1
Exhibit 13
SELECTED FINANCIAL DATA
Forest City Enterprises, Inc. and Subsidiaries
For the Years Ended January 31,
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
===============================================================================================================================
(in thousands,except per share data)
OPERATING RESULTS:
Revenues ...................................... $ 793,071 $ 696,649 $ 632,669 $ 610,449 $ 529,433
=============================================================================
Operating earnings, net of tax(1) ............. $ 35,600 $ 19,963 $ 24,539 $ 6,986 $ 13,490
Provision for decline in real estate and other,
net of tax ................................ (3,060) - - (7,413) (6,073)
Gain (loss) on disposition of properties, net
of tax .................................... 7,990 18,444 (23,356) 9,598 (478)
-----------------------------------------------------------------------------
Net earnings before extraordinary gain ........ 40,530 38,407 1,183 9,171 6,939
Extraordinary gain, net of tax ................ 272 16,343 19,356 2,900 1,847
-----------------------------------------------------------------------------
Net earnings .................................. $ 40,802 $ 54,750 $ 20,539 $ 12,071 $ 8,786
=============================================================================
Earnings before depreciation,amortization and
deferred taxes (EBDT) (1)(6)(7) ............ $ 132,639 $ 117,854 $ 106,910 $ 90,404 $ 82,021
=============================================================================
DILUTED EARNINGS PER COMMON SHARE
Net earnings before extraordinary gain ..... $ 1.34 $ 1.27 $ 0.04 $ 0.35 $ 0.26
Extraordinary gain, net of tax ............. 0.01 0.54 0.67 0.11 0.07
-----------------------------------------------------------------------------
Net earnings ............................... $ 1.35 $ 1.81 $ 0.71 $ 0.46 $ 0.33
=============================================================================
EBDT (1)(6)(7) ............................. $ 4.40 $ 3.91 $ 3.69 $ 3.43 $ 3.04
=============================================================================
Cash dividends declared Class A and Class B ... $ 0.190 $ 0.155 $ 0.125 $ 0.137 $ 0.083
=============================================================================
January 31,
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
===============================================================================================================================
(in thousands)
FINANCIAL POSITION:
Consolidated assets ........................... $ 3,814,474 $ 3,437,110 $ 2,963,353 $ 2,760,673 $ 2,642,756
Real estate portfolio, at cost ................ $ 3,426,508 $ 3,087,498 $ 2,704,560 $ 2,520,179 $ 2,425,083
Long-term debt, primarily nonrecourse mortgages $ 2,749,380 $ 2,478,872 $ 2,132,931 $ 1,991,428 $ 1,940,059
- -------------------------------------------------------------------------------------------------------------------------------
FOREST CITY RENTAL PROPERTIES CORPORATION
REAL ESTATE ACTIVITY(2)
Real estate -- end of year
Completed rental properties ................ $ 2,870,313 $ 2,605,048 $ 2,390,969 $ 2,227,859 $ 2,085,284
Projects under development ................. 478,766 412,072 251,416 215,960 246,240
-----------------------------------------------------------------------------
Real estate, at cost ..................... 3,349,079 3,017,120 2,642,385 2,443,819 2,331,524
Less accumulated depreciation .............. (532,607) (477,253) (436,377) (387,733) (338,216)
-----------------------------------------------------------------------------
Total real estate ........................ $ 2,816,472 $ 2,539,867 $ 2,206,008 $ 2,056,086 $ 1,993,308
=============================================================================
REAL ESTATE ACTIVITY DURING THE YEAR
Completed rental properties
Capital additions ........................ $ 295,681 $ 127,065 $ 166,740 $ 160,690 $ 89,028
Acquisitions ............................. -- 156,879 90,438 22,264 28,587
Dispositions ............................. (30,416)(3) (69,865)(4) (94,068)(5) (40,379) (27,960)
-----------------------------------------------------------------------------
265,265 214,079 163,110 142,575 89,655
-----------------------------------------------------------------------------
Projects under development
New development .......................... 324,553 243,106 154,746 98,403 58,798
Transferred to completed rental properties (257,859) (82,450) (119,290) (128,683) (43,360)
-----------------------------------------------------------------------------
66,694 160,656 35,456 (30,280) 15,438
-----------------------------------------------------------------------------
Increase in real estate, at cost ............... $ 331,959 $ 374,735 $ 198,566 $ 112,295 $ 105,093
=============================================================================
(1) Excludes the provision for decline in real estate and other 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 disposition of Rolling Acres Mall, a 1,014,000
square foot mall in Akron, Ohio.
(4) Primarily reflects the dispositions 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
Brentwood, California.
(5) Reflects the sale of Toscana, a residential complex containing 563 units in
Irvine, California.
(6) Earnings before depreciation, amortization and deferred taxes consists of
net earnings before extraordinary gain, excluding the provision for decline
in real estate and other and gain (loss) on disposition of properties, net
of tax, before deducting the noncash charges from Forest City Rental
Properties Corporation for depreciation,amortization and deferred income
taxes.
(7) Includes $6,991,000 or $0.24 per share, for the year ended January 31, 1998
related to the litigation settlement and sale of Toscana.
26
2
Forest City Enterprises, Inc. and Subsidiaries
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
independent accountants to be appointed by the Board of Directors 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, 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, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 2000, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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 11, 2000
27
3
CONSOLIDATED BALANCE SHEETS
Forest City Enterprises, Inc. and Subsidiaries
January 31,
- ---------------------------------------------------------------------------------------------------------------------
2000 1999
=====================================================================================================================
(dollars in thousands,except per share data)
ASSETS
Real Estate
Completed rental properties ................................................. $ 2,894,890 $ 2,625,589
Projects under development .................................................. 478,766 412,072
Land held for development or sale ........................................... 52,852 49,837
-------------------------
Real Estate, at cost ..................................................... 3,426,508 3,087,498
Less accumulated depreciation ............................................... (547,479) (491,293)
-------------------------
Total Real Estate ........................................................ 2,879,029 2,596,205
Cash and equivalents .......................................................... 97,195 78,629
Restricted cash ............................................................... 76,662 51,994
Notes and accounts receivable, net ............................................ 226,749 229,714
Inventories ................................................................... 57,444 47,299
Investments in and advances to real estate affiliates ......................... 318,308 299,599
Other assets .................................................................. 159,087 133,670
-------------------------
$ 3,814,474 $ 3,437,110
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage debt, nonrecourse .................................................... $ 2,382,380 $ 2,173,872
Accounts payable and accrued expenses ......................................... 409,390 398,499
Notes payable ................................................................. 62,898 43,929
Long-term debt ................................................................ 167,000 105,000
8.5% Senior notes ............................................................. 200,000 200,000
Deferred income taxes ......................................................... 174,661 150,150
Deferred profit ............................................................... 31,639 33,552
-------------------------
Total Liabilities ........................................................ 3,427,968 3,105,002
=========================
SHAREHOLDERS' EQUITY
Preferred stock -- convertible, without par value
5,000,000 shares authorized; no shares issued ............................... - -
Common stock -- $.33 1/3 par value
Class A, 96,000,000 shares authorized; 19,946,756 and 19,904,556
shares issued, 19,372,406 and 19,281,606 outstanding, respectively ......... 6,649 6,636
Class B, convertible, 36,000,000 shares authorized; 10,937,196 and
10,979,396 shares issued, 10,659,096 and 10,701,296 outstanding, respectively 3,646 3,661
-------------------------
10,295 10,297
Additional paid-in capital .................................................... 113,764 114,270
Retained earnings ............................................................. 254,063 218,967
-------------------------
378,122 343,534
Less treasury stock, at cost; 2000: 574,350 Class A and 278,100 Class B shares
1999: 622,950 Class A and 278,100 Class B shares ............................ (10,773) (11,426)
Accumulated other comprehensive income ........................................ 19,157 -
-------------------------
Total Shareholders' Equity .................................................. 386,506 332,108
-------------------------
$ 3,814,474 $ 3,437,110
=========================
The accompanying notes are an integral part of these consolidated financial
statements.
28
4
CONSOLIDATED STATEMENTS OF EARNINGS
Forest City Enterprises, Inc. and Subsidiaries
For the Years Ended January 31,
- -----------------------------------------------------------------------------------------
2000 1999 1998
=========================================================================================
(in thousands,except per share data)
REVENUES ..................................... $ 793,071 $ 696,649 $ 632,669
--------------------------------------
Operating expenses ........................... 486,009 424,097 379,531
Interest expense ............................. 159,719 149,960 136,322
Provision for decline in real estate and other 5,062 - -
Depreciation and amortization ................ 88,144 87,068 74,793
--------------------------------------
738,934 661,125 590,646
--------------------------------------
Gain (loss) on disposition of properties ..... 10,712 30,557 (38,638)
--------------------------------------
EARNINGS BEFORE INCOME TAXES ................. 64,849 66,081 3,385
--------------------------------------
INCOME TAX EXPENSE (BENEFIT)
Current ..................................... 12,257 (86) (1,478)
Deferred .................................... 12,062 27,760 3,680
--------------------------------------
24,319 27,674 2,202
--------------------------------------
NET EARNINGS BEFORE EXTRAORDINARY GAIN ....... 40,530 38,407 1,183
Extraordinary gain, net of tax ............... 272 16,343 19,356
--------------------------------------
NET EARNINGS ................................. $ 40,802 $ 54,750 $ 20,539
======================================
BASIC EARNINGS PER COMMON SHARE
Net earnings before extraordinary gain ...... $ 1.35 $ 1.28 $ .04
Extraordinary gain, net of tax .............. .01 .55 .67
--------------------------------------
NET EARNINGS ................................. $ 1.36 $ 1.83 $ .71
======================================
DILUTED EARNINGS PER COMMON SHARE
Net earnings before extraordinary gain ...... $ 1.34 $ 1.27 $ .04
Extraordinary gain, net of tax .............. .01 .54 .67
--------------------------------------
NET EARNINGS ................................. $ 1.35 $ 1.81 $ .71
======================================
The accompanying notes are an integral part of these consolidated financial
statements.
29
5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Forest City Enterprises, Inc. and Subsidiaries
Common Stock
---------------------------------------
Class A Class B Additional
Comprehensive --------------------------------------- Paid-In Retained
Income Shares Amount Shares Amount Capital Earnings
=================================================================================================================
(in thousands, except per share data)
BALANCES AT JANUARY 31,1997.......... 15,863 $ 5,290 11,111 $3,705 $ 39,496 $152,077
Net earnings........................ $20,539 20,539
=======
Dividends:
$.03 per share (three quarters)... (2,703)
$.035 per share (one quarter)..... (1,049)
Issuance of Class A common
shares in public offering......... 3,910 1,302 74,774
Conversion of Class B to Class A
shares............................. 40 14 (40) (14)
Purchase of treasury stock
----------------------------------------------------------------
BALANCES AT JANUARY 31, 1998......... 19,813 6,606 11,071 3,691 114,270 168,864
Net earnings........................ $54,750 54,750
=======
Dividends:
$.035 per share (one quarter)..... (1,049)
$.04 per share (three quarters)... (3,598)
Conversion of Class B to Class A
shares............................. 92 30 (92) (30)
Exercise of stock options...........
