Forest City Enterprises, Inc. and Subsidiaries
Selected Financial Data
For the Years Ended January 31,
- -----------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Operating Results:
Revenues $ 696,649 $ 632,669 $ 610,449 $ 529,433 $ 522,608
===================================================================
Operating earnings, net of tax (1) $ 19,963 $ 24,539 $ 6,986 $ 13,490 $ 6,774
Provision for decline in real estate, net of tax - - (7,413) (6,073) (4,986)
Gain (loss) on disposition of properties, net of tax 18,444 (23,356) 9,598 (478) (20,321)
-------------------------------------------------------------------
Net earnings (loss) before extraordinary gain 38,407 1,183 9,171 6,939 (18,533)
Extraordinary gain, net of tax 16,343 19,356 2,900 1,847 60,449
-------------------------------------------------------------------
Net earnings $ 54,750 $ 20,539 $ 12,071 $ 8,786 $ 41,916
===================================================================
Diluted Earnings per Common Share
Net earnings (loss) before extraordinary gain $ 1.27 $ 0.04 $ 0.35 $ 0.26 $ (0.68)
Extraordinary gain, net of tax 0.54 0.67 0.11 0.07 2.24
-------------------------------------------------------------------
Net earnings $ 1.81 $ 0.71 $ 0.46 $ 0.33 $ 1.56
===================================================================
Cash dividends declared-Class A and Class B $ 0.155 $ 0.125 $ 0.137 $ 0.083 $ 0.067
===================================================================
January 31,
- -----------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
Financial Position:
Consolidated assets $ 3,437,110 $ 2,963,353 $ 2,760,673 $ 2,642,756 $ 2,584,734
Real estate portfolio, at cost $ 3,087,498 $ 2,704,560 $ 2,520,179 $ 2,425,083 $ 2,322,136
Long-term debt, primarily nonrecourse mortgages $ 2,478,872 $ 2,132,931 $ 1,991,428 $ 1,940,059 $ 1,878,270
- -----------------------------------------------------------------------------------------------------------------------
Forest City Rental Properties Corporation - Real Estate Activity (2)
Total real estate - end of year
Completed rental properties, before depreciation$ 2,605,048 $ 2,390,969 $ 2,227,859 $ 2,085,284 $ 1,995,629
Projects under development 412,072 251,416 215,960 246,240 230,802
-------------------------------------------------------------------
3,017,120 2,642,385 2,443,819 2,331,524 2,226,431
Accumulated depreciation (477,253) (436,377) (387,733) (338,216) (293,465)
-------------------------------------------------------------------
Rental properties, net of depreciation $ 2,539,867 $ 2,206,008 $ 2,056,086 $ 1,993,308 $ 1,932,966
===================================================================
Real Estate Activity during the year
Completed rental properties
Capital additions $ 127,065 $ 166,740 $ 160,690 $ 89,028 $ 77,265
Acquisitions 156,879 90,438 22,264 28,587 32,811
Dispositions (69,865)(3) (94,068)(4) (40,379) (27,960) (215,975)(5)
-------------------------------------------------------------------
214,079 163,110 142,575 89,655 (105,899)
-------------------------------------------------------------------
Projects under development
New development 243,106 154,746 98,403 58,798 49,585
Transferred to completed rental properties (82,450) (119,290) (128,683) (43,360) (32,894)
-------------------------------------------------------------------
160,656 35,456 (30,280) 15,438 16,691
-------------------------------------------------------------------
Increase (decrease) in rental properties, at cost $ 374,735 $ 198,566 $ 112,295 $ 105,093 $ (89,208)
===================================================================
(1) Excludes the provision for decline in real estate and gain (loss) on
disposition of properties, net of tax.
(2) The table includes only the real estate activity for Forest City Rental
Properties Corporation.
(3) Primarily reflects the dispositions via tax-free exchanges of Summit Park
Mall, Trolley Plaza and San Vicente office building. Summit Park contains
695,000 square feet located in Wheatfield, New York. Trolley Plaza is a
351-unit apartment complex in Detroit, Michigan. San Vicente contains
469,000 square feet in Los Angeles, California.
(4) Reflects the sale of Toscana, a residential complex containing 563 units in
Irvine, California
(5) Reflects the sale of Park LaBrea Towers, a residential complex containing
2,825 units in Los Angeles, California.
Management's Report
The management of Forest City Enterprises, Inc. is responsible for the
accompanying consolidated financial statements. These statements have been
prepared by the Company in accordance with generally accepted accounting
principles and include amounts based on judgments of management. The financial
information contained elsewhere in this annual report conforms with that in the
consolidated financial statements.
The Company maintains a system of internal accounting control which
provides reasonable assurance in all material respects that the assets are
safeguarded and transactions are executed in accordance with management's
authorization and accurately recorded in the Company's books and records. The
concept of reasonable assurance recognizes that limitations exist in any system
of internal accounting control based upon the premise that the cost of such
controls should not exceed the benefits derived.
The Audit Committee, composed of four members of the Board of Directors who
are not employees of the Company, meets regularly with representatives of
management, the independent accountants and the Company's internal auditors to
monitor the functioning of the accounting and control systems and to review the
results of the auditing activities. The Audit Committee recommends the
appointment of the independent accountants for approval by the shareholders. The
Committee reviews the scope of the audit and the fee arrangements. The
independent accountants conduct an objective, independent examination of the
consolidated financial statements.
The Audit Committee reviews results of the audit effort with the
independent accountants. The Audit Committee also meets with the independent
accountants and the internal auditors without management present to ensure that
they have open access to the Audit Committee.
Report of Independent Accountants
To the Shareholders and Board of Directors
Forest City Enterprises, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of earnings and shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Forest
City Enterprises, Inc. and its Subsidiaries (the "Company") at January 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended January 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/S/ PricewaterhouseCoopers LLP
Cleveland, Ohio
March 10, 1999
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Balance Sheets
January 31,
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Assets
Real Estate
Completed rental properties $ 2,625,589 $ 2,407,045
Projects under development 412,072 251,416
Land held for development or sale 49,837 46,099
----------------------------------------
3,087,498 2,704,560
Less accumulated depreciation (491,293) (448,634)
----------------------------------------
Total Real Estate 2,596,205 2,255,926
Cash and equivalents 78,629 54,854
Notes and accounts receivable, net 229,714 191,719
Inventories 47,299 58,696
Investments in and advances to affiliates 301,735 202,409
Other assets 183,528 199,749
---------------------------------------
$ 3,437,110 $ 2,963,353
=======================================
Liabilities and Shareholders' Equity
Liabilities
Mortgage debt, nonrecourse $ 2,173,872 $ 2,018,931
Accounts payable and accrued expenses 398,499 361,398
Notes payable 43,929 34,819
Long-term debt 105,000 114,000
8.5% Senior notes 200,000 -
Deferred income taxes 150,150 117,723
Deferred profit 33,552 34,537
----------------------------------------
Total Liabilities 3,105,002 2,681,408
----------------------------------------
Shareholders' Equity
Preferred stock - convertible, without par value
5,000,000 shares authorized; no shares issued - -
Common stock - $.33 1/3 par value
Class A, 96,000,000 and 48,000,000 shares authorized; 19,904,556 and 19,813,372
shares issued, 19,281,606 and 19,186,072 outstanding, respectively 6,636 6,606
Class B, convertible, 36,000,000 and 18,000,000 shares authorized; 10,979,396 and
11,070,580 shares issued, 10,701,296 and 10,792,480 outstanding, respectively 3,661 3,691
---------------------------------------
10,297 10,297
Additional paid-in capital 114,270 114,270
Retained earnings 218,967 168,864
---------------------------------------
343,534 293,431
Less treasury stock, at cost; 1999: 622,950 Class A and 278,100 Class B shares,
1998: 627,300 Class A and 278,100 Class B shares (11,426) (11,486)
---------------------------------------
Total Shareholders' Equity 332,108 281,945
---------------------------------------
$ 3,437,110 $ 2,963,353
=======================================
The accompanying notes are an integral part of these consolidated financial
statements.
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Earnings
For the Years Ended January 31,
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues $ 696,649 $ 632,669 $ 610,449
---------------------------------------------
Operating expenses 424,097 379,531 386,970
Interest expense 149,960 136,322 133,364
Provision for decline in real estate - - 12,263
Depreciation and amortization 87,068 74,793 73,304
--------------------------------------------
661,125 590,646 605,901
Gain (loss) on disposition of properties 30,557 (38,638) 17,574
--------------------------------------------
Earnings before income taxes 66,081 3,385 22,122
--------------------------------------------
Income tax expense (benefit)
Current (86) (1,478) 1,935
Deferred 27,760 3,680 11,016
--------------------------------------------
27,674 2,202 12,951
--------------------------------------------
Net earnings before extraordinary gain 38,407 1,183 9,171
Extraordinary gain, net of tax 16,343 19,356 2,900
--------------------------------------------
Net earnings $ 54,750 $ 20,539 $ 12,071
============================================
Basic earnings per common share
Net earnings before extraordinary gain $ 1.28 $ .04 $ .35
Extraordinary gain, net of tax .55 .67 .11
--------------------------------------------
Net earnings $ 1.83 $ .71 $ .46
============================================
Diluted earnings per common share
Net earnings before extraordinary gain $ 1.27 $ .04 $ .35
Extraordinary gain, net of tax .54 .67 .11
--------------------------------------------
Net earnings $ 1.81 $ .71 $ .46
=============================================
The accompanying notes are an integral part of these consolidated financial
statements.
