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, 1998
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.)
1100 Terminal Tower
50 Public Square Cleveland, Ohio 44113
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code 216-621-6060
(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 9, 1998
Class A Common Stock, $.33 1/3 par value 19,277,706 shares
Class B Common Stock, $.33 1/3 par value 10,705,196 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 - October 31, 1998
(Unaudited) and January 31, 1998 3
Consolidated Statements of Earnings and Retained
Earnings (Unaudited) - Three and Nine Months
Ended October 31, 1998 and 1997 4
Consolidated Statements of Cash Flows (Unaudited)
- Nine Months Ended October 31, 1998 and 1997 5 - 6
Notes to Consolidated Financial Statements
(Unaudited) 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 27
Part II. Other Information
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 29 - 36
Signatures 37
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
October 31, 1998 January 31, 1998
---------------- ----------------
(Unaudited)
(dollars in thousands, except per share data)
<S> <C> <C>
ASSETS
Real Estate
Completed rental properties $ 2,582,772 $ 2,409,545
Projects under development 370,987 251,416
Land held for development or sale 55,144 43,599
------------- -------------
3,008,903 2,704,560
Less accumulated depreciation (479,097) (448,634)
------------- -------------
Total Real Estate 2,529,806 2,255,926
Cash 52,451 54,854
Notes and accounts receivable, net 182,533 191,719
Inventories 40,934 58,696
Investments in and advances to affiliates 276,215 202,409
Other assets 199,411 199,749
------------- -------------
$ 3,281,350 $ 2,963,353
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage debt, nonrecourse $ 2,138,346 $ 2,018,931
Accounts payable and accrued expenses 343,330 361,398
Notes payable 7,886 34,819
Long-term debt 95,000 114,000
8.5% Senior notes 200,000 -
Deferred income taxes 143,407 117,723
Deferred profit 34,357 34,537
------------- -------------
Total Liabilities 2,962,326 2,681,408
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock - convertible, without par value;
5,000,000 shares authorized; no shares issued. - -
Common stock - $.33 1/3 par value
Class A, 96,000,000 and 48,000,000 shares authorized,
19,900,056 and 19,813,372 shares issued, 19,277,106
and 19,186,072 outstanding, respectively. 6,635 6,602
Class B, convertible, 36,000,000 and 18,000,000 shares
authorized, 10,983,896 and 11,070,580 shares issued,
10,705,796 and 10,792,480 outstanding, respectively. 3,662 3,688
------------- --------------
10,297 10,290
Additional paid-in capital 114,272 114,276
Retained earnings 205,881 168,864
-------------- --------------
330,450 293,430
Less treasury stock, at cost; 622,950 Class A and 278,100
Class B shares and 627,300 Class A and 278,100 Class B
shares, respectively. (11,426) (11,485)
------------- --------------
Total Shareholders' Equity 319,024 281,945
------------- --------------
$ 3,281,350 $ 2,963,353
============= ==============
</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 October 31, Nine Months Ended October 31,
--------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ------- -------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues $ 176,902 $ 154,975 $ 491,232 $ 448,078
----------- ----------- ----------- -----------
Operating expenses 106,388 91,904 293,751 259,981
Interest expense 39,274 32,655 113,552 96,261
Depreciation and amortization 22,780 18,354 64,012 54,265
---------- ---------- ----------- -----------
168,442 142,913 471,315 410,507
---------- ----------- ----------- -----------
Gain (loss) on disposition of properties 1,027 - 31,081 (38,637)
---------- ----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES 9,487 12,062 50,998 (1,066)
---------- ----------- ----------- -----------
INCOME TAX EXPENSE (BENEFIT)
Current (552) 2,737 2,548 4,387
Deferred 4,871 (1,324) 18,938 (7,785)
---------- ----------- ----------- -----------
4,319 1,413 21,486 (3,398)
---------- ----------- ----------- -----------
NET EARNINGS BEFORE EXTRAORDINARY GAIN 5,168 10,649 29,512 2,332
Extraordinary gain, net of tax 10,618 - 10,952 14,187
---------- ----------- ----------- -----------
NET EARNINGS 15,786 10,649 40,464 16,519
Retained earnings at beginning of period 191,294 156,144 168,864 152,077
Dividends on common stock - $.04 per share
and $.115 per share in 1998, respectively,
and $.03 and $.09 per share in 1997,
respectively. (1,199) (900) (3,447) (2,703)
----------- ----------- ----------- -----------
Retained earnings at end of period $ 205,881 $ 165,893 $ 205,881 $ 165,893
=========== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE
Weighted average common shares outstanding 29,980,738 30,007,268 29,979,289 28,544,446
=========== =========== =========== ===========
Net earnings before extraordinary gain, net of tax $ 0.17 $ 0.35 $ 0.98 $ 0.08
Extraordinary gain, net of tax 0.36 - 0.37 0.50
----------- ----------- ----------- -----------
NET EARNINGS $ 0.53 $ 0.35 $ 1.35 $ 0.58
=========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE
Weighted average common shares outstanding 30,148,326 30,081,490 30,174,190 28,592,593
=========== =========== =========== ===========
Net earnings before extraordinary gain, net of tax $ 0.17 $ 0.35 $ 0.98 $ 0.08
Extraordinary gain, net of tax 0.35 - 0.36 0.50
----------- ----------- ----------- -----------
NET EARNINGS $ 0.52 $ 0.35 $ 1.34 $ 0.58
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended October 31,
-----------------------------
1998 1997
----------- ------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Rents and other revenues received $ 468,440 $ 431,987
Proceeds from land sales 28,527 15,237
Land development expenditures (31,652) (17,400)
Operating expenditures (290,562) (272,651)
Interest paid (107,800) (96,201)
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 66,953 60,972
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (353,436) (209,999)
Proceeds from disposition of assets 33,345 -
Investments in and advances to affiliates (73,806) (27,121)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (393,897) (237,120)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes 200,000 -
Payments of senior notes issuance costs (6,274) -
Increase in nonrecourse mortgage and long-term debt 563,377 225,714
Principal payments on nonrecourse mortgage debt
on real estate (284,069) (44,681)
Payments on long-term debt (114,000) (76,557)
Increase in notes payable 12,340 35,470
Payments on notes payable (39,273) (46,754)
Decrease in restricted cash 6,830 3,600
Payment of deferred financing costs (11,155) (5,448)
Net proceeds from sale of common stock - 76,084
Sale (purchase) of treasury stock 62 (2,896)
Dividends paid to shareholders (3,297) (2,590)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 324,541 161,942
---------- -----------
NET DECREASE IN CASH (2,403) (14,206)
CASH AT BEGINNING OF PERIOD 54,854 41,302
---------- -----------
CASH AT END OF PERIOD $ 52,451 $ 27,096
========== ===========
</TABLE>
<PAGE>
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended October 31,
------------------------------
1998 1997
------------ -------------
(in thousands)
<S> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
NET EARNINGS $ 40,464 $ 16,519
Depreciation 46,525 42,974
Amortization 17,487 11,291
Increase (decrease) in deferred income taxes 25,684 (2,241)
(Gain) loss on disposition of properties (31,081) 38,637
Extraordinary gain (18,118) (18,272)
Increase in land held for development or sale (11,545) (7,296)
Decrease in notes and accounts receivable 8,621 7,193
Decrease in inventories 17,762 2,124
Increase in other assets (7,688) (3,566)
Decrease in accounts payable and accrued expenses (20,978) (25,344)
Decrease in deferred profit (180) (1,047)
---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 66,953 $ 60,972
========== ===========
</TABLE>
SUPPLEMENTAL NON-CASH DISCLOSURE:
The effect of the following non-cash transactions for 1998 are summarized in the
table below:
* Disposition of interest in Summit Park Mall
* Disposition of interest in Trolley Plaza
The effect of the following non-cash transactions for 1997 are summarized in the
table below:
* Increase in interest in Skylight Office Tower
* Disposition of interest in Toscana
* Reduction of interest in MIT Phase II
* Exchange of Woodridge
<TABLE>
<S> <C> <C>
Operating Activities
Notes and accounts receivable $ 565 $ (5,072)
Other assets 1,138 (121)
Accounts payable and accrued expenses 2,760 (6,900)
Deferred taxes - 164
---------- -----------
Total effect on operating activities $ 4,463 $ (11,929)
========== ===========
Investing Activities
Additions to completed rental property $ - $ (3,498)
Dispositions of completed rental property 42,312 56,568
Investments in and advances to affiliates - 4,131
---------- -----------
Total effect on investing activities $ 42,312 $ 57,201
========== ===========
Financing Activities
Assumption of non-recourse mortgage debt $ - $ 3,185
Reduction of non-recourse mortgage debt (46,775) (48,988)
Notes payable - 531
---------- -----------
Total effect on financing activities $ (46,775) $ (45,272)
========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Extraordinary Gain
The extraordinary gain recorded in the third quarter represents extinguishment
of non-recourse debt related to Terminal Tower ($13,947,000 pre-tax) and
Skylight Office Tower ($3,619,000 pre tax), both located in Cleveland, Ohio. An
extraordinary gain of $552,000 (pre-tax) was recorded in the second quarter as a
result of the disposition of Trolley Plaza.
B. Senior Notes
On March 16, 1998, the Company issued $200,000,000 of 8.50% Senior Notes, due
March 15, 2008, in a public offering. Proceeds were used to repay $114,000,000
of its term loan and revolving credit loans. The remaining proceeds are being
used to finance projects currently under development and to pursue new real
estate opportunities. Accrued interest is payable on March 15 and September 15
of each year. The Senior Notes are unsecured senior obligations of the Company,
however, they are subordinated to all existing and future indebtedness and other
liabilities of the Company's subsidiaries, including the revolving credit
facility. The indenture contains covenants providing, among other things,
limitations on the incurrence of additional debt and payment of dividends.
The Senior Notes may be redeemed by the Company, in whole or in part, at any
time on or after March 15, 2003 at redemption prices beginning at 104.25% for
the year beginning March 15, 2003 and systematically reduced to 100% in the
years thereafter. The Company may also redeem up to 33% of the original
principal amount prior to March 15, 2001 from proceeds of one or more common
stock public offerings at a redemption price of 108.50%.
