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 April 30, 1997
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 May 31, 1997
Class A Common Stock, $.33 1/3 par value 9,657,633 shares
Class B Common Stock, $.33 1/3 par value 5,409,343 shares
<PAGE>
FOREST CITY ENTERPRISES, INC.
Index
Page No.
Part I. Financial Information:
Item 1. Financial Statements
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Balance Sheets - April 30, 1997
(Unaudited) and January 31, 1997 3
Consolidated Statements of Earnings and Retained
Earnings (Unaudited) - Three Months Ended
April 30, 1997 and 1996 4
Consolidated Statements of Cash Flows (Unaudited) - 5 - 6
Three Months Ended April 30, 1997 and 1996
Notes to Consolidated Financial Statements
(Unaudited) 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 18
Part II. Other Information
Item I. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
April 30, 1997 January 31, 1997
-------------- ----------------
(Unaudited)
(dollars in thousands)
<S> <C> <C>
ASSETS
Real Estate
Completed rental properties $ 2,179,829 $ 2,247,393
Projects under development 246,014 220,137
Land held for development or sale 56,006 52,649
----------- -----------
2,481,849 2,520,179
Less accumulated depreciation (408,082) (399,830)
Total Real Estate ----------- -----------
2,073,767 2,120,349
Cash 20,698 41,302
Notes and accounts receivable, net 202,817 204,959
Inventories 46,864 48,769
Investments in and advances to affiliates 146,069 145,242
Other assets 177,967 180,784
----------- -----------
$ 2,668,182 $ 2,741,405
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage debt, nonrecourse $ 1,853,147 $ 1,898,428
Accounts payable and accrued expenses 336,718 378,230
Notes payable 36,958 37,041
Long-term debt 109,282 94,923
Deferred income taxes 115,937 115,488
Deferred profit 25,285 25,317
----------- -----------
Total Liabilities 2,477,327 2,549,427
----------- -----------
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; 7,938,583 and
7,932,358 shares issued, 7,702,633 and 7,696,408
outstanding, respectively. 2,645 2,643
Class B, convertible, 6,000,000 shares authorized;
5,548,393 and 5,554,618 shares issued, 5,409,343 and
5,415,568 outstanding, respectively. 1,849 1,851
----------- -----------
4,494 4,494
Additional paid-in capital 43,996 43,996
Retained earnings 150,954 152,077
----------- -----------
199,444 200,567
Less treasury stock, at cost; 1997: 235,950 Class A
and 139,050 Class B shares (8,589) (8,589)
----------- -----------
Total Shareholders' Equity 190,855 191,978
----------- -----------
$ 2,668,182 $ 2,741,405
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Unaudited)
<CAPTION>
Three Months Ended April 30,
----------------------------
1997 1996
------ ------
(dollars in thousands,
except per share data)
<S> <C> <C>
Revenues $ 151,068 $ 128,971
---------- ----------
Operating expenses 83,520 80,335
Interest expense 33,109 33,013
Depreciation and amortization 17,542 16,581
---------- ----------
134,171 129,929
---------- ----------
Loss on disposition of properties (35,505) -
---------- ----------
LOSS BEFORE INCOME TAXES (18,608) (958)
---------- ----------
INCOME TAX EXPENSE (BENEFIT)
Current (2,704) 348
Deferred (4,640) (360)
---------- ----------
(7,344) (12)
---------- ----------
NET LOSS BEFORE EXTRAORDINARY GAIN (11,264) (946)
Extraordinary gain, net of tax 11,045 -
---------- ----------
NET LOSS (219) (946)
Retained earnings at beginning of period 152,077 143,590
Dividends on common stock - $.06 per share (904) -
---------- ----------
Retained earnings at end of period $ 150,954 $ 142,644
========== ==========
Weighted average common shares outstanding 13,111,976 13,286,537
========== ==========
NET LOSS PER COMMON SHARE
Net loss before extraordinary gain, net of tax $ (.86) $ (.07)
Extraordinary gain, net of tax .84 -
---------- ----------
NET LOSS PER COMMON SHARE $ (.02) $ (.07)
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended April 30,
----------------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Rents and other revenues received $ 150,079 $ 138,554
Proceeds from land sales 3,134 5,286
Land development expenditures (2,233) (4,954)
Operating expenditures (113,305) (85,030)
Interest paid (33,109) (33,013)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,566 20,843
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (50,234) (30,566)
Investments in and advances to affiliates (4,958) (1,956)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (55,192) (32,522)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in mortgage and long-term debt 45,945 21,414
Payments on long-term debt (2,640) (5,678)
Principal payments on mortgage debt on real estate (14,306) (6,806)
Increase in notes payable 8,788 1,557
Payments on notes payable (9,402) (1,672)
Decrease in cash restricted for letter of credit 3,600 -
Payment of deferred financing costs (1,176) (1,136)
Purchase of treasury stock - (6,080)