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Shareholders Equity
Common Stock
----------------------------------
Class A Class B Additional Treasury Stock
---------------------------------- Paid-In Retained ---------------
Shares Amount Shares Amount Capital Earnings Shares Amount Total
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Balances at January 31, 1996,
as previously reported 7,907 $2,635 5,580 $1,859 $44,014 $143,590 116 $(2,509) $189,589
Two-for-one stock split
effective July 16, 1998
applied retroactively, plus
rounding adjustments 7,906 2,639 5,581 1,862 (4,500) 115 (1)
-------------------------------------------------------------------------------------------
Balances at January 31, 1996,
as restated 15,813 5,274 11,161 3,721 39,514 143,590 231 (2,510) 189,589
Net earnings 12,071 12,071
Dividends:
Annual 1996 -$.107 per share (2,797) (2,797)
Quarterly 1997-$.03 per share
(one quarter) (787) (787)
Conversion of Class B
shares to Class A shares 50 16 (50) (16) -
Purchase of treasury stock 518 (6,080) (6,080)
Cash in lieu of fractional shares
from three-for-two stock split (18) (18)
--------------------------------------------------------------------------------------------
Balances at January 31, 1997,
as restated 15,863 5,290 11,111 3,705 39,496 152,077 749 (8,590) 191,978
Net earnings 20,539 20,539
Dividends:
$.03 per share (three quarters) (2,703) (2,703)
$.035 per share (one quarter) (1,049) (1,049)
Issuance of Class A common shares
in public offering 3,910 1,302 74,774 76,076
Conversion of Class B
shares to Class A shares 40 14 (40) (14) -
Purchase of treasury stock 156 (2,896) (2,896)
--------------------------------------------------------------------------------------------
Balances at January 31, 1998,
as restated 19,813 6,606 11,071 3,691 114,270 168,864 905 (11,486) 281,945
Net earnings 54,750 54,750
Dividends:
$.035 per share (one quarter) (1,049) (1,049)
$.04 per share (three quarters) (3,598) (3,598)
Conversion of Class B shares
to Class A shares 92 30 (92) (30) -
Sale of treasury stock (4) 60 60
--------------------------------------------------------------------------------------------
Balances at January 31, 1999 19,905 $6,636 10,979 $3,661 $114,270 $218,967 901 $(11,426) $332,108
============================================================================================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended January 31,
- ---------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------
(in thousands)
Reconciliation of Net Earnings to Cash Provided by Operating Activities
Net Earnings $ 54,750 $ 20,539 $ 12,071
Depreciation 61,908 56,923 52,979
Amortization 25,160 17,870 20,325
Deferred income taxes 32,427 2,071 10,377
(Gain) loss on disposition of properties (30,557) 38,638 (17,574)
Provision for decline in real estate - - 12,263
Extraordinary gain (27,036) (22,174) (4,797)
(Increase) decrease in land held for development or sale (6,571) 396 8,980
(Increase) decrease in notes and accounts receivable (38,560) 10,019 (40,579)
Decrease (increase) in inventories 11,397 (9,927) (7,583)
Increase in other assets (13,794) (27,168) (20,918)
Increase (decrease) in accounts payable and accrued expenses 25,353 (12,704) 24,696
Decrease in deferred profit (985) (1,218) (1,962)
-------------------------------------
Net cash provided by operating activities $ 93,492 $ 73,265 $ 48,278
=====================================
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended January 31,
- --------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------
(in thousands)
Cash Flows from Operating Activities
Rents and other revenues received $604,363 $587,851 $532,177
Proceeds from land sales 50,035 46,619 44,297
Land development expenditures (45,784) (32,670) (25,741)
Operating expenditures (369,536) (394,536) (367,901)
Interest paid (145,586) (133,999) (134,554)
-------------------------------------
Net cash provided by operating activities 93,492 73,265 48,278
-------------------------------------
Cash Flows from Investing Activities
Capital expenditures (440,716) (242,831) (157,601)
Proceeds from disposition of properties 33,345 - 26,040
Investments in and advances to affiliates (99,326) (33,737) (8,048)
-------------------------------------
Net cash used in investing activities (506,697) (276,568) (139,609)
-------------------------------------
Cash Flows from Financing Activities
Proceeds from issuance of senior notes 200,000 - -
Payment of senior notes issuance costs (6,297) - -
Increase in nonrecourse mortgage and long-term debt 704,722 385,807 174,409
Principal payments on nonrecourse mortgage debt (370,970) (102,518) (55,880)
Payments on long-term debt (114,000) (109,000) (23,000)
Increase in notes payable 50,491 48,574 23,613
Payments on notes payable (41,381) (57,407) (10,195)
Change in restricted cash and book overdrafts 35,417 (6,149) 3,455
Payment of deferred financing costs (16,565) (12,142) (10,037)
Sale of common stock, net - 76,076 -
Sale (purchase) of treasury stock 60 (2,896) (6,080)
Dividends paid to shareholders (4,497) (3,490) (2,797)
-------------------------------------
Net cash provided by financing activities 436,980 216,855 93,488
-------------------------------------
Net increase in cash and equivalents 23,775 13,552 2,157
Cash and equivalents at beginning of year 54,854 41,302 39,145
-------------------------------------
Cash and equivalents at end of year $ 78,629 $ 54,854 $ 41,302
=====================================
Supplemental Non-Cash Disclosure:
The schedule below represents the effect of the following non-cash transactions
for the years ended January 31:
1999 o Disposition of interest in Summit Park Mall and Trolley
Plaza
1998 o Increase in interest in Skylight Office Tower, Antelope
Valley Mall and Station Square
o Disposition of interest in Toscana
o Reduction of interest in MIT Phase II
o Exchange of Woodridge
1997 o Reduction of interest in Granite Development Partners, L.P.
and the Clark Building
o Disposition of interest in Beachwood Place
Operating Activities
Land held for development or sale $ - $ 3,022 $ 15,650
Notes and accounts receivable 565 (5,072) 3,797
Other assets 1,138 (1,125) 5,175
Accounts payable and accrued expenses 2,760 (3,470) (5,311)
Deferred taxes - 164 -
-------------------------------------
Total effect on operating activities $ 4,463 $ (6,481) $ 19,311
=====================================
Investing Activities
Additions to completed rental properties $ - $(45,272) $ -
Disposition of completed rental properties 42,312 53,547 16,085
Investments in and advances to affiliates - 4,131 3,338
-------------------------------------
Total effect on investing activities $ 42,312 $ 12,406 $ 19,423
=====================================
Financing Activities
Assumption of nonrecourse debt $ - $ 38,375 $ -
Disposition of nonrecourse mortgage debt (46,775) (48,988) (39,362)
Notes payable - 4,688 628
-------------------------------------
Total effect on financing activities $(46,775) $ (5,925) $(38,734)
=====================================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
A. Summary of Significant Acccounting Policies
NATURE OF BUSINESS
Forest City Enterprises, Inc. is a major, verticaly integrated national
real estate company with four principal business groups. The Commercial Group
owns, develops, acquires and operates shopping centers, office buildings and
mixed-use projects including hotels. The Residential Group develops or acquires,
owns 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. The Lumber Trading Group operates the Company's lumber wholesaling
business.
Forest City Enterprises, Inc. owns approximately $3.1 billion of properties
at cost in 21 states and Washington, D.C. The Company's executive offices are in
Cleveland, Ohio. Regional offices are located in New York, Los Angeles, Boston,
Tucson, Washington, D.C., San Francisco and Denver.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Forest City
Enterprises, Inc. and all wholly-owned subsidiaries ("Company"). The Company
also includes its proportionate share of the assets, liabilities and results of
operations of its real estate partnerships, joint ventures and majority-owned
corporations. These entities are included as of their respective fiscal
year-ends (generally December 31).
All significant intercompany accounts and transactions between consolidated
entities have been eliminated. Entities which the Company does not control are
accounted for on the equity method. Undistributed earnings of such entities are
included in retained earnings, with no significant amounts at January 31, 1999.
The Company is required to make estimates and assumptions when preparing
its financial statements and accompanying notes in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
The Company does not necessarily own or hold any direct or indirect
ownership interest in the various real estate assets consolidated in its
financial statements but generally holds this ownership through its direct or
indirect subsidiaries, except for certain parcels of land held for development
or sale.
The Company has adopted SFAS 131, "Disclosure About Segments of an
Enterprise and Related Information," that established standards for reporting
information about operating segments. Operating segments are defined as
components of an enterprise that are used in decisions made by senior
management. The adoption of SFAS 131 did not significantly change the segment
information historically provided in the Company's annual financial statements.
Certain prior years' amounts in the accompanying financial statements have
been reclassified to conform to the current year's presentation.
FISCAL YEAR
The years 1998, 1997 and 1996 refer to the fiscal years ended January 31,
1999, 1998 and 1997, respectively.
LAND OPERATIONS
Land held for development or sale is stated at the lower of carrying amount
or fair market value less cost to sell
RECOGNITION OF REVENUE AND PROFIT
Real Estate Sales - The Company follows the provisions of Statement of
Financial Accounting Standards (SFAS) 66, "Accounting for Sales of Real Estate"
for reporting the disposition of properties.
Leasing Operations - The Company enters into leases with tenants in its
rental properties. The lease terms of tenants occupying space in the shopping
centers and office buildings range from 1 to 25 years, excluding leases with
anchor tenants. Leases with most shopping center tenants provide for percentage
rents when the tenants' sales volumes exceed stated amounts. Minimum and
percentage rent revenues are recognized when due from tenants. The Company is
also reimbursed for certain expenses related to operating its commercial
properties.
Lumber Brokerage - The Company recognizes the gross margin on these sales
as revenue. Sales invoiced for the years 1998, 1997 and 1996 were approximately
$2,979,000,000, $2,940,000,000 and $2,884,000,000, respectively.
Construction - Revenue and profit on long-term fixed-price contracts are
reflected under the percentage-of-completion method. On reimbursable cost-plus
fee contracts, revenues are recorded in the amount of the accrued reimbursable
costs plus proportionate fees at the time the costs are incurred.
RECOGNITION OF COSTS AND EXPENSES
Operating expenses primarily represent the recognition of operating costs,
administrative expenses and taxes other than income taxes.
For financial reporting purposes, interest and real estate taxes during
development and construction are capitalized as a part of the project cost.
Depreciation is generally computed on a straight-line method over the
estimated useful asset lives. The estimated useful lives of buildings range from
20 to 50 years.
Major improvements are capitalized and expensed through depreciation
charges. Repairs, maintenance and minor improvements are expensed as incurred.
Costs and accumulated depreciation applicable to assets retired or sold are
eliminated from the respective accounts and any resulting gains or losses are
reported in the Consolidated Statements of Earnings.
The Company periodically reviews its properties to determine if its
carrying costs will be recovered from future operating cash flows. In cases
where the Company does not expect to recover its carrying costs, an impairment
loss is recorded as a provision for decline in real estate.
CASH AND EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
The Company maintains operating cash and reserve for replacement balances
in financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000.
INVENTORIES
The lumber brokerage inventories are stated at the lower of cost or market.
Inventory cost is determined by specific identification and average cost
methods.
OTHER ASSETS
Included in other assets are costs incurred in connection with obtaining
financing which are deferred and amortized over the life of the related debt.
Costs incurred in connection with leasing space to tenants are also included in
other assets and are deferred and amortized using the straight-line method over
the lives of the related leases. Additionally, restricted deposits and funded
reserves are included in other assets and represent deposits with mortgage
lenders for taxes and insurance, security deposits, capital replacement,
improvement and operating reserves, bond funds and development and construction
escrows.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company determined the estimated fair value of its debt and hedging
instruments by aggregating the various types (i.e., fixed-rate versus
variable-rate debt) and discounting future cash payments at interest rates that
the Company believes approximates the current market. There was no material
difference in the carrying amount and the estimated fair value of the Company's
total mortgage debt and hedging instruments.
INTEREST RATE PROTECTION AGREEMENTS
The Company maintains a practice of hedging its variable interest rate risk
by purchasing interest rate caps or entering into interest rate swap agreements
for periods of one to five years. The principal risk to the Company through its
interest rate hedging strategy is the potential inability of the financial
institution from which the interest rate protection was purchased to cover all
of its obligations. To mitigate this exposure, the Company purchases its
interest rate protection from either the institution that holds the debt or from
institutions with a minimum A credit rating.
The cost of interest rate protection is capitalized in other assets in the
Consolidated Balance Sheets and amortized over the benefit period as interest
expense in the Consolidated Statements of Earnings.
INCOME TAXES
Deferred tax assets and liabilities reflect the tax consequences on future
years of differences between the tax and financial statement basis of assets and
liabilities at year-end. The Company has recognized the benefits of its tax loss
carryforward and general business tax credits which it expects to use as a
reduction of the deferred tax expense.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion (APBO) 25,
"Accounting for Stock Issued to Employees", and related Interpretations to
account for stock-based compensation. As such, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount the employee is required to
pay for the stock.
STOCK SPLIT
All common shares and per share amounts have been adjusted to give
retroactive effect to the earliest period presented in the accompanying
Consolidated Financial Statements for a two-for-one stock split distributed on
July 16, 1998 (See Note O).
CAPITAL STOCK
Class B common stock is convertible into Class A common stock on a
share-for-share basis. The 5,000,000 authorized shares of preferred stock
without par value, none of which have been issued, are convertible into Class A
common stock.
Class A common shareholders elect 25% of the members of the Board of
Directors and Class B common shareholders elect the remaining directors
annually. The Company currently has 12 directors.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilutive effect of the Company's stock
option plan by adjusting the denominator using the treasury stock method. The
sum of the four quarters' earnings per share may not equal the annual earnings
per share due to the weighting of stock and option activity occurring during the
year. All earnings per share disclosures appearing in these financial statements
were computed assuming dilution unless otherwise indicated.