----------------------------------------------------------------
BALANCES AT JANUARY 31, 1999........ 19,905 6,636 10,979 3,661 114,270 218,967
Comprehensive income:
Net earnings...................... $40,802 40,802
Other comprehensive income,
net of tax
Unrealized gain on securities... 19,157
-------
Total comprehensive income $59,959
=======
Dividends:
$.04 per share (one quarter)..... (1,199)
$.05 per share (three quarters).. (4,507)
Conversion of Class B to Class A
shares............................ 42 14 (42) (14)
Exercise of stock options.......... 4
Restricted stock issued............ (605)
Amortization of unearned
compensation..................... 93
Rounding adjustments............... (1) (1) 2
----------------------------------------------------------------
BALANCES AT JANUARY 31, 2000........ 19,947 $6,649 10,937 $3,646 $113,764 $254,063
================================================================
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Forest City Enterprises, Inc. and Subsidiaries
Accumulated
Treasury Stock Other
---------------- Comprehensive
Shares Amount Income Total
===============================================================================
(in thousands, except per share data)
BALANCES AT JANUARY 31, 1997.......... 749 $ (8,590) $ - $191,978
Net earnings......................... 20,539
Dividends:
$.03 per share (three quarters).... (2,703)
$.035 per share (one quarter)...... (1,049)
Issuance of Class A common
shares in public offering 76,076
Conversion of Class B to Class A
shares.............................. -
Purchase of treasury stock........... 156 (2,896) (2,896)
-----------------------------------------
BALANCES AT JANUARY 31, 1998.......... 905 (11,486) - 281,945
Net earnings......................... 54,750
Dividends:
$.035 per share (one quarter)...... (1,049)
$.04 per share (three quarters).... (3,598)
Conversion of Class B to Class A
shares.............................. -
Exercise of stock options............ (4) 60 60
-----------------------------------------
BALANCES AT JANUARY 31, 1999 901 (11,426) - 332,108
Comprehensive income:
Net earnings....................... 40,802
Other comprehensive income,
net of tax
Unrealized gain on securities.... 19,157 19,157
Total comprehensive income
Dividends:
$.04 per share (one quarter)....... (1,199)
$.05 per share (three quarters).... (4,507)
Conversion of Class B to Class A
shares.............................. -
Exercise of stock options............ (4) 48 52
Restricted stock issued.............. (45) 605 -
Amortization of unearned
compensation....................... 93
Rounding adjustments................. -
-----------------------------------------
BALANCES AT JANUARY 31, 2000.......... 852 $(10,773) $19,157 $386,506
=========================================
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Forest City Enterprises, Inc. and Subsidiaries
For the Years Ended January 31,
- --------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
================================================================================================================================
(in thousands)
RECONCILIATION OF NET EARNINGS TO CASH PROVIDED BY OPERATING ACTIVITIES
NET EARNINGS........................................................... $ 40,802 $ 54,750 $ 20,539
Depreciation......................................................... 70,615 61,908 56,923
Amortization......................................................... 17,529 25,160 17,870
Deferred income taxes................................................ 11,978 32,427 2,071
(Gain) loss on disposition of properties............................. (10,712) (30,557) 38,638
Provision for decline in real estate and other....................... 5,062 - -
Extraordinary gain................................................... (450) (27,036) (22,174)
Decrease in commercial land held for sale............................ 15,226 19,627 11,364
(Increase) decrease in land held for development or sale............. (3,015) (6,571) 396
Decrease (increase) in notes and accounts receivable................. 2,867 (38,560) 10,019
(Increase) decrease in inventories................................... (10,145) 11,397 (9,927)
Increase in other assets............................................. (5,397) (13,794) (27,168)
(Decrease)increase in accounts payable and accrued expenses.......... (5,658) 25,353 (12,704)
Decrease in deferred profit.......................................... (1,913) (985) (1,218)
---------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... $126,789 $113,119 $ 84,629
===================================================
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Forest City Enterprises, Inc. and Subsidiaries
For the Years Ended January 31,
- --------------------------------------------------------------------------------------------------
2000 1999 1998
==================================================================================================
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Rents and other revenues received ................. $ 756,917 $ 604,363 $ 587,851
Proceeds from land sales .......................... 37,108 50,035 46,619
Land development expenditures ..................... (37,632) (45,784) (32,670)
Operating expenditures ............................ (469,695) (349,909) (383,172)
Interest paid ..................................... (159,909) (145,586) (133,999)
--------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....... 126,789 113,119 84,629
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .............................. (384,137) (460,343) (254,195)
Proceeds from disposition of properties ........... - 33,345 -
Investments in and advances to affiliates ......... (23,717) (99,326) (33,737)
--------------------------------------
NET CASH USED IN INVESTING ACTIVITIES ........... (407,854) (526,324) (287,932)
--------------------------------------
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 491,855 704,722 385,807
Principal payments on nonrecourse mortgage debt ... (193,599) (370,970) (102,518)
Payments on long-term debt ........................ - (114,000) (109,000)
Increase in notes payable ......................... 92,758 50,491 48,574
Payments on notes payable ......................... (73,789) (41,381) (57,407)
Change in restricted cash and book overdrafts ..... (6,226) 35,417 (6,149)
Payment of deferred financing costs ............... (6,021) (16,565) (12,142)
Sale of common stock, net ......................... - - 76,076
Sale (purchase) of treasury stock ................. 52 60 (2,896)
Dividends paid to shareholders .................... (5,399) (4,497) (3,490)
--------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ...... 299,631 436,980 216,855
--------------------------------------
NET INCREASE IN CASH AND EQUIVALENTS ................ 18,566 23,775 13,552
CASH AND EQUIVALENTS AT BEGINNING OF YEAR ........... 78,629 54,854 41,302
--------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR ................. $ 97,195 $ 78,629 $ 54,854
======================================
SUPPLEMENTAL NON-CASH DISCLOSURE:
The schedule below represents the effect of the following non-cash transactions
for the years ended January 31:
2000 - Disposition of interest in Rolling Acres Mall
1999 - Disposition of interest in Summit Park Mall and Trolley
Plaza
1998 - Increase in interest in Skylight Office Tower,
Antelope Valley Mall and Station Square
- Disposition of interest in Toscana
- Reduction of interest in MIT Phase II
- Exchange of Woodridge
Operating Activities
Land held for development or sale ................. $ - $ - $ 3,022
Notes and accounts receivable ..................... 98 565 (5,072)
Other assets ...................................... 1,112 1,138 (1,125)
Accounts payable and accrued expenses ............. (155) 2,760 (3,470)
Deferred taxes .................................... - - 164
----------------------------------------
Total effect on operating activities ........... $ 1,055 $ 4,463 $ (6,481)
========================================
Investing Activities
Additions to completed rental properties .......... $ - $ - $ (45,272)
Disposition of completed rental properties ........ 25,693 42,312 53,547
Investments in and advances to affiliates ......... - - 4,131
----------------------------------------
Total effect on investing activities ............ $ 25,693 $ 42,312 $ 12,406
========================================
Financing Activities
Assumption of nonrecourse debt .................... $ - $ - $ 38,375
Disposition of nonrecourse mortgage debt .......... (26,748) (46,775) (48,988)
Notes payable ..................................... - - 4,688
----------------------------------------
Total effect on financing activities ............ $ (26,748) $ (46,775) $ (5,925)
========================================
The accompanying notes are an integral part of these consolidated financial
statements.
31
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Forest City Enterprises, Inc. is a major, vertically 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 $3.4 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, 2000.
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.
Effective February 1, 1999, the Company adopted Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities", which requires start-up
costs and organizational costs to be expensed as incurred. The adoption of this
accounting principle had no material effect on earnings and financial position
of the Company.
Certain prior years' amounts in the accompanying financial statements have
been reclassified to conform to the current year's presentation.
FISCAL YEAR
The years 1999, 1998 and 1997 refer to the fiscal years ended January 31,
2000, 1999 and 1998, 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 1999, 1998 and 1997 were approximately
$3,712,000,000, $2,979,000,000 and $2,940,000,000, 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.
OTHER COMPREHENSIVE INCOME - Net unrealized gain on securities, net of
tax, is included in Other Comprehensive Income and represents the difference
between the market value of investments in unaffiliated companies that are
available for sale at the balance sheet date and the Company's cost.
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 and tenant 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.
32
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RESTRICTED CASH
Restricted cash represents deposits with mortgage lenders for taxes and
insurance, security deposits, capital replacement, improvement and operating
reserves, bond funds and development and construction escrows.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its debt instruments by
discounting future cash payments at interest rates that the Company believes
approximates the current market. The carrying amount of the Company's total
fixed-rate debt at January 31, 2000 was $1,834,000,000 compared to an estimated
fair value of $1,556,000,000.
The Company estimates the fair value of its hedging instruments based on
interest rate market pricing models. At January 31, 2000, the carrying amount of
the Company's hedging instruments was $9,169,000 compared to an estimated fair
value of $16,489,000.
INTEREST RATE PROTECTION AGREEMENTS
The Company maintains a practice of hedging its variable interest rate
risk by purchasing LIBOR-based interest rate caps and Treasury options. The
LIBOR caps have typical durations ranging from one to three years while the
Treasury options are for periods of five to 10 years. The Company also enters
into interest rate swap agreements for hedging purposes 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.
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 13 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 June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
137, which defers the effective date of SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", to all fiscal quarters of fiscal years
beginning after June 15, 2000. Therefore, the Company plans to implement SFAS
133 for the fiscal quarters in its fiscal year ending January 31, 2002. The
adoption of SFAS 133 is not expected to have a material effect on the financial
position or results of operations of the Company.
33
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
B. REAL ESTATE AND RELATED NONRECOURSE MORTGAGE DEBT
The components of real estate cost and related nonrecourse mortgage debt
are presented below.