Dividends paid to shareholders (787) -
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 30,022 1,599
---------- ----------
NET DECREASE IN CASH (20,604) (10,080)
CASH AT BEGINNING OF PERIOD 41,302 39,145
---------- ----------
CASH AT END OF PERIOD $ 20,698 $ 29,065
========== ==========
</TABLE>
<PAGE>
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended April 30,
----------------------------
1997 1996
---- ----
(in thousands)
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
NET LOSS $ (219) $ (946)
Depreciation 14,620 13,183
Amortization 2,922 3,398
Increase (decrease) in deferred income taxes 449 (360)
Loss on disposition of properties 35,505 -
Extraordinary gain (18,272) -
Increase in land held for development or sale (3,357) (1,096)
Decrease in notes and accounts receivable 9,177 6,354
Decrease (increase) in inventories 1,905 (18,006)
(Decrease) increase in accounts payable
and accrued expenses (35,724) 19,764
Decrease in deferred profit (32) (52)
Increase in other assets (2,408) (1,396)
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,566 $ 20,843
========= ==========
</TABLE>
Supplemental Non-Cash Disclosure:
The following items represent the non-cash effect of an increase in the
Company's interest in Skylight Office Tower, the disposition of the Company's
interest in Toscana, and a reduction of the Company's interest in MIT Phase II,
during the period ended April 30, 1997 and a reduction of the Company's interest
in the Clark Building during the period ended April 30, 1996.
<TABLE>
<S> <C> <C>
Operating Activities
Notes and accounts receivable $ (7,035) $ 212
Other assets (121) 844
Accounts payable and accrued expenses (6,071) (2,051)
--------- ----------
Total effect on operating activities $ (13,227) $ (995)
--------- ----------
Investing Activities
Capital expenditures $ 50,048 $ 9,073
Investments in and advances to affiliates 4,131 -
--------- ----------
Total effect on investing activities $ 54,179 $ 9,073
--------- ----------
Financing Activities
Mortgage and long-term debt $ (41,483) $ (8,078)
Notes payable 531 -
--------- ----------
Total effect on financing activities $ (40,952) $ (8,078)
--------- ----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. EXTRAORDINARY GAIN
During the first quarter of 1997, the Company recorded an extraordinary
gain, net of tax, of $11,045,000, or $.84 per share, resulting from debt
extinguishment of Toscana, a 563-unit apartment complex which was sold
in February 1997. See "Sale of Toscana" in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
B. DIVIDENDS
On March 19, 1997, the Board of Directors declared a regular quarterly
cash dividend of $.06 per share on both Class A and Class B common
shares, payable June 16, 1997, to shareholders of record on June 2,
1997.
On June 9, 1997, the Board of Directors declared a regular quarterly
cash dividend of $.06 per share on both Class A and Class B common
shares, payable September 15, 1997, to shareholders of record on
September 2, 1997.
C. AUTHORIZED SHARES
On June 10, 1997, the shareholders approved amendments to the Company's
Articles of Incorporation to increase the Company's capitalization to a)
48,000,000 shares of Class A common stock from 16,000,000 shares;
b)18,000,000 shares of Class B common stock from 6,000,000 shares; and
c) 5,000,000 shares of preferred stock from 1,000,000 shares.
D. TREASURY STOCK
On May 7, 1997, the Company agreed to repurchase 77,700 shares of Class
A common stock owned by three children of Samuel H. Miller, the
Company's Co-Chairman of the Board and Treasurer, and Ruth Miller, who
died on November 26, 1996. The purchase price of the shares is
$2,836,050 ($36.50 per share), plus 6.7% interest from May 7, 1997 to
August 18, 1997, less any dividends paid between those two dates. The
payment for the shares and the transfer of shares will take place on
August 18, 1997.
<PAGE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
E. PUBLIC OFFERING/SUPPLEMENTARY EARNINGS PER SHARE
On May 20, 1997, the Company sold to the public 1,955,000 shares of
Class A common stock at an initial price of $42.00 per share. Had the
issuance of these shares occurred at the beginning of each of the
periods presented, earnings (loss) per share would have been as follows:
Three Months Ended April 30,
----------------------------
1997 1996
---- ----
Net loss before extraordinary gain $(.74) $(.06)
Extraordinary gain, net of tax .73 -
------ ------
Net loss per common share $(.01) $(.06)
====== ======
<PAGE>
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 months ended April 30, 1997 and 1996 are not necessarily indicative of
results of operations which may be expected for the full year.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations of Forest City Enterprises, Inc. should be read in
conjunction with the financial statements and the footnotes thereto contained in
the January 31, 1997 annual report ("Form 10-K").