C. Stock Split
A two-for-one stock split of the Company's Class A and Class B common stock was
paid on July 16, 1998 to shareholders of record on July 1, 1998. The stock split
is given retroactive effect to the beginning of the earliest period presented in
the accompanying Consolidated Balance Sheets by transferring the par value of
the additional shares issued from the additional paid-in capital account to the
common stock accounts. All share and per share data presented in these financial
statements have been restated to reflect the stock split.
D. Authorized Shares
On June 9, 1998, the shareholders approved amendments to the Company's Articles
of Incorporation to increase the Company's capitalization to a) 96,000,000
shares of Class A common stock from 48,000,000 shares; and b) 36,000,000 shares
of Class B common stock from 18,000,000 shares.
E. Dividends
The Board of Directors declared regular quarterly cash dividends on both Class A
and Class B common shares as follows:
Amount
Date Date of Payment Per Share
Declared Record Date (Post-Split)
March 18, 1998 June 1, 1998 June 15, 1998 $.035
June 9, 1998 September 1, 1998 September 15, 1998 $.04
September 8, 1998 December 1, 1998 December 15, 1998 $.04
December 10, 1998 March 1, 1999 March 15, 1999 $.04
<PAGE>
F. Earnings per Share
The reconciliation of the numerator and denominator of basic earnings per share
(EPS) with diluted EPS is as follows:
Net Earnings Weighted Net Earnings
Before Average Before
Extraordinary Shares Extraordinary
Gain Outstanding Gain
(Numerator) (Denominator) Per Share
Three Months Ended October 31, 1998:
Basic EPS $ 5,168,000 29,980,738 $0.17
Dilutive effect of stock options - 167,588
Diluted EPS $ 5,168,000 30,148,326 $0.17
Nine Months Ended October 31, 1998:
Basic EPS $29,512,000 29,979,289 $0.98
Dilutive effect of stock options - 194,901
Diluted EPS $29,512,000 30,174,190 $0.98
Three Months Ended October 31, 1997:
Basic EPS $10,649,000 30,007,268 $0.35
Dilutive effect of stock options - 74,222
Diluted EPS $10,649,000 30,081,490 $0.35
Nine Months Ended October 31, 1997:
Basic EPS $ 2,332,000 28,544,446 $0.08
Dilutive effect of stock options - 48,147
Diluted EPS $ 2,332,000 28,592,593 $0.08
G. Treasury Stock
During the third quarter, 4,350 shares of Class A treasury stock were sold to
employees upon the exercise of their stock options. A gain of $4,024 was
recorded to Additional Paid-in Capital as a result of these transactions.
H. New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Management does
not anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company.
<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 nine months ended
October 31, 1998 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, 1998 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, 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, is necessary to
understand its operating results. The Company's view is that EBDT is also an
indicator of the Companys 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 12.8% (or 12.2% per share) in the third quarter of
1998 to $30,393,000, or $1.01 per share of common stock, from $26,947,000, or
$.90 per share of common stock, for the third quarter of 1997. EBDT for the nine
months ended October 31, 1998 was $82,211,000, or $2.72 per share, compared to
$80,119,000, or $2.80 per share, for the nine months ended October 31, 1997.
EBDT for the nine months ended October 31, 1998 grew by 12.4%, excluding
$6,991,000 in EBDT in 1997 related to the litigation settlement for Toscana, a
563-unit apartment complex in Irvine, California (see "-Other Transactions -
Sale of Toscana"). All per share figures are fully diluted and are adjusted for
the Company's two-for-one stock split paid in July 1998.
The increase in EBDT is primarily attributable to the acquisitions or openings
of fifteen properties during 1998 and a full nine months of operations for the
eleven properties that opened during 1997.
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
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.
NET OPERATING INCOME FROM REAL ESTATE OPERATIONS - NOI from the combined
Commercial Group and Residential Group for the third quarter of 1998 was
$66,357,000 compared to $58,480,000 for the third quarter of 1997, an increase
of 13.5%. NOI from the combined Commercial Group and Residential Group for the
nine months ended October 31, 1998 was $188,757,000 compared to $175,136,000 for
1997, an increase of 7.8%. NOI in 1997 was affected by the non-recurring
$15,000,000 Toscana litigation settlement income (see "Sale of Toscana" below).
Adjusting for this item, NOI for the nine months ended October 31, 1998
increased by 17.9% over the comparable period of 1997.
COMMERCIAL GROUP
REVENUES. Revenues of the Commercial Group increased $8,825,000, or 10.5%,
to $93,236,000 in the third quarter of 1998 from $84,411,000 in the third
quarter of 1997. This increase is primarily the result of property openings and
acquisitions. During 1998, Forest City acquired the 292-room Sheraton Hotel at
Station Square in Pittsburgh, Pennsylvania and the 325,000-square-foot Fairmont
Plaza office building and adjacent 189,000-square-foot Pavilion retail center in
San Jose, California, which increased revenues over last year's third quarter by
$4,464,000 and $3,193,000, respectively. Phase II of University Park at MIT in
Cambridge, Massachusetts opened during the second quarter of 1998. This
mixed-use facility, owned in partnership with MIT, consists of 76,000 square
feet of office space, 95,000 square feet of retail space, a 210-room hotel and a
960-space parking facility and generated $1,849,000 of revenues during the third
quarter of 1998. Revenues for the third quarter also increased from the openings
of properties in the New York City area during 1997 including Nine MetroTech
office building in Brooklyn, New York ($1,198,000) and two retail properties in
Queens, New York, Northern Boulevard ($1,129,000) and Grand Avenue ($463,000).
Richmond Avenue, a retail center in Staten Island, New York, opened in 1998 and
generated additional revenues of $444,000. In addition, the Company's increased
ownership in two properties resulted in increases to revenues: Antelope Valley
Mall in Palmdale, California increased from 40% in 1997 to 78% in 1998
($1,041,000) and Station Square in Pittsburgh, Pennsylvania increased from 25%
in 1997 to 100% in 1998 ($1,907,000). These increases were partially offset by
decreases in revenues due to the disposition of the Company's interest in three
commercial properties in 1998: the 469,000-square-foot San Vicente office
building in Brentwood, California ($897,000), the 695,000-square-foot Summit
Park Mall in Wheatfield, New York ($1,319,000) and the Courtyard strip shopping
center in Flint, Michigan ($139,000). Additionally, the Commercial Group
recorded $4,541,000 of revenues in the third quarter of 1997 from the sale of
commercial land that did not recur in the third quarter of 1998.
Revenues of the Commercial Group increased $36,319,000, or 15.4%, to
$271,593,000 for the nine months ended October 31, 1998 from $235,274,000 for
the comparable period of 1997. This increase is primarily the result of the 1998
acquisitions of Sheraton Hotel at Station Square ($9,312,000) and Fairmont Plaza
and Pavilion ($4,050,000) and the 1997 acquisitions of additional interests in
Antelope Valley Mall ($2,739,000) and Station Square ($5,384,000). Additionally,
the openings of several properties in the New York City area in 1997 and 1998
resulted in increased revenues: Nine MetroTech ($4,007,000), Northern Boulevard
($2,972,000), Grand Avenue ($1,328,000), Richmond Avenue ($1,040,000). In
addition, Phase II of University Park at MIT opened in 1998 and generated
$2,451,000 in revenues, the Ritz-Carlton Hotel recorded revenues of $642,000
over the 1997 results for nine months and the existing Commercial Group
portfolio revenues improved by approximately $3,600,000. Revenues also improved
for two properties that opened in 1996: Atlantic Center in Brooklyn, New York
($754,000) and Marketplace at Riverpark in Fresno, California ($311,000). These
increases were partially offset by a decrease in revenues due to the disposition
of the Company's interest in three commercial properties during 1998: San
Vicente ($2,315,000), Summit Park Mall ($2,518,000) and Courtyard ($420,000).
OPERATING AND INTEREST EXPENSES. During the third quarter of 1998,
operating expenses for the Commercial Group increased $6,023,000, or 14.6%, to
$47,294,000 from $41,271,000 in the third quarter of 1997. The increase in
operating expenses was attributable primarily to costs associated with the
acquisitions of the Sheraton Hotel at Station Square ($3,168,000) and Fairmont
Plaza ($1,157,000) and the openings of Phase II at University Park at MIT
($1,510,000) and Nine MetroTech ($463,000). In addition, operating expenses
increased due to the 1997 acquisitions of increased ownership percentages in
Antelope Valley Mall ($378,000) and Station Square ($1,298,000). These increases
were partially offset by decreases in operating expenses of $883,000 and
$356,000 as a result of the dispositions of Summit Park Mall and San Vicente,
respectively. Interest expense for the third quarter of 1998 increased by
$3,668,000, or 18.2%, to $23,864,000 from $20,196,000 for the third quarter of
1997. The increase in interest expense is attributable primarily to the openings
of Phase II at University Park at MIT and new properties in the New York City
area and the acquisitions of Sheraton Hotel at Station Square and Fairmont Plaza
and increased ownership percentages in Antelope Valley Mall and Station Square.
During the nine months ended October 31, 1998, operating and interest expenses
increased $18,268,000 and $7,871,000 (15.6% and 12.9%), respectively, over the
comparable period in 1997 to $135,578,000 and $68,890,000, respectively. The
increase in operating expenses is primarily attributable to costs associated
with the acquisitions of the Sheraton Hotel at Station Square ($6,302,000) and
Fairmont Plaza ($1,568,000), the openings of Phase II at University Park at MIT
($1,954,000), Nine MetroTech ($1,393,000) and new retail properties in the New
York City boroughs ($1,414,000), and increased occupancy at the Ritz-Carlton
Hotel ($518,000). In addition, operating expenses increased due to the 1997
acquisitions of increased ownership percentages in Antelope Valley Mall
($1,129,000) and Station Square ($3,824,000), and general portfolio operating
expenses increased approximately $3,000,000 as a result of increased occupancy.
