<PAGE> 1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended July 31, 1999
---------------------
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 September 3, 1999
----- --------------------------------
Class A Common Stock, $.33 1/3 par value 19,331,606 shares
Class B Common Stock, $.33 1/3 par value 10,698,096 shares
This Form 10-Q/A amends Part I, Items 1, 2 and 3. All other contents of this
filing are as of September 14, 1999 and have not been updated.
The second quarter ended July 31, 1999 has been restated to reflect the
revision of the computation of cost of sales of a land development project.
During the third quarter of 1999, Forest City was informed by the project
manager/partner of a Land Group development partnership of cost overruns that
will reduce the anticipated sales margin from the project. These cost overruns
were identified by the project manager during the second quarter, requiring the
restatement of second quarter 1999 earnings. This restatement reduced the
Company's previously reported second quarter net earnings by $1,535,000, or $.05
per share. Readers of the restated financial statements included in this Form
10-Q/A for the second quarter ended July 31, 1999 are encouraged to read the
Form 10-Q for the third quarter ended October 31, 1999 for information
concerning actions taken by management as a result of the cost overruns
requiring the restatement.
On the Company's Consolidated Balance Sheet at July 31, 1999, this restatement
reduced Land Held for Development or Sale by $2,539,000, reduced Deferred Income
Taxes by $1,004,000 and reduced Retained Earnings by $1,535,000.
On the Company's Consolidated Statement of Earnings for the three and six months
ended July 31, 1999, this restatement increased Operating Expenses by
$2,539,000, reduced Deferred Income Tax Expense by $1,004,000, and reduced Net
Earnings by $1,535,000, or $.05 per share.
On the Company's Consolidated Statement of Shareholders' Equity for the six
months ended July 31, 1999, this restatement reduced Net Earnings, Retained
Earnings and Total Shareholders' Equity by $1,535,000.
On the Company's Consolidated Statement of Cash Flows for the six months July
31, 1999, the Reconciliation of Net Earnings to Cash Provided by Operating
Activities changed as follows: Net Earnings reduced by $1,535,000, Deferred
Income Taxes reduced by $1,004,000 and Increase in Land Held for Development or
Sale reduced by $2,539,000. The direct method presentation did not require
restatement.
Part I, Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations, has been updated to reflect the second quarter 1999
restatement and developments for the Company's preparedness for Year 2000.
Part I, Item 3, Quantitative and Qualitative Disclosures About Market Risk, has
been revised to present the correct December 10, 2001 maturity date for the
Revolving Credit Facility. The original filing included a December 10, 2000
maturity date.
Part II, Item 1, Legal Proceedings and Part II, Item 4, Submission of Matters to
a Vote of Security Holders, have not been updated and reflect circumstances in
place as of September 14, 1999. For an update on Legal Proceedings, please refer
to the Company's Form 10-Q for the third quarter of 1999 filed December 15,
1999. Part II, Item 6, Exhibits and Reports on Form 8-K have been updated only
for Exhibit 27, Financial Data Schedules.
<PAGE> 2
FOREST CITY ENTERPRISES, INC.
Index
-----
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Balance Sheets - July 31, 1999
(Unaudited) (Restated) and January 31, 1999 3
Consolidated Statements of Earnings
(Unaudited) - Three and Six Months
Ended July 31, 1999 (Restated) and 1998 4
Consolidated Statements of Shareholders' Equity
(Unaudited - Six Months Ended
July 31, 1999 ) (Restated) and 1998 5
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended July 31, 1999 (Restated)
and 1998 6 - 7
Notes to Consolidated Financial Statements
(Unaudited) 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 27
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 28 - 29
Part II. Other Information
Item 1. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 32 - 40
Signatures 41
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item I. Financial Statements.
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, 1999 January 31, 1999
------------- ----------------
(Unaudited)
(Restated)
ASSETS (dollars in thousands, except per share data)
<S> <C> <C>
Real Estate
Completed rental properties $ 2,710,375 $ 2,625,589
Projects under development 483,050 412,072
Land held for development or sale 59,469 49,837
----------- -----------
3,252,894 3,087,498
Less accumulated depreciation (525,819) (491,293)
----------- -----------
Total Real Estate 2,727,075 2,596,205
Cash and equivalents 53,888 78,629
Notes and accounts receivable, net 274,257 229,714
Inventories 47,210 47,299
Investments in and advances to affiliates 323,235 301,735
Other assets 181,463 183,528
----------- -----------
$ 3,607,128 $ 3,437,110
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage debt, nonrecourse $ 2,272,833 $ 2,173,872
Accounts payable and accrued expenses 422,110 398,499
Notes payable 53,812 43,929
Long-term debt 127,000 105,000
8.5% Senior notes 200,000 200,000
Deferred income taxes 154,455 150,150
Deferred profit 33,097 33,552
----------- -----------
Total Liabilities 3,263,307 3,105,002
----------- -----------
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 shares authorized, 19,907,756
and 19,904,556 shares issued, 19,331,606 and 19,281,606
outstanding, respectively 6,637 6,636
Class B, convertible, 36,000,000 shares authorized, 10,976,196
and 10,979,396 shares issued, 10,698,096 and 10,701,296
outstanding, respectively 3,660 3,661
----------- -----------
10,297 10,297
Additional paid-in capital 113,690 114,270
Retained earnings 226,516 218,967
----------- -----------
350,503 343,534
Less treasury stock, at cost; 576,150 Class A and 278,100 Class B
shares and 622,950 Class A and 278,100 Class B shares, respectively (10,797) (11,426)
Accumulated other comprehensive income 4,115 --
----------- -----------
Total Shareholders' Equity 343,821 332,108
----------- -----------
$ 3,607,128 $ 3,437,110
----------- -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(RESTATED) (RESTATED)
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES $198,951 $165,707 $380,645 $314,330
-------- -------- -------- --------
Operating expenses 126,216 100,127 239,106 187,363
Interest expense 41,099 37,531 80,744 74,278
Depreciation and amortization 23,367 19,804 43,343 41,232
-------- -------- -------- --------
190,682 157,462 363,193 302,873
-------- -------- -------- --------
Gain on disposition of properties -- 18,607 -- 30,054
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES 8,269 26,852 17,452 41,511
-------- -------- -------- --------
INCOME TAX EXPENSE
Current 2,624 1,549 5,214 3,100
Deferred 905 9,467 2,204 14,067
-------- -------- -------- --------
3,529 11,016 7,418 17,167
-------- -------- -------- --------
NET EARNINGS BEFORE EXTRAORDINARY GAIN 4,740 15,836 10,034 24,344
Extraordinary gain, net of tax -- 334 214 334
-------- -------- -------- --------
NET EARNINGS $ 4,740 $ 16,170 $ 10,248 $ 24,678
-------- -------- -------- --------
BASIC AND DILUTED EARNINGS PER COMMON SHARE
Net earnings before extraordinary gain, net of tax $ 0.16 $ 0.53 $ 0.33 $ 0.81
Extraordinary gain, net of tax -- 0.01 0.01 0.01
-------- -------- -------- --------
NET EARNINGS $ 0.16 $ 0.54 $ 0.34 $ 0.82
-------- -------- -------- --------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------------------------
Class A Class B Additional
Comprehensive ------------------------------------------ Paid-In Retained
Income Shares Amount Shares Amount Capital Earnings
--------------- ---------------------------------------------------------------------
(in thousands, except per share data)
SIX MONTHS ENDED JULY 31, 1999 (RESTATED)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 31, 1999 19,905 $6,636 10,979 $3,661 $114,270 $218,967
Comprehensive income
Net earnings $10,248 10,248
Other comprehensive income, net of tax
Unrealized gain on securities 4,115
---------------
Total comprehensive income $14,363
---------------
Dividends: $.09 per share (2,699)
Conversion of Class B shares
to Class A shares 3 1 (3) (1)
Exercise of stock options 2
Restricted stock granted (605)
Amortization of unearned compensation 23
---------------------------------------------------------------------
BALANCES AT JULY 31, 1999 19,908 $6,637 10,976 $3,660 $113,690 $226,516
---------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1998
Balances at January 31, 1998, as restated
for a two-for-one stock split effective
July 16, 1998 19,813 $6,606 11,071 $3,691 $114,270 $168,864
Comprehensive income
Net earnings $24,678 24,678