January 31, 2000
- ----------------------------------------------------------------------------------------------------------
Less Accumulated Nonrecourse
Total Cost Depreciation Net Cost Mortgage Debt
==========================================================================================================
(in thousands)
Completed rental properties
Residential ............................. $ 644,625 $ 137,789 $ 506,836 $ 525,759
Commercial
Shopping centers ...................... 1,113,165 172,153 941,012 877,317
Office and other buildings ............ 1,112,523 222,665 889,858 834,692
Corporate and other equipment ........... 24,577 14,872 9,705 -
-------------------------------------------------------
2,894,890 547,479 2,347,411 2,237,768
-------------------------------------------------------
Projects under development
Residential ............................. 103,767 - 103,767 8,499
Commercial
Shopping centers ...................... 184,593 - 184,593 40,407
Office and other buildings ............ 190,406 - 190,406 69,381
-------------------------------------------------------
478,766 - 478,766 118,287
-------------------------------------------------------
Land held for development or sale .......... 52,852 - 52,852 26,325
-------------------------------------------------------
$3,426,508 $ 547,479 $2,879,029 $2,382,380
=======================================================
C. NOTES AND ACCOUNTS RECEIVABLE, NET
January 31,
- --------------------------------------------------------------------------------
2000 1999
================================================================================
(in thousands)
Lumber brokerage ................. $ 144,364 $ 166,400
Real estate sales ................ 24,051 18,688
Syndication activities ........... 17,362 13,604
Receivable from tenants .......... 16,300 15,802
Other receivables ................ 33,205 22,708
---------------------------------
235,282 237,202
Allowance for doubtful
accounts ...................... (8,533) (7,488)
---------------------------------
$ 226,749 $ 229,714
=================================
Notes receivable at January 31, 2000 of $47,054,000, included in the table
above, are collectible primarily over five years, with $9,640,000 being due
within one year. The weighted average interest rate on notes receivable at
January 31, 2000 and 1999 was 8.55% and 8.08%, respectively.
In July 1999, 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 $102,000,000. At January 31, 2000, the Company had received
$55,000,000 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. INVESTMENTS IN AND ADVANCES TO REAL ESTATE AFFILIATES
Included in Investments in and Advances to Real Estate Affiliates is
$85,000,000 for Residential Group's interest in 21 limited partnerships where
the Company acts as managing general partner. The Company records its share of
net income (loss) based on the partnership agreements. Following is summarized
financial information for these apartment projects.
(in thousands) January 31, 2000
- --------------------------------------------------------------------------------
Balance Sheet:
Completed rental properties ................................. $ 544,000
Projects under development .................................. 61,000
Accumulated depreciation .................................... (77,000)
Other assets ................................................ 22,000
---------
Total Assets .............................................. $ 550,000
=========
Mortgage debt, nonrecourse .................................. $ 440,000
Advances from general partner ............................... 36,000
Other liabilities ........................................... 44,000
Partners' equity ............................................ 30,000
---------
Total Liabilities and Partners' Equity $ 550,000
=========
YEAR ENDED JANUARY 31, 2000
- --------------------------------------------------------------------------------
Operations:
Revenues .................................................... $ 66,000
Operating expenses .......................................... (35,000)
Interest expense ............................................ (22,000)
Depreciation and amortization ............................... (14,000)
---------
Net Loss .................................................. $ (5,000)
=========
Company's share (Net Income) .............................. $ 2,600
=========
Following is a reconciliation of interest in the underlying net assets to the
Company's carrying value.
Partners' equity, as above ..................................... $ 30,000
Deficit equity of other partners ............................... 19,000
---------
Company's investment in limited partnerships ................... 49,000
Advances to limited partnerships, as above ..................... 36,000
---------
Residential Group's share
(included in Investments in and
Advances to Real Estate Affiliates) .......................... $ 85,000
=========
34
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
E. OTHER ASSETS
January 31,
- --------------------------------------------------------------------------------
2000 1999
================================================================================
(in thousands)
Unamortized costs, net ................. $ 85,853 $ 96,571
Prepaid expenses and other ............. 73,234 37,099
----------------------------
$159,087 $133,670
============================
F. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in accounts payable and accrued expenses at January 31, 2000 and
1999 are book overdrafts of approximately $85,506,000 and $66,060,000,
respectively. The overdrafts are a result of the Company's cash management
program and represent checks issued but not yet presented to a bank for
collection.
G. 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,
- --------------------------------------------------------------------------------
2000 1999
================================================================================
(in thousands)
Payable to
Banks ......................... $21,486 $17,275
Other ......................... 41,412 26,654
---------------------------
$62,898 $43,929
===========================
Notes payable to banks reflects borrowings on the Lumber Trading Group's
$87,000,000 bank lines of credit. The bank lines of credit allow for up to
$5,000,000 in outstanding letters of credit ($1,404,000 of which were
outstanding at January 31, 2000) 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 8.15% and 8.14% at
January 31, 2000 and 1999, respectively.
Interest incurred on notes payable was $6,199,000 in 1999, $7,331,000 in
1998 and $6,068,000 in 1997. Interest paid on notes payable was $5,901,000 in
1999, $5,664,000 in 1998 and $6,407,000 in 1997.
H. MORTGAGE DEBT, NONRECOURSE
Mortgage debt, which is collateralized by completed rental properties,
projects under development and certain undeveloped land, is as follows.
January 31,
- --------------------------------------------------------------------------------
2000 1999
================================================================================
(dollars in thousands)
Rate(1) Rate(1)
------- -------
Fixed .................. $1,564,620 7.52% $1,575,731 7.59%
Variable -
Swapped(2) ........... 198,792 7.44% 219,003 7.23%
Capped(3) ............ 396,652 7.86% 154,960 6.90%
Tax-Exempt ........... 152,457 4.10% 154,420 3.66%
UDAG and other
subsidized
loans ................ 69,859 2.57% 69,758 2.57%
---------- ----------
$2,382,380 7.21% $2,173,872 7.07%
========== ==========
(1) The weighted average interest rates shown above include both the base index
and the lender margin.
(2) The $198,792 of LIBOR-based swapped debt has a combined remaining average
life of 0.97 years as of January 31, 2000.
(3) The $396,652 of capped debt is protected by $584,330 in LIBOR caps as
described below. These caps protect the current debt outstanding as well as
the anticipated increase in debt outstanding for projects currently under
development or anticipated to be under development during fiscal year 2000.
Debt related to projects under development at January 31, 2000 totals
$118,287,000 out of a total commitment from lenders of $231,951,000. Of this
outstanding debt, $112,120,000 is variable-rate debt and $6,167,000 is
fixed-rate debt. The Company generally borrows funds for development and
construction projects with maturities of two to five years utilizing
variable-rate financing. Upon opening and achieving stabilized operations, the
Company generally pursues long-term fixed-rate financing.
The Company has purchased London Interbank Offered Rate ("LIBOR") interest
rate caps as follows.
Principal
Strike Rate Period Outstanding
================================================================================
(in thousands)
6.50% 02/01/00 - 01/31/01 $ 584,330
6.50% 02/01/01 - 07/31/01 315,358
7.00% 08/01/01 - 01/31/02 297,158
7.00% 02/01/01 - 01/31/02 257,351
6.75% 09/01/00 - 08/31/03 79,929
8.00%* 06/01/01 - 06/01/04 8,960
8.00%* 11/01/01 - 10/31/04 115,460
8.00%* 08/01/02 - 07/31/05 21,700
8.00%* 02/01/03 - 01/31/06 133,900
*Three-year 8.00% LIBOR caps were purchased in February and March 2000.
- --------------------------------------------------------------------------------
35
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
H. MORTGAGE DEBT, NONRECOURSE (CONTINUED)
The interest rate caps and swaps discussed above were purchased to
mitigate 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 protect against significant increases in interest rates, the Company
has purchased Treasury Options for the development portfolio as follows.
Strike Rate Term Exercise Date Notional
================================================================================
(years) (in thousands)
6.76% 10 11/01/00 $45,700
7.00% 10 02/01/01 33,180
6.00% 10 04/10/01 41,252
7.00%* 10 05/01/01 38,920
6.00% 10 08/10/01 38,677
7.00%* 10 11/01/01 9,030
7.00%* 10 08/01/02 98,760
7.00% 5 08/01/01 43,010
* Ten-year 7.00% Treasury Options were purchased in February 2000.
- --------------------------------------------------------------------------------
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 by government agencies as an inducement to develop real
estate in targeted 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 resulting from a
sale or refinancing is capitalized as additional basis and amortized.
Mortgage debt maturities for the next five years ending January 31 are as
follows: 2001, $472,160,000; 2002, $157,991,000; 2003, $164,309,000; 2004,
$155,666,000; and 2005, $71,406,000.
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, 2000, $127,846,000 of debt with upcoming maturities has
refinancing commitments in place and $326,356,000 has extension options
available.
Interest incurred on mortgage debt was $152,784,000 in 1999, $144,890,000
in 1998 and $138,546,000 in 1997. Interest paid on mortgage debt was
$154,185,000 in 1999, $148,959,000 in 1998 and $136,799,000 in 1997.
I. LONG-TERM DEBT
At January 31, 2000 and 1999, the Company had $167,000,000 and
$105,000,000, respectively, outstanding under its $225,000,000 revolving credit
facility. The revolving credit facility matures December 10, 2001, unless
extended, and allows for up to a combined amount of $30,000,000 in outstanding
letters of credit and surety bonds ($9,245,000 and $19,882,000, respectively,
were outstanding at January 31, 2000). The outstanding letters of credit reduce
the credit available to the Company. Annually, within 60 days after January 31,
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 into a four-year term
loan. The revolving credit available is reduced quarterly by $2,500,000, which
began April 1, 1998. At January 31, 2000, the revolving credit line was
$205,000,000.
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, 2000, retained
earnings of $8,494,000 were available for payment of dividends.
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
$100,620,000 and $83,280,000, respectively.
Interest incurred on long-term debt was $10,897,000 in 1999, $6,317,000 in
1998 and $7,811,000 in 1997. Interest paid on long-term debt was $9,984,000 in
1999, $6,010,000 in 1998 and $6,896,000 in 1997.
J. 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. 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 I).
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 $17,000,000 in 1999, $14,922,000
in 1998 and $1,781,000 in 1997. Interest paid was $17,000,000 in 1999,
$8,453,000 in 1998 and $1,781,000 in 1997. Interest incurred and paid in 1997
was for the purchase of a treasury option to fix the interest rate on the senior
notes. The option was not exercised and its cost was expensed in 1997.
36
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
J. SENIOR NOTES (CONTINUED)
CONSOLIDATED INTEREST
Total interest incurred on all forms of indebtedness (included in Notes
G,H, I and J) was $186,880,000 in 1999, $173,460,000 in 1998 and $154,206,000 in
1997 of which $27,161,000, $23,500,000 and $17,884,000 was capitalized,
respectively. Interest paid on all forms of indebtedness was $187,070,000 in
1999, $169,086,000 in 1998 and $151,883,000 in 1997.
K. INCOME TAXES
The income tax provision (benefit) consists of the following components.
For the Years Ended January 31,
- --------------------------------------------------------------------------------
2000 1999 1998
================================================================================
(in thousands)
Current
Federal ..................... $ 8,620 $ (570) $ (2,706)
Foreign ..................... 446 409 330
State ....................... 3,191 75 898
----------------------------------------
12,257 (86) (1,478)
----------------------------------------
Deferred
Federal ..................... 10,796 21,996 4,301
Foreign ..................... 28 16 32
State ....................... 1,238 5,748 (653)
----------------------------------------
12,062 27,760 3,680
----------------------------------------
Total provision ................ $ 24,319 $ 27,674 $ 2,202
========================================
The effective tax rate for income taxes varies from the federal statutory
rate of 35% for 1999, 1998 and 1997 due to the following items.