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- - --------------------------------------------------------------------------------
GENERAL
The Company develops, acquires, owns and manages commercial and residential real
estate properties in 21 states and the District of Columbia. The Company owns a
portfolio that is diversified both geographically and by property types and
operates through four principal business groups: Commercial Group, Residential
Group, Land Group and Lumber Trading Group.
The Company uses an additional measure, along with net earnings (loss), to
report its operating results. This measure, referred to as Earnings Before
Depreciation, Amortization and Deferred Taxes ("EBDT"), is not a measure of
operating results or cash flows from operations as defined by generally accepted
accounting principles. However, the Company believes that EBDT provides
additional information about its operations and, along with net earnings (loss),
is necessary to understand its operating results. The Company's view is that
EBDT is also an indicator of the Company's ability to generate cash to meet its
funding requirements. EBDT is defined and discussed in detail under "Results of
Operations - EBDT."
The Company's EBDT grew by 78.3% (or 80.8% per share) in the first quarter 1997
to $28,447,000, or $2.17 per share of common stock, from $15,957,000, or $1.20
per share of common stock for the first quarter of 1996. Pro forma per share
EBDT, reflecting the sale of 1,955,000 shares of Class A common stock in May
1997, was $1.89 for the first quarter of 1997 and $1.05 for the same period of
1996. Of this increase in EBDT, $6,991,000 represents litigation settlement
proceeds for Toscana, a 563-unit apartment complex in Irvine, California. See
"Sale of Toscana" below. In addition, EBDT grew as the result of the addition of
new retail properties, improved operating results from the Company's existing
portfolio and acquisition of apartment projects.
<PAGE>
RESULTS OF OPERATIONS
The Company reports its results of operations by each of its four principal
business groups as it believes it provides the most meaningful understanding of
the Company's financial performance.
The major components of EBDT are Revenues, Operating Expenses and Interest
Expense, each of which is discussed below. Net Operating Income ("NOI") is
defined as Revenues less Operating Expenses. See the information in the table
"Earnings before Depreciation, Amortization and Deferred Taxes" at the end of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
COMMERCIAL GROUP
REVENUES. Revenues of the Commercial Group increased by $4,417,000, or
6.3%, to $74,845,000 in the first quarter of 1997 from $70,428,000 in 1996. This
increase is primarily the result of the openings of the Galleria at Sunset in
Henderson, Nevada ($1,052,000), Atlantic Center in Brooklyn, New York
($1,859,000), Bruckner Boulevard in the Bronx, New York ($472,000), and
Marketplace at Riverpark in Fresno, California ($222,000). In addition, existing
retail properties' revenues increased ($418,000) and two hotels realized
increased revenues in the first quarter over the prior year: Marriott in
Charleston, West Virgina ($577,000) and Ritz-Carlton in Cleveland, Ohio
($286,000). These increases were offset by a reduction in revenues due to the
disposition in 1996 of Beachwood Place ($536,000). NOI for comparable properties
increased 3.6% from first quarter 1996 to first quarter 1997.
OPERATING AND INTEREST EXPENSES. In the first quarter of 1997, operating
and interest expenses increased $3,368,000 and $2,241,000 (9.4% and 10.4%),
respectively, over the first quarter of 1996 to $39,241,000 and $23,833,000,
respectively. The increase in operating expenses is primarily attributable to
the increase in costs associated with the increase in hotel occupancy, real
estate taxes, and wages ($1,957,000) and the opening of new properties
($1,411,000). Operating expenses of projects in service in both first quarter
1997 and 1996 increased 2.5%. The increase in interest expense is attributable
to the opening of new properties.
RESIDENTIAL GROUP
REVENUES. Revenues for the Residential Group increased by $15,988,000,
or 58.4% in the first quarter of 1997, from $27,363,000 in first quarter of 1996
to $43,351,000. This increase reflects proceeds from the Toscana litigation
settlement ($15,000,000 - see "Sale of Toscana" below) and the acquisition of
Emerald Palms, a 419-unit apartment community in Miami, Florida ($907,000). NOI
for comparable properties increased 8.1% from first quarter 1996 to first
quarter 1997.
OPERATING AND INTEREST EXPENSES. Operating expenses increased by
$210,000 and interest expense decreased by $1,106,000 (or 1.4% and 14.0%),
respectively, to $15,476,000 and $6,779,000, respectively, in the first quarter
of 1997. The majority of the increase in operating expenses reflect the
acquisition of Emerald Palms. Operating expenses on projects that were in
service both in the first quarter of 1997 and 1996 increased by 0.6%, reflecting
the Company's continued effort to control costs at each of its properties. The
decrease in interest expense is primarily the result of the sale of Toscana (see
"Sale of Toscana" below).