These increases were partially offset by decreases in operating expenses of
$1,585,000 and $1,141,000 as a result of the dispositions of Summit Park Mall
and San Vicente, respectively. The increase in interest expense is attributable
primarily to the openings of Phase II at University Park at MIT and new
properties in the New York City area and the acquisitions of Sheraton Hotel at
Station Square and Fairmont Plaza and additional interests in Antelope Valley
Mall and Station Square.
RESIDENTIAL GROUP
REVENUES. Revenues for the Residential Group increased by $4,359,000, or
14.0%, in the third quarter of 1998 to $35,599,000 from $31,240,000 in the third
quarter of 1997. This increase was primarily attributable to the sale of Forest
City Capital Corporation ($1,329,000), which was a mortgage servicing division
of Residential Group and the recognition of development and syndication fees on
several projects of $1,038,000 in excess of the third quarter of 1997. Revenues
also increased as a result of 1997 acquisitions of Whitehall Terrace in Kent,
Ohio ($350,000) and Colony Woods in Bellevue, Washington ($276,000) as well as
the 1998 acquisitions of the 534-unit Woodlake Apartments in Silver Spring,
Maryland ($1,062,000), a 50% interest in the 342-unit Park Plaza in Mayfield
Heights, Ohio ($319,000) and an additional 20% interest in the 450-unit Studio
Colony apartment community in Los Angeles, California ($391,000). In addition,
revenues increased $271,000 over the third quarter of last year from the
expansion of 294 units during 1997 to three apartment communities in Cleveland,
Ohio. These increases are partially offset by the decrease in revenues of
$697,000 as the result of the 1998 disposition of Trolley Plaza in Detroit,
Michigan.
Revenues for the Residential Group decreased by $4,227,000 in the nine months
ended October 31, 1998 to $99,860,000 from $104,087,000 for the comparable
period in 1997. Excluding the $15,000,000 in proceeds from the Toscana
litigation settlement received in 1997 (see "Other Transactions - Sale of
Toscana" below), revenues for the nine months ended October 31, 1998 increased
$10,773,000, or 12.1%, over the comparable period of 1997. This increase was
primarily attributable to the 1997 acquisitions of Museum Towers ($1,128,000)
and Whitehall Terrace ($1,017,000) and the 1998 acquisitions of Woodlake
($1,062,000), Park Plaza ($464,000) and an additional 20% interest in Studio
Colony ($1,198,000). In addition, revenues increased $878,000 over last year
from the expansion of 294 units during 1997 at three apartment communities in
Cleveland, Ohio. Revenues of the existing operating portfolio of the Residential
Group increased approximately $2,600,000, $785,000 more in revenues were
recorded over last year due to the sale of Forest City Capital Corporation and
development and syndication fees increased $2,236,000 for the nine months ended
October 31, 1998 compared to 1997. These increases were partially offset by a
decrease in revenues of $619,000 as a result of the disposition of Trolley
Plaza.
OPERATING AND INTEREST EXPENSES. Operating expenses for the Residential
Group for the third quarter of 1998 decreased by $716,000, or 4.5%, to
$15,184,000 from $15,900,000 in the third quarter of 1997. The decrease in
operating expenses is attributable primarily to the $2,500,000 reduction in a
reserve for collection of the note receivable from Millender Center, a mixed-use
facility in downtown Detroit, Michigan. This decrease was partially offset by
increases in operating expenses from the 1997 acquisitions of Colony Woods
($94,000) and Whitehall Terrace ($123,000) and the 1998 acquisitions of Woodlake
($460,000), Park Plaza ($152,000) and an additional 20% interest in Studio
Colony ($92,000). In addition, operating expenses increased $175,000 over last
year due to the expansion of 294 units at three apartment communities in
Cleveland, Ohio and $547,000 in additional costs were associated with the
generation of increased development fees. Interest expense for the third quarter
of 1998 decreased by $1,580,000, or 20.4%, to $6,167,000 from $7,747,000 in the
third quarter of 1997. This decrease is the result of an increase in capitalized
interest of $2,695,000 related to the increased Residential development program.
This decrease was partially offset by increases in interest expense from debt
incurred to acquire Woodlake ($297,000), Park Plaza ($97,000), Whitehall Terrace
($90,000) and an additional 20% interest in Studio Colony ($88,000) and to
renovate Colony Woods ($237,000).
Operating expenses for the Residential Group for the nine months ended October
31, 1998 increased by $203,000, or .4%, to $47,118,000 from $46,915,000 for the
comparable period of 1997. The increase in operating expenses is attributable
primarily to the 1997 acquisitions of Museum Towers ($317,000), Colony Woods
($658,000) and Whitehall Terrace ($421,000), the 1998 acquisition of Woodlake
($460,000) and the addition of 294 units at three apartment communities in
Cleveland, Ohio ($414,000). In addition, the Residential Group incurred
$1,310,000 in additional costs associated with the generation of development
fees. These increases were partially offset by a $3,500,000 reduction in a
reserve for collection of the note receivable from Millender Center. Interest
expense for the nine months ended October 31, 1998 decreased by $1,573,000, or
7.2%, to $20,144,000 from $21,717,000 for the comparable period of 1997. This
decrease is primarily due to increased capitalized interest of $3,746,000
related to the increased Residential development program. This decrease was
partially offset by an increase in interest expense from debt incurred to
acquire Museum Towers ($182,000), Woodlake ($297,000), Park Plaza ($110,000),
Whitehall Terrace ($271,000) and an additional 20% interest in Studio Colony
($191,000). In addition, interest expense increased in the Residential Group for
the nine months ended October 31, 1998 over the comparable period of 1997 as a
result of additional debt incurred to renovate Colony Woods ($281,000) and the
addition of 294 apartment units to three existing communities in Cleveland, Ohio
($264,000).
LAND GROUP
REVENUES. Revenues for the Land Group increased by $10,183,000 to
$15,090,000 in the third quarter of 1998 from $4,907,000 in the third quarter of
1997. Revenues for the Land Group increased by $15,713,000 from $12,224,000 in
the nine months ended October 31, 1997 to $27,937,000 for the comparable period
of 1998. Sales of land and related earnings vary from period to period,
depending on management's decisions regarding the disposition of significant
land holdings.
OPERATING AND INTEREST EXPENSES. Operating expenses and interest expense
increased by $8,875,000 and $1,023,000, respectively, in the third quarter of
1998 to $12,739,000 and $2,633,000, respectively, from $3,864,000 and
$1,610,000, respectively, in the third quarter of 1997. The fluctuation in
operating expenses primarily reflects costs associated with land sales volume in
each period. The increase in interest expense was due primarily to a higher
level of interest-bearing debt.
Operating expenses and interest expense increased by $12,931,000 and $2,624,000,
respectively, in the nine months ended October 31, 1998 to $23,205,000 and
$6,927,000, respectively, from $10,274,000 and $4,303,000, respectively, in the
nine months ended October 31, 1997. The fluctuation in operating expenses
primarily reflects costs associated with land sales volume in each period. The
increase in interest expense was due primarily to a higher level of
interest-bearing debt.
LUMBER TRADING GROUP
REVENUES. Revenues of the Lumber Trading Group decreased by $1,193,000, or
3.5%, to $32,781,000 in the third quarter of 1998 from $33,974,000 in the third
quarter of 1997. The decrease was due primarily to a lower level of trading
activity in 1998 compared to 1997 ($405,000) and an decrease in volume at Forest
City/Babin, a wholesaler of major appliances, cabinets and hardware to housing
contractors ($788,000).
Revenues for the Lumber Trading Group for the nine months ended October 31, 1998
decreased $3,718,000, or 3.9%, to $90,659,000 from $94,377,000 for the
comparable period of 1997. The decrease was due primarily to a reduced level of
trading activity in 1998 compared to 1997 ($2,572,000) and a decrease in volume
at Forest City/Babin, a wholesaler of major appliances, cabinets and hardware to
housing contractors ($1,146,000).
OPERATING AND INTEREST EXPENSES. Operating expenses in the Lumber Trading
Group increased in the third quarter of 1998 by $833,000, or 2.9%, to
$29,483,000 from $28,650,000 in the third quarter of 1997. This increase
reflected the fluctuation in variable expenses due to lower trading margins
compared to last year ($1,559,000), net of decreased operating expenses at
Forest City/Babin ($726,000) as a result of a decrease in sales volume compared
to last year. Interest expense for the third quarter of 1998 decreased by
$162,000, or 11.9% to $1,197,000 from $1,359,000 in the third quarter of 1997.
This increase in interest expense was primarily due to lower average borrowings
under Lumber Trading Group's credit facility.
Operating expenses in the Lumber Trading Group decreased in the nine months
ended October 31, 1998 by $139,000, or .2%, to $82,033,000 from $82,172,000 for
the comparable period of 1997. This decrease reflected the reduction in
operating expenses at Forest City/Babin ($934,000) as a result of a decrease in
sales volume compared to last year, partially offset by an increase in expenses
due to lower trading margins compared to last year ($795,000). Interest expense
for the nine months ended October 31, 1998 increased by $304,000, or 7.7% to
$4,253,000 from $3,949,000 for the nine months ended October 31, 1997. This
increase in interest expense was primarily due to higher average borrowings
under Lumber Trading Group's credit facility.
CORPORATE ACTIVITIES
REVENUES. Corporate Activities' revenues decreased $247,000 in the third
quarter of 1998 to $196,000 from $443,000 in the third quarter of 1997.
Corporate Activities' revenues decreased $933,000 for the nine months ended
October 31, 1998 to $1,183,000 compared to $2,116,000 for the same period in
1997. Corporate Activities revenues consists primarily of interest income on
investments made by the Company and vary from year to year depending on interest
rates and the amount of loans outstanding.
