a general partnership that owns an eight-acre parcel of land adjacent to the New Orleans Riverside Hilton Hotel. The remaining 22.5% partnership interest in this land parcel is held by New Orleans International Hotel, a limited partnership, in which Catellus owns a 15.9% limited partnership interest and Hilton owns a 29.5% limited partnership interest. All remaining interests in the foregoing partnerships are held by unrelated parties.

 

The Embassy Suites Hotel in San Diego, California is owned by Pacific Market Investment Company, a general partnership, equally owned by Catellus and Embassy Suites, Inc. Embassy Suites, Inc. manages that hotel under a management agreement with the partnership, and Embassy Suites, Inc. has been a subsidiary of Hilton since November 1999.

 

 

74


Ms. Oppenheimer, a director since May 2001, is President of Banking and Financial Services of Washington Mutual, Inc., a financial services company. Washington Mutual Bank, FA, a subsidiary of Washington Mutual, Inc., made a construction loan to us on April 5, 2001, in the principal amount of $9.9 million and payable at an interest rate of 30-day LIBOR plus 2.0%. The balance outstanding on that loan as of March 11, 2003 was $6.3 million. In addition, Washington Mutual, Inc. has merged with Bank United Corp., which made a construction loan to us on September 15, 2000 in the principal amount of $9.75 million, payable at an interest rate of 30-day LIBOR plus 2.5%. That loan was paid in full on July 23, 2002. Catellus believes that the terms of each of the foregoing transactions are no less favorable to Catellus than the terms obtainable in an arm’s length transaction with an independent third party.

 

In the normal course of business, we build buildings for and lease space to businesses similar to those with which some of our directors are affiliated. We have entered into two five-year leases with Washington Mutual Bank for premises of approximately 40,000 square feet and 25,947 square feet, respectively, owned by a subsidiary of Catellus in Northridge, California. In addition, we have entered into a ten-year lease with Washington Mutual Bank for premises of approximately 50,922 square feet located in a building owned by Catellus located in Coppell, Texas. Catellus believes that the proposed terms of each of the foregoing transactions are no less favorable to Catellus than the terms obtainable in an arm’s length transaction with an independent third party. We may, in the future, discuss other transactions of these types with businesses with which our directors are affiliated. Any such transactions will be approved by a majority of the disinterested directors.

 

On December 22, 2000, we made an unsecured loan of $1,000,000 to Mr. Rising, Chairman of our board of directors and Chief Executive Officer, pursuant to the terms of his employment agreement. Principal is payable in three equal installments on the first three anniversaries of the termination of Mr. Rising’s employment. Interest on the unpaid principal at the rate of 5.87% per annum is payable on February 28 of each year until all principal and interest amounts are paid in full.

 

In April 1999, we made an interest-free loan of $500,000 to Mr. Beaudin for the purchase or construction of a residence in connection with his relocation to the Denver, Colorado area, pursuant to the terms of his employment agreement. The loan is secured by a junior deed of trust on the residence. Principal is payable in installments of $166,666 on each April 6th of 2002 and 2003, and $166,667 on April 6, 2004. The balance outstanding on this loan as of March 11, 2003 is $333,333. In conjunction with the loan, Mr. Beaudin agreed to pledge certain of his stock options in Catellus as additional collateral for the loan, and further agreed not to conduct a cashless exercise of such options until the loan is paid in full. On October 26, 2001, we agreed to allow Mr. Beaudin to exercise an option to purchase 50,000 shares of common stock, which, unless exercised, would have expired on February 10, 2002. In consideration for being permitted to exercise the expiring stock options, Mr. Beaudin agreed to sell only as many shares as were necessary to pay the exercise price and applicable taxes. Mr. Beaudin further agreed to hold the remaining shares until such time as the loan is paid in full or he has received advance written clearance from Catellus to sell the shares.

 

Item 14.    Controls and Procedures

 

Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

 

 

75


PART IV

 

Item 15.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K

 

(a)(1) and (a)(2) Financial Statements and Financial Statement Schedules

 

See Index to Financial Statements and Financial Statement Schedules at F-1 herein.

 

All other Schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

 

(a)(3) Exhibits

 

See Index to Exhibits on Pages E-1 and E-2.

 

(b) Reports on Form 8-K

 

76


SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Catellus Development Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

CATELLUS DEVELOPMENT CORPORATION

By:

 

/s/    NELSON C. RISING         


   

Nelson C. Rising

Chairman and Chief Executive Officer

Dated: March 27, 2003

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Catellus Development Corporation and in the capacities and on the date indicated.

 

Signature


  

Title


 

Date


/s/    NELSON C. RISING        


Nelson C. Rising

  

Chairman and Chief Executive Officer (Principal Executive Officer)

 

March 27, 2003

/s/    C. WILLIAM HOSLER        


C. William Hosler

  

Senior Vice President and Chief Financial Officer (Principal Financial Officer)

 

March 27, 2003

/s/    PAUL A. LOCKIE        


Paul A. Lockie

  

Vice President and Controller (Principal Accounting Officer)

 

March 27, 2003

    *        


Joseph F. Alibrandi

  

Director

 

March 27, 2003

    *        


Stephen F. Bollenbach

  

Director

 

March 27, 2003

    *        


Daryl J. Carter

  

Director

 

March 27, 2003

    *        


Richard D. Farman

  

Director

 

March 27, 2003

    *        


Christine Garvey

  

Director

 

March 27, 2003

    *        


William M. Kahane

  

Director

 

March 27, 2003

    *        


Leslie D. Michelson

  

Director

 

March 27, 2003

 

77


Signature


  

Title


 

Date


    *        


Deanna W. Oppenheimer

  

Director

 

March 27, 2003

    *        


Thomas M. Steinberg

  

Director

 

March 27, 2003

    *        


Cora M. Tellez

  

Director

 

March 27, 2003

*By:   /s/    PAUL A. LOCKIE        


Paul A. Lockie

Attorney-in-Fact

March 27, 2003

        

 

78


 

I, Nelson C. Rising, certify that:

 

1.   I have reviewed this annual report on Form 10-K of Catellus Development Corporation;

 

2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Catellus Development Corporation as of, and for, the periods presented in this annual report;

 

4.   Catellus Development Corporation’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Catellus Development Corporation and we have:

 

  a)   designed such disclosure controls and procedures to ensure that material information relating to Catellus Development Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

  b)   evaluated the effectiveness of Catellus Development Corporation’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

  c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   Catellus Development Corporation’s other certifying officers and I have disclosed, based on our most recent evaluation, to Catellus Development Corporation’s auditors and the Audit Committee of Catellus Development Corporation’s Board of Directors (or persons performing the equivalent functions):

 

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect Catellus Development Corporation’s ability to record, process, summarize and report financial data and have identified for Catellus Development Corporation’s auditors any material weaknesses in internal controls; and

 

  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in Catellus Development Corporation’s internal controls; and

 

6.   Catellus Development Corporation’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 27, 2003

 
   

/s/    NELSON C. RISING      


   

Nelson C. Rising

Chairman and Chief Executive Officer

 

79


 

I, C. William Hosler, certify that:

 

1.   I have reviewed this annual report on Form 10-K of Catellus Development Corporation;

 

2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of Catellus Development Corporation as of, and for, the periods presented in this annual report;

 

4.   Catellus Development Corporation’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Catellus Development Corporation and we have:

 

  a)   designed such disclosure controls and procedures to ensure that material information relating to Catellus Development Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

  b)   evaluated the effectiveness of Catellus Development Corporation’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

  c)   presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   Catellus Development Corporation’s other certifying officers and I have disclosed, based on our most recent evaluation, to Catellus Development Corporation’s auditors and the Audit Committee of Catellus Development Corporation’s Board of Directors (or persons performing the equivalent functions):

 

  a)   all significant deficiencies in the design or operation of internal controls which could adversely affect Catellus Development Corporation’s ability to record, process, summarize and report financial data and have identified for Catellus Development Corporation’s auditors any material weaknesses in internal controls; and

 

  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in Catellus Development Corporation’s internal controls; and

 

6.   Catellus Development Corporation’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: March 27, 2003

 
   

/s/    C. WILLIAM HOSLER        


   

C. William Hosler

Senior Vice President

Chief Financial Officer

 

 

80


 

CATELLUS DEVELOPMENT CORPORATION

 

INDEX TO FINANCIAL STATEMENTS

 

    

Page


Financial Statements

    

Report of Independent Accountants dated January 29, 2003, except as to Note 18, for which the date is March 3, 2003

  

F-2

Consolidated Balance Sheet at December 31, 2002 and 2001

  

F-3

Consolidated Statement of Operations for the years ended December 31, 2002, 2001, and 2000

  

F-4

Consolidated Statement of Stockholders’ Equity for the years ended December 31, 2002, 2001, and
2000

  

F-5

Consolidated Statement of Cash Flows for the years ended December 31, 2002, 2001, and 2000

  

F-6

Notes to Consolidated Financial Statements

  

F-7

Summarized Quarterly Results (Unaudited)

  

F-33

Financial Statement Schedules

    

Report of Independent Accountants dated January 29, 2003, except as to Note 18, for which the date is March 3, 2003

  

S-1

Schedule II—Valuation and Qualifying Accounts

  

S-2

Schedule III—Real Estate and Accumulated Depreciation

  

S-3

Attachment A to Schedule III

  

S-4

Index to Exhibits

    

Exhibits

  

E-1

 

F-1


 

REPORT OF INDEPENDENT ACCOUNTANTS

 

To the Board of Directors and Stockholders of

Catellus Development Corporation

 

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of Catellus Development Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 17 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, effective January 1, 2002.

 

PRICEWATERHOUSECOOPERS LLP

 

San Francisco, California

January 29, 2003, except as to Note 18, for which the date is March 3, 2003

 

F-2


 

CATELLUS DEVELOPMENT CORPORATION

 

CONSOLIDATED BALANCE SHEET

(In thousands)

 

    

December 31,


 
    

2002


    

2001


 

Assets

                 

Properties

  

$

2,448,081

 

  

$

2,276,508

 

Less accumulated depreciation

  

 

(399,923

)

  

 

(354,557

)

    


  


    

 

2,048,158

 

  

 

1,921,951

 

Other assets and deferred charges, net

  

 

273,853

 

  

 

167,305

 

Notes receivable, less allowance

  

 

44,947

 

  

 

73,335

 

Accounts receivable, less allowance

  

 

14,211

 

  

 

22,663

 

Assets held for sale

  

 

2,760

 

  

 

—  

 

Restricted cash and investments

  

 

36,593

 

  

 

7,566

 

Cash and cash equivalents

  

 

274,927

 

  

 

222,695

 

    


  


Total

  

$

2,695,449

 

  

$

2,415,515

 

    


  


Liabilities and stockholders’ equity

                 

Mortgage and other debt

  

$

1,500,955

 

  

$

1,310,457

 

Accounts payable and accrued expenses

  

 

117,493

 

  

 

145,688

 

Deferred credits and other liabilities

  

 

151,466

 

  

 

177,656

 

Liabilities associated with assets held for sale

  

 

3,233

 

  

 

—  

 

Deferred income taxes

  

 

318,970

 

  

 

290,658

 

    


  


Total liabilities

  

 

2,092,117

 

  

 

1,924,459

 

    


  


Commitments and contingencies (Note 15)

                 

Minority interests

  

 

57,363

 

  

 

55,799

 

    


  


Stockholders’ equity

                 

Common stock, 110,817 and 110,209 shares issued, and 87,170 and 86,562 shares outstanding at December 31, 2002 and 2001, respectively

  

 

1,108

 

  

 

1,102

 

Paid-in capital

  

 

531,362

 

  

 

521,312

 

Treasury stock, at cost (23,647 shares at December 31, 2002 and 2001)

  

 

(401,082

)

  

 

(401,082

)

Accumulated earnings

  

 

414,581

 

  

 

313,925

 

    


  


Total stockholders’ equity

  

 

545,969

 

  

 

435,257

 

    


  


Total

  

$

2,695,449

 

  

$

2,415,515

 

    


  


 

See notes to consolidated financial statements.

 

F-3


 

CATELLUS DEVELOPMENT CORPORATION

 

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Rental properties

                          

Rental revenue

  

$

266,951

 

  

$

232,106

 

  

$

203,691

 

Property operating costs

  

 

(71,559

)

  

 

(61,704

)

  

 

(54,468

)

Equity in earnings of operating joint ventures, net

  

 

8,277

 

  

 

8,833

 

  

 

9,809

 

    


  


  


    

 

203,669

 

  

 

179,235

 

  

 

159,032

 

    


  


  


Property sales and fee services

                          

Sales revenue

  

 

139,604

 

  

 

245,804

 

  

 

451,096

 

Cost of sales

  

 

(89,661

)

  

 

(149,698

)

  

 

(337,755

)

    


  


  


Gain on property sales

  

 

49,943

 

  

 

96,106

 

  

 

113,341

 

Equity in earnings of development joint ventures, net

  

 

29,232

 

  

 

25,978

 

  

 

27,780

 

    


  


  


Total gain on property sales

  

 

79,175

 

  

 

122,084

 

  

 

141,121

 

Management and development fees

  

 

7,088

 

  

 

6,000

 

  

 

15,460

 

Selling, general and administrative expenses

  

 

(25,990

)

  

 

(26,570

)

  

 

(45,801

)

Other, net

  

 

16,087

 

  

 

6,211

 

  

 

(9,351

)

    


  


  


    

 

76,360

 

  

 

107,725

 

  

 

101,429

 

    


  


  


Interest expense

  

 

(60,188

)

  

 

(56,753

)

  

 

(49,975

)

Depreciation and amortization

  

 

(63,149

)

  

 

(51,891

)

  

 

(45,939

)

Corporate administrative costs

  

 

(17,705

)

  

 

(19,256

)

  

 

(15,675

)

Gain on non-strategic asset sales

  

 

7,264

 

  

 

3,909

 

  

 

46,279

 

Other, net

  

 

957

 

  

 

5,660

 

  

 

940

 

    


  


  


Income before minority interests, income taxes, and discontinued operations

  

 

147,208

 

  

 

168,629

 

  

 

196,091

 

Minority interests

  

 

(6,106

)

  

 

(6,142

)

  

 

(10,701

)

    


  


  


Income before income taxes and discontinued operations

  

 

141,102

 

  

 

162,487

 

  

 

185,390

 

    


  


  


Income tax expense

                          

Current

  

 

(32,567

)

  

 

(16,367

)

  

 

(12,254

)

Deferred

  

 

(21,385

)

  

 

(49,499

)

  

 

(62,556

)

    


  


  


    

 

(53,952

)

  

 

(65,866

)

  

 

(74,810

)

    


  


  


Income from continuing operations

  

 

87,150

 

  

 

96,621

 

  

 

110,580

 

    


  


  


Discontinued operations, net of income tax:

                          

Gain from disposal of discontinued operations

  

 

13,748

 

  

 

—  

 

  

 

—  

 

(Loss) gain from discontinued operations

  

 

(242

)

  

 

(100

)

  

 

427

 

    


  


  


Gain (loss) from discontinued operations

  

 

13,506

 

  

 

(100

)

  

 

427

 

    


  


  


Net income

  

$

100,656

 

  

$

96,521

 

  

$

111,007

 

    


  


  


Income per share from continuing operations

                          

Basic

  

$

1.00

 

  

$

0.97

 

  

$

1.04

 

    


  


  


Assuming dilution

  

$

0.97

 

  

$

0.94

 

  

$

1.02

 

    


  


  


Income per share from discontinued operations

                          

Basic

  

$

0.16

 

  

$

—  

 

  

$

—  

 

    


  


  


Assuming dilution

  

$

0.16

 

  

$

—  

 

  

$

—  

 

    


  


  


Net income per share

                          

Basic

  

$

1.16

 

  

$

0.97

 

  

$

1.04

 

    


  


  


Assuming dilution

  

$

1.13

 

  

$

0.94

 

  

$

1.02

 

    


  


  


Average number of common shares outstanding—basic

  

 

86,987

 

  

 

99,958

 

  

 

106,561

 

    


  


  


Average number of common shares outstanding—diluted

  

 

89,463

 

  

 

102,685

 

  

 

109,017

 

    


  


  


 

See notes to consolidated financial statements.