<PAGE>
LAND GROUP
REVENUES. Revenues for the Land Group decreased by $2,220,000, or 46.6%,
from $4,761,000 in the first quarter of 1996 to $2,541,000 in the first quarter
of 1997. In the first quarter of 1996, the Land Group had significant
residential and commercial land sales activity at Silver Lakes near Fort
Lauderdale, Florida, which did not recur in the first quarter of 1997.
OPERATING AND INTEREST EXPENSES. Operating expenses decreased by
$1,955,000 and interest expense decreased by $478,000 (or 43.6% and 27.4%),
respectively, in the first quarter of 1997 to $2,524,000 and $1,267,000
respectively, from $4,479,000 and $1,745,000, respectively, in the first quarter
of 1996. The decrease in operating expenses primarily reflects the fluctuation
in sales volume from the prior year. The decrease in interest expense is
primarily due to the reduction of principal throughout 1996 on the development
mortgage on Seven Hills in Henderson, Nevada.
LUMBER TRADING GROUP
REVENUES. Revenues of the Lumber Trading Group increased by $4,231,000,
or 16.7%, from $25,372,000 in the first quarter of 1996 to $29,603,000 in the
first quarter of 1997. The increase was primarily due to an increase in the
Lumber Trading Group's margins as a result of higher commodity lumber prices in
the first quarter of 1997.
OPERATING AND INTEREST EXPENSES. Operating expenses in the Lumber
Trading Group increased in the first quarter of 1997 by $3,287,000, or 14.4%,
from $22,760,000 in the first quarter of 1996. This increase reflected the
fluctuation in variable expenses due to increased sales volume. Interest expense
for the first quarter of 1997 decreased by $390,000, or 24.5%, to $1,205,000
from $1,595,000 in the first quarter of 1996. This decrease in interest expense
was the result of a reduced rate of interest on Lumber Trading Group's lines of
credit.
CORPORATE ACTIVITIES
REVENUES. Revenues from Corporate Activities decreased $319,000, or
30.5%, in the first quarter of 1997 to $728,000 from $1,047,000 in the first
quarter of 1996. Corporate Activities revenues consists primarily of interest
income on advances made by the Company on behalf of our partners, and vary from
year to year depending on interest rates and the amount of loans outstanding.
OPERATING AND INTEREST EXPENSES. Operating expenses decreased
$1,638,000, or 63.6%, in the first quarter of 1997 to $939,000 from $2,557,000
in the first quarter of 1996, primarily reflecting an adjustment to insurance
reserves. Interest expense, which consists primarily of interest expense on the
Term Loan and Revolving Credit Facility that has not been allocated to a
principal business unit, remained essentially flat for the first quarter 1997
compared to 1996.
<PAGE>
SALE OF TOSCANA
During February 1997, the Company sold Toscana, a 563-unit apartment complex in
Irvine, California, back to the original land owner and settled litigation
related to the property. As a result, the Company recorded a loss on disposition
of property of $21,462,000, after tax, and an extraordinary gain of $11,045,000,
after tax, related to the extinguishment of a portion of the property's
nonrecourse mortgage debt. The result of these transactions to the Company
for the first quarter of 1997 was an after-tax loss of $1,260,000 and an
increase in EBDT of $6,991,000.
INCOME TAXES
Income tax benefit for the first quarter of 1997 and 1996 totaled $7,344,000,
and $12,000, respectively. At January 31, 1997, the Company had a tax net
operating loss carryforward ("NOL") of $88,868,000 which will expire in the
years ending January 31, 2005 through January 31, 2011 and general business
credit carryovers of $3,601,000 which will expire in the years ending January
31, 2003 through January 31, 2011. The Company's policy is to utilize its NOL
before it expires and will consider a variety of strategies to implement that
policy.
NET EARNINGS
In the first quarter of 1997, the Company's net loss was $219,000, or $.02 per
share of common stock, compared to a net loss of $946,000, or $.07 per share of
common stock in the first quarter of 1996. Proforma per share amounts,
reflecting the issuance of 1,955,000 shares of Class A common stock in May
1997, are $.01 and $.06 for the first quarter of 1997 and 1996, respectively.