NEW ACCOUNTING STANDARDS
In the first quarter of 1999, the Company will adopt 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. In the first quarter of
2000, the Company will adopt SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires recognition of all derivatives
as either assets or liabilities and measurement of those instruments at fair
value. The Company anticipates that the adoption of both SOP 98-5 and SFAS 133
will not have a material effect on its earnings or financial position.
B. Real Estate and Related Accumulated Depreciation and Nonrecourse Mortgage
Debt
The components of real estate cost and related nonrecourse mortgage
debt are presented below.
January 31, 1999
- --------------------------------------------------------------------------------------------------
Less Accumulated Nonrecourse
Total Cost Depreciation Net Cost Mortgage Debt
- --------------------------------------------------------------------------------------------------
(in thousands)
Completed rental properties
Residential $ 624,325 $ 123,485 $ 500,840 $ 499,327
Commercial
Shopping centers 923,672 160,552 763,120 746,679
Office and other buildings 1,057,051 193,215 863,836 787,380
Corporate and other equipment 20,541 14,041 6,500 -
------------------------------------------------------------------
2,625,589 491,293 2,134,296 2,033,386
------------------------------------------------------------------
Projects under development
Residential 43,119 - 43,119 6,562
Commercial
Shopping centers 177,465 - 177,465 24,763
Office and other buildings 191,488 - 191,488 84,285
------------------------------------------------------------------
412,072 - 412,072 115,610
------------------------------------------------------------------
Land held for development or sale 49,837 - 49,837 24,876
------------------------------------------------------------------
$ 3,087,498 $ 491,293 $ 2,596,205 $ 2,173,872
==================================================================
C. Notes and Accounts Receivable, Net
Notes and accounts receivable are summarized below.
January 31,
- --------------------------------------------------------
1999 1998
- --------------------------------------------------------
(in thousands)
Lumber brokerage $ 166,400 $ 134,197
Real estate sales 18,688 18,278
Syndication activities 13,604 12,197
Receivable from tenants 15,802 16,050
Other receivables 22,708 19,166
---------------------------
237,202 199,888
Allowance for doubtful
accounts (7,488) (8,169)
---------------------------
$ 229,714 $ 191,719
===========================
Notes receivable at January 31, 1999 of $50,973,000, included in the table
above, are collectible primarily over five years, with $11,163,000 being due
within one year. The weighted average interest rate at January 31, 1999 and 1998
was 8.08% and 8.43%, respectively.
In July 1996, the Lumber Trading Group entered into a three-year agreement
under which it is selling an undivided interest in a pool of accounts receivable
up to a maximum of $91,800,000. At January 31, 1999, the Company had received
$44,000,000 in net proceeds under this agreement. The program is nonrecourse to
the Company and the Company bears no risk as to the collectability of the
accounts receivable.
D. Other Assets
Other assets are as follows.
January 31,
- --------------------------------------------------------
1999 1998
- --------------------------------------------------------
(in thousands)
Unamortized costs, net $ 96,571 $ 90,320
Restricted funds and deposits 51,994 81,738
Prepaid expenses 34,963 27,691
--------------------------
$ 183,528 $ 199,749
==========================
E. Accounts Payable and Accrued Expenses
Included in accounts payable and accrued expenses at January 31, 1999 and
1998 are book overdrafts of approximately $66,060,000 and $57,222,000,
respectively. The overdrafts are a result of the Company's cash management
program and represent checks issued but not yet presented to a Company bank for
collection.
F. Notes Payable
The components of notes payable, which represent indebtedness whose
original maturity dates are within one year of issuance, are as follows.
January 31,
- --------------------------------------------------------
1999 1998
- --------------------------------------------------------
(in thousands)
Payable to
Banks $ 17,275 $ 19,024
Other 26,654 15,795
--------------------------
$ 43,929 $ 34,819
==========================
Notes payable to banks reflects borrowings on the Lumber Trading Group's
$67,000,000 bank lines of credit. The bank lines of credit allow for up to
$5,000,000 in outstanding letters of credit ($1,138,000 of which were
outstanding at January 31, 1999) which reduce the credit available to the Lumber
Trading Group. Borrowings under these bank lines of credit, which are
nonrecourse to the Company, are collateralized by all the assets of the Lumber
Trading Group, bear interest at the lender's prime rate or 2.25% over LIBOR, and
have a fee of 1/5% per annum on the unused portion of the available commitment.
These bank lines of credit are subject to review and extension annually.
Other notes payable relate to improvements and construction funded by
tenants, property and liability insurance premium financing and advances from
affiliates and partnerships.
The weighted average interest rate on notes payable was 8.14% and 7.89% at
January 31, 1999 and 1998, respectively.
Interest incurred on notes payable was $7,331,000 in 1998, $6,068,000 in
1997 and $5,978,000 in 1996. Interest paid on notes payable was $5,664,000 in
1998, $6,407,000 in 1997 and $5,250,000 in 1996.
G. Mortgage Debt, Nonrecourse
Mortgage debt, which is collateralized by completed rental properties,
projects under development and certain undeveloped land, is as follows.
January 31,
- ----------------------------------------------------------
1999 1998
- ----------------------------------------------------------
(dollars in thousands)
Rate(1) Rate(1)
------ ------
Fixed $ 1,575,731 7.59% $ 1,118,748 7.88%
Variable -
Hedged(2) 219,003 7.23% 283,710 7.97%
Unhedged 154,960 6.90% 388,969 7.94%
Tax-Exempt 154,420 3.66% 151,051 4.76%
UDAG and other
subsidized
loans 69,758 2.57% 76,453 2.36%
------------ -----------
$ 2,173,872 7.07% $ 2,018,931 7.46%
=========== ===========
<FN>
(1) The weighted average interest rates shown above include both the
base index and the lender margin.
(2) The hedged debt of $219,003 represents $133,479 of 1-year LIBOR
contracts and $85,524 of LIBOR-based swaps that have a combined
remaining average life of 0.65 years as of January 31, 1999.
</FN>
Debt related to projects under development at January 31, 1999 totals
$115,610,000 out of a total commitment from lenders of $367,874,000. Of this
outstanding debt, $104,747,000 is variable-rate debt and $10,863,000 is
fixed-rate debt. The Company generally borrows funds for development and
construction projects with maturities of two to seven years utilizing
variable-rate financing. Upon opening and achieving stabilized operations, the
Company generally obtains long-term fixed-rate financing.
As of January 31, 1999, the Company had purchased London Interbank Offered
Rate ("LIBOR") interest rate caps as follows.
Cap Principal
Strike Rate Period Outstanding
- ---------------------------------------------------------------
(dollars in thousands)
6.50% 02/01/99 - 01/31/00 $ 394,503
6.50% 02/01/00 - 01/31/01 457,613
6.50%* 02/01/01 - 07/31/01 362,577
7.00%* 08/01/01 - 02/01/02 362,577
6.75% 09/01/00 - 09/01/03 79,929
<FN>
* Protection for the year ending January 31, 2002 was purchased in
February and March 1999.
</FN>
Interest rate caps and swaps are purchased to reduce short-term variable
interest rate risk. The Company intends to convert a significant portion of its
committed variable- rate debt to fixed-rate debt. 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 $170,850,000,
$41,252,000 and $38,677,000 with exercise dates of February 2000, April 2001 and
August 2001, respectively. Treasury Options totaling $79,929,000 were purchased
in February 1999.
The Urban Development Action Grants (UDAG) and other subsidized loans bear
interest at rates which are below prevailing commercial lending rates and are
granted to the Company as an inducement to develop real estate in economically
under-developed areas. A right to participate by the local government in the
future cash flows of the project is generally a condition of these loans.
Participation in annual cash flows generated from operations is recognized as an
expense in the period earned. Participation in appreciation and cash flows
resulting from a sale or refinancing is recorded as an expense at the time of
sale or is capitalized as additional basis and amortized if amounts are paid
prior to the disposition of the property.
Mortgage debt maturities for the next five years ending January 31 are as
follows: 2000, $249,451,000; 2001, $272,202,000; 2002, $142,500,000; 2003,
$145,792,000; and 2004, $119,373,000.
The Company is engaged in discussions with its current lenders and is
actively pursuing new lenders to extend and refinance maturing mortgage debt. As
of January 31, 1999, $134,179,000 of debt with upcoming maturities have
refinancing commitments in place.
Interest incurred on mortgage debt was $144,890,000 in 1998, $138,546,000
in 1997 and $127,531,000 in 1996. Interest paid on mortgage debt was
$148,959,000 in 1998, $136,799,000 in 1997 and $130,213,000 in 1996.
H. Long-Term Debt
Long-term debt is as follows.
January 31,
- -----------------------------------------------------
1999 1998
- -----------------------------------------------------
(in thousands)
Revolving credit loans $ 105,000 $ 54,000
Term loan - 60,000
---------------------
$ 105,000 $114,000
=====================
At January 31, 1999, the Company had $105,000,000 outstanding under its new
$225,000,000 revolving credit facility. The new revolving credit line replaced
the $80,000,000 revolving credit facility and $60,000,000 term loan in place at
January 31, 1998. The new revolving credit facility matures December 10, 2000,
unless extended, and allows for up to $30,000,000 in outstanding letters of
credit ($22,413,000 of which were outstanding at January 31, 1999) that reduce
the credit available to the Company. On each anniversary date, the maturity date
of the revolving credit facility may be extended by one year by unanimous
consent of the nine participating banks. At its 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 January 31, 1999, the revolving credit line was
$215,000,000.
The revolving credit agreement 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. At January 31, 1999, retained
earnings of $8,801,000 was available for payment of dividends.
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. 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. This protection was purchased in February and March
1999.
Interest incurred on long-term debt was $6,317,000 in 1998, $7,811,000 in
1997 and $7,880,000 in 1996. Interest paid on long-term debt was $6,010,000 in
1998, $6,896,000 in 1997 and $7,116,000 in 1996.
I. Senior Notes
On March 16, 1998, the Company issued $200,000,000 of 8.50% senior notes,
due March 15, 2008, in a public offering. Net proceeds in the amount 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
of its term loan and revolving credit loans (Note H). The remaining proceeds
were used to finance acquisitions and development of real estate projects.
Accrued interest 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 the revolving credit facility. The
indenture contains covenants providing, among other things, limitations on
incurring additional debt and payment of dividends. The dividend limitation is
not as restrictive as that imposed by the Company's revolving credit facility
(Note H).
The senior notes may be redeemed by the Company, in whole or in part, at
any time on or after March 15, 2003 at redemption prices beginning at 104.25%
for the year beginning March 15, 2003 and systematically reduced to 100% in the
years thereafter. The Company may also redeem up to 33% of the original
principal amount prior to March 15, 2001 from proceeds of one or more common
stock public offerings at a redemption price of 108.50%.
Interest incurred on the senior notes was $14,922,000 and $1,781,000 in
1998 and 1997, respectively. Interest paid was $8,453,000 and $1,781,000 in 1998
and 1997, respectively. Interest incurred and paid in 1997 was for the purchase
of a treasury option to fix the interest rate on the senior notes. Because the
treasury option was not advantageous, the option was not exercised and its cost
was expensed in 1997.
Consolidated Interest
Total interest incurred on all forms of indebtedness (included in Notes F,
G, H and I) was $173,460,000 in 1998, $154,206,000 in 1997 and $141,389,000 in
1996 of which $23,500,000, $17,884,000 and $8,025,000 was capitalized,
respectively. Interest paid on all forms of indebtedness was $169,086,000 in
1998, $151,883,000 in 1997 and $142,579,000 in 1996.
J. Income Taxes
The income tax provision (benefit) consists of the following components.
