1
Exhibit 13
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
FOREST CITY RENTAL PROPERTIES CORPORATION PORTFOLIO OF REAL ESTATE
SHOPPING CENTERS
Date of Opening/ % of
Name Acquisition Ownership Location
- ------------------------------------------------------------------
Antelope Valley Mall 1990 78.00% Palmdale, CA
Atlantic Center 1996 75.00% Brooklyn, NY
* Atlantic Center Site V 1998 70.00% Brooklyn, NY
Avenue at Tower City 1990 100.00% Cleveland, OH
Ballston Common 1986 100.00% Arlington, VA
Boulevard Mall 1962 50.00% Amherst, NY
Bowling Green Mall 1966 50.00% Bowling Green, KY
Bruckner Boulevard 1996 70.00% Bronx, NY
Canton Centre 1981 100.00% Canton, OH
Chapel Hill Mall 1966 50.00% Akron, OH
Chapel Hill Suburban 1969 50.00% Akron, OH
Charleston Town Center 1983 50.00% Charleston, WV
Courtland Center 1968 100.00% Flint, MI
Courtyard 1990 50.00% Flint, MI
Flatbush Avenue 1995 80.00% Brooklyn, NY
* 42nd Street 1999 70.00% Manhattan, NY
Galleria at Sunset 1996 60.00% Henderson, NV
Gallery at MetroTech 1990 80.00% Brooklyn, NY
Golden Gate 1958 50.00% Mayfield Hts., OH
Grand Avenue 1997 70.00% Queens, NY
Gun Hill Road 1997 70.00% Bronx, NY
Hunting Park 1996 70.00% Philadelphia, PA
Manhattan Town Center 1987 37.50% Manhattan, KS
Marketplace at Riverpark 1996 50.00% Fresno, CA
Midtown Plaza 1961 50.00% Parma, OH
Newport Plaza 1977 50.00% Newport, KY
Northern Boulevard 1997 70.00% Queens, NY
Plaza at Robinson Town Center 1989 50.00% Pittsburgh, PA
* Richmond Avenue 1998 70.00% Staten Island, NY
Rolling Acres Mall 1975 80.00% Akron, OH
Showcase 1996 20.00% Las Vegas, NV
South Bay Galleria 1985 50.00% Redondo Beach, CA
South Bay Southern 1978 100.00% Redondo Beach, CA
Summit Park Mall 1972 100.00% Wheatfield, NY
Tucson Mall 1982 67.50% Tucson, AZ
Tucson Place 1989 100.00% Tucson, AZ
Leasable
Name Major Tenants Square Feet
- ------------------------------------------------------------------------------------------------------
Antelope Valley Mall Sears; Penney's; Gottshalk's; Harris; Mervyn's 839,000
Atlantic Center Caldor; Sports Authority; Pathmark; OfficeMax; Old Navy 391,000
* Atlantic Center Site V Sneaker Stadium 47,000
Avenue at Tower City Dillard's 790,000
Ballston Common Hecht's; Penney's; Sport & Health 490,000
Boulevard Mall Jenss; Penney's; Kaufmann's 772,000
Bowling Green Mall Kroger; Quality Big Lots 242,000
Bruckner Boulevard Pergament; Seaman's; YoungWorld; Old Navy 114,000
Canton Centre Kaufmann's; Penney's; Montgomery Ward 680,000
Chapel Hill Mall Kaufmann's; Penney's; Sears 882,000
Chapel Hill Suburban Value City; Petzazz 112,000
Charleston Town Center Kaufmann's; Penney's; Sears; Montgomery Ward; Stone & Thomas 897,000
Courtland Center Crowley's; Penney's; Mervyn's 460,000
Courtyard V.G.'s Market; Home Depot; OfficeMax 233,000
Flatbush Avenue Edward's Supermarket 136,000
* 42nd Street AMC Theaters; Madame Tussaud's Wax Museum 296,000
Galleria at Sunset Dillard's; Robinsons-May; Mervyn's; Penney's 892,000
Gallery at MetroTech Toys "R" Us 163,000
Golden Gate OfficeMax; Old Navy; Champs; Michael's; Home Place 260,000
Grand Avenue Edward's Supermarket 100,000
Gun Hill Road Home Depot; Sneaker Stadium 147,000
Hunting Park Caldor; US Kidz; Payless Shoes 144,000
Manhattan Town Center Dillard's; Penney's; Sears 380,000
Marketplace at Riverpark Best Buy; Target; Marshall's; Penney's 453,000
Midtown Plaza Hills 256,000
Newport Plaza IGA 157,000
Northern Boulevard Edward's Supermarket; Marshall's; Old Navy 214,000
Plaza at Robinson Town Center T.J. Maxx; IKEA; Hills; Marshall's; Sears 455,000
* Richmond Avenue Circuit City; Staples 76,000
Rolling Acres Mall Kaufmann's; Penney's; Sears; Dillard's; Target 1,014,000
Showcase Coca-Cola(R); All Star Cafe; M&M's World/Ethel M.
Chocolates; Game Works; United Artists 189,000
South Bay Galleria Robinsons-May; Mervyn's; Nordstrom's; General Cinema 953,000
South Bay Southern CompUSA 160,000
Summit Park Mall Bon-Ton; Jenss; Sears, 695,000
Tucson Mall Broadway's; Foley's; Dillard's; Mervyn's; Penney's; Sears 1,293,000
Tucson Place Wal-Mart; Homelife; OfficeMax 276,000
----------
Shopping Centers at January 31, 1998 15,658,000
==========
Shopping Centers at January 31, 1997 14,775,000
==========
OFFICE BUILDINGS
Date of Opening/ % of
Name Acquisition Ownership Location
- ----------------------------------------------------------------------------------------------
Chagrin Plaza I & II 1969 66.67% Beachwood, OH
Chase Financial Tower 1991 95.00% Cleveland, OH
Clark Building 1989 50.00% Cambridge, MA
Eleven MetroTech Center 1995 65.00% Brooklyn, NY
Emery-Richmond 1991 50.00% Warrensville Hts., OH
Halle Building 1986 75.00% Cleveland, OH
Jackson Building 1987 100.00% Cambridge, MA
Liberty Center 1986 50.00% Pittsburgh, PA
M.K. Ferguson Plaza 1990 1.00% Cleveland, OH
Nine MetroTech 1997 65.00% Brooklyn, NY
One MetroTech 1991 65.00% Brooklyn, NY
One Pierrepont Plaza 1988 85.00% Brooklyn, NY
Richards Building 1990 100.00% Cambridge, MA
San Vicente 1983 25.00% Brentwood, CA
Signature Square I 1986 50.00% Beachwood, OH
Signature Square II 1989 50.00% Beachwood, OH
Skylight Office Tower 1991 92.50% Cleveland, OH
Station Square 1994 100.00% Pittsburgh, PA
Ten MetroTech Center 1991 80.00% Brooklyn, NY
Terminal Tower 1983 100.00% Cleveland, OH
Two MetroTech 1990 65.00% Brooklyn, NY
* University Park at MIT-Millennium 1998 50.00% Cambridge, MA
* University Park at MIT-Phase II 1999 100.00% Cambridge, MA
Leasable
Name Major Tenants Square Feet
- -------------------------------------------------------------------------------------------------------------------------
Chagrin Plaza I & II National City Bank 116,000
Chase Financial Tower Chase Financial 119,000
Clark Building Oravax 122,000
Eleven MetroTech Center E-9ll - City of New York 216,000
Emery-Richmond Allstate Insurance 5,000
Halle Building Sealy, Inc.; North American Refractories Co. 379,000
Jackson Building Ariad Pharmaceuticals 99,000
Liberty Center Federated Investors 526,000
M.K. Ferguson Plaza M.K. Ferguson; Chase Financial 482,000
Nine MetroTech Fire Department - City of New York 317,000
One MetroTech Brooklyn Union; Bear Stearns 932,000
One Pierrepont Plaza Morgan Stanley; Goldman Sachs; U.S. Attorney 672,000
Richards Building Genzyme Tissue Repair; Alkermes 126,000
San Vicente Foote, Cone; Needham, Harper 469,000
Signature Square I Ciuni & Panichi 79,000
Signature Square II Sterling Software 81,000
Skylight Office Tower Ernst & Young, L.L.P. 321,000
Station Square Woodson's; Grand Concourse 144,000
Ten MetroTech Center Internal Revenue Service 409,000
Terminal Tower Forest City Enterprises, Inc. 583,000
Two MetroTech Securities Industry Automation Corp. 521,000
* University Park at MIT-Millennium Millennium Pharmaceuticals, Inc.; Monsanto 276,000
* University Park at MIT-Phase II Star Market; Tofias, Fleishman, Shapiro & Co.; Comp USA 172,000
---------
Office Buildings at January 31, 1998 7,166,000
=========
Office Buildings at January 31, 1997 6,890,000
=========
HOTELS
Date of Opening/ % of
Name Acquisition Ownership Location Rooms
- ------------------------------------------------------------------------------------------------------------------------
Budgetel 1982 28.35% Mayfield Hts., OH 102
Charleston Marriott 1983 95.00% Charleston, WV 354
DoubleTree at Liberty Center 1986 50.00% Pittsburgh, PA 616
DoubleTree at Millender Center 1985 4.00% Detroit, MI 250
* Hotel at 42nd Street 1999 56.00% Manhattan, NY 449
Ritz-Carlton 1990 95.00% Cleveland, OH 208
* University Park Hotel at MIT 1998 50.00% Cambridge, MA 210
-------
Hotel Rooms at January 31, 1998 2,189
=======
Hotel Rooms at January 31, 1997 1,530
=======
* These properties were under construction as of January 31, 1998.
22
2
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
FOREST CITY RENTAL PROPERTIES CORPORATION PORTFOLIO OF REAL ESTATE
APARTMENTS
Date of Opening/ % of Leasable
Name Acquisition Ownership Location Units
- -----------------------------------------------------------------------------------------------------------------------------
Bayside Village I, II & III 1988-1989 50.00% San Francisco, CA 862
* Big Creek 1996-1998 50.00% Parma Hts., OH 232
Boot Ranch 1991 50.00% Tampa, FL 236
Boulevard Towers 1969 50.00% Amherst, NY 402
Camelot 1967 50.00% Parma, OH 150
Chapel Hill Towers 1969 50.00% Akron, OH 402
Cherry Tree 1996-1997 50.00% Strongsville, OH 276
Chestnut Lake 1969 50.00% Strongsville, OH 789
Clarkwood 1963 50.00% Warrensville Hts., OH 568
Classic Residence by Hyatt 1990 50.00% Chevy Chase, MD 339
Classic Residence by Hyatt 1989 50.00% Teaneck, NJ 221
Colony Woods 1997 100.00% Bellevue, WA 396
Copper Creek 1992 20.00% Houston, TX 300
Deer Run I & II 1987-1989 43.03% Twinsburg, OH 562
Emerald Palms 1996 100.00% Miami, FL 419
* Enclave 1997-1998 1.00% San Jose, CA 637
Fenimore Court 1982 0.50% Detroit, MI 144
Fort Lincoln II 1979 45.00% Washington, D.C. 176
Fort Lincoln III & IV 1981 24.90% Washington, D.C. 306
Granada Gardens 1966 50.00% Warrensville Hts., OH 940
* Grand 1998 0.90% North Bethesda, MD 546
Greenbriar 1992 20.00% Houston, TX 400
Hamptons 1969 50.00% Beachwood, OH 649
Highlands I & II 1988-1990 100.00% Grand Terrace, CA 556
Hunter's Hollow 1990 50.00% Strongsville, OH 208
Independence Place I 1976 50.00% Parma Hts., OH 202
Kennedy Lofts 1990 0.50% Cambridge, MA 142
Knolls 1995 1.00% Orange, CA 260
Laurels 1995 100.00% Justice, IL 520
Lenox Club 1991 0.50% Arlington, VA 385
Lenox Park 1992 0.50% Silver Spring, MD 406
Liberty Hills 1979-1986 50.00% Solon, OH 396
Metropolitan 1989 100.00% Los Angeles, CA 270
Midtown Towers 1969 50.00% Parma, OH 635
Millender Center 1985 4.00% Detroit, MI 339
Museum Towers 1997 89.00% Philadelphia, PA 286
Noble Towers 1979 50.00% Pittsburgh, PA 133
Oaks 1994 100.00% Bryan, TX 248
One Franklintown 1988 100.00% Philadelphia, PA 335
Palm Villas 1991 100.00% Henderson, NV 350
Panorama Towers 1978 99.00% Los Angeles, CA 154
Parmatown 1972-1973 100.00% Parma, OH 412
Pavilion 1992 0.50% Chicago, IL 1,115
Pebble Creek 1995-1996 50.00% Twinsburg, OH 148
Peppertree 1993 100.00% College Station, TX 208
Pine Ridge Valley 1967-1974 50.00% Willoughby, OH 1,147
Queenswood 1990 0.70% Corona, NY 296
Regency Towers 1994 100.00% Jackson, NJ 372
Shippan Avenue 1980 100.00% Stamford, CT 148
Studio Colony 1986 80.00% Los Angeles, CA 450
Surfside Towers 1970 50.00% Eastlake, OH 246
Tam-A-Rac I, II & III 1990-1997 50.00% Willoughby, OH 454
Trolley Plaza 1981 100.00% Detroit, MI 351
Trowbridge 1988 53.25% Southfield, MI 304
Twin Lake Towers 1966 50.00% Denver, CO 254
Village Green 1994-1995 25.00% Beachwood, OH 360
Vineyards 1995 100.00% Broadview Hts., OH 336
Waterford Village 1994 1.00% Indianapolis, IN 520
White Acres 1966 50.00% Richmond Hts., OH 473
Whitehall Terrace 1997 100.00% Kent, OH 188
Woodforest Glen 1992 20.00% Houston, TX 336
------
23,895
Senior Citizen Apartments 9,402
------
Apartments at January 31, 1998 33,297
======
Apartments at January 31, 1997 32,938
======
* These properties were under construction as of January 31, 1998.