EBDT
Earnings Before Depreciation, Amortization and Deferred Taxes ("EBDT") is
defined as net earnings from operations before depreciation, amortization and
deferred taxes on income, and excludes provision for decline in real estate,
gain (loss) on disposition of properties and extraordinary gain. The Company
excludes depreciation and amortization expense from EBDT because they are
non-cash items and the Company believes the values of its properties have
appreciated, over time, in excess of their original cost. Deferred income taxes
are excluded because they are a non-cash item. Payment of income taxes has not
been significant and is not expected to be significant in the foreseeable
future. The provision for decline in real estate is excluded from EBDT because
it is a non-cash item that varies from year to year based on factors unrelated
to the Company's overall financial performance. The Company excludes gain (loss)
on the disposition of properties from EBDT because it develops and acquires
properties for long-term investment, not short-term trading gains. As a result,
the Company views dispositions of properties other than commercial outlots or
land held by the Land Group as nonrecurring items. Extraordinary gains are
generally the result of the restructuring of nonrecourse debt obligations and
are not considered to be a component of the Company's operating results.
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
On May 20, 1997, the Company sold 1,955,000 new shares of its Class A common
stock at $42 per share and realized net proceeds of $77,593,950. The proceeds
were used to repay the outstanding balance on the Revolving Credit Facility
($71,000,000) and the remainder was allocated for working capital. The Company
plans to draw on the Revolving Credit Facility for its equity investment in
development projects.
The Company believes that its sources of liquidity and capital are adequate. The
Company's principal sources of funds are cash provided by operations, the
Revolving Credit Facility and refinancings of existing properties. The Company's
principal use of funds are the financing of new developments, capital
expenditures and payments on non-recourse mortgage debt on real estate.
The Lumber Trading Group is financed separately from the rest of the Company's
principal business groups, and the financing obligations of Lumber Trading Group
are not recourse to the Company. Accordingly, the liquidity of Lumber Trading
Group is discussed separately below under "Lumber Trading Group Liquidity."
MORTGAGE REFINANCINGS / OUTLOOK FOR 1997
During 1997 to date, the Company completed $183,801,000 in financings, including
$88,700,000 in refinancings, $56,030,000 for new development projects and
$39,071,000 in acquisition mortgages.
As of January 31, 1997, the Company had $288,915,000 million of nonrecourse
mortgage indebtedness due and payable in 1997. Of this amount, the Company has
refinanced $88,700,000 and discharged $67,800,000 as a result of the sale of
Toscana (see "Sale of Toscana"). The Company anticipates that the remaining
$132,415,000 of mortgage indebtedness will either be refinanced with new
non-recourse mortgage indebtedness or extended.
LONG-TERM DEBT
At April 30, 1997, the Company had recourse debt of $107,500,000 outstanding,
comprised of $42,500,000 under a $70,000,000 Term Loan maturing July 1, 2001 and
$65,000,000 under an $80,000,000 Revolving Credit Facility maturing July 25,
1998. As discussed above, the outstanding amount under Revolving Credit Facility
was repaid on May 20, 1997 by proceeds from the Company's sale of Class A common
stock, thereby making the entire $80,000,000 available to the Company. The
Company is required to make quarterly principal payments of $2,500,000 under the
Term Loan. The Company has entered into a interest rate swap agreement to fix
$87,000,000 of the Term Loan and Revolving Credit Facility for the period
February 1, 1997 through February 1, 1998.
The Term Loan and Revolving Credit Facility provide for the maintenance of a
specified level of net worth and cash flows (as defined) and a restriction on
dividend payments.
<PAGE>
INTEREST RATE EXPOSURE
At April 30, 1997, the Company had $997,570,000 in fixed-rate and $855,577,000
in variable-rate non-recourse mortgages outstanding, with a weighted average
interest rate of 7.37%. At April 30, 1997, the Company's fixed-rate debt carried
a weighted average interest rate of 7.88%. Its weighted average variable-rate
taxable interest rate was 7.63%. Of the variable-rate debt, $134,252,000 are
tax-exempt financings which carried a weighted average interest rate of 5.34% at
April 30, 1997. Its weighted average interest rate on UDAG loans and other
government financing was 2.60%. The Company generally does not hedge tax-exempt
debt because, since 1992, the low base rate on this type of financing has
averaged 3.25% and has never exceeded 5.75%. With respect to taxable
variable-rate debt, the Company generally attempts to obtain interest rate
protection for such debt with a maturity in excess of one year. Of the
$721,325,000 in taxable variable-rate debt outstanding at April 30, 1997,
$330,385,000 was protected by interest rate swaps with a weighted average rate
of 7.9% and an average term of 2.3 years, effectively reducing the Company's
taxable variable-rate debt to $390,940,000. In addition, $19,139,000 of
variable-rate debt was protected by interest rate caps extending for more than
one year.