For the Years Ended January 31,
- ----------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------
(in thousands)
Current
Federal $ (570) $ (2,706) $ 896
Foreign 409 330 580
State 75 898 459
--------------------------------
(86) (1,478) 1,935
--------------------------------
Deferred
Federal 21,996 4,301 6,985
Foreign 16 32 (126)
State 5,748 (653) 4,157
--------------------------------
27,760 3,680 11,016
--------------------------------
Total provision $ 27,674 $ 2,202 $ 12,951
================================
The effective tax rate for income taxes varies from the federal statutory
rate of 35% for 1998, 1997 and 1996 due to the following items.
For the Years Ended January 31,
- ---------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------
(in thousands)
Statement earnings
before income taxes $ 66,081 $ 3,385 $ 22,122
-------------------------------
Income taxes computed at
the statutory rate $ 23,129 $ 1,185 $ 7,742
Increase (decrease) in tax
resulting from:
State taxes, net of
federal benefit 3,452 83 3,000
Contribution
carryover 1,113 1,032 811
Nondeductible
lobbying costs - - 811
Adjustment of prior
estimated taxes (116) (134) (111)
Valuation allowance 165 - 351
Other items (69) 36 347
-------------------------------
Total provision $ 27,674 $ 2,202 $ 12,951
===============================
An analysis of the deferred tax provision is as follows.
For the Years Ended January 31,
- ---------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------
(in thousands)
Excess of tax over
statement depreciation
and amortization $ 4,356 $ 2,194 $ 4,730
Allowance for doubtful
accounts deducted
for statement purposes (389) (585) (349)
Costs on land and rental
properties under
development expensed
for tax purposes 5,688 100 3,244
Revenues and expenses
recognized in different
periods for tax and
statement purposes 11,986 3,843 851
Development fees deferred
for statement purposes - (395) (109)
Provision for decline
in real estate - - (1,650)
Deferred state taxes, net
of federal benefit 3,019 (530) 2,392
Interest on construction
advances deferred for
statement purposes 975 (1,207) (189)
Utilization and (benefits)
of tax loss carry-forward
recognized against
deferred taxes 5,423 (1,509) 3,187
Deferred compensation (106) 1,703 2,061
Valuation allowance 165 - 351
Alternative minimum tax
credits (3,357) 66 (3,503)
------------------------------
Deferred provision $ 27,760 $ 3,680 $ 11,016
==============================
The types of differences that gave rise to significant portions of the
deferred income tax liability are presented in the following table.
January 31,
- -------------------------------------------------------------
Temporary Differences Deferred Tax
- -------------------------------------------------------------
1999 1998 1999 1998
- -------------------------------------------------------------
(in thousands)
Depreciation $ 244,697 $ 235,337 $ 96,778 $ 93,076
Capitalized costs 201,992 137,599 79,888 54,420
Net operating losses (76,433) (89,903) (26,938) (32,527)
Federal tax credits - - (14,165) (9,686)
Other 19,614 10,667 14,587 12,440
-----------------------------------------
$ 389,870 $ 293,700 $ 150,150 $ 117,723
=========================================
Income taxes paid totaled $3,740,000, $6,247,000 and $830,000 in 1998, 1997
and 1996, respectively. At January 31, 1999, the Company had a net operating
loss carryforward for tax purposes of $76,433,000 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 deferred tax liability at January 31, 1999 is comprised of
deferred liabilities of $268,872,000, deferred assets of $123,634,000 and a
valuation allowance related to state taxes and general business credits of
$4,912,000.
K. 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. All amounts,
including footnotes, are presented in thousands.
January 31, For the Years Ended January 31,
-------------------------------------------------------------------------
Identifiable Assets Expenditures for Additions to Real Estate
-------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
-------------------------------------------------------------------------
Commercial Group $ 2,330,624 $ 1,956,418 $ 1,749,539 $ 369,342 $ 234,766 $ 109,088
Residential Group 722,160 646,574 646,024 75,258 57,868 43,586
Land Group 100,501 87,909 88,953 41,706 30,397 25,741
Lumber Trading Group 218,551 199,602 209,901 2,301 2,254 2,958
Corporate 65,274 72,850 66,256 426 931 922
-------------------------------------------------------------------------
Consolidated $ 3,437,110 $ 2,963,353 $ 2,760,673 $ 489,033 $ 326,216 $ 182,295
=========================================================================
For the Years Ended January 31,
----------------------------------------------------------------------------------------------------------
Revenues Interest Expense Depreciation & Amortization Expense
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
----------------------------------------------------------------------------------------------------------
Commercial Group $ 380,264 $ 330,117 $ 314,762 $ 91,291 $ 87,035 $ 81,507 $ 65,527 $ 56,996 $ 54,875
Residential Group 139,003 135,253 116,878 27,342 28,884 32,947 18,128 14,682 15,419
Land Group 52,611 44,614 53,888 6,814 5,575 6,813 562 740 748
Lumber Trading Group(1) 123,325 122,169 124,491 5,262 5,254 5,166 2,045 2,202 2,140
Corporate 1,446 516 430 19,251 9,574 6,931 806 173 122
----------------------------------------------------------------------------------------------------------
Consolidated $ 696,649 $ 632,669 $ 610,449 $ 149,960 $ 136,322 $ 133,364 $ 87,068 $ 74,793 $ 73,304
==========================================================================================================
Earnings (Loss) Before Earnings Before Depreciation,
Income Taxes (EBIT) (2) Amortization & Deferred Taxes (EBDT)
-------------------------------------------------------------------------
Commercial Group $ 27,480 $ 18,979 $ 9,914 $ 94,027 $ 73,773 $ 66,032
Residential Group 27,285 28,153 7,148 38,614 31,985 24,818
Land Group 5,265 5,184 6,007 3,186 3,326 3,929
Lumber Trading Group 6,066 9,242 8,966 3,227 5,199 5,053
Corporate (30,572) (19,535) (15,224) (21,200) (7,373) (9,428)
Provision for decline in real estate - - (12,263) - - -
Gain (loss) on disposition of properties 30,557 (38,638) 17,574 - - -
-------------------------------------------------------------------------
Consolidated $ 66,081 $ 3,385 $ 22,122 117,854 106,910 90,404
=====================================
Reconciliation of EBDT to net earnings:
Depreciation and amortization - Real Estate Groups (83,655) (71,678) (70,221)
Deferred taxes - Real Estate Groups (14,236) (10,693) (13,197)
Provision for decline in real estate, net of tax - - (7,413)
Gain (loss) on disposition of properties, net of tax 18,444 (23,356) 9,598
Extraordinary gain, net of tax 16,343 19,356 2,900
-------------------------------------
Net earnings $ 54,750 $ 20,539 $ 12,071
=====================================
<FN>
(1) The Company recognizes the gross margin on lumber brokerage sales as
Revenues. Sales invoiced for the years ended January 31, 1999, 1998 and
1997 were approximately $2,979,000, $2,940,000 and $2,884,000,
respectively.
(2) See Consolidated Statements of Earnings on page 27 for reconciliation of
EBIT to net earnings.
</FN>
L. Leases
The Company as Lessor
The following summarizes the minimum future rental income to be received on
noncancelable operating leases of commercial properties that generally extend
for periods of more than one year.
Minimum
Future
For the Years Ending January 31, Rentals
- -----------------------------------------------------
(in thousands)
2000 $ 182,462
2001 174,883
2002 161,710
2003 151,114
2004 140,640
Later years 960,290
----------
$1,771,099
==========
Most of the commercial leases include provisions for reimbursements of
other charges including real estate taxes and operating costs. Total
reimbursements amounted to $67,659,000, $63,479,000 and $61,300,000 in 1998,
1997 and 1996, respectively.
The Company as Lessee
The Company is a lessee under various operating leasing arrangements for
real property and equipment having terms expiring through 2095, excluding
optional renewal periods.
Minimum fixed rental payments under long-term leases (over one year) in
effect at January 31, 1999 are as follows.
Minimum
Lease
For the Years Ending January 31, Payments
- -----------------------------------------------------
(in thousands)
2000 $ 9,493
2001 9,000
2002 8,454
2003 7,039
2004 6,676
Later years 193,487
---------
$ 234,149
=========
Rent expense was $10,267,000, $10,273,000 and $8,813,000 for 1998, 1997 and
1996, respectively.
M. Contingent Liabilities
As of January 31, 1999, the Company has guaranteed loans totaling
$2,960,000 and has $23,551,000 in outstanding letters of credit, including
$1,138,000 which relates to the Lumber Trading Group.
The Company customarily guarantees lien-free completion of its
construction. Upon completion the guarantees are released. The Company is also
involved in certain claims and litigation related to its operations. Based upon
the facts known at this time, management is of the opinion that the ultimate
outcome of all such claims and litigation will not have a material adverse
effect on the financial condition, results of operations or cash flows of the
Company.
N. Stock Option Plan
Shares may be awarded under the 1994 Stock Option Plan ("Plan") to key
employees in the form of either incentive stock options or non-qualified stock
options. The aggregate number of shares that may be awarded during the term of
the Plan was increased by shareholder approval on June 9, 1998 to 2,250,000
shares, subject to adjustments under the Plan. The maximum number of shares that
may be awarded to an employee during any calendar year is 75,000 shares. An
option's maximum term is 10 years. The exercise price of all non-qualified and
incentive stock options shall be at least equal to the fair market value of a
share on the date the option is granted unless the grantee of incentive stock
options constructively owns more than ten percent of the total combined voting
power of all classes of stock of the Company, in which case the exercise price
of each incentive stock option shall be at least 110% of the fair market value
of a share on the date granted. The Plan is administered by the Compensation
Committee of the Board of Directors. The Company granted 390,800 options in 1998
and 361,800 options in 1996. All options granted were Class A fixed stock
options, have a term of 10 years and vest over two to four years.
The Company applies APBO 25 and related Interpretations in accounting for
its Plan. Accordingly, no compensation cost has been recognized for its Plan.
Had compensation cost been determined in accordance with SFAS 123 "Accounting
for Stock-Based Compensation", net earnings and earnings per share for 1998,
1997 and 1996 would have been reduced to the pro forma amounts indicated below.
For the Years Ended January 31,
- --------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
Net earnings (in thousands)
As reported $ 54,750 $ 20,539 $ 12,071
Pro forma $ 53,150 $ 19,974 $ 11,846
Basic earnings per share
As reported $ 1.83 $ .71 $ .46
Pro forma $ 1.77 $ .69 $ .45
Diluted earnings per share
As reported $ 1.81 $ .71 $ .46
Pro forma $ 1.77 $ .69 $ .45
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
the grants in 1998 and 1996, respectively: dividend yield of .5% in both years;
expected volatility of 38.0% and 30.7%; risk-free interest rate of 5.7% and
6.5%; expected life of 8.7years in both years; and turnover of 3.0% and none.
A summary of stock option activity is presented below.
For the Years Ended January 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 354,600 $ 14.38 361,800 $ 14.38 - -
Granted 390,800 $ 28.50 - - 361,800 $ 14.38
Exercised (4,350) $ 14.38 - - - -
Forfeited (17,100) $ 20.32 (7,200) $ 14.38 - -
--------- ------- -------
Outstanding at end of year 723,950 $ 21.86 354,600 $ 14.38 361,800 $ 14.38
======== ======= =======
Options exercisable at end of year 82,500 $ 14.38 - $ - - $ -
Number of shares available for
granting of options at end of year 1,521,700 395,400 388,200
Weighted average fair value of
options granted during the year $ 15.12 $ - $ 7.19
The following table summarizes information about fixed stock options outstanding
at January 31, 1999.