OPERATING AND INTEREST EXPENSES. Operating expenses of Corporate Activities
decreased $443,000 in the third quarter of 1998 to $2,605,000 from $3,048,000 in
the third quarter of 1997. Operating expenses increased for the nine months
ended October 31, 1998 by $2,786,000 to $8,397,000 from $5,611,000 for the
comparable period of 1997. These increases represent general corporate expenses,
including amortization of costs associated with the 1998 public offering of
Senior Notes (see "Financial Condition and Liquidity"). Interest expense
increased $3,670,000 in the third quarter of 1998 to $5,413,000 from $1,743,000
in the third quarter of 1997. Interest expense for the nine months ended October
31, 1998 increased $8,065,000 to $13,338,000 from $5,273,000 for the comparable
period of 1997. Corporate Activities interest expense consists primarily of
interest expense on the 8.50% Senior Notes (issued on March 16, 1998) and the
FCRPC Credit Facility that has not been allocated to a principal business group
(see "Financial Condition and Liquidity"). Beginning in the fourth quarter of
1997, capitalized interest on development projects, which was previously
reported as Corporate Activities, is reported by the principal business group
developing the project. Prior years' interest expense for Corporate Activities,
Commercial Group and Residential Group have been restated to reflect this
presentation.
OTHER TRANSACTIONS
GAIN (LOSS) ON DISPOSITION OF PROPERTIES - Gain (loss) on disposition of
properties, net of tax, totaled a gain of $554,000 in the third quarter of 1998.
Gain (loss) on disposition of properties, net of tax, totaled a gain of
$18,722,000 for the nine months ended October 31, 1998 compared to a loss of
$23,356,000 for the nine months ended October 31, 1997.
During the third quarter of 1998, the Company sold its 20% interests in three
apartment buildings in Houston, Texas (Copper Creek, Greenbriar and Woodforest
Glen) and recorded a pre-tax gain on disposition of $1,027,000. During the
second quarter of 1998, the Company disposed of its interests in Summit Park
Mall, a regional shopping center in suburban Buffalo, New York and Trolley
Plaza, an apartment community in downtown Detroit, Michigan and recognized
pre-tax gains of $14,088,000 and $4,941,000, respectively. During the first
quarter of 1998, the Company sold its interests in San Vicente, an office
building in Brentwood, California and Courtyard, a strip shopping center in
Flint, Michigan. The Company recognized pre-tax gains on disposition of
$10,403,000 on San Vicente and $622,000 on Courtyard. During the second quarter
of 1997, the Company recorded a pre-tax loss of $3,133,000 on the disposition of
its interest in Woodridge, a land development project in suburban Chicago,
Illinois. During the first quarter of 1997, the Company recorded a loss on
disposition of Toscana of $35,505,000 ($21,462,000 after tax / see "- Sale of
Toscana").
EXTRAORDINARY GAIN - Extraordinary gain, net of tax, totaled $10,618,000 in
the third quarter of 1998. Extraordinary gain, net of tax, totaled $10,952,000
and $14,187,000 for the nine months ended October 31, 1998 and 1997,
respectively. The 1998 extraordinary gain recorded in the third quarter
represents extinguishment of non-recourse debt related to Terminal Tower
($13,947,000 pre-tax) and Skylight Office Tower ($3,619,000 pre-tax), both
located in Cleveland, Ohio. In addition, extraordinary gain of $552,000
(pre-tax) was recorded in the second quarter as a result of the disposition of
Trolley Plaza. The 1997 extraordinary gain represented pre-tax earnings of
$18,272,000 for the extinguishment of nonrecourse debt and related accrued
interest of Toscana (see "- Sale of Toscana").
SALE OF TOSCANA - During the first quarter of 1997, the Company sold
Toscana, a 563-unit apartment complex in Irvine, California, back to the
original landowner and settled litigation related to the property. As a result,
the Company recorded operating income of $9,157,000, after tax, a loss on
disposition of property of $21,462,000, after tax, and an extraordinary gain of
$14,187,000, after tax, related to the extinguishment of a portion of the
property's nonrecourse mortgage debt. Proceeds from the litigation settlement
resulted in EBDT of $6,991,000 for the year ended January 31, 1998. The net
result of these transactions to the Company was after-tax income of $1,882,000.
INCOME TAXES - Income tax expense for the third quarter of 1998 and 1997
totaled $4,319,000 and $1,413,000, respectively. Income tax expense (benefit)
for the nine months ended October 31, 1998 and 1997 totaled $21,486,000 and
($3,398,000), respectively. At January 31, 1998, the Company had a tax net
operating loss carryforward ("NOL") of $89,903,000 (generated primarily over
time in the ordinary course of business from the significant impact of
depreciation expense from real estate properties on the Company's net earnings)
which will expire in the years ending January 31, 2005 through January 31, 2011
and general business credits carryovers of $3,205,000 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 third quarter of 1998, the Company's net earnings
grew to $15,786,000, or $.52 per share of common stock, from $10,649,000, or
$.35 per share of common stock, in the third quarter of 1997. For the nine
months ended October 31, 1998, the Company's net earnings grew to $40,464,000,
or $1.34 per share of common stock, from $16,519,000, or $.58 per share of
common stock, for the nine months ended October 31, 1997. All per share amounts
are diluted and adjusted for the two-for-one stock split that was effective July
16, 1998.
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 related to real
estate operations from EBDT because they are non-cash items and the Company
believes the values of its properties, in general, have appreciated, over time,
in excess of their original cost. Deferred income taxes from real estate
operations 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.
FINANCIAL CONDITION AND LIQUIDITY
On March 16, 1998, the Company sold $200,000,000 in 8.50% senior notes due March
15, 2008 in a public offering. Proceeds from the sale of these notes were
initially used to repay $114,000,000 outstanding under the FCRPC Credit
Agreement (defined below) with the remainder to be used to finance projects
currently under development and to pursue new real estate opportunities that
arise from current favorable market conditions.
On December 10, 1997, and as amended on January 20, 1998 and March 6, 1998, the
Company replaced its $37,500,000 term loan due July 1, 2001 and its $80,000,000
revolving credit facility with a Forest City Rental Properties Corporation
("FCRPC", a significant subsidiary of the Company) Credit Agreement. The FCRPC
Credit Agreement with a group of nine banks is a $225,000,000 revolving credit
facility maturing December 10, 2000, unless extended, and provides for a
quarterly reduction of $2,500,000 commencing April 1, 1998 and allows for up to
$30,000,000 in outstanding letters of credit, which reduces the revolving credit
available to the Company. As of October 31, 1998, the Company had $95,000,000
recourse debt outstanding under the FCRPC Credit Agreement.
The FCRPC Credit Agreement provides, among other things, for 1) interest rates
ranging from 1/4% to 3/4% over the prime rate or 2% to 2-1/2% over the London
Interbank Offered Rate ("LIBOR"); 2) maintenance of debt service coverage ratio,
specified level of net worth and cash flow (as defined) and 3) restriction on
dividend payments. The Company has purchased LIBOR interest rate caps for the
debt under the FCRPC credit agreement in the amount of $25,000,000 at 6.5% for
1998 and $45,000,000 at 7.5% for 1999.
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
During the nine months ended October 31, 1998, the Company completed
$714,000,000 in financings, including $364,000,000 in refinancings, $239,000,000
for new development projects and $111,000,000 in acquisition mortgages. The
Company is pursuing the refinancing of its nonrecourse mortgage debt which
matures within the next 12 months. In addition, the Company is attempting to
extend the maturities and/or refinance the nonrecourse debt that is coming due
in 1999 and 2000, generally pursuing long-term fixed rate debt to take advantage
of the recent low interest rate levels. The Company has purchased $170,850,000
(including its partners' share) in Treasury options to ensure Treasury rates
will not exceed 6.00% for construction debt which is anticipated to be converted
to permanent fixed-rate debt by February 1, 2000.
INTEREST RATE EXPOSURE
At October 31, 1998, the composition of nonrecourse mortgage debt is as follows:
Amount Rate (1)
------------- --------
(in thousands)
Fixed $ 1,494,032 7.64%
Variable -
Swapped (2) 184,881 8.09%
Adjustable 231,517 6.76%
Tax-Exempt 155,424 5.14%
UDAG and other subsidized loans (fixed) 72,492 2.73%
----------
$2,138,346 7.22%
==========
(1) The weighted average interest rates shown above include both the base index
and the lender margin.
(2) Interest rates swaps have an average term of 1.0 years as of October 31,
1998.
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. In addition, the Company has purchased interest rate cap protection for
its variable-rate debt portfolio in the amount of $293,675,000, $394,503,000 and
$366,751,000 for the fiscal years ending January 31, 1999, 2000 and 2001,
respectively. The Company generally does not hedge tax-exempt debt because,
since 1990, the base rate of this type of financing has averaged only 3.80% and
has never exceeded 7.90%.
At October 31, 1998, 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 $2,300,000. 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 $1,600,000.
LUMBER TRADING GROUP LIQUIDITY
The Lumber Trading Group is separately financed with two revolving lines of
credit and a non-recourse accounts receivable sale program. These credit
facilities are without recourse to the Company.
At October 31, 1998 Lumber Trading Group's two lines of credit totaled a
$67,000,000 commitment expiring June 30, 1999. 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 October 31, 1998, $4,056,000 was
outstanding 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 $91,800,000 and uses this program
to finance its working capital needs. At October 31, 1998, $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.
CASH FLOWS
Net cash provided by operating activities was $66,953,000 and $60,972,000 for
the nine months ended October 31, 1998 and 1997, respectively. The increase in
net cash provided by operating activities in 1998 from 1997 is the result of an
increase in rents and other revenues received of $36,453,000, partially offset
by an increase of $17,911,000 in operating expenses and a $11,599,000 increase
in interest paid.
