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, 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 December 6, 1996
Class A Common Stock, $.33 1/3 par value 5,131,098 shares
Class B Common Stock, $.33 1/3 par value 3,610,516 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, 1996
(Unaudited) and January 31, 1996 3-4
Consolidated Statements of Earnings and Retained
Earnings (Unaudited) - Three and Nine Months Ended
October 31, 1996 and 1995 5
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended October 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 8-13
Part II. Other Information:
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
PART I - FINANCIAL INFORMATION
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
October 31, 1996 January 31, 1996
---------------- ----------------
(Unaudited)
(dollars in thousands)
<S> <C> <C>
ASSETS
Real Estate
Completed rental properties $2,190,998 $2,101,564
Projects under development 262,689 246,240
Land held for development or sale 74,851 77,279
---------- ----------
2,528,538 2,425,083
Less accumulated depreciation (385,668) (347,912)
---------- ----------
Total Real Estate 2,142,870 2,077,171
Cash 27,494 39,145
Notes and accounts receivable, net of allowance
for doubtful accounts of $5,257 and $3,687,
respectively 192,574 168,177
Inventories 42,329 41,186
Investments in and advances to affiliates 165,481 145,238
Other assets 144,204 160,129
---------- ----------
$2,714,952 $2,631,046
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage debt, nonrecourse $1,889,773 $1,832,059
Accounts payable and accrued expenses 377,788 347,095
Notes payable 13,222 19,856
Long-term debt 100,438 113,061
Deferred income taxes 113,630 105,111
Deferred profit 26,560 24,275
---------- ----------
Total Liabilities 2,521,411 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;
5,283,398 and 5,271,327 shares issued,
5,126,098 and 5,269,327 shares outstanding,
respectively 1,761 1,757
Class B, convertible, 6,000,000 shares
authorized; 3,708,216 and 3,720,287 shares
issued, 3,615,516 and 3,645,287 shares
outstanding, respectively 1,236 1,240
---------- ----------
2,997 2,997
Additional paid-in capital 45,511 45,511
Retained earnings 153,622 143,590
---------- ----------
202,130 192,098
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 193,541 189,589
---------- ----------
$2,714,952 $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 Nine Months Ended
October 31, October 31,
------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Sales and operating revenues $157,977 $120,989 $424,026 $347,369
Interest and other income 5,832 5,410 17,246 11,421
-------- -------- -------- --------
Total revenues 163,809 126,399 441,272 358,790
-------- -------- -------- --------
Operating expenses 103,470 74,560 276,034 217,855
Interest expense 32,851 33,488 99,401 96,168
Provision for decline in real estate 7,810 - 7,810 -
Depreciation and amortization 17,977 16,645 52,730 48,336
-------- -------- -------- --------
162,108 124,693 435,975 362,359
Gain on disposition of properties 17,123 - 18,057 -
-------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary gain 18,824 1,706 23,354 (3,569)
Income taxes
Current 377 133 3,062 398
Deferred 8,400 972 8,369 (456)
-------- -------- -------- --------
8,777 1,105 11,431 (58)
-------- -------- -------- --------
Net earnings (loss) before
extraordinary gain 10,047 601 11,923 (3,511)
Extraordinary gain, net of tax - - 907 1,847
-------- -------- -------- --------
Net earnings (loss) 10,047 601 12,830 (1,664)
Retained earnings at beginning of period 146,373 134,787 143,590 137,052
Dividends on common stock (2,798) (2,248) (2,798) (2,248)
-------- -------- -------- --------
Retained earnings at end of period $153,622 $133,140 $153,622 $133,140
======== ======== ======== ========
Per common share
Net earnings (loss) before
extraordinary gain $ 1.15 $ 0.07 $ 1.36 $ (.39)
Extraordinary gain, net of tax - - .10 .21
--------- --------- --------- ---------
Net earnings (loss) $ 1.15 $ 0.07 $ 1.46 $ (0.18)
========= ========= ========= =========
Weighted average common
shares outstanding 8,741,614 8,991,614 8,779,741 8,991,614
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended October 31,
-----------------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Operating Activities
Net earnings (loss) $ 12,830 $ (1,664)
Depreciation and amortization 52,730 48,336
Deferred income taxes 8,519 752
Gain on disposition of properties (18,057) -
Provision for decline in real estate 7,810
Extraordinary gain (1,500) (3,055)