Other comprehensive income, net of tax
None -
---------------
Total comprehensive income $24,678
---------------
Dividends: $.075 per share (2,248)
Conversion of Class B shares
to Class A shares 40 13 (40) (13)
---------------------------------------------------------------------
BALANCES AT JULY 31, 1998 19,853 $6,619 11,031 $3,678 $114,270 $191,294
---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Treasury Stock Other Total
---------------------- Comprehensive Shareholders'
Shares Amount Income Equity
------------------------------------------------------
(in thousands, except per share data)
SIX MONTHS ENDED JULY 31, 1999 (RESTATED)
<S> <C> <C> <C> <C>
Balances at January 31, 1999 901 $(11,426) $ - $332,108
Comprehensive income
Net earnings 10,248
Other comprehensive income, net of tax
Unrealized gain on securities 4,115 4,115
Total comprehensive income
Dividends: $.09 per share (2,699)
Conversion of Class B shares
to Class A shares -
Exercise of stock options (2) 24 26
Restricted stock granted (45) 605 -
Amortization of unearned compensation 23
------------------------------------------------------
BALANCES AT JULY 31, 1999 854 $(10,797) $4,115 $343,821
------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1998
Balances at January 31, 1998, as restated
for a two-for-one stock split effective
July 16, 1998 905 $ (11,486) $ - $281,945
Comprehensive income
Net earnings 24,678
Other comprehensive income, net of tax
None - -
Total comprehensive income
Dividends: $.075 per share (2,248)
Conversion of Class B shares
to Class A shares -
------------------------------------------------------
BALANCES AT JULY 31, 1998 905 $ (11,486) $ - $304,375
------------------------------------------------------
</TABLE>
5
<PAGE> 6
FOREST CITY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended July 31,
--------------------------
1999 1998
--------- ---------
(Restated)
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Rents and other revenues received $ 317,462 $ 314,099
Proceeds from land sales 18,185 14,076
Land development expenditures (26,793) (19,646)
Operating expenditures (212,475) (195,813)
Interest paid (78,380) (68,265)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,999 44,451
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (171,837) (283,397)
Proceeds from disposition of assets -- 31,622
Investments in and advances to affiliates (21,500) (38,526)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (193,337) (290,301)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior notes -- 200,000
Payments on senior notes issuance costs -- (5,685)
Increase in nonrecourse mortgage and long-term debt 209,975 361,320
Principal payments on nonrecourse mortgage debt on real estate (88,014) (183,284)
Payments on long-term debt -- (114,000)
Increase in notes payable 50,390 6,613
Payments on notes payable (40,507) (33,996)
Change in restricted cash and book overdrafts 23,881 10,382
Payment of deferred financing costs (2,755) (9,551)
Exercise of stock options 26 --
Dividends paid to shareholders (2,399) (2,098)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 150,597 229,701
--------- ---------
NET DECREASE IN CASH AND EQUIVALENTS (24,741) (16,149)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 78,629 54,854
--------- ---------
CASH AND EQUIVALENTS AT END OF PERIOD $ 53,888 $ 38,705
--------- ---------
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Six Months Ended July 31,
--------------------------
1999 1998
--------- ---------
(Restated)
(in thousands)
<S> <C> <C>
RECONCILIATION OF NET EARNINGS TO CASH PROVIDED BY OPERATING ACTIVITIES
NET EARNINGS $ 10,248 $ 24,678
Depreciation 34,562 30,773
Amortization 8,781 10,459
Deferred income taxes 1,748 13,816
Gain on disposition of properties -- (30,054)
Extraordinary gain (353) (552)
Decrease in commercial land held for sale 12,531 2,248
Increase in land held for development or sale (9,632) (10,733)
(Increase) decrease in notes and accounts receivable (44,543) 17,269
Decrease in inventories 89 7,277
Decrease (increase) in other assets 2,807 (3,958)
Increase (decrease) in accounts payable and accrued expenses 2,216 (16,054)
Decrease in deferred profit (455) (718)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 17,999 $ 44,451
-------- --------
SUPPLEMENTAL NON-CASH DISCLOSURE:
The following items represent the effect of non-cash transactions for 1998:
- - Disposition of Summit Park Mall and Trolley Plaza
Operating Activities
Notes and accounts receivable $ -- $ 565
Other assets -- 1,138
Accounts payable and accrued expenses -- 2,760
-------- --------
Total effect on operating activities $ -- $ 4,463
-------- --------
Investing Activities
Dispositions of completed rental properties $ -- $ 42,312
-------- --------
Total effect on investing activities $ -- $ 42,312
-------- --------
Financing Activities
Disposition of nonrecourse mortgage and long-term debt $ -- $(46,775)
-------- --------
Total effect on financing activities $ -- $(46,775)
-------- --------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Restatement of Second Quarter
- -----------------------------
During the third quarter ended October 31, 1999, Forest City was informed by
one of its partners (the project manager) in a Land Group partnership of cost
overruns that will reduce the anticipated sales margins from the project. These
cost overruns were identified by the project manager during the second quarter,
requiring the restatement of second quarter earnings. This restatement
decreases the Company's previously reported second quarter net earnings by
$1,535,000, or $.05 per share, and increases third quarter net earnings by
$1,535,000, or $.05 per share.
A. Extraordinary Item
------------------
The extraordinary gain ($353,000 pre-tax) recorded in the first quarter
of 1999 represents extinguishment of non-recourse debt related to Plaza
at Robinson Town Centre located in Pittsburgh, Pennsylvania.
B. Dividends
---------
The Board of Directors declared regular quarterly cash dividends on
both Class A and Class B common shares as follows:
Date Date of Payment Amount
Declared Record Date Per Share
-------- ------ ---- ---------
March 11, 1999 June 1, 1999 June 15, 1999 $.04
June 8, 1999 September 1, 1999 September 15, 1999 $.05
September 8, 1999 December 1, 1999 December 15, 1999 $.05
Subsequent Event:
December 14, 1999 March 1, 2000 March 15, 2000 $.05
C. Earnings per Share
------------------
The reconciliation of the numerator and denominator of basic earnings
per share (EPS) with diluted EPS is as follows:
<TABLE>
<CAPTION>
Net Earnings Net Earnings
Before Weighted Average Before
Extraordinary Gain Shares Outstanding Extraordinary Gain
(Numerator) (Denominator) (Per Share)
----------- ------------- -----------
Three Months Ended
July 31, 1999:
<S> <C> <C> <C>
Basic EPS $ 4,740,000 30,020,991 $0.16
Dilutive effect of
stock options - 160,845 -
------------ ---------- -----
Diluted EPS $ 4,740,000 30,181,836 $0.16
============ ========== =====
</TABLE>
8
<PAGE> 9
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
C. Earnings per Share (continued)
------------------------------
<TABLE>
<CAPTION>
Net Earnings Net Earnings
Before Weighted Average Before
Extraordinary Gain Shares Outstanding Extraordinary Gain
(Numerator) (Denominator) (Per Share)
----------- ------------- -----------
<S> <C> <C> <C>
Six Months Ended
July 31, 1999:
Basic EPS $ 10,034,000 30,002,618 $0.33
Dilutive effect of
stock options - 169,705 -
------------ ---------- -----
Diluted EPS $ 10,034,000 30,172,323 $0.33
============ ========== =====
</TABLE>
D. Stock-Based Compensation
------------------------
In April 1999, the Compensation Committee of the Board of Directors
granted 372,800 Class A fixed stock options under the 1994 Stock Option
Plan. The options have a term of 10 years, vest over two to four years
and have an exercise price of $22.375.
During the second quarter the Compensation Committee granted 45,000
shares of restricted Class A common stock to certain key employees. The
restricted shares were awarded out of treasury stock with rights to
vote the shares and receive dividends while being subject to
restrictions on disposition and transferability and risk of forfeiture.
The shares become nonforfeitable over a period of four years. In
accordance with APBO 25, the market value on the date of grant of
$1,114,000 was initially recorded as unearned compensation to be
charged to expense over the respective vesting periods. The unearned
compensation is being reported in Additional Paid-In Capital in the
accompanying Consolidated Balance Sheets. At July 31, 1999, unearned
compensation amounted to $1,091,000. The treasury stock had a cost
basis of $605,000.
E. Long-Term Debt
--------------
The termination date for the Company's revolving credit agreement was
extended by one year to December 10, 2001.
