FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended October 31, 1994
Commission file number 1-4372
FOREST CITY ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-0863886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10800 Brookpark Road Cleveland, Ohio 44130
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 216-267-1200
None
(Former name, former address and former fiscal year, if changed since last
report.)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 29, 1994
Class A Common Stock, $.33 1/3 par value 5,146,226 shares
Class B Common Stock, $.33 1/3 par value 3,845,388 shares
FOREST CITY ENTERPRISES, INC.
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Forest City Enterprises, Inc. and Subsidiaries:
Consolidated Balance Sheets - October 31, 1994
(Unaudited) and January 31, 1994 3-4
Consolidated Statements of Earnings and Retained
Earnings (Unaudited) - Three and Nine Months Ended
October 31, 1994 and 1993 5
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended October 31, 1994 and 1993 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-12
Part II. Other Information:
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I - FINANCIAL INFORMATION
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
October 31, 1994 January 31, 1994
---------------- ----------------
(Unaudited)
(in thousands)
<S>
Assets
Real Estate <C> <C>
Completed rental properties $2,176,973 $2,116,557
Projects under development 229,101 214,111
Land held for development or sale 78,888 74,398
---------- ----------
2,484,962 2,405,066
Less accumulated depreciation (319,298) (282,313)
---------- ----------
Total Real Estate 2,165,664 2,122,753
Cash 13,491 21,798
Notes and accounts receivable, net of allowance
for doubtful accounts of $5,419 and $5,322,
respectively 257,749 252,009
Inventories and construction contracts
in progress 36,968 63,220
Investments in and advances to affiliates 74,552 59,891
Other assets 144,604 148,386
---------- ----------
$2,693,028 $2,668,057
========== ==========
Liabilities and Shareholders' Equity
Liabilities
Mortgage debt, nonrecourse $1,945,582 $1,930,999
Accounts payable and accrued expenses 372,904 361,023
Notes payable 17,444 39,183
Long-term debt 116,756 95,452
Deferred income taxes 68,873 69,449
Deferred profit 27,180 26,509
---------- ----------
Total Liabilities 2,548,739 2,522,615
---------- ----------
Shareholders' Equity
Preferred stock - convertible, without par
value; 1,000,000 shares authorized;
no shares issued - -
Common stock - $.33 1/3 par value
Class A, 16,000,000 shares authorized;
5,146,226 shares outstanding 1,715 1,715
Class B, convertible, 6,000,000 shares
authorized; 3,845,388 shares
outstanding 1,282 1,282
---------- ----------
2,997 2,997
Additional paid-in capital 45,511 45,511
Retained earnings 95,781 96,934
---------- ----------
Total Shareholders' Equity 144,289 145,442
---------- ----------
$2,693,028 $2,668,057
========== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
1994 1993 1994 1993
---- ---- ---- ----
(dollars in thousands, except
per share data)
<S> <C> <C> <C> <C>
Sales and operating revenues $127,951 $119,753 $370,380 $362,563
Interest and other income 4,475 4,247 12,025 10,004
-------- -------- -------- --------
Total revenues 132,426 124,000 382,405 372,567
Operating expenses 84,449 79,851 244,487 237,728
Interest expense 32,558 27,498 93,255 82,880
Depreciation and amortization 16,063 15,004 48,498 46,461
Gain on disposition of properties - 37 - 412
-------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary gain (644) 1,684 (3,835) 5,910
-------- -------- -------- --------
Income taxes
Current 554 151 16 451
Deferred (598) 2,123 (576) 4,547
-------- -------- -------- --------
(44) 2,274 (560) 4,998
-------- -------- -------- --------
Net earnings (loss) before
extraordinary gain (600) (590) (3,275) 912
Extraordinary gain, net of tax 567 - 3,920 -
-------- -------- -------- --------
Net earnings (loss) (33) (590) 645 912
Retained earnings at beginning of period 97,612 96,224 96,934 94,722
Dividends on common stock (1,798) - (1,798) -
-------- -------- -------- --------
Retained earnings at end of period $ 95,781 $ 95,634 $ 95,781 $ 95,634
======== ======== ======== ========
Per common share
Net earnings (loss) before
extraordinary gain $ (.06) $ (.07) $ (.36) $ .10
Extraordinary gain, net of tax .06 - .43 -
-------- -------- -------- --------
Net earnings (loss) $ - $ (.07) $ .07 $ .10