At April 30, 1997, a 100 basis point increase in taxable interest rates would
increase the annual pre-tax interest cost of the Company's taxable variable-rate
debt by approximately $3,900,000. Although tax-exempt rates generally increase
in an amount that is smaller than corresponding changes in taxable interest
rates, a 100 basis point increase in tax-exempt interest rates would increase
the annual pre-tax interest cost of the Company's tax-exempt variable-rate debt
by approximately $1,300,000.
LUMBER TRADING GROUP LIQUIDITY
The Lumber Trading Group is separately financed with two lines of credit and an
accounts receivable sale program. These credit facilities are not recourse to
the Company.
The Lumber Trading Group has in place two lines of credit totaling $46,000,000.
These credit lines are secured by the assets of the Lumber Trading Group, and
are used by the Trading Group to finance its working capital needs. At April 30,
1997, the Lumber Trading Group had $ 24,511,000 available credit under these
facilities.
The Lumber Trading Group also has sold an undivided ownership interest in a pool
of accounts receivable of up to a maximum of $90,000,000. The Trading Group uses
this program to finance its working capital needs. At April 30, 1997,
$58,000,000 had been sold under this accounts receivable program.
The Company believes that the amounts available under these credit facilities,
together with the accounts receivable sale program, will be sufficient to meet
the Lumber Trading Group's liquidity needs in 1997.
<PAGE>
CASH FLOWS
Net cash provided by operating activities was $4,566,000 and $20,843,000 for
the first quarter of 1997 and 1996, respectively. The decrease in cash provided
by operating activities in 1997 compared to 1996 is primarily the result of a
reduction in accounts payable and accrued expenses of $35,724,000 in the first
quarter of 1997 compared to an increase in accounts payable and accrued expenses
of $19,764,000 in the first quarter of 1996. This fluctuation is primarily the
result of Lumber Trading Group's activity (reduction of $17,096,000 in 1997
versus an increase of $16,349,000 in 1996). In addition, in the first quarter of
1997, Corporate Activities paid insurance premiums and taxes totaling $5,700,000
which were accrued at the end of 1996 and the Land Group reduced its account
payable and accrued expenses by $2,123,000. The additional increase in operating
expenses in the first quarter of 1997 were offset by an increase in rents and
other revenues received.
Net cash used in investing activities totaled $55,192,000 and $32,522,000 for
the first quarter of 1997 and 1996, respectively. Capital expenditures, other
than development and acquisition activities, totaled $10,685,000 (including both
recurring and investment capital expenditures) in the first quarter of 1997 and
were financed primarily with cash provided by operating activities. In the first
quarter of 1997, net cash used in investing activities reflected the Company's
use of $39,549,000 of funds for development activities, which were financed with
$21,012,000 in new mortgage indebtedness (see below for discussion of Cash Flows
from Financing Activities), cash on hand at the beginning of the year and the
remainder from draws on the Revolving Credit Facility.
Net cash provided by financing activities totaled $30,022,000 and $1,599,000 in
the first quarter of 1997 and 1996, respectively. The Company's refinancing of
mortgage indebtedness is discussed above in "Mortgages Refinancings/Outlook for
1997" and borrowings under new mortgage indebtedness for development activities
is included in the preceding paragraphs discussing net cash used in investing
activities. In addition, net cash provided by financing activities in the first
quarter of 1997 reflected net borrowings on Lumber Trading Group's lines of
credit ($8,392,000), repayment of the $6,365,000 note payable relating to the
purchase of the Company's additional 33-1/3% interest in the Pittsburgh Mall,
the release of $3,600,000 in restricted cash related to the financing of
Atlantic Center in Brooklyn, New York and payment of $787,000 of dividends. Net
cash provided by financing activities in the first quarter of 1996 reflected, in
addition to the refinancing of mortgage indebtedness and borrowing under new
mortgage indebtedness, $6,080,000, in common stock repurchases.
<PAGE>
STOCK SPLIT, DIVIDENDS, CAPITALIZATION AND TREASURY STOCK PURCHASE
A three-for-two stock split of both the Company's Class A and Class B common
stock, was effective February 17, 1997 to shareholders of record at the close of
business on February 3, 1997. The stock split was effected as a stock dividend.
Quarterly cash dividends of $.06 per share (post-split) on shares of both Class
A and Class B common stock were paid on March 17, 1997 and June 16, 1997. The
third 1997 quarterly dividend of $.06 per share on shares of both Class A and
Class B common stock will be paid on September 15, 1997 to shareholders of
record at the close of business on September 2, 1997.
On June 10, 1997, the shareholders approved amendments to the Company's Articles
of Incorporation to increase the Company's capitalization to a) 48,000,000
shares of Class A common stock from 16,000,000 shares; b) 18,000,000 shares of
Class B common stock from 6,000,000 shares; and c) 5,000,000 shares of Preferred
Stock from 1,000,000 shares.