Net cash used in investing activities totaled $393,897,000 and $237,120,000 for
the nine months ended October 31, 1998 and 1997, respectively. Capital
expenditures, other than development and acquisition activities, totaled
$43,664,000 during the nine months of 1998 (including both recurring and
investment capital expenditures) and were financed primarily from cash on hand
at the beginning of the year. During the nine months ended October 31, 1998, net
cash used in investing activities reflected the Company's use of $309,772,000 of
funds for acquisition and development activities, which were financed with
$188,739,000 in new mortgage indebtedness, proceeds from the issuance of senior
notes, and borrowings under the FCRPC Credit Agreement. In addition, $73,806,000
was used for investments in and advances to affiliates, and includes investments
in the following Residential Group projects, which have been syndicated: The
Grand in North Bethesda, Maryland ($5,556,000); The Enclave ($12,754,000) and
101 San Fernando ($19,312,000), both located in San Jose, California; Tobacco
Row in Richmond, Virginia ($3,358,000); The Drake in Philadelphia, Pennsylvania
($12,125,000) and four apartment communities in the Hamptons/Newport News area
of Virginia ($7,950,000). The four properties are known as Bridgewater, Trellis,
Arboretum and Silver Hills. In addition, the Company has advanced $4,224,000 on
behalf of its partner in the Promenade at Temecula regional mall that is
currently under construction and scheduled to open in Fall of 1999 and
$7,700,000 was advanced on behalf of Forest City's partner in the various real
estate projects in the New York City area. Net cash used in investing activities
for the nine months ended October 31, 1997 included $31,609,000 in capital
expenditures other than development and acquisition activities (including both
recurring and investment capital expenditures) and were financed primarily with
cash provided by operating activities. The nine months ended October 31, 1997
also reflected the use of $178,390,000 of funds for development and acquisition
activities, which were financed with approximately $135,000,000 in new mortgage
indebtedness and proceeds from the sale of common stock. In addition,
$27,121,000 was used for investments in and advances to affiliates, primarily
related to Forest City's partner in New York City ($8,400,000), The Grand
($9,700,000) and temporary advances for financing commitments ($6,000,000).
Net cash provided by financing activities totaled $324,541,000 and $161,942,000
in the nine months ended October 31, 1998 and 1997, respectively. Net proceeds
from the issuance of senior notes in March 1998 were $193,726,000, which were
initially used to repay $114,000,000 outstanding under the FCRPC Credit
Agreement. The Company's refinancing of mortgage indebtedness is discussed above
in "Mortgages Refinancings" and borrowings under new mortgage indebtedness for
acquisition and development activities is included in the preceding paragraph
discussing net cash used in investing activities. Net cash provided by financing
activities for the nine months ended October 31, 1998 reflected a reduction of
$6,830,000 in restricted cash related to the financing of The Enclave apartment
project in San Jose, California. In addition, the Company reported a net
decrease of $26,933,000 in notes payable (primarily as a result of repayment of
$14,968,000 of borrowings under Lumber Trading Group's lines of credit and
$8,117,000 repayment of notes payable by the Land Group), payment of deferred
financing costs of $11,155,000 and payment of $3,297,000 of dividends. During
the nine months ended October 31, 1997, cash provided by financing activities
included proceeds from the sale of common stock of $76,084,000, repayment of
$17,628,000 on Lumber Trading Group's lines of credit, the release of $3,600,000
in restricted cash related to the Atlantic Center retail project in Brooklyn,
New York, repayment of a $6,365,000 note payable relating to the purchase of the
Company's additional 33-1/3% interest in the Pittsburgh Mall, and repayment of a
land note of $5,521,000. In addition, financing activities for the nine months
ended October 31, 1997 included the payment of deferred financing costs of
$5,448,000, purchase of treasury stock for $2,896,000 and payment of $2,590,000
of dividends.
SHELF REGISTRATION
On December 3, 1997, the Company filed a shelf registration statement with the
Securities and Exchange Commission for the potential offering on a delayed basis
of up to $250,000,000 in debt or equity securities. This registration is in
addition to the shelf registration filed March 4, 1997 of up to $250,000,000 in
debt or equity securities. The Company has sold approximately $82,000,000
through an equity offering completed on May 20, 1997, $200,000,000 through a
debt offering completed on March 16, 1998 and currently has available on the
second shelf registration statement approximately $218,000,000 of debt, equity
or any combination thereof.
<PAGE>
STOCK SPLIT, CAPITALIZATION AND DIVIDENDS
The Board of Directors approved a two-for-one stock split of both the Company's
Class A and Class B Common Stock, effective July 16, 1998 to shareholders of
record at the close of business on July 1, 1998. The stock split was effected as
a stock dividend.
On June 9, 1998, the Board of Directors voted to increase the 1998 quarterly
dividend, adjusted for the two-for-one stock split, to $.04 per share on both
Class A and Class B, representing a 14.3% annual increase in the previous
quarterly dividend.
The first 1998 quarterly dividend of $.07 per share (on a pre-split basis) on
shares of both Class A and Class B Common Stock was paid on March 16, 1998 to
shareholders of record at the close of business on March 2, 1998. The second
1998 quarterly dividend of $.07 per share (on a pre-split basis) on shares of
both Class A and Class B Common Stock was paid on June 15, 1998 to shareholders
of record at the close of business on June 1, 1998. The third 1998 quarterly
dividend of $.04 per share (post-split) on shares of both Class A and Class B
Common Stock was paid on September 15, 1998 to shareholders of record at the
close of business on September 1, 1998. The fourth 1998 quarterly dividend of
$.04 per share (post-split) on shares of both Class A and Class B Common Stock
will be paid on December 15, 1998 to shareholders of record at the close of
business on December 1, 1998.
The first 1999 quarterly dividend of $.04 per share on shares of both Class A
and Class B will be paid on March 15, 1999 to shareholders of record at the
close of business on March 1, 1999.
On June 9, 1998, the shareholders approved an amendment to the Company's
Articles of Incorporation to increase the Company's capitalization to a)
96,000,000 shares of Class A Common Stock from 48,000,000 shares and b)
36,000,000 shares of Class B Common Stock from 18,000,000 shares. The 5,000,000
Preferred shares remained unchanged.
YEAR 2000
Forest City Enterprises, Inc. has undertaken a program to prepare the Company's
financial and operating computer systems and embedded applications for the Year
2000. All necessary modifications are expected to occur in a timely manner at a
cost which is not expected to be material to the Company's operating results.
During 1997, the Company completed the final phases of the replacement of older
mainframe systems. All major systems were replaced with newly purchased Year
2000 compliant software or software with definitive plans for upgrades to Year
2000 code. This conversion covered the Company's corporate organization and
three business groups, Commercial, Residential and Land. Also in 1997, Lumber
Trading Group successfully converted their internal systems to Year 2000
compliant code. Finally, Forest City/Babin, a division of Lumber Trading Group,
has also completed the upgrade of its software to Year 2000 compliant code. The
Company's policy is to acquire Year 2000 compliant software and to avoid
developing internal software.
With most of the Company's core businesses now using Year 2000 compliant
software code, Forest City's plan is concentrating on testing the compliant
systems and identifying other systems, such as embedded systems, that are not
part of the new software. The specific steps of the Company's plan include:
* Capturing an inventory of all systems including:
* The new Year 2000 compliant software.
* Computer related hardware and peripherals.
* Internal systems that may have been developed utilizing the
compliant code.
* Embedded systems, including the Company's environmental, water,
power, utilities, telecommunications, lighting, elevator, fire
control, parking, security and internal administrative systems.
* Obtaining compliance letters from all vendors in the inventory;
* Contacting the Company's major business partners (suppliers,
contractors, utilities, financial institutions, etc.) to insure that
they have an active Year 2000 compliance program.
* Testing systems for compliance;
* Upgrading or replacing software and operational or embedded systems
as needed.
In September 1996 senior management and the audit committee were alerted of the
Year 2000 issue and have been provided a quarterly report regarding the
Company's Year 2000 compliance plan. Forest City's external auditors have been
reviewing our plan and progress. Each principal business group has formed a Year
2000 compliance committee under senior management direction. Each committee is
coordinated at the company level to share issues and eliminate duplication of
efforts. All employees and business associates have been informed of the issues
and their help has been solicited in identifying systems that may have not been
discovered in the inventory process.
As part of the due diligence in the acquisitions of new properties, the Company
reviews Year 2000 compatibility. Forest City has updated the terms and
conditions of its purchasing function to require goods and services purchased to
be Year 2000 compliant.
The collection of the inventory for both software and embedded systems is
complete. The inventory gathering and testing for embedded systems, particularly
for our shopping centers and offices, included over 70 different systems to be
considered for review. For each property, the Company gathered information
related to environmental (HVAC, energy management, programmable thermostats),
water (cooling, heating, purification, irrigation), power (generation,
uninterrupted power supply power management systems), utilities,
telecommunications, lighting, elevator/elevator, fire control, parking,
security, and internal administrative systems.
Forest City has made excellent progress in notifying vendors and business
partners. This phase of the Year 2000 project, originally planned for completion
in the 3rd quarter 1998, will now be completed in the 4th quarter 1998. The
responses have not always been definitive and reliance, in some cases, must be
made on the MD&A discussions in the quarterly and yearly filings of certain
vendors and partners where appropriate.
The Company is actively testing its systems for Year 2000 compliance. Software
has been acquired to review systems that have been written in Year 2000
compliant code, but may be generating non-compliant dates or logic. Through the
3rd quarter 1998, testing has discovered some Year 2000 issues, which have been
corrected. Specifically, certain data communications equipment was not compliant
and has been replaced. Forest City's project cost accounting software,
originally documented by the vendor as compliant, is not compliant. The Company
escalated the upgrade to the next version and that software is now compliant.
The general ledger system had generated some historical data with dates that
might not be compliant and these were corrected. The upgrading of the general
ledger software is proceeding as planned to be Year 2000 compliant. Finally, a
possible issue with one of our automated software scheduling systems has been
identified and will be corrected with the upgrade of the general ledger system.
The Company expects to complete the testing phase by the end of the 4th quarter
1998 and does not foresee any major difficulties in becoming Year 2000
compliant.
Forest City has tested most of the embedded systems, particularly those related
to the safety of our employees, tenants and customers. Where the Company has not
received Year 2000 certification from the embedded systems vendors, instructions
for resolution have been received. The testing has determined that an energy
management system interface at one of the Company's facilities will need to be
upgraded at a cost to be determined.
At the end of 1997, Forest City completed the migration of its property
management, development accounting, and company-wide general ledger and
reporting systems from the older mainframe environment. The total project costs
including hardware, software, implementation and training were approximately $4
million. The intent of this conversion was to move from the mainframe to newer
technology, support planned company growth and improve reporting systems. As a
by-product, Year 2000 compliant software was installed or software with planned
upgrades to be compliant and the costly process of converting our internally
developed systems into Year 2000 code was avoided.