======== ======== ======== ========
Weighted average common shares outstanding 8,991,614 8,991,614 8,991,614 8,991,614
========= ========= ========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended October 31,
-----------------------------
1994 1993
---- ----
(in thousands)
<S> <C> <C>
Operating Activities
Net earnings $ 645 $ 912
Depreciation and amortization 48,498 46,461
Deferred income taxes (576) 4,547
Accrued interest of a rental property
not payable until future years 8,935 4,285
Extraordinary gain (6,646) -
Gain on disposition of properties - (412)
(Increase) decrease in land held for
development or sale (4,490) 1,173
(Increase) decrease in notes and
accounts receivable, net (5,740) 33,381
(Increase) decrease in inventories and
construction contracts in progress 26,252 (12,713)
(Increase) in other assets (7,070) (20,805)
Increase in accounts payable
and accrued expenses 1,148 6,740
Increase in deferred profit 671 2,173
-------- --------
Net cash provided by operating activities 61,627 65,742
-------- --------
Investing Activities
Capital expenditures (76,067) (44,426)
(Increase) decrease in investments
in and advances to affiliates (14,661) (1,549)
-------- --------
Net cash used in investing activities (90,728) (45,975)
-------- --------
Financing Activities
Increase in mortgage and long-term debt 81,935 26,125
Payments on long-term debt (14,769) (19,509)
Principal payments on mortgage debt
on real estate (24,633) (23,351)
Increase in notes payable 434 3,964
Payments on notes payable (22,173) (34,087)
-------- --------
Net cash provided by (used in)
financing activities 20,794 (46,858)
-------- --------
Net (decrease) in cash (8,307) (27,091)
Cash at beginning of period 21,798 41,483
-------- --------
Cash at end of period $ 13,491 $ 14,392
======== ========
<FN>
See notes to consolidated financial statements.
</TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. During the first nine months of fiscal year 1994, the Company and its
partners restructured the nonrecourse debt on two of its commercial
properties. The first transaction occurred in the first quarter in
which $5,656,000 of debt was forgiven by the lender. The second
transaction occurred in the third quarter in which $990,000 of debt was
forgiven by the lender. As a result of these transactions, the Company
recorded extraordinary gains, net of tax, totaling $3,920,000.
B. On August 31, 1994, the Board of Directors declared a cash dividend of
$.20 per share on shares of both Class A and Class B common stock for
fiscal year 1994. The dividends are payable December 15, 1994 to
shareholders of record at the close of business on December 1, 1994.
C. Effective July 25, 1994, the Company replaced its six-year term loan,
its $15,000,000 short-term line of credit and its seven-year term loan
with a seven-year, $70,000,000 term loan and a three-year, $70,000,000
revolving credit agreement. Quarterly principal payments of $2,500,000
on the seven-year term loan commenced October 1, 1994. The revolving
credit agreement allows for up to $20,000,000 in outstanding letters of
credit, which shall reduce the revolving credit portion available to the
Company. At its maturity, the revolving credit agreement may be renewed
annually or converted to a seven-year term loan by the Company. The
seven-year term loan and revolving credit agreement provide, among other
things, for 1) interest rates ranging from 1/4% to 3/4% over the prime
rate or 2% to 2-1/2% over the London Interbank Offered Rate ("LIBOR");
2) the maintenance of a specified level of net worth and cash flow (as
defined); and 3) a restriction on dividend payments.
PART I - FINANCIAL INFORMATION (CONTINUED)
The enclosed financial statements have been prepared on a basis
consistent with accounting principles applied in the prior periods and reflect
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the periods presented. All such
adjustments were of a normal recurring nature. Results of operations for the
three and nine months ended October 31, 1994 and 1993 are not necessarily
indicative of results of operations which may be expected for the full year.
The following discussion and analysis of business segments of Forest
City Enterprises, Inc. and all majority-owned subsidiaries ("Company") should
be read in conjunction with the financial statements and the footnotes thereto
contained in the January 31, 1994 annual report ("Form 10-K").