On May 7, 1997, the Company agreed to repurchase 77,700 shares of Class A common
stock owned by three children of Samuel H. Miller, the Company's Co-Chairman of
the Board and Treasurer, and Ruth Miller, who died on November 26, 1996. The
purchase price of the shares is $2,836,050 ($36.50 per share), plus 6.7%
interest from May 7, 1997 to August 18, 1997, less any dividends paid between
those two dates. The payment for the shares and the transfer of shares will take
place on August 18, 1997.
INFLATION
The Commercial Group's exposure to increases in costs and operating expenses
resulting from inflation is minimized due to the provisions of its leases with
its tenants that require tenants to reimburse the Company for the majority of
its operating expenses. Also, many of the Company's leases provide for payments
based on a percentage of the rental income of the tenants, which generally
increases in periods of inflation. The Residential Group's risk in a period of
inflation is minimized by the annual turnover of tenant leases, which allow for
immediate market rate increases. The Land and Lumber Trading Groups may be
affected by inflation by the availability of buyers of new housing to obtain
mortgage financing when interest rates are high.
<PAGE>
NEW ACCOUNTING STANDARDS
In February 1997, FASB issued SFAS 128 "Earnings per Share," which is effective
for fiscal years ending after December 15, 1997. This Statement simplifies the
standards for computing earnings per share ("EPS") and makes them comparable to
international EPS standards. The Company will adopt the provisions of SFAS 128
in its 1997 Annual Report, but does not expect to have a material impact on EPS.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This Quarterly Report, 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 reflect
management's current views with respect to financial results related to future
events and 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 or 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 on a nation-wide basis as well
as regionally in areas where the Company has a geographic concentration of
properties; 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, which may be impacted by competition and
consumer spending; the rate of revenue increases versus expense increases; the
cyclical nature of the lumber wholesaling business; as well as other risks
listed from time to time in the Company's reports filed with the Securities and
Exchange Commission. The Company has no obligation to revise or update any
forward-looking statements as a result of future events or new information.
Readers are cautioned not to place undue reliance on such forward-looking
statements.
<PAGE>
<TABLE>
FOREST CITY ENTERPRISES, INC.
EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES
QUARTERS ENDED APRIL 30, 1997 AND 1996
(IN THOUSANDS)
<CAPTION>
Commercial Group Residential Group Land Group
------------------ ---------------- -----------------
1997 1996 1997 1996 1997 1996
--------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $74,845 $70,428 $43,351 $27,363 $2,541 $4,761
Operating expenses,
including depreciation
and amortization for non-
real estate Groups 39,241 35,873 15,476 15,266 2,524 4,479
Interest expense 23,833 21,592 6,779 7,885 1,267 1,745
Income tax provision 14 (743) 6,793 (611) (490) (579)
--------- -------- ------- ------- -------- --------
63,088 56,722 29,048 22,540 3,301 5,645
--------- -------- ------- ------- -------- --------
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $11,757 $13,706 $14,303 $4,823 ($760) ($884)
========= ======== ======= ======= ======== ========
Lumber Trading Group Corporate Activities Total
------------------ ---------------- -----------------
1997 1996 1997 1996 1997 1996
--------- -------- ------- ------- -------- --------
Revenues $29,603 $25,372 $728 $1,047 $151,068 $128,971
Operating expenses,
including depreciation
and amortization for non-
real estate Groups 26,047 22,760 939 2,577 84,227 80,955
Interest expense 1,205 1,595 25 196 33,109 33,013
Income tax provision 1,045 402 (2,077) 577 5,285 (954)
--------- -------- ------- ------- -------- --------
28,297 24,757 (1,113) 3,350 122,621 113,014
--------- -------- ------- ------- -------- --------
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $1,306 $615 $1,841 ($2,303) $28,447 $15,957
========= ======== ======= ======= ======== ========
RECONCILATION TO NET EARNINGS:
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $28,447 $15,957
Depreciation and amortization --
real estate Groups (16,835) (15,993)
Deferred taxes -- real estate Groups (1,414) (910)
Provision for decline in real estate,
net of tax 0 0
Gain (loss) on disposition of properties,
net of tax (21,462) 0
Extraordinary gain, net of tax 11,045 0
-------- --------
Net earnings (loss) ($219) ($946)
======== ========
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The ownership of 50% (i.e., a 33-1/3% interest in the project) of the
Company's interest in the Pittsburgh Mall project, which is currently under
development, is under dispute in litigation pending in Common Pleas Court in
Cuyahoga County, Ohio, between a subsidiary of the Company ("RMI") and Simon
DeBartolo Group, L.P. ("SDG"). SDG has sought injunctive relief concerning its
alleged rights to such interest, as well as $20 million compensatory and $10
million punitive damages. The Company believes it has meritorious defenses to
these claims, and intends to defend against them vigorously. No assurance,
however, can be given that such litigation will not delay or hinder the
development of this project; if decided in a manner adverse to RMI, such
litigation could adversely affect the potential value of this project to the
Company. The Company's General Counsel is of the opinion that these claims would
not have a material adverse effect on the Company.
