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 July 31, 1996
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 September 4, 1996
Class A Common Stock, $.33 1/3 par value 5,121,598 shares
Class B Common Stock, $.33 1/3 par value 3,620,016 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 - July 31, 1996
(Unaudited) and January 31, 1996 3-4
Consolidated Statements of Earnings and Retained
Earnings (Unaudited) - Three and Six Months Ended
July 31, 1996 and 1995 5
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended July 31, 1996 and 1995 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>
July 31, 1996 January 31, 1996
------------- ----------------
(Unaudited)
(dollars in thousands)
<S> <C> <C>
ASSETS
Real Estate
Completed rental properties $2,169,417 $2,101,564
Projects under development 240,589 246,240
Land held for development or sale 75,097 77,279
---------- ----------
2,485,103 2,425,083
Less accumulated depreciation (372,630) (347,912)
---------- ----------
Total Real Estate 2,112,473 2,077,171
Cash 27,879 39,145
Notes and accounts receivable, net of allowance
for doubtful accounts of $4,994 and $3,687,
respectively 170,682 168,177
Inventories 41,472 41,186
Investments in and advances to affiliates 148,412 145,238
Other assets 150,394 160,129
---------- ----------
$2,651,312 $2,631,046
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage debt, nonrecourse $1,877,285 $1,832,059
Accounts payable and accrued expenses 349,862 347,095
Notes payable 6,140 19,856
Long-term debt 100,200 113,061
Deferred income taxes 106,294 105,111
Deferred profit 25,239 24,275
---------- ----------
Total Liabilities 2,465,020 2,441,457
---------- ----------
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;
5,278,898 and 5,271,327 shares issued,
5,121,598 and 5,269,327 shares outstanding,
respectively 1,759 1,757
Class B, convertible, 6,000,000 shares
authorized; 3,712,716 and 3,720,287 shares
issued, 3,620,016 and 3,645,287 shares
outstanding, respectively 1,238 1,240
---------- ----------
2,997 2,997
Additional paid-in capital 45,511 45,511
Retained earnings 146,373 143,590
---------- ----------
194,881 192,098
Less treasury stock, at cost; 157,300
and 2,000 Class A shares and 92,700
and 75,000 Class B shares, respectively (8,589) (2,509)
---------- ----------
Total Shareholders' Equity 186,292 189,589
---------- ----------
$2,651,312 $2,631,046
========== ==========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Sales and operating revenues $142,308 $118,082 $266,049 $226,380
Interest and other income 6,184 2,725 11,414 6,011
--------- --------- --------- ---------
Total revenues 148,492 120,807 277,463 232,391
--------- --------- --------- ---------
Operating expenses 92,229 75,367 172,564 143,295
Interest expense 33,537 30,935 66,550 62,680
Depreciation and amortization 18,172 15,503 34,753 31,691
--------- --------- --------- ---------
143,938 121,805 273,867 237,666
--------- --------- --------- ---------
Gain on disposition of properties 934 - 934 -
--------- --------- --------- ---------
Earnings (loss) before income taxes 5,488 (998) 4,530 (5,275)
Income taxes
Current 2,337 132 2,685 265
Deferred 329 (227) (31) (1,428)
--------- --------- --------- ---------
2,666 (95) 2,654 (1,163)
--------- --------- --------- ---------
Net earnings (loss) before
extraordinary gain 2,822 (903) 1,876 (4,112)
Extraordinary gain, net of tax 907 1,847 907 1,847
--------- --------- --------- ---------
Net earnings (loss) 3,729 944 2,783 (2,265)
Retained earnings at beginning of period 142,644 133,843 143,590 137,052
--------- --------- --------- ---------
Retained earnings at end of period $146,373 $134,787 $146,373 $134,787
========= ========= ========= =========
Per common share
Net earnings (loss) before
extraordinary gain $ .33 $ (.10) $ .22 $ (.46)
Extraordinary gain, net of tax .10 .21 .10 .21
--------- --------- --------- ---------
Net earnings (loss) $ .43 $ .11 $ .32 $ (.25)
========= ========= ========= =========
Weighted average common
shares outstanding 8,741,614 8,991,614 8,799,015 8,991,614
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended July 31,
--------------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Operating Activities
Net earnings (loss) $ 2,783 $ (2,265)
Depreciation and amortization 34,753 31,691
Deferred income taxes 1,183 (220)
Gain on disposition of properties (934) -
Extraordinary gain (1,500) (3,055)
(Increase) decrease in land held
for development or sale 2,182 (2,341)
(Increase) decrease in notes and accounts
receivable, net (2,505) 24,326
(Increase) decrease in inventories (286) 14,936