F. Prior Year Reclassifications
----------------------------
Certain prior year figures were reclassified to conform to the current
year presentation.
9
<PAGE> 10
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
G. New Accounting Standards
------------------------
Effective February 1, 1999, the Company adopted Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities", which requires
start-up costs and organizational costs be expensed as incurred. The
adoption of this accounting principle had no material effect on
earnings and financial position.
In June 1999, the Financial Accounting Standards Board (FASB) issued
SFAS 137, which defers the effective date of SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities", to all fiscal quarters
of fiscal years beginning after June 15, 2000. Therefore, the Company
plans to implement SFAS 133 for the fiscal quarters in its fiscal year
ending January 31, 2002.
H. Segment Information
-------------------
Principal business groups are determined by the type of customer served
or the product sold. The Commercial Group owns, develops, acquires and
operates shopping centers, office buildings and mixed-use projects,
including hotels. The Residential Group develops or acquires and
operates the Company's multi-family properties. Real Estate Groups are
the combined Commercial and Residential Groups. The Land Group owns and
develops raw land into master planned communities and other residential
developments for resale to users principally in Arizona, Colorado,
Florida, Nevada, New York, North Carolina and Ohio. The Lumber Trading
Group operates the Company's lumber wholesaling business. Corporate
includes interest on corporate borrowings and general administrative
expenses.
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
Company's ability to generate cash to meet its funding requirements.
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 items.
The following tables summarize selected financial data for the
Commercial, Residential, Land and Lumber Trading Groups and Corporate.
10
<PAGE> 11
H. Segment Information (continued).
--------------------------------
All amounts, including footnotes, are presented in thousands.
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
JULY 31, January 31, -----------------------------------------------------
1999 1999 1999 1998 1999 1998
----------------------------- -----------------------------------------------------
IDENTIFIABLE ASSETS EXPENDITURES FOR ADDITIONS TO REAL ESTATE
----------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial Group ............................... $ 2,463,583 $ 2,330,624 $ 73,902 $ 145,513 $ 123,875 $ 229,866
Residential Group .............................. 746,057 722,160 12,153 40,495 29,284 56,390
Land Group ..................................... 111,271 100,501 10,495 12,520 25,959 20,806
Lumber Trading Group............................ 254,633 218,551 1,020 842 1,846 1,333
Corporate ...................................... 31,584 65,274 1,908 140 2,082 255
----------------------------- -----------------------------------------------------
Consolidated ............................... $ 3,607,128 $ 3,437,110 $ 99,478 $ 199,510 $ 183,046 $ 308,650
----------------------------- -----------------------------------------------------
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31, Three Months Ended July 31, Six Months Ended July 31,
------------------------------------------------------ -----------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
------------------------------------------------------ -----------------------------------------------------
REVENUES INTEREST EXPENSE
------------------------------------------------------ -----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Group ...... $ 102,909 $ 92,953 $ 209,935 $ 178,357 $ 23,796 $ 22,185 $ 47,851 $ 45,026
Residential Group ..... 38,623 32,997 72,900 64,261 7,742 6,877 14,227 13,977
Land Group ............ 10,433 7,895 16,069 12,847 1,893 2,194 4,026 4,294
Lumber Trading Group(1) 46,847 31,548 81,473 57,878 1,314 1,740 2,416 3,056
Corporate ............. 139 314 268 987 6,354 4,535 12,224 7,925
------------------------------------------------------ -----------------------------------------------------
Consolidated ...... $ 198,951 $165,707 $ 380,645 $ 314,330 $ 41,099 $ 37,531 $ 80,744 $ 74,278
------------------------------------------------------ -----------------------------------------------------
<CAPTION>
DEPRECIATION AND AMORTIZATION EXPENSE EARNINGS BEFORE INCOME TAXES (EBIT) (2)
------------------------------------------------------ ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Group ...... $ 16,875 $ 14,548 $ 32,045 $ 31,348 $ 9,869 $ 8,405 $ 21,688 $ 13,700
Residential Group ..... 5,692 4,342 9,766 8,221 6,546 5,973 12,646 10,128
Land Group ............ 31 194 56 323 (3,677) (290) (6,052) (1,913)
Lumber Trading Group .. 521 548 1,006 1,070 5,081 1,463 7,898 2,271
Corporate ............. 248 172 470 270 (9,550) (7,306) (18,728) (12,729)
Gain on disposition of
properties -- 18,607 -- 30,054
------------------------------------------------------ ----------------------------------------------------
Consolidated ...... $ 23,367 $ 19,804 $ 43,343 $ 41,232 $ 8,269 $ 26,852 $ 17,452 $ 41,511
------------------------------------------------------ ----------------------------------------------------
<CAPTION>
EARNINGS BEFORE DEPRECIATION, AMORTIZATION
AND DEFERRED TAXES (EBDT)
----------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Group ............................................................. $ 23,550 $ 20,886 $ 48,008 $ 41,704
Residential Group ............................................................ 9,603 9,095 18,467 16,622
Land Group ................................................................... (2,248) (177) (3,708) (1,159)
Lumber Trading Group ......................................................... 3,109 723 4,801 1,116
Corporate .................................................................... (5,035) (3,304) (11,459) (6,465)
----------------------------------------------------
Consolidated ............................................................. 28,979 27,223 56,109 51,818
RECONCILIATION TO NET EARNINGS:
Depreciation and amortization - Real Estate Groups............................ (22,567) (18,890) (41,811) (39,569)
Deferred taxes - Real Estate Groups .......................................... (1,672) (3,745) (4,264) (6,073)
Gain on disposition of properties, net of tax ................................ -- 11,248 -- 18,168
Extraordinary gain, net of tax ............................................... -- 334 214 334
----------------------------------------------------
Net earnings ............................................................. $ 4,740 $ 16,170 $ 10,248 $ 24,678
----------------------------------------------------
</TABLE>
(1) The Company recognizes the gross margin on lumber brokerage sales as
Revenues. Sales invoiced for the three months ended July 31, 1999 and 1998
were approximately $1,105,000 and $804,000, respectively. Sales invoiced for
the six months ended July 31, 1999 and 1998 were approximately $1,974,000
and $1,518,000, respectively.
(2) See Consolidated Statements of Earnings for reconciliation of EBIT to net
earnings.
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<PAGE> 12
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 six months ended
July 31, 1999 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, 1999 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 Company's ability to generate cash to meet its funding
requirements. EBDT is defined and discussed in detail under "Results of
Operations - EBDT."
RESTATEMENT OF SECOND QUARTER - During the third quarter ended October 31,
1999, the Company was informed by the project manager/partner of a Land Group
development partnership of cost overruns that will reduce the anticipated sales
margin from the project. These cost overruns were identified by the project
manager during the second quarter, requiring restatement of second quarter 1999
earnings. This restatement decreases the Company's previously reported second
quarter net earnings by $1,535,000, or $.05 per share.
The Company's EBDT for the second quarter of 1999 grew by 6.5% to $28,979,000,
or $.96 per share of common stock, from $27,223,000, or $.90 per share of common
stock in the second quarter of 1998. EBDT for the six months ended July 31, 1999
grew by 8.3% to $56,109,000, or $1.86 per share of common stock, from
$51,818,000, or $1.72 per share of common stock for the six months ended July
31, 1998. The increase in EBDT is the result of improved comparable property
operations and the opening of new developments and acquisitions made during, or
subsequent to, the second quarter of 1998 offset by increased costs in land
developments.
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<PAGE> 13
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
entitled "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 GROUPS - NOI for the combined Commercial
Group and Residential Group ("Real Estate Groups") for the second quarter of
1999 was $70,520,000 compared to $62,331,000 for the second quarter of 1998, a
13.1% increase. NOI for the Real Estate Groups for the six months ended July 31,
1999 was $138,223,000 compared to $122,400,000 for the six months ended July 31,
1998, a 12.9% increase.
COMMERCIAL GROUP
REVENUES - Revenues for the Commercial Group increased $9,956,000, or 10.7%, to
$102,909,000 in the second quarter of 1999 from $92,953,000 in the second
quarter of 1998. This increase is primarily the result of property openings and
acquisitions. Increased revenues of $3,100,000 were generated by Millennium, an
office building at University Park at MIT in Cambridge, Massachusetts which
opened in February 1999. During 1998, Forest City acquired the
324,000-square-foot Fairmont Plaza office building and adjacent
249,000-square-foot Pavilion retail center in San Jose, California, which
increased revenues over last year by $2,165,000 and $349,000, respectively.