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Earnings Before Depreciation and Deferred Taxes from Operations ("EBDT") were
$20,003,000 for the quarter ended October 31, 1994 compared to $22,223,000 for
the third quarter of fiscal 1993. EBDT consists of net earnings before gain
on disposition of properties and the provision for decline in real estate plus
noncash charges from real estate operations of depreciation and amortization,
deferred income taxes and accrued interest on mortgage notes of a rental
property that is not payable until future years. EBDT for the nine months
ended October 31, 1994 was $59,460,000 versus $58,791,000 for the first nine
months of fiscal 1993.
Consolidated sales and operating revenues were $127,951,000 for the
three months ended October 31, 1994 versus $119,753,000 for the quarter ended
October 31, 1993. Consolidated sales and operating revenues were $370,380,000
for the nine months ended October 31, 1994 versus $362,563,000 for the
comparable period in 1993.
The net loss from operations, including gain on disposition of
properties, was $600,000 for the quarter ended October 31, 1994, approximately
equivalent to the net loss from operations for the quarter ended October 31,
1993 of $590,000. The net loss from operations for the nine months ended
October 31, 1994 was $3,275,000 versus net earnings of $912,000 for the
comparable period in 1993. The gain on disposition of properties, net of tax,
which varies from year to year and is not considered by management to be a
part of the on-going results of operations, was a net gain of $19,000 for the
quarter ended October 31, 1993 and net earnings of $249,000 for the nine
months ended October 31, 1993. There was no gain on disposition of properties
for the first nine months of 1994.
The Company also recorded an extraordinary gain, net of tax, of $567,000
during the quarter ended October 31, 1994. The extraordinary gain for the
nine months ended October 31, 1994 was $3,920,000. This resulted from the
restructuring of two nonrecourse mortgages on commercial properties. As a
part of these transactions, $6,646,000 in debt was forgiven by the lenders.
INVESTMENT REAL ESTATE - FOREST CITY RENTAL PROPERTIES CORPORATION
The Company conducts the development and management of its real estate
portfolio through Forest City Rental Properties Corporation. Sales and
operating revenues increased to $96,757,000 for the quarter ended October 31,
1994 from $92,060,000 for the third quarter of 1993. Sales for the nine
months ended October 31, 1994 were $285,632,000 versus $272,774,000 for the
first nine months of 1993. Although the Company has not opened any new
properties as a result of its development program during 1994, the acquisition
of two multifamily projects and an improvement in occupancy during the first
nine months of 1994 account for much of the increase in revenues. The net
loss before gain on disposition of properties for the quarter ended October
31, 1994 was $1,277,000 versus a net loss of $1,772,000 for the third quarter
of 1993. For the nine months ended October 31, 1994, the net loss before gain
on disposition of properties was $697,000 versus a net loss of $2,912,000 for
the comparable period in 1993.
LAND DIVISION
The sales of residential, commercial and industrial land were $10,738,000 for
the third quarter of 1994 versus $6,588,000 for the comparable period in 1993.
Revenues for the nine months ended October 31, 1994 were $29,093,000 versus
$26,467,000 for the first nine months of 1993. The pretax loss was $94,000
for the quarter ended October 31, 1994 versus a pretax loss of $117,000 for
the three months ended October 31, 1993. The pretax loss for the nine months
ended October 31, 1994 was $1,215,000 versus pretax earnings of $3,442,000 for
the first nine months of 1993. During the first nine months of 1993, the
Company completed the sale of a multifamily parcel in northeast Ohio as well
as a sale of a commercial parcel at one of our shopping centers. There were
no such significant individual sales during the first nine months of 1994. In
addition, in 1994, the Company is incurring interest expense on the debt of a
joint venture which is in its initial stages of development. The Company
anticipates that additional sales from the joint venture will occur during the
fourth quarter of 1994. Sales of land and related earnings vary from period
to period, depending upon management's decisions regarding disposition of
significant land holdings.