Options Outstanding Options Exercisable
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding at Remaining Average Exercisable at Average
Prices January 31, 1999 Contractual Life Exercise Prices January 31, 1999 Exercise Prices
- ------------------------------------------------------------------------------------------------------------------------------------
$ 14.38 340,350 7.6 years $ 14.38 82,500 $ 14.38
$ 28.50 383,600 9.1 years $ 28.50 - $ -
------- ------
723,950 82,500
======= ======
O. Capital Stock
On July 16, 1998, the Company paid a two-for-one common stock split to
Class A and Class B shareholders of record on July 1, 1998. Previously, the
Company paid a three-for-two common stock split to Class A and Class B
shareholders of record on February 3, 1997. Both stock splits were effected as
stock dividends. The stock splits were given retroactive effect to the beginning
of the earliest period presented in the accompanying Consolidated Balance Sheets
and Consolidated Statements of Shareholders' Equity by transferring the par
value of the additional shares issued from the additional paid-in capital
account to the common stock accounts. All share and per share data included in
this annual report, including stock option plan information, have been restated
to reflect the stock splits.
On May 20, 1997, the Company sold to the public 3,910,000 (1,955,000
pre-split) shares of Class A common stock at an initial price of $21.00 ($42.00
pre-split) per share.
In June 1997 and June 1998 the shareholders approved amendments to the
Company's Articles of Incorporation to increase the Company's authorized shares
of stock. Class A common shares were increased from 16,000,000 to 48,000,000
shares in 1997 and to 96,000,000 shares in 1998. Class B common shares were
increased from 6,000,000 to 18,000,000 shares in 1997 and to 36,000,000 shares
in 1998. Preferred shares were increased from 1,000,000 to 5,000,000 shares in
1997.
During 1998, 4,350 shares of Class A treasury stock were sold to employees
upon the exercise of their stock options (see Note N).
P. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for "net earnings before
extraordinary gain."
Weighted
Net Earnings Average
Before Common
Extraordinary Shares Per
Gain Outstanding Common
(Numerator) (Denominator) Share
- --------------------------------------------------------------------------------
(in thousands)
Year ended January 31, 1999
Basic earnings
per share $ 38,407 29,980,200 $ 1.28
Effect of dilutive
securities -stock options - 193,730 (.01)
---------- ---------- -------
Diluted earnings
per share $ 38,407 30,173,930 $ 1.27
========== ========== =======
Year ended January 31, 1998
Basic earnings
per share $ 1,183 28,905,920 $ .04
Effect of dilutive
securities -stock options - 57,760 -
---------- ---------- -------
Diluted earnings
per share $ 1,183 28,963,680 $ .04
========== ========== =======
Year ended January 31, 1997
Basic earnings
per share $ 9,171 26,310,472 $ .35
Effect of dilutive
securities -stock options - 33,327 -
---------- ---------- -------
Diluted earnings
per share $ 9,171 26,343,799 $ .35
========== ========== =======
Q. Summarized Financial Information
Forest City Rental Properties Corporation ("Rental Properties") is a
wholly-owned subsidiary engaged in the development, acquisition and management
of real estate projects, including apartment complexes, regional malls and
shopping centers, hotels, office buildings and mixed-use facilities. Condensed
consolidated balance sheets and statements of earnings for Rental Properties and
its subsidiaries follows.
Forest City Rental Properties Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
January 31,
- -----------------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
Assets
Real Estate
Completed rental properties $ 2,605,048 $ 2,390,969
Projects under development 412,072 251,416
-------------------------------------
3,017,120 2,642,385
Less accumulated depreciation (477,253) (436,377)
-------------------------------------
Total Real Estate 2,539,867 2,206,008
Cash 33,158 36,763
Other assets 480,513 406,522
-------------------------------------
$ 3,053,538 $ 2,649,293
=====================================
Liabilities and Shareholder's Equity
Liabilities
Mortgage debt, nonrecourse $ 2,148,996 $ 1,994,843
Accounts payable and accrued expenses 151,380 144,831
Long-term debt 105,000 114,000
Other liabilities and deferred credits 261,908 243,989
-------------------------------------
Total Liabilities 2,667,284 2,497,663
-------------------------------------
Shareholder's Equity
Common stock and additional paid-in capital 200,878 5,378
Retained earnings 185,376 146,252
-------------------------------------
Total Shareholder's Equity 386,254 151,630
-------------------------------------
$ 3,053,538 $ 2,649,293
=====================================
Forest City Rental Properties Corporation and Subsidiaries
Consolidated Statements of Earnings
For the Years Ended January 31,
- -----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
Revenues $ 519,282 $ 465,370 $ 426,226
------------------------------------------------------
Operating expenses 264,496 229,856 228,110
Interest expense 137,556 123,713 121,186
Provision for decline in real estate - - 11,684
Depreciation and amortization 83,655 71,678 70,221
------------------------------------------------------
485,707 425,247 431,201
------------------------------------------------------
Gain (loss) on disposition of properties 30,890 (35,505) 17,574
------------------------------------------------------
Earnings before income taxes 64,465 4,618 12,599
------------------------------------------------------
Income tax expense (benefit)
Current (705) (2,437) (989)
Deferred 26,389 6,455 9,515
------------------------------------------------------
25,684 4,018 8,526
------------------------------------------------------
Net earnings before extraordinary gain 38,781 600 4,073
Extraordinary gain, net of tax 16,343 19,356 2,900
------------------------------------------------------
Net earnings $ 55,124 $ 19,956 $ 6,973
======================================================
R. Gain (Loss) on Disposition and Extraordinary Gain
Gain (Loss) on Disposition of Properties - Gain (loss) on disposition of
properties totaled a gain of $30,557,000, a loss of $38,638,000 and a gain of
$17,574,000 in 1998, 1997 and 1996, respectively. During 1998, the Company
recognized a gain on the disposition of its interests in Summit Park Mall
($13,897,000 or $8,401,000 after tax), a regional shopping center in suburban
Buffalo, New York; San Vicente ($10,403,000 or $6,289,000 after tax), an office
building in Brentwood, California; and Trolley Plaza ($4,941,000 or $2,987,000
after tax), an apartment community in downtown Detroit, Michigan. The
dispositions of Summit Park, San Vicente and Trolley Plaza were all structured
as tax-free exchanges. Also in 1998, the Company reported gains on the sale of
Courtyard ($622,000 or $376,000 after tax), a strip shopping center in Flint,
Michigan and the Company's 20% interests in three apartment buildings in
Houston, Texas ($1,027,000 or $593,000 after tax).
During 1997, the Company sold its interest in Woodridge, a land development
project in suburban Chicago, Illinois ($3,133,000 loss or $1,892,000 after tax
loss) and recorded a loss on disposition of Toscana ($35,505,000 or $21,464,000
after tax). The 1996 gain primarily reflects the disposition of the Company's
18.63% interest in Beachwood Place, a regional shopping center in Cleveland,
Ohio.
Extraordinary Gain - Extraordinary gain, net of tax, totaled $16,343,000,
$19,356,000 and $2,900,000 in 1998, 1997 and 1996, respectively, representing
extinguishment of nonrecourse debt and related accrued interest.
The 1998 extraordinary gain recorded represents extinguishment of
nonrecourse debt related to Terminal Tower ($13,947,000 or $8,431,000 after tax)
and Skylight Office Tower ($3,619,000 or $2,188,000 after tax) both located in
Cleveland, Ohio; Courtland ($7,381,000 or $4,462,000 after tax), a regional mall
in Flint, Michigan; One Franklintown ($1,350,000 or $816,000 after tax), an
apartment complex in Philadelphia, Pennsylvania; Boot Ranch ($187,000 or
$113,000 after tax), an apartment property in Tampa, Florida; and Trolley Plaza
($552,000 or $333,000 after tax).
In 1997, the properties which recorded extraordinary gain on extinguishment
of nonrecourse debt were Toscana ($18,081,000 or $16,884,000 after tax); Halle
Office Building in Cleveland, Ohio ($3,569,000 or $2,156,000 after tax); and San
Vicente ($524,000 or $316,000 after tax). In 1996, the properties which recorded
extraordinary gain on extinguishment of nonrecourse debt are Enclave, an
apartment complex in San Jose, California and the Clark Building, an office
building in Cambridge, Massachusetts.
Sale of Toscana - During February 1997, the Company sold Toscana, a
563-unit apartment complex in Irvine, California, back to the original land
owner and settled litigation related to the property. As a result, the Company
recorded operating income of $9,146,000, after tax, a loss on disposition of
property of $21,464,000, after tax, and an extraordinary gain of $16,884,000,
after tax, related to the extinguishment of a portion of the property's
nonrecourse mortgage debt. The net result of these transactions to the Company
is after-tax income of $4,566,000.
Quarterly Consolidated Financial Data (Unaudited)
Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Jan. 31, Oct. 31, July 31, Apr. 30,
1999 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues $ 205,417 $ 176,902 $ 165,707 $ 148,623
Earnings before income taxes $ 15,083 $ 9,487 $ 26,852 $ 14,659
Net earnings before extraordinary gain(1) $ 8,895 $ 5,168 $ 15,836 $ 8,508
Net earnings $ 14,286 $ 15,786 $ 16,170 $ 8,508
Basic earnings per share
Net earnings before extraordinary gain(1)(2) $ .30 $ .17 $ .53 $ .28
Net earnings(2) $ .48 $ .53 $ .54 $ .28
Diluted earnings per share
Net earnings before extraordinary gain(1)(2) $ .29 $ .17 $ .53 $ .28
Net earnings(2) $ .47 $ .52 $ .54 $ .28
Dividends declared per common share(3)
Quarterly dividend
Class A $ .04 $ .04 $ .04 $ .035
Class B $ .04 $ .04 $ .04 $ .035
Market price range of common stock
Class A
High $ 26.63 $ 28.88 $ 30.63 $ 29.88
Low $ 21.63 $ 17.75 $ 28.13 $ 26.66
Class B
High $ 26.38 $ 29.63 $ 30.13 $ 29.66
Low $ 22.44 $ 18.00 $ 28.13 $ 27.00
Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Jan. 31, Oct. 31, July 31, Apr. 30,
1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues $ 184,591 $ 154,975 $ 142,035 $ 151,068
Earnings (loss) before income taxes $ 4,451 $ 12,062 $ 5,480 $ (18,608)
Net earnings (loss) before extraordinary gain(1) $ (1,149)$ 10,649 $ 2,947 $ (11,264)
Net earnings (loss) $ 4,020 $ 10,649 $ 6,089 $ (219)
Basic earnings per share
Net earnings (loss) before extraordinary gain(1)(2) $ (.04)$ .35 $ .10 $ (.43)
Net earnings (loss)(2) $ .13 $ .35 $ .21 $ (.01)
Diluted earnings per share
Net earnings (loss) before extraordinary gain(1)(2) $ (.04)$ .35 $ .10 $ (.43)
Net earnings (loss)(2) $ .13 $ .35 $ .21 $ (.01)
Dividends declared per common share(3)
Quarterly dividend
Class A $ .035 $ .03 $ .03 $ .03
Class B $ .035 $ .03 $ .03 $ .03
Market price range of common stock
Class A
High $ 29.44 $ 31.25 $ 27.47 $ 25.19
Low $ 26.63 $ 26.25 $ 20.88 $ 19.75
Class B
High $ 29.38 $ 30.38 $ 27.44 $ 25.00
Low $ 26.88 $ 26.75 $ 21.38 $ 21.00
Both classes of common stock are traded on the New York Stock Exchange under the
symbols FCEA and FCEB.
As of March 1, 1999, the number of registered holders of Class A and Class B
common stock were 811 and 631, respectively.
(1) Excludes the extraordinary gain, net of tax of $16,343 ($.55 basic and $.54
diluted per share) and $19,356 ($.67 basic and diluted per share) in fiscal
1998 and 1997, respectively. These items are explained in Note R in the
Notes to Consolidated Financial Statements.
(2) The sum of quarterly earnings per share may not equal annual earnings per
share due to the weighting of stock and option activity during the year.
(3) Future dividends will depend upon such factors as earnings, capital
requirements and financial condition of the Company. Retained earnings of
$8,801 was available for payment of dividends as of January 31, 1999, under
the restrictions contained in the revolving credit agreement with a group
of banks.