Phase Two of University Park at MIT 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, 96,000 square feet of retail space, a 210-room
hotel and a 960-space parking facility and generated revenues of $2,113,000 over
the second quarter of 1998. Revenues also increased as a result of improved
operations at Liberty Center in Pittsburgh, Pennsylvania ($935,000) and The
Avenue at Tower City Center in Cleveland, Ohio ($815,000). These increases were
partially offset by a decrease in revenues due to the 1998 disposition of the
Company's interest in the 695,000-square-foot Summit Park Mall in Wheatfield,
New York ($967,000). The Commercial Group also recorded additional land sales of
$3,330,000 in the second quarter of 1999 compared to the prior year.
Revenues for the Commercial Group increased $31,578,000, or 17.7%, to
$209,935,000 in the first half of 1999 from $178,357,000 in the first half of
1998. This increase is primarily due to the opening Millennium ($5,330,000) and
Phase Two of University Park at MIT ($4,333,000) and the 1998 acquisitions of
the 292-room Sheraton Hotel at Station Square in Pittsburgh, Pennsylvania
($5,396,000), Fairmont Plaza ($5,143,000) and Pavilion ($1,013,000). Revenues
also increased as a result of improved opertations at Liberty Center
($1,456,000) and The Avenue at Tower City Center ($1,821,000). These increases
were partially offset by a decrease in revenues due to the 1998 disposition
Summit Park Mall
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<PAGE> 14
($2,229,000). The Commercial Group also recorded additional land sales of
$12,727,000 in the first half of 1999 compared to the same period last year.
OPERATING AND INTEREST EXPENSES - Operating expenses for the Commercial Group
increased $4,554,000, or 9.5%, to $52,369,000 in the second quarter of 1999 from
$47,815,000 in the second quarter of 1998. This increase was attributable
primarily to costs associated with the opening of Millennium ($443,000) and
Phase Two at University Park at MIT ($1,348,000) and the 1998 acquisitions of
Fairmont Plaza ($852,000) and Pavilion ($145,000). Operating expenses also
increased at Liberty Center ($466,000) and The Avenue at Tower City ($124,000).
In addition, development expenses increased $1,205,000 and incremental costs
associated with increased land sales were $310,000 compared to the second
quarter of last year. These increases were partially offset by a decrease in
operating expenses due to the 1998 disposition of the Company's interest in
Summit Park Mall ($388,000). Interest expense increased by $1,611,000, or 7.3%,
to $23,796,000 in the second quarter of 1999 from $22,185,000 in the second
quarter of 1998. This increase is primarily attributable to 1998 and 1999
additions to the Commercial Group portfolio.
Operating expenses for the Commercial Group increased $20,067,000, or 22.7%, to
$108,351,000 in the first half of 1999 from $88,284,000 in the first half of
1998. This increase was attributable primarily to costs associated with the 1999
opening of Millennium ($612,000) and 1998 opening of Phase Two at MIT
($2,878,000) and the 1998 acquisitions of Sheraton Hotel at Station Square
($2,958,000), Fairmont Plaza ($1,810,000) and Pavilion ($430,000). Operating
expenses also increased at Liberty Center ($905,000) and The Avenue at Tower
City ($537,000). In addition, development expenses increased $1,455,000 and
incremental costs associated with increased land sales were $7,857,000 compared
to the first half of last year. Interest expense increased by $2,825,000, or
6.3%, to $47,851,000 in the first half of 1999 from $45,026,000 in the first
half of 1998. This increase is primarily attributable to 1998 and 1999 additions
to the Commercial Group portfolio.
RESIDENTIAL GROUP
REVENUES - Revenues for the Residential Group increased by $5,626,000, or 17.1%,
to $38,623,000 in the second quarter of 1999 from $32,997,000 in the second
quarter of 1998. This increase was attributable to the recognition of
development and syndication fees on several projects ($3,321,000) and 1998
acquisitions of the 534-unit Woodlake Apartments in Silver Spring, Maryland
($1,206,000), a 50% interest in the 342-unit Park Plaza in Mayfield Heights,
Ohio ($182,000) and an additional 20% interest in the 450-unit Studio Colony
apartment community in Los Angeles, California ($137,000). In addition, revenues
increased in the first quarter of 1999 from additional units at three apartment
communities in Cleveland, Ohio ($179,000) as well as operational increases at
Colony Woods ($603,000) and Bayside Village ($117,000). These increases were
partially offset by a decrease due to the sale of Trolley Plaza in Detroit,
Michigan ($821,000). The remainder of the increase is primarily due to improved
operations (approximately $700,000).
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<PAGE> 15
Revenues for the Residential Group increased by $8,639,000, or 13.4%, to
$72,900,000 in the first half of 1999 from $64,261,000 in the first half of
1998. This increase was attributable to the recognition of development and
syndication fees on several projects ($4,469,000) and as a result of 1998
acquisitions of the 534-unit Woodlake Apartments in Silver Spring, Maryland
($2,402,000), a 50% interest in the 342-unit Park Plaza in Mayfield Heights,
Ohio ($501,000) and an additional 20% interest in the 450-unit Studio Colony
apartment community in Los Angeles, California ($634,000). In addition, revenues
increased in the first quarter of 1999 from additional units at three apartment
communities in Cleveland, Ohio ($396,000) as well as increases resulting from
lease-up at Colony Woods ($1,241,000) and Bayside Village ($230,000). These
increases were partially offset by a decrease due to the sale of Trolley Plaza
($1,508,000). The remainder of the increase is primarily due to improved
operations (approximately $270,000).
OPERATING AND INTEREST EXPENSES - Operating expenses for the Residential Group
increased by $2,839,000, or 18.0%, to $18,643,000 in the second quarter of 1999
from $15,804,000 in the second quarter of 1998. The increase in operating
expenses was primarily due to additional costs associated with the generation of
increased development fees ($2,519,000) and the 1998 acquisitions of Woodlake
Apartments ($604,000), Park Plaza ($127,000) and a 20% interest in Studio Colony
($92,000). These increases were partially offset by a decrease due to the sale
of Trolley Plaza ($681,000). Interest expense increased by $865,000, or 12.6%,
to $7,742,000 in the second quarter of 1999 from $6,877,000 in the second
quarter of 1998. This increase is primarily the result of 1998 property
acqusitions that was partially offset by the effect of reduced tax exempt
interest rates.
Operating expenses for the Residential Group increased by $4,327,000, or 13.6%,
to $36,261,000 in the first half of 1999 from $31,934,000 in the first half of
1998. The increase in operating expenses was primarily due to additional costs
associated with the generation of increased development fees ($3,989,000) and
the 1998 acquisitions of Woodlake Apartments ($1,145,000), Park Plaza ($269,000)
and a 20% interest in Studio Colony ($172,000). These increases were partially
offset by a decrease due to the sale of Trolley Plaza ($1,129,000). Interest
expense increased by $250,000, or 1.8%, to $14,227,000 in the first half of 1999
from $13,977,000 in the first half of 1998.
LAND GROUP
During the third quarter of 1999, the Land Group was informed by one of its
partners (the project manager) in Seven Hills, a land development partnership
in Henderson, Nevada, of cost overruns that will reduce the anticipated sales
margins from the project. These cost overruns were identified by the project
manager during the second quarter, requiring the restatement of second quarter
earnings. As a result, the Land Group's operating expenses for the three months
and six months ended July 31, 1999 increased $2,539,000.
REVENUES - Revenues for the Land Group increased by $2,538,000 to $10,433,000 in
the second quarter of 1999 from $7,895,000 in the second quarter of 1998. This
increase is primarily the result of increased land sales at The Cascades in
Brooklyn, Ohio, Silver Lakes in Pembroke, Florida and Westwood Lakes in Tampa,
Florida. These increases were partially offset by decreases at The Greens at
Birkdale Village in Huntersville, North Carolina and Richmond Run in Richmond,
Ohio.
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<PAGE> 16
Revenues for the Land Group increased by $3,222,000 to $16,069,000 in the first
half of 1999 from $12,847,000 in the first half of 1998. This increase is
primarily the result of increased land sales at The Cascades in Brooklyn, Ohio,
Silver Lakes in Pembroke, Florida, Westwood Lakes in Tampa, Florida and The
Greens at Birkdale Village in Huntersville, North Carolina. These increases were
partially offset by decreases at River Oaks in Kirtland, Ohio and Richmond Run
in Richmond, Ohio.