3
Forest City Enterprises, Inc. and Subsidiaries
Selected Financial Data
For the Years Ended January 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Operating Results
Revenues ........................................... $ 632,669 $ 610,449 $ 529,433 $ 522,608 $ 519,379
==================================================================
Operating earnings, net of tax (1) ................. $ 24,539 $ 6,986 $ 13,490 $ 6,774 $ 718
Provision for decline in real estate, net of tax ... -- (7,413) (6,073) (4,986) --
Gain (loss) on disposition of properties, net of tax (23,356) 9,598 (478) (20,321) 1,494
--------------------------------------------------------------------
Net earnings (loss) before extraordinary gain ...... 1,183 9,171 6,939 (18,533) 2,212
Extraordinary gain, net of tax ..................... 19,356 2,900 1,847 60,449 --
--------------------------------------------------------------------
Net earnings ....................................... $ 20,539 $ 12,071 $ 8,786 $ 41,916 $ 2,212
==================================================================
Earnings per Common Share
BASIC AND DILUTED
Net earnings (loss) before extraordinary gain .. $ 0.08 $ 0.70 $ 0.51 $ (1.37) $ 0.16
Extraordinary gain, net of tax ................. 1.34 0.22 0.14 4.48 --
--------------------------------------------------------------------
Net earnings ................................... $ 1.42 $ 0.92 $ 0.65 $ 3.11 $ 0.16
==================================================================
Cash dividends declared-Class A and Class B ........ $ 0.25 $ 0.27 $ 0.17 $ 0.13 $ --
==================================================================
January 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
FINANCIAL POSITION
Consolidated assets ........................... $ 2,963,353 $ 2,760,673 $ 2,642,756 $ 2,584,734 $ 2,668,057
Real estate portfolio, at cost ................ $ 2,704,560 $ 2,520,179 $ 2,425,083 $ 2,322,136 $ 2,405,066
Long-term debt, including mortgage debt ....... $ 2,132,931 $ 1,991,428 $ 1,940,059 $ 1,878,270 $ 2,022,249
- ----------------------------------------------------------------------------------------------------------------------------
FOREST CITY RENTAL PROPERTIES CORPORATION -
REAL ESTATE ACTIVITY (2)
Total real estate - end of year
Completed rental properties, before
depreciation ............................. $ 2,390,969 $ 2,227,859 $ 2,085,284 $ 1,995,629 $ 2,101,528
Projects under development ................ 251,416 215,960 246,240 230,802 214,111
------------------------------------------------------------------------
2,642,385 2,443,819 2,331,524 2,226,431 2,315,639
Accumulated depreciation .................. (436,377) (387,733) (338,216) (293,465) (272,518)
------------------------------------------------------------------------
Rental properties, net of depreciation .. $ 2,206,008 $ 2,056,086 $ 1,993,308 $ 1,932,966 $ 2,043,121
========================================================================
Real Estate Activity during the year
Completed rental properties
Capital additions ....................... $ 166,740 $ 160,690 $ 89,028 $ 77,265 $ 50,384
Acquisitions ............................ 90,438 22,264 28,587 32,811 5,198
Dispositions (3)(4) ..................... (94,068) (40,379) (27,960) (215,975) -
------------------------------------------------------------------------
163,110 142,575 89,655 (105,899) 55,582
------------------------------------------------------------------------
Projects under development
New development ......................... 154,746 98,403 58,798 49,585 54,317
Transferred to completed rental properties (119,290) (128,683) (43,360) (32,894) (28,393)
------------------------------------------------------------------------
35,456 (30,280) 15,438 16,691 25,924
------------------------------------------------------------------------
Increase (decrease) in rental properties, at cost $ 198,566 $ 112,295 $ 105,093 $ (89,208) $ 81,506
========================================================================
(1) Excludes the provision for decline in real estate and gain (loss) on
disposition of properties, net of tax.
(2) The table includes only the real estate activity for Forest City
Rental Properties Corporation.
(3) Reflects the sale of Toscana, a residential complex containing 563
units in Irvine, California, during the year ended January 31, 1998.
(4) Reflects the sale of Park LaBrea Towers, a residential complex
containing 2,825 units in Los Angeles, California, during the year
ended January 31, 1995.
4
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Balance Sheets
January 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data)
Assets
Real Estate
Completed rental properties ................................................... $ 2,407,045 $ 2,247,393
Projects under development .................................................... 251,416 220,137
Land held for development or sale ............................................. 46,099 52,649
----------------------------
2,704,560 2,520,179
Less accumulated depreciation ................................................. (448,634) (399,830)
----------------------------
Total Real Estate .......................................................... 2,255,926 2,120,349
Cash ............................................................................. 54,854 41,302
Notes and accounts receivable, net ............................................... 191,719 204,959
Inventories ...................................................................... 58,696 48,769
Investments in and advances to affiliates ........................................ 202,409 164,510
Other assets ..................................................................... 199,749 180,784
----------------------------
$ 2,963,353 $ 2,760,673
============================
Liabilities and Shareholders' Equity
Liabilities
Mortgage debt, nonrecourse ....................................................... $ 2,018,931 $ 1,898,428
Accounts payable and accrued expenses ............................................ 361,398 387,060
Notes payable .................................................................... 34,819 38,964
Long-term debt ................................................................... 114,000 93,000
Deferred income taxes ............................................................ 117,723 115,488
Deferred profit .................................................................. 34,537 35,755
----------------------------
Total Liabilities .......................................................... 2,681,408 2,568,695
----------------------------
Shareholders' Equity
Preferred stock - convertible, without par value;
5,000,000 and 1,000,000 shares authorized, respectively; no shares issued ..... -- --
Common stock - $.33 1/3 par value
Class A, 48,000,000 and 16,000,000 shares authorized; 9,906,686 and 7,932,358
shares issued, 9,593,036 and 7,696,408 outstanding, respectively ........... 3,301 2,643
Class B, convertible, 18,000,000 and 6,000,000 shares authorized; 5,535,290 and
5,554,618 shares issued, 5,396,240 and 5,415,568 outstanding, respectively . 1,844 1,851
----------------------------
5,145 4,494
Additional paid-in capital ....................................................... 119,421 43,996
Retained earnings ................................................................ 168,864 152,077
----------------------------
293,430 200,567
Less treasury stock, at cost; 1998: 313,650 Class A and 139,050 Class B shares,
1997: 235,950 Class A and 139,050 Class B shares .............................. (11,485) (8,589)
----------------------------
Total Shareholders' Equity ................................................. 281,945 191,978
----------------------------
$ 2,963,353 $ 2,760,673
============================
The accompanying notes are an integral part of these consolidated financial
statements.
5
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements Of Earnings
For the Years Ended January 31,
- ------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues .................................. $ 632,669 $ 610,449 $ 529,433
-----------------------------------
Operating expenses ........................ 379,531 386,970 305,819
Interest expense .......................... 136,322 133,364 130,001
Provision for decline in real estate ...... -- 12,263 9,581
Depreciation and amortization ............. 74,793 73,304 65,716
-----------------------------------
590,646 605,901 511,117
-----------------------------------
Gain (loss) on disposition of properties .. (38,638) 17,574 (754)
-----------------------------------
Earnings before income taxes .............. 3,385 22,122 17,562
-----------------------------------
Income tax expense (benefit)
Current ................................ (1,478) 1,935 370
Deferred ............................... 3,680 11,016 10,253
-----------------------------------
2,202 12,951 10,623
-----------------------------------
Net earnings before extraordinary gain .... 1,183 9,171 6,939
Extraordinary gain, net of tax ............ 19,356 2,900 1,847
-----------------------------------
Net earnings .............................. $ 20,539 $ 12,071 $ 8,786
===================================
Basic and diluted earnings per common share
Net earnings before extraordinary gain . $ .08 $ .70 $ .51
Extraordinary gain, net of tax ......... 1.34 .22 .14
-----------------------------------
Net earnings .............................. $ 1.42 $ .92 $ .65
===================================
The accompanying notes are an integral part of these consolidated financial
statements.
6
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements Of Shareholders' Equity
Common Stock
------------------------------
Class A Class B Additional Treasury Stock
------------------------------- Paid-In Retained --------------
Shares Amount Shares Amount Capital Earnings Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
BALANCES AT JANUARY 31, 1995........... 7,719 $2,572 5,768 $1,922 $44,014 $137,052 - $ - $185,560
Net earnings ........................ 8,786 8,786
Dividends-$.17 per share ............ (2,248) (2,248)
Conversion of Class B shares to
Class A shares ..................... 188 63 (188) (63) -
Purchase of treasury stock .......... 116 (2,509) (2,509)
-------------------------------------------------------------------------------
BALANCES AT JANUARY 31, 1996 .......... 7,907 2,635 5,580 1,859 44,014 143,590 116 (2,509) 189,589
Net earnings ........................ 12,071 12,071
Dividends:
Annual 1996 -$.21 per share ....... (2,797) (2,797)
Quarterly 1997-$.06 per share
(one quarter) .................... (787) (787)
Conversion of Class B shares to
Class A shares ..................... 25 8 (25) (8) -
Purchase of treasury stock .......... 259 (6,080) (6,080)
Cash in lieu of fractional shares from
three-for-two stock split ......... (18) (18)
-------------------------------------------------------------------------------
BALANCES AT JANUARY 31, 1997 .......... 7,932 2,643 5,555 1,851 43,996 152,077 375 (8,589) 191,978
Net earnings ........................ 20,539 20,539
Dividends:
Quarterly 1997 -$.06 per share
(three quarters) ................. (2,703) (2,703)
Quarterly 1998- $.07 per share
(one quarter) .................... (1,049) (1,049)
Issuance of 1,955,000 Class A common
shares in public offering ......... 1,955 651 75,425 76,076
Conversion of Class B shares to
Class A shares ..................... 20 7 (20) (7) -
Purchase of treasury stock .......... 78 (2,896) (2,896)
-------------------------------------------------------------------------------
BALANCES AT JANUARY 31, 1998 ........ 9,907 $3,301 5,535 $1,844 $119,421 $168,864 453 $(11,485) $281,945
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Consolidated Statements Of Cash Flows
For the Years Ended January 31,
- -----------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Rents and other revenues received ............................ $ 587,851 $ 532,177 $ 509,708
Proceeds from land sales ..................................... 46,619 44,297 44,740
Land development expenditures ................................ (32,670) (25,741) (24,163)
Operating expenditures ....................................... (404,285) (349,246) (321,701)
Interest paid ................................................ (133,999) (134,554) (132,009)
--------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................. 63,516 66,933 76,575
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ......................................... (242,831) (157,601) (122,878)
Proceeds from disposition of properties ...................... -- 26,040 15,950
Investments in and advances to affiliates .................... (33,737) (8,048) (9,986)
--------------------------------------
NET CASH USED IN INVESTING ACTIVITIES ...................... (276,568) (139,609) (116,914)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in nonrecourse mortgage and long-term debt .......... 385,807 174,409 119,706
Principal payments on nonrecourse mortgage debt on real estate (102,518) (55,880) (43,631)
Payments on long-term debt ................................... (109,000) (23,000) (30,000)
Increase in notes payable .................................... 48,574 23,613 8,427
Payments on notes payable .................................... (57,407) (10,195) (9,497)
Decrease (increase) in restricted cash ....................... 3,600 (15,200) --
Payment of deferred financing costs .......................... (12,142) (10,037) (7,242)
Sale of common stock, net .................................... 76,076 -- --
Purchase of treasury stock ................................... (2,896) (6,080) (2,509)
Dividends paid to shareholders ............................... (3,490) (2,797) (2,248)
--------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................. 226,604 74,833 33,006
--------------------------------------
NET INCREASE (DECREASE) IN CASH ................................. 13,552 2,157 (7,333)
CASH AT BEGINNING OF YEAR ....................................... 41,302 39,145 46,478
--------------------------------------
CASH AT END OF YEAR ............................................. $ 54,854 $ 41,302 $ 39,145
======================================
7
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements Of Cash Flows
For the Years Ended January 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
RECONCILIATION OF NET EARNINGS TO CASH PROVIDED BY OPERATING ACTIVITIES
NET EARNINGS .......................................................... $ 20,539 $ 12,071 $ 8,786
Depreciation ....................................................... 56,923 52,979 50,821
Amortization ....................................................... 17,870 20,325 14,895
Deferred income taxes .............................................. 2,071 10,377 11,461
Loss (gain) on disposition of properties ........................... 38,638 (17,574) 754
Provision for decline in real estate ............................... -- 12,263 9,581
Extraordinary gain ................................................. (22,174) (4,797) (3,055)
Decrease in land held for development or sale ...................... 396 8,980 2,887
Decrease (increase) in notes and accounts receivable ............... 10,019 (40,579) 29,425
Increase in inventories ............................................ (9,927) (7,583) (2,237)
Increase in other assets ........................................... (27,168) (20,918) (24,519)
(Decrease) increase in accounts payable and accrued expenses ....... (22,453) 43,351 (26,380)
(Decrease) increase in deferred profit ............................. (1,218) (1,962) 4,156
----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... $ 63,516 $ 66,933 $ 76,575
==================================
SUPPLEMENTAL NON-CASH DISCLOSURE:
The schedule below represents the effect of the following
non-cash transactions:
January 31, 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
* Disposition of interest in Woodridge
January 31, 1997:
* Reduction of interests in Granite Development Partners L.P. and the
Clark Building
* Disposition of interest in Beachwood Place
January 31, 1996:
* Increase in interest in Liberty Center Venture
Operating Activities
Land held for development or sale .................................. $ 3,022 $ 15,650 $ --
Notes and accounts receivable ...................................... (5,072) 3,797 --
Other assets ....................................................... (1,125) 5,175 --
Accounts payable and accrued expenses .............................. (3,470) (5,311) --
Deferred taxes ..................................................... 164 -- --
-----------------------------------
Total effect on operating activities ............................. $ (6,481) $ 19,311 $ --
===================================
Investing Activities
Additions to completed rental properties .......................... $(45,272) $ -- $(15,714)
Disposition of completed rental properties ........................ 53,547 16,085 --
Investments in and advances to affiliates ......................... 4,131 3,338 --
-----------------------------------
Total effect on investing activities ............................ $ 12,406 $ 19,423 $(15,714)
===================================
Financing Activities
Assumption of nonrecourse mortgage and long-term debt.............. $ 38,375 $ -- $ 15,714
Disposition of nonrecourse mortgage and long-term debt............. (48,988) (39,362) --
Notes payable ..................................................... 4,688 628 --
-----------------------------------
Total effect on financing activities ............................ $ (5,925) $(38,734) $ 15,714
===================================
The accompanying notes are an integral part of these consolidated financial
statements.