 

F-4


 

CATELLUS DEVELOPMENT CORPORATION

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

 

   

Common Stock


 

Treasury Stock


   

Paid-In Capital


  

Accumulated Earnings


 

Total


 
   

Shares


 

Amount


 

Shares


   

Amount


        

Balance at December 31, 1999

 

107,185

 

$

1,072

 

—  

 

 

$

—  

 

 

$

483,503

  

$

106,397

 

$

590,972

 

Exercise of stock options and other

 

903

 

 

9

 

—  

 

 

 

—  

 

 

 

9,917

  

 

—  

 

 

9,926

 

Treasury stock purchases

 

—  

 

 

—  

 

(1,997

)

 

 

(28,660

)

 

 

—  

  

 

—  

 

 

(28,660

)

Net income

 

—  

 

 

—  

 

—  

 

 

 

—  

 

 

 

—  

  

 

111,007

 

 

111,007

 

   
 

 

 


 

  

 


Balance at December 31, 2000

 

108,088

 

 

1,081

 

(1,997

)

 

 

(28,660

)

 

 

493,420

  

 

217,404

 

 

683,245

 

Exercise of stock options and other

 

2,121

 

 

21

 

—  

 

 

 

—  

 

 

 

27,892

  

 

—  

 

 

27,913

 

Treasury stock purchases

 

—  

 

 

—  

 

(21,650

)

 

 

(372,422

)

 

 

—  

  

 

—  

 

 

(372,422

)

Net income

 

—  

 

 

—  

 

—  

 

 

 

—  

 

 

 

—  

  

 

96,521

 

 

96,521

 

   
 

 

 


 

  

 


Balance at December 31, 2001

 

110,209

 

 

1,102

 

(23,647

)

 

 

(401,082

)

 

 

521,312

  

 

313,925

 

 

435,257

 

Exercise of stock options and other

 

608

 

 

6

 

—  

 

 

 

—  

 

 

 

10,050

  

 

—  

 

 

10,056

 

Net income

 

—  

 

 

—  

 

—  

 

 

 

—  

 

 

 

—  

  

 

100,656

 

 

100,656

 

   
 

 

 


 

  

 


Balance at December 31, 2002

 

110,817

 

$

1,108

 

(23,647

)

 

$

(401,082

)

 

$

531,362

  

$

414,581

 

$

545,969

 

   
 

 

 


 

  

 


 

 

See notes to consolidated financial statements.

 

F-5


 

CATELLUS DEVELOPMENT CORPORATION

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 

Cash flows from operating activities:

                          

Net income

  

$

100,656

 

  

$

96,521

 

  

$

111,007

 

Adjustments to reconcile net income to net cash provided by operating activities:

                          

Depreciation and amortization

  

 

63,149

 

  

 

51,891

 

  

 

45,939

 

Deferred income taxes

  

 

21,385

 

  

 

49,499

 

  

 

62,556

 

Deferred gain recognized

  

 

(14,820

)

  

 

(4,987

)

  

 

(22,737

)

Amortization of deferred loan fees and other costs

  

 

5,993

 

  

 

5,775

 

  

 

6,400

 

Equity in earnings of joint ventures

  

 

(37,509

)

  

 

(34,811

)

  

 

(37,589

)

Gain on sales of investment property

  

 

(22,252

)

  

 

(33,078

)

  

 

(38,382

)

Minority interests in earnings of consolidated entities

  

 

6,106

 

  

 

6,142

 

  

 

10,701

 

Operating distributions from joint ventures

  

 

86,222

 

  

 

43,786

 

  

 

26,714

 

Cost of development property and non-strategic assets sold

  

 

83,612

 

  

 

166,340

 

  

 

301,902

 

Capital expenditures for development property

  

 

(56,955

)

  

 

(66,277

)

  

 

(167,520

)

Other property acquisitions

  

 

(738

)

  

 

(16,785

)

  

 

—  

 

Other, net

  

 

2,996

 

  

 

(4,861

)

  

 

(1,004

)

Change in assets and liabilities:

                          

Accounts and notes receivable

  

 

37,092

 

  

 

(28,418

)

  

 

(12,319

)

Other assets and deferred charges

  

 

(78,035

)

  

 

(37,589

)

  

 

(4,045

)

Accounts payable and accrued expenses

  

 

(17,144

)

  

 

15,306

 

  

 

(13,283

)

Deferred credits and other liabilities

  

 

7,388

 

  

 

133,310

 

  

 

27,673

 

    


  


  


Net cash provided by operating activities

  

 

187,146

 

  

 

341,764

 

  

 

296,013

 

    


  


  


Cash flows from investing activities:

                          

Property acquisitions

  

 

(24,449

)

  

 

(79,782

)

  

 

(35,471

)

Capital expenditures for investment property

  

 

(227,533

)

  

 

(254,807

)

  

 

(226,424

)

Tenant improvements

  

 

(9,945

)

  

 

(2,893

)

  

 

(5,767

)

Reimbursable construction costs

  

 

(54,426

)

  

 

(16,097

)

  

 

(13,156

)

Net proceeds from sale of investment property

  

 

29,460

 

  

 

50,149

 

  

 

66,970

 

Distributions from joint ventures

  

 

—  

 

  

 

—  

 

  

 

15,600

 

Contributions to joint ventures

  

 

(17,365

)

  

 

(2,035

)

  

 

—  

 

(Increase) decrease in restricted cash and investments

  

 

(29,027

)

  

 

37,912

 

  

 

(25,913

)

    


  


  


Net cash used in investing activities

  

 

(333,285

)

  

 

(267,553

)

  

 

(224,161

)

    


  


  


Cash flows from financing activities:

                          

Borrowings

  

 

445,778

 

  

 

398,501

 

  

 

540,007

 

Repayment of borrowings

  

 

(251,626

)

  

 

(228,763

)

  

 

(282,710

)

Distributions to minority partners

  

 

(4,542

)

  

 

(5,106

)

  

 

(7,123

)

Purchase of treasury stock

  

 

—  

 

  

 

(372,422

)

  

 

(28,660

)

Proceeds from issuance of common stock

  

 

8,761

 

  

 

19,716

 

  

 

7,782

 

    


  


  


Net cash provided by (used in) financing activities

  

 

198,371

 

  

 

(188,074

)

  

 

229,296

 

    


  


  


Net increase (decrease) in cash and cash equivalents

  

 

52,232

 

  

 

(113,863

)

  

 

301,148

 

Cash and cash equivalents at beginning of year

  

 

222,695

 

  

 

336,558

 

  

 

35,410

 

    


  


  


Cash and cash equivalents at end of year

  

$

274,927

 

  

$

222,695

 

  

$

336,558

 

    


  


  


Supplemental disclosures of cash flow information:

                          

Cash paid during the year for:

                          

Interest (net of amount capitalized)

  

$

53,706

 

  

$

52,378

 

  

$

41,131

 

Income taxes

  

$

32,386

 

  

$

8,110

 

  

$

20,669

 

Non-cash financing activities:

                          

Seller-financed acquisitions

  

$

—  

 

  

$

10,000

 

  

$

1,702

 

Debt forgiveness—property reconveyance

  

$

(507

)

  

$

(3,844

)

  

$

—  

 

 

See notes to consolidated financial statements.

 

 

F-6


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Note 1.    Description of Business

 

Catellus Development Corporation, together with its consolidated subsidiaries (the “Company”), is a diversified real estate operating company, with a large portfolio of rental properties and developable land, that manages and develops real estate for its own account and those of others. Interests of third parties in entities controlled and consolidated by the Company are separately reflected as minority interests in the accompanying financial statements. The Company’s rental portfolio and developable land, consisting of industrial, residential, retail, office, and other projects are located mainly in major markets in California, Illinois, Texas, Colorado, and Oregon.

 

Note 2.    Summary of Significant Accounting Policies

 

Revenue recognition—Rental revenue, in general, is recognized when due from tenants; however, revenue from leases with rent concessions or fixed escalations is recognized on a straight-line basis over the initial term of the lease. Direct costs of negotiating and consummating a lease are deferred and amortized on a straight-line basis over the initial term of the related lease.

 

The Company recognizes revenue from the sale of properties using the accrual method. Sales not qualifying for full recognition at the time of sale are accounted for under other appropriate deferral methods, including the percentage-of-completion method. In certain cases, the Company retains the right to repurchase property from the buyer at a specified price. Profit on these sales is not recognized until the Company’s right to repurchase expires. In other cases, when the Company receives inadequate cash down payment and takes a note for the balance, profit is deferred until such time as sufficient cash is received to meet minimum down payment requirements. In general, specific identification and relative sales value methods are used to determine the cost of sales. Estimated future costs to be incurred by the Company after completion of each sale are included in cost of sales.

 

Property and deferred costs—Real estate is stated at the lower of cost or estimated fair value using the methodology described as follows: (a) for operating properties and properties held for investment, a write-down to estimated fair value is recognized when a property’s estimated undiscounted future cash flow is less than its net book value; (b) for properties held for sale, a write-down to estimated fair value is recorded when the Company determines that the net book value exceeds the estimated selling price, less cost to sell. This evaluation is made by management on a property-by-property basis. The evaluation of future cash flows and fair value of individual properties requires significant judgment; it is reasonably possible that a change in estimate could occur as economic conditions change.

 

The Company capitalizes direct construction and development costs. Costs associated with financing or leasing projects are also capitalized and amortized over the period benefited by those expenditures.

 

Depreciation is computed using the straight-line method. Buildings and improvements are depreciated using lives of between 20 and 40 years. Tenant improvements are depreciated over the primary terms of the leases (generally 3-15 years), while furniture and equipment are depreciated using lives ranging between 3 and 10 years.

 

Maintenance and repair costs are charged to expense as incurred, while significant improvements, replacements, and major renovations are capitalized.

 

Allowance for uncollectible accounts—Accounts receivable are net of an allowance for uncollectible accounts totaling $1.6 million and $1.4 million at December 31, 2002 and 2001, respectively.

 

Environmental costs—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 operating properties

 

F-7


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

and properties previously sold are expensed. Costs relating to undeveloped land are capitalized as part of development costs. Costs incurred for properties to be sold are deferred and charged to cost of sales when the properties are sold.

 

The Company maintains a reserve for estimated costs of environmental remediation to be incurred in connection with operating properties and properties previously sold. For developable land, remediation costs will be capitalized, as incurred, as part of the project costs.

 

Income taxes—Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company’s assets and liabilities. In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.

 

Principles of consolidation—The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and investees, which are controlled by the Company. All other investees are accounted for using the equity method.

 

Cash and cash equivalents and restricted cash and investments—The Company considers all highly liquid investments with maturity of three months or less at time of purchase to be cash equivalents. Of the restricted cash and investments totaling $36.6 million and $7.6 million at December 31, 2002 and 2001, respectively, $5.1 million and $0.4 million, respectively, represent proceeds from property sales being held in separate cash accounts at trust companies in order to preserve the Company’s options of reinvesting the proceeds on a tax-deferred basis. Approximately $24.6 million at December 31, 2002, represents funds held in pledge accounts at a bank until certain loan collateral pool requirements are met. In addition, restricted investments of $6.9 million and $7.2 million at December 31, 2002 and 2001, respectively, represent certificates of deposit used to guarantee lease performance. The Company maintains cash balances with investment grade financial institutions to mitigate the risk of loss for amounts on deposit in excess of federally insured limits.

 

Interest rate protection contracts (“Treasury-lock contracts”)—The Company may enter into interest rate protection agreements from time to time to lock its interest rate when negotiating fixed rate financing agreements. Amounts paid or received would be capitalized and amortized as a component of interest expense using the effective interest method over the term of the associated debt agreement.

 

Notes receivable—Notes receivable are carried at the principal balance, less estimated uncollectible amounts totaling $1.8 million at December 31, 2002 and 2001. Interest is recognized as earned; however, the Company discontinues accruing interest when collection is considered doubtful. Notes are generally collateralized by real property or a financing agreement.

 

Financial instruments—The historical cost basis of the Company’s notes receivable is representative of fair value based on a comparison to year-end interest rates for receivables of comparable risks and maturities. Variable rate debt has carrying values which approximate estimated fair value while fixed rate mortgage loans have an estimated aggregate fair value of $1.2 billion and remaining principal of $1.1 billion based on a comparison to year-end interest rates for debt with similar terms and remaining maturities.

 

Bond financings—Assessment bonds are usually issued by a municipality district or a tax incremental financing entity to finance costs of public infrastructure improvements. The Company records an obligation within mortgage and other debt if the assessment to be levied by the bond’s issuer is fixed and determinable, the assessment has been guaranteed by the Company or the Company controls the municipal board (See Notes 3 and 15). In all other cases, the Company records a receivable for the amount due from the municipality as it is incurred.

 

F-8


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Income per share—Income from continuing operations per share of common stock applicable to common stockholders is computed by dividing income from continuing operations by the weighted average number of shares of common stock outstanding during the period (see table below for effect of dilutive securities).