Management's Discussion and Analysis of Financial Condition and Results of
Operation
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."
The Company's EBDT for 1998 grew by 10.2% (or 6.0% per share) to
$117,854,000, or $3.91 per share of common stock, from $106,910,000, or $3.69
per share of common stock for 1997, diluted and adjusted for the two-for-one
stock split distributed in July 1998. EBDT for 1998 grew by 18.0%, or 13.3% per
share, excluding $6,991,000 in EBDT in 1997 related to the litigation settlement
for Toscana, a 563-unit apartment complex in Irvine, California (see "Results of
Operations - Other Transactions - Sale of Toscana").
The increase in EBDT is primarily attributable to the acquisitions or
openings of 16 properties during 1998 and a full year of operations for the 11
properties that opened during 1997.
Results of Operations
The Company reports its results of operations by each of its four principal
business groups as it believes it provides the most meaningful understanding of
the Company's financial performance.
The major components of EBDT are Revenues, Operating Expenses and Interest
Expense, each of which is discussed below. Net Operating Income ("NOI") is
defined as Revenues less Operating Expenses. See the information in the table
"Three Year Summary of 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 from the combined
Commercial Group and Residential Group ("Real Estate Groups") for 1998 was
$257,053,000 compared to $234,730,000 in 1997, a 9.5% increase. NOI in 1997
included $15,000,000 of non-recurring Toscana litigation settlement income (see
"- Other Transactions - Sale of Toscana" below). Adjusting for this item, NOI
increased by 17.0% over 1997. Comparable NOI (NOI for properties in operation
throughout both years) for Real Estate Groups increased 6.5% from 1997 to 1998
and 4.6% from 1996 to 1997. Including the expected NOI for the twelve months
following stabilization for the 16 properties that were opened, expanded or
acquired in 1998, NOI for Real Estate Groups would be approximately $274,000,000
for 1998.
Commercial Group
Revenues - Revenues for the Commercial Group increased $50,147,000, or
15.2%, to $380,264,000 in 1998 from $330,117,000 in 1997. This increase is
primarily the result of property openings and acquisitions. During 1998, Forest
City acquired the 292-room Sheraton Hotel at Station Square in Pittsburgh,
Pennsylvania and the 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 $13,616,000, $5,919,000 and
$1,574,000, respectively. Phase Two of University Park at MIT in Cambridge,
Massachusetts opened during the second quarter of 1998. This mixed-use facility,
owned in partnership with MIT, consists of 76,000 square feet of office space,
96,000 square feet of retail space, a 210-room hotel and a 960-space parking
facility and generated revenues of $4,246,000 in 1998. Richmond Avenue, a retail
center in Staten Island, New York, also opened in 1998 and generated revenues of
$1,535,000. Revenues increased from the openings of properties in the New York
City area during 1997 including Nine MetroTech office building in Brooklyn, New
York ($4,400,000) and two retail properties in Queens, New York, Northern
Boulevard ($3,701,000) and Grand Avenue ($1,735,000). In addition, the Company's
increased ownership in two properties during 1997 resulted in increases to
revenues: Antelope Valley Mall in Palmdale, California increased from 40% to 78%
($3,131,000) and Station Square in Pittsburgh, Pennsylvania increased from 25%
to 100% ($5,278,000). These increases were partially offset by decreases in
revenues due to the disposition of the Company's interest in three commercial
properties in 1998: the 469,000-square-foot San Vicente office building in
Brentwood, California ($3,390,000), the 695,000-square-foot Summit Park Mall in
Wheatfield, New York ($3,554,000) and the Courtyard strip shopping center in
Flint, Michigan ($581,000). The Commercial Group also recorded an increase in
land sales of $5,388,000 over 1997. The balance of the increase in revenues
within the Commercial Group (approximately $7,000,000) was generally due to
improved operations.
Revenues for the Commercial Group increased $15,355,000, or 4.9%, to
$330,117,000 in 1997 from $314,762,000 in 1996. This increase is primarily the
result of 1997 property openings including Nine MetroTech ($1,495,000), Atlantic
Center in Brooklyn, New York ($6,856,000), Bruckner Boulevard in the Bronx, New
York ($1,422,000), Gun Hill Road in the Bronx, New York ($749,000), Northern
Boulevard ($282,000) and Grand Avenue ($156,000). Properties which opened in
1996 had a full year of operations in 1997 and generated additional revenues
include: Showcase in Las Vegas, Nevada ($1,623,000), Galleria at Sunset in
Henderson, Nevada ($901,000) and Marketplace at Riverpark in Fresno, California
($690,000). In addition, the Ritz-Carlton hotel in Cleveland, Ohio realized
increased revenues in 1997 over the prior year of $1,897,000 and comparable
office building revenues increased by approximately $6,300,000. These increases
were partially offset by 1996 land sales which did not recur ($2,989,000), a
reduction in revenues from Beachwood Place in Cleveland, Ohio which was sold in
1996 ($1,389,000) and the closing of the Handy Andy stores that were the
Company's tenants ($3,034,000).
Operating and Interest Expenses - During 1998, operating expenses for the
Commercial Group increased $28,859,000, or 17.3%, to $195,966,000 from
$167,107,000 in 1997. The increase in operating expenses was attributable
primarily to costs associated with the 1998 acquisitions of the Sheraton Hotel
at Station Square ($9,403,000), Fairmont Plaza ($2,137,000) and Pavilion
($901,000) as well as 1998 openings of Phase Two of University Park at MIT
($3,056,000) and Richmond Avenue ($222,000) and 1997 openings of Nine MetroTech
($1,605,000), Northern Boulevard ($1,374,000) and Grand Avenue ($274,000). In
addition, operating expenses increased due to increased ownership in 1997 in
Antelope Valley Mall ($1,303,000) and Station Square ($4,060,000) and additional
costs associated with increased land sales ($7,181,000). These increases were
partially offset by decreases in operating expenses of $3,972,000 resulting from
1998 dispositions. Interest expense for 1998 increased by $4,256,000, or 4.9%,
to $91,291,000 from $87,035,000 for 1997. The increase in interest expense is
primarily attributable to the 1998 openings and acquisitions discussed above, a
full year of interest for 1997 openings and increased ownership in two
properties in 1997, also discussed above.
During 1997, operating expenses for the Commercial Group decreased
$1,359,000, or 0.8%, to $167,107,000 from $168,466,000 in 1996. The decrease in
operating expenses was attributable primarily to costs associated with the sale
of land in 1996 ($5,066,000) which did not recur in 1997, partially offset by
the opening of new retail properties ($3,638,000) and costs associated with
increased hotel occupancy ($1,379,000). Interest expense increased $5,528,000 in
1997, or 6.8%, to $87,035,000 from $81,507,000 in 1996. The increase in interest
expense was attributable to the financing of new properties.
Net Operating Income - Commercial Group NOI for 1998 was $184,298,000
compared to $163,010,000 in 1997, a 13.1% increase. NOI increased 6.2% from 1997
to 1998 and 4.1% from 1996 to 1997 for Commercial Group properties in operation
throughout both years. Including the expected NOI for the twelve months after
stabilization for the Commercial Group properties that were opened or acquired
in 1998 and the additional NOI from the purchase of additional ownership
interests in two properties during 1997, NOI would be approximately $200,000,000
for 1998.
Residential Group
Revenues - Revenues for the Residential Group increased by $3,750,000, or
2.8%, in 1998 to $139,003,000 from $135,253,000 in 1997. Excluding the
$15,000,000 in proceeds from the Toscana litigation settlement received in 1997
(see "- Other Transactions - Sale of Toscana" below), revenues for 1998
increased $18,750,000, or 15.6% over 1997. This increase was primarily
attributable to the sale of the mortgage servicing division of Forest City
Capital Corporation ($1,329,000) and the recognition of development and
syndication fees on several projects ($3,843,000). Revenues also increased as a
result of 1998 acquisitions of the 534-unit Woodlake Apartments in Silver
Spring, Maryland ($2,229,000), a 50% interest in the 342-unit Park Plaza in
Mayfield Heights, Ohio ($786,000) and an additional 20% interest in the 450-unit
Studio Colony apartment community in Los Angeles, California ($1,599,000) as
well as a full year of operations for the 1997 acquisitions of Whitehall
Terrace, a 188-unit apartment building in Kent, Ohio ($1,059,000), Colony Woods,
a 396-unit garden apartment complex in Bellevue, Washington ($1,357,000) and
Museum Towers, a 286-unit high rise apartment building in Philadelphia,
Pennsylvania ($774,000). In addition, revenues increased $1,100,000 over 1997
from the addition of 386 units during 1998 to three apartment communities in
Cleveland, Ohio and income relating to syndicated partnerships ($2,970,000) and
interest on advances made on behalf of the Company's partner in Trowbridge and
Museum Towers ($978,000). These increases are partially offset by the decrease
in revenues as the result of the 1998 disposition of Trolley Plaza in Detroit,
Michigan ($1,297,000). The balance of the increase in revenues within the
Residential Group was generally due to improved operations.
Revenues for the Residential Group increased by $18,375,000, or 15.7%, in
1997 to $135,253,000 from $116,878,000 in 1996. This increase reflects proceeds
from the Toscana litigation settlement ($15,000,000 - see "- Other Transactions
- - Sale of Toscana"), development fees from The Knolls, a 260-unit apartment
community in Orange, California ($1,145,000), the acquisitions in 1997 of Museum
Towers ($2,477,000), Colony Woods ($1,186,000) and Whitehall Terrace ($309,000),
and a full year of operations for Emerald Palms, a 419-unit apartment complex in
Miami, Florida which was acquired in 1996 ($1,041,000). Revenues increased
$1,039,000 from the opening of 294 additional units at three existing apartment
developments in Cleveland, Ohio. In addition, revenues for comparable properties
improved over last year ($3,906,000), offset by the loss of revenue due to the
sale of Toscana ($7,206,000).
Operating and Interest Expenses - Operating expenses for the Residential
Group increased by $2,715,000, or 4.3%, in 1998, to $66,248,000 from $63,533,000
in 1997. The increase in operating expenses was primarily due to the 1998
acquisition of Woodlake ($1,048,000) and 1997 acquisitions of Colony Woods
($790,000), Whitehall Terrace ($436,000) and Museum Towers ($772,000). In
addition, operating expenses increased $471,000 over last year due to the
addition of 386 units at three apartment communities in Cleveland, Ohio and
$986,000 in additional costs associated with the generation of increased
development fees. This increase was partially offset by a decrease in expenses
relating to the sale of Trolley Plaza ($647,000) and 1997 development expenses
which did not recur in 1998 ($1,147,000). Interest expense decreased by
$1,542,000 in 1998, or 5.3%, to $27,342,000 from $28,884,000 in 1997. This
decrease is primarily the result of the disposition of Trolley Plaza.
Operating expenses for the Residential Group increased by $2,096,000, or
3.4%, to $63,533,000 in 1997 from $61,437,000 in 1996. Interest expense
decreased by $4,063,000, or 12.3%, to $28,884,000 in 1997 from $32,947,000 in
1996. The increase in operating expenses is primarily attributable to the 1997
acquisitions of Museum Towers ($1,049,000), Colony Woods ($652,000) and
Whitehall Terrace ($127,000), a full year of operations for Emerald Palms
($556,000) which was acquired in 1996, the addition of 294 units at three
existing apartment projects in Cleveland, Ohio ($389,000) and normal
inflationary growth on the portfolio (approximately $1,300,000). This increase
was partially offset by a decrease in operating expenses due to the sale of
Toscana ($2,899,000). The decrease in interest expense is primarily the result
of the sale of Toscana ($4,097,000).