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 increased by $6,226,000 for
the second quarter of 1999 to $12,218,000 from $5,992,000 for the second quarter
of 1998. Operating expenses increased by $7,630,000 for the first half of 1999
to $18,096,000 from $10,466,000 for the first half of 1998. The increase in
operating expenses is due to costs associated with increased land sales volume
over the first half of last year, timing of indirect expenses and increased
project costs at Seven Hills. Interest expense decreased by $301,000 in the
second quarter of 1999 to $1,893,000 from $2,194,000 in the second quarter of
1998. Interest expense decreased by $268,000 in the first half of 1999 to
$4,026,000 from $4,294,000 in the first half of 1998.
LUMBER TRADING GROUP
REVENUES - Revenues for the Lumber Trading Group increased by $15,299,000 in the
second quarter of 1999 to $46,847,000 from $31,548,000 in the second quarter of
1998. The increase was primarily due to increased lumber trading margins in the
second quarter of 1999 compared to the first quarter of 1998 ($16,141,000) which
was partially offset by a decrease in volume at Forest City/Babin, a wholesaler
of major appliances, cabinets and hardware to housing contractors ($492,000).
Revenues for the Lumber Trading Group increased by $23,595,000 in the first half
of 1999 to $81,473,000 from $57,878,000 in the first half of 1998. The increase
was primarily due to increased lumber trading margins in the second half of 1999
compared to the first half of 1998 ($23,790,000).
OPERATING AND INTEREST EXPENSES - Operating expenses for the Lumber Trading
Group increased by $12,108,000 in the second quarter of 1999 to $40,452,000 from
$28,344,000 in the second quarter of 1998. Operating expenses for the Lumber
Trading Group increased by $18,609,000 in the first half of 1999 to $71,159,000
from $52,550,000 in the first half of 1998. The increases in the second quarter
and first half of 1999 reflected higher variable expenses due to increased
trading margins compared to 1998. Interest expense decreased by $426,000 in the
second quarter of 1999 to $1,314,000 from $1,740,000 in the second quarter of
1998. Interest expense decreased by $640,000 in the first half of 1999 to
$2,416,000 from $3,056,000 in the first half of 1998.
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<PAGE> 17
CORPORATE ACTIVITIES
REVENUES - Corporate Activities' revenues decreased $175,000 in the second
quarter of 1999 to $139,000 from $314,000 in the second quarter of 1998.
Corporate Activities' revenues decreased $719,000 in the first half of 1999 to
$268,000 from $987,000 in the first half of 1998. Corporate Activities' revenues
consist primarily of interest income from 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 for Corporate Activities
increased $248,000 in the second quarter of 1999 to $3,334,000 from $3,086,000
in the second quarter of 1998. Operating expenses for Corporate Activities
increased $979,000 in the first half of 1999 to $6,771,000 from $5,792,000 in
the first half of 1998. These increases represent additional general corporate
expenses including amortization of costs associated with the 1998 public
offering of Senior Notes (see "Financial Condition and Liquidity"). Interest
expense increased $1,819,000 in the second quarter of 1999 to $6,354,000 from
$4,535,000 in the second quarter of 1998. Interest expense increased $4,299,000
in the first half of 1999 to $12,224,000 from $7,925,000 in the first half of
1998. Corporate Activities' interest expense consists primarily of interest
expense on the 8.50% Senior Notes (issued on March 16, 1998) and the Revolving
Credit Agreement that has not been allocated to a principal business group (see
"Financial Condition and Liquidity").
OTHER TRANSACTIONS
GAIN OR LOSS ON DISPOSITION OF PROPERTIES - No properties were disposed of
during the first half of 1999. Gain or loss on disposition of properties for the
second quarter of 1998 totaled a gain of $11,248,000. Gain (loss) on disposition
of properties for the first half of 1998 totaled a gain of $18,168,000.
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 and recognized pre-tax gains on disposition of $10,809,000 and
$638,000, respectively.
EXTRAORDINARY GAIN - Extraordinary gain, net of tax, totaled $214,000 for the
first half of 1999, all of which occurred in the first quarter representing
extinguishment of $353,000 of non-recourse debt related to Plaza at Robinson
Town Centre in Pittsburgh, Pennsylvania. Extraordinary gain, net of tax, totaled
$334,000 for the first half of 1998, all of which occurred in the second quarter
representing extinguishment of $552,000 of non-recourse debt related to Trolley
Plaza which was disposed of during the second quarter.
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<PAGE> 18
INCOME TAXES - Income tax expense for the second quarter of 1999 and 1998
totaled $3,529,000 and $11,016,000, respectively. Income tax expense for the
first half of 1999 and 1998 totaled $7,418,000 and $17,167,000, respectively.
The 1999 amounts for second quarter and first half include a reduction in income
taxes of $1,004,000 as a result of the Land Group restatement (see "General -
Restatement of Second Quarter"). At January 31, 1999, the Company had a net
operating loss carryforward ("NOL") for tax purposes of $76,433,000 (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, 2006 through January
31, 2011 and general business credits carryovers of $2,432,000 which will expire
in the years ending January 31, 2004 through January 31, 2013. 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 second quarter of 1999, the Company's net earnings were
$4,740,000, or $.16 per share of common stock, compared to $16,170,000, or $.54
per share of common stock in the second quarter of 1998. In the first half of
1999, the Company's net earnings were $10,248,000, or $.34 per share of common
stock, compared to $24,678,000, or $.82 per share of common stock in the first
half of 1998. The 1999 amounts for second quarter and first half include a
reduction in net earnings of $1,535,000, or $.05 per share, as a result of the
Land Group restatement (see "General - Restatement of Second Quarter").
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 items. 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. 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 land or land held by the Land Group as nonrecurring items.
Extraordinary items 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
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 development and acquisitions of real
estate projects, capital expenditures for its existing portfolio and payments on
nonrecourse mortgage debt on real estate.
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REVOLVING CREDIT FACILITY - At July 31, 1999, the Company had $117,000,000
outstanding under its $225,000,000 revolving credit facility. The Company's
revolving credit facility matures December 10, 2001, unless extended, and allows
for up to a combined amount of $30,000,000 in outstanding letters of credit or
surety bonds. Outstanding letters of credit reduce the credit available to the
Company, and $13,595,000 were outstanding as of July 31, 1999. On each
anniversary date, the maturity date may be extended by one year by unanimous
consent of the nine participating banks. At the maturity date, the outstanding
revolving credit loans, if any, may be converted by the Company to a four-year
term loan. The revolving credit available is reduced quarterly by $2,500,000
beginning April 1, 1998. At July 31, 1999, the revolving credit line was
$210,000,000. The revolving credit facility provides, among other things, for:
1) interest rates of 2% over LIBOR or 1/4% over the prime rate; 2) maintenance
of debt service coverage ratios and specified levels of net worth and cash flow
(as defined); and 3) restriction on dividend payments.
The Company has entered into a one-year 5.125% LIBOR option expiring January 3,
2000 on $75,000,000 of the revolving credit line. To further protect borrowings
under this facility from variable interest rates, the Company has purchased a
6.50% LIBOR interest rate cap for 2000 and an average 6.75% LIBOR interest rate
cap for 2001 at notional amounts of $42,387,000 and $37,423,000, respectively.
SENIOR NOTES - On March 16, 1998, the Company issued $200,000,000 in 8.50%
senior notes due March 15, 2008 in a public offering. Net proceeds of
$195,500,000 were contributed to the capital of Forest City Rental Properties
Corporation, a wholly-owned subsidiary, and were then used to repay $114,000,000
outstanding on its term loan and revolving credit loans. The remaining proceeds
were used to finance acquisition and development of real estate projects.
Accrued interest on the senior notes is payable semiannually on March 15 and
September 15. 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 borrowings under the
revolving credit facility. The indenture contains covenants providing, among
other things, limitations on incurring additional debt and payment of dividends.
LUMBER TRADING GROUP - The Lumber Trading Group is financed separately from the
rest of the Company's principal business groups. The financing obligations of
Lumber Trading Group are without recourse to the Company. Accordingly, the
liquidity of Lumber Trading Group is discussed separately below under "Lumber
Trading Group Liquidity."