 

    

Year Ended December 31,


    

2002


  

2001


  

2000


    

Income


  

Shares


  

Per Share

Amount


  

Income


    

Shares


  

Per Share

Amount


  

Income


  

Shares


  

Per Share

Amount


    

(In thousands, except per share data)

Income from continuing operations

  

$

87,150

  

86,987

  

$

1.00

  

$

96,621

 

  

99,958

  

$

0.97

  

$

110,580

  

106,561

  

$

1.04

                

                

              

Effect of dilutive securities: stock options

  

 

—  

  

2,476

         

 

—  

 

  

2,727

         

 

—  

  

2,456

      
    

  
         


  
         

  
      

Income from continuing operations assuming dilution

  

$

87,150

  

89,463

  

$

0.97

  

$

96,621

 

  

102,685

  

$

0.94

  

$

110,580

  

109,017

  

$

1.02

    

  
  

  


  
  

  

  
  

Gain (loss) from discontinued operations

  

$

13,506

  

86,987

  

$

0.16

  

$

(100

)

  

99,958

  

$

—  

  

$

427

  

106,561

  

$

—  

                

                

              

Effect of dilutive securities: stock options

  

 

—  

  

2,476

         

 

—  

 

  

2,727

         

 

—  

  

2,456

      
    

  
         


  
         

  
      

Gain (loss) from discontinued operations assuming dilution

  

$

13,506

  

89,463

  

$

0.16

  

$

(100

)

  

102,685

  

$

—  

  

$

427

  

109,017

  

$

—  

    

  
  

  


  
  

  

  
  

Net income

  

$

100,656

  

86,987

  

$

1.16

  

$

96,521

 

  

99,958

  

$

0.97

  

$

111,007

  

106,561

  

$

1.04

                

                

              

Effect of dilutive securities: stock options

  

 

—  

  

2,476

         

 

—  

 

  

2,727

         

 

—  

  

2,456

      
    

  
         


  
         

  
      

Net income assuming dilution

  

$

100,656

  

89,463

  

$

1.13

  

$

96,521

 

  

102,685

  

$

0.94

  

$

111,007

  

109,017

  

$

1.02

    

  
  

  


  
  

  

  
  

 

Use of estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Actual results could differ from those estimates.

 

Reclassifications—Certain prior year amounts have been reclassified to conform with the current year financial statement presentation.

 

Partnership accounting—The Company accounts for unconsolidated partnerships or other investees (collectively referred to as unconsolidated joint ventures) under the equity method. Earnings or losses of unconsolidated joint ventures are recognized to the extent of the Company’s ownership or participation interest. The Company does not recognize its share of losses generated by these investments in excess of its investment unless it is legally committed or intends to fund deficits in the future. The Company may provide fee services to joint ventures but will recognize revenues only to the extent of the outside partner’s ownership interest and will defer profits on its ownership interest until the joint venture is sold or liquidated (see Note 5, Joint Venture Investments).

 

Minority interests—In 1999, the Company formed a subsidiary REIT and sold 10% of this subsidiary’s stock to minority investors. Subsequent to December 31, 2002, the Company acquired the 10% interest of the minority investors for $60.7 million (See Note 18, Subsequent Events).

 

F-9


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

New accounting standards

 

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” which addresses financial accounting and reporting for the impairment and disposal of long-lived assets. In general, sales of rental property, (a) not sold subject to an initial tenant purchase option, or (b) explicitly built with the intention of selling, but not sold within two years of completion, are referred to as “Investment Properties” and classified as discontinued operations. Therefore, as required, gain or loss attributed to the operations and sale of Investment Properties sold or held for sale is presented in the statement of operations as discontinued operations, net of applicable income tax. Prior period statements of operations have been reclassified to reflect as discontinued operations the gain or loss related to Investment Properties that were sold or held for sale and presented as discontinued operations during the year ended December 31, 2002. Additionally, all periods presented will likely require further reclassification in future periods as additional, similar sales of Investment Properties occur.

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (see Note 15, Commitments and Contingencies, for required disclosure).

 

In January 2003, the FASB Interpretation No. 46, “Consolidation of Variable Interest Entities—an interpretation of ARB No. 51” (FIN 46). FIN 46 requires that any entity meeting certain rules relating to a company’s equity investment risk and level of financial control be consolidated as a variable interest entity. The statement is applicable to all variable interest entities created or acquired after January 31, 2003, and the first interim period beginning after June 15, 2003, for variable interest entities in which the Company holds a variable interest that is acquired before February 1, 2003. The Company plans on adopting FIN 46 in the time frames as required by the statement. Management expects no significant effect on the financial position, results of operations or cash flows of the Company as a result of the initial adoption of this standard in regard to existing variable interest entities; however, newly formed entities in 2003 could meet these requirements and will be recorded as appropriate.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure—An Amendment of Statement of Financial Accounting Standards No. 123.” As of December 31, 2002, the Company has not elected the fair value recognition provisions of SFAS No. 123; as such, under SFAS No. 148, the Company made the following disclosure: At December 31, 2002, the Company has five stock-based employee compensation plans. The company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (see Note 11, for further data regarding Black-Scholes and the Company’s option plans).

 

F-10


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands, except income per share data)

 

Net income, as reported

  

$

100,656

 

  

$

96,521

 

  

$

111,007

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

  

 

(5,330

)

  

 

(4,558

)

  

 

(3,859

)

    


  


  


Pro forma net income

  

$

95,326

 

  

$

91,963

 

  

$

107,148

 

    


  


  


Earnings per share:

                          

Basic—as reported

  

$

1.16

 

  

$

0.97

 

  

$

1.04

 

    


  


  


Basic—pro forma

  

$

1.10

 

  

$

0.92

 

  

$

1.01

 

    


  


  


Diluted—as reported

  

$

1.13

 

  

$

0.94

 

  

$

1.02

 

    


  


  


Diluted—pro forma

  

$

1.07

 

  

$

0.90

 

  

$

0.98

 

    


  


  


 

Note 3.     Mortgage and Other Debt

 

Mortgage and other debt consisted of the following:

 

    

December 31,


    

2002


  

2001


    

(In thousands)

Fixed rate mortgage loans, interest at 6.01% to 9.50%, due at various dates through April 12, 2016(a)

  

$

1,080,655

  

$

842,296

Floating rate mortgage loans, interest variable (3.22% to 3.69% at December 31, 2002), due at various dates through August 1, 2006(b)

  

 

207,212

  

 

272,288

Construction loans, interest variable (3.22% to 3.69% at December 31, 2002), due at various dates through June 12, 2004(c)

  

 

73,068

  

 

98,321

Land acquisition and development loans, interest at 3.82% to 5.33%, due at various dates through October 15, 2025(d)

  

 

22,241

  

 

58,498

Assessment district bonds, interest at 3.50% to 8.70%, due at various dates through September 1, 2025(e)

  

 

103,935

  

 

34,456

Capital leases, interest variable (4.25% at December 31, 2002), due at various dates through December 31, 2004(f)

  

 

5,176

  

 

3,981

Other loans, interest at 3.74% to 7.0%, due at various dates through August 2, 2012(g)

  

 

8,668

  

 

617

    

  

Mortgage and other debt

  

 

1,500,955

  

 

1,310,457

Liabilities of assets held for sale:

             

Fixed rate mortgage loans

  

 

2,849

  

 

—  

Floating rate mortgage loans

  

 

298

  

 

—  

    

  

Total mortgage and other debt

  

$

1,504,102

  

$

1,310,457

    

  


(a)  

The fixed rate mortgage loans consist of the following: a $352.5 million loan bearing interest at 6.01% (6.66% effective rate considering financing costs), with a 30 year amortization schedule and a maturity in November 2008; a $196.9 million loan bearing interest at 7.25% (7.28% effective rate considering financing costs), with a 30 year amortization schedule and a maturity in April 2016; a $142.9 million loan bearing interest at 6.65% (6.84% effective rate considering financing costs), maturing in September 2006; $72.6 million of loans bearing interest at 7.29% (7.43% effective rate considering financing costs), maturing on

 

F-11


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

various dates from January 2008 through May 2010; $16.5 million of loans bearing interest at 7.23%, maturing on various dates from February 2003 through December 2005; and $17.9 million of loans bearing interest at 8.13% to 9.50%, maturing on various dates from October 2006 through March 2009.

 

In addition, during 2002, the Company closed a $285.3 million fixed rate mortgage loan bearing interest of 7.05% (7.16% effective rate considering financing costs) with a 30 year amortization schedule and a maturity in April 2012. Of the loan proceeds, $136.5 million was used to pay off existing variable rate debt, related interest, and fees at closing. At December 31, 2002, $284.2 million was outstanding.

 

These fixed rate mortgage loans are collateralized by certain of the Company’s operating properties and by an assignment of rents generated by the underlying properties. A majority of these loans have penalties if paid prior to maturity.

 

(b)   In 2002, the Company closed a $20.4 million floating rate mortgage loan (LIBOR plus 1.80%) that has a 25-year amortization schedule and a maturity of 3 years. Under certain conditions, this loan has a yield maintenance premium if paid prior to maturity.

 

Floating rate mortgage loans are collateralized by operating properties and by an assignment of rents generated by the underlying properties.

 

(c)   The Company’s construction loans are used to finance development projects and are collateralized by the related land and improvements. As construction is completed, these loans may be refinanced with fixed or variable rate mortgages.

 

(d)   Land acquisition and development loans are used to acquire land and/or finance related development and are collateralized by the related land.

 

(e)   The assessment district bonds are issued through local municipalities to fund the construction of public infrastructure and improvements, which benefit the Company’s properties. Debt service on these bonds is either collateralized by certain of the Company’s properties or by letters of credit (see Note 15). In 2002, $74.1 million of such bonds were issued with an estimated weighted average variable interest rate of 4.30% and a series of maturities up to thirty years.

 

(f)   Capital leases represent the estimated present value of the minimum lease payments.

 

(g)   During 2002, the Company acquired a corporate aircraft and financed it with an $8.3 million floating rate collateralized loan (LIBOR plus 2.42%) with a maturity of 10 years. There is a yield maintenance premium if paid prior to the first annual anniversary date.

 

Three of the Company’s credit agreements, totaling $135 million, contain corporate financial covenants including a minimum debt service coverage ratio of 1.6 to 1, a maximum leverage ratio of 60%, and a minimum tangible net worth of $435.2 million (subject to adjustment for stock buybacks), all terms as defined in those credit agreements. As of or for the period ending December 31, 2002, the actual results were 1.97; 54.1%; and $546 million, respectively. The Company’s partial guarantee of one of its joint venture’s construction loans of $165 million has the same debt service and tangible net worth covenants, but a different maximum leverage covenant definition. Under this definition, the Company’s leverage ratio is 57.3% versus a covenant of 65%. The Company’s performance against these covenants is measured on a quarterly basis, with debt service coverage being measured on a four-quarter trailing basis. In the event the Company was to breach any of these covenants and was unable to negotiate satisfactory waivers or amendments, the lenders in these credit facilities could declare the amounts outstanding due and payable.

 

F-12


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The maturities of mortgage and other debt outstanding as of December 31, 2002, including debt associated with assets held for sale, are summarized as follows (in thousands):

 

2003

  

$

154,152

2004

  

 

52,346

2005

  

 

150,007

2006

  

 

186,823

2007

  

 

21,491

Thereafter

  

 

939,283

    

    

$

1,504,102

    

 

Interest costs relating to mortgage and other debt are summarized as follows:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Total interest incurred

  

$

85,156

 

  

$

83,623

 

  

$

69,620

 

Interest capitalized

  

 

(24,380

)

  

 

(25,478

)

  

 

(18,656

)

    


  


  


Interest expensed

  

 

60,776

 

  

 

58,145

 

  

 

50,964

 

Less discontinued operations

  

 

(588

)

  

 

(1,392

)

  

 

(989

)

    


  


  


Interest expense for continuing operations

  

$

60,188

 

  

$

56,753

 

  

$

49,975

 

    


  


  


 

Total interest incurred includes $6 million, $5.8 million, and $6.4 million of amortization of deferred loan fees and other costs for the years ended December 31, 2002, 2001, and 2000, respectively.

 

Note 4.    Income Taxes

 

The income tax expense reflected in the consolidated statement of operations differs from the amounts computed by applying the federal statutory rate of 35% to income before income taxes and discontinued operations as follows:

 

    

Year Ended December 31,


    

2002


    

2001


  

2000


    

(In thousands)

Federal income tax expense at statutory rate

  

$

49,385

 

  

$

56,871

  

$

64,881

Increase (decrease) in taxes resulting from:

                      

State income taxes, net of federal impact

  

 

6,659

 

  

 

8,723

  

 

9,821

Property donation at fair value

  

 

(2,960

)

  

 

—  

  

 

—  

Other

  

 

868

 

  

 

272

  

 

108

    


  

  

    

$

53,952

 

  

$

65,866

  

$

74,810

    


  

  

 

Property donation at fair value reflects property conveyances that qualify as charitable contributions for tax purposes. The difference between the fair value and book basis of the properties conveyed represents a tax deduction that results in a permanent reduction in income tax. The effect of deducting the excess of fair value of property over the book basis was a reduction in the effective tax rate of approximately 2% for the year ended December 31, 2002.

 

F-13


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and for operating loss and tax credit carryforwards. Significant components of the Company’s net deferred tax liability are as follows:

 

    

December 31,


    

2002


  

2001


    

(In thousands)

Deferred tax liabilities:

             

Involuntary conversions (condemnations) of property

  

$

82,460

  

$

85,715

Capitalized interest, taxes, and overhead

  

 

82,820

  

 

95,154

Like-kind property exchanges

  

 

129,217

  

 

107,323

Investments in partnerships

  

 

65,624

  

 

61,307

Income of subsidiary REIT

  

 

52,318

  

 

40,708

Capital lease

  

 

6,094

  

 

12,148

Other

  

 

17,294

  

 

16,137

    

  

    

 

435,827

  

 

418,492

    

  

Deferred tax assets:

             

Intercompany transactions (prior to spin-off)

  

 

15,265

  

 

15,001

Capitalized rent

  

 

24,182

  

 

24,048

Adjustment to carrying value of property

  

 

36,726

  

 

41,261

Construction contract receivable

  

 

4,024

  

 

10,556

Depreciation and amortization

  

 

24,862

  

 

21,372

Capital lease payable

  

 

2,070

  

 

1,592

Environmental reserve

  

 

3,277

  

 

3,529

Other

  

 

6,451

  

 

10,475

    

  

    

 

116,857

  

 

127,834

    

  

Net deferred tax liability

  

$

318,970

  

$

290,658

    

  

 

The permanent income tax benefit of $1.3 million, $7.2 million, and $2.1 million for the years ended December 31, 2002, 2001, and 2000, respectively, associated with the exercise of stock options is credited directly to paid-in capital on the accompanying statement of stockholders’ equity.