RESIDENTIAL DEVELOPMENT DIVISION
Revenues for the three months ended October 31, 1994 were $433,000 versus
revenues of $283,000 for the quarter ended October 31, 1993. The pretax
earnings were $1,976,000 for the third quarter of 1994 compared to a pretax
loss of $429,000 for the quarter ended October 31, 1993. Revenues for the
nine months ended October 31, 1994 were $1,528,000 versus revenues of
$1,643,000 for the nine months ended October 31, 1993. Earnings before income
taxes were $2,097,000 for the first nine months of 1994 versus pretax earnings
of $327,000 for the nine months ended October 31, 1993. Earnings for the
three and nine months ended October 31, 1994 include $2,905,000 of interest
and other income, primarily resulting from the equity in earnings from a
property syndicated in prior years. There were no such earnings in 1993.
This division's efforts are directed toward acquiring completed real estate at
favorable prices for the Company's portfolio and continuing to oversee the
operations of properties syndicated in prior years. In addition to earning
acquisition fees, the Company also earns certain management incentive fees
from syndicated properties.
WHOLESALE LUMBER DIVISION
Forest City Trading Group's revenues were $20,023,000 for the quarter ended
October 31, 1994 versus revenues of $20,822,000 for the third quarter of 1993.
Revenues for the nine months ended October 31, 1994 were $54,127,000 versus
revenues of $61,679,000 for the nine months ended October 31, 1993. Pretax
earnings from this division, including earnings from the Company's building
materials business which are accounted for on the equity method, were
$1,813,000 for the quarter ended October 31, 1994 versus $2,570,000 for the
third quarter of 1993. The pretax income for the nine months ended October
31, 1994 was $1,554,000 versus pretax earnings of $5,755,000 for the nine
months ended October 31, 1993. The decrease in revenues and profitability for
the nine months ended October 31, 1994 is due to the steep decline in the
market price of lumber that occurred during the first quarter of 1994 and the
associated negative impact upon the division's physical inventory. Physical
inventory levels had grown during 1993 due to market price increases and the
volume of trading. When the market price of lumber fell during the first
quarter of 1994, the division sold its physical inventory at a loss. All of
the loss related to the physical inventory has been accrued.
FINANCIAL CONDITION AND LIQUIDITY
The net cash provided by operating activities was $61,627,000 and $65,742,000
during the nine months ended October 31, 1994 and 1993, respectively. The
reduction in cash provided by operating activities in the first nine months of
fiscal 1994 as compared to the first nine months of fiscal 1993 is primarily
the result of two events: 1) the Company's lumber brokerage subsidiary revised
its debt agreement in fiscal 1993, resulting in a decrease in accounts
receivable that was only partially offset by a decrease in accounts payable;
there was no similar fluctuation in 1994; and 2) the market price of lumber
declined in 1994, leading to a reduction in both volume and price of the
Company's lumber brokerage subsidiary's physical inventory during 1994.
Net cash used in investing activities was $90,728,000 for the first nine
months of fiscal 1994, an increase of $44,753,000 over cash used in the
comparable period in 1993. Net cash provided by financing activities for the
nine months ended October 31, 1994 was $20,794,000 versus cash used of
$46,558,000 for the same period in 1993. The Company acquired two apartment
buildings in 1994 which resulted in an increase in capital expenditures and
mortgage debt in 1994 as compared to 1993. On-going development activity also
is reflected in the increase in capital expenditures and investments in and
advances to affiliates. Mortgage debt increased in 1994 over 1993 due to debt
issued by Granite Development Partners, L.P. Payments on notes payable during
the first nine months of fiscal 1994 was less than the same period in 1993 due
to the change in debt agreements at the Company's lumber brokerage subsidiary
that occurred in the first nine months of 1993.
The Company's wholly-owned subsidiary, Forest City Rental Properties
Corporation, renegotiated the unsecured corporate banking line of credit
during the quarter ended July 31, 1994. The Company's two term loans that
totaled $91,250,000 at January 31, 1994 and its $15,000,000 short-term line of
credit were replaced by a $70,000,000 term loan and a $70,000,000 revolving
credit agreement. The $70,000,000 term loan is a seven-year agreement
providing for interest to be payable monthly at rates based on LIBOR plus an
increment ranging from 2% in years one through three to 2-1/4% in years four
and five and 2-1/2% in years six and seven. Quarterly principal payments of
$2,500,000 commenced October 1, 1994. The $70,000,000 revolving credit
agreement is for a three-year period with interest payable monthly based on
LIBOR plus 2%. At termination, the Company and the banks may agree to renew
the revolver or the Company may convert it to a seven-year term loan with the
same principal repayment and interest rate terms as the $70,000,000 term loan.