8
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
develops, acquires, owns and operates shopping centers, office buildings and
mixed-use projects including hotels. The RESIDENTIAL GROUP develops or acquires,
and owns and operates the Company's multi-family properties. 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 $2.7 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, Detroit, Washington, D.C. and San Francisco.
FISCAL YEAR
The years 1997, 1996 and 1995 refer to the fiscal years ended January 31,
1998, 1997 and 1996, respectively.
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, 1998.
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.
Certain prior years' amounts in the accompanying financial statements have
been reclassified to conform to the current year's presentation.
RECOGNITION OF REVENUE AND PROFIT
REAL ESTATE SALES - The Company follows the provisions of Statement of
Financial Accounting Standards (SFAS) No. 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. Minimum rent revenues are recognized when due from tenants.
Leases with most shopping center tenants provide for percentage rents when the
tenants' sales volumes exceed stated amounts. 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 1997, 1996 and 1995 were approximately
$2,940,000,000, $2,884,000,000 and $2,337,500,000, respectively.
CONSTRUCTION - Revenue and profit on long-term fixed-price contracts are
reflected under the percentage-of-completion method. On reimbursable cost-plus
fee contracts, revenues are recorded in the amount of the accrued reimbursable
costs plus proportionate fees at the time the costs are incurred.
RECOGNITION OF COSTS AND EXPENSES
Operating expenses primarily represent the recognition of operating costs,
administrative expenses and taxes other than income taxes.
For financial reporting purposes, interest and real estate taxes during
development and construction are capitalized as a part of the project cost.
Depreciation is generally computed on a straight-line method over the
estimated useful asset lives. The estimated useful lives of buildings range from
20 to 50 years.
Major improvements are capitalized and expensed through depreciation
charges. Repairs, maintenance and minor improvements are expensed as incurred.
Costs and accumulated depreciation applicable to assets retired or sold are
eliminated from the respective accounts and any resulting gains or losses are
reported in the Consolidated Statements of Earnings.
The Company periodically reviews its properties to determine if its
carrying costs will be recovered from future operating cash flows. In cases
where the Company does not expect to recover its carrying costs, an impairment
loss is recorded as a provision for decline in real estate.
LAND OPERATIONS
Land held for development or sale is stated at the lower of carrying
amount or fair value less cost to sell.
30
9
Forest City Enterprises, Inc. and Subsidiaries
A. Summary Of Significant Accounting Policies (continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
The Company maintains operating cash and reserve for replacement balances
in financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000.
INVENTORIES
The lumber brokerage inventories are stated at the lower of cost or
market. Inventory cost is determined by specific identification and average cost
methods.
OTHER ASSETS
Included in other assets are costs incurred in connection with obtaining
financing, which are deferred and amortized over the life of the related debt.
Costs incurred in connection with leasing space to tenants are also included in
other assets and are deferred and amortized on the straight-line method over the
lives of the related leases. Additionally, restricted deposits and funded
reserves are included in other assets and represent deposits with mortgage
lenders for taxes and insurance, security deposits, capital replacement,
improvement and operating reserves, bond funds and development and construction
escrows.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company determined the estimated fair value of its debt and hedging
instruments by aggregating the various types (i.e. fixed-rate versus
variable-rate debt) and discounting future cash payments at interest rates that
the Company believes approximates the current market. There was no material
difference in the carrying amount and the estimated fair value of the Company's
total mortgage debt and hedging instruments.
INTEREST RATE PROTECTION AGREEMENTS
The Company maintains a practice of hedging its variable interest rate
risk by purchasing interest rate caps or entering into interest rate swap
agreements for periods of one to five years. The principal risk to the Company
through its interest rate hedging strategy is the potential inability of the
financial institution from which the interest rate protection was purchased to
cover all of its obligations. To mitigate this exposure, the Company purchases
its interest rate protection from either the institution that holds the debt or
from institutions with a minimum A credit rating.
The cost of interest rate protection is capitalized in other assets in the
Consolidated Balance Sheets and amortized over the benefit period as interest
expense in the Consolidated Statements of Earnings.
STOCK-BASED COMPENSATION
The Company follows Accounting Principles Board Opinion (APBO) No. 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 12 directors.
EARNINGS PER SHARE
In 1997, the Company adopted the principles of
SFAS 128 "Earnings per Share". All prior period per share amounts have been
restated to conform to the new accounting principles.
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 1997, the FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information", which is effective for years beginning
after December 15, 1997. This statement provides guidance on the determination
of reporting segments and requires interim financial statement disclosure. The
Company does not anticipate that significant changes to the segment information
historically provided in its annual financial statements will occur as a result
of the adoption of SFAS 131. Beginning with the Company's Quarterly Report on
Form 10-Q for the quarter ending April 30, 1998, the Company will include
interim segment information.
31
10
Forest City Enterprises, Inc. and Subsidiaries
B. Real Estate And Related Accumulated Depreciation And Nonrecourse
Mortgage Debt
The components of real estate cost and related nonrecourse mortgage debt are
presented below.
January 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Less Accumulated Nonrecourse
Total Cost Depreciation Net Cost Mortgage Debt
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
Completed rental properties
Residential............................$ 580,221 $ 117,188 $ 463,033 $ 482,439
Commercial
Shopping centers..................... 890,064 152,030 738,034 771,103
Office and other buildings........... 918,186 167,159 751,027 701,710
Corporate and other equipment.......... 18,574 12,257 6,317 --
----------------------------------------------------------------------
2,407,045 448,634 1,958,411 1,955,252
----------------------------------------------------------------------
Projects under development
Residential............................ 32,307 -- 32,307 215
Commercial
Shopping centers..................... 99,696 -- 99,696 17,968
Office and other buildings........... 119,413 -- 119,413 21,408
----------------------------------------------------------------------
251,416 -- 251,416 39,591
----------------------------------------------------------------------
Land held for development or sale......... 46,099 -- 46,099 24,088
----------------------------------------------------------------------
$2,704,560 $ 448,634 $2,255,926 $2,018,931
======================================================================
C. Notes And Accounts Receivable, Net
- ------------------------------------------------------------
Notes and accounts receivable are summarized below.
January 31,
- ------------------------------------------------------------
1998 1997
- ------------------------------------------------------------
(in thousands)
Lumber brokerage...........$ 134,197 $ 153,944
Real estate sales.......... 18,278 14,509
Syndication activities..... 12,197 12,865
Receivable from tenants.... 17,730 12,795
Other receivables ......... 17,486 15,840
---------------------------------
199,888 209,953
Allowance for doubtful
accounts ............... (8,169) (4,994)
---------------------------------
$ 191,719 $ 204,959
=================================
Notes receivable at January 31, 1998 of $25,787,000, reflected in the
table above, are collectible primarily over five years, with $7,185,000 being
due within one year. The weighted average interest rate at January 31, 1998 and
1997 was 9.10% and 9.20%, respectively.
In July 1996, the Lumber Trading Group entered into a three-year agreement
under which it is selling an undivided interest in a pool of accounts receivable
up to a maximum of $90,000,000. At January 31, 1998 and 1997, the Company had
received $49,000,000 and $34,000,000, respectively, as net proceeds from this
transaction. The program is nonrecourse to the Company and the Company bears no
risk as to the collectability of the accounts receivable. An interest in
additional accounts receivable may be sold as collections reduce previously sold
interests.
D. Accounts Payable And Accrued Expenses
Included in accounts payable and accrued expenses at January 31, 1998 and
1997 are book overdrafts of approximately $57,222,000 and $66,971,000,
respectively. The overdrafts are a result of the Company's cash management
program and represent checks issued but not yet presented to a Company bank for
collection.
32
11
Forest City Enterprises, Inc. and Subsidiaries
E. 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,
- ---------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------
(in thousands)
Payable To
Banks................. $ 19,024 $ 15,191
Other................. 15,795 23,773
-------------------------------------
$ 34,819 $ 38,964
=====================================
Notes payable to banks reflects borrowings on the Lumber Trading Group's
$47,000,000 bank lines of credit. The Company has the right to borrow an
additional $10,000,000 for up to 90 days through May 31, 1998 under these bank
lines of credit. The bank lines of credit allow for up to $5,000,000 in
outstanding letters of credit ($716,000 were outstanding at January 31, 1998)
which reduce the credit available to 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 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 7.89% and 7.99% at
January 31, 1998 and 1997, respectively. Interest expense on notes payable was
$6,068,000 in 1997, $5,978,000 in 1996 and $5,177,000 in 1995.
Interest paid on notes payable was $6,407,000 in 1997, $5,250,000 in 1996
and $5,189,000 in 1995.
F. Mortgage Debt, Nonrecourse
Mortgage debt, which is collateralized by completed rental properties,
projects under development and certain undeveloped land, is as follows.
January 31,
- ---------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------
(dollars in thousands)
Rate (1) Rate (1)
-------- --------
Fixed..........$ 1,118,748 7.88% $ 917,547 7.96%
Variable -
Swapped..... 283,710 7.97% 330,385 7.79%
Unhedged.... 388,969 7.94% 438,784 7.08%
Tax-Exempt.. 151,051 4.76% 134,302 4.38%
UDAG and other
subsidized..
loans....... 76,453 2.36% 77,410 2.60%
----------- ----------
$ 2,018,931 7.46% $1,898,428 7.25%
=========== ==========
<FN>
(1) The weighted average interest rates shown above include both the base index
and the lender margin.
Debt related to projects under development at January 31, 1998 totals
$39,591,000, out of a total commitment from lenders of $99,528,000. Of this
outstanding debt, $32,243,000 is variable-rate debt and $7,348,000 is fixed-rate
debt. The Company generally borrows funds for development and construction
projects with maturities of three to seven years utilizing variable-rate
financing. Upon opening and achieving stabilized operations, the Company
generally obtains long-term fixed-rate financing.