 

F-14


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 5.    Joint Venture Investments

 

The Company has investments in a variety of unconsolidated real estate joint ventures that are involved in both operating properties and development of various other projects.

 

The Company’s unconsolidated joint ventures include the following at December 31, 2002:

 

Operating Properties


    

Ownership

Percentage


      

Development Projects


    

Ownership

Percentage


 

Hotel

             

Residential

        

International Rivercenter (a)

    

25

%

    

Talega Associates, LLC (e)

    

30

%

New Orleans Rivercenter (b)

    

42

%

    

Talega Village, LLC (f)

    

50

%

Pacific Market Investment Company (c)

    

50

%

    

Serrano Associates, LLC (g)

    

50

%

Office

             

Parkway Company, LLC (h)

    

50

%

Torrance Investment Company (d)

    

67

%

    

Urban

        
               

Third & King Investors, LLC (i)

    

29

%

               

Commercial

        
               

Traer Creek-HD LLC (j)

    

16

%

               

Traer Creek-WMT LLC (k)

    

10

%

               

Traer Creek-RP LLC (l)

    

10

%


(a)   International Rivercenter owns the 1,600-room New Orleans Hilton Hotel on and adjacent to the Lower Poydras Wharf in New Orleans, Louisiana.

 

(b)   New Orleans Rivercenter owns a 75% undivided interest in an 8.5-acre parcel of land, which primarily provides parking for the New Orleans Hilton Hotel.

 

(c)   Pacific Market Investment Company owns and operates a 337-room Embassy Suites Hotel in San Diego, California.

 

(d)   Torrance Investment Company owns two office buildings totaling 202,000 square feet on 14 acres of land in Torrance, California.

 

(e)   Talega Associates, LLC acquired and develops a master-planned community located partially in the City of San Clemente, and partially in an incorporated area of Orange County. At December 31, 2002, it had an inventory of 1,226 available lots.

 

(f)   Talega Village, LLC develops age-restricted residential units in Orange County, California. At December 31, 2002, it had an inventory of 65 available homes.

 

(g)   Serrano Associates, LLC acquired and is developing a 3,500-acre master-planned community near Sacramento, California. At December 31, 2002, it had an inventory of 1,190 available lots.

 

(h)   Parkway Company, LLC develops a master-planned residential community located in Folsom, California. At December 31, 2002, it had an inventory of 538 multi-unit home lots.

 

(i)   Third & King Investors, LLC is in the construction phase of a mixed-use project at Mission Bay in San Francisco, California.

 

(j)   Traer Creek-HD LLC owns 9.7 acres of land currently under development for Home Depot in Avon, Colorado.

 

(k)   Traer Creek-WMT LLC owns 13.5 acres of land currently under development for WalMart in Avon, Colorado.

 

(l)   Traer Creek-RP LLC owns 1,591 acres of land for development in Avon, Colorado.

 

In 2001, the Company sold its retained interest in BHC Residential, LLC, and realized a pre-tax gain of $14.2 million (see Note 14), which has been included in “equity in earnings of development joint ventures, net” on the consolidated statement of operations.

 

F-15


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The Company guarantees a portion of the debt and interest of certain of its joint ventures. At December 31, 2002, these guarantees totaled $44.6 million. In some cases, other parties have jointly and severally guaranteed these obligations, which are also collateralized by the related properties.

 

The combined balance sheets and statements of operations of these unconsolidated joint ventures, along with the Company’s proportionate share, are summarized as follows:

 

    

Combined


    

Proportionate Share


 
    

December 31,


    

December 31,


 
    

2002


    

2001


    

2002


    

2001


 
    

(In thousands)

 

Assets:

      

Operating properties:

                                   

Property

  

$

147,183

 

  

$

139,620

 

  

$

46,553

 

  

$

45,432

 

Other

  

 

17,483

 

  

 

19,118

 

  

 

6,003

 

  

 

6,032

 

Development projects:

                                   

Property

  

 

318,727

 

  

 

350,877

 

  

 

104,158

 

  

 

137,786

 

Other

  

 

31,269

 

  

 

40,244

 

  

 

10,583

 

  

 

11,390

 

    


  


  


  


Total

  

$

514,662

 

  

$

549,859

 

  

$

167,297

 

  

$

200,640

 

    


  


  


  


Liabilities and venturers’ equity:

                                   

Operating properties:

                                   

Notes Payable

  

$

189,531

 

  

$

192,134

 

  

$

58,596

 

  

$

59,466

 

Other

  

 

17,052

 

  

 

17,408

 

  

 

4,880

 

  

 

5,024

 

Development projects:

                                   

Notes Payable

  

 

68,038

 

  

 

101,345

 

  

 

26,538

 

  

 

36,803

 

Other

  

 

83,668

 

  

 

96,714

 

  

 

30,132

 

  

 

35,617

 

    


  


  


  


Total liabilities

  

 

358,289

 

  

 

407,601

 

  

 

120,146

 

  

 

136,910

 

    


  


  


  


Venturers’ equity/(deficit):

                                   

Operating properties

  

 

(41,918

)

  

 

(50,804

)

  

 

(10,920

)

  

 

(13,026

)

Development projects

  

 

198,291

 

  

 

193,062

 

  

 

58,071

 

  

 

76,756

 

    


  


  


  


    

 

156,373

 

  

 

142,258

 

  

 

47,151

 

  

 

63,730

 

    


  


  


  


Total liabilities and venturers’ equity

  

$

514,662

 

  

$

549,859

 

  

$

167,297

 

  

$

200,640

 

    


  


  


  


 

The Company’s proportionate share of venturers’ equity is an aggregate amount for all ventures. Because the Company’s ownership percentage differs from venture to venture, because there are varying distribution agreements, and because certain ventures have accumulated equity while others have accumulated deficits, the Company’s percentage of venturers’ equity is not reflective of the Company’s ownership percentage of the ventures. The Company does not recognize its share of losses generated by joint ventures in excess of its investment unless it is legally committed or intends to fund deficits in the future.

 

The Company has contributed appreciated property to certain of its joint venture investments. Although the properties are recorded by the venture at fair value on the date of contribution, the related gains have been deferred in the Company’s financial statements and will be recognized when the properties are sold by the joint ventures.

 

F-16


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

    

Combined


  

Proportionate Share


    

Year Ended December 31,


    

2002


  

2001


  

2000


  

2002


  

2001


  

2000


    

(In thousands)

Revenue:

                                         

Operating properties

  

$

136,217

  

$

135,849

  

$

139,692

  

$

40,792

  

$

41,006

  

$

41,777

Development projects

  

 

282,100

  

 

220,154

  

 

320,988

  

 

124,434

  

 

109,842

  

 

144,381

    

  

  

  

  

  

    

 

418,317

  

 

356,003

  

 

460,680

  

 

165,226

  

 

150,848

  

 

186,158

    

  

  

  

  

  

Expenses:

                                         

Operating properties

  

 

107,284

  

 

106,184

  

 

104,642

  

 

32,515

  

 

32,173

  

 

31,968

Development projects

  

 

207,765

  

 

191,370

  

 

276,200

  

 

95,202

  

 

83,864

  

 

116,601

    

  

  

  

  

  

    

 

315,049

  

 

297,554

  

 

380,842

  

 

127,717

  

 

116,037

  

 

148,569

    

  

  

  

  

  

Net earnings before income tax

  

$

103,268

  

$

58,449

  

$

79,838

  

$

37,509

  

$

34,811

  

$

37,589

    

  

  

  

  

  

 

Note 6.    Property

 

Book value by property type consists of the following:

 

    

December 31,


 
    

2002


    

2001


 
    

(In thousands)

 

Rental properties:

                 

Industrial buildings

  

$

1,134,890

 

  

$

943,340

 

Office buildings

  

 

409,339

 

  

 

297,707

 

Retail buildings

  

 

100,882

 

  

 

96,263

 

Ground leases

  

 

139,886

 

  

 

138,708

 

Investment in operating joint ventures

  

 

(10,920

)

  

 

(13,026

)

    


  


    

 

1,774,077

 

  

 

1,462,992

 

    


  


Developable properties:

                 

Commercial

  

 

171,924

 

  

 

188,527

 

Residential (See Note 14)

  

 

52,850

 

  

 

52,108

 

Urban

  

 

279,495

 

  

 

258,504

 

Investment in development joint ventures

  

 

58,071

 

  

 

76,756

 

    


  


    

 

562,340

 

  

 

575,895

 

    


  


Work-in-process:

                 

Commercial

  

 

31,036

 

  

 

118,668

 

Commercial—capital lease

  

 

18,902

 

  

 

40,560

 

Urban

  

 

16,915

 

  

 

40,318

 

    


  


    

 

66,853

 

  

 

199,546

 

    


  


Furniture, fixtures and equipment

  

 

38,096

 

  

 

28,818

 

Other

  

 

6,715

 

  

 

9,257

 

    


  


Gross book value

  

 

2,448,081

 

  

 

2,276,508

 

Accumulated depreciation

  

 

(399,923

)

  

 

(354,557

)

    


  


Net book value

  

$

2,048,158

 

  

$

1,921,951

 

    


  


 

F-17


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 7.    Other Financial Statement Captions

 

Other Assets and Deferred Charges, Net

 

The Company’s other assets and deferred charges consisted of the following:

 

    

December 31,


    

2002


  

2001


    

(In thousands)

Reimbursable construction costs

  

$

83,680

  

$

25,052

Deferred lease commissions, net

  

 

41,446

  

 

34,200

Bonds proceeds receivable

  

 

35,629

  

 

—  

Straight-line rent

  

 

27,563

  

 

21,612

Deferred financing fees, net

  

 

23,081

  

 

26,584

Prepaid expenses

  

 

20,089

  

 

7,567

Tax increment financing assets

  

 

16,932

  

 

15,555

Cash surrender value of life insurance

  

 

15,673

  

 

9,012

Deferred cost of sales

  

 

4,647

  

 

19,627

Employee loans

  

 

1,733

  

 

2,025

Deferred cost of acquisitions

  

 

856

  

 

2,273

Funds held in escrow accounts

  

 

424

  

 

1,332

Other

  

 

2,100

  

 

2,466

    

  

    

$

273,853

  

$

167,305

    

  

 

Reimbursable construction costs represent costs the Company has incurred on behalf of municipal bond districts for public infrastructure improvements at four development projects. Subsequent to December 31, 2002, and through March 1, 2003, the Company has been reimbursed $5.7 million by the districts.

 

Amortization of lease commissions was $7.7 million, $6.5 million, and $4.9 million for the years ended December 31, 2002, 2001, and 2000, respectively. Accumulated amortization of deferred lease commissions totaled $23.8 million and $19.5 million at December 31, 2002 and 2001, respectively. Amortization of finance fees was $6 million, $5.8 million, and $6.4 million for the years ended December 31, 2002, 2001, and 2000, respectively. Accumulated amortization of deferred finance fees totaled $18.2 million and $12.4 million at December 31, 2002 and 2001, respectively.

 

In 2001, the Company entered into a tax increment financing agreement with a municipality and shares a portion of the increased property tax to be generated by one of its residential development projects. The estimated value to the Company of the incremental tax revenue at December 31, 2002, was $16.9 million and this amount is anticipated to be collected, with interest, over the next 37 years.

 

F-18


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Accounts Payable and Accrued Expenses

 

The Company’s accounts payable and accrued expenses consisted of the following:

 

    

December 31,


    

2002


  

2001


    

(In thousands)

Accrued construction costs

  

$

46,832

  

$

76,562

Salaries, bonuses and deferred compensation

  

 

31,462

  

 

33,542

Property taxes

  

 

18,121

  

 

15,425

Interest

  

 

11,531

  

 

10,454

Other

  

 

9,547

  

 

9,705

    

  

    

$

117,493

  

$

145,688

    

  

 

Deferred Credits and Other Liabilities

 

The Company’s deferred credits and other liabilities consisted of the following:

 

    

December 31,


    

2002


  

2001


    

(In thousands)

Rent deposits

  

$

107,712

  

$

111,105

Deferred profits

  

 

13,570

  

 

38,774

Environmental and legal reserves

  

 

10,359

  

 

11,216

Security deposits

  

 

7,229

  

 

7,253

Construction deposit

  

 

3,290

  

 

—  

Refundable property taxes

  

 

2,298

  

 

2,107

Sales deposits

  

 

1,441

  

 

1,530

Unearned income

  

 

1,166

  

 

1,332

Other

  

 

4,401

  

 

4,339

    

  

    

$

151,466

  

$

177,656

    

  

 

Rent deposits includes $99.4 million and $102.5 million of prepaid ground lease rent from a major tenant at December 31, 2002 and 2001, respectively, and is being amortized over the lease term of 34 years until 2035. The environmental and legal reserves are more fully described in Note 15. Deferred profits represent cash or notes received by the Company in connection with property sales transactions, which do not meet the criteria for full profit recognition.