Through testing, it has been determined that some hardware will need to be
replaced. Regardless of the Year 2000 issue, this hardware would have been
upgraded in a normal replacement cycle. Most all of the required software
upgrades are part of our normal operating expenses and have not generated
additional expense specifically for Year 2000 compliance. Except for the one
energy management system interface that will need upgrading, the Company does
not foresee any major additional costs and believes that the costs incurred will
not have a material impact on operations.
Since Forest City's major hardware, software and embedded systems are or will be
compliant, the Company does not foresee any major risks. The Company has
identified concerns in each area and the contingency plan to respond to each
concern. Related to hardware, the most likely worst case scenario would be if a
specific computer or server would not be compatible. In that case, the Company
would use other hardware, provided by our business continuity/disaster recovery
program, that is compliant and available to regenerate data from our backup
systems.
Related to software, the most likely worst case scenario would be if the
automated software scheduling routines would not properly schedule in the Year
2000 and beyond. Each of these automated scheduling systems has a manual
function, which has been tested, and the Company is confident that the
scheduling software can be reset to perform properly in the Year 2000 and
beyond.
Related to embedded systems, the Company's primary concern is that these
systems, despite testing, would not function properly in the Year 2000. All of
these systems have manual reset functions and Year 2000 date issues can be
corrected. Additionally, Forest City will have appropriate personnel, and
outside contractors if necessary, on site starting the evening of December 31,
1999 and the ensuing weekend to reset the functions if necessary. The Company
does not believe any of the systems related to the safety of the properties'
tenants or customers will be affected.
Similar to other companies, Forest City is highly dependent upon systems in the
public sector, such as utilities, mail, and transportation systems. Failures in
those systems, upon which the Company has no control, could materially affect
operations. The property sites have well defined emergency plans in place, and
these would be activated if necessary. The Year 2000 plan is aimed at
identifying and correcting all issues upon which Forest City has direct control
or indirect control through its vendors and business partners. The Company feels
that the successful completion of its Year 2000 program will minimize the effect
on operations.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This 10Q, 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 expenses 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. AND SUBSIDIARIES
EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES
FOR THE THIRD QUARTER ENDED OCTOBER 31, 1998 AND 1997
(IN THOUSANDS)
<CAPTION>
Commercial Group Residential Group Land Group
-------------------- -------------------- ---------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 93,236 $ 84,411 $ 35,599 $ 31,240 $15,090 $ 4,907
Operating expenses,
including depreciation
and amortization for non-
real estate Groups 47,294 41,271 15,184 15,900 12,739 3,864
Interest expense 23,864 20,196 6,167 7,747 2,633 1,610
Income tax provision
(benefit) (770) 1,756 3,041 940 (76) (2,199)
--------- --------- --------- --------- ---------- ----------
70,388 63,223 24,392 24,587 15,296 3,275
--------- --------- --------- --------- ---------- ----------
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $ 22,848 $ 21,188 $11,207 $ 6,653 $ (206) $ 1,632
========= ========= ========= ========= ========== ==========
Lumber Trading Group Corporate Activities Total
-------------------- -------------------- ---------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- ---------- ----------
Revenues $ 32,781 $ 33,974 $ 196 $ 443 $ 176,902 $ 154,975
Operating expenses,
including depreciation
and amortization for non-
real estate Groups 29,483 28,650 2,605 3,048 107,305 92,733
Interest expense 1,197 1,359 5,413 1,743 39,274 32,655
Income tax provision
(benefit) 933 1,376 (3,198) 767 (70) 2,640
--------- --------- --------- --------- ---------- ----------
31,613 31,385 4,820 5,558 146,509 128,028
--------- --------- --------- --------- ---------- ----------
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $ 1,168 $ 2,589 ($4,624) ($ 5,115) $ 30,393 $ 26,947
========= ========= ========= ========= ========== ==========
Reconciliation to net earnings:
Earnings before depreciation,
amortization and deferred taxes (EBDT) $ 30,393 $ 26,947
Depreciation and amortization - real estate Groups (21,863) (17,525)
Deferred taxes - real estate Groups (3,916) 1,227
Gain on disposition of properties, net of tax 554 0
Extraordinary gain, net of tax 10,618 0
---------- ----------
Net earnings $ 15,786 $ 10,649
========== ==========
</TABLE>
<PAGE>
<TABLE>
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES
FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997
(IN THOUSANDS)
<CAPTION>
Commercial Group Residential Group Land Group
-------------------- -------------------- ---------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $271,593 $235,274 $ 99,860 $104,087 $27,937 $ 12,224
Operating expenses,
including depreciation
and amortization for non-
real estate Groups 135,578 117,310 47,118 46,915 23,205 10,274
Interest expense 68,890 61,019 20,144 21,717 6,927 4,303
Income tax provision
(benefit) 2,573 2,326 4,769 9,039 (830) (2,897)
--------- --------- --------- --------- ---------- ----------
207,041 180,655 72,031 77,671 29,302 11,680
--------- --------- --------- --------- ---------- ----------
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $ 64,552 $ 54,619 $27,829 $26,416 $(1,365) $ 544
========= ========= ========= ========= ========== ==========
Lumber Trading Group Corporate Activities Total
-------------------- -------------------- ---------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- ---------- ----------
Revenues $ 90,659 $ 94,377 $ 1,183 $ 2,116 $ 491,232 $ 448,078
Operating expenses,
including depreciation
and amortization for non-
real estate Groups 82,033 82,172 8,397 5,611 296,331 262,282
Interest expense 4,253 3,949 13,338 5,273 113,552 96,261
Income tax provision
(benefit) 2,089 3,260 (9,463) (2,312) (862) 9,416
--------- --------- --------- --------- ---------- ----------
88,375 89,381 12,272 8,572 409,021 367,959
--------- --------- --------- --------- ---------- ----------
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $ 2,284 $ 4,996 ($11,089) ($ 6,456) $ 82,211 $ 80,119
========= ========= ========= ========= ========== ==========
Reconciliation to net earnings:
Earnings before depreciation,
amortization and deferred taxes (EBDT) $ 82,211 $ 80,119
Depreciation and amortization - real estate Groups (61,432) (51,964)
Deferred taxes - real estate Groups (9,989) (2,467)
Gain (loss) on disposition of properties, net of tax 18,722 (23,356)
Extraordinary gain, net of tax 10,952 14,187
---------- ----------
Net earnings $ 40,464 $ 16,519
========== ==========
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
An action was filed in August 1997 against Forest City Trading Group, Inc. (a
wholly-owned subsidiary of the Company) and 10 of its subsidiaries, all of which
are in the business of trading lumber. The complaint alleged improper
calculation and underpayment of commissions and other related claims. On
September 11, 1998 Plaintiffs filed a Motion for Class Certification. On
December 8, 1998 the court posted an order denying class certification. The
lawsuit is now limited to the original four Plaintiffs which has eliminated any
materiality of the lawsuit.
The Company, through subsidiaries, owns a 14.6% interest in the Seven Hills
housing development, located in Henderson, Nevada, which is owned by the Silver
Canyon Partnership and is being developed in conjunction with a golf course. In
August 1997, a class-action lawsuit was filed by the current homeowners in Seven
Hills against the Silver Canyon Partnership, the golf course developers and
other entities, including the Company. In addition, separate lawsuits were filed
by some of the production homebuilding companies at Seven Hills, against some of
the same parties, not including the Company. Each of these lawsuits sought a
commitment for public play on the golf course, as well as damages and in October
1998, the court granted play rights. Sales efforts are continuing at the Seven
Hills development, and because these events are recent, it is not yet possible
to determine the extent of any impact on the Partnership's financial
performance. The Company believes that any exposure will be limited to the
Silver Canyon Partnership and is not expected to have a material adverse effect
upon the financial condition, results of operations or cash flows of the
Company.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Amended Articles of Incorporation adopted as of October 11, 1983,
incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q
for the quarter ended October 31, 1983 (File No. 1-4372).
3.2 Code of Regulations as amended June 14, 1994, incorporated by
reference to Exhibit 3.2 to the Company's Form 10-K for the fiscal
year ended January 31, 1997 (File No.1-4372).
3.3 Certificate of Amendment by Shareholders to the Articles of
Incorporation of Forest City Enterprises, Inc. dated June 24, 1997,
incorporated by reference to Exhibit 4.14 to the Company's
Registration Statement on Form S-3 (Registration No. 333-41437).
3.4 Certificate of Amendment by Shareholders to the Articles of
Incorporation of Forest City Enterprises, Inc. dated June 16, 1998,
incorporated by reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-8 (Registration No. 333-61925).
4.1 Form of Senior Subordinated Indenture between the Company and National
City Bank, as Trustee thereunder, incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-3 (Registration
No. 333-22695).
4.2 Form of Junior Subordinated Indenture between the Company and National
City Bank, as Trustee thereunder, incorporated by reference to Exhibit
4.2 to the Company's Registration Statement on Form S-3 (Registration
No. 333-22695).
4.3 Form of Senior Subordinated Indenture between the Company and The Bank
of New York, as Trustee thereunder, incorporated by reference to
Exhibit 4.22 to the Company's Registration Statement on Form S-3
(Registration No. 333-41437).
10.1 Credit Agreement, dated as of December 10, 1997, by and among Forest
City Rental Properties Corporation, the banks named therein, KeyBank
National Association, as administrative agent, and National City Bank,
as syndication agent, incorporated by reference to Exhibit 10.38 to
the Company's Form 10-Q for the quarter ended October 31, 1997 (File
No.1-4372).
10.2 Guaranty of Payment of Debt, dated as of December 10, 1997, by and
among Forest City Enterprises, Inc., the banks named therein, KeyBank
National Association, as administrative agent, and National City Bank,
as syndication agent, incorporated by reference to Exhibit 10.39 to
the Company's Form 10-Q for the quarter ended October 31, 1997 (File
No.1-4372).
10.3 First Amendment to Credit Agreement, dated as of January 20, 1998, by
and among Forest City Rental Properties Corporation, the banks named
therein, KeyBank National Association, as administrative agent, and
National City Bank, as syndication agent, incorporated by reference to
Exhibit 4.19 to the Company's Registration Statement on Form S-3 (File
No. 333-41437).