MORTGAGE REFINANCINGS
During the six months ended July 31, 1999, the Company completed $265,000,000 in
financings, including $166,000,000 in refinancings and $99,000,000 for new
development projects. The Company continues to seek long-term fixed rate debt
for those project loans that mature within the next 12 months. In addition, the
Company is actively seeking permanent financing for those projects that will
begin operations within the next 12 months, generally pursuing long-term fixed
rate loans.
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INTEREST RATE EXPOSURE
At July 31, 1999, the composition of nonrecourse mortgage debt is as follows:
Amount Rate(1)
-----------------------------
(in thousands)
Fixed .................... $1,654,234 7.51%
Variable -
Taxable (2) .......... 394,943 7.01%
Tax-Exempt ........... 153,773 4.03%
UDAG and other
subsidized loans (fixed) 69,883 2.57%
----------
$2,272,833 7.04%
----------
(1) The weighted average interest rates shown above include both the base index
and the lender margin.
(2) The taxable debt of $394,943 is hedged with $394,503 as described below.
Interest rate caps and swaps are purchased to reduce short-term variable
interest rate risk. The Company has purchased 6.50% LIBOR interest rate cap
protection for its variable-rate debt portfolio in the amount of $394,503,000
and $457,613,000 for the years ending January 31, 2000 and 2001, respectively.
In addition, LIBOR interest rate caps averaging 6.75% in the amount of
$362,577,000 and $79,929,000 have been purchased for the year ending January 31,
2002 and the three year period ending September 1, 2003, respectively. In order
to reduce the risk associated with increases in interest rates, the Company has
purchased 10-year Treasury Options at a strike rate of 6.00% in the amounts of
$86,100,000, $41,252,000 and $38,677,000 with the exercise dates of February
2000, April 2001 and August 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 3.60% and has never exceeded 7.90%.
At July 31, 1999, 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 2,500,000. 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 $1,500,000.
LUMBER TRADING GROUP LIQUIDITY
The Lumber Trading Group is separately financed with two revolving lines of
credit and a nonrecourse accounts receivable sale program. These credit
facilities are without recourse to the Company.
During the second quarter of 1999, Lumber Trading Group's lines of credit were
increased by $20,000,000. At July 31, 1999, Lumber Trading Group's two lines of
credit totaled a $87,000,000 commitment expiring June 30, 2000. These credit
lines are secured by the assets
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of the Lumber Trading Group and are used by the Trading Group to finance its
working capital needs. At July 31, 1999, $21,882,000 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 $102,000,000 (as increased by
$10,200,000 during the second quarter of 1999) and uses this program to finance
its working capital needs. At July 31, 1999, $67,000,000 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 totaled $17,999,000 and $44,451,000
for the first half of 1999 and 1998, respectively. The decrease was a result of
a $16,662,000 net increase in operating expenditures (primarily a result of a
$49,204,000 increase in operating expenses offset by an increase in notes
payable and accounts payable and accrued expenses of $33,494,000 most of which
occurred at Lumber Trading Group), an increase of $7,147,000 in land development
expenditures and an increase of $10,115,000 in interest paid. These decreases
were partially offset by an increase of $3,363,000 in rents and other revenues
(primarily a result of increased revenues of $66,315,000 which was partially
offset by an increase in notes and accounts receivable of $61,812,000 most of
which occurred at Lumber Trading Group) and an increase of $4,109,000 in
proceeds from land sales.
Net cash used in investing activities totaled $193,337,000 and $290,301,000 for
the first half of 1999 and 1998, respectively. Capital expenditures, other than
development and acquisition activities, totaled $17,283,000 and $24,537,000
(including both recurring and investment capital expenditures) in the first half
of 1999 and 1998, respectively and were financed with cash on hand at the
beginning of the year and cash provided from operating activities. The Company
invested $154,554,000 and $256,612,000 in acquisition and development of real
estate projects in the first half of 1999 and 1998, respectively. These
expenditures were financed with approximately $99,000,000 and $170,180,000 in
new mortgage indebtedness incurred in the first half of 1999 and 1998,
respectively, borrowings under the revolving credit facility in 1999 and 1998,
proceeds from the refinancing of existing properties in 1999 and proceeds from
the issuance of senior notes in 1998. The Company invested $21,500,000 and
$38,526,000 in investments in and advances to affiliates in the first half of
1999 and 1998, respectively. The first half of 1999 investments primarily
related to New York City area urban development ($7,605,000) and the following
syndicated residential projects: The Grand, a 546-unit luxury high-rise
apartment building in North Bethesda, Maryland that opened in February 1999
($8,864,000), Philip Morris at Tobacco Row, a 175-unit apartment renovation
project currently under construction in Richmond, Virginia ($4,808,000) and 101
San Fernando, a 316-unit apartment complex currently under construction in San
Jose, California ($1,573,000). The first half of 1998 investments were primarily
related to 101 San Fernando ($19,312,000), The Enclave ($9,397,000) and The
Grand ($5,246,000). In addition, in the first half of 1998, $31,622,000 was
collected in proceeds from the disposition of the Company's interest in San
Vicente ($27,244,000) and Courtyard ($4,378,000).
21
<PAGE> 22
Net cash provided by financing activities totaled $150,597,000 and $229,701,000
in the first half of 1999 and 1998, respectively. The Company's refinancing of
mortgage indebtedness is discussed above in "Mortgage 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 first
half of 1999 also reflected an increase of $4,607,000 in net borrowings under
Lumber Trading Group's lines of credit, an increase of $5,276,000 in notes
payable, an change in restricted cash and book overdrafts of $23,881,000 and
payment of $2,399,000 of dividends. During the first half of 1998, the Company
received net proceeds from the issuance of senior notes in March 1998 of
$194,315,000 which were initially used to repay $114,000,000 of long-term debt.
In addition, net cash provided by financing activities reflected the release of
$10,382,000 in restricted cash, a net decrease of $27,383,000 in notes payable
(primarily from repayment of $19,024,000 of borrowings under Lumber Trading
Group's lines of credit and $3,818,000 repayment of a note payable by the Land
Group), payment of deferred financing costs of $9,551,000 and payment of
$2,098,000 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 was 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 a common equity offering completed on May 20, 1997 and $200,000,000
through a debt offering completed on March 16, 1998. The Company currently has
available approximately $218,000,000 on the second shelf registration statement
of debt, equity or any combination thereof.
INCREASED DIVIDEND
The first 1999 quarterly dividend of $.04 per share on shares of both Class A
and Class B Common Stock was paid on June 15, 1999 to shareholders of record at
the close of business on June 1, 1999. The second, third and fourth 1999
quarterly dividends of $.05 per share on shares of both Class A and Class B
Common Stock represents a 25% increase over the first quarter dividend. The
second and third quarterly dividends were paid September 15, 1999 and December
15, 1999, respectively, to shareholders of record as of the close of business on
September 1, 1999 and December 1, 1999, respectively. The fourth quarterly
dividend was declared on December 14, 1999 and will be paid March 15, 2000 to
shareholders of record as of the close of business on March 1, 2000.
NEW ACCOUNTING STANDARDS
In the first quarter of 1999, the Company adopted SOP 98-5, "Reporting on the
Costs of Start-up Activities." This statement requires that start-up costs and
organization costs be expensed as incurred. The adoption of this accounting
principle had no material effect on earnings or financial position.
22
<PAGE> 23
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS 137,
which defers the effective date of SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", to all fiscal quarters of fiscal years
beginning after June 15, 2000. Therefore, the Company plans to implement SFAS
133 for the fiscal quarters in its fiscal year ending January 31, 2002.
YEAR 2000
The Company has completed its program to prepare its financial and operating
computer systems and embedded applications for the Year 2000.
For business reasons unrelated to the Year 2000, the Company's computer systems
have been moved from a mainframe environment to a distributed environment. Major
processing systems were replaced with Year 2000-compliant software. The cost of
this project was approximately $4 million.
The Company has completed updates relating to its general ledger, financial
reporting, human resources and Commercial Group and Residential Group property
management systems.
The Company has identified concerns related to hardware, software and embedded
systems and developed a contingency plan to respond to each concern. For
hardware, the most likely worst case scenario would be if a specific computer or
server would not be compliant. In that case, the Company would use other
compliant hardware that is located on-site and available to regenerate data from
our backup systems.
For 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.