 

F-19


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 8.    Leases

 

The Company, as lessor, has entered into non-cancelable operating leases expiring at various dates through 2099. Rental revenue under these leases totaled $261.3 million in 2002, $230.2 million in 2001, and $202.8 million in 2000. Included in this revenue are rentals contingent on lessees’ operations of $2.4 million in 2002, $2 million in 2001, and $3.4 million in 2000. Future minimum rental revenue under existing non-cancelable operating leases as of December 31, 2002, is summarized as follows (in thousands):

 

2003

  

$

208,174

2004

  

 

188,709

2005

  

 

158,570

2006

  

 

129,508

2007

  

 

111,116

Thereafter

  

 

987,290

    

    

$

1,783,367

    

 

The book value of the Company’s properties under operating leases or held for rent is summarized as follows:

 

    

December 31,


 
    

2002


    

2001


 
    

(In thousands)

 

Buildings

  

$

1,645,111

 

  

$

1,337,310

 

Ground leases

  

 

139,886

 

  

 

138,708

 

    


  


    

 

1,784,997

 

  

 

1,476,018

 

Less accumulated depreciation

  

 

(366,772

)

  

 

(325,130

)

    


  


    

$

1,418,225

 

  

$

1,150,888

 

    


  


 

The Company, as lessee, has entered into noncancelable operating leases expiring at various dates through 2023. Rental expense under these leases totaled $2.9 million in 2002, $3 million in 2001, and $3.1 million in 2000. Future minimum lease payments as of December 31, 2002, are summarized as follows (in thousands):

 

2003

  

$

2,510

2004

  

 

2,246

2005

  

 

1,745

2006

  

 

213

2007

  

 

15

Thereafter

  

 

225

    

    

$

6,954

    

 

F-20


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 9.    Other, net

 

Property sales and fee services—other income (expense) is summarized as follows:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Interest income

  

$

9,429

 

  

$

10,395

 

  

$

6,551

 

Lease termination fee

  

 

8,304

 

  

 

3,398

 

  

 

—  

 

Proceeds from condemnation sale

  

 

—  

 

  

 

1,347

 

  

 

—  

 

Land holding costs

  

 

(805

)

  

 

(89

)

  

 

(286

)

Abandoned project costs

  

 

(891

)

  

 

(3,977

)

  

 

(1,720

)

Reserve for uncollectible note receivable

  

 

—  

 

  

 

—  

 

  

 

(2,000

)

Loss on fee development contract

  

 

—  

 

  

 

(5,108

)

  

 

(11,797

)

All other, net

  

 

50

 

  

 

245

 

  

 

(99

)

    


  


  


    

$

16,087

 

  

$

6,211

 

  

$

(9,351

)

    


  


  


 

Other, net—other income (expense) is summarized as follows:

 

    

Year Ended December 31,


 
    

2002


  

2001


    

2000


 
    

(In thousands)

 

Interest income

  

$

442

  

$

13,213

 

  

$

4,652

 

Consulting fees

  

 

—  

  

 

(6,470

)

  

 

(3,500

)

All other, net

  

 

515

  

 

(1,083

)

  

 

(212

)

    

  


  


    

$

957

  

$

5,660

 

  

$

940

 

    

  


  


 

Note 10.     Non-Strategic Asset Sales

 

The Company’s sales of non-strategic assets are summarized as follows:

 

    

Year Ended December 31,


 
    

2002


    

2001


    

2000


 
    

(In thousands)

 

Sales

  

$

8,373

 

  

$

4,161

 

  

$

50,759

 

Cost of sales

  

 

(1,109

)

  

 

(252

)

  

 

(4,480

)

    


  


  


Gain

  

$

7,264

 

  

$

3,909

 

  

$

46,279

 

    


  


  


 

In 2000, the Company sold 405,000 acres of desert holdings for $45.1 million resulting in a pre-tax gain of $42.4 million.

 

Note 11.    Employee Benefit and Stock Option Plans

 

The Company has a profit sharing and savings plan for all employees. Funding consists of employee contributions along with matching and discretionary profit sharing contributions by the Company. Total expense for the Company under this plan was $1.2 million in each year 2002, 2001, and 2000.

 

The Company has various plans through which employees may purchase common stock of the Company, and through which non-employee directors may purchase or receive common stock of the Company.

 

F-21


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

The Company has five stock option plans under which certain committees of the Board of Directors may grant options to purchase up to 14,500,000 shares of common stock (1991 Stock Option Plan, Amended and Restated Executive Stock Option Plan, 1995 Stock Option Plan, Amended and Restated 1996 Performance Award Plan, and 2000 Performance Award Plan). The exercise price of options granted under these plans is generally the closing price of the common stock on the date of grant. Options typically become exercisable in four annual installments commencing on the first anniversary of the date of grant and expire ten years from the date of grant. However, there are other vesting schedules and expiration periods for options granted under the plans.

 

Each non-employee director is automatically granted an option, immediately following each annual meeting of stockholders, to purchase 5,000 shares of common stock. Any new non-employee member of the Board will receive an option to purchase a portion of 5,000 shares that corresponds to the number of months until the next annual meeting. The exercise price of each automatic stock option is the closing stock price on the date of grant. Each automatic stock option has a ten-year term and becomes exercisable in four equal installments on each of the first four anniversaries of the date of grant.

 

In addition, each non-employee director may elect irrevocably to defer any retainers or fees and receive director stock units instead. If a director makes such an election, his or her director stock units will be distributed to him or her in the form of common stock in a single lump sum or in up to five substantially equal installments, beginning on either January 1 of the year immediately following the director’s termination of service, or January 1 of another year selected by the director provided that such year is not less than three years after the year in which the compensation being deferred is earned. On the distribution date, the director will receive a number of shares of common stock calculated by dividing the deferred compensation by 90% of the fair market value of the common stock on the date of credit.

 

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (Statement 123) requires use of option valuation models that were developed for use in valuing publicly traded stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

 

Pro forma information regarding net income and income per share as required by Statement 123 is presented in Note 2 and has been determined as if the Company had accounted for its employee stock options under the fair value method. The weighted-average fair value of options granted during 2002, 2001, and 2000 was $5.01, $5.42, and $5.31, respectively. The fair value of options granted was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001, and 2000, respectively: risk-free interest rates of 3.47%, 4.42%, and 6.39%; zero percent dividend yields; volatility factors of the expected market price of the Company’s common stock of 22.5%, 24.0%, and 28.5%; and a weighted-average expected life of the options of five years.

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employee stock options.

 

F-22


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

A summary of the Company’s stock option activity, and related information is as follows:

 

    

Year Ended December 31,


    

2002


  

2001


  

2000


    

Options


      

Weighted-Average

Exercise Price


  

Options


      

Weighted-Average

Exercise Price


  

Options


      

Weighted-Average

Exercise Price


    

(In thousands, except exercise price information)

Outstanding—beginning of year

  

8,867

 

    

$

13.50

  

10,259

 

    

$

12.22

  

7,333

 

    

$

10.83

Granted

  

547

 

    

$

18.14

  

1,119

 

    

$

17.65

  

4,172

 

    

$

14.05

Exercised

  

(608

)

    

$

14.41

  

(2,104

)

    

$

9.24

  

(903

)

    

$

8.61

Expired

  

(11

)

    

$

16.13

  

(33

)

    

$

18.83

  

(147

)

    

$

11.74

Forfeited

  

(341

)

    

$

15.27

  

(374

)

    

$

13.50

  

(196

)

    

$

15.85

    

           

           

        

Outstanding—end of year

  

8,454

 

    

$

13.68

  

8,867

 

    

$

13.50

  

10,259

 

    

$

12.22

    

           

           

        

Exercisable at end of year

  

5,276

 

    

$

12.28

  

4,663

 

    

$

11.85

  

5,158

 

    

$

10.03

    

           

           

        

 

Exercise prices for options outstanding as of December 31, 2002, ranged from $5.58 to $21.38. The weighted-average remaining contractual life of those options is 5.7 years.

 

Note 12.    Capital Stock

 

The Company has authorized the issuance of 150 million shares of $.01 par value common stock. The Company has reserved 14,500,000 shares of common stock pursuant to various compensation programs.

 

From October 1999 through July 2001, the Company’s Board of Directors authorized a total of $250 million in repurchases of the Company’s Common Stock. Through December 31, 2001, the Company purchased 13,047,097 shares at a cost of $218 million under these programs. The remaining $32 million authorized has expired or was terminated. All purchases were made on the open market.

 

In December 2001, the Company purchased 10,600,000 shares of its Common Stock from the California Public Employees’ Retirement System (‘CalPERS’) for $183.1 million or $17.2755 per share, representing a negotiated 1% discount to the closing price of the Company’s common stock on December 12, 2001. An independent third party, American Appraisal Associates, Inc., provided the Company’s Board of Directors with a written opinion confirming that the terms and conditions of this transaction were fair, from a financial point of view, to the Company’s stockholders other than CalPERS. Immediately prior to the transaction, CalPERS was the beneficial owner of 18,782,276 shares, or approximately 19.3%, of the Company’s issued and outstanding common stock. As a result of the transaction, CalPERS’ beneficial ownership was reduced to 8,182,276 shares, or approximately 9.45%, of the Company’s issued and outstanding common stock.

 

The Company’s repurchases are reflected as treasury stock at cost and are presented as a reduction to consolidated stockholders’ equity.

 

In December 1999, the Company authorized the issuance of 2,000,000 shares of Series A Junior Participating Preferred Stock in connection with the adoption of a shareholder rights plan. This series of preferred stock has a quarterly dividend of the greater of $1.00 or 100 times the dividend paid on our common stock, and it has a voting right of 100 votes per share. Also in connection with the shareholder rights plan adopted in December 1999, the Company’s Board of Directors declared a dividend of one right to purchase 1/100th of a share of Series A Junior Participating Preferred Stock for each share of common stock. This right becomes exercisable on the occurrence of certain events, and it also may entitle the holder to purchase shares of common stock at one-half its market price on the occurrence of certain events. No shares of this series of preferred stock have been issued.

 

F-23


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 13.    Segment Reporting

 

The Company’s reportable segments are based on the Company’s method of internal reporting, which disaggregates its business by type and before the adjustments for discontinued operations. The Company has five reportable segments: Asset Management; Suburban, which includes two reportable segments, Commercial and Residential; Urban; and Corporate. The Asset Management segment leases and manages the Company-owned commercial buildings and ground leases. The Suburban-Commercial segment develops real estate for the Company’s own account or for third parties and acquires and sells developable land and commercial buildings. The Suburban-Residential segment acquires and develops suburban residential communities and sells finished lots to homebuilders via direct ownership or through joint ventures. The Urban segment develops major mixed-use sites—including development for residential, office, retail, and entertainment purposes—for the Company’s own account and for joint ventures. The Corporate segment consists of administrative services.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (See Note 2). Inter-segment gains and losses are not recognized. Debt and interest-bearing assets are allocated to segments based upon the grouping of the underlying assets. All other assets and liabilities are specifically identified. Each segment has a separate operating management structure.

 

F-24


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Financial data by reportable segment is as follows:

 

    

Asset Management


    

Suburban


                      

Discontinued Operations


       
       

Commercial


    

Residential


   

Urban


   

Corporate


   

Subtotal


      

Total


 
    

(In thousands)

 

2002

                                                                   

Rental properties:

                                                                   

Rental revenue

  

$

267,807

 

  

$

—  

 

  

$

—  

 

 

$

—  

 

 

$

—  

 

 

$

267,807

 

  

$

(856

)

 

$

266,951

 

Property operating costs

  

 

(71,929

)

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(71,929

)

  

 

370

 

 

 

(71,559

)

Income from operating joint ventures, net

  

 

8,277

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

8,277

 

  

 

—  

 

 

 

8,277

 

    


  


  


 


 


 


  


 


    

 

204,155

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

204,155

 

  

 

(486

)

 

 

203,669

 

    


  


  


 


 


 


  


 


Property sales and fee services:

                                                                   

Sales revenue

  

 

43,184

 

  

 

52,966

 

  

 

59,107

 

 

 

14,500

 

 

 

—  

 

 

 

169,757

 

  

 

(30,153

)

 

 

139,604

 

Cost of sales

  

 

(14,256

)

  

 

(42,689

)

  

 

(28,862

)

 

 

(11,154

)

 

 

(601

)

 

 

(97,562

)

  

 

7,901

 

 

 

(89,661

)

    


  


  


 


 


 


  


 


Gain on property sales

  

 

28,928

 

  

 

10,277

 

  

 

30,245

 

 

 

3,346

 

 

 

(601

)

 

 

72,195

 

  

 

(22,252

)

 

 

49,943

 

Income from development joint ventures, net

  

 

—  

 

  

 

—  

 

  

 

33,063

 

 

 

—  

 

 

 

(3,831

)

 

 

29,232

 

  

 

—  

 

 

 

29,232

 

    


  


  


 


 


 


  


 


Total gain on property sales

  

 

28,928

 

  

 

10,277

 

  

 

63,308

 

 

 

3,346

 

 

 

(4,432

)

 

 

101,427

 

  

 

(22,252

)

 

 

79,175

 

Management and development fees

  

 

42

 

  

 

2,973

 

  

 

1,516

 

 

 

2,557

 

 

 

—  

 

 

 

7,088

 

  

 

—  

 

 

 

7,088

 

Selling and G & A expenses

  

 

(1,185

)

  

 

(9,576

)

  

 

(8,316

)

 

 

(6,913

)

 

 

—  

 

 

 

(25,990

)

  

 

—  

 

 

 

(25,990

)

Other, net

  

 

10,691

 

  

 

(550

)

  

 

6,075

 

 

 

(129

)

 

 

—  

 

 

 

16,087

 

  

 

—  

 

 

 

16,087

 

    


  


  


 


 


 


  


 


    

 

38,476

 

  

 

3,124

 

  

 

62,583

 

 

 

(1,139

)

 

 

(4,432

)

 

 

98,612

 

  

 

(22,252

)

 

 

76,360

 

    


  


  


 


 


 


  


 


Interest expense

  

 

(78,831

)

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

18,055

 

 

 

(60,776

)

  

 

588

 

 

 

(60,188

)

Depreciation and amortization

  

 

(59,170

)

  

 

(673

)

  

 

(182

)

 

 

(1,065

)

 

 

(2,349

)

 

 

(63,439

)

  

 

290

 

 

 

(63,149

)

Corporate administrative costs

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

(17,705

)

 

 

(17,705

)

  

 

—  

 

 

 

(17,705

)

Gain on non-strategic asset sales

  

 

7,264

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

7,264

 

  

 

—  

 

 

 

7,264

 

Other, net

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

957

 

 

 

957

 

  

 

—  

 

 

 

957

 

Minority interests

  

 

(6,106

)

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(6,106

)

  

 

—  

 

 

 

(6,106

)

Income taxes

  

 

(40,455

)

  

 

(937

)

  

 

(23,848

)

 

 

842

 

 

 

2,092

 

 

 

(62,306

)

  

 

8,354

 

 

 

(53,952

)

    


  


  


 


 


 


  


 


Income (loss) from continuing operations

  

 

65,333

 

  

 

1,514

 

  

 

38,553

 

 

 

(1,362

)

 

 

(3,382

)

 

 

100,656

 

  

 

(13,506

)

 

 

87,150

 

    


  


  


 


 


 


  


 


Discontinued operations, net of tax:

                                                                   

Gain from disposal of discontinued operations

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

13,748

 

 

 

13,748

 

Loss from discontinued operations

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

(242

)

 

 

(242

)

    


  


  


 


 


 


  


 


Gain from discontinued operations

  

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

13,506

 

 

 

13,506

 

    


  


  


 


 


 


  


 


Net income (loss)

  

$

65,333

 

  

$

1,514

 

  

$

38,553

 

 

$

(1,362

)

 

$

(3,382

)

 

$

100,656

 

  

$

—  

 

 

$

100,656

 

    


  


  


 


 


 


  


 


Investments in equity method subsidiaries

  

$

(10,920

)

  

$

561

 

  

$

37,917

 

 

$

19,593

 

 

$

—  

 

 

$

47,151

 

  

$

—  

 

 

$

47,151

 

    


  


  


 


 


 


  


 


Segment assets

  

$

1,539,024

 

  

$

327,615

 

  

$

130,564

 

 

$

363,945

 

 

$

331,541

 

 

$

2,692,689

 

  

$

2,760

 

 

$

2,695,449

 

    


  


  


 


 


 


  


 


Capital expenditures for segment assets

  

$

37,614

 