As of January 31, 1998, the Company had entered into London Interbank
Offered Rate ("LIBOR") interest rate swap agreements for durations ranging from
one to five years, as follows.
Swap Base Principal
LIBOR Rate Period Outstanding
- ---------------------------------------------------------------
(dollars in thousands)
6.25% 03/15/96 - 12/29/00 $ 21,096
6.28% 05/01/96 - 11/12/01 31,520
6.54% 06/03/96 - 10/31/00 56,199
6.64% 01/02/97 - 01/04/99 38,925
6.50% 04/15/97 - 04/15/99 96,470
6.43% 06/16/97 - 01/28/02 39,500
----------
$ 283,710
==========
The effect of these interest rate swap agreements reduces the Company's
outstanding taxable variable-rate debt at January 31, 1998 to $388,969,000,
which is 19.3% of the total nonrecourse mortgage debt.
In addition, the Company has purchased 6.50%, 6.50% and 7.25% LIBOR
interest rate caps for its variable-rate debt in the amount of $293,675,000,
$400,000,000 and $200,000,000, respectively, for the years ending January 31,
1999, 2000 and 2001, respectively. The interest rate caps for the years ending
January 31, 2000 and 2001 where purchased during April 1998.
The Urban Development Action Grants and other subsidized loans bear
interest at rates which are below prevailing commercial lending rates and are
granted to the Company as an inducement to develop real estate in economically
under-developed areas. A right to participate by the local government in the
future cash flows of the project is generally a condition of these loans.
Participation in annual cash flows generated from operations is recognized as an
expense in the period earned. Participation in appreciation and cash flows
resulting from a sale or refinancing is recorded as an expense at the time of
sale or is capitalized as additional basis and amortized if amounts are paid
prior to the disposition of the property.
Mortgage debt maturities for the next five years ending January 31 are as
follows: 1999, $105,165,000; 2000, $499,392,000; 2001, $322,201,000; 2002,
$152,966,000, and 2003, $147,600,000.
The Company is engaged in discussions with its current lenders and is
actively pursuing new lenders to extend and refinance maturing mortgage debt.
The Company intends to convert a significant portion of its existing
variable-rate debt to fixed-rate mortgages in order to reduce the volatility in
the Company's project mortgage interest expense.
Interest incurred on mortgage debt was $138,546,000 in 1997, $127,531,000
in 1996 and $125,370,000 in 1995. Interest paid on mortgage debt was
$118,915,000 in 1997, $122,188,000 in 1996 and $118,829,000 in 1995.
33
12
Forest City Enterprises, Inc. and Subsidiaries
G. Long-Term Debt
Long-term debt is as follows.
January 31,
1998 1997
- -------------------------------------------------------
(in thousands)
Term loan .......................$ 60,000 $45,000
Revolving credit loans........... 54,000 48,000
----------------------
$114,000 $93,000
======================
The $80,000,000 revolving credit agreement maturing July 25, 1998 and
related term loan was replaced on December 10, 1997 with a $165,000,000
revolving credit facility and $60,000,000 term loan with a group of banks. The
revolving credit facility matures December 10, 2000 and allows for up to
$30,000,000 in outstanding letters of credit ($16,188,000 were outstanding at
January 31, 1998), which reduce the revolving credit portion available to the
Company. At each anniversary date, the maturity date of the revolving credit
facility may be extended by one year by unanimous consent of the banks. At its
maturity date, the outstanding revolving credit loans, if any, may be converted
by the Company to a four-year term loan. On March 6, 1998, the credit agreement
was amended to: 1) allow a $200,000,000 Senior Note offering (see Note Q); 2)
require the use of the offering proceeds to pay off the term loan and
outstanding revolving credit loans; 3) convert the credit agreement to be solely
a $225,000,000 revolving credit facility; and 4) provide for a $2,500,000
quarterly reduction (beginning April 1, 1998) of the revolving credit limit. On
March 16, 1998, the Company paid off the term loan and revolving credit loans
totaling $114,000,000 with proceeds from the $200,000,000 Senior Note offering
(Note Q).
The credit agreement provides, among other things, for 1) interest rates
of 1/4% over the prime rate or 2% over LIBOR; 2) maintenance of two debt service
coverage ratios and specified level of net worth and cash flow (as defined); and
3) restriction on dividend payments. At January 31, 1998, $9,101,000 of retained
earnings were available for payment of dividends.
The Company purchased 6.5% LIBOR interest rate caps covering $25,000,000
of revolving credit loans in 1998 and 7.5% LIBOR caps covering $45,000,000 in
1999.
Interest incurred on long-term debt was $7,811,000 in 1997, $7,880,000 in
1996 and $8,815,000 in 1995. Interest paid on long-term debt was $8,677,000 in
1997, $7,116,000 in 1996 and $7,991,000 in 1995.
CONSOLIDATED INTEREST
Total interest incurred on all forms of indebtedness (included in Notes E,
F and G) was $154,206,000 in 1997, $141,389,000 in 1996 and $139,362,000 in 1995
of which $17,884,000, $8,025,000 and $9,361,000 was capitalized, respectively.
Interest incurred for 1997 includes $1,781,000 for the purchase of a treasury
option to fix the interest rate on the new $200,000,000 Senior Notes (see Note
Q) issued March 16, 1998. Because the cap was not advantageous, the option was
not exercised and was written off to interest expense. Interest paid on all
forms of indebtedness was $133,999,000 in 1997, $134,554,000 in 1996 and
$132,009,000 in 1995.
H. Income Taxes
The income tax provision (benefit) consists of the following components.
For the Years Ended January 31,
- -------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------
(in thousands)
Current
Federal .................. $ (2,706) $ 896 $ 159
Foreign .................. 330 580 143
State .................... 898 459 68
------------------------------------------
(1,478) 1,935 370
------------------------------------------
Deferred
Federal .................. 4,301 6,985 6,083
Foreign .................. 32 (126) --
State .................... (653) 4,157 4,170
------------------------------------------
3,680 11,016 10,253
------------------------------------------
Total provision ............. $ 2,202 $ 12,951 $ 10,623
==========================================
The effective tax rate for income taxes varies from the federal statutory
rate of 35% for 1997, 1996 and 1995 due to the following items.
For the Years Ended January 31,
- ------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------
(in thousands)
Statement earnings
before income taxes...........$ 3,385 $ 22,122 $ 17,562
======================================
Income taxes computed at
the statutory rate ...........$ 1,185 $ 7,742 $ 6,146
Increase (decrease) in tax
resulting from:
State taxes, net of
federal benefit............ 83 3,000 2,220
Contribution
carryover.................. 1,032 811 520
Nondeductible
lobbying costs............. -- 811 --
Adjustment of prior
estimated taxes............ (134) (111) 566
Valuation allowance......... -- 351 897
Other items................. 36 347 274
--------------------------------------
Total provision .................$ 2,202 $ 12,951 $ 10,623
=======================================
34
13
Forest City Enterprises, Inc. and Subsidiaries
H. Income Taxes (continued)
An analysis of the deferred tax provision is as follows.
For the Years Ended January 31,
- -----------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------
(in thousands)
Excess of tax over
statement
depreciation
and amortization .......... $ 2,194 $ 4,730 $ 5,743
Allowance for doubtful
accounts deducted
for statement
purposes................... (585) (349) 461
Costs on land and
rental properties
under development
expensed for tax
purposes................... 100 3,244 (515)
Revenues and expenses
recognized in different
periods for tax and
statement purposes......... 3,909 (2,652) 6,224
Development fees
deferred for statement
purposes................... (395) (109) (1,326)
Provision for decline
in real estate............. -- (1,650) 3,547
Deferred state taxes, net
of federal benefit......... (530) 2,392 2,565
Interest on construction
advances deferred for
statement purposes......... (1,207) (189) (953)
Utilization and (benefits)
of tax loss carry-forward
recognized against
deferred taxes............. (1,509) 3,187 (5,656)
Deferred compensation......... 1,703 2,061 (734)
Valuation allowance........... -- 351 897
--------------------------------------
Deferred provision............ $ 3,680 $ 11,016 $ 10,253
======================================
The types of differences that give rise to significant portions of the
deferred income tax liability for 1997 are as follows.
Temporary Deferred Tax
Differences (Asset) Liability
- ---------------------------------------------------------------
(in thousands)
Depreciation ................ $ 235,337 $ 93,076
Capitalized costs ........... 137,599 54,420
Net operating losses ........ (89,903) (35,557)
General business credits .... -- (3,205)
Other ....................... 10,667 8,989
-------------------------------
$ 293,700 $ 117,723
===============================
Income taxes paid (refunded) totaled $6,247,000, $830,000 and $(888,000)
in 1997, 1996 and 1995, respectively. At January 31, 1998, the Company had a net
operating loss carryforward for tax purposes of $89,903,000 which will expire in
the years ending January 31, 2005 through January 31, 2011 and general business
credits carryovers of $3,205,000 which will expire in the years ending January
31, 2003 through January 31, 2011.
The Company's deferred tax liability at January 31, 1998 is comprised of
deferred liabilities of $231,525,000, deferred assets of $118,548,000 and a
valuation allowance related to state taxes and general business credits of
$4,746,000.
35
14
Forest City Enterprises, Inc. and Subsidiaries
I. 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 owns and operates the Company's
multi-family properties. The LAND GROUP owns and develops raw land into master
planned communities and other residential developments for resale to users
principally in Arizona, Florida, Nevada, New York and Ohio. The LUMBER TRADING
GROUP operates the Company's lumber wholesaling business. Corporate includes
interest on corporate borrowings and general administrative expenses. The
following tables summarize selected financial data by business segment for the
fiscal years ended January 31, 1998, 1997 and 1996.
For the Years Ended January 31,
------------------------------------------------------------------
Earnings (Loss) Before
Revenues Income Taxes
------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
------------------------------------------------------------------
(in thousands)
Commercial Group (1) .............................. $ 330,117 $ 314,762 $ 298,912 $ 18,979 $ 9,914 $ 23,444
Residential Group (1) ............................. 135,253 116,878 106,103 28,153 7,148 7,602
Land Group ........................................ 44,614 53,888 42,889 5,184 6,007 3,823
Lumber Trading Group (2) .......................... 122,169 124,491 81,093 9,242 8,966 5,826
Provision for decline in real estate .............. -- -- -- -- (12,263) (9,581)
Gain (loss) on disposition of properties .......... -- -- -- (38,638) 17,574 (754)
Corporate (1) ..................................... 516 430 436 (19,535) (15,224) (12,798)
------------------------------------------------------------------
Consolidated ................................... $ 632,669 $ 610,449 $ 529,433 $ 3,385 $ 22,122 $ 17,562
==================================================================
Identifiable Assets at January 31,
----------------------------------------------
1998 1997 1996
----------------------------------------------
(in thousands)
Commercial Group (1) ........... $1,956,418 $1,749,539 $1,678,494
Residential Group (1) .......... 646,574 646,024 616,515
Land Group ..................... 87,909 88,953 121,031
Lumber Trading Group ........... 199,602 209,901 172,305
Corporate (1) .................. 72,850 66,256 54,411
------------------------------------------
Consolidated ................ $2,963,353 $2,760,673 $2,642,756
==========================================
Real Estate for the Years Ended January 31,
--------------------------------------------------------------------------------------
Depreciation
Additions, net & Amortization
--------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
--------------------------------------------------------------------------------------
(in thousands)
Commercial Group (1) .............. $ 221,597 $ 91,793 $ 87,592 $ 56,996 $ 54,875 $ 49,572
Residential Group (1) ............. (34,723) 26,236 27,666 14,682 15,419 14,001
Land Group ........................ (1,594) (25,658) (8,887) 740 748 59
Lumber Trading Group .............. 860 2,285 (504) 2,202 2,140 1,962
Corporate (1) ..................... (1,759) 440 (2,920) 173 122 122
--------------------------------------------------------------------------------------
Consolidated ................... $ 184,381 $ 95,096 $ 102,947 $ 74,793 $ 73,304 $ 65,716
======================================================================================
<FN>
(1) Interest income and capitalized interest on development projects for years
ended January 31, 1997 and January 31, 1996 related to projects in the
Commercial and Residential Groups was previously reported in Corporate and
has been reclassified to the Commercial and Residential Groups to conform
to the presentation which management believes better matches such items
with the operating group to which they relate.
(2) The Company recognizes the gross margin on lumber brokerage sales as
revenue. Sales invoiced for the years ended January 31, 1998, 1997 and
1996 were approximately $2,940,000,000, $2,884,000,000 and $2,337,500,000,
respectively.
36
15
Forest City Enterprises, Inc. and Subsidiaries
J. 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.
For the Years Ending January 31,
- ---------------------------------------------------------------------------
(in thousands)
1999 ................................... $ 168,698
2000 ................................... 163,615
2001 ................................... 155,834
2002 ................................... 143,904
2003 ................................... 133,008
Later years ............................ 952,944
------------
Total minimum future rentals $ 1,718,003
============
Most of the commercial leases include provisions for reimbursements of
other charges including real estate taxes and operating costs. Total
reimbursements amounted to $63,479,000, $61,300,000 and $59,867,000 in 1997,
1996 and 1995, 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, 1998 are as follows.