(Increase) decrease in other assets 1,233 (12,027)
Increase (decrease) in accounts payable and
accrued expenses 2,767 (22,184)
Increase in deferred profit 964 4,697
-------- --------
Net cash provided by operating activities 40,640 27,486
-------- --------
Investing Activities
Capital expenditures (73,016) (62,910)
Proceeds from disposition of properties 10,215 -
Investments in and advances to affiliates (3,174) (5,814)
-------- --------
Net cash used in investing activities (65,975) (68,724)
-------- --------
Financing Activities
Increase in mortgage and long-term debt 70,113 63,465
Principal payments on mortgage debt
on real estate (19,569) (25,616)
Payments on long-term debt (16,679) (6,221)
Increase in notes payable 6,282 -
Payments on notes payable (19,998) (12,626)
Purchase of treasury stock (6,080) -
-------- --------
Net cash provided by
financing activities 14,069 19,002
-------- --------
Net (decrease) in cash (11,266) (22,236)
Cash at beginning of period 39,145 46,478
-------- --------
Cash at end of period $ 27,879 $ 24,242
======== ========
</TABLE>
See notes to consolidated financial statements.
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. During the second quarter of 1996, the Company recorded an extraordinary
gain, net of tax, of $907,000, or $.10 per share, resulting from debt
extinguishment of a commercial property.
B. During the second quarter of 1995, the Company recorded an extraordinary
gain, net of tax, of $1,847,000, or $.21 per share, resulting from the
restructuring of the ownership and debt extinguishment of a commercial
property.
C. On September 9, 1996, the Board of Directors declared a cash dividend of
$.32 per share on shares of both Class A and Class B common stock for
fiscal year 1996. The dividends are payable December 16, 1996 to
shareholders of record at the close of business on December 2, 1996.
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 six months ended July 31, 1996 and 1995 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, 1996 annual report ("Form 10-K").
Certain prior year's amounts in the accompanying Balance Sheet have been
reclassified to conform to the current year's presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ---------------------------------------------------------------------------
Earnings Before Depreciation and Deferred Taxes ("EBDT") were $21,821,000
for the quarter ended July 31, 1996 compared to $13,914,000 for the second
quarter of fiscal 1995. EBDT for the six months ended July 31, 1996 were
$37,778,000 versus $28,050,000 for the first six months of 1995. The
increase in EBDT is primarily the result of the acquisition of apartment
complexes, opening of retail centers, strong lumber trading activity and
the decrease in interest rates. 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 and deferred income taxes.
Consolidated sales and operating revenues were $142,308,000 for the three months
ended July 31, 1996 versus $118,082,000 for the quarter ended July 31, 1995.
Consolidated sales and operating revenues were $266,049,000 for the six months
ended July 31, 1996 versus $226,380,000 for the comparable period in 1995. The
increase in revenues is due to the acquisition of apartment complexes, the
opening of retail centers and strong lumber trading activity.
Operating earnings were $2,257,000 for the quarter ended July 31, 1996 versus a
net loss from operations of $903,000 for the second quarter of 1995. Operating
earnings for the six months ended July 31, 1996 were $1,311,000 compared to
a net loss from operations of $4,112,000 for the first half of 1995. This
improvement is attributable to earnings from newly-opened Commercial properties.
During the quarter ended July 31, 1996, the Company also recorded a gain on
disposition, net of tax, of $565,000 on the sale of its 50% interest in Village
Center, a strip shopping center in Victorville, California. The Company also
recorded an extraordinary gain, net of tax, of $907,000 which resulted from the
$1,500,000 extinguishment of debt on the Clark Building at University Park in
Cambridge, Massachusetts.
During the second quarter of 1995, the Company recorded an extraordinary gain,
net of tax, of $1,847,000 which relates to the $3,055,000 extinguishment of debt
on Liberty Center in Pittsburgh, Pennsylvania.
FOREST CITY RESIDENTIAL GROUP
Forest City Residential Group is made up of two divisions: Apartments and
Residential Development. Apartments owns, leases and manages residential
properties. Residential Development develops new properties, acquires existing
real estate and manages syndicated partnerships.