(Increase) decrease in land held
for development or sale 2,428 (5,768)
(Increase) decrease in notes and accounts
receivable, net (24,397) 14,669
(Increase) decrease in inventories (1,143) 6,045
(Increase) decrease in other assets 3,352 (17,643)
Increase (decrease) in accounts payable and
accrued expenses 27,895 (8,951)
Increase in deferred profit 2,285 5,302
-------- --------
Net cash provided by operating activities 72,752 38,023
-------- --------
Investing Activities
Capital expenditures (134,385) (107,018)
Proceeds from disposition of properties 33,052 -
Increase in investments in and advances
to affiliates (20,243) (1,248)
-------- --------
Net cash used in investing activities (121,576) (108,266)
-------- --------
Financing Activities
Increase in mortgage and long-term debt 120,407 96,179
Principal payments on mortgage debt
on real estate (46,200) (31,900)
Payments on long-term debt (24,319) (8,793)
Increase in notes payable 6,749 -
Payments on notes payable (13,384) (9,371)
Purchase of treasury stock (6,080) -
-------- --------
Net cash provided by financing activities 37,173 46,115
-------- --------
Net (decrease) in cash (11,651) (24,128)
Cash at beginning of period 39,145 46,478
-------- --------
Cash at end of period $ 27,494 $ 22,350
======== ========
</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.
D. In September 1996, the Board of Directors granted 120,600 Class A fixed
stock options under the 1994 Stock Option Plan. The options
have a term of 10 years and vest over two to four years. These
options do not have a material dilutive effect on earnings per share.
The Company recognizes compensation cost in accordance with the
provisions of Accounting Principles Board Opinion No. 25 and related
Interpretations. The Company has not adopted the recognition provisions
of Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (SFAS 123). Disclosures required by
SFAS 123 will be included in future annual financial statements.
E. On December 11, 1996, the Board of Directors declared a 3 for 2 stock
split of both Class A and Class B common shares effective February 17,
1997 to shareholders of record at the close of business on February 3,
1997.
The Board of Directors also declared a quarterly cash dividend of $0.06
per share (post-split) on shares of both Class A and Class B common
stock for fiscal year 1997. This quarterly dividend is payable
March 17, 1997 to shareholders of record at the close of business on
March 3, 1997.
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, 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
- ------------------------------------------------------------------------------
This Form 10-Q, together with other statements and information publicly
disseminated by the Company, contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements are based on assumptions and expectations which may not be
realized and are inherently subject to risks and uncertainties, many of
which cannot be predicted with accuracy and some of which might not even be
anticipated. Future events and actual results, financial and otherwise,
may differ from the results discussed in the forward-looking statements.
Risks and other factors that might cause differences, some of which could
be material, include, but are not limited to, the effect of economic and
market conditions; failure to consummate financing arrangements; development
risks, including lack of satisfactory financing, construction and lease-up
delays and cost overruns; the level and volatility of interest rates;
financial stability of tenants within the retail industry; the rate of
revenue increases versus expense increases, as well as other risks listed
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS
Earnings Before Depreciation and Deferred Taxes ("EBDT") were $24,213,000 for
the quarter ended October 31, 1996 compared to $18,614,000 for the third
quarter of fiscal 1995. EBDT for the nine months ended October 31, 1996
was $61,991,000 versus $46,664,000 for the first nine months of 1995. The
increase in EBDT is primarily the result of improved operating results from
the Company's mature portfolio, acquisition of apartment projects, sales of
land by Commercial and Land Groups, strong lumber trading activity and the
decrease in interest rates. EBDT consists of net earnings before extraordinary
gain, gain on disposition of properties and the provision for decline in
real estate operations plus noncash charges from real estate operations of
depreciation and amortization and deferred income taxes.