  

$

196,786

 

  

$

38,796

 

 

$

99,529

 

 

$

18,686

 

 

$

391,411

 

  

$

—  

 

 

$

391,411

 

    


  


  


 


 


 


  


 


 

F-25


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

   

Asset Management


    

Suburban


                      

Discontinued Operations


       
      

Commercial


    

Residential


   

Urban


   

Corporate


   

Subtotal


      

Total


 
   

(In thousands)

 

2001

                                                                  

Rental properties:

                                                                  

Rental revenue

 

$

234,881

 

  

$

—  

 

  

$

—  

 

 

$

—  

 

 

$

—  

 

 

$

234,881

 

  

$

(2,775

)

 

$

232,106

 

Property operating costs

 

 

(62,663

)

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(62,663

)

  

 

959

 

 

 

(61,704

)

Income from operating joint ventures, net

 

 

8,833

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

8,833

 

  

 

—  

 

 

 

8,833

 

   


  


  


 


 


 


  


 


   

 

181,051

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

181,051

 

  

 

(1,816

)

 

 

179,235

 

   


  


  


 


 


 


  


 


Property sales and fee services:

                                                                  

Sales revenue

 

 

71,818

 

  

 

75,686

 

  

 

48,507

 

 

 

49,793

 

 

 

—  

 

 

 

245,804

 

  

 

—  

 

 

 

245,804

 

Cost of sales

 

 

(30,744

)

  

 

(50,896

)

  

 

(30,202

)

 

 

(37,337

)

 

 

(519

)

 

 

(149,698

)

  

 

—  

 

 

 

(149,698

)

   


  


  


 


 


 


  


 


Gain on property sales

 

 

41,074

 

  

 

24,790

 

  

 

18,305

 

 

 

12,456

 

 

 

(519

)

 

 

96,106

 

  

 

—  

 

 

 

96,106

 

Income from development joint ventures, net

 

 

—  

 

  

 

9

 

  

 

27,670

 

 

 

—  

 

 

 

(1,701

)

 

 

25,978

 

  

 

—  

 

 

 

25,978

 

   


  


  


 


 


 


  


 


Total gain on property sales

 

 

41,074

 

  

 

24,799

 

  

 

45,975

 

 

 

12,456

 

 

 

(2,220

)

 

 

122,084

 

  

 

—  

 

 

 

122,084

 

Management and development fees

 

 

145

 

  

 

3,679

 

  

 

1,394

 

 

 

782

 

 

 

—  

 

 

 

6,000

 

  

 

—  

 

 

 

6,000

 

Selling and G & A expenses

 

 

(1,235

)

  

 

(9,607

)

  

 

(11,379

)

 

 

(4,349

)

 

 

—  

 

 

 

(26,570

)

  

 

—  

 

 

 

(26,570

)

Other, net

 

 

5,518

 

  

 

(179

)

  

 

(3,868

)

 

 

4,716

 

 

 

—  

 

 

 

6,187

 

  

 

24

 

 

 

6,211

 

   


  


  


 


 


 


  


 


   

 

45,502

 

  

 

18,692

 

  

 

32,122

 

 

 

13,605

 

 

 

(2,220

)

 

 

107,701

 

  

 

24

 

 

 

107,725

 

   


  


  


 


 


 


  


 


Interest expense

 

 

(75,110

)

  

 

(7

)

  

 

—  

 

 

 

(684

)

 

 

17,656

 

 

 

(58,145

)

  

 

1,392

 

 

 

(56,753

)

Depreciation and amortization

 

 

(47,925

)

  

 

(514

)

  

 

(311

)

 

 

(1,853

)

 

 

(1,855

)

 

 

(52,458

)

  

 

567

 

 

 

(51,891

)

Corporate administrative costs

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

(19,256

)

 

 

(19,256

)

  

 

—  

 

 

 

(19,256

)

Gain on non-strategic asset sales

 

 

3,909

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

3,909

 

  

 

—  

 

 

 

3,909

 

Other, net

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

5,660

 

 

 

5,660

 

  

 

—  

 

 

 

5,660

 

Minority interests

 

 

(6,059

)

  

 

—  

 

  

 

(83

)

 

 

—  

 

 

 

—  

 

 

 

(6,142

)

  

 

—  

 

 

 

(6,142

)

Income taxes

 

 

(41,091

)

  

 

(7,366

)

  

 

(12,861

)

 

 

(4,487

)

 

 

6

 

 

 

(65,799

)

  

 

(67

)

 

 

(65,866

)

   


  


  


 


 


 


  


 


Income (loss) from continuing operations

 

 

60,277

 

  

 

10,805

 

  

 

18,867

 

 

 

6,581

 

 

 

(9

)

 

 

96,521

 

  

 

100

 

 

 

96,621

 

   


  


  


 


 


 


  


 


Discontinued operations, net of tax:

                                                                  

Gain from disposal of discontinued operations

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

—  

 

 

 

—  

 

Loss from discontinued operations

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

(100

)

 

 

(100

)

   


  


  


 


 


 


  


 


Loss from discontinued operations

 

 

—  

 

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

(100

)

 

 

(100

)

   


  


  


 


 


 


  


 


Net income (loss)

 

$

60,277

 

  

$

10,805

 

  

$

18,867

 

 

$

6,581

 

 

$

(9

)

 

$

96,521

 

  

$

—  

 

 

$

96,521

 

   


  


  


 


 


 


  


 


Investments in equity method subsidiaries

 

$

(13,026

)

  

$

—  

 

  

$

74,721

 

 

$

2,035

 

 

$

—  

 

 

$

63,730

 

  

$

—  

 

 

$

63,730

 

   


  


  


 


 


 


  


 


Segment assets

 

$

1,243,108

 

  

$

371,105

 

  

$

216,920

 

 

$

321,601

 

 

$

262,781

 

 

$

2,415,515

 

  

$

—  

 

 

$

2,415,515

 

   


  


  


 


 


 


  


 


Capital expenditures for segment assets

 

$

75,127

 

  

$

234,124

 

  

$

58,640

 

 

$

61,317

 

 

$

9,468

 

 

$

438,676

 

  

$

—  

 

 

$

438,676

 

   


  


  


 


 


 


  


 


 

F-26


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

    

Asset Management


    

Suburban


                      

Discontinued Operations


       
       

Commercial


   

Residential


   

Urban


   

Corporate


   

Subtotal


      

Total


 
    

(In thousands)

 

2000

                                                                  

Rental properties:

                                                                  

Rental revenue

  

$

206,762

 

  

$

—  

 

 

$

—  

 

 

$

—  

 

 

$

—  

 

 

$

206,762

 

  

$

(3,071

)

 

$

203,691

 

Property operating costs

  

 

(55,272

)

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(55,272

)

  

 

804

 

 

 

(54,468

)

Income from operating joint ventures, net

  

 

9,809

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

9,809

 

  

 

—  

 

 

 

9,809

 

    


  


 


 


 


 


  


 


    

 

161,299

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

161,299

 

  

 

(2,267

)

 

 

159,032

 

    


  


 


 


 


 


  


 


Property sales and fee services:

                                                                  

Sales revenue

  

 

89,323

 

  

 

68,951

 

 

 

292,822

 

 

 

—  

 

 

 

—  

 

 

 

451,096

 

  

 

—  

 

 

 

451,096

 

Cost of sales

  

 

(46,410

)

  

 

(52,415

)

 

 

(238,930

)

 

 

—  

 

 

 

—  

 

 

 

(337,755

)

  

 

—  

 

 

 

(337,755

)

    


  


 


 


 


 


  


 


Gain on property sales

  

 

42,913

 

  

 

16,536

 

 

 

53,892

 

 

 

—  

 

 

 

—  

 

 

 

113,341

 

  

 

—  

 

 

 

113,341

 

Income from development joint ventures, net

  

 

—  

 

  

 

13

 

 

 

27,767

 

 

 

—  

 

 

 

—  

 

 

 

27,780

 

  

 

—  

 

 

 

27,780

 

    


  


 


 


 


 


  


 


Total gain on property sales

  

 

42,913

 

  

 

16,549

 

 

 

81,659

 

 

 

—  

 

 

 

—  

 

 

 

141,121

 

  

 

—  

 

 

 

141,121

 

Management and development fees

  

 

11,814

 

  

 

999

 

 

 

1,498

 

 

 

1,149

 

 

 

—  

 

 

 

15,460

 

  

 

—  

 

 

 

15,460

 

Selling and G & A expenses

  

 

(8,903

)

  

 

(9,643

)

 

 

(25,007

)

 

 

(2,248

)

 

 

—  

 

 

 

(45,801

)

  

 

—  

 

 

 

(45,801

)

Other, net

  

 

2,353

 

  

 

524

 

 

 

(12,209

)

 

 

(19

)

 

 

—  

 

 

 

(9,351

)

  

 

—  

 

 

 

(9,351

)

    


  


 


 


 


 


  


 


    

 

48,177

 

  

 

8,429

 

 

 

45,941

 

 

 

(1,118

)

 

 

—  

 

 

 

101,429

 

  

 

—  

 

 

 

101,429

 

    


  


 


 


 


 


  


 


Interest expense

  

 

(57,832

)

  

 

(4

)

 

 

(546

)

 

 

(1,153

)

 

 

8,571

 

 

 

(50,964

)

  

 

989

 

 

 

(49,975

)

Depreciation and amortization

  

 

(42,090

)

  

 

(747

)

 

 

(108

)

 

 

(1,684

)

 

 

(1,876

)

 

 

(46,505

)

  

 

566

 

 

 

(45,939

)

Corporate administrative costs

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

(15,675

)

 

 

(15,675

)

  

 

—  

 

 

 

(15,675

)

Gain on non-strategic asset sales

  

 

46,279

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

46,279

 

  

 

—  

 

 

 

46,279

 

Other, net

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

940

 

 

 

940

 

  

 

—  

 

 

 

940

 

Minority interests

  

 

(6,347

)

  

 

—  

 

 

 

(4,354

)

 

 

—  

 

 

 

—  

 

 

 

(10,701

)

  

 

—  

 

 

 

(10,701

)

Income taxes

  

 

(60,320

)

  

 

(3,098

)

 

 

(16,517

)

 

 

1,596

 

 

 

3,244

 

 

 

(75,095

)

  

 

285

 

 

 

(74,810

)

    


  


 


 


 


 


  


 


Income (loss) from continuing operations

  

 

89,166

 

  

 

4,580

 

 

 

24,416

 

 

 

(2,359

)

 

 

(4,796

)

 

 

111,007

 

  

 

(427

)

 

 

110,580

 

    


  


 


 


 


 


  


 


Discontinued operations, net of tax:

                                                                  

Gain from disposal of discontinued operations

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

—  

 

 

 

—  

 

Gain from discontinued operations

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

427

 

 

 

427

 

    


  


 


 


 


 


  


 


Gain from discontinued operations

  

 

—  

 

  

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

—  

 

  

 

427

 

 

 

427

 

    


  


 


 


 


 


  


 


Net income (loss)

  

$

89,166

 

  

$

4,580

 

 

$

24,416

 

 

$

(2,359

)

 

$

(4,796

)

 

$

111,007

 

  

$

—  

 

 

$

111,007

 

    


  


 


 


 


 


  


 


Investments in equity method subsidiaries

  

$

(16,092

)

  

$

11

 

 

$

46,245

 

 

$

—  

 

 

$

—  

 

 

$

30,164

 

  

$

—  

 

 

$

30,164

 

    


  


 


 


 


 


  


 


Segment assets

  

$

1,072,283

 

  

$

325,513

 

 

$

152,551

 

 

$

355,202

 

 

$

368,867

 

 

$

2,274,416

 

  

$

—  

 

 

$

2,274,416

 

    


  


 


 


 


 


  


 


Capital expenditures for segment assets

  

$

32,028

 

  

$

247,455

 

 

$

123,372

 

 

$

43,416

 

 

$

2,067

 

 

$

448,338

 

  

$

—  

 

 

$

448,338

 

    


  


 


 


 


 


  


 


 

F-27


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 14.    Sale of Home-Building Assets

 

In July 2000, the Company’s residential subsidiary sold a majority of its home-building assets, with a book value of $125.8 million, to a newly formed limited liability company (“LLC”) managed by Brookfield Homes of California, Inc., for $139 million in cash and a retained interest in the new company valued at $22.5 million. Approximately $77 million of the initial cash proceeds were used for debt repayment, closing costs, and other expenses related to the sale of the home building operations. The remaining proceeds were added to the Company’s working capital. Under the agreement, the Company’s residential subsidiary was entitled to a preferred return on the retained interest and 35% of additional profits from LLC operations. The deferred gain related to the retained interest and the 35% share of profits from LLC’s operations were recorded as part of “Equity in earnings of development joint ventures, net” as home/lots were sold by LLC.

 

In 2000, the Company recorded a $13.4 million gain on property sales related to this transaction and recognized $8.3 million of the $22.5 million retained interest, $0.8 million of the Company’s 35% share of the profits of the LLC, and a $1 million preferred return from the Company’s investment in the LLC.

 

In 2001, the Company sold its retained interest in the LLC for $8.2 million and recognized the remaining deferred gain of $14.2 million, which has been included as part of “Equity in earnings of development joint ventures, net”.

 

Note 15.    Commitments and Contingencies

 

The Company has surety bonds and standby letters of credit related to various development projects, lease payment guarantees, various debt and debt service guarantees, and guarantees in capital contribution requirements related to certain unconsolidated real estate joint ventures. These guarantees at December 31, 2002 are summarized in the following categories (in thousands):

 

Off-balance sheet guarantees:

      

Surety bonds

  

$

285,225

Standby letters of credit

  

 

52,016

Debt service guarantees

  

 

44,625

Contribution requirements

  

 

5,600

Lease payment guarantee

  

 

2,087

    

Sub-total

  

 

389,553

Guarantee liabilities included in balance sheet:

      

Standby letters of credit

  

 

54,375

    

Total

  

$

443,928

    

 

Surety bonds are to guarantee the construction of infrastructure and public improvements. Surety bonds are commonly required by public agencies from developers in real estate development, and are renewable and expire upon completion of the required improvements. The typical development period of the Company’s development projects is approximately one to three years. Example of events that would require the Company to perform under these surety bonds would be from failure of the Company to construct or complete the required improvements. At December 31, 2002, the Company has not been required to fund any of the surety bonds.