For 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 allowing Year 2000 date issues to be
corrected. Additionally, the Company 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, government agencies 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 recent successful completion of its Year 2000 program
will minimize the effect the Year 2000 issue will have on operations.
23
<PAGE> 24
INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS
This Form 10-Q, together with other statements and information publicly
disseminated by the Company, contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements 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 nationwide 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.
24
<PAGE> 25
FOREST CITY ENTERPRISES, INC.
EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES
FOR THE SECOND QUARTER ENDED JULY 31, 1999 AND 1998
(in thousands)
(Restated)
<TABLE>
<CAPTION>
Commercial Group Residential Group Land Group
----------------------- ----------------------- ------------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 102,909 $ 92,953 $ 38,623 $ 32,997 $ 10,433 $ 7,895
Operating expenses,
including depreciation
and amortization for non-
real estate groups 52,369 47,815 18,643 15,804 12,218 5,992
Interest Expense 23,796 22,185 7,742 6,877 1,893 2,194
Income Tax Provision 3,194 2,067 2,635 1,221 (1,430) (114)
--------- --------- --------- --------- --------- ---------
79,359 72,067 29,020 23,902 12,681 8,072
--------- --------- --------- --------- --------- ---------
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $ 23,550 $ 20,886 $ 9,603 $ 9,095 ($2,248) ($177)
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Lumber Trading Group Corporate Activities Total
----------------------- ------------------------ -----------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 46,847 $ 31,548 $ 139 $ 314 $ 198,951 $ 165,707
Operating expenses,
including depreciation
and amortization for non-
real estate groups 40,452 28,344 3,334 3,086 127,016 101,041
Interest Expense 1,314 1,740 6,354 4,535 41,099 37,531
Income Tax Provision 1,972 741 (4,514) (4,003) 1,857 (88)
--------- --------- --------- --------- --------- ---------
43,738 30,825 5,174 3,618 169,972 138,484
--------- --------- --------- --------- --------- ---------
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $ 3,109 $ 723 ($5,035) ($3,304) $ 28,979 $ 27,223
========= ========= ========= ========= ========= =========
Reconciliation to net earnings:
Earnings before depreciation,
amortization and deferred taxes (EBDT) $ 28,979 $ 27,223
Depreciation and amortization - real estate groups (22,567) (18,890)
Deferred taxes - real estate groups (1,672) (3,745)
Gain on disposition of properties, net of tax 0 11,248
Extraordinary gain, net of tax 0 334
--------- --------
Net earnings $ 4,740 $ 16,170
====-==== ========
</TABLE>
25
<PAGE> 26
FOREST CITY ENTERPRISES, INC.
EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES
FOR THE SIX MONTHS ENDED JULY 31, 1999 AND 1998
(IN THOUSANDS)
(RESTATED)
<TABLE>
<CAPTION>
Commercial Group Residential Group Land Group
----------------------- ----------------------- ------------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 209,935 $ 178,357 $ 72,900 $ 64,261 $ 16,069 $ 12,847
Operating expenses,
including depreciation
and amortization for non-
real estate groups 108,351 88,284 36,261 31,934 18,096 10,466
Interest expense 47,851 45,026 14,227 13,977 4,026 4,294
Income tax provision 5,725 3,343 3,945 1,728 (2,345) (754)
--------- --------- --------- --------- --------- ---------
161,927 136,653 54,433 47,639 19,777 14,006
--------- --------- --------- --------- --------- ---------
Earnings before
depreciation, amortization
and deferred taxes
(EBDT) $ 48,008 $ 41,704 $ 18,467 $ 16,622 ($3,708) ($1,159)
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Lumber Trading Group Corporate Activities Total
----------------------- ------------------------ -----------------------
1999 1998 1999 1998 1999 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 81,473 $ 57,878 $ 268 $ 987 $ 380,645 $ 314,330
Operating expenses,
including depreciation
and amortization for non-
real estate groups 71,159 52,550 6,771 5,792 240,638 189,026
Interest expense 2,416 3,056 12,224 7,925 80,744 74,278
Income tax provision 3,097 1,156 (7,268) (6,265) 3,154 (792)
--------- --------- --------- --------- --------- ---------
76,672 56,762 11,727 7,452 324,536 262,512
--------- --------- --------- --------- --------- ---------
Earnings Before
depreciation, amortization
and deferred taxes
(EBDT) $ 4,801 $ 1,116 ($ 11,459) ($6,465) $ 56,109 $ 51,818
========= ========= ========= ========= ========= =========
Reconciliation to net earnings:
Earnings before depreciation,
amortization and deferred taxes (EBDT) $ 56,109 $ 51,818
Depreciation and amortization - real estate groups (41,811) (39,569)
Deferred taxes - real estate groups (4,264) (6,073)
Gain (loss) on disposition of properties, net of tax 0 18,168
Extraordinary gain, net of tax 214 334
--------- ---------
Net earnings $ 10,248 $ 24,678
========= =========
</TABLE>
26
<PAGE> 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
The Company's primary market risk exposure is interest rate risk. At July 31,
1999, the Company had $675,700,000 of variable-rate debt outstanding.
Additionally, the Company has interest rate risk associated with fixed-rate debt
at maturity.
To reduce the effects of significant increases in interest rates on the amounts
payable with respect to the Company's variable-rate debt, the Company makes use
of interest rate exchange agreements, including interest rate caps and swaps,
primarily to manage interest rate risk associated with variable-rate debt. The
Company had purchased London Interbank Offered Rate ("LIBOR") interest rate caps
as follows.
Cap
Strike Principal
Rate Period Outstanding
---- ------------------- -----------
6.50% 02/01/99 - 01/31/00 $394,503,000
6.50% 02/01/00 - 01/31/01 457,613,000
6.50% 02/01/01 - 07/31/01 362,577,000
7.00% 08/01/01 - 02/01/02 362,577,000
6.75% 09/01/00 - 09/01/03 79,929,000
The Company intends to convert a significant portion of its committed
variable-rate debt to fixed-rate debt. In addition, to reduce the effect of
upward fluctuations in future interest rates, the Company has purchased 10-year
Treasury Options at a strike rate of 6.00% in the amounts of $86,100,000,
$41,252,000 and $38,677,000, with the exercise dates of February 2000, April
2001 and August 2001, respectively.
At July 31, 1999, the Company had $127,000,000 outstanding under its
$225,000,000 revolving credit facility, which bears interest at LIBOR plus 2%.
The Company has entered into a one-year 5.125% LIBOR option expiring January 3,
2000 on $75,000,000 for its revolving credit line. Additionally, the Company has
purchased a 6.50% LIBOR interest rate cap for 2000 and an average 6.75% LIBOR
interest rate cap for 2001 at notional amounts of $42,387,000 and $37,423,000,
respectively.
At July 31, 1999, the Company estimates that a 100 basis point decrease in
market interest rates would have changed the fair value of fixed-rate debt at
that date of $1,833,316,000 to a liability of approximately $1,941,383,000. The
sensitivity to changes in interest rates of the Company's fixed-rate debt was
determined with a valuation model based upon changes that measure the net
present value of such obligation which arise from the hypothetical estimate as
discussed above. The Company intends to monitor and manage interest costs on its
variable debt portfolio and may enter into swap positions based on market
fluctuations.
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates.