There was $112,500,000 outstanding under these two loans at October 31,
1994.
During 1991, the Company borrowed $10,000,000 from a related party who
is also a shareholder. The balance outstanding on this loan at October 31,
1994 was $8,665,000. This loan is secured by selected real estate assets of
the Company and collections on a note receivable.
The Company's mortgage debt, all of which is nonrecourse, totaled
$1,945,582,000 at October 31, 1994. The Company has followed a policy of
obtaining debt which is nonrecourse to the Company. However, the Company does
guarantee the completion of the initial construction of certain projects.
During 1993 and 1994, certain loans matured which were either extended or
refinanced. Just as we have been able to refinance our debt that has matured
in the past, we expect to either extend the maturity dates on our loans as
they come due in 1994 or refinance the projects.
The Company's lumber brokerage subsidiary has a three-year agreement
maturing July 15, 1996, under which it is selling an undivided ownership
interest in a pool of accounts receivable up to a maximum of $80,000,000. The
Company also has a bank line of credit of $50,000,000 with a right to borrow
an additional $10,000,000 for up to ninety days through May 31, 1995. At
October 31, 1994, $3,307,000 was outstanding under this line of credit.
The sources of liquidity of the Company and its subsidiaries are unused
bank lines, cash flow from operations, refinancings of rental properties with
larger mortgages and sales of real estate. The sources of funds have been
and, to a lesser extent, will continue to be used principally for the
development of additional real estate projects, the acquisition of existing
real estate and the repayment of recourse debt. Now that the Company's
development program has diminished and the properties are completing their
lease-up, we are experiencing an increase in cash flow from operations. This
has had a positive impact upon the Company's liquidity.
The Company has historically invested a significant amount of equity in
its projects during their development and construction phases. Forest City
generally mortgages the properties owned by Forest City Rental Properties on
an intermediate- to long-term nonrecourse basis with maturities of five years
and higher to the extent that funds are available on acceptable terms. Rental
Properties has financed most of its development and construction projects with
shorter- to intermediate-term bank loans bearing floating rates of interest.
We have now begun a program of securitizing our nonrecourse debt on a longer-
term basis.
The Company has a substantial amount of variable-rate debt which enables
it to benefit from historically low interest rates. In past years, the
Company has purchased interest rate protection on a portion of its debt to
provide protection against significant increases in interest rates. The
Company has elected to purchase interest rate protection on a substantial
portion of its debt through January 31, 1996. Increases in interest rates
still could have a negative impact upon the Company to the extent that it has
variable-rate debt that is not covered by interest rate protection. The
Company will continue to review the various components of its variable-rate
debt structure and purchase interest rate protection as it deems appropriate.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various claims and lawsuits incidental to its
business. The Company's General Counsel is of the opinion that, except for
the claims discussed below which may or may not have a material effect, none
of the other claims and lawsuits will have a material adverse effect on the
Company.
The Company holds a partnership interest in Grant Liberty Development
Group Associates ("GLDGA"). GLDGA and Metropolitan Life Insurance Company
("Metropolitan") hold ownership interests of 40% and 60%, respectively, in
Liberty Center Venture ("Partnership"). Metropolitan is also the holder of
the nonrecourse mortgage which encumbers the property held by the Partnership.
In July 1990, GLDGA initiated an action against Metropolitan alleging
Metropolitan violated its fiduciary duty to the Partnership by refusing to
refinance or reduce the interest rate on the mortgage and by making decisions
detrimental to the Partnership. Subsequently, in March 1991, Metropolitan
filed an action against the Partnership to foreclose on the mortgage and
obtain title to the property. Subsequent thereto, a receiver had been
appointed to manage the property.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K filed for the three months ended October 31, 1994:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOREST CITY ENTERPRISES, INC.
(Registrant)
Date December 15, 1994 /s/ Thomas G. Smith
Thomas G. Smith, Senior Vice President,
Chief Financial Officer and Secretary
Date December 15, 1994 /s/ D. Layton McCown
D. Layton McCown, Vice President,
Corporate Controller and Chief
Accounting Officer
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