During the fourth quarter of fiscal year ended January 31, 1996, the Company had
a major transaction which will not recur this year. Therefore, the results for
the first three quarters of the fiscal year ending January 31, 1997 compared
to last year are not indicative of comparable results for the full year.
Consolidated sales and operating revenues were $157,977,000 for the three months
ended October 31, 1996 versus $120,989,000 for the quarter ended October 31,
1995. Consolidated sales and operating revenues were $424,026,000 for the nine
months ended October 31, 1996 versus $347,369,000 for the comparable period in
1995. The increase in revenues is due to the acquisition of apartment
complexes, the opening of retail centers in Las Vegas and the New York City
area, sales of land by the Commercial and Land Groups, the consolidation of
a subsidiary previously recorded on the equity method and strong lumber
trading activity.
Operating earnings consists of net earnings before extraordinary gain,
gain on disposition of properties and provision for decline in real estate.
Operating earnings, net of tax, were $5,187,000 for the quarter ended
October 31, 1996 versus $601,000 for the quarter ended October 31, 1995.
Operating earnings, net of tax, for the nine months ended October 31, 1996
were $6,498,000 compared to a net loss from operations of $3,511,000 for
the nine months ended October 31, 1995. This improvement is attributable
to earnings from newly-opened Commercial properties, sales of land, lower
interest rates in 1996 compared to 1995 and higher earnings from the
Company's lumber trading subsidiary.
During the quarter ended October 31, 1996, Forest City recorded a provision for
decline in real estate of $7,810,000 ($4,721,000 net of tax) relating
primarily to the Company's investment in Atlantic City, New Jersey. The
Company has entered into a joint venture to develop a project on the land
acquired by Forest City. Certain costs incurred by Forest City have been
determined to have no continuing value since this project differs significantly
from the development Forest City had planned prior to forming this joint
venture.
A gain on disposition of properties of $17,123,000 ($9,581,000 net of tax)
has been recorded for the quarter ended October 31, 1996, resulting
primarily from the sale of the Company's interest in Beachwood Place, a
shopping center in suburban Cleveland, Ohio.
Earlier in 1996, the Company recorded an extraordinary gain, net of tax, of
$907,000 resulting from the extinguishment of non-recourse debt on a commercial
project located in Cambridge, Massachusetts. During the nine months ended
October 31, 1995, the Company recorded an extraordinary gain, net of tax, of
$1,847,000, which relates to debt extinguishment on a commercial property 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 October 31, 1996 were $28,311,000 versus $25,524,000 for the
third quarter of 1995. Revenues for the first nine months of 1996 were
$82,588,000 compared to $73,469,000 for the nine months ended
October 31, 1995. The increase in revenues is due to the acquisition of
completed real estate. Pre-tax earnings were $1,006,000 for the third quarter
of 1996 compared to pre-tax earnings of $1,056,000 for the three months ended
October 31, 1995. Pre-tax earnings were $3,101,000 for the nine months ended
October 31, 1996 compared to $3,004,000 for the comparable period 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 October 31, 1996 were $82,796,000 compared to
$68,583,000 for the third quarter of 1995. Revenues for the nine months
ended October 31, 1996 were $226,130,000 compared to $196,313,000 for the
comparable period of 1995. The increase in revenues is due to the opening
of several retail properties, one office building and the acquisition of
additional ownership interest in a mixed-use project. Pre-tax earnings for
the quarter ended October 31, 1996 were $2,642,000 compared to pre-tax loss
of $240,000 for the three months ended October 31, 1995. Pre-tax earnings
for the nine months ended October 31, 1996 were $6,705,000 versus pre-tax
loss of $3,835,000 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 $12,935,000
for the third quarter of 1996 versus $5,172,000 for the comparable period in
1995. Sales were $26,543,000 for the nine months ended October 31, 1996
compared to $18,180,000 for the first nine months of 1995. The pre-tax
earnings $1,769,000 for the three months ended October 31, 1996 versus a
pre-tax loss of $477,000 for the third quarter of 1995. The pre-tax loss
was $472,000 for the nine months ended October 31, 1996 versus $3,325,000
for the comparable period in 1995. The decrease in the loss is primarily
attributable the generation of fee income by the Land Group and the
realization of higher margins in 1996 than in 1995. 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 $33,935,000 for the three months ended
October 31, 1996 compared to revenues of $21,710,000 for the third quarter of
1995. Revenues were $88,765,000 for the nine months ended October 31, 1996
versus $59,407,000 for the comparable period of 1995. The increase in revenues
is primarily attributable to increased lumber brokerage activity and 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 third quarter of
1996 were $3,036,000 versus $1,784,000 for the same period in 1995.