Net Operating Income - Residential Group NOI for 1998 was $72,755,000,
compared to $71,720,000 in 1997, a 1.4% increase. NOI increased 7.2% from 1997
to 1998 for Residential Group properties in operation throughout both years, and
5.9% from 1996 to 1997. Including the expected NOI for the twelve months after
stabilization for Residential Group properties that were opened, expanded or
acquired in 1998, NOI would be approximately $74,000,000 for 1998.
Land Group
Revenues - Revenues for the Land Group increased by $7,997,000 to
$52,611,000 in 1998 from $44,614,000 in 1997. This increase is a result of
increased land sales at Seven Hills in Henderson, Nevada and The Greens at
Birkdale Village in Charlotte, North Carolina. Revenues for the Land Group
decreased by $9,274,000 to $44,614,000 in 1997 from $53,888,000 in 1996. This
decrease is attributable primarily to 1996 land sale activity at Silver Lakes in
Fort Lauderdale, Florida and a significant sale of land located in Miami,
Florida in 1996, both of which did not recur in 1997. 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
$6,677,000 in 1998 to $40,532,000 from $33,855,000 in 1997. Operating expenses
decreased by $7,213,000 in 1997 to $33,855,000 from $41,068,000 in 1996. The
fluctuation in operating expenses primarily reflects costs associated with land
sales volume in each period. Interest expense increased by $1,239,000 in 1998 to
$6,814,000 from $5,575,000 in 1997. Interest expense decreased by $1,238,000 in
1997 to $5,575,000 from $6,813,000 in 1996. Interest expense varies from year to
year depending on the level of interest-bearing debt within the Land Group.
Lumber Trading Group
Revenues - Revenues for the Lumber Trading Group increased by $1,156,000 in
1998 to $123,325,000 from $122,169,000 in 1997. The increase was due primarily
to increased lumber trading margins in 1998 compared to 1997 ($8,065,000) which
was partially offset by a decrease due to the sale of a facsimile line of
business in 1997 ($5,615,000) and a decrease in volume at Forest City/Babin, a
wholesaler of major appliances, cabinets and hardware to housing contractors
($936,000).
Revenues for the Lumber Trading Group decreased by $2,322,000 in 1997 to
$122,169,000 from $124,491,000 in 1996. The decrease was due primarily to a
reduced level of trading activity in 1997 compared to 1996 ($5,219,000),
partially offset by an increase in volume at Forest City/Babin ($2,420,000).
Operating and Interest Expenses - Operating expenses for the Lumber Trading
Group increased by $4,325,000 in 1998 to $111,998,000 from $107,673,000 in 1997.
This increase reflected higher variable expenses due to increased trading
margins compared to 1997 ($7,572,000) that was partially offset by a decrease
due to the sale of a facsimile line of business in 1997 ($3,356,000) and a
decrease in operating expenses at Forest City/Babin ($857,000). Interest expense
increased by $8,000 in 1998 to $5,262,000 from $5,254,000 in 1997.
Operating expenses for the Lumber Trading Group decreased by $2,686,000 in
1997 to $107,673,000 from $110,359,000 in 1996. This decrease reflected the
fluctuation in variable expenses due to decreased trading sales volume. Interest
expense for 1997 increased by $88,000 in 1997 to $5,254,000 from $5,166,000 in
1996.
Corporate Activities
Revenues- Corporate Activities' revenues increased $930,000 in 1998 to
$1,446,000 from $516,000 in 1997 and increased $86,000 in 1997 to $516,000 from
$430,000 in 1996. 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 $2,288,000 in 1998 to $12,766,000 from $10,478,000 in 1997
and increased $1,755,000 in 1997 to $10,478,000 from $8,723,000 in 1996. These
increases represent general corporate expenses including amortization of costs
associated with the 1998 public offering of Senior Notes (see "Financial
Condition and Liquidity"). Interest expense increased $9,677,000 in 1998 to
$19,251,000 from $9,574,000 in 1997. Interest expense increased $2,643,000 in
1997 to $9,574,000 from $6,931,000 in 1996. 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 (Loss) on Disposition of Properties - Gain (loss) on disposition of
properties totaled a gain of $30,557,000, a loss of $38,638,000 and a gain of
$17,574,000 in 1998, 1997 and 1996, respectively. During 1998, the Company
recognized a gain on the disposition of its interests in Summit Park Mall
($13,897,000 or $8,401,000 after tax), a regional shopping center in suburban
Buffalo, New York; San Vicente ($10,403,000 or $6,289,000 after tax), an office
building in Brentwood, California; and Trolley Plaza ($4,941,000 or $2,987,000
after tax), an apartment community in downtown Detroit, Michigan. The
dispositions of Summit Park, San Vicente and Trolley Plaza were all structured
as tax-free exchanges. Also in 1998, the Company reported gains on the sale of
Courtyard ($622,000 or $376,000 after tax), a strip shopping center in Flint,
Michigan and the Company's 20% interests in three apartment buildings in
Houston, Texas ($1,027,000 or $593,000 after tax).
During 1997, the Company sold its interest in Woodridge, a land development
project in suburban Chicago, Illinois ($3,133,000 pre-tax loss or $1,892,000
after tax loss) and recorded a loss on disposition of Toscana ($35,505,000
pre-tax or $21,464,000 after tax). The 1996 gain primarily reflects the
disposition of the Company's 18.63% interest in Beachwood Place, a regional
shopping center in Cleveland, Ohio.
Extraordinary Gain - Extraordinary gain, net of tax, totaled $16,343,000,
$19,356,000 and $2,900,000 in 1998, 1997 and 1996, respectively, representing
extinguishment of nonrecourse debt and related accrued interest. The 1998
extraordinary gain recorded represents extinguishment of nonrecourse debt
related to Terminal Tower ($13,947,000 or $8,431,000 after tax) and Skylight
Office Tower ($3,619,000 or $2,188,000 after tax) both located in Cleveland,
Ohio; Courtland ($7,381,000 or $4,462,000 after tax), a regional mall in Flint,
Michigan; One Franklintown ($1,350,000 or $816,000 after tax), an apartment
complex in Philadelphia, Pennsylvania; Boot Ranch ($187,000 or $113,000 after
tax), an apartment property in Tampa, Florida; and Trolley Plaza ($552,000 or
$333,000 after tax).
In 1997, the properties that recorded extraordinary gain on extinguishment
of nonrecourse debt were Toscana ($18,081,000, or $16,884,000 after tax); Halle
Office Building in Cleveland, Ohio ($3,569,000 or $2,156,000 after tax); and San
Vicente ($524,000 or $316,000 after tax). In 1996, the properties which recorded
extraordinary gain on extinguishment of nonrecourse debt are Enclave, an
apartment complex in San Jose, California and the Clark Building, an office
building in Cambridge, Massachusetts.
Sale of Toscana - During February 1997, the Company sold Toscana, a
563-unit apartment complex in Irvine, California, back to the original land
owner and settled litigation related to the property. As a result, the Company
recorded operating income of $9,146,000, after tax, a loss on disposition of
property of $21,464,000, after tax, and an extraordinary gain of $16,884,000,
after tax, related to the extinguishment of a portion of the property's
nonrecourse mortgage debt. The net result of these transactions to the Company
is after-tax income of $4,566,000.
Income Taxes - Income tax expense for 1998 and 1997 totaled $27,674,000,
$2,202,000 and $12,951,000, in 1998, 1997 and 1996, respectively. 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 1998, the Company's net earnings grew to $54,750,000, or
$1.81 per share of common stock, from $20,539,000, or $.71 per share of common
stock in 1997. All per share amounts are diluted and adjusted for the
two-for-one stock split that was effective July 16, 1998.
EBDT - Earnings Before Depreciation, Amortization and Deferred Taxes
("EBDT") is defined as net earnings from operations before depreciation,
amortization and deferred taxes on income, and excludes provision for decline in
real estate, gain (loss) on disposition of properties and extraordinary 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 outlots 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.
Revolving Credit Facility - At January 31, 1999, the Company had
$105,000,000 outstanding under its new $225,000,000 revolving credit facility.
The new revolving credit line replaced the $80,000,000 revolving credit facility
and $60,000,000 term loan in place at January 31, 1998. The new revolving credit
facility matures December 10, 2000, unless extended, and allows for up to
$30,000,000 in outstanding letters of credit ($22,413,000 of which were
outstanding at January 31, 1999) that reduce the credit available to the
Company. 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 January 31, 1999, the revolving credit
line was $215,000,000.
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. At January 31, 1999, retained
earnings of $8,801,000 were available for payment of dividends.
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 year ended January 31, 1999, the Company completed
$1,026,000,000 in financings, including $556,000,000 in refinancings,
$358,000,000 for new development projects and $112,000,000 in acquisition
mortgages. The Company is pursuing the refinancing of its nonrecourse mortgage
debt which matures within the next 12 months. In addition, the Company is
attempting to extend the maturities and/or refinance the nonrecourse debt that
is coming due in 1999 and 2000, generally pursuing a strategy of utilizing
long-term fixed rate debt and taking advantage of favorable financial market
conditions.
Interest Rate Exposure
At January 31, 1999, the composition of nonrecourse mortgage debt is as
follows:
Amount Rate(1)
- --------------------------------------------------------------------------------
(in thousands)
Fixed $ 1,575,731 7.59%
Variable -
Hedged(2) 219,003 7.23%
Unhedged 154,960 6.90%
Tax-Exempt 154,420 3.66%
UDAG and other
subsidized loans (fixed) 69,758 2.57%
--------------
$ 2,173,872 7.07%
--------------
(1) The weighted average interest rates shown above include both the base index
and the lender margin.
(2) The hedged debt of $219,003 represents $133,479 of 1-year LIBOR contracts
and $85,524 of LIBOR-based swaps that have a combined average term of .65
years as of January 31, 1999.
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
$170,850,000, $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 January 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 $1,600,000. 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.
At January 31, 1999, Lumber Trading Group's two lines of credit totaled a
$67,000,000 commitment expiring June 30, 1999. These credit lines are secured by
the assets of the Lumber Trading Group and are used by the Trading Group to
finance its working capital needs. At January 31, 1999, $17,275,000 was
outstanding under these facilities.
The Lumber Trading Group also has sold an undivided ownership interest in a
pool of accounts receivable of up to a maximum of $91,800,000 and uses this
program to finance its working capital needs. At January 31, 1999, $44,000,000
had been sold under this accounts receivable program.
The Company believes that the amounts available under these credit
facilities, together with the accounts receivable sale program, will be
sufficient to meet the Lumber Trading Group's liquidity needs.
Cash Flows
Net cash provided by operating activities was $93,492,000, $73,265,000 and
$48,278,000 for 1998, 1997 and 1996, respectively. The increase in net cash
provided by operating activities in 1998 from 1997 is the result of an increase
of $16,512,000 in rents and other revenues received principally comprised of an
increase in consolidated revenues of $63,980,000, net of an increase in notes
and accounts receivable of $48,579,000 (resulting from an increase of
$38,560,000 in 1998 versus a decrease of $10,019,000 in 1997) primarily from
Lumber Trading Group, an increase of $3,416,000 in proceeds from land sales and
a $25,000,000 decrease in expenditures for operating expenses primarily due to
an increase in accounts payable in Lumber Trading Group. These increases were
partially offset by an increase of $13,114,000 in land development expenditures
and an increase of $11,587,000 in interest paid. The increase in net cash
provided by operating activities in 1997 from 1996 is primarily the result of a
$55,674,000 increase in collection of revenues received primarily due to the
decrease in Lumber Trading Group accounts receivable and a $2,322,000 increase
in proceeds from land sales. This increase was partially offset by a $6,929,000
increase in land development expenditures and a $26,635,000 increase in
operating expenditures, primarily due to the decrease in Lumber Trading Group
accounts payable and accrued expenses.