For the Years Ending January 31,
- --------------------------------------------------------
(in thousands)
1999 ..................................... $ 8,528
2000 ..................................... 7,908
2001 ..................................... 7,276
2002 ..................................... 6,474
2003 ..................................... 5,567
Later years .............................. 170,888
----------
Total minimum lease payments ............. $ 206,641
==========
Rent expense was $10,273,000, $8,813,000 and $6,986,000 for 1997, 1996 and
1995, respectively.
K. Contingent Liabilities
As of January 31, 1998, the Company has guaranteed loans totaling
$3,960,000 and has $16,904,000 in outstanding letters of credit, including
$716,000 which relates to Lumber Trading Group.
The Company customarily guarantees lien-free completion of its
construction. Upon completion the guarantees are released. The Company is also
involved in certain claims and litigation related to its operations. Based upon
the facts known at this time, management is of the opinion that the ultimate
outcome of all such claims and litigation will not have a materially adverse
effect on the financial condition, results of operations or cash flows of the
Company.
37
16
Forest City Enterprises, Inc. and Subsidiaries
L. Stock Option Plan
Shares may be awarded under the 1994 Stock Option Plan ("Plan") to key
employees in the form of either incentive stock options or non-qualified stock
options. The aggregate number of shares that may be awarded during the term of
the Plan is 375,000 shares, subject to adjustments under the Plan. The maximum
number of shares that may be awarded to any employee during any calendar year is
37,500 shares. The exercise price of all non-qualified and incentive stock
options shall be at least equal to the fair market value of a share on the date
the option is granted unless the grantee of incentive stock options
constructively owns more than ten percent of the total combined voting power of
all classes of stock of the Company, in which case the exercise price of each
incentive stock option shall not be less than 110% of the fair market value of a
share on the date granted. The Plan is administered by the Compensation
Committee of the Board of Directors. During 1996, 180,900 Class A fixed stock
options were granted. The options have a term of 10 years and vest over two to
four years. No options were granted in 1997 and 1995.
The Company applies APBO 25 and related Interpretations in accounting
for its Plan. Accordingly, no compensation cost has been recognized for its
Plan. Had compensation cost been determined in accordance with SFAS 123, net
earnings and earnings per share for 1997 and 1996 would have been reduced to
the pro forma amounts indicated below.
1997 1996
- --------------------------------------------------------------------
Basic and Basic and
Diluted Diluted
Net Earnings Net Earnings
Earnings Per Share Earnings Per Share
- --------------------------------------------------------------------
As reported $ 20,539 $ 1.42 $ 12,071 $ 0.92
Pro forma $ 19,974 $ 1.38 $ 11,846 $ 0.90
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 grant in 1996: dividend yield of .5%; expected volatility of 30.7%;
risk-free interest rate of 6.5%; and expected life of 8.7 years.
A summary of stock option activity during 1997 and 1996 is presented
below.
1997 1996 Weighted Average
Shares Shares Exercise Price
- -----------------------------------------------------------------------------------------------------
Outstanding at beginning of year ........... 180,900 -- $ 28.75
Granted .................................... -- 180,900 $ 28.75
Exercised .................................. -- --
Forfeited .................................. (3,600) -- $ 28.75
-------- ---------
Outstanding at end of year ................. 177,300 180,900 $ 28.75
======== =========
Options exercisable at year end ............ -- --
======== =========
Weighted average fair value of
options granted during the year .......... $ -- $ 14.37
======== =========
Range of exercise prices ................... $ 28.75 $ 28.75
======== =========
Weighted average remaining
contractual life ........................ 8.6 years 9.6 years
========= =========
Number of shares available for
granting of options at end of year ...... 197,700 194,100
======== =========
Stock Options Granted in 1998 - On March 17, 1998, 192,700 Class A fixed
stock options were granted. These options have a term of 10 years, vest over two
to four years and have an exercise price of $57.00.
38
17
Forest City Enterprises, Inc. and Subsidiaries
M. Capital Stock
On December 11, 1996, the Board of Directors declared a three-for-two
stock split of the Company's common stock payable February 17, 1997 to
shareholders of record on February 3, 1997. The stock split was effected as a
stock dividend. The stock split is given retroactive effect to the beginning of
the earliest period presented in the accompanying Consolidated Balance Sheets
and Consolidated Statements of Shareholders' Equity by transferring the par
value of the additional shares issued from the additional paid-in capital
account to the common stock accounts. All share and per share data included in
this annual report, including stock option plan information, have been restated
to reflect the stock split.
On May 20, 1997, the Company sold to the public 1,955,000 shares of Class
A common stock at an initial price of $42.00 per share.
On June 10, 1997, the shareholders approved amendments to the Company's
Articles of Incorporation to increase the Company's authorized shares to: a)
48,000,000 shares of Class A common stock from 16,000,000 shares; b) 18,000,000
shares of Class B common stock from 6,000,000 shares; and c) 5,000,000 shares of
preferred stock from 1,000,000 shares.
On August 18, 1997, the Company purchased 77,700 shares of Class A common
stock owned by three children of Samuel H. Miller, the Company's Co-Chairman of
the Board of Directors, and Ruth Miller. The purchase price was $36.50 per share
plus 8% interest from May 7, 1997 to August 18, 1997, less dividends paid
between those two dates, for a total of $2,896,000. During 1996, the Company
repurchased 232,950 shares of Class A and 26,550 shares of Class B common stock,
and during 1995, the Company repurchased 3,000 shares of Class A and 112,500
shares of Class B common stock. All of these repurchased shares were held in
treasury at January 31, 1998.
N. 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
- -----------------------------------------------------------------------------------
(dollars in thousands)
Year ended
January 31, 1998
Basic earnings
per share ....................... $ 1,183 14,452,960 $ 0.08
Effect of dilutive
securities - stock options ...... -- 29,251 --
---------- ---------- --------
Diluted earnings
per share ....................... $ 1,183 14,482,211 $ 0.08
========== ========== ========
Year ended
January 31, 1997
Basic earnings
per share ....................... $ 9,171 13,155,236 $ 0.70
Effect of dilutive
securities - stock options ...... -- 16,664 --
---------- ---------- --------
Diluted earnings
per share ....................... $ 9,171 13,171,900 $ 0.70
========== ========== ========
O. Summarized Financial Information
Forest City Rental Properties Corporation ("Rental Properties") is a
wholly-owned subsidiary engaged in the development, acquisition and management
of real estate projects, including apartment complexes, regional malls and
shopping centers, hotels, office buildings and mixed-use facilities. Condensed
consolidated balance sheets and statements of earnings for Rental Properties and
its subsidiaries follows.
39
18
Forest City Enterprises, Inc. and Subsidiaries
O. Summarized Financial Information (continued)
FOREST CITY RENTAL PROPERTIES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
ASSETS
Real Estate
Completed rental properties ............................................... $ 2,390,969 $ 2,227,859
Projects under development ................................................ 251,416 215,960
--------------------------------------
2,642,385 2,443,819
Less accumulated depreciation ............................................. (436,377) (387,733)
--------------------------------------
Total Real Estate ....................................................... 2,206,008 2,056,086
Cash ......................................................................... 36,763 14,194
Other assets ................................................................. 406,522 286,864
--------------------------------------
$ 2,649,293 $ 2,357,144
=======================================
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES
Mortgage debt, nonrecourse ................................................... $ 1,994,843 $ 1,866,730
Accounts payable and accrued expenses ........................................ 144,831 110,362
Long-term debt ............................................................... 114,000 93,000
Other liabilities and deferred credits ....................................... 243,989 168,371
--------------------------------------
Total Liabilities ......................................................... 2,497,663 2,238,463
--------------------------------------
SHAREHOLDER'S EQUITY
Common stock and additional paid-in capital .................................. 5,378 5,378
Retained earnings ............................................................ 146,252 113,303
--------------------------------------
Total Shareholder's Equity ................................................ 151,630 118,681
--------------------------------------
$ 2,649,293 $ 2,357,144
======================================
FOREST CITY RENTAL PROPERTIES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Years Ended January 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands)
REVENUES ......................................................... $ 465,370 $ 426,226 $ 398,576
------------------------------------------------------
Operating expenses ............................................... 229,856 228,110 198,282
Interest expense ................................................. 123,713 121,186 117,560
Provision for decline in real estate ............................. -- 11,684 9,581
Depreciation and amortization .................................... 71,678 70,221 63,557
------------------------------------------------------
425,247 431,201 388,980
------------------------------------------------------
Gain (loss) on disposition of properties ......................... (35,505) 17,574 (754)
------------------------------------------------------
EARNINGS BEFORE INCOME TAXES ..................................... 4,618 12,599 8,842
------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT)
Current ....................................................... (2,437) (989) (1,213)
Deferred ...................................................... 6,455 9,515 6,925
------------------------------------------------------
4,018 8,526 5,712
------------------------------------------------------
NET EARNINGS BEFORE EXTRAORDINARY GAIN ........................... 600 4,073 3,130
Extraordinary gain, net of tax ................................... 19,356 2,900 1,847
------------------------------------------------------
NET EARNINGS ..................................................... $ 19,956 $ 6,973 $ 4,977
======================================================
40
19
Forest City Enterprises, Inc. and Subsidiaries
P. Sale of Toscana, Gain (Loss) On Disposition And Extraordinary Gain
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.
GAIN (LOSS) ON DISPOSITION OF PROPERTIES - Gain (loss) on disposition of
properties totaled a loss of $ 38,638,000, a gain of $17,574,000 and a loss of
$754,000 in 1997, 1996 and 1995, respectively. During 1997, the Company sold its
interest in Woodridge, a land development project in suburban Chicago, Illinois
and recorded a loss on disposition of $3,133,000 ($1,892,000 after tax) and the
Company recorded a loss on disposition of Toscana of $35,505,000 ($21,464,000
after tax). The 1996 gain primarily reflects the disposition of the Company's
18.63% interest in Beachwood Place, a regional shopping center in Cleveland,
Ohio ($17,788,000 or $9,715,000 after tax). The 1995 loss was primarily the
result of the disposition of Vineyard Village, a California apartment building.
EXTRAORDINARY GAIN - Extraordinary gain, net of tax, totaled $19,356,000,
$2,900,000 and $1,847,000 in 1997, 1996 and 1995, respectively, representing
extinguishment of nonrecourse debt and related accrued interest. In 1997, the
properties which recorded extraordinary gain on extinguishment of nonrecourse
debt are 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, an
office building in Brentwood, California ($524,000 or $316,000 after tax). In
1996, the properties which recorded extraordinary gain on extinguishment of
nonrecourse debt are Enclave, an apartment complex in San Jose, California
($3,297,000 or $1,993,000 after tax) related to the parcels deeded back to the
original land owner and the Clark Building, an office building in Cambridge,
Massachusetts ($1,500,000 or $907,000 after tax). The extraordinary gain
recorded in 1995 related to Liberty Center, a mixed-use commercial property in
Pittsburgh, Pennsylvania ($3,055,000 or $1,847,000 after tax).
Q. Subsequent Event
PUBLIC DEBT OFFERING - On March 16, 1998, the Company issued $200,000,000
of 8.50% Senior Notes ("Senior Notes") in a public offering. Proceeds were used
to repay $114,000,000 of its term loan and revolving credit loans as described
in Note G. The remaining proceeds will be used to finance projects currently
under development and to pursue new real estate opportunities. The Senior Notes
mature on March 15, 2008. Accrued interest is payable on March 15 and September
15 of each year. The Senior Notes are unsecured senior obligations of the
Company, however, they are subordinated to all existing and future indebtedness
and other liabilities of the Company's subsidiaries, including the revolving
credit facility described in Note G. The Senior Notes agreement contains
covenants providing, among other things, limitations on the incurrence of
additional debt and payment of dividends. Had the Senior Notes been outstanding
at January 31, 1998, the Company would have been in compliance with the
covenants.