 

Standby letters of credit consist of two types: performance and financial. Performance standby letters of credit are similar in nature and term as the surety bonds described above. Financial standby letters of credit are a form of credit enhancement commonly required in real estate development when bonds are issued to finance

 

F-28


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

public improvements; these financial standby letters of credit are scheduled to expire between December 2005 and May 2007. As of December 31, 2002, the Company has a total of $106.4 million in standby letters of credit; $52 million of the total is off-balance sheet ($40.4 million is financial letters of credit and $11.6 million is performance letters of credit), while the remaining $54.4 million are related to indebtedness that is reflected in the Company’s consolidated balance sheet. Example of events that would require the Company to perform under the performance standby letters of credit would be from failure of the Company to construct or complete the required improvements. Examples of events that would require the Company to perform under the financial standby letters of credit would be from debt service shortfall in the municipal districts that issued the municipal bonds. At December 31, 2002, the Company has not been required to satisfy any of these standby letters of credit.

 

The Company has made debt service guarantees for certain of its unconsolidated joint ventures. At December 31, 2002, based on the joint ventures’ outstanding balance, these debt guarantees totaled $44.6 million; these debt service guarantees are scheduled to expire between March 2003 and September 2005. These debt service guarantees are typical business arrangements commonly required of developers in real estate development. Examples of events that would require the Company to provide a cash payment pursuant to a guarantee include a loan default, which would result from failure of the primary borrower to service its debt when due, or non-compliance of the primary borrower with financial covenants and inadequacy of asset collateral. At December 31, 2002, the Company has not been required to satisfy any amounts under these debt service guarantees.

 

The Company is required to make additional capital contributions to two of its unconsolidated joint ventures should additional capital contributions be necessary to fund development costs or operating shortfall. At December 31, 2002, the Company had approximately $5.6 million remaining from the contingent obligation to fund development costs for one of its joint ventures and does not expect to fund any additional capital contributions beyond this amount. The second joint venture requires capital contributions to fund operating shortfall upon written notice from the joint venture’s management committee. As of December 31, 2002, no such notice has been received.

 

The Company has guaranteed $2.1 million of lease payments through September 2003 of a third party in connection with a development project. As of December 31, 2002, the Company has not been required to satisfy any amounts under this guarantee.

 

The Company also has recorded in its consolidated balance sheet $0.7 million estimated residual home warranty related liability from home-building activities prior to the selling of its home-building assets in 2000. The estimate is based on past claims and experience. These home warranty related reserves are charged to cost of sales when established.

 

As of December 31, 2002, $163.3 million of Community Facility District bonds were sold to finance public infrastructure improvements at several Company projects. The Company provided a letter of credit totaling $40 million in support of one of these bonds. The $40 million is included in the standby letters of credit and surety bonds amounts disclosed above. The Company, along with other landowners, is required to satisfy any shortfall in annual debt service obligation for these bonds if incremental tax revenues generated by the projects are insufficient.

 

The Company is a party to a number of legal actions arising in the ordinary course of business. The Company cannot predict with certainty the final outcome of these proceedings. Considering current insurance coverages and the substantial legal defenses available, however, 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. Where appropriate, the Company has established reserves for potential liabilities related to legal actions or threatened legal actions. These reserves are necessarily based on estimates and probabilities of the occurrence of events and therefore are subject to revision from time to time.

 

F-29


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Some of the legal actions to which the Company is party seek to restrain actions related to the development process or challenge title to or possession of the Company’s properties. Typically, such actions, if successful, would not result in significant financial liability for the Company but might instead prevent the completion of the development process originally planned, and therefore, impairment may occur in certain development assets.

 

Inherent in the operations of the real estate business is the possibility that environmental liability may arise from the current or past ownership, or current or past operation, of real properties. 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 because of such factors as the unknown magnitude of possible contamination, the unknown timing and extent of the corrective actions that may be required, the determination of the Company’s potential liability in proportion to that of other potentially responsible parties, and the extent to which such costs are recoverable from insurance. Also, the Company does not generally have access to properties sold in the past.

 

At December 31, 2002, management estimates that future costs for remediation of environmental contamination on operating properties and properties previously sold approximate $9.3 million, and has provided a reserve for that amount. It is anticipated that such costs will be incurred over the next several years. Management also estimates approximately $12.5 million of similar costs relating to the Company’s properties to be developed or sold. The Company may incur additional costs related to management of excess contaminated soil from our projects; however, the necessity of this activity depends on the type of future development activities, and, therefore, the related costs are not currently determinable. These costs will be capitalized as components of development costs when incurred, which is anticipated to be over a period of approximately twenty years, or will be deferred and charged to cost of sales when the properties are sold. Environmental costs capitalized during 2002 totaled $5.3 million. The Company’s estimates were developed based on reviews that took place over several years based upon then-prevailing law and identified site conditions. Because of the breadth of its portfolio, and past sales, the Company is unable to review each property extensively 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 and ability of other parties to pay some or all of such costs.

 

Note 16.    Related Party Transactions

 

The Company provides development and management services and loan guarantees to various unconsolidated joint venture investments. Fees earned were $4.2 million, $1.2 million, and $0.6 million in 2002, 2001, and 2000, respectively. Deferred fees of $1.8 million at December 31, 2002, will be earned as completed projects are sold or the venture is sold or liquidated.

 

In 2001, the Company entered into a 99-year ground lease with one of its unconsolidated joint venture investments. Rent payments of $3.7 million and $1.8 million were received and recognized as rental income during the years ended December 31, 2002 and 2001, respectively. Rent payments of $1.0 million of previously received rent was deferred at December 31, 2002, and will be recognized, together with annual rents, over the life of the lease.

 

The Company has a $4.7 million collateralized 9.0% note receivable from an unconsolidated joint venture for project costs plus accrued interest. The note is collateralized by property owned by the venture, and matures in October 2028. The Company has entered into various lease agreements with this unconsolidated joint venture. As lessee, rent expense was $0.1 million in each of the years 2002, 2001, and 2000; this lease will expire in November 2011. As lessor, the Company entered into a ground lease, which will expire in August 2054. The Company earned rental income of $0.2 million in each of the last three years and has recorded a $1.8 million receivable associated with this lease.

 

F-30


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 17.    Discontinued Operations

 

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets”, which addresses financial accounting and reporting for the impairment and disposal of long-lived assets. In general, sales of rental property, (a) not sold subject to an initial tenant purchase option or, (b) explicitly built with the intention of selling, but not sold within two years of completion, are referred to as “Investment Properties” and classified as discontinued operations. Therefore, as required, gain or loss attributed to the operations and sale of Investment Properties sold or held for sale is presented in the statement of operations as discontinued operations, net of applicable income tax. Prior period statements of operations have been reclassified to reflect as discontinued operations the gain or loss related to Investment Properties that were sold or held for sale and presented as discontinued operations during the year ended December 31, 2002. Additionally, all periods presented will likely require further reclassification in future periods as additional, similar sales of Investment Properties occur.

 

During the year ended December 31, 2002, the Company sold Investment Properties for $30.2 million, with a gain from the disposal of discontinued operations of $13.8 million, net of income taxes of $8.5 million. Rents from these properties, and properties under contract to be sold were $0.9 million in 2002, $2.8 million in 2001, and $3.1 million in 2000. Loss from discontinued operations from these properties was $0.2 million net of income tax benefit of $0.2 million and $0.1 million, net of income tax benefit of $0.1 million for the years ended December 31, 2002 and 2001, respectively, and a gain of $0.4 million, net of income tax expense of $0.3 million, for the year ended December 31, 2000.

 

Asset and liability balances of Investment Properties under contract to be sold at December 31, 2002, consist of the following:

 

      

December 31, 2002


 
      

(In thousands)

 

Assets

          

Properties

    

$

3,216

 

Accumulated depreciation

    

 

(744

)

      


Net

    

 

2,472

 

Other assets

    

 

288

 

      


Total assets

    

 

2,760

 

      


Liabilities

          

Mortgage and other debt

    

 

3,147

 

Payables

    

 

62

 

Other liabilities

    

 

24

 

      


Total liabilities

    

 

3,233

 

      


Net liabilities

    

$

473

 

      


 

F-31


CATELLUS DEVELOPMENT CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Note 18.     Subsequent Events

 

On March 3, 2003, the Company announced that its Board of Directors has authorized it to restructure its business operations in order to qualify as a real estate investment trust (“REIT”), effective January 1, 2004. The REIT conversion is subject to a shareholder approval process, which is expected to conclude in the third quarter of 2003, as well as Board approval. This announcement has no material effect on the financial statements as of, or for, the year ended December 31, 2002; however, it will likely have an impact on future operating results in the following areas, if approved by the shareholder vote:

 

  ·   a one-time distribution of pre-REIT earnings and profits, projected to be approximately $100 million in cash and $200 million in common stock, will be declared in the fourth quarter and be paid in the first quarter of 2004, this distribution is subject to approval by the Internal Revenue Service

 

  ·   commencing in the third quarter of 2003, a quarterly dividend of approximately $0.30 per existing share of common stock will be paid

 

  ·   conversion and related restructure costs are currently estimated to be $15 million

 

  ·   certain deferred tax liabilities associated with assets in the REIT would be reversed through income and result in a one-time increase in income currently estimated in the $200 to $250 million range

 

The Company will soon file a preliminary proxy statement/prospectus with the Securities and Exchange Commission that will provide important information, including detailed risk factors, regarding the proposed transaction.

 

In January 2003, the Company acquired the 10% minority interest owned by other investors in a subsidiary for cash of $60.7 million. The acquisition was accounted for based on the purchase method of accounting.

 

 

F-32


 

CATELLUS DEVELOPMENT CORPORATION

 

Summarized Quarterly Results (Unaudited)

 

The Company’s income and cash flow are determined to a large extent by property sales. Sales and net income have fluctuated significantly from quarter to quarter, as evidenced by the following summary of unaudited quarterly consolidated results of operations. Property sales fluctuate from quarter to quarter, reflecting general market conditions and the Company’s intent to sell property when it can obtain attractive prices. Cost of sales may also vary widely because (i) properties have been owned for varying periods of time; (ii) properties are owned in various geographical locations; and (iii) development projects have varying infrastructure costs and build-out periods.

 

    

Year Ended December 31,


 
    

2002


    

2001


 
    

First


    

Second


    

Third


    

Fourth


    

First


    

Second


    

Third


    

Fourth


 
    

(In thousands, except per share data)

 

Rental properties:

                                                                       

Rental revenue

  

$

62,967

 

  

$

64,895

 

  

$

66,115

 

  

$

72,974

 

  

$

55,007

 

  

$

56,345

 

  

$

58,515

 

  

$

62,239

 

Property operating costs

  

 

(15,701

)

  

 

(17,215

)

  

 

(18,102

)

  

 

(20,541

)

  

 

(13,804

)

  

 

(13,854

)

  

 

(17,174

)

  

 

(16,872

)

Property sales and fee services:

                                                                       

Sales revenue

  

 

54,694

 

  

 

43,998

 

  

 

10,299

 

  

 

30,613

 

  

 

57,896

 

  

 

67,966

 

  

 

64,324

 

  

 

55,618

 

Cost of sales

  

 

(39,085

)

  

 

(28,167

)

  

 

(2,471

)

  

 

(19,938

)

  

 

(35,051

)

  

 

(41,824

)

  

 

(36,609

)

  

 

(36,214

)

Equity in earnings of development joint ventures, net

  

 

7,447

 

  

 

8,177

 

  

 

4,201

 

  

 

9,407

 

  

 

7,795

 

  

 

332

 

  

 

13,489

 

  

 

4,362

 

Management and development fees

  

 

1,132

 

  

 

1,764

 

  

 

2,755

 

  

 

1,437

 

  

 

1,180

 

  

 

1,374

 

  

 

1,266

 

  

 

2,180

 

Selling, general and administrative expenses

  

 

(7,850

)

  

 

(6,130

)

  

 

(5,824

)

  

 

(6,186

)

  

 

(8,648

)

  

 

(6,932

)

  

 

(6,373

)

  

 

(4,617

)

Interest expense

  

 

(12,571

)

  

 

(13,928

)

  

 

(16,388

)

  

 

(17,301

)

  

 

(14,273

)

  

 

(14,652

)

  

 

(13,569

)

  

 

(14,259

)

Gain (loss) on non-strategic asset sales

  

 

(238

)

  

 

7,059

 

  

 

421

 

  

 

22

 

  

 

1,747

 

  

 

1,389

 

  

 

765

 

  

 

8

 

Corporate administrative costs

  

 

(4,102

)

  

 

(4,362

)

  

 

(4,284

)

  

 

(4,957

)

  

 

(5,545

)

  

 

(5,062

)

  

 

(4,685

)

  

 

(3,964

)

Depreciation and amortization

  

 

(13,438

)

  

 

(14,957

)

  

 

(17,570

)

  

 

(17,184

)

  

 

(12,792

)

  

 

(12,801

)

  

 

(12,751

)

  

 

(13,547

)

Income from continuing operations

  

 

27,061

 

  

 

26,174

 

  

 

13,415

 

  

 

20,500

 

  

 

26,252

 

  

 

22,158

 

  

 

28,686

 

  

 

19,525

 

Net income

  

$

31,484

 

  

$

33,639

 

  

$

14,655

 

  

$

20,878

 

  

$

26,208

 

  

$

22,171

 

  

$

28,646

 

  

$

19,496

 

    


  


  


  


  


  


  


  


Income per share from continuing operations—basic

  

$

0.31

 

  

$

0.30

 

  

$

0.15

 

  

$

0.24

 

  

$

0.25

 

  

$

0.22

 

  

$

0.29

 

  

$

0.20

 

    


  


  


  


  


  


  


  


Income per share from continuing operations—assuming dilution

  

$

0.30

 

  

$

0.29

 

  

$

0.15

 

  

$

0.23

 

  

$

0.24

 

  

$

0.21

 

  

$

0.28

 

  

$

0.20

 

    


  


  


  


  


  


  


  


Net income per common share—basic

  

$

0.36

 

  

$

0.39

 

  

$

0.17

 

  

$

0.24

 

  

$

0.25

 

  

$

0.22

 

  

$

0.29

 

  

$

0.20

 

    


  


  


  


  


  


  


  


Net income per common share—

assuming dilution

  

$

0.35

 

  

$

0.37

 

  

$

0.16

 

  

$

0.23

 

  

$

0.24

 

  

$

0.21

 

  

$

0.28

 

  

$

0.20

 

    


  


  


  


  


  


  


  


 

 

F-33


 

REPORT OF INDEPENDENT ACCOUNTANTS ON

FINANCIAL STATEMENT SCHEDULES

 

To the Board of Directors

of Catellus Development Corporation

 

Our audits of the consolidated financial statements referred to in our report dated January 29, 2003, appearing on page F-2 of this Form 10-K of Catellus Development Corporation, also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

 

PRICEWATERHOUSECOOPERS LLP

San Francisco, California

January 29, 2003, except as to Note 18, for which the date is March 3, 2003

 

S-1


 

CATELLUS DEVELOPMENT CORPORATION

 

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

 

Three Years Ended December 31, 2002

(In thousands)

 

    
  

Additions


  

Deductions


    

Balance at

End of Year


    

Balance at Beginning

of Year


  

Charged to Costs and

Expenses


    

Charged

to Other Accounts


     

Year ended December 31, 2000

                                      

Allowance for doubtful accounts receivable

  

$

1,254

  

$

853

 

  

$

  —  

  

$

(404

)(1)

  

$

1,703

Allowance for doubtful notes receivable

  

 

1,860

  

 

2,000

 

  

 

—  

  

 

(40

)(1)

  

 

3,820

Reserve for environmental and legal costs

  

 

10,502

  

 

—  

 

  

 

—  

  

 

(125

)(2)

  

 

10,377

Year ended December 31, 2001

                                      

Allowance for doubtful accounts receivable

  

 

1,703

  

 

444

 

  

 

—  

  

 

(716

)(1)

  

 

1,431

Allowance for doubtful notes receivable

  

 

3,820

  

 

—  

 

  

 

—  

  

 

(2,000

)(3)

  

 

1,820

Reserve for environmental and legal costs

  

 

10,377

  

 

1,102

 

  

 

—  

  

 

(263

)(2)

  

 

11,216

Year ended December 31, 2002

                                      

Allowance for doubtful accounts receivable

  

 

1,431

  

 

338

 

  

 

—  

  

 

(185

)(1)

  

 

1,584

Allowance for doubtful notes receivable

  

 

1,820

  

 

—  

 

  

 

—  

  

 

 

  

 

1,820

Reserve for environmental and legal costs

  

 

11,216

  

 

(416

)(4)

  

 

—  

  

 

(441

)(2)

  

 

10,359


Notes:

(1)   Balances written off as uncollectible.
(2)   Environmental and legal costs incurred.
(3)   Recovery of note receivable previously written off.
(4)   Reduction in estimate.