10.4 First Amendment to Guaranty of Payment of Debt, dated as of the banks
namedtherein, KeyBank National Association, as administrative agent,
and National City Bank, as syndication agent, incorporated by
reference to Exhibit 4.20 to the Company's Registration Statement on
Form S-3 (File No. 333-41437).
10.5 Letter Agreement, dated as of February 25, 1998, by and among Forest
City Enterprises, Inc., Forest City Rental Properties Corporation, the
banks named therein, KeyBank National Association, as administrative
agent, and National City Bank, as syndication agent, incorporated by
reference to Exhibit 4.21 to the Company's Registration Statement on
Form S-3 (File No.333-41437).
10.6 Second Amendment to Credit Agreement, dated as of March 6, 1998, by
and among Forest City Rental Properties Corporation, the banks named
therein, KeyBank National Association, as administrative agent, and
National City Bank, as syndication agent, incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K, dated March 6, 1998 (File No.
1-4372).
10.7 Second Amendment to Guaranty of Payment of Debt, dated as of March 6,
1998, by and among Forest City Enterprises, Inc., the banks named
therein, KeyBank National Association, as administrative agent, and
National City Bank, as syndication agent, incorporated by reference to
Exhibit 10.2 to the Company's Form 8-K, dated March 6, 1998 (File No.
1-4372).
10.8 Stock Purchase Agreement, dated May 7, 1997, between Forest City
Enterprises, Inc. and Richard Miller, Aaron Miller and Gabrielle
Miller, incorporated by reference to Exhibit 10.34 to the Company's
Form 10-Q for the quarter ended April 30, 1997 (File No. 1-4372).
10.9 Letter Agreement, dated August 14, 1997, adjusting the interest rate
in the Stock Purchase Agreement, dated May 7, 1997, between Forest
City Enterprises, Inc. and Richard Miller, Aaron Miller and Gabrielle
Miller, incorporated by reference to Exhibit 10.35 to the Company's
Form 10-Q for the quarter ended July 31, 1997 (File No. 1-4372).
10.10 Supplemental Unfunded Deferred Compensation Plan for Executives,
incorporated by reference to Exhibit 10.9 to the Company's Form 10-K
for the year ended January 31, 1997 (File No. 1-4372).
10.11 Deferred Compensation Agreement between Forest City Enterprises, Inc.
and Thomas G. Smith, dated December 27, 1995, incorporated by
reference to Exhibit 10.33 to the Company's Form 10-K for the year
ended January 31, 1997 (File No. 1-4372).
10.12 1994 Stock Option Plan, including forms of Incentive Stock Option
Agreement and Nonqualified Stock Option Agreement, incorporated by
reference to Exhibit 10.10 to the Company's Form 10-K for the year
ended January 31, 1997 (File No. 1-4372).
10.13 Employment Agreement entered into as of September 25, 1989 by the
Company and Albert B. Ratner, incorporated by reference to Exhibit
10.11 to the Company's Form 10-K for the year ended January 31, 1997
(File No.1-4372).
10.14 First Amendment to Employment Agreement entered into as of December
6, 1996 by the Company and Albert B. Ratner, incorporated by reference
to Exhibit 10.12 to the Company's Form 10-K for the year ended January
31, 1997 (File No. 1-4372).
10.15 Employment Agreement entered into on April 6, 1998, effective as of
February 1, 1997, by the Company and Samuel H. Miller, incorporated by
reference to Exhibit 10.15 to the Company's Form 10-K for the year
ended January 31, 1998 (File No. 1-4372).
10.16 Employment Agreement entered into on April 6, 1998, effective as of
February 1, 1997, by the Company and Charles A. Ratner, incorporated
by reference to Exhibit 10.16 to the 10-K for the year ended January
31, 1998 (File No. 1-4372).
10.17 First Amendment to Employment Agreement (dated April 6, 1998) entered
into as of April 24, 1998 by the Company and Charles A. Ratner,
incorporated by reference to Exhibit 10.17 to the Company's Form 10-K
for the year ended January 31, 1998 (File No. 1-4372).
10.18 First Amendment to Employment Agreement (dated December 6, 1996 and
superseded by Employment Agreement dated April 6, 1998) entered into
as of December 6, 1996 by the Company and Charles A. Ratner,
incorporated by reference to Exhibit 10.18 to the Company's Form 10-K
for the year ended January 31, 1997 (File No.1-4372).
10.19 Employment Agreement entered into on April 6, 1998, effective as of
February 1, 1997, by the Company and James A. Ratner,incorporated by
reference to Exhibit 10.19 to the Company's Form 10-K for the year
ended January 31, 1998 (File No. 1-4372).
10.20 Employment Agreement entered into on April 6, 1998, effective as of
February 1, 1997, by the Company and Ronald A. Ratner, incorporated by
reference to Exhibit 10.20 to the Company's Form 10-K for the year
ended January 31, 1998 (File No. 1-4372).
10.21 Employment Agreement entered into as of September 25, 1989 by the
Company and Nathan P. Shafran, incorporated by reference to Exhibit
10.14 to the Company's Form 10-K for the year ended January 31, 1997
(File No. 1-4372).
10.22 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Deborah Ratner Salzberg and Forest City
Enterprises, Inc., insuring the lives of Albert Ratner and Audrey
Ratner, dated June 26, 1996, incorporated by reference to Exhibit
10.19 to the Company's Form 10-K for the year ended January 31, 1997
(File No. 1-4372).
10.23 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Brian J. Ratner and Forest City
Enterprises, Inc., insuring the lives of Albert Ratner and Audrey
Ratner, dated June 26, 1996, incorporated by reference to Exhibit
10.20 to the Company's Form 10-K for the year ended January 31, 1997
(File No. 1-4372).
10.24 Letter Supplement to Split Dollar Insurance Agreement and Assignment
of Life Insurance Policy as Collateral between Brian J. Ratner and
Forest City Enterprises, Inc., insuring the lives of Albert Ratner and
Audrey Ratner, effective June 26, 1996, incorporated by reference to
Exhibit 10.21 to the Company's Form 10-K for the year ended January
31, 1997 (File No.1-4372).
10.25 Letter Supplement to Split Dollar Insurance Agreement and Assignment
of Life Insurance Policy as Collateral between Deborah Ratner Salzberg
and Forest City Enterprises, Inc., insuring the lives of Albert Ratner
and Audrey Ratner, effective June 26, 1996, incorporated by reference
to Exhibit 10.22 to the Company's Form 10-K for the year ended January
31, 1997 (File No.1-4372).
10.26 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Albert B. Ratner and James Ratner,
Trustees under the Charles Ratner 1992 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the lives of Charles Ratner
and Ilana Horowitz (Ratner), dated November 2, 1996, incorporated by
reference to Exhibit 10.23 to the Company's Form 10-K for the year
ended January 31, 1997 (File No. 1-4372).
10.27 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Albert B. Ratner and James Ratner,
Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner,
dated October 24, 1996, incorporated by reference to Exhibit 10.24 to
the Company's Form 10-K for the year ended January 31, 1997 (File No.
1-4372).
10.28 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Albert B. Ratner and James Ratner,
Trustees under the Max Ratner 1988 Grandchildren's Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner,
dated October 24, 1996, incorporated by reference to Exhibit 10.25 to
the Company's Form 10-K for the year ended January 31, 1997 (File No.
1-4372).
10.29 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Albert B. Ratner and James Ratner,
Trustees under the Max Ratner 1988 Grandchildren's Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner,
dated October 24, 1996, incorporated by reference to Exhibit 10.26 to
the Company's Form 10-K for the year ended January 31, 1997 (File No.
1-4372).
10.30 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Albert B. Ratner and James Ratner,
Trustees under the Max Ratner 1988 Grandchildren's Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner,
dated October 24, 1996, incorporated by reference to Exhibit 10.27 to
the Company's Form 10-K for the year ended January 31, 1997 (File No.
1-4372).
10.31 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Albert B. Ratner and James Ratner,
Trustees under the Max Ratner 1988 Grandchildren's Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner,
dated October 24, 1996, incorporated by reference to Exhibit 10.28 to
the Company's Form 10-K for the year ended January 31, 1997 (File No.
1-4372).
10.32 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Albert B. Ratner and James Ratner,
Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner,
dated October 24, 1996, incorporated by reference to Exhibit 10.29 to
the Company's Form 10-K for the year ended January 31, 1997 (File No.
1-4372).
10.33 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Albert B. Ratner and James Ratner,
Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner,
dated October 24, 1996, incorporated by reference to Exhibit 10.30 to
the Company's Form 10-K for the year ended January 31, 1997 (File No.
1-4372).
10.34 Split Dollar Insurance Agreement and Assignment of Life Insurance
Policy as Collateral between Albert B. Ratner and James Ratner,
Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner,
dated October 24, 1996, incorporated by reference to Exhibit 10.31 to
the Company's Form 10-K for the year ended January 31, 1997 (File No.
1-4372).
10.35 Letter Supplement to Split Dollar Insurance Agreement and Assignment
of Life Insurance Policy as Collateral between James Ratner and Albert
Ratner, Trustees under the Charles Ratner 1992 Irrevocable Trust
Agreement and Forest City Enterprises, Inc., insuring the lives of
Charles Ratner and Ilana Ratner, effective November 2, 1996,
incorporated by reference to Exhibit 10.32 to the Company's Form 10-K
for the year ended January 31, 1997 (File No. 1-4372).
10.36 First Amendment to the 1994 Stock Option Plan dated as of June 9,
1998, incorporated by reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-8 (Registration No. 333-61925).
10.37 First Amendment to the forms of Incentive Stock Option Agreement and
Nonqualified Stock Option Agreement, incorporated by reference to
Exhibit 4.8 to the Company's Registration Statement on Form S-8
(Registration No.333-61925).
* 10.38 Amended and Restated form of Stock Option Agreement effective as of
July 16,1998.
* 27 Financial Data Schedules.
* - Filed herewith.