20
Forest City Enterprises, Inc. and Subsidiaries
Quarterly Consolidated Financial Data (Unaudited)
Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------------
Jan. 31, Oct. 31, July 31, Apr. 30,
1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues ................................................... $ 184,591 $ 154,975 $ 142,035 $ 151,068
Earnings (loss) before income taxes ........................ $ 4,451 $ 12,062 $ 5,480 $ (18,608)
Net earnings (loss) before extraordinary gain (1) .......... $ (1,149) $ 10,649 $ 2,947 $ (11,264)
Net earnings (loss) ........................................ $ 4,020 $ 10,649 $ 6,089 $ (219)
BASIC AND DILUTED EARNINGS PER SHARE
Net earnings (loss) before extraordinary gain (1)(2) .... $ (.08) $ .71 $ .20 $ (.86)
Net earnings (loss) (2) ................................. $ .27 $ .71 $ .42 $ (.02)
Dividends declared per common share (3)
Quarterly dividend
Class A .............................................. $ .07 $ .06 $ .06 $ .06
Class B .............................................. $ .07 $ .06 $ .06 $ .06
Market price range of common stock
Class A
High ............................................... $ 58.88 $ 62.50 $ 54.94 $ 50.38
Low ................................................ $ 53.25 $ 52.50 $ 41.75 $ 39.50
Class B
High ............................................... $ 58.75 $ 60.75 $ 54.88 $ 50.00
Low ................................................ $ 53.75 $ 53.50 $ 42.75 $ 42.00
Quarter Ended
- -----------------------------------------------------------------------------------------------------------------------------------
Jan. 31, Oct. 31, July 31, Apr. 30,
1997 1996 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Revenues ..................................................... $ 169,177 $ 163,809 $ 148,492 $ 128,971
Earnings (loss) before income taxes (4) ...................... $ 2,065 $ 15,527 $ 5,488 $ (958)
Net earnings (loss) before extraordinary gain (1)(4) ......... $ (759) $ 8,054 $ 2,822 $ (946)
Net earnings (loss) .......................................... $ (759) $ 10,047 $ 3,729 $ (946)
BASIC AND DILUTED EARNINGS PER SHARE
Net earnings (loss) before extraordinary gain (1)(4) ...... $ (.05) $ .61 $ .21 $ (.07)
Net earnings (loss) ....................................... $ (.05) $ .76 $ .28 $ (.07)
Dividends declared per common share
Annual dividend
Class A ................................................ $ -- $ .21 $ -- $ --
Class B ................................................ $ -- $ .21 $ -- $ --
Quarterly dividend
Class A ................................................ $ .06 $ -- $ -- $ --
Class B ................................................ $ .06 $ -- $ -- $ --
Market price range of common stock
Class A
High ................................................. $ 41.67 $ 33.08 $ 28.08 $ 25.50
Low .................................................. $ 32.67 $ 27.83 $ 24.50 $ 22.00
Class B
High ................................................. $ 40.67 $ 32.67 $ 28.08 $ 25.42
Low .................................................. $ 32.75 $ 27.92 $ 24.92 $ 22.17
<FN>
Both classes of common stock are traded on the New York Stock Exchange
under the symbols FCEA and FCEB. As of March 12, 1998, the number of
registered holders of Class A and Class B common stock were 842 and 659,
respectively.
(1) Excludes the extraordinary gain, net of tax of $19,356,000 ($1.34 per
share) and $2,900,000 ($.22 per share) in fiscal 1997 and 1996,
respectively. These items are explained in Note P in the Notes to
Consolidated Financial Statements.
(2) The sum of 1997 quarterly earnings per share does 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
$9,101,000 was available for payment of dividends as of January 31, 1998,
under the restrictions contained in the term loan and revolving credit
agreement with a group of banks.
(4) Third quarter 1996 data has been restated to reflect the reclassification
of $3,297,000, before taxes, from provision for decline in real estate to
extraordinary gain. This reclassification represents a $.15 reduction in
net earnings (loss) before extraordinary gain per common share, but has no
effect on net earnings of the Company.
21
Forest City Enterprises, Inc. and Subsidiaries
GENERAL
The Company owns, develops, acquires 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."
EBDT for 1997 grew by 18.3% (or 7.6% per share) to $106,910,000, or $7.38
per share of common stock assuming dilution, from $90,404,000, or $6.86 per
share of common stock assuming dilution, in 1996. EBDT grew by $7,167,000 in the
Residential Group primarily as a result of a litigation settlement reported by
the Residential Group related to Toscana, a 563-unit apartment complex in
Irvine, California (see "Results of Operations-Other Transactions - Sale of
Toscana") and $7,741,000 in the Commercial Group primarily from openings of new
properties. In addition, EBDT increased in Corporate Activities from a reduction
in current taxes which was attributable primarily to higher tax benefits in the
current year relating to higher pre-tax losses and a refund of alternative
minimum tax for 1996 received in 1997. EBDT grew by 10.2% (or 12.8% per share)
in 1996 from $82,021,000, or $6.08 per share of common stock assuming dilution,
in 1995. This increase in EBDT was primarily the result of the addition of new
retail properties, improved operating results from the Company's existing
portfolio, acquisition of apartment projects, sales of land by the Commercial
and Land Groups, strong lumber trading activity and lower interest rates.
RESULTS OF OPERATIONS
The Company reports its results of operations by each of its four
principal business groups as it believes it provides the most meaningful
understanding of the Company's financial performance.
The major components of EBDT are Revenues, Operating Expenses and Interest
Expense, each of which is discussed below. Net Operating Income ("NOI") is
defined as Revenues less Operating Expenses. See the information in the table
"Earnings before Depreciation, Amortization and Deferred Taxes" at the end of
this Management's Discussion and Analysis of Financial Condition and Results of
Operations.
NET OPERATING INCOME FROM REAL ESTATE OPERATIONS - NOI from the combined
Commercial Group and Residential Group for 1997 was $234,730,000 compared to
$201,737,000 in 1996, a 16.4% increase. NOI for 1997 included $15,000,000 of
non-recurring Toscana litigation settlement proceeds. Adjusting for this item,
NOI would have increased by 8.9%. Comparable NOI (NOI for properties in
operation throughout both periods) increased 4.6% from 1996 to 1997 and 2.5%
from 1995 to 1996. Including the expected NOI for the twelve months after
stabilization for the 11 properties that were opened, expanded or acquired in
1997 and the additional NOI from the purchase of additional ownership interests
in two properties during 1997, NOI would be approximately $245,000,000 for 1997.
COMMERCIAL GROUP
REVENUES - Revenues for the Commercial Group increased $15,355,000, or
4.9%, to $330,117,000 in 1997 from $314,762,000 in 1996. This increase is
primarily the result of 1997 property openings including Nine MetroTech in
Brooklyn, New York ($1,495,000), Atlantic Center in Brooklyn, New York
($6,856,000), Bruckner Boulevard in the Bronx, New York ($1,422,000), Gun Hill
Road in the Bronx, New York ($749,000), Northern Boulevard in Queens, New York
($282,000) and Grand Avenue in Queens, New York ($156,000). Properties which
opened in 1996 had a full year of operations in 1997 and generated additional
revenues include: Showcase in Las Vegas, Nevada ($1,623,000), Galleria at Sunset
in Henderson, Nevada ($901,000) and Marketplace at Riverpark in Fresno,
California ($690,000). In addition, the Ritz-Carlton hotel in Cleveland, Ohio
realized increased revenues in 1997 over the prior year of $1,897,000 and
comparable office building revenues increased by approximately $6,300,000. These
increases were partially offset by 1996 land sales which did not recur
($2,989,000), reduction in revenues from Beachwood Place in Cleveland, Ohio
which was sold in 1996 ($1,389,000) (see "-Other Transactions - Gain (Loss) on
Disposition of Properties") and the closing of the Handy Andy stores that were
the Company's tenants ($3,034,000).
In 1996, Commercial Group revenues increased by $15,850,000, or 5.3%, from
$298,912,000 in 1995. This increase was primarily the result of the opening of
the Galleria at Sunset ($5,578,000), improved performance from existing
properties ($6,412,000) and the benefit of a full year of operating results from
properties that opened in 1995 ($5,403,000). These increases were offset by a
reduction in revenues due to the dispositions of Beachwood Place ($786,000) and
Victor Village located in Victorville, California ($438,000) and the loss of
revenue from ten leases rejected by Handy Andy which went bankrupt in 1996
($1,109,000).
OPERATING AND INTEREST EXPENSES - During 1997, operating expenses for the
Commercial Group decreased $1,359,000, or 0.8%, to $167,107,000 from
$168,466,000 in 1996. The decrease in operating expenses was attributable
primarily to costs associated with the sale of land in 1996 ($5,066,000) which
did not recur in 1997, partially offset by the opening of new retail properties
($3,638,000) and costs associated with increased hotel occupancy ($1,379,000).
At January 31, 1998, the Commercial Group's property level expenses for
properties opened since 1994 had increased at a compounded annual rate of only
0.7%. Interest expense increased $5,528,000 in 1997, or 6.8%, to $87,035,000
from $81,507,000 in 1996. The increase in interest expense was attributable to
the financing of new properties.
43
22
Forest City Enterprises, Inc. and Subsidiaries
In 1996, operating and interest expenses for the Commercial Group
increased $22,126,000 and $1,951,000 (15.1% and 2.5%), respectively, over 1995
from $146,340,000 and $79,556,000, respectively. The increase in operating
expenses was primarily attributable to the decrease in EBDT ($6,565,000)
resulting from an unusually low cost basis in land sold in 1995 (on comparable
sales revenues), increased development expenses ($5,726,000) and the opening of
new properties ($5,089,000). The increase in interest expense was attributable
to the financing of new properties.
NET OPERATING INCOME - Commercial Group NOI for 1997 was $163,010,000,
compared to $146,296,000 in 1996, a 11.4% increase. NOI increased 4.1% from 1996
to 1997 for Commercial Group properties in operation throughout both years and
0.9% from 1995 to 1996. Including the expected NOI for the twelve months after
stabilization for the four Commercial Group properties that were opened or
acquired in 1997 and the additional NOI from the purchase of additional
ownership interests in two properties during 1997, NOI would be approximately
$185,000,000 for 1997.
RESIDENTIAL GROUP
REVENUES - Revenues for the Residential Group increased by $18,375,000, or
15.7% in 1997 to $135,253,000 from $116,878,000 in 1996. This increase reflects
proceeds from the Toscana litigation settlement ($15,000,000 - see "- Other
Transactions - Sale of Toscana"), development fees from The Knolls, a 260-unit
apartment community in Orange, California ($1,145,000), the acquisitions in 1997
of Museum Towers, a 286-unit high rise apartment building in Philadelphia,
Pennsylvania ($2,477,000), Colony Woods, a 396 unit garden apartment complex in
Bellevue, Washington ($1,186,000) and Whitehall Terrace, a 188-unit apartment
building in Kent, Ohio ($309,000), and a full year of operations for Emerald
Palms, a 419-unit apartment complex in Miami, Florida which was acquired in 1996
($1,041,000). Revenues increased $1,039,000 from the opening of 294 additional
units at three existing apartment developments in Cleveland, Ohio. In addition,
revenues for comparable properties improved over last year ($3,906,000), offset
by the loss of revenue due to the sale of Toscana ($7,206,000). Average
occupancy in 1997 remained at 96%, consistent with the 1996 level.
Revenues for the Residential Group increased by $10,775,000, or 10.2%, in
1996 from $106,103,000 in 1995. This increase reflected a full year of
performance from the 1995 acquisitions of Laurels, a 520-unit apartment complex
in Justice, Illinois ($2,701,000) and Vineyards, a 336-unit apartment community
in Cleveland, Ohio ($1,887,000). Revenues in 1996 were also favorably impacted
by the addition of 336 units at four existing developments in Cleveland, Ohio
($874,000) and the 1996 acquisition of Emerald Palms ($2,563,000). These revenue
increases were partially offset by the disposition of Vineyard Village, a
152-unit apartment building in Ontario, California.
OPERATING AND INTEREST EXPENSES - Operating expenses for the Residential
Group increased by $2,096,000, or 3.4%, to $63,533,000 in 1997 from $61,437,000
in 1996. Interest expense decreased by $4,063,000, or 12.3 %, to $28,884,000 in
1997 from $32,947,000 in 1996. The increase in operating expenses is
attributable primarily to the 1997 acquisitions of Museum Towers ($1,049,000),
Colony Woods ($652,000) and Whitehall Terrace ($127,000), a full year of
operations for Emerald Palms ($556,000) which was acquired in 1996, the addition
of 294 units at three existing apartment projects in Cleveland, Ohio ($389,000)
and normal inflationary growth on the portfolio (approximately $1,300,000),
partially offset by a decrease in operating expenses due to the sale of Toscana
($2,899,000). During the fiscal years ended January 31, 1995 through January 31,
1998, comparable operating expenses for the Residential Group increased at a
compounded annual rate of 2.6%. The decrease in interest expenses is primarily
the result of the sale of Toscana ($4,097,000).
Operating and interest expenses for the Residential Group increased in
1996 by $7,438,000 and $2,430,000 (or 13.8% and 8.0%), respectively, from
$53,999,000 and $30,517,000, respectively, in 1995. The majority of the increase
in operating and interest expense reflected the expenses and debt service
associated with the addition of Laurels, Vineyards and the 336 new units added
at existing properties discussed above.