Pre-tax earnings for the nine months ended October 31, 1996 were $6,116,000
compared to $4,107,000 for the first nine months of 1995. The increase in pre-
tax earnings is the result of strong lumber brokerage activity.
FINANCIAL CONDITION AND LIQUIDITY
Net cash provided by operating activities totaled $72,752,000 for the nine
months ended October 31, 1996 versus $38,023,000 for the first nine months
of 1995. The increase in cash provided by operating activities was primarily
due to higher operating earnings from the Commercial Group due to
newly-opened properties and land sales; a reduction in other assets due to
the release of a significant escrow deposit; and Forest City Trading Group's
increase in accounts payable and accrued expenses, offset by its increase in
notes and accounts receivable.
Net cash used in investing activities totaled $121,576,000 for the nine months
ended October 31, 1996 versus $108,266,000 used during the comparable period of
1995. The increase in cash used in investing activities was the result of
additional capital expenditures for new commercial developments projects,
investments and advances in affiliates related to residential development
projects, net of proceeds from the sales of two commercial properties.
The net cash provided by financing activities was $37,173,000 for the nine
months ended October 31, 1996 versus $46,115,000 for the nine months ended
July 31, 1995. The decrease in the net cash provided by financing
activities was primarily the result of the purchase of treasury stock by
the Company in 1996.
At October 31, 1996, the Company's wholly-owned real estate subsidiary, Forest
City Rental Properties Corporation, had a total of $95,500,000 outstanding under
its term loan and revolving credit agreements. 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 $1,889,773,000
at October 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 several significant nonrecourse financing transactions, representing
both new mortgages and refinancing. 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 October 31, 1996, there were borrowings of
$7,200,000 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 concentrate on 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.
STOCK SPLIT, NEW QUARTERLY DIVIDEND POLICY AND INCREASED DIVIDEND
The Board of Directors have approved a 3 for 2 stock split of both the Company's
Class A and Class B shares of common stock. The common stock split is
effective February 17, 1997 to shareholders of record at the close of
business on February 3, 1997.
The Company intends to pay cash dividends on a quarterly basis in the future,
whereas recent cash dividends have been paid on an annual basis. A quarterly
cash dividend of $.06 per share (post-split) on shares of both Class A and Class
B common stock has been declared and is payable on March 17, 1997 to
shareholders of record at the close of business on March 3, 1997. The $.06
quarterly dividend per share equates to an annual pre-split dividend of $.36
per share and represents a 12.5% increase over the annual dividend declared
during the current fiscal year.
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.
During the third quarter of 1996, the Company granted options under its
Stock Option Plan. The Company recognizes compensation cost in accordance
with the provisions Accounting Principles Board Opinion No. 25 and related
Interpretations. The Company has not adopted the recognition provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS 123). Disclosures required by SFAS 123 will be included in
future annual financial statements.
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.
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
October 31, 1996 - 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 16, 1996 /s/ Thomas G. Smith
Thomas G. Smith, Senior Vice President
and Chief Financial Officer
Date December 16, 1996 /s/ Linda M. Kane
Linda M. Kane, Vice President,
Corporate Controller
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