 

S-2


 

CATELLUS DEVELOPMENT CORPORATION

 

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION

December 31, 2002

(Dollars in thousands)

 

    

Encumbrances


 

Initial Cost to Catellus


  

Cost Capitalized

Subsequent to

Acquisition


 

Gross Amount at Which Carried

at Close of Period(1)(2)(3)


  

Accumulated

Depreciation


    

Date of

Completion of

Construction


  

Date

Acquired


    

Life on

Which

Depreciation

in Latest

Income

Statement is

Computed


 

Description


    

Land


  

Buildings &

Improvements


  

Improvements


 

Carrying

Costs


 

Land


  

Buildings &

Improvements


 

Total


               

Rental properties

  

$

1,319,447

 

$

197,739

  

$

141,828

  

$

1,289,079

 

$

156,351

 

$

197,739

  

$

1,587,258

 

$

1,784,997

  

$

366,772

    

N/A

  

Various

    

(4

)

    

 

  

  

 

 

  

 

  

                    

Developable properties

                                                                               

Mission Bay, San Francisco, CA

  

 

9,795

 

 

66,829

  

 

3,952

  

 

105,480

 

 

57,871

 

 

66,829

  

 

167,303

 

 

234,132

  

 

5,159

    

N/A

  

Various

    

(4

)

Other properties less than 5% of total

  

 

154,296

 

 

102,956

  

 

798

  

 

140,196

 

 

93,041

 

 

102,956

  

 

234,035

 

 

336,991

  

 

5,540

    

N/A

  

Various

    

(4

)

    

 

  

  

 

 

  

 

  

                    

Total developable properties

  

 

164,091

 

 

169,785

  

 

4,750

  

 

245,676

 

 

150,912

 

 

169,785

  

 

401,338

 

 

571,123

  

 

10,699

                    
    

 

  

  

 

 

  

 

  

                    

Other

  

 

547

 

 

5,259

  

 

—  

  

 

1,385

 

 

70

 

 

5,259

  

 

1,455

 

 

6,714

  

 

725

    

N/A

  

Various

    

(4

)

    

 

  

  

 

 

  

 

  

                    

Total

  

$

1,484,085

 

$

372,783

  

$

146,578

  

$

1,536,140

 

$

307,333

 

$

372,783

  

$

1,990,051

 

$

2,362,834

  

$

378,196

                    
    

 

  

  

 

 

  

 

  

                    

(1)   The aggregate cost for Federal income tax purpose is approximately $1,719,576.
(2)   See Attachment A to Schedule III for reconciliation of beginning of period total to total at close of period.
(3)   Excludes investments in joint ventures and furniture and equipment.
(4)   Reference is made to Note 2 to the Consolidated Financial Statements for information related to depreciation.

 

 

S-3


 

CATELLUS DEVELOPMENT CORPORATION

 

ATTACHMENT A TO SCHEDULE III

RECONCILIATION OF COST OF REAL ESTATE AT BEGINNING OF PERIOD

WITH TOTAL AT END OF PERIOD

(In thousands)

 

    

Year Ended December 31,


    

2002


  

2001


  

2000


Balance at January 1

  

$

2,183,960

  

$

1,969,050

  

$

1,873,254

    

  

  

Additions during period:

                    

Acquisitions

  

 

32,326

  

 

83,567

  

 

63,637

Improvements

  

 

235,739

  

 

321,788

  

 

368,185

Reclassification from other accounts

  

 

13,999

  

 

6,075

  

 

22,107

    

  

  

Total additions

  

 

282,064

  

 

411,430

  

 

453,929

    

  

  

Deductions during period:

                    

Cost of real estate sold

  

 

100,064

  

 

195,541

  

 

356,077

Other

                    

Reclassification to assets held for sale, personal property and other accounts

  

 

3,126

  

 

979

  

 

2,056

    

  

  

Total deductions

  

 

103,190

  

 

196,520

  

 

358,133

    

  

  

Balance at December 31

  

$

2,362,834

  

$

2,183,960

  

$

1,969,050

    

  

  

 

RECONCILIATION OF REAL ESTATE ACCUMULATED DEPRECIATION

AT BEGINNING OF PERIOD WITH TOTAL AT END OF PERIOD

(In thousands)

 

    

Year Ended December 31,


    

2002


  

2001


    

2000


Balance at January 1

  

$

335,741

  

$

303,866

 

  

$

279,946

    

  


  

Additions during period:

                      

Charged to expense

  

 

52,603

  

 

43,522

 

  

 

39,266

    

  


  

Deductions during period:

                      

Cost of real estate sold

  

 

9,244

  

 

11,923

 

  

 

14,685

Other

  

 

904

  

 

(276

)

  

 

661

    

  


  

Total deductions

  

 

10,148

  

 

11,647

 

  

 

15,346

    

  


  

Balance at December 31

  

$

378,196

  

$

335,741

 

  

$

303,866

    

  


  

 

S-4


 

EXHIBIT INDEX

 

Exhibit Number


    

3.1

  

Restated Certificate of Incorporation, effective December 4, 1990. (Incorporated by reference to the exhibits to Catellus Development Corporation’s (“Catellus”) Registration Statement on Form 10, with the Securities and Exchange Commission (“SEC”) on July 18, 1990 (“Form 10”).)

3.2

  

Amendment to Restated Certificate of Incorporation, effective July 13, 1993. (Incorporated by reference to Exhibit 3.1B to Catellus’ Form 10-K for the year ended December 31, 2000 (the “2000 Form 10-K”).)

3.3

  

Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to the 2000 Form 10-K.)

4.1

  

Rights Agreement, dated as of December 16, 1999, between Catellus and American Stock Transfer and Trust Company. (Incorporated by reference to Exhibit 4.1 to Catellus’ Form 8-K filed with the SEC on December 28, 1999.)

4.2

  

Form of Certificate of Designations of Series A Junior Participating Preferred Stock, Form of Right Certificate and Summary of Rights to Purchase Preferred Shares. (Incorporated by reference to Exhibits A, B and C, respectively, to Exhibit 4.1 to Catellus’ Form 8-K filed with the SEC on December 28, 1999.)

4.3

  

Registration Rights Agreement, dated as of December 29, 1989, among Catellus, BAREIA, O&Y and Itel. (Incorporated by reference to the exhibits to Form 10.)

4.4

  

First Amendment to Registration Rights Agreement among Catellus, BAREIA, O&Y and Itel. (Incorporated by reference to the exhibits to Amendment No. 2 to Catellus’ Form S-3, filed with the SEC on February 4, 1993.)

4.5

  

Letter Agreement dated November 14, 1995, between Catellus and California Public Employees’ Retirement System (“CalPERS”). (Incorporated by reference to Exhibit 10.4A to Catellus’ Form 10-K for the year ended December 31, 1995.)

4.6

  

Purchase and Sale Agreement dated December 12, 2001, between Catellus and CalPERS. (Incorporated by reference to Exhibit 99.1 to Catellus’ Form 8-K filed with the SEC on December 13, 2001.)

10.1

  

Loan Agreement by and between Catellus Finance 1, L.L.C. (“Catellus Finance”), and Prudential Mortgage Capital Company, Inc., dated as of October 26, 1998 (the “Loan Agreement”). (Incorporated by reference to Exhibit 4.3 to Catellus’ Form 10-K for the year ended December 31, 1998.)

10.2

  

First Amendment to Loan Agreement, dated as of January 11, 2001, by and among Catellus Finance, LaSalle Bank National Association, as trustee (“LaSalle”), certain certificate holders and Prudential Insurance Company of America , as servicer (“Prudential”).

10.3

  

Second Amendment to Loan Agreement, dated as of February 8, 2001, by and among Catellus Finance and LaSalle.

10.4

  

[Third] Amendment to Loan Agreement, dated as of August 27, 2002, by and among Catellus Finance, LaSalle, certain certificate holders and Prudential.

10.5

  

Fourth Amendment to Loan Agreement, dated as of December 23, 2002, by and among Catellus Finance, LaSalle, certain certificate holders and Prudential.

10.6

  

Loan Agreement (Pool A), dated as of March 28, 2002, by and between Catellus and Teachers Insurance and Annuity Association of America (“Teachers”).

10.7

  

First Amendment to Loan Agreement (Pool A), dated July 23, 2002, by and between Catellus and Teachers.

 

E-1


Exhibit Number


    

10.8

  

Second Amendment to Loan Agreement (Pool A), dated November 15, 2002, by and between Catellus and Teachers.

10.9

  

Loan Agreement (Pool B), dated as of March 28, 2002, by and between Catellus and Teachers.

10.10

  

First Amendment to Loan Agreement (Pool B), dated July 23, 2002, by and between Catellus and Teachers.

10.11

  

Second Amendment to Loan Agreement (Pool B), dated November 15, 2002, by and between Catellus and Teachers.

10.12

  

Restated Tax Allocation and Indemnity Agreement dated December 29, 1989, by and among Catellus and certain of its subsidiaries and Santa Fe Pacific Corporation. (Incorporated by reference to the exhibits to Form 10.)

    

EXECUTIVE COMPENSATION PLANS OR ARRANGEMENTS (Exhibits 10.13–10.30)

10.13

  

The Amended and Restated 1991 Stock Option Plan. (Incorporated by reference to Exhibit 10.7 to Catellus’ Form 10-K for the year ended December 31, 1997 (the “1997 10-K”).)

10.14

  

Amendment to Amended and Restated 1991 Stock Option Plan, dated as of September 26, 2001. (Incorporated by reference to Exhibit 10.4 to Catellus’ Form 10-Q for the quarter ended September 30, 2001 (the “2001 third quarter 10-Q”).)

10.15

  

The Amended and Restated 1995 Stock Option Plan. (Incorporated by reference to Exhibit 10.13 to the 1997 Form 10-K.)

10.16

  

Amendment to Amended and Restated 1995 Stock Option Plan, dated as of September 26, 2001. (Incorporated by reference to Exhibit 10.5 to the 2001 third quarter 10-Q.)

10.17

  

The Amended and Restated Executive Stock Option Plan. (Incorporated by reference to Exhibit 10.8 to the 1997 Form 10-K.)

10.18

  

Amendment to Amended and Restated Executive Stock Option Plan, dated as of September 26, 2001. (Incorporated by reference to Exhibit 10.6 to the 2001 third quarter 10-Q.)

10.19

  

The Amended and Restated 1996 Performance Award Plan. (Incorporated by reference to Exhibit 10.14 to Catellus’ Form 10-Q for the quarter ended March 31, 1999.)

10.20

  

Amendment to Amended and Restated 1996 Performance Award Plan, dated as of September 26, 2001. (Incorporated by reference to Exhibit 10.7 to the 2001 third quarter 10-Q.)

10.21

  

The 2000 Performance Award Plan. (Incorporated by reference to Appendix A to Catellus’ proxy statement filed with the SEC on Schedule 14A on March 31, 2000.)

10.22

  

Amendment to 2000 Performance Award Plan, dated as of September 26, 2001. (Incorporated by reference to Exhibit 10.8 to 2001 third quarter 10-Q.)

10.23

  

Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.21 to the 1997 Form 10-K.)

10.24

  

First Amendment to Deferred Compensation Plan, effective as of January 1, 2002. (Incorporated by reference to Exhibit 10.8B to Catellus’ Form 10-Q for the quarter ended March 31, 2002.)

10.25

  

Second Amendment to Deferred Compensation Plan. (Incorporated by reference to Exhibit 10.1 to Catellus’ Form 10-Q for the quarter ended June 30, 2002.)

10.26

  

Third Amended and Restated Employment Agreement between Catellus and Nelson C. Rising, dated as of December 24, 2001. (Incorporated by reference to Exhibit 10.10 to Catellus’ Form 10-K for the year ended December 31, 2001.)

10.27

  

Memorandum of Understanding regarding Employment between Catellus and Timothy J. Beaudin, dated February 7, 2001. (Incorporated by reference to Exhibit 10.14 to the 2001 third quarter 10-Q.)

 

E-2


Exhibit Number


    

10.28

  

Memorandum of Understanding regarding Employment between Catellus and C. William Hosler, dated February 7, 2001. (Incorporated by reference to Exhibit 10.11 to the 2000 Form 10-K.)

10.29

  

Memorandum of Understanding regarding Employment between Catellus and Vanessa L. Washington, dated as of December 12, 2001.

10.30

  

Amendment to Memorandum of Understanding regarding Employment between Catellus and Vanessa L. Washington, dated as of October 4, 2002.

21

  

Schedule of Subsidiaries and Joint Ventures of the Registrant.

23

  

Consent of Independent Accountants.

24

  

Power of Attorney.

 

The Registrant has omitted instruments with respect to long-term debt where the total amount of the securities authorized thereunder does not exceed 10 percent of the assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees to furnish a copy of such instruments to the Commission upon request.

 

E-3