27
<PAGE> 28
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
---------------------------------------------------------------------------
(Restated) (Restated)
Long-Term Debt 1999 2000 2001 2002
- ------------------------------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FIXED:
Fixed rate debt (1) 140,808,357 95,188,201 80,954,627 61,686,746
Weighted average interest rate 7.40% 8.08% 8.25% 7.66%
UDAG (1) 25,256 1,049,021 10,481,224 541,722
Weighted average interest rate 6.92% 0.35% 7.99% 7.73%
Senior notes -- -- -- --
Weighted average interest rate
--------------- -------------- -------------- --------------
Total Fixed Rate Debt 140,833,613 96,237,222 91,435,851 62,228,468
--------------- -------------- -------------- --------------
VARIABLE:
Variable rate debt (1) (2) 75,267,651 126,848,431 22,891,971 99,755,580
Weighted average interest rate
Tax Exempt (1) -- 55,980,001 32,684,748 --
Weighted average interest rate
Revolving Credit Facility -- -- 127,000,000 --
Weighted average interest rate
--------------- -------------- -------------- --------------
Total Variable Rate Debt 75,267,651 182,828,432 182,576,719 99,755,580
--------------- -------------- -------------- --------------
TOTAL LONG-TERM DEBT $ 216,101,264 $ 279,065,654 $ 274,012,570 $ 161,984,048
=============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
----------------------------------
Total Fair Market
Outstanding Value
Long-Term Debt 2003 Thereafter 7/31/99 7/31/99
- ------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
FIXED:
Fixed rate debt (1) 85,688,438 1,189,907,777 1,654,234,146 1,596,583,670
Weighted average interest rate 8.20% 7.37% 7.51%
UDAG (1) 163,085 57,623,142 69,883,450 42,981,870
Weighted average interest rate 2.78% 1.57% 2.57%
Senior notes -- 200,000,000 200,000,000 193,750,000
Weighted average interest rate 8.50% 8.50%
-------------- -------------- -------------- --------------
Total Fixed Rate Debt 85,851,523 1,447,530,919 1,924,117,596 1,833,315,540
-------------- -------------- -------------- --------------
VARIABLE:
Variable rate debt (1) (2) 50,150,167 20,028,711 394,942,511 394,942,511
Weighted average interest rate 7.01%
Tax Exempt (1) -- 65,108,000 153,772,749 153,772,749
Weighted average interest rate 4.03%
Revolving Credit Facility -- -- 127,000,000 127,000,000
Weighted average interest rate 7.18%
-------------- -------------- -------------- --------------
Total Variable Rate Debt 50,150,167 85,136,711 675,715,260 675,715,260
-------------- -------------- -------------- --------------
TOTAL LONG-TERM DEBT $ 136,001,690 $1,532,667,630 $2,599,832,856 $2,509,030,800
============== ============== ============== ==============
</TABLE>
(1) Represents nonrecourse debt.
(2) As of July 31, 1999, $141,393,000 of variable-rate debt has been hedged via
$133,479,000 of 1-year LIBOR contracts and $7,914,000 of LIBOR-based swaps
that have a combined remaining average life of 0.38 years.
28
<PAGE> 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
This Item l. Legal Proceedings reflects circumstances in place as of September
14, 1999 and has not been updated. Please refer to the Company's third quarter
Form 10-Q filed December 15, 1999.
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. On April
5, 1999 the original four Plaintiffs filed a notice of dismissal of this lawsuit
without prejudice in state court. On April 16, 1999, the case was re-filed in
Federal court against Forest City Trading Group, Inc. and four of its
subsidiaries. The Defendants will vigorously defend the allegations. This
litigation is not expected to have a material adverse effect upon the financial
condition, results of operations or cash flows of the Company.
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 ("Silver Canyon") 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. In February 1999
the owner of the golf course filed a cross-claim against the Silver Canyon
Partnership and the Company. Silver Canyon has since reached an agreement in
principle with the Plaintiff homeowners and with certain of Silver Canyon's
insurance carriers to settle the claims of the Plaintiff homeowners. A hearing
on damages for claims of the production builders and the owner of the golf
course will be held at a future date to be determined. 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.
29
<PAGE> 30
Item 4. Submission of Matters to a Vote of Security-Holders.
- ------------------------------------------------------------
On June 8, 1999, the Company held its annual meeting of shareholders. At that
meeting, the shareholders elected three directors by holders of Class A Common
Stock and nine directors by holders of Class B Common Stock, each to hold office
until the next shareholder meeting and until his or her successor is elected;
and elected PricewaterhouseCoopers LLP as independent auditors for the Company
for the fiscal year ending January 31, 2000.
It was reported that 17,305,468 shares of Class A Common Stock representing
17,305,468 votes and 10,382,844 shares of Class B Common Stock representing
103,828,440 votes were represented in person and by proxy and that these shares
represented a quorum. The votes cast for the aforementioned matters were as
follows:
<TABLE>
<CAPTION>
Abstentions
and/or
Broker
For Against Non-votes
---------- ------- -----------
<S> <C> <C> <C>
(1) Election of the following nominated
directors by Class A shareholders 17,190,522 -- 114,946
Michael P. Esposito, Jr
Joan K. Shafran
Louis Stokes
(2) Election of the following nominated
directors by Class B shareholders 103,759,000 -- 69,440
Albert B. Ratner
Samuel H. Miller
Charles A. Ratner
James A. Ratner
Jerry V. Jarrett
Ronald A. Ratner
Scott S. Cowen
Brian J. Ratner
Deborah Ratner Salzberg
(3) Election of independent auditors
PricewaterhouseCoopers LLP 121,059,769 29,300 44,839
</TABLE>
30
<PAGE> 31
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits
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).
31
<PAGE> 32
Exhibit
Number Description of Document
------ -----------------------
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 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 named therein, 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).
32
<PAGE> 33
Exhibit
Number Description of Document
------ -----------------------
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).
33
<PAGE> 34
Exhibit
Number Description of Document
------ -----------------------
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 Form 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).
34
<PAGE> 35
Exhibit
Number Description of Document
------ -----------------------
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).
35
<PAGE> 36
Exhibit
Number Description of Document
------ -----------------------
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).
36
<PAGE> 37
Exhibit
Number Description of Document
------ -----------------------
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, incorporated by reference to Exhibit 10.38
to the Company's Form 10-Q for the quarter ended October 31,
1998 (File No. 1-4372).
37
<PAGE> 38
Exhibit
Number Description of Document
------ -----------------------
10.39 - Third Amendment to Credit Agreement, dated as of January 29,
1999, 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 incorporation by reference to Exhibit 20.1 to the
Company's Form 8-K, dated January 29, 1999 (File No. 1-4372).
10.40 - Third Amendment to Guaranty of Payment of Debt, dated as of
January 29, 1999, 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 20.2 to the
Company's Form 8-K, dated January 29, 1999 (File No. 1-4372).
10.41 - Subordination Agreement, dated as of January 29, 1999, by and
among Forest City Enterprises, Inc., St. Paul Fire and Marine
Insurance Company, St. Paul Mercury Insurance Company, St. Paul
Guardian Insurance Company, Seaboard Surety Company, Economy
Fire & Casualty Company, Asset Guaranty Insurance Company,
KeyBank National Association, as administrative agent, and
National City Bank, as syndication agent, incorporated by
reference to Exhibit 20.3 to the Company's Form 8-K, dated
January 29, 1999 (File No. 1-4372).
10.42 - Dividend Reinvestment and Stock Purchase Plan, incorporated by
reference to Exhibit 10.42 to the Company's Form 10-K for the
year ended January 31, 1999 (File No. 1-4372).
10.43 - Deferred Compensation Plan for Executives, effective as of
January 1, 1999, incorporated by reference to Exhibit 10.43 to
the Company's Form 10-K for the year ended January 31, 1999
(File No. 1-4372).
10.44 - Deferred Compensation Plan for Nonemployee Directors, effective
as of January 1, 1999, incorporated by reference to Exhibit
10.44 to the Company's Form 10-K for the year ended January 31,
1999 (File No. 1-4372).
10.45 - Amended and Restated Credit Agreement, dated as of June 25,
1999, 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 20.1 to the
Company's Form 8-K, dated June 25, 1999 (File No. 1-4372).
38
<PAGE> 39
Exhibit
Number Description of Document
------ -----------------------
10.46 - Amended and Restated Guaranty of Payment of Debt, dated as of
June 25, 1999, 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 20.2 to the
Company's Form 8-K, dated June 25, 1999 (File No. 1-4372).
** 10.47 - Employment Agreement entered into on May 31, 1999, effective
January 1, 1999, by the Company and Albert B. Ratner.
** 10.48 - Employment Agreement entered into on May 31, 1999, effective
January 1, 1999, by the Company and Samuel H. Miller.
* 27 - Financial Data Schedules.
- -------------
* - Filed herewith.
** - Previously filed with the original Form 10-Q.
(b) Reports on Form 8-K:
On July 15, 1999, the Company filed Form 8-K (dated June 25, 1999) to
submit the Amended and Restated Credit Agreement and Guaranty of
Payment of Debt, both dated June 25, 1999.
39
<PAGE> 40
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 22, 1999 /s/ Thomas G. Smith
--------------------- ----------------------------------------
Thomas G. Smith, Senior Vice President
and Chief Financial Officer
Date December 22, 1999 /s/ Linda M. Kane
--------------------- ----------------------------------------
Linda M. Kane, Vice President,
Corporate Controller
40
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