For the Years Ended January 31,
- --------------------------------------------------------------------------------
2000 1999 1998
================================================================================
(in thousands)
Statement earnings
before income taxes ......... $ 64,849 $ 66,081 $ 3,385
=========================================
Income taxes computed at
the statutory rate .......... $ 22,697 $ 23,129 $ 1,185
Increase (decrease) in tax
resulting from:
State taxes, net of
federal benefit ........... 3,016 3,452 83
Contribution carryover ...... (201) 1,113 1,032
Adjustment of prior
estimated taxes ........... 64 (116) (134)
Valuation allowance ......... (423) 165 -
Other items ................. (834) (69) 36
----------------------------------------
Total provision ................ $ 24,319 $ 27,674 $ 2,202
=========================================
An analysis of the deferred tax provision is as follows.
For the Years Ended January 31,
- --------------------------------------------------------------------------------
2000 1999 1998
================================================================================
(in thousands)
Excess of tax over
statement depreciation
and amortization ............ $ 3,738 $ 4,356 $ 2,194
Allowance for doubtful
accounts deducted for
statement purposes .......... 2 (389) (585)
Costs on land and rental
properties under
development expensed
for tax purposes ............ 3,055 5,688 100
Revenues and expenses
recognized in different
periods for tax and
statement purposes .......... (538) 11,986 3,843
Development fees deferred
for statement purposes ...... -- -- (395)
Provision for decline in
real estate and other ....... (1,772) -- --
Deferred state taxes, net
of federal benefit .......... 1,188 3,019 (530)
Interest on construction
advances deferred for
statement purposes .......... 736 975 (1,207)
Utilization and (benefits)
of tax loss carryforward
recognized against
deferred taxes .............. 15,577 5,423 (1,509)
Deferred compensation .......... 228 (106) 1,703
Valuation allowance ............ (423) 165 --
Alternative minimum tax
credits ..................... (9,729) (3,357) 66
----------------------------------------
Deferred provision ............. $ 12,062 $ 27,760 $ 3,680
========================================
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
=======================================================
2000 1999 2000 1999
================================================================================
(in thousands)
Depreciation ......... $ 244,378 $ 244,697 $ 96,652 $ 96,778
Capitalized costs .... 229,349 201,992 90,708 79,888
Net operating losses.. (41,513) (76,433) (14,530) (26,938)
Federal tax credits... - - (23,263) (14,165)
Comprehensive income.. 31,690 - 12,533 -
Other ................ 18,916 19,614 12,561 14,587
-------------------------------------------------------
$ 482,820 $ 389,870 $ 174,661 $ 150,150
=======================================================
Income taxes paid totaled $7,176,000, $3,740,000 and $6,247,000 in 1999,
1998 and 1997, respectively. At January 31, 2000, the Company had a net
operating loss carryforward for tax purposes of $41,513,000 which will expire in
the years ending January 31, 2007 through January 31, 2011 and general business
credits carryovers of $1,526,000 which will expire in the years ending January
31, 2004 through January 31, 2014.
The Company's deferred tax liability at January 31, 2000 is comprised of
deferred liabilities of $308,330,000, deferred assets of $137,870,000 and a
valuation allowance related to state taxes and general business credits of
$4,201,000.
37
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
L. 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 and other, 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,
- ---------------------------------------------------------------------------------------------------------------------------
Expenditures for Additions to
Identifiable Assets Real Estate
- ---------------------------------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998
===========================================================================================================================
Commercial Group ..................................... $2,606,698 $2,330,624 $1,956,418 $280,782 $369,342 $234,766
Residential Group .................................... 815,082 722,160 646,574 81,593 75,258 57,868
Land Group ........................................... 92,868 100,501 87,909 34,907 41,706 30,397
Lumber Trading Group ................................. 208,836 218,551 199,602 3,899 2,301 2,254
Corporate ............................................ 90,990 65,274 72,850 2,476 426 931
-------------------------------------------------------------------
Consolidated ...................................... $3,814,474 $3,437,110 $2,963,353 $403,657 $489,033 $326,216
===================================================================
For the Years Ended January 31,
---------------------------------------------------------------------------------------------------
Depreciation & Amortization
Revenues Interest Expense Expense
---------------------------------------------------------------------------------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
===================================================================================================
Commercial Group ...... $442,992 $380,264 $330,117 $94,356 $ 91,291 $ 87,035 $ 66,848 $ 65,527 $56,996
Residential Group ..... 158,768 139,003 135,253 26,447 27,342 28,884 17,808 18,128 14,682
Land Group ............ 41,356 52,611 44,614 7,370 6,814 5,575 240 562 740
Lumber Trading Group(1) 149,357 123,325 122,169 5,288 5,262 5,254 2,125 2,045 2,202
Corporate ............. 598 1,446 516 26,258 19,251 9,574 1,123 806 173
---------------------------------------------------------------------------------------------------
Consolidated ....... $793,071 $696,649 $632,669 $159,719 $ 149,960 $ 136,322 $ 88,144 $ 87,068 $74,793
===================================================================================================
Earnings Before Earnings Before Depreciation,
Income Taxes Amortization & Deferred
(EBIT)(2) Taxes (EBDT)
-------------------------------------------------------------------
Commercial Group ..................................... $ 50,589 $ 27,480 $ 18,979 $105,877 $94,027 $73,773
Residential Group .................................... 40,472 27,285 28,153 46,411 38,614 31,985
Land Group ........................................... (5,746) 5,265 5,184 (3,489) 3,186 3,326
Lumber Trading Group ................................. 12,258 6,066 9,242 7,070 3,227 5,199
Corporate ............................................ (38,374) (30,572) (19,535) (23,230) (21,200) (7,373)
Provision for decline in real estate and other(3) .... (5,062) - - - - -
Gain (loss) on disposition of properties ............. 10,712 30,557 (38,638) - - -
-------------------------------------------------------------------
Consolidated ...................................... $ 64,849 $ 66,081 $ 3,385 132,639 117,854 106,910
=================================
Reconciliation of EBDT to net earnings:
Depreciation and amortization - Real Estate Groups ....................................... (84,586) (83,655) (71,678)
Deferred taxes - Real Estate Groups ...................................................... (12,453) (14,236) (10,693)
Provision for decline in real estate and other, net of tax ............................... (3,060) - -
Gain (loss) on disposition of properties, net of tax ..................................... 7,990 18,444 (23,356)
Extraordinary gain, net of tax ........................................................... 272 16,343 19,356
--------------------------------
Net earnings ............................................................................. $ 40,802 $54,750 $20,539
================================
(1) The Company recognizes the gross margin on lumber brokerage sales as
Revenues. Sales invoiced for the years ended January 31, 2000, 1999 and
1998 were approximately $3,712,000, $2,979,000 and $2,940,000,
respectively.
(2) See Consolidated Statements of Earnings on page 29 for reconciliation of
EBIT to net earnings.
(3) Represents the write-down to the estimated net realizable value of the Land
Group's investment in Granite Development Partners, L.P.
38
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
M. 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)
2001 .............................................................. $ 210,514
2002 .............................................................. 200,965
2003 .............................................................. 192,254
2004 .............................................................. 182,010
2005 .............................................................. 163,087
Later years ....................................................... 1,182,948
----------
$2,131,778
==========
Most of the commercial leases include provisions for reimbursements of
other charges including real estate taxes and operating costs. Total
reimbursements amounted to $75,954,000, $67,659,000 and $63,479,000 in 1999,
1998 and 1997, 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, 2000 are as follows.
Minimum
Lease
For the Years Ending January 31, Payments
================================================================================
(in thousands)
2001 .............................................................. $12,977
2002 .............................................................. 12,358
2003 .............................................................. 11,365
2004 .............................................................. 11,129
2005 .............................................................. 10,498
Later years ....................................................... 339,566
--------
$397,893
========
Rent expense was $13,361,000, $10,267,000 and $10,273,000 for 1999, 1998
and 1997, respectively.
N. CONTINGENT LIABILITIES
As of January 31, 2000, the Company has guaranteed loans of $1,400,000,
letters of credit outstanding of $10,649,000 and surety bonds outstanding of
$19,882,000.
The Company customarily guarantees lien-free completion of its
construction. Upon completion the guarantees are released. For certain limited
partnerships in which the Company is a general partner, it guarantees the
funding of operating deficits of newly-opened apartment projects for periods
averaging five years. 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.
39
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
O. STOCK-BASED COMPENSATION
Class A fixed options in the form of either incentive stock options or
non-qualified stock options may be awarded under the 1994 Stock Option Plan
("Plan") to key employees and non-employee members of the Company's Board of
Directors. The maximum number of options that may be awarded under the Plan was
increased to 2,250,000 by shareholder approval in June 1998. The maximum award
to a person during any calendar year is 75,000 and the maximum term of an option
is 10 years. The exercise price of all options equal the fair market value of
the stock on the date of grant, except, if incentive stock options are granted
to someone who owns more than 10% of the total combined voting power of all
classes of stock of the Company, then the exercise price will be 110% of the
fair market value of the stock on the date of grant and the term of the option
will be five years. The Plan is administered by the Compensation Committee of
the Board of Directors. The Company granted 377,800 options in 1999 and 390,800
in 1998. All options granted under the Plan to date have been for 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. The "intrinsic value" on the grant dates have been zero, thus no
compensation costs have been recognized for the Plan.
Had compensation costs been determined in accordance with SFAS 123
"Accounting for Stock-Based Compensation", net earnings and earnings per share
would have been reduced to the pro forma amounts indicated below.
For the Years Ended January 31,
- --------------------------------------------------------------------------------
2000 1999 1998
================================================================================
Net earnings (in thousands)
As reported ............ $ 40,802 $ 54,750 $ 20,539
Pro forma .............. $ 38,502 $ 53,150 $ 19,974
Basic earnings per share
As reported ............ $ 1.36 $ 1.83 $ .71
Pro forma .............. $ 1.28 $ 1.77 $ .69
Diluted earnings per share
As reported ............ $ 1.35 $ 1.81 $ .71
Pro forma .............. $ 1.29 $ 1.77 $ .69
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 1999 and 1998, respectively: dividend yield of .6% and .5%;
expected volatility of 36.8% and 38.0%; risk-free interest rate of 5.2% and
5.7%; expected life of 8.7 years in both years; and turnover of 2.0% and 3.0%.
A summary of stock option activity is presented below.