(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 December 15, 1998 /s/ Thomas G. Smith
Thomas G. Smith, Senior Vice President
and Chief Financial Officer
Date December 15, 1998 /s/ Linda M. Kane
Linda M. Kane, Vice President,
Corporate Controller
<PAGE>
Exhibit 10.38
AMENDED AND RESTATED
1996 STOCK OPTION GRANT AGREEMENT
THIS AMENDED AND RESTATED 1996 STOCK OPTION GRANT AGREEMENT (the
"Agreement"), effective as of this 16th day of July, 1998, by and between FOREST
CITY ENTERPRISES, INC., an Ohio corporation of Cleveland, Ohio, hereinafter
referred to as "Company," and __________________, hereinafter referred to as
"Employee."
WITNESSETH:
WHEREAS, the Board of Directors of the Company is of the opinion that the
interests of the Company and its shareholders will be advanced by affording
present and future participants an opportunity to secure stock ownership in the
Company; and
WHEREAS, pursuant to that certain Agreement effective September 9, 1996, as
amended by that certain First Amendment effective February 17, 1997
(collectively called the "Original Agreement"), the Company granted to the
Participant a nonqualified stock option to purchase shares of the presently
authorized $0.33 1/3 par value Class A Common Stock of the Company; and
WHEREAS, the Company now desires to amend and restate the Original
Agreement in its entirety to, inter alia, adjust the number of option shares and
the option price in relation to the two-for-one stock split effective July 16,
1998, to add a form of written notice to exercise the option and to add a
schedule of vesting and exercise rights.
NOW THEREFORE, in consideration of the premises and the mutual covenants,
agreements and promises set forth herein, the parties hereto agree as follows:
1. GRANT OF OPTION. The Company granted to the Employee as of September 9,
1996 (the "Option Date"), as amended as of February 17, 1997, an incentive stock
option ("ISO") to purchase under the 1994 Stock Option Plan (the "Plan") shares
of the presently authorized $0.33 1/3 par value Class A Common Stock of the
Company. Subsequent to the February 17, 1997 three-for-two stock split and the
July 16, 1998 two-for-one stock split, the Employee may purchase an aggregate
______ shares of Class A Common Stock (the "Option") which Option, subject to
all the terms and conditions hereinafter set forth, shall be exercisable by the
Employee over the option period as hereinafter described.
2. OPTION PRICE. In connection with the July 16, 1998 two-for-one stock
split, the option price with respect to the shares of stock covered by this
Agreement (the "Option Shares") shall be $14.375 per share.
3. VESTING AND TIME OF EXERCISE OF OPTION. The Option granted hereunder
shall continue in effect for a period of ten (10) years from the date of the
granting of the same, except as such period may be reduced as hereinafter
provided with respect to termination of employment, retirement or death of the
Employee (the "Term").
The Option shall be exercisable cumulatively over the option period only in
accordance with the following terms, conditions and provisions:
(a) Except as otherwise provided in the Plan or this Agreement, this
Option shall not be exercisable prior to the first business day after
the second anniversary of the Option Date, and upon such day the
Option shall automatically become vested and exercisable with respect
to 25 percent (25%) of the total Option Shares. Thereafter, upon the
first business day after the third anniversary of the Option Date,
Employee may exercise an additional 25 percent (25%) up to 50 percent
(50%) of the aggregate total Option Shares. Upon the first business
day after the fourth anniversary and thereafter until the tenth
anniversary of the Option Date, the Employee may exercise an
additional 50 percent (50%) up to 100 percent (100%) of the aggregate
total Option Shares. Schedule I, attached hereto, lists the number of
Option Shares the Employee may exercise upon the second, third and
fourth through tenth anniversaries of the ten-year Term.
(b) Except as hereinafter provided, no Option may be exercised unless the
Employee is, at the date of such exercise, in the employ of the
Company or a subsidiary of the Company, and shall have been
continuously so employed since the date his Option was granted.
Absence or leave from the Company, or a subsidiary of the Company,
shall not be considered an interruption of employment for the purposes
of this Agreement.
4. METHOD OF EXERCISE. Option Shares may be purchased pursuant to this
Agreement only upon receipt by the Secretary of the Company of notice in writing
from Employee of his intention to purchase, specifying the number of shares as
to which he desires to exercise his Option, and said notice shall be accompanied
by the full amount of the purchase price in the form of: cash, a certified or
official bank check, a money order, a cashier's check, or in shares of stock
currently owned by the Employee and valued at the fair market value of the
shares on the date of exercise. Such form of written notice is attached hereto.
In no event shall an Option be exercisable as to less than twenty-five (25)
shares at any one time [or all of the remaining shares then subject to the
Option, if less than twenty-five (25)].
5. OPTION CONFERS NO RIGHTS AS COMMON STOCK HOLDER. The Employee shall not
be entitled to any privileges of ownership with respect to shares of Class A
Common Stock subject to this Option, unless and until purchased and delivered
upon the exercise of this Option, in whole or in part, and the Employee becomes
a stockholder of record with respect to such delivered shares. The Employee
shall not be considered a stockholder of the Company with respect to any such
shares not so purchased and delivered.
6. TERMINATION OF OPTION. In the event the employment of the Employee with
the Company, or its subsidiary, shall terminate and prevent him from performing
his regular duties for any reason other than disability, death, or retirement
with the consent of the Company, all rights to purchase shares pursuant to his
Option (including rights to purchase shares thereunder which have accrued but
which then remain unexercised) shall forthwith cease and terminate.
In the event of the termination of the Employee's employment because of
Disability (as defined in the Plan), the Option may be exercised by the
Employee, to the extent he was entitled to do so on the date of termination of
his employment, at any time, but not later than the expiration date stated
herein.
If the Employee's employment shall terminate (i) by reason of his
retirement in accordance with the Company's retirement plan, or (ii) with the
consent of the Compensation Committee, his right to exercise shall terminate and
be forfeited on the expiration date specified herein or three (3) months after
the date of such termination, whichever is the shorter period.
If the Employee shall die during his employment or during a period of
Disability, his Option can be exercised by his legal representative at any time
during its original term.
To the extent that the Option of the Employee shall not have been exercised
within the period above provided due to his death, retirement or termination
because of disability, all further rights to purchase shares pursuant to such
Option shall cease and terminate at the expiration of such period.
7. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred by the
Employee other than by Will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Ohio Revised Code or
Title I of the Employee Retirement Income Security Act. During the Employee's
lifetime, this Option is exercisable only by the Employee or his guardian or
legal representative, PROVIDED that if so determined by the Board of Directors,
the Employee may, in a manner designated by the Board of Directors, designate a
beneficiary to exercise the rights of the Employee under this Option upon the
death of the Employee. Absent such a designation, in a case of death, such
Option shall be exercisable by the executor, administrator or legal
representative of the deceased Employee.
8. CHANGE IN STOCK CAPITALIZATION. If after the effective date of the Stock
Option there is any change in the Common Stock of the Company through the
declaration of stock dividends or reclassification, reorganization,
redesignation or recapitalization resulting in stock split-ups or combinations
or exchanges of shares, or through merger, consolidation, liquidation, or other
similar event, the number of shares available for option and the shares subject
to any option, and the price per share, shall be appropriately adjusted as
determined by the Compensation Committee of the Board of Directors to prevent
dilution or enlargement of option rights. The Company shall give the Employee
written notice of any change described in this Section 8.
9. EMPLOYMENT RIGHTS. Nothing contained in the Plan, however, or in any
Option granted pursuant to the Plan, shall confer upon any Employee any right to
be continued in the employment of the Company or any subsidiary of the Company,
or interfere in any way with the right of the Company, or such subsidiary, to
terminate his employment at any time.
10. RIGHTS OF AMENDMENTS TO OPTION PLAN. The Board of Directors may,
without further action by the shareholders, from time to time, amend, alter,
suspend or terminate the Plan, except as otherwise required by applicable
federal securities laws.
The Plan shall be administered by the Board of Directors of the Company
whose interpretation of the terms and provisions thereof shall be final and
conclusive.
11. DELIVERING OF SHARES. The Employee shall give notice of his intent to
exercise an Option, and shares shall be delivered by the Company against full
payment of the Option Price in respect of the shares delivered, subject to the
conditions of Item 4 hereof.
12. CANCELLATION OF OPTION RIGHTS. The Board of Directors may cancel all
unexercised options hereunder if the Employee, after retirement and while having
rights to purchase hereunder, engages in employment or activities which in any
way directly or indirectly, divert or attempt to divert from the Company any
business whatsoever, and which in the opinion of the Board of Directors are
contrary to the best interests of the Company.
13. NOTICES. Any notice to be given hereunder by the Employee shall be sent
by certified or registered mail addressed to the Company for the attention of
the Chairman of the Board, or the President, at its principle office, 1160
Terminal Tower, 50 Public Square, Cleveland, Ohio 44113, and any notice by the
Company to the Employee shall be sent by certified or registered mail addressed
to the Employee at _______________________. Either party may, by notice given to
the other in accordance with the provisions of this Section, change the address
to which subsequent notices shall be sent.
14. AGREEMENT SUBJECT TO THE PLAN. This Agreement is subject to the
provisions of the Plan and shall be interpreted in accordance therewith. The
Employee hereby acknowledges receipt of a copy of the Plan.
15. GOVERNING LAWS. It is intended that (a) this Agreement shall come
within the provisions of the Plan and shall qualify as an Incentive Stock Option
within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as
amended, and shall be construed accordingly, and (b) the Company will treat any
deduction under the Internal Revenue Code of 1986, as amended, in respect of
shares acquired by the Employee pursuant hereto in such manner as to accord to
the Employee the full benefit of Section 422(b) of the Internal Revenue Code of
1986, as amended. This Agreement shall be governed by the laws of the State of
Ohio.
THIS AGREEMENT SUPERSEDES THE ORIGINAL AGREEMENT. Further, this Agreement
may not be modified orally. It is understood that wherever the masculine
pronouns are used in this Agreement, it is intended to include the feminine
pronouns as well as the masculine.
IN WITNESS WHEREOF, we have hereunto set our hands this ____ day of_______,
1998.
FOREST CITY ENTERPRISES, INC.
____________________________________
Charles A. Ratner, President
____________________________________
________________, Employee
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