The Company is involved in various other claims and lawsuits incidental to
its business. The Company's General Counsel is of the opinion that none of these
other claims and lawsuits will have a material adverse effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
No. 10.34 Stock Purchase Agreement, dated May 7, 1997, between
Forest City Enterprises, Inc. and Richard Miller, Aaron
Miller and Gabrielle Miller.
(b) Reports on Form 8-K - 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 June 16, 1997 /s/ Thomas G. Smith
------------- --------------------------------------
Thomas G. Smith, Senior Vice President
and Chief Financial Officer
Date June 16, 1997 /s/ Linda M. Kane
------------- --------------------------------------
Linda M. Kane, Vice President,
Corporate Controller
STOCK PURCHASE AGREEMENT
THIS AGREEMENT, made this 7th day of May, 1997, by and between FOREST
CITY ENTERPRISES, INC., an Ohio corporation with its offices at 10800 Brookpark
Road, Cleveland, Ohio 44130 (herein called "FCE") and RICHARD MILLER, AARON
MILLER, and GABRIELLE MILLER, c/o Paul H. Feinberg, Esq., Suite 3200, National
City Center, 1900 East 9th Street, Cleveland, Ohio 44114, (herein referred to
collectively as "Shareholders" and individually as "Shareholder").
W I T N E S S E T H:
WHEREAS, Shareholders are the owners and holders of record of an
aggregate of 77,700 shares of Class A Common Stock of FCE, each Shareholder
being the owner and holder of record of 25,900 shares of Class A Common Stock of
FCE (the "Shares").
WHEREAS, the parties desire that FCE purchase from each of the
Shareholders and each of the Shareholders sell to FCE the Shares owned by each
upon the following terms and conditions:
THEREFORE, the parties hereto, for and upon the mutual covenants and
considerations hereinafter set forth, agree as follows.
(1) Each Shareholder shall sell to FCE and FCE shall purchase from each
Shareholder the 25,900 Shares owned and held of record by each Shareholder for a
purchase price calculated as follows:
(i) $36.50 per Share plus
(ii) interest at the rate of 6.6923% per annum (based upon a 360 day
year) from May 7, 1997 until the Closing Date, less
(iii) any dividends paid per Share between May 7, 1997 and the
Closing Date.
(2) FCE shall pay the purchase price in immediately collectible funds
to each Shareholder on August 18, 1997 (the "Closing Date") as directed in
writing by each Shareholder, at which time each Shareholder will deliver the
Shares endorsed in blank for transfer, free and clear of all encumbrances.
(3) Each Shareholder represents and warrants that he/she is the owner,
free and clear of any encumbrances, of all the Shares sold and delivered by
him/her hereunder.
(4) FCE represents and warrants that the execution and delivery of this
agreement by it has been duly authorized by proper corporate action and it
constitutes a valid, binding, and enforceable obligation of FCE in accordance
with its terms.
(5) All representations and warranties made hereunder shall survive the
delivery of the Shares sold hereunder.
(6) All demands and notices given hereunder shall be sent by registered
mail addressed to FCE and to each Shareholder c/o Paul H. Feinberg, Esq., Baker
& Hostetler, National City Center, 1900 East 9th Street, Suite 3200, Cleveland,
Ohio 44114.
(7) This Agreement shall inure to the benefit of and be binding upon
the parties hereto and their respective heirs, executors, administrators and
permitted assigns.
(8) This Agreement cannot be assigned by any party without the written
consent of the other parties.
(9) At the request of FCE, the Shares shall be transferred into a custody
or other arrangement under instructions which will restrict any sale or transfer
of the Shares by the Shareholders except pursuant to this Agreement.
(10) This Agreement may be amended only by a written instrument signed by
all parties.
(11) This Agreement may be executed in counterparts.
IN WITNESS WHEREOF, the parties hereto have signed this instrument this
7th day of May, 1997.
FOREST CITY ENTERPRISES, INC. SHAREHOLDERS:
By__________________________ _________________________________
Richard Miller
---------------------------------
Attests: Aaron Miller
- - ----------------------------- ---------------------------------
Gabrielle Miller
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