Net cash used in investing activities totaled $506,697,000, $276,568,000
and $139,609,000 for 1998, 1997 and 1996, respectively. Capital expenditures,
other than development and acquisition activities, totaled $44,615,000,
$39,421,000 and $32,007,000 (including both recurring and investment capital
expenditures) in 1998, 1997 and 1996, respectively and were financed with cash
provided from operating activities. The Company invested $396,101,000,
$203,410,000 and $120,667,000 in acquisition and development of real estate
projects in 1998, 1997 and 1996, respectively. These expenditures were financed
with approximately $203,000,000, $181,000,000 and $117,000,000 in new mortgage
indebtedness incurred in 1998, 1997 and 1996, respectively, cash provided from
operations and borrowings under the revolving credit facility (after the
outstanding balance was repaid from proceeds from the Company's public offerings
in 1998 and 1997).
In 1998, 1997 and 1996, $33,345,000, $-0- and $26,040,000 was collected in
proceeds from the disposition of real estate properties. The Company invested
$99,326,000, $33,737,000 and $8,048,000 in investments in and advances to
affiliates in 1998, 1997 and 1996, respectively. The 1998 investments were
primarily in the following syndicated Residential Group projects: 101 San
Fernando ($31,100,000), under construction in San Jose, California; The Enclave
($16,300,000), another development in San Jose that opened in phases during 1997
and 1998; The Grand ($7,800,000) in North Bethesda, Maryland that opened in
February 1999; Tobacco Row ($4,900,000), a redevelopment project in Richmond,
Virginia; and The Drake ($5,200,000), a redevelopment project in Philadelphia,
Pennsylvania. In addition, investments were made on behalf of the Company's
partners during 1998 for the following projects: $11,772,000 for New York City
area urban development; $5,181,000 for the Promenade regional mall under
construction in Temecula, California; $5,400,000 for The Mall at Robinson Town
Centre project under development; and $6,000,000 in Land Group joint ventures.
In 1997, the Company invested primarily in The Grand, The Mall at Robinson Town
Centre and the New York City urban retail program.
Net cash provided by financing activities totaled $436,980,000,
$216,855,000 and $93,488,000 in 1998, 1997 and 1996, respectively. Net proceeds
from the issuance of senior notes in March 1998 were $193,703,000, which were
initially used to repay $114,000,000 of long-term debt. The Company's
refinancing of mortgage indebtedness is discussed above in "Mortgages
Refinancings" and borrowings under new mortgage indebtedness for acquisition and
development activities is included in the preceding paragraph discussing net
cash used in investing activities. Net cash provided by financing activities for
1998 reflected a reduction of $26,579,000 in restricted cash primarily related
to the financing of The Enclave apartment project in San Jose, California and
the sale of the mortgage servicing division of Forest City Capital Corp., and an
increase in book overdrafts of $8,838,000 (representing checks issued but not
yet paid). In addition, the Company reported a net increase of $9,110,000 in
notes payable primarily from the 101 San Fernando residential development
project, payment of deferred financing costs of $16,565,000 and payment of
$4,497,000 of dividends. During 1997, cash provided by financing activities
included proceeds from the sale of common stock of $76,076,000, the release of
$3,600,000 in restricted cash related to the Atlantic Center retail project in
Brooklyn, New York, a reduction in book overdrafts of $9,749,000, repayment of a
$6,365,000 note payable relating to the purchase of the Company's additional
33-1/3% interest in the The Mall at Robinson Town Centre, payment of deferred
financing costs of $12,142,000, purchase of treasury stock for $2,896,000 and
payment of $3,490,000 of dividends. During 1996, cash provided by financing
activities included the release of $15,200,000 in restricted cash related to The
Enclave, an increase in book overdrafts of $18,655,000, payment of deferred
financing costs of $10,037,000, purchase of treasury stock for $6,080,000 and
payment of $2,797,000 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.
Stock Split, Capitalization and Dividends
The Board of Directors approved a two-for-one stock split of both the
Company's Class A and Class B Common Stock, effective July 16, 1998 to
shareholders of record at the close of business on July 1, 1998. The stock split
was effected as a stock dividend.
On June 9, 1998, the Board of Directors voted to increase the 1998
quarterly dividend to $.04 per share (adjusted for the two-for-one stock split)
on both Class A and Class B shares, representing a 14.3% annual increase in the
previous quarterly dividend.
The first, second, third and fourth 1998 quarterly dividends of $.035,
$.04, $.04 and $.04, respectively, per share (on a post-split basis) on shares
of both Class A and Class B Common Stock were paid June 15, 1998, September 15,
1998, December 15, 1998 and March 15, 1999, respectively.
The first 1999 quarterly dividend of $.04 per share on shares of both Class
A and Class B was declared on March 11, 1999 and will be paid on June 15, 1999
to shareholders of record at the close of business on June 1, 1999.
On June 9, 1998, the shareholders approved an amendment to the Company's
Articles of Incorporation to increase the Company's capitalization to: a)
96,000,000 shares of Class A Common Stock from 48,000,000 shares and b)
36,000,000 shares of Class B Common Stock from 18,000,000 shares. The 5,000,000
Preferred shares remained unchanged.
New Accounting Standards
In the first quarter of 1999, the Company will adopt 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. In the first quarter of
2000, the Company will adopt SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires recognition of all derivatives
as either assets or liabilities and measurements of those instruments at fair
value. The Company anticipates that the adoption of both SOP 98-5 and SFAS 133
will not have a material effect on its earnings or financial position.
Year 2000
The Company is completing its plan to prepare its financial and operational
computer systems and embedded applications for the Year 2000. The Company
believes that 90% of the required modifications have been completed, the total
cost of which is not expected to be material to the Company's operating results.
The Company anticipates that the remaining modifications will be made by the end
of the second quarter of 1999.
For business reasons unrelated to the Year 2000, the Company's computer
systems have moved from a mainframe environment to a distributed environment.
Major processing systems were replaced with Year 2000-compliant software or
software with definitive plans for upgrades to Year 2000 compliant code. Costs
for this project were approximately $4 million. In addition, the Lumber Trading
Group successfully converted their internal systems to Year 2000-compliant code.
With a majority of the Company's core businesses using Year 2000-compliant
software code, the Company's plan has been focused on testing the compliant
systems and identifying other systems, such as embedded systems, to ensure that
they have an active Year 2000 compliance program.
Since 1996, senior management and the audit committee have been alerted to
the Year 2000 issue and have been provided a quarterly report regarding the
Company's Year 2000 compliance plan. The Company's independent auditors have
been reviewing the plan and its progress. Each principal business group has
formed a Year 2000 compliance committee under senior management's direction.
As part of the due diligence in the acquisitions of new properties, the
Company continues to review Year 2000 compatibility and has updated the terms
and conditions of its purchasing function to require goods and services
purchased to be Year 2000-compliant.
The process of inventory collection has been completed at the Corporate and
principal business group level for hardware, software and embedded systems.
Inventory collection is in process at certain regional offices. The Company has
made excellent progress in notifying vendors and business partners of its
progress relating to the Year 2000 compliance plan.
Our testing procedures have uncovered some Year 2000 software issues which
have been corrected. The upgrading of the general ledger software and its
various interfaces is proceeding as planned.
The Company has tested most of the embedded systems, particularly those
related to the safety of our employees, tenants and customers. The testing has
determined that an energy management system interface at one of the Company's
commercial facilities and certain gate access systems at residential facilities
are not compliant and will need to be upgraded in 1999.
The Company has identified issues related to hardware, software and
embedded systems and developed a contingency plan to respond to each concern.
For hardware, the primary concern is that a specific computer or server would
not be compliant. In that case, the Company would use other available hardware,
provided by our business continuity/disaster recovery program, that is compliant
to regenerate data from our backup systems.
For software, the primary concern is that the automated software scheduling
routines would not properly schedule in the Year 2000. Each of these automated
scheduling systems has a manual function that has been tested.
For embedded systems, the primary concern is that these systems, despite
testing, would not function properly in the Year 2000. All of these systems have
manual reset functions and Year 2000 date issues can be corrected. Additionally,
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 our tenants or customers will be affected.
The Company 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 that
would be activated if necessary. The Year 2000 plan is aimed at identifying and
correcting all issues upon which the Company has direct control or indirect
control through its vendors and business partners. The Company feels that the
successful completion of its Year 2000 plan will avoid or minimize any adverse
effect of the Year 2000 issue on operations.
Information Relating to Forward-Looking Statements
This annual report, together with other statements and information publicly
disseminated by the Company, contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements reflect
management's current views with respect to financial results related to future
events and are based on assumptions and expectations which may not be realized
and are inherently subject to risks and uncertainties, many of which cannot be
predicted with accuracy and some of which might not even be anticipated. Future
events and actual results, financial or otherwise, may differ from the results
discussed in the forward-looking statements. Risks and other factors that might
cause differences, some of which could be material, include, but are not limited
to, the effect of economic and market conditions on a 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.
Three Year Summary of Earnings Before Depreciation, Amortization and Deferred Taxes
(in thousands)
Commercial Group Residential Group
- ----------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Revenues $380,264 $330,117 $314,762 $139,003 $135,253 $116,878
Operating expenses, including
depreciation and amortization
for non-Real Estate Groups 195,966 167,107 168,466 66,248 63,533 61,437
Interest expense 91,291 87,035 81,507 27,342 28,884 32,947
Income tax provision (benefit) (1,020) 2,202 (1,243) 6,799 10,851 (2,324)
-------------------------------------------------------------------
286,237 256,344 248,730 100,389 103,268 92,060
-------------------------------------------------------------------
Earnings before depreciation,
amortization and deferred
taxes (EBDT) $94,027 $73,773 $66,032 $38,614 $31,985 $24,818
===================================================================
Land Group Lumber Trading Group
- ----------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Revenues $52,611 $44,614 $53,888 $123,325 $122,169 $124,491
Operating expenses, including
depreciation and amortization
for non-Real Estate Groups 40,532 33,855 41,068 111,998 107,673 110,359
Interest expense 6,814 5,575 6,813 5,262 5,254 5,166
Income tax provision (benefit) 2,079 1,858 2,078 2,838 4,043 3,913
-------------------------------------------------------------------
49,425 41,288 49,959 120,098 116,970 119,438
-------------------------------------------------------------------
Earnings before depreciation,
amortization and deferred
taxes (EBDT) $3,186 $3,326 $3,929 $3,227 $5,199 $5,053
===================================================================
Corporate Activities Total
- ----------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Revenues $ 1,446 $ 516 $ 430 $696,649 $632,669 $610,449
Operating expenses, including
depreciation and amortization
for non-Real Estate Groups 12,766 10,478 8,723 427,510 382,646 390,053
Interest expense 19,251 9,574 6,931 149,960 136,322 133,364
Income tax provision (benefit) (9,371) (12,163) (5,796) 1,325 6,791 (3,372)
-------------------------------------------------------------------
22,646 7,889 9,858 578,795 525,759 520,045
-------------------------------------------------------------------
Earnings before depreciation,
amortization and deferred
taxes (EBDT) $(21,200) $(7,373) $(9,428) $117,854 $106,910 $90,404
===================================================================
Reconciliation to net earnings:
Earnings before depreciation,
amortization and deferred
taxes (EBDT) $117,854 $106,910 $90,404
Depreciation and amortization
- Real Estate Groups (83,655) (71,678) (70,221)
Deferred taxes - Real Estate Groups (14,236) (10,693) (13,197)
Provision for decline in real estate, net of tax - - (7,413)
Gain (loss) on disposition of properties, net of tax 18,444 (23,356) 9,598
Extraordinary gain, net of tax 16,343 19,356 2,900
----------------------------------
Net earnings $54,750 $20,539 $12,071
==================================