For the Years Ended January 31,
- --------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
====================================================================================================================
Outstanding at beginning of year ....... 723,950 $21.86 354,600 $14.38 361,800 $14.38
Granted ................................ 377,800 $22.42 390,800 $28.50 - $ -
Exercised .............................. (3,600) $14.38 (4,350) $14.38 - $ -
Forfeited .............................. (17,825) $22.81 (17,100) $20.32 (7,200) $14.38
--------- ------- -------
Outstanding at end of year ............. 1,080,325 $22.06 723,950 $21.86 354,600 $14.38
========= ======= =======
Options exercisable at end of year ..... 163,275 $14.38 82,500 $14.38 - $ -
Number of shares available for
granting of options at end of year .. 1,161,725 1,521,700 395,400
Weighted average fair value of
options granted during the year ..... $ 11.29 $ 15.12 $ -
The following table summarizes information about fixed stock options
outstanding at January 31, 2000.
Options Outstanding Options Exercisable
-------------------------------------------------------- ---------------------------------------
Range of Number Weighted Average Weighted Number Weighted
Exercise Outstanding at Remaining Average Exercisable at Average
Prices January 31, 2000 Contractual Life Exercise Prices January 31, 2000 Exercise Prices
=======================================================================================================================
$ 14.38 331,125 6.6 years $ 14.38 163,275 $14.38
$ 22.38 369,200 9.2 years $ 22.38 - $ -
$25.65 - $28.50 380,000 8.1 years $ 28.46 - $ -
40
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
O. STOCK-BASED COMPENSATION (CONTINUED)
During 1999 the Compensation Committee granted 45,000 shares of restricted
Class A common stock to key employees. The restricted shares were awarded out of
treasury stock, having a cost basis of $605,000, with rights to vote the shares
and receive dividends while being subject to restrictions on disposition and
transferability and risk of forfeiture. The shares become nonforfeitable over a
period of four years. In accordance with APBO 25, the market value on the date
of grant of $1,114,000 was initially recorded as unearned compensation to be
charged to expense over the respective vesting periods. The unearned
compensation is a reduction of Additional Paid-In Capital in the accompanying
consolidated financial statements. At January 31, 2000, unearned compensation
amounted to $1,021,000.
P. CAPITAL STOCK
The Company paid a two-for-one common stock split on July 16, 1998 and a
three-for-two common stock split on February 17, 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. 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 for $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 1999 and 1998, 3,600 and 4,350 shares, respectively, of Class A
common stock were issued out of treasury stock upon the exercise of stock
options (See Note O).
Q. 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, 2000
Basic earnings
per share ............. $40,530 30,016,323 $1.35
Effect of dilutive
securities-stock
options .............. - 136,734 (.01)
------- ---------- -----
Diluted earnings
per share ............. $40,530 30,153,057 $1.34
======= ========== =====
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
======= ========== =====
R. 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.
Consolidated balance sheets and statements of earnings for Rental Properties and
its subsidiaries follows.
41
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
R. SUMMARIZED FINANCIAL INFORMATION (CONTINUED)
FOREST CITY RENTAL PROPERTIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
- -----------------------------------------------------------------------------------------------
2000 1999
===============================================================================================
(in thousands)
ASSETS
Real Estate
Completed rental properties ...................... $ 2,870,313 $ 2,605,048
Projects under development ....................... 478,766 412,072
--------------------------------
3,349,079 3,017,120
Less accumulated depreciation .................... (532,607) (477,253)
--------------------------------
Total Real Estate .............................. 2,816,472 2,539,867
Cash and equivalents ................................ 25,320 33,158
Restricted cash ..................................... 75,689 50,926
Notes and accounts receivable, net .................. 63,971 47,757
Investments in and advances to real estate affiliates 297,745 266,405
Other assets ........................................ 141,541 115,425
--------------------------------
$ 3,420,738 $ 3,053,538
--------------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Mortgage debt, nonrecourse .......................... $ 2,356,055 $ 2,148,996
Accounts payable and accrued expenses ............... 236,472 192,552
Notes payable ....................................... 34,454 21,783
Long-term debt ...................................... 167,000 105,000
Deferred income taxes ............................... 199,791 168,863
Deferred profit ..................................... 28,646 30,090
--------------------------------
Total Liabilities ................................ 3,022,418 2,667,284
--------------------------------
SHAREHOLDER'S EQUITY
Common stock and additional paid-in capital ......... 200,878 200,878
Retained earnings 178,285 185,376
--------------------------------
379,163 386,254
Accumulated other comprehensive income .............. 19,157 -
--------------------------------
Total Shareholder's Equity ....................... 398,320 386,254
--------------------------------
$ 3,420,738 $ 3,053,538
================================
FOREST CITY RENTAL PROPERTIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended January 31,
- -----------------------------------------------------------------------------------------------
2000 1999 1998
===============================================================================================
(in thousands)
Revenues ............................... $ 601,760 $ 519,282 $ 465,370
----------------------------------------------
Operating expenses ..................... 306,614 264,496 229,856
Interest expense ....................... 147,061 137,556 123,713
Depreciation and amortization .......... 84,586 83,655 71,678
----------------------------------------------
538,261 485,707 425,247
----------------------------------------------
Gain (loss) on disposition of properties 10,712 30,890 (35,505)
----------------------------------------------
Earnings before income taxes ........... 74,211 64,465 4,618
----------------------------------------------
Income tax expense (benefit)
Current ............................. 12,446 (705) (2,437)
Deferred ............................ 15,139 26,389 6,455
----------------------------------------------
27,585 25,684 4,018
----------------------------------------------
Net earnings before extraordinary gain . 46,626 38,781 600
Extraordinary gain, net of tax ......... 272 16,343 19,356
----------------------------------------------
Net earnings ........................... $ 46,898 $ 55,124 $ 19,956
==============================================
42
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
S. GAIN(LOSS) ON DISPOSITION OF PROPERTIES, EXTRAORDINARY GAIN AND PROVISION
FOR DECLINE IN REAL ESTATE AND OTHER
GAIN (LOSS) ON DISPOSITION OF PROPERTIES - Gain (loss) on disposition of
properties totaled a gain of $10,712,000, a gain of $30,557,000 and a loss of
$38,638,000 in 1999, 1998 and 1997, respectively.
During 1999, the Company recorded a gain on the disposition of properties
($10,712,000 or $7,990,000 after tax) primarily resulting from the disposition
of its interest in Rolling Acres Mall in Akron, Ohio through a tax-free
exchange.
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).
PROVISION FOR DECLINE IN REAL ESTATE AND OTHER - During 1999, the Company
recorded a Provision for Decline in Real Estate and Other of $5,062,000
($3,060,000 net of tax) related to the write-down to estimated net realizable
value of the Land Group's investment in Granite Development Partners L.P.
(Granite). The Company owns a 43.75% interest in Granite as the result of
capital contribution of land, which was classified as Investments In and
Advances to Affiliates on the Company's Consolidated Balance Sheets. Granite
owns an interest in several raw land developments held for resale, the most
significant of which is a one-third interest in Seven Hills in Henderson,
Nevada. The Company has been informed by one of its partners (the project
manager) of cost overruns that will, in turn, reduce the anticipated sales
margins of the Seven Hills project. The revised projection of costs to complete
the project indicates that the Company may not recover its capital investment in
Granite.
EXTRAORDINARY GAIN - Extraordinary gain, net of tax, totaled $272,000,
$16,343,000 and $19,356,000 in 1999, 1998 and 1997, respectively, representing
extinguishment of nonrecourse debt and related accrued interest.
Extraordinary gain for 1999 represents extinguishment of $450,000
($272,000 after tax) of non-recourse debt related to Plaza at Robinson Town
Centre in Pittsburgh, Pennsylvania.
The 1998 extraordinary gain 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).
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
was after-tax income of $4,566,000. During 1999, the Company received
$4,500,000, pre-tax, in final settlement of the Toscana litigation, which is
included in operating income.
T. RECENT DEVELOPMENTS
During the first quarter of 2000, the Company disposed of two apartment
complexes, Highlands and Studio Colony with a total of 1,006 units, and recorded
a pre-tax gain on disposition of properties of approximately $26,500,000.
43
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Quarter Ended
- -------------------------------------------------------------------------------------------------------------------
Jan. 31, Oct. 31, July 31, Apr. 30,
2000 1999 1999 1999
===================================================================================================================
(in thousands, except per share data)
Revenues ...................................... $224,259 $188,167 $198,951 $181,694
Earnings before income taxes .................. $ 35,150 $ 12,247 $ 8,269 $ 9,183
Net earnings before extraordinary gain(1) ..... $ 23,463 $ 7,033 $ 4,740 $ 5,294
Net earnings .................................. $ 23,521 $ 7,033 $ 4,740 $ 5,508
BASIC EARNINGS PER SHARE
Net earnings before extraordinary gain(1)(2) $ .78 $ .23 $ .16 $ .17
Net earnings(2) ............................ $ .78 $ .23 $ .16 $ .18
DILUTED EARNINGS PER SHARE
Net earnings before extraordinary gain(1)(2) $ .78 $ .23 $ .16 $ .17
Net earnings(2) ............................ $ .78 $ .23 $ .16 $ .18
Dividends declared per common share(3)
Quarterly dividend
Class A ................................. $ .05 $ .05 $ .05 $ .04
Class B ....................................... $ .05 $ .05 $ .05 $ .04
Market price range of common stock
Class A
High .................................. $ 28.25 $ 26.50 $ 28.75 $ 25.88
Low ................................... $ 23.82 $ 21.88 $ 24.75 $ 19.88
Class B
High .................................. $ 31.44 $ 27.50 $ 28.63 $ 26.00
Low ................................... $ 27.07 $ 25.00 $ 25.00 $ 20.69
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
Both classes of common stock are traded on the New York Stock Exchange under the
symbols FCEA and FCEB. As of March 1, 2000, the number of registered holders of
Class A and Class B common stock were 826 and 619, respectively.
(1) Excludes the extraordinary gain, net of tax of $272 ($.01 basic and diluted
per share) and $16,343 ($.55 basic and $.54 diluted per share) in fiscal
1999 and 1998, respectively. These items are explained in Note S 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
$8,494 was available for payment of dividends as of January 31, 2000, under
the restrictions contained in the revolving credit agreement with a group
of banks.
44
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
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 1999 grew by 12.5% to $132,639,000 from
$117,854,000. The increase in EBDT is primarily attributable to improved results
from existing properties and from seven new projects and additions to three
residential projects that opened in 1999, and a full year of operations for the
16 properties that opened in 1998.
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 1999 was
$296,521,000 compared to $257,053,000 in 1998, a 15.4% increase. Comparable NOI
(NOI for properties in operation throughout both years) for Real Estate Groups
increased 4.9% from 1998 to 1999 and 6.5% from 1997 to 1998. Including the
expected NOI for the twelve months following stabilization for the properties
that were opened, expanded, acquired or disposed in 1999, NOI for Real Estate
Groups would be approximately $317,000,000 for 1999.