NET OPERATING INCOME - Residential Group NOI for 1997 was $71,720,000,
compared to $55,441,000 in 1996, a 29.4% increase. Excluding $15,000,000 of
litigation settlement proceeds which is included in NOI for 1997, NOI increased
2.3% from 1996. NOI increased 5.9% from 1996 to 1997 for Residential Group
properties in operation throughout both years, and 6.7% from 1995 to 1996.
Including the expected NOI for the twelve months after stabilization for the
seven Residential Group properties that were opened, expanded or acquired in
1997, NOI would be approximately $60,000,000 for 1997.
LAND GROUP
REVENUES - Revenues for the Land Group decreased by $9,274,000, or 17.2%,
to $44,614,000 in 1997 from $53,888,000 in 1996. This decrease was attributable
primarily to 1996 land sale activity at Silver Lakes in Fort Lauderdale, Florida
and a significant sale of land located in Miami, Florida in the third quarter of
1996, both of which did not recur in 1997. Sales of land and related earnings
vary from period to period, depending on management's decisions regarding the
disposition of significant land holdings.
Revenues for the Land Group increased by $10,999,000, or 25.6%, in 1996
from $42,889,000 in 1995. This increase reflected income from the sale of a
parcel of land in Miami, Florida ($9,029,000) and increased sales at the Silver
Lakes development in Fort Lauderdale, Florida ($2,343,000).
OPERATING AND INTEREST EXPENSES - Operating expenses and interest expense
decreased by $7,213,000 and $1,238,000 (or 17.6% and 18.2%), respectively, in
1997 to $33,855,000 and $5,575,000, respectively, from $41,068,000 and
$6,813,000, respectively, in 1996. Operating expenses increased by $9,966,000
and interest expense decreased by $1,151,000 (or 32.0% and 14.5%), respectively,
in 1996 from $31,102,000 and $7,964,000, respectively, in 1995. The fluctuation
in operating expenses primarily reflects the change in land sales volume between
years. The decrease in interest expense was due primarily to the reduction in
interest-bearing debt.
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Forest City Enterprises, Inc. and Subsidiaries
LUMBER TRADING GROUP
REVENUES - Revenues for the Lumber Trading Group decreased by $2,322,000,
or 1.9%, to $122,169,000 in 1997 from $124,491,000 in 1996. The decrease was due
primarily to a reduced level of trading activity in 1997 compared to 1996
($5,219,000), partially offset by an increase in volume at Forest City/Babin, a
wholesaler of major appliances, cabinets and hardware to housing contractors
($2,420,000).
Revenues for the Lumber Trading Group increased by $43,398,000, or 53.5%,
from $81,093,000 in 1995. Of this increase, $26,708,000 reflected the
consolidation of the revenues of Forest City/Babin for the first time. At the
end of 1995, the Company acquired the remaining 50% interest in Forest
City/Babin and began consolidating this wholly-owned subsidiary. The Company
previously accounted for its 50% interest in Forest City/Babin under the equity
method. The remaining increase was primarily due to an increase in Lumber
Trading Group's margins as a result of increased housing starts.
OPERATING AND INTEREST EXPENSES - Operating expenses for the Lumber
Trading Group decreased in 1997 by $2,686,000, or 2.4%, to $107,673,000 from
$110,359,000 in 1996. This decrease reflected the fluctuation in variable
expenses due to decreased trading sales volume. Interest expense for 1997
increased by $88,000, or 1.7%, to $5,254,000 from $5,166,000 in 1996.
Operating and interest expenses for the Lumber Trading Group increased in
1996 by $40,170,000 and $88,000 (or 57.2% and 1.7%), respectively, from
$70,189,000 and $5,078,000, respectively, in 1995. A significant portion of this
increase ($25,844,000 and $572,000 in operating expenses and interest expenses,
respectively) was the result of the Forest City/Babin acquisition described
above. The remaining $14,326,000 increase in operating expenses reflected the
increase in variable expenses due to increased trading sales volume. The
remaining $484,000 decrease in interest expense was the result of reduced
inventory and a reduced rate of interest on Lumber Trading Group's lines of
credit.
CORPORATE ACTIVITIES
REVENUES - Revenues for the Corporate Activities increased $86,000, or
20.0%, in 1997 to $516,000 from $430,000 in 1996. Revenues of the Corporate
Activities decreased $6,000, or 1.4% in 1996 from $436,000 in 1995. Corporate
Activities revenues consists primarily of interest income on investments made by
the Company and vary from year to year depending on interest rates and the
amount invested.
OPERATING AND INTEREST EXPENSES - Operating expenses for Corporate
Activities increased $1,755,000, or 20.1%, in 1997 to $10,478,000 from
$8,723,000 for 1996. Corporate Activities operating expenses increased
$2,375,000, or 37.4%, in 1996 from $6,348,000 in 1995. These increases represent
general corporate expenses. Interest expense increased $2,643,000, or 38.1% in
1997 to $9,574,000 from $6,931,000 in 1996. Interest expense increased $45,000,
or .7%, in 1996 from $6,886,000 in 1995. Corporate Activities interest expense
consists primarily of interest expense on the term loan and revolving credit
facility that has not been allocated to a principal business group. Beginning in
1997, capitalized interest on development projects, which was previously
reported as Corporate Activities, is reported by the principal business group
developing the project. Prior years' interest expense for Corporate Activities,
Commercial Group and Residential Group have been restated to reflect this
presentation.
OTHER TRANSACTIONS
PROVISION FOR DECLINE IN REAL ESTATE -The Company's provision for decline
in real estate totaled $-0-, $12,263,000 and $9,581,000 in 1997, 1996 and 1995,
respectively. In 1996, the Company entered into a joint venture agreement with
MGM to develop a casino/retail project which substantially changed the scope of
the Company's original development of the project. The 1996 provision for
decline in real estate includes $5,104,000 of development costs incurred by the
Company which management determined to write-off as a result of the change in
the scope of the project. In addition, the Company recorded a provision for
decline in real estate relating to the land acquired for Enclave, a 637-unit
apartment complex in San Jose, California, resulting from an adjustment of
$5,583,000 to write down the land to its fair market value. The 1995 provision
for decline in real estate primarily reflected the write-off of development
costs of $7,242,000 associated with future phases of Toscana (see"-Sale of
Toscana") based on management's determination that the Company would not pursue
future development at this location. Also in 1995, the provision included an
adjustment of $1,404,000 relating to the write-down of parcels of land to fair
market value which were originally acquired for Enclave and deeded back to the
original land owner.
GAIN (LOSS) ON DISPOSITION OF PROPERTIES - Gain (loss) on disposition of
properties totaled a loss of $38,638,000, a gain of $17,574,000 and a loss of
$754,000 in 1997, 1996 and 1995, respectively. During 1997, the Company sold its
interest in Woodridge, a land development project in suburban Chicago, Illinois
and recorded a loss on disposition of $3,133,000 ($1,892,000 after tax) and
recorded a loss on disposition of Toscana of $35,505,000 ($21,464,000 after tax,
see"-Sale of Toscana"). The 1996 gain primarily reflects the disposition of the
Company's 18.63% interest in Beachwood Place, a regional shopping center in
Cleveland, Ohio of $17,788,000 ($9,715,000 after tax). The 1995 loss was
primarily the result of the disposition of Vineyard Village, a California
apartment building.
EXTRAORDINARY GAIN - Extraordinary gain, net of tax, totaled $19,356,000,
$2,900,000 and $1,847,000 in 1997, 1996 and 1995, respectively, representing
extinguishment of nonrecourse debt and related accrued interest. In 1997, the
properties which recorded extraordinary gain on extinguishment of nonrecourse
debt are Toscana ($18,081,000 or $16,884,000 after tax, see "- Sale of
Toscana"); Halle Office Building in Cleveland, Ohio ($3,569,000 or $2,156,000
after tax); and San Vicente, an office building in Brentwood, California
($524,000 or $316,000 after tax). In 1996, the properties which recorded
extraordinary gain on extinguishment of nonrecourse debt are Enclave, a 637-unit
apartment complex in San Jose, California related to the parcels deeded back to
the original land owner ($3,297,000 or $1,993,000 after tax, see "-Provision for
Decline in Real Estate") and Clark Building,
45
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Forest City Enterprises, Inc. and Subsidiaries
an office building in Cambridge, Massachusetts ($1,500,000 or $907,000 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. Proceeds from the litigation settlement resulted in
EBDT of $6,991,000 for the year ended January 31, 1998. The net result of these
transactions to the Company is after-tax income of $4,566,000.
INCOME TAXES - Income tax expense totaled $2,202,000, $12,951,000 and
$10,623,000, respectively, in 1997, 1996 and 1995. At January 31, 1998, the
Company had a tax net operating loss carryforward ("NOL") of $89,903,000
(generated primarily over time in the ordinary course of business from the
significant impact of depreciation expense from real estate properties on the
Company's net earnings) which will expire in the years ending January 31, 2005
through January 31, 2011 and general business credits carryovers of $3,205,000
which will expire in the years ending January 31, 2003 through January 31, 2011.
The Company's policy is to utilize its NOL before it expires and will consider a
variety of strategies to implement that policy. Federal, state and local income
taxes paid (refunded) totaled $6,247,000, $830,000 and ($888,000) in 1997, 1996
and 1995, respectively. In 1997, the Company paid no regular Federal corporate
income tax and paid $5,084,000 in Federal Alternative Minimum Tax.
NET EARNINGS - In 1997, the Company's net earnings grew to $20,539,000, or
$1.42 per share of common stock, from $12,071,000, or $.92 per share of common
stock, in 1996. In 1995, net earnings were $8,786,000, or $.65 per share of
common stock.
EBDT - Earnings Before Depreciation, Amortization and Deferred Taxes
("EBDT") is defined as net earnings from operations before depreciation,
amortization and deferred taxes on income, and excludes provision for decline in
real estate, gain (loss) on disposition of properties and extraordinary gain.
The Company excludes depreciation and amortization expense from EBDT because
they are non-cash items and the Company believes the values of its properties,
in general, have appreciated over time in excess of their original cost.
Deferred income taxes are excluded because they are a non-cash item. Payment of
income taxes has not been significant and is not expected to be significant in
the foreseeable future. The provision for decline in real estate is excluded
from EBDT because it is a non-cash item that varies from year to year based on
factors unrelated to the Company's overall financial performance. The Company
excludes gain (loss) on the disposition of properties from EBDT because it
develops and acquires properties for long-term investment, not short-term
trading gains. As a result, the Company views dispositions of properties other
than commercial outlots or land held by the Land Group as nonrecurring items.
Extraordinary gains are generally the result of the restructuring of nonrecourse
debt obligations and are not considered to be a component of the Company's
operating results.
FINANCIAL CONDITION AND LIQUIDITY
On March 16, 1998, the Company sold $200,000,000 of 8.50% Senior Notes due
March 15, 2008 in a public offering. Proceeds from the sale of these notes were
used to repay $114,000,000 outstanding under the FCRPC Credit Agreement (defined
below) with the remainder to be used to finance projects currently under
development and to pursue new real estate opportunities.
On May 20, 1997, the Company sold 1,955,000 shares of its Class A common
stock at $42 per share and realized net proceeds, after offering costs, of
$76,076,000. The proceeds were used to repay the outstanding balance on the
revolving credit facility ($71,000,000) and the remainder was allocated for
working capital.
On December 10, 1997, the Company replaced its $37,500,000 term loan due
July 1, 2001 and its $80,000,000 revolving credit facility with a Forest City
Rental Properties Corporation ("FCRPC") Credit Agreement. The FCRPC Credit
Agreement with a group of nine banks provides for a $225,000,000 revolving
credit facility maturing December 10, 2000, unless extended, and a quarterly
reduction of $2,500,000 commencing April 1, 1998 and allows for up to
$30,000,000 in outstanding letters of credit, which reduces the revolving credit
available to the Company. As of January 31, 1998, the Company had $114,000,000
of recourse debt outstanding under the FCRPC Credit Agreement.
The FCRPC Credit Agreement provides, among other things, for 1) interest
rates of 1/4% over the prime rate or 2% over the London Interbank Offered Rate
("LIBOR"); 2) maintenance of two debt service coverage ratios and specified
level of net worth and cash flow (as defined) and 3) restriction on dividend
payments. The Company has purchased LIBOR interest rate caps for the debt under
the FCRPC Credit Agreement in the amount of $25,000,000 at 6.5% for 1998 and
$45,000,000 at 7.5% for 1999.
The Company believes that its sources of liquidity and capital are
adequate. The Company's principal sources of funds are cash provided by
operations, the revolving credit facility and refinancings of existing
properties. The Company's principal use of funds are the financing of new
developments, capital expenditures and payments on nonrecourse mortgage debt on
real estate.
The Lumber Trading Group is financed separately from the rest of the
Company's principal business groups, and the financing obligations of Lumber
Trading Group are not recourse to the Company. Accordingly, the liquidity of
Lumber Trading Group is discussed separately below under "Lumber Trading Group
Liquidity."