Revenues for the three months ended July 31, 1996 were $27,914,000 versus
$23,948,000 for the second quarter of 1995. Revenues for the first half of 1996
were $54,277,000 compared to $47,945,000 for the six months ended
July 31, 1995. The increase in revenues is due to the acquisition of
completed real estate. Pre-tax earnings were $1,517,000 for the second
quarter of 1996 compared to $1,128,000 for the three months ended
July 31, 1995. Pre-tax earnings were $2,095,000 for the six months ended
July 31, 1996 compared to $1,948,000 for the first half of 1995.
FOREST CITY COMMERCIAL GROUP
Forest City Commercial Group owns, acquires, develops and manages retail,
office, urban entertainment, hotel and mixed-use properties. Revenues for
the three months ended July 31, 1996 were $75,396,000 compared to
$65,294,000 for the second quarter of 1995. Revenues for the six months
ended July 31, 1996 were $143,334,000 compared to $127,730,000 for the first
half of 1995. The increase in revenues is due to the opening of commercial
properties. Pre-tax earnings for the quarter ended July 31, 1996 were
$3,329,000 compared to pre-tax loss of $1,665,000 for the three months ended
July 31, 1995. Pre-tax earnings for the six months ended July 31, 1996 were
$4,063,000 versus pre-tax loss of $3,595,000 for the comparable period in
1995. The improvement in earnings is the result of the opening of new
projects and improved operations of the existing portfolio.
FOREST CITY LAND GROUP
The sales of residential, commercial and industrial land were $9,371,000 for the
second quarter of 1996 versus $8,109,000 for the comparable period in 1995.
Sales were $13,608,000 for the six months ended July 31, 1996 versus $13,008,000
for the six months ended July 31, 1995. The pre-tax loss was $778,000 for the
three months ended July 31, 1996 versus $870,000 for the second quarter of
1995. The pre-tax loss was $2,241,000 for the six months ended July 31,
1996 compared to $2,848,000 for the comparable period in 1995. The
decrease in the loss is primarily attributable to the generation of fee
income by the Land Group. Sales of land and related earnings vary from
period to period, depending upon management's decisions regarding the
disposition of significant land holdings.
FOREST CITY TRADING GROUP
Forest City Trading Group's revenues were $29,627,000 for the three months ended
July 31, 1996 compared to revenues of $20,731,000 for the second quarter of
1995. Revenues were $54,830,000 for the six months ended July 31, 1996 versus
$37,697,000 for the first half of 1995. The increase in revenues is primarily
attributable to the acquisition of the Company's building materials business as
a wholly-owned subsidiary on January 1, 1996. Prior to this date, this joint
venture was accounted for on the equity method. Pre-tax earnings for the second
quarter of 1996 were $2,063,000 versus $1,899,000 for the same period in 1995.
Pre-tax earnings for the six months ended July 31, 1996 were $3,080,000 compared
to $2,323,000 for the first half of 1995. This is the result of a strong first
half of 1996 for the lumber trading activity.
FINANCIAL CONDITION AND LIQUIDITY
Net cash provided by operating activities totaled $40,640,000 for the six months
ended July 31, 1996, versus $27,486,000 for the first half of 1995. The
increase in cash provided by operating activities is primarily due to a
decrease in accounts payable at the Company's lumber brokerage subsidiary in
1995 as compared to 1996 and a nonrecurring increase in other assets in 1995
primarily resulting from the increase in ownership of a commercial property.
These increases in cash provided were partially offset by a reduction of
sales of accounts receivable at the Company's lumber brokerage subsidiary
in 1996 as compared to the same period in 1995 and a decrease of inventory
in 1995, also at the Company's lumber brokerage subsidiary, which did not
reoccur in 1996.
Net cash used in investing activities totaled $65,975,000 for the six months
ended July 31, 1996 versus $68,724,000 used during the comparable period of
1995. The net cash provided by financing activities was $14,069,000 for the
six months ended July 31, 1996 versus $19,002,000 for the six months ended
July 31, 1995. The decrease in cash provided by financing activities was
primarily the result of the purchase of treasury stock in the first half
of 1996.