COMMERCIAL GROUP
REVENUES - Revenues for the Commercial Group increased $62,728,000, or
16.5%, to $442,992,000 in 1999 from $380,264,000 in 1998. This increase is
primarily the result of the openings of Millennium ($11,496,000) an office
building at University Park at MIT in Cambridge, Massachusetts which opened in
February 1999, Phase Two of University Park at MIT ($1,029,000) a mixed use
facility which opened during the second quarter of 1998, the 210-room MIT Hotel
($4,358,000), and The Promenade in Temecula ($2,175,000), a 795,000 square-foot
regional mall in Temecula, California. The 1998 acquisitions of the 292-room
Sheraton Hotel at Station Square in Pittsburgh, Pennsylvania increased revenues
by $4,866,000, the 324,000-square-foot Fairmont Plaza by $6,221,000, and the
adjacent 249,000-square-foot Pavilion retail center in San Jose, California by
$1,555,000. Revenues also increased as a result of improved operations at
Liberty Center in Pittsburgh, Pennsylvania ($1,832,000), The Avenue at Tower
City Center in Cleveland, Ohio ($5,545,000), the Ritz-Carlton Hotel in
Cleveland, Ohio ($1,233,000), the Tuscon Mall ($1,948,000) in Tuscon, Arizona,
and openings in the Company's urban retail portfolio in New York City
($4,669,000) including Columbia Park, Kaufman Studios and 1131 Bay Street. These
increases were partially offset by a decrease in revenues due to the 1998
disposition of Summit Park Mall ($2,229,000). The Commercial Group also recorded
additional land sales of $11,276,000 in 1999 compared to 1998. The remainder of
the increase (approximately $6,500,000) was due to improved operations as a
result of rental rate and occupancy increases.
The Commercial Group recognizes rental revenues when due from its tenants.
If the Commercial Group had recognized rental revenue using the straight-line
method in 1999, additional revenues of approximately $4,400,000, and
approximately $2,600,000 in net earnings after tax, would have been reported for
the year. The cumulative effect at January 31, 2000 on retained earnings, had
rental revenues been recorded using the straight-line method, would be an
increase of approximately $29,000,000.
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 the prior 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 169,000 square feet of office and
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
45
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
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.
OPERATING AND INTEREST EXPENSES - During 1999, operating expenses for the
Commercial Group increased $35,232,000, or 18.0%, to $231,198,000 from
$195,966,000 in 1998. This increase was attributable primarily to costs
associated with the 1999 openings of Millennium ($3,136,000), Promenade in
Temecula ($586,000); the 1998 openings of Phase Two at MIT ($534,000) and
University Park Hotel at MIT ($2,877,000); and the 1998 acquisitions of Sheraton
Hotel at Station Square ($2,674,000), Fairmont Plaza ($1,860,000) and Pavilion
($88,000). Operating expenses also increased at Liberty Center ($1,266,000),
Ritz-Carlton Hotel ($1,160,000), and The Avenue at Tower City ($4,129,000) as a
result of increased revenues, and also as a result of 1998 and 1999 openings in
the urban New York City retail portfolio ($1,242,000). In addition, development
expenses increased $1,941,000 over 1998, incremental costs associated with
increased land sales were $5,916,000 compared to last year, and operating
expenses for mature properties increased approximately $5,000,000. Interest
expense for 1999 increased by $3,065,000, or 3.4%, to $94,356,000 from
$91,291,000 for 1998. The increase in interest expense is primarily attributable
to the 1999 additions to the Commercial Group portfolio discussed above, and a
full year of interest for 1998 openings.
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
increased by $4,256,000 in 1998, or 4.9%, to $91,291,000 from $87,035,000 in
1997. The increase in interest expense was 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.
NET OPERATING INCOME - Commercial Group NOI for 1999 was $211,794,000
compared to $184,298,000 in 1998, a 14.9% increase. NOI increased 4.9% from 1998
to 1999 and 6.2% from 1997 to 1998 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 1999, NOI would be approximately $230,000,000 for 1999.
RESIDENTIAL GROUP
REVENUES - Revenues for the Residential Group increased by $19,765,000, or
14.2%, in 1999 to $158,768,000 from $139,003,000 in 1998. This increase was
primarily attributable to proceeds from the Toscana litigation settlement
($4,500,000), the recognition of development and other fees ($5,722,000) on
several projects including: The Grand, a 546-unit luxury high-rise apartment
building in North Bethesda, Maryland which opened in February 1999; The Drake, a
288-unit high-rise building in Philadelphia, Pennsylvania; The Enclave, a
637-unit apartment complex in San Jose, California which opened in early 1998;
and 101 San Fernando, a 323-unit apartment complex also in San Jose, California,
a full year of operations for the 1998 acquisitions of the 534-unit Woodlake
Apartments in Silver Spring, Maryland ($2,663,000), an additional 20% ownership
in Studio Colony, a 450-unit apartment building in Los Angeles, California
($934,000) and a 50% interest in the 342-unit complex Coppertree (formerly Park
Plaza) in Mayfield Heights, Ohio ($520,000). In addition, revenues increased at
Bayside Village, an 862-unit complex in San Francisco, California ($770,000),
the Company's Senior Housing properties in New York, New Jersey, and Maryland
($1,182,000), an increase in units in three Cleveland properties ($796,000) and
as a result of lease-up of the 396-unit complex at Colony Woods in Bellevue,
Washington ($1,872,000). These increases were partially offset by a decrease due
to the sale in the second quarter of 1998 of Trolley Plaza, a 351-unit apartment
community in Detroit, Michigan ($1,504,000). The balance of the increase in
revenues ($2,300,000) within the Residential Group was generally due to improved
operations.
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 other 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 (approximately $2,000,000) within the Residential Group
was generally due to improved operations as a result of increased rental rates
and occupancy.
OPERATING AND INTEREST EXPENSES - Operating expenses for the Residential
Group increased by $7,793,000, or 11.8%, in 1999, to $74,041,000 from
$66,248,000 in 1998. The increase in operating expenses was primarily due to the
reduction in a reserve for collection of a note receivable in 1998 from
Millender Center ($3,000,000), additional costs
46
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
associated with the generation of increased development fees ($999,000),
increased operating expenses for mature properties (approximately $2,000,000),
increased expenses due to lease-up at Colony Woods ($353,000) and the three
Cleveland properties ($316,000), and the 1998 acquisitions of Woodlake
Apartments ($1,356,000) and Coppertree (formerly Park Plaza) ($355,000). These
increases were partially offset by a decrease due to the sale in 1998 of Trolley
Plaza ($1,135,000). Interest expense decreased by $895,000 in 1999, or 3.3%, to
$26,447,000 from $27,342,000 in 1998. This decrease is primarily the result of
an increase in capitalized interest on funded development projects.
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 the prior 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.
NET OPERATING INCOME - Residential Group NOI for 1999 was $84,727,000,
compared to $72,755,000 in 1998, a 16.5% increase. NOI increased 5.0% from 1998
to 1999 for Residential Group properties in operation throughout both years, and
7.2% from 1997 to 1998. Including the expected NOI for the twelve months after
stabilization for Residential Group properties that were opened, expanded or
acquired in 1999, NOI would be approximately $87,000,000 for 1999.
LAND GROUP
During 1999, the Company was informed by the project manager/partner of
costs that would be incurred in excess of budget to complete Seven Hills, a
1,300-acre planned-unit development project in Henderson, Nevada. The Company
owns a 14.57% interest in Seven Hills through its investment in Granite (see
"Other Transactions - Provision for Decline in Real Estate and Other). As a
result of this deterioration in Seven Hills' margins, the Company entered into
an agreement (Agreement) during 1999 with the project manager/partner to
restructure the partnership agreement and reposition the project. In accordance
with the Agreement, the Company has agreed to forgo its fee and interest income
to which it was entitled in order to preserve cash flow available to meet the
project's obligations.
REVENUES - Revenues for the Land Group decreased by $11,255,000 to
$41,356,000 in 1999 from $52,611,000 in 1998. This decrease is a result of
forgiveness of interest income relating to Granite ($4,001,000) discussed above
and decreased revenues at: various other projects owned by Granite
(approximately $4,000,000); Greens at Birkdale Village, a 220-acre mixed use
community in Huntersville, North Carolina ($2,791,000); Chestnut Lakes, an
85-acre planned-unit development in North Ridgeville, Ohio ($3,151,000); and
Eaton Estate, 22-acre apartment and cluster site in Sagamore Hills, Ohio
($848,000). Revenues also decreased approximately $10,000,000 in 1999 compared
to 1998 as a result of a cumulative adjustment to properly reflect the Company's
share of the revenues of Seven Hills pursuant to the Agreement discussed above.
These decreases were partially offset by increases in revenues at Westwood
Lakes, 475-acres, 657 lots located in Tampa, Florida ($5,960,000); Silver Lakes,
2,400 acres, 5,108 units in Fort Lauderdale, Florida ($2,724,000); and
Canterberry Crossing, a new 470-acre residential golf course community in
Parker, Colorado ($4,649,000).
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 ($2,038,000) and The Greens at Birkdale Village ($5,049,000). Sales
of land and related gross margins vary from period to period, depending on
management's decisions regarding the disposition of significant land holdings.
OPERATING AND INTEREST EXPENSES - Operating expenses decreased by $800,000
in 1999 to $39,732,000 from $40,532,000 in 1998. This decrease is primarily the
result of a decrease in costs related to lower sales volume at various projects
owned by Granite ($1,666,000), Greens at Birkdale Village ($2,372,000), Chestnut
Lakes ($2,575,000) and Eaton Estate ($696,000). Operating expenses also
decreased approximately $3,500,000 in 1999 compared to 1998 as a result of a
cumulative adjustment to properly reflect the Company's share of the revenues of
Seven Hills pursuant to the Agreement discussed above. These decreases were
partially offset by increases in operating expenses related to increased sales
volume at Westwood Lakes ($4,157,000), Seven Hills ($3,500,000), Silver Lakes
($2,903,000) and Canterberry Crossing ($4,155,000). Operating expenses also
decreased for 1999 by $4,729,000 due to certain valuation allowances relating to
Land Group investments. These accruals are reviewed periodically and adjusted to
reflect management's estimated value of the Land Group's portfolio.
Operating expenses increased by $6,677,000 in 1998 to $40,532,000 from
$33,855,000 in 1997. The fluctuation in operating expenses primarily reflects
costs associated with land sales volume in each period. Interest expense
increased by $556,000 in 1999 to $7,370,000 from $6,814,000 in 1998. Interest
expense increased by $1,239,000 in 1998 to $6,814,000 from $5,575,000 in 1997.
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 $26,032,000
in 1999 to $149,357,000 from $123,325,000 in 1998. The increase was due
primarily to increased lumber trading margins of $26,159,000 for 1999 compared
to 1998.
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).