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Forest City Enterprises, Inc. and Subsidiaries
MORTGAGE REFINANCINGS
During the year ended January 31, 1998, the Company completed
approximately $614,000,000 in financings, including $433,000,000 in
refinancings, $115,000,000 for new development projects and $66,000,000 in
acquisition mortgages. The Company is pursuing the refinancing of its
nonrecourse mortgage debt which matures within the next 12 months. In addition,
the Company is attempting to extend the maturities and/or refinance the
nonrecourse debt that is coming due in 1999 and 2000, generally pursuing
long-term fixed rate debt to take advantage of recent low interest rate levels.
INTEREST RATE EXPOSURE
At January 31, 1998, the composition of nonrecourse mortgage debt is as
follows:
Amount Rate(1)
- -------------------------------------------------------------------
(in thousands)
Fixed $ 1,118,748 7.88%
Variable -
Swapped(2) 283,710 7.97%
Unhedged 388,969 7.94%
Tax-Exempt 151,051 4.76%
UDAG and other
subsidized loans (fixed) 76,453 2.36%
------------
$ 2,018,931 7.46%
============
<FN>
(1) The weighted average interest rates shown above include both the base
index and the lender margin.
(2) Interest rates swaps have an average term of 2.1 years as of January 31,
1998.
With respect to taxable variable-rate debt, the Company generally attempts
to obtain interest rate protection for such debt with a maturity in excess of
one year. In addition, the Company has purchased 6.50%, 6.50% and 7.25% interest
rate caps for its variable-rate debt portfolio in the amount of $293,675,000,
$400,000,000 and $200,000,000, respectively, for the fiscal years ending January
31, 1999, 2000 and 2001, respectively. The Company generally does not hedge
tax-exempt debt because, since 1990, the base rate of this type of financing has
averaged only 3.80% and has never exceeded 7.90%.
At January 31, 1998, a 100 basis point increase in taxable interest rates
would increase the annual pre-tax interest cost of the Company's taxable
variable-rate debt by approximately $3,900,000. Although tax-exempt rates
generally increase in an amount that is smaller than corresponding changes in
taxable interest rates, a 100 basis point increase in tax-exempt interest rates
would increase the annual pre-tax interest cost of the Company's tax-exempt
variable-rate debt by approximately $1,500,000.
LUMBER TRADING GROUP LIQUIDITY
The Lumber Trading Group is separately financed with two lines of credit
and an accounts receivable sale program. These credit facilities are without
recourse to the Company.
The Lumber Trading Group's two lines of credit total a $47,000,000
commitment. These credit lines are secured by the assets of the Lumber Trading
Group and are used by the Trading Group to finance its working capital needs. At
January 31, 1998, the Lumber Trading Group had approximately $27,000,000 of
available credit under these facilities.
The Lumber Trading Group has sold an undivided ownership interest in a
pool of accounts receivable of up to a maximum of $90,000,000 and uses this
program to finance its working capital needs. At January 31, 1998, $49,000,000
had been sold under this accounts receivable program.
The Company believes that the amounts available under these credit
facilities, together with the accounts receivable sale program, will be
sufficient to meet the Lumber Trading Group's liquidity needs.
CASH FLOWS
Net cash provided by operating activities was $63,516,000 and $66,933,000
for the years ended January 31, 1998 and 1997, respectively. The decrease in net
cash provided by operating activities in 1997 from 1996 is primarily the result
of a $6,929,000 increase in land development expenditures and a $55,039,000
increase in operating expenditures, primarily due to the decrease in Lumber
Trading Group accounts payable and accrued expenses. This decrease was partially
offset by a $55,674,000 increase in collection of revenues received primarily
due to the decrease in Lumber Trading Group accounts receivable and a $2,322,000
increase in proceeds from land sales.
Net cash used in investing activities totaled $276,568,000 and
$139,609,000 for the years ended January 31, 1998 and 1997, respectively.
Capital expenditures, other than development and acquisition activities, totaled
$39,421,000 (including both recurring and investment capital expenditures) in
1997 and were financed primarily with cash provided by operating activities. In
1997, net cash used in investing activities reflected the Company's use of
$203,410,000 of funds for acquisition and development activities, which were
financed with approximately $181,000,000 in new mortgage indebtedness and
borrowings on the revolving credit facility. In addition, $33,737,000 was used
for investments in and advances to affiliates, and includes investments in The
Grand, a syndicated project in North Bethesda, Maryland ($12,931,000); Enclave,
another syndicated project in San Jose, California ($3,441,000); advances on
behalf of our partners in projects in Pittsburgh, Pennsylvania ($1,513,000) and
advances on behalf of the Company's New York affiliate for equity contributions
in development projects ($11,118,000).
Net cash provided by financing activities totaled $226,604,000 and
$74,833,000 in the year ended January 31, 1998 and 1997, respectively. Net
proceeds from the sale of 1,955,000 shares of Class A common stock in May of
1997 were $76,076,000, which were initially used to repay the Company's
revolving credit facility. 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 In
addition, net cash provided by financing activities in 1997 reflected net
repayment of a $6,365,000 note payable relating to the purchase of the Company's
additional 33-1/3% interest in the Pittsburgh Mall, the release of
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26
Forest City Enterprises, Inc. and Subsidiaries
$3,600,000 in restricted cash related to the financing of Atlantic Center in
Brooklyn, New York, payment of deferred financing costs of $12,142,000, purchase
of 77,700 shares of treasury stock for $2,896,000 and payment of $3,490,000 of
dividends.
SHELF REGISTRATION
On December 3, 1997, the Company filed a shelf
registration statement with the Securities and Exchange Commission for the
potential offering on a delayed basis of up to $250,000,000 in debt or equity
securities. This registration is in addition to the shelf registration filed
March 4, 1997 of up to $250,000,000 in debt or equity securities. The Company
sold approximately $82,000,000 through an equity offering on May 20, 1997 and
$200,000,000 through a debt offering completed on March 16, 1998. The Company
currently has available on shelf registration statements approximately
$218,000,000 of debt, equity or any combination thereof.
STOCK SPLIT, DIVIDENDS, CAPITALIZATION AND TREASURY STOCK PURCHASE
A three-for-two stock split of both the Company's Class A and Class B
Common Stock was effective February 17, 1997 to shareholders of record at the
close of business on February 3, 1997. The stock split was effected as a stock
dividend.
Quarterly cash dividends of $.06 per share (post-split) on shares of both
Class A and Class B Common Stock were paid on March 17, June 16, September 15
and December 15, 1997. The first 1998 quarterly dividend of $.07 per share on
shares of both Class A and Class B Common Stock was paid on March 16, 1998 to
shareholders of record at the close of business on March 2, 1998. The second
1998 quarterly dividend of $.07 per share on shares of both Class A and Class B
Common stock will be paid on June 15, 1998 to
shareholders of record at the close of business on June 1, 1998.
On June 10, 1997, the shareholders approved an amendment to the Company's
Articles of Incorporation to increase the Company's capitalization to a)
48,000,000 shares of Class A Common Stock from 16,000,000 shares; b) 18,000,000
shares of Class B Common Stock from 6,000,000 shares; and c) 5,000,000 shares of
preferred stock from 1,000,000 shares.
On August 18, 1997, the Company purchased 77,700 shares of Class A common
stock owned by Richard Miller, Aaron Miller and Gabrielle Miller, the children
of Samuel H. Miller, the Company's Co-Chairman of the Board of Directors, and
Ruth Miller, who died on November 26, 1996. The repurchase provided funds
necessary to pay taxes on the estate of Ruth Miller. The shares were purchased
at a price of $36.50 per share for an aggregate purchase price of $2,836,050
plus 8.0% interest from May 7, 1997 to August 18, 1997, less any dividends paid
between those two dates, for a total of $2,896,000.
NEW ACCOUNTING STANDARDS
In February 1997, FASB issued SFAS 128 "Earnings per Share," which is
effective for fiscal years ending after December 15, 1997. This Statement
simplifies the standards for computing earnings per share ("EPS") and makes them
comparable to international EPS standards. The Company adopted the provisions of
SFAS 128 in its 1997 Annual Report. The adoption of this statement does not have
a material impact on EPS.
In June 1997, FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information," which is effective for periods beginning
after December 15, 1997. This statement provides guidance on the determination
of reporting segments and requires interim financial statement disclosure. The
Company does not anticipate that significant changes to the segment information
historically provided in its annual financial statements will occur as a result
of the adoption of SFAS 131. Beginning with the Company's quarterly report on
Form 10-Q for the quarter ending April 30, 1998, the Company will include
interim segment information.
YEAR 2000
Management has undertaken a program to prepare the Company's financial and
operating computer systems and ancillary applications for the year 2000. All
necessary software modifications are expected to occur in a timely manner at a
cost which is not expected to be material.
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 nation-wide basis as well as regionally in areas where the Company has a
geographic concentration of properties; failure to consummate financing
arrangements; development risks, including lack of satisfactory financing,
construction and lease-up delays and cost overruns; the level and volatility of
interest rates; financial stability of tenants within the retail industry, which
may be impacted by competition and consumer spending; the rate of revenue
increases versus expenses increases; the cyclical nature of the lumber
wholesaling business; as well as other risks listed from time to time in the
Company's reports filed with the Securities and Exchange Commission. The Company
has no obligation to revise or update any forward-looking statements as a result
of future events or new information. Readers are cautioned not to place undue
reliance on such forward-looking statements.
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Forest City Enterprises, Inc. and Subsidiaries
THREE YEAR SUMMARY OF EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND
DEFERRED TAXES
(in thousands)
Commercial Group Residential Group
----------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------- ----------------------------------
Revenues ......................................... $ 330,117 $ 314,762 $ 298,912 $ 135,253 $ 116,878 $ 106,103
Operating expenses, including depreciation
and amortization for non-real estate Groups .... 167,107 168,466 146,340 63,533 61,437 53,999
Interest expense ................................. 87,035 81,507 79,556 28,884 32,947 30,517
Income tax provision (benefit) ................... 2,202 (1,243) 9,465 10,851 (2,324) 717
----------------------------------- ----------------------------------
256,344 248,730 235,361 103,268 92,060 85,233
----------------------------------- ----------------------------------
Earnings before depreciation, amortization and
deferred taxes (EBDT) .......................... $ 73,773 $ 66,032 $ 63,551 $ 31,985 $ 24,818 $ 20,870
=================================== ==================================
Land Group Lumber Trading Group
----------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995
- ---------------------------------------------------------------------------------------- ----------------------------------
Revenues ......................................... $ 44,614 $ 53,888 $ 42,889 $ 122,169 $ 124,491 $ 81,093
Operating expenses, including depreciation
and amortization for non-real estate Groups .... 33,855 41,068 31,102 107,673 110,359 70,189
Interest expense ................................. 5,575 6,813 7,964 5,254 5,166 5,078
Income tax provision (benefit) ................... 1,858 2,078 (358) 4,043 3,913 2,823
------------------------------------ ----------------------------------
41,288 49,959 38,708 116,970 119,438 78,090
------------------------------------ ----------------------------------
Earnings before depreciation, amortization and
deferred taxes (EBDT) .......................... $ 3,326 $ 3,929 $ 4,181 $ 5,199 $ 5,053 $ 3,003
==================================== ==================================
Corporate Activities Total
------------------------------------ ----------------------------------
1997 1996 1995 1997 1996 1995
- ----------------------------------------------------------------------------------------- ----------------------------------
Revenues ......................................... $ 516 $ 430 $ 436 $ 632,669 $ 610,449 $ 529,433
Operating expenses, including depreciation
and amortization for non-real estate Groups .... 10,478 8,723 6,348 382,646 390,053 307,978
Interest expense ................................. 9,574 6,931 6,886 136,322 133,364 130,001
Income tax provision (benefit) ................... (12,163) (5,796) (3,214) 6,791 (3,372) 9,433
------------------------------------ ----------------------------------
7,889 9,858 10,020 525,759 520,045 447,412
------------------------------------ ----------------------------------
Earnings before depreciation, amortization and
deferred taxes (EBDT) .......................... $ (7,373) $ (9,428) $ (9,584) $ 106,910 $ 90,404 $ 82,021
==========================================================================
Reconciliation to net earnings:
Earnings before depreciation, amortization and deferred taxes (EBDT) ....... $ 106,910 $ 90,404 $ 82,021
Depreciation and amortization - real estate Groups ......................... (71,678) (70,221) (63,557)
Deferred taxes - real estate Groups ........................................ (10,693) (13,197) (4,974)
Provision for decline in real estate, net of tax ........................... -- (7,413) (6,073)
Gain (loss) on disposition of properties, net of tax ....................... (23,356) 9,598 (478)
Extraordinary gain, net of tax ............................................. 19,356 2,900 1,847
----------------------------------
Net earnings ............................................................... $ 20,539 $ 12,071 $ 8,786
==================================