UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
| For the quarterly period ended | July 31, 2004 |
| Commission file number | 1-4372 |
FOREST CITY ENTERPRISES, INC.
| Ohio | 34-0863886 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| Terminal Tower Suite 1100 |
50 Public Square Cleveland, Ohio |
44113 | ||
| (Address of principal executive offices) | Zip Code | |||
| Registrant’s telephone number, including area code | 216-621-6060 | |||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES x NO o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class |
Outstanding at September
7, 2004 |
|||
Class A Common Stock, $.33 1/3 par value |
36,731,132 shares | |||
Class B Common Stock, $.33 1/3 par value |
13,300,230 shares | |||
(THIS PAGE INTENTIONALLY LEFT BLANK)
Forest City Enterprises, Inc. and Subsidiaries
Table of Contents
| Page |
||||||||
| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 4 | ||||||||
| 5-6 | ||||||||
| 7-23 | ||||||||
| 24-42 | ||||||||
| 42-45 | ||||||||
| 46 | ||||||||
| 46 | ||||||||
| 47 | ||||||||
| 48-51 | ||||||||
| 52 | ||||||||
| 53-55 | ||||||||
| EX-10.39 Third Amendment to Deferred Compensation | ||||||||
| EX-31.1 Certification | ||||||||
| EX-31.2 Certification | ||||||||
| EX-32.1 Certification | ||||||||
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Forest City Enterprises, Inc. and Subsidiaries
| July 31, 2004 |
January 31, 2004 |
|||||||
| (Unaudited) | ||||||||
| (in thousands) | ||||||||
Assets |
||||||||
Real Estate |
||||||||
Completed rental properties |
$ | 5,549,279 | $ | 4,523,748 | ||||
Projects under development |
660,974 | 544,389 | ||||||
Land held for development or sale |
47,512 | 33,450 | ||||||
Total Real Estate |
6,257,765 | 5,101,587 | ||||||
Less accumulated depreciation |
(841,089 | ) | (730,705 | ) | ||||
Real Estate, net |
5,416,676 | 4,370,882 | ||||||
Cash and equivalents |
89,258 | 107,491 | ||||||
Restricted cash |
414,683 | 257,795 | ||||||
Notes and accounts receivable, net |
444,702 | 422,765 | ||||||
Inventories |
73,417 | 46,140 | ||||||
Investments in and advances to real estate affiliates |
421,105 | 432,584 | ||||||
Other assets |
334,333 | 286,415 | ||||||
Total Assets |
$ | 7,194,174 | $ | 5,924,072 | ||||
Liabilities and Shareholders’ Equity |
||||||||
Liabilities |
||||||||
Mortgage debt, nonrecourse |
$ | 4,486,524 | $ | 3,634,177 | ||||
Notes payable |
194,316 | 152,111 | ||||||
Long-term credit facility |
128,000 | 56,250 | ||||||
Senior and subordinated debt |
449,400 | 349,400 | ||||||
Accounts payable and accrued expenses |
749,677 | 639,824 | ||||||
Deferred income taxes |
321,623 | 294,925 | ||||||
Total Liabilities |
6,329,540 | 5,126,687 | ||||||
Minority interest |
78,660 | 48,474 | ||||||
Commitments and contingencies |
— | — | ||||||
Company-obligated trust preferred securities |
— | — | ||||||
Shareholders’ Equity |
||||||||
Preferred stock — without par value |
||||||||
5,000,000 shares authorized; no shares issued |
— | — | ||||||
Common stock — $.33 1/3 par value |
||||||||
Class A, 96,000,000 shares authorized; 36,911,748 and 36,509,836
shares issued, 36,712,682 and 36,270,496 outstanding, respectively |
12,303 | 12,170 | ||||||
Class B, convertible, 36,000,000 shares authorized; 13,314,080 and
13,715,992 shares issued and outstanding, respectively |
4,439 | 4,572 | ||||||
| 16,742 | 16,742 | |||||||
Additional paid-in capital |
237,181 | 235,398 | ||||||
Retained earnings |
529,054 | 496,537 | ||||||
| 782,977 | 748,677 | |||||||
Less treasury stock, at cost; 199,066 and 239,340 Class A shares, respectively |
(1,457 | ) | (1,752 | ) | ||||
Accumulated other comprehensive income |
4,454 | 1,986 | ||||||
Total Shareholders’ Equity |
785,974 | 748,911 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 7,194,174 | $ | 5,924,072 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Forest City Enterprises, Inc. and Subsidiaries
| Three Months Ended July 31, |
Six Months Ended July 31, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
Revenues |
||||||||||||||||
Rental properties |
$ | 275,087 | $ | 208,664 | $ | 522,275 | $ | 418,262 | ||||||||
Lumber trading |
30,856 | 21,442 | 66,498 | 36,760 | ||||||||||||
| 305,943 | 230,106 | 588,773 | 455,022 | |||||||||||||
Expenses |
||||||||||||||||
Operating expenses |
176,244 | 134,689 | 345,542 | 270,189 | ||||||||||||
Interest expense |
61,716 | 46,176 | 120,963 | 89,310 | ||||||||||||
Loss on early extinguishment of debt |
— | 10,718 | — | 10,718 | ||||||||||||
Provision for decline in real estate |
— | 1,624 | — | 1,624 | ||||||||||||
Depreciation and amortization |
44,682 | 30,246 | 85,425 | 59,346 | ||||||||||||
| 282,642 | 223,453 | 551,930 | 431,187 | |||||||||||||
Equity in earnings of unconsolidated real estate entities |
43,650 | 11,827 | 49,894 | 21,670 | ||||||||||||
Loss on disposition of other investments |
— | (453 | ) | — | (431 | ) | ||||||||||
Earnings before income taxes |
66,951 | 18,027 | 86,737 | 45,074 | ||||||||||||
Income tax expense (benefit) |
||||||||||||||||
Current |
(889 | ) | 1,127 | 1,129 | 4,116 | |||||||||||
Deferred |
23,825 | 5,022 | 27,378 | 11,641 | ||||||||||||
| 22,936 | 6,149 | 28,507 | 15,757 | |||||||||||||
Earnings before minority interest, discontinued operations and
cumulative effect of change in accounting principle |
44,015 | 11,878 | 58,230 | 29,317 | ||||||||||||
Minority interest |
(9,054 | ) | (4,908 | ) | (16,379 | ) | (7,485 | ) | ||||||||
Earnings from continuing operations |
34,961 | 6,970 | 41,851 | 21,832 | ||||||||||||
Discontinued operations, net of tax and minority interest |
||||||||||||||||
Loss from operations |
(168 | ) | (367 | ) | (381 | ) | (490 | ) | ||||||||
Gain on disposition of operating properties and division |
30 | — | 11,817 | 53 | ||||||||||||
| (138 | ) | (367 | ) | 11,436 | (437 | ) | ||||||||||
Cumulative effect of change in accounting principle, net of tax (Note A) |
— | — | (11,261 | ) | — | |||||||||||
Net earnings |
$ | 34,823 | $ | 6,603 | $ | 42,026 | $ | 21,395 | ||||||||
Basic earnings per common share |
||||||||||||||||
Earnings from continuing operations |
$ | 0.70 | $ | 0.14 | $ | 0.84 | $ | 0.44 | ||||||||
(Loss) earnings from discontinued operations, net of tax