OPERATING AND INTEREST EXPENSES - Operating expenses
47
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
for the Lumber Trading Group increased by $19,813,000 in 1999 to $131,811,000
from $111,998,000 in 1998. The increase reflected higher variable expenses due
to increased lumber trading margins compared to 1998. Interest expense increased
$26,000 in 1999 to $5,288,000 from $5,262,000 in 1998.
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.
CORPORATE ACTIVITIES
REVENUES - Corporate Activities' revenues decreased $848,000 in 1999 to
$598,000 from $1,446,000 in 1998 and increased $930,000 in 1998 to $1,446,000
from $516,000 in 1997. 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 $20,000 in 1999 to
$12,786,000 from $12,766,000 in 1998 and increased $2,288,000 in 1998 to
$12,766,000 from $10,478,000 in 1997. The increase in 1999 represents
additional facilities expense. The increase in 1998 represents general
corporate expenses including amortization of costs associated with the 1998
public offering of Senior Notes (see "Financial Condition and Liquidity").
Interest expense increased $7,007,000 in 1999 to $26,258,000 from $19,251,000
in 1998 and increased $9,677,000 in 1998 to $19,251,000 from $9,574,000 in
1997. 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
PROVISION FOR DECLINE IN REAL ESTATE AND OTHER - During 1999, the Company
recorded a Provision for Decline in Real Estate and Other of $5,062,000
($3,060,000 net of tax) related to the write-down to estimated net realizable
value of the Land Group's investment in Granite Development Partners L.P.
(Granite). The Company owns a 43.75% interest in Granite as a result of capital
contribution of land, which was classified as Investments In and Advances to
Real Estate Affiliates on the Company's Consolidated Balance Sheets. Granite
owns an interest in several raw land developments held for resale, the most
significant of which is a one-third interest in Seven Hills in Henderson,
Nevada. The Company has been informed by one of it's partners (the project
manager) of cost overruns that will, in turn, reduce the anticipated sales
margins of the Seven Hills project. The revised projection of costs to complete
the project indicates that the Company may not recover its capital investment in
Granite.
GAIN (LOSS) ON DISPOSITION OF PROPERTIES - Gain (loss) on disposition of
properties totaled a gain of $10,712,000, a gain of $30,557,000, and a loss of
$38,638,000 in 1999, 1998 and 1997, respectively. During 1999, the Company
recognized a gain on the disposition of properties ($10,712,000 or $7,990,000
after tax) primarily resulting from the disposition of its interest in Rolling
Acres Mall in Akron, Ohio through a tax-free exchange.
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).
EXTRAORDINARY GAIN - Extraordinary gain, net of tax, totaled $272,000,
$16,343,000, and $19,356,000 in 1999, 1998, and 1997, respectively, representing
extinguishment of nonrecourse debt and related accrued interest. The 1999
extraordinary gain was the result of the extinguishment of $450,000 of
non-recourse debt related to Plaza at Robinson Town Centre in Pittsburgh,
Pennsylvania.
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).
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. During 1999, the Company received $4,500,000,
pre-tax, in final settlement of the Toscana litigation, which is included in
1999 Revenues of the Residential Group.
INCOME TAXES - Income tax expense totaled $24,319,000, $27,674,000, and
$2,202,000 in 1999, 1998 and 1997, respectively. At January 31, 2000, the
Company had a net operating loss ("NOL") carryforward for tax purposes of
$41,513,000 (generated primarily over time in the ordinary course of business
from the significant impact of depreciation
48
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
expense from real estate properties on the Company's net earnings) which will
expire in the years ending January 31, 2007 through January 31, 2011 and general
business credits carryovers of $1,526,000 which will expire in the years ending
January 31, 2004 through January 31, 2014. The Company's policy is to utilize
its NOL before it expires and to evaluate its future tax position while
considering a variety of tax-saving strategies.
NET EARNINGS - In 1999, the Company's net earnings decreased to
$40,802,000, or $1.35 per share of common stock, from $54,750,000, or $1.81 per
share of common stock in 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 and other, 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 and other is excluded from EBDT because it is a
non-cash item that varies from year to year that, in management's opinion, is
considered to be non-recurring in nature and outside the principal operations of
the Company. 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, 2000 and 1999, the Company had
$167,000,000 and $105,000,000, respectively, outstanding under its $225,000,000
revolving credit facility. The revolving credit facility matures December 10,
2001, unless extended, and allows for up to a combined amount of $30,000,000 in
outstanding letters of credit and surety bonds ($9,245,000 and $19,882,000,
respectively, were outstanding at January 31, 2000). The outstanding letters of
credit reduce the credit available to the Company. Annually, within 60 days of
January 31, 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 into
a four-year term loan. The revolving credit available is reduced quarterly by
$2,500,000, which began April 1, 1998. At January 31, 2000, the revolving credit
line was $205,000,000.
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, 2000, retained
earnings of $8,494,000 were available for payment of dividends.
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
$100,620,000 and $83,280,000, 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.
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 - 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, 2000, the Company completed
approximately $701,000,000 in financings, including $255,000,000 in
refinancings, $146,000,000 for new development projects and $300,000,000 in
loan extensions. The Company is actively working to extend the maturities
and/or refinance the nonrecourse debt that is coming due in 2000 and 2001,
generally pursuing long-term fixed rate debt.
INTEREST RATE EXPOSURE
At January 31, 2000, the composition of nonrecourse mortgage debt was as
follows:
Amount Rate(1)
=============================
(in thousands)
Fixed .................................... $1,564,620 7.52%
Variable -
Swapped(2) ............................ 198,792 7.44%
Capped(3) ............................. 396,652 7.86%
Tax-Exempt ............................ 152,457 4.10%
UDAG and other
subsidized loans (fixed) ................ 69,859 2.57%
----------
$2,382,380 7.21%
==========
(1) The weighted average interest rates shown above include both the base index
and the lender margin.
(2) The $198,792 of LIBOR-based swapped debt had a combined remaining average
life of 0.97 years as of January 31, 2000.
(3) The $396,652 of capped debt is protected by $584,330 in LIBOR caps as
described below. These caps protect the current debt outstanding as well as the
anticipated increase in debt outstanding for projects currently under
development or anticipated to be under development during fiscal year 2000.
49
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
With respect to taxable variable-rate debt, the Company generally attempts
to obtain interest rate protection for such debt with a maturity in excess of
one year. The Company has purchased 6.50% and an average 6.86% LIBOR interest
rate caps for its variable-rate mortgage debt in the amount of $584,330,000 and
an average $563,609,000, respectively, for the years ending January 31, 2001 and
2002.
In addition, 3-year LIBOR caps were purchased at strike rates ranging from
6.75% - 8.00% to protect the development portfolio, in the aggregate amount of
$359,949,000 with start dates from September 2000 through February 2003. The
Company intends to convert a significant portion of its committed variable-rate
debt to fixed-rate debt.
In order to mitigate upward fluctuations in interest rates, the Company
has entered into Treasury Options. The Company owns $305,519,000 of 10-year
Treasury Options at strike rates ranging from 6.00% - 7.00% with exercise dates
ranging from November 2000 to August 2002. Additionally, the Company owns
$43,010,000 of 5-year Treasury Options at a strike rate of 7.00% with an
exercise date of August 2001. 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, 2000, a 100 basis point increase in taxable interest rates
would increase the annual pre-tax interest cost of the Company's taxable
variable-rate debt by approximately $2,400,000. This effect is lessened due to
the 6.50% LIBOR caps in place for fiscal year 2000.
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
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, 2000, Lumber Trading Group's two lines of credit totaled an
$87,000,000 commitment expiring June 30, 2000. These credit lines are secured by
the assets of the Lumber Trading Group and are used to finance its working
capital needs. At January 31, 2000, $21,486,000 was outstanding under these
facilities.
In July 1999, 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 $102,000,000. At January 31, 2000, the Company had received
$55,000,000 in net proceeds from this agreement. The program is nonrecourse to
the Company and the Company bears no risk as to the collectibility of the
accounts receivable.
The Company believes that the amounts available under these credit
facilities, together with the accounts receivable sale program, will be
sufficient to meet Lumber Trading Group's liquidity needs.
CASH FLOWS
Net cash provided by operating activities was $126,789,000, $113,119,000,
and $84,629,000 for 1999, 1998 and 1997, respectively. The increase in net cash
provided by operating activities in 1999 from 1998 is the result of an increase
of $152,554,000 in rents and other revenues received principally comprised of an
increase in consolidated revenues of $ 96,422,000 and a decrease in notes and
accounts receivable of $41,427,000 (resulting from a decrease of $2,867,000 in
1999 versus an increase of $38,560,000 in 1998) primarily from Lumber Trading
Group, and a decrease of $8,152,000 in land development expenditures. These
increases were partially offset by a $119,786,000 increase in expenditures for
operating expenses (due to an increase of $62,217,000 in operating expenses, an
increase in accounts payable of $31,011,000 and an increase in Lumber Trading
Group's inventory of $21,542,000), an increase of $14,323,000 in interest paid,
and a decrease of $12,927,000 in proceeds from land sales. 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 $33,263,000 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.
Net cash used in investing activities totaled $407,854,000, $526,324,000
and $287,932,000 for 1999, 1998 and 1997, respectively. Capital expenditures,
other than development and acquisition activities, totaled $37,822,000,
$44,615,000, and $39,421,000 (including both recurring and investment capital
expenditures) in 1999, 1998, and 1997, respectively, and were financed with cash
provided from operating activities. The Company invested $346,315,000, $
415,728,000, and $203,410,000 in acquisition and development of real estate
projects in 1999, 1998, and 1997, respectively. These expenditures were financed
with approximately $194,000,000, $203,000,000, and $181,000,000 in new mortgage
indebtedness incurred in 1999, 1998, and 1997, respectively, cash provided from
operations and borrowings under the revolving credit facility.
In 1999, 1998, and 1997, $-0-, $33,345,000, and $-0- was collected in proceeds
from the disposition of real estate properties. The Company invested
$23,717,000, $99,326,000, and $33,737,000 in investments in and advances to
affiliates in 1999, 1998, and 1997, respectively. The 1999 investments were
primarily in the following syndicated Residential Group projects: The Grand
($15,200,000), a 546-unit luxury high-rise apartment building in North Bethesda,
Maryland that opened in February 1999; Grand Lowry Lofts ($9,600,000), 261 units
under construction in Denver, Colorado; and Philip Morris at Tobacco Row
($10,300,000), a 171-unit apartment renovation project in Richmond, Virginia. In
addition, investments of $10,000,000 were made during 1999 on behalf of the
Company's partner for New York City area urban development projects. During
1999, a return on investment of $23,270,000 was received on 101 San Fernando in
San Jose, California. The 1998 investments were primarily in the following
syndicated Residential Group projects: 101 San Fernando ($31,100,000) in San
Jose, California; The Enclave ($16,300,000), another development in San Jose
that opened in phases during 1997 and 1998;
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26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
The Grand ($7,800,000); Philip Morris at Tobacco Row ($4,900,000), and The Drake
($5,200,000), a redevelopment project in Philadelphia, Pennsylvania. In
addition, investments were made during 1998 on behalf of the Company's partner
for the following projects: $11,772,000 for New York City area urban
development; $5,181,000 for the Promenade regional mall 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 $299,631,000,
$436,980,000, and $216,855,000 in 1999, 1998, and 1997, respectively. The
Company's refinancing of mortgage indebtedness is discussed above in "Mortgage
Refinancings" and borrowings under new mortgage indebtedness for acquisition and
development activities is included in the preceding paragraph discussing net
cash used in investing activities.