At July 31, 1996, the Company's wholly-owned real estate subsidiary, Forest City
Rental Properties Corporation, had a total of $95,000,000 outstanding under its
$70,000,000 term loan and $80,000,000 revolving credit agreement. The Company is
required to make quarterly principal payments of $2,500,000 under the term loan.
The Company has entered into agreements with two banks to establish a new
$8,500,000 Letter of Credit Line and has extended its current revolver agreement
for another year.
The Company's mortgage debt, all of which is nonrecourse, totaled $1,877,285,000
at July 31, 1996. The Company has followed a policy of obtaining debt which is
nonrecourse to the Company. However, the Company does guarantee completion
of the initial construction of certain projects. During 1996 to date, the
Company completed $623,329,000 of financing, including $368,486,000 in new
mortgages and $254,843,000 in refinancing existing mortgages. Just as we
have been able to refinance our debt that has matured in the past, we expect
to either extend the maturity dates of our loans as they come due or
refinance the projects.
Forest City Trading Group has a three-year agreement maturing July 17, 1999
under which it is selling an undivided ownership interest in a pool of
accounts receivable up to a maximum of $90,000,000. The Company also has a
bank line of credit of $40,000,000 with the right to borrow an additional
$10,000,000 for up to 90 days through May 31, 1997. At July 31, 1996,
there were no borrowings under this line of credit.
The sources of liquidity of the Company and its subsidiaries are unused bank
lines, cash flow from operations, refinancing of properties with larger
mortgages and sales of real estate. The sources of funds 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.
The Residential and Commercial Groups generally mortgage their properties on an
intermediate-to long-term nonrecourse basis with maturities of five years and
higher. The Company has financed most of its development and construction
projects with medium-term bank loans bearing floating rates of interest.
Permanent nonrecourse financing has been obtained on a fixed-rate basis for many
projects. The Company intends to continue pursuing opportunities to obtain
fixed-rate financing with favorable terms.
Interest rate protection has been purchased for the vast majority of the
variable-rate portfolio for 1996 and 1997 and the Company plans to purchase
additional interest rate protection and fix rates as is deemed appropriate.
During 1996 to date, $894,000,000 of variable-rate loans have been fixed to
maturity, $105,000,000 of variable-rate loans have been fixed for one year
expiring May 1, 1997, and the Company has entered into a rate swap transaction
which converts $215,000,000 of variable-rate debt to fixed-rate debt for the
period February 1, 1997 through January 31, 1998.
NEW ACCOUNTING STANDARDS
In March 1995, The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121
establishes accounting standards for the review of impairment of a long-lived
asset whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. The Company has adopted the
provisions of SFAS 121, which have no material effect on the financial position
or results of operations of the Company.
In October 1995, the FASB issued SFAS 123 "Accounting for Stock-Based
Compensation." To date, the Company has not granted options under its Stock
Option Plan. Once stock options are granted, the Company will analyze whether
to adopt the recognition provisions of SFAS 123 or apply the existing accounting
rules contained in Accounting Principles Board Opinion 25 "Accounting for Stock
Issued to Employees.
GENERAL
Forest City had both investment tax credits and substantial tax net operating
loss carryforwards ("NOL") at the end of 1995. The Company projects that this
NOL will decrease during 1996, primarily due to property transactions. The
Company's policy is to utilize these NOL's before they expire and will consider
a variety of strategies to implement that policy. These NOL's generally
will not begin to expire before January 31, 2005.
CAUTIONARY STATEMENT
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
With the exception of historical information, the matters discussed or
incorporated by reference in this Report on Form 10-Q are forward-looking
statements that involve risks and uncertainties including, but not limited to,
general business and economic conditions in the residential, retail and office
sectors, ability to obtain financing and the Company's ability to acquire,
develop and market residential and commercial real estate properties.
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 none of these
claims and lawsuits will have a material adverse effect on the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none.
(b) Reports on Form 8-K filed for the three months ended July 31, 1996 -
none.<PAGE>
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 September 13, 1996 /s/ Thomas G. Smith
Thomas G. Smith, Senior Vice President
and Chief Financial Officer
Date September 13, 1996 /s/ Linda M. Kane
Linda M. Kane, Vice President,
Corporate Controller
<TABLE> <S> <C>
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<S> <C>
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<PERIOD-START> MAY-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 27879
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<RECEIVABLES> 175676
<ALLOWANCES> 4994
<INVENTORY> 41472
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0
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</TABLE>