Net cash provided by financing activities for 1999 reflected an increase
of $25,672,000 in restricted cash related to the financing of Millennium
($8,676,000), an office building at University Park at MIT in Cambridge,
Massachusetts, and a good faith deposit on Residential property to be acquired
in the year 2000 ($11,514,000), net of an increase in book overdrafts of
$19,446,000 (representing checks issued but not yet paid). In addition, the
Company reported a net increase of $18,969,000 in notes payable primarily from
two New York City hotels under construction payable to the hotel management
company, payment of deferred financing costs of $6,021,000 and payment of
$5,399,000 of dividends.
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. Net proceeds from the issuance
of senior notes in March 1998 of $193,703,000, which were initially used to
repay $114,000,000 of long-term debt, 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.
RECENT DEVELOPMENTS
During the first quarter of 2000, the Company disposed of two apartment
complexes, Highlands and Studio Colony with a total of 1,006 units, and recorded
a pre-tax gain on disposition of properties of approximately $26,500,000.
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 on 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.
DIVIDENDS
On June 8, 1999, the Board of Directors voted to increase the 1999
quarterly dividend to $.05 per share on both Class A and Class B Common Stock,
representing a 25% annual increase in the previous quarterly dividend.
The first, second, third and fourth 1999 quarterly dividends of $.04,
$.05, $.05 and $.05, respectively, per share on shares of both Class A and Class
B Common Stock were paid June 15, 1999, September 15, 1999, December 15, 1999
and March 15, 2000, respectively.
The first 2000 quarterly dividend of $.05 per share on both Class A and
Class B Common Stock was declared on March 10, 2000 and will be paid on June 15,
2000 to share-holders of record at the close of business on June 1, 2000.
LEGAL PROCEEDINGS
On September 21, 1999, a complaint was filed in state court in Los Angeles
County against Forest City Enterprises, Inc., Forest City California Residential
Development, Inc., and Forest City Residential West, Inc. Plaintiffs are 63
construction workers who claim to have been exposed to asbestos and mold and
mildew while engaged in renovation work at a construction site in Washington
("the Washington claims"). Three of the plaintiffs also claim to have been
exposed to lead paint and asbestos at a construction site in California ("the
California claims"). Plaintiffs seek damages for unspecified personal injuries,
lost income, and diminished earning capacity and also seek punitive and treble
damages. Defendants filed a motion to dismiss or stay the Washington claims on
the grounds that Washington was a more appropriate forum in which to hear these
claims. On February 25, 2000, the Superior Court for the County of Los Angeles
granted defendants' motion and severed the Washington claims from the California
claims and stayed the Washington claims so that they can be tried in Washington,
which the Court found to be the more appropriate forum. The Company will
continue the defense of the California claims in the State of California court
system.
An action was filed in August 1997 against Forest City Trading Group, Inc.
(a wholly-owned subsidiary of the Company) and 10 of its subsidiaries, all of
which are in the business of trading lumber. The complaint alleged improper
calculation and underpayment of commissions and other related claims. On
September 11, 1998 Plaintiffs filed a Motion for Class Certification. On
December 8, 1998 the court posted an order denying class certification. On April
5, 1999 the original four Plaintiffs filed a notice of dismissal of this lawsuit
without prejudice in state court. On April 16, 1999,
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27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
the case was re-filed in Federal court against Forest City Trading Group, Inc.
and four of its subsidiaries. On November 30, 1999, the U.S. District Court for
the District of Oregon dismissed the federal claims with prejudice and the state
law claims without prejudice. The time to appeal has expired. There will be no
further report on this case if no new developments take place.
The Company, through its subsidiaries, owns a 14.6% interest in the Seven
Hills housing development located in Henderson, Nevada, which is owned by the
Silver Canyon Partnership ("Silver Canyon") and is being developed next to a
golf course. In August 1997, a class-action lawsuit was filed by the current
homeowners in Seven Hills against the Silver Canyon Partnership, the golf course
developers and other entities, including the Company. In addition, separate
lawsuits were filed by some of the production home-building companies at Seven
Hills against some of the same parties, including the Company. Each of these
lawsuits sought a commitment for public play on the golf course, as well as
damages and, in October 1998, the court granted play rights. In February 1999,
the owner of the golf course filed a cross-claim against the Silver Canyon
Partnership and the Company. Silver Canyon has since settled with the Plaintiff
homeowners and with certain of Silver Canyon's insurance carriers and the
Company has been released. In addition, Silver Canyon has reached settlement
agreements with the owner of the golf course and with one of the production
home-builders which are expected to be executed in the near future. These
settlements include a release of the Company. The Company was dismissed as a
defendant in the other two lawsuits filed by the production builders, and
subsequent to the dismissal of the Company, Silver Canyon reached settlement in
principle in connection with one of the production home builder lawsuits. The
remaining lawsuit is set for trial in June 2000 against Silver Canyon. Silver
Canyon believes it has meritorious defenses and intends to vigorously defend the
lawsuit.
NEW ACCOUNTING STANDARDS
In the first quarter of 1999, the Company adopted SOP 98-5, "Reporting on
the Costs of Start-up Activities." This statement requires that start-up costs
and organization costs be expensed as incurred. The adoption of this accounting
principle had no material effect on earnings or financial position.
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
137, which defers the effective date of SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities", to all fiscal quarters of fiscal years
beginning after June 15, 2000. Therefore, the Company plans to implement SFAS
133 for the fiscal quarters in its fiscal year ending January 31, 2002. The
adoption of SFAS 133 is not expected to have a material effect on the financial
position or results of operations of the Company.
YEAR 2000
The Company has completed its program to prepare its financial and
operating computer systems and embedded applications for the Year 2000. The
Company did not experience any significant malfunctions or errors. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the "Year 2000 issue." No problems
were detected through the leap year processing. The Company is currently not
aware of any significant Year 2000 or similar problems that have arisen for its
partners, vendors, suppliers and tenants.
For business reasons unrelated to the Year 2000, the Company's computer
systems have been moved from the mainframe environment to a distributed
environment. Major processing systems were replaced with Year 2000-compliant
software. The project costs was approximately $4 million.
The Company had identified concerns related to hardware, software and
embedded systems and developed a contingency plan to respond to each concern.
The Company had appropriate personnel, and outside contractors, on site starting
on the evening of December 31, 1999 and the ensuing weekend. The Company
completed the Year 2000 tasks and notified senior management of the program
completion. None of the systems that related to the safety of the properties'
tenants or customers were affected. The property sites have well defined
emergency plans in place, and these would have been activated if necessary.
Similar to other companies, Forest City was highly dependent upon systems
in the public sector, such as utilities, mail, government agencies and
transportation systems. The Company did not experience any failure in these
areas. The Year 2000 plan was aimed at identifying and correcting all issues
upon which Forest City had direct control or indirect control through its
vendors and business partners. The Company successfully completed its Year 2000
program with minimal effect 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.
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28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
THREE YEAR SUMMARY OF EARNINGS BEFORE DEPRECIATION,
AMORTIZATION AND DEFERRED TAXES
(in thousands)
Commercial Group Residential Group
---------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
=============================================================================================================================
Revenues ..................................... $ 442,992 $ 380,264 $ 330,117 $ 158,768 $ 139,003 $ 135,253
Operating expenses, including depreciation
and amortization for non-Real Estate Groups 231,198 195,966 167,107 74,041 66,248 63,533
Interest expense ............................. 94,356 91,291 87,035 26,447 27,342 28,884
Income tax provision (benefit) ............... 11,561 (1,020) 2,202 11,869 6,799 10,851
---------------------------------------------------------------------------
337,115 286,237 256,344 112,357 100,389 103,268
---------------------------------------------------------------------------
Earnings before depreciation, amortization and
deferred taxes (EBDT) ..................... $ 105,877 $ 94,027 $ 73,773 $ 46,411 $ 38,614 $ 31,985
===========================================================================
Land Group Lumber Trading Group
---------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
=============================================================================================================================
Revenues ..................................... $ 41,356 $ 52,611 $ 44,614 $ 149,357 $ 123,325 $ 122,169
Operating expenses, including depreciation
and amortization for non-Real Estate Groups 39,732 40,532 33,855 131,811 111,998 107,673
Interest expense ............................. 7,370 6,814 5,575 5,288 5,262 5,254
Income tax provision (benefit) ............... (2,257) 2,079 1,858 5,188 2,838 4,043
---------------------------------------------------------------------------
44,845 49,425 41,288 142,287 120,098 116,970
---------------------------------------------------------------------------
Earnings before depreciation, amortization and
deferred taxes (EBDT) ..................... $ (3,489) $ 3,186 $ 3,326 $ 7,070 $ 3,227 $ 5,199
===========================================================================
Corporate Activities Total
---------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
=============================================================================================================================
Revenues ..................................... $ 598 $ 1,446 $ 516 $ 793,071 $ 696,649 $ 632,669
Operating expenses, including depreciation
and amortization for non-Real Estate Groups 12,786 12,766 10,478 489,568 427,510 382,646
Interest expense ............................. 26,258 19,251 9,574 159,719 149,960 136,322
Income tax provision (benefit) ............... (15,216) (9,371) (12,163) 11,145 1,325 6,791
---------------------------------------------------------------------------
23,828 22,646 7,889 660,432 578,795 525,759
---------------------------------------------------------------------------
Earnings before depreciation, amortization and
deferred taxes (EBDT) ..................... $ (23,230) $ (21,200) $ (7,373) $ 132,639 $ 117,854 $ 106,910
===========================================================================
RECONCILIATION TO NET EARNINGS:
Earnings before depreciation, amortization and deferred taxes (EBDT) ........... $ 132,639 $ 117,854 $ 106,910
Depreciation and amortization - Real Estate Groups ............................. (84,586) (83,655) (71,678)
Deferred taxes - Real Estate Groups ............................................ (12,453) (14,236) (10,693)
Provision for decline in real estate and other, net of tax ..................... (3,060) - -
Gain (loss) on disposition of properties, net of tax ........................... 7,990 18,444 (23,356)
Extraordinary gain, net of tax ................................................. 272 16,343 19,356
-----------------------------------
Net earnings ................................................................... $ 40,802 $ 54,750 $ 20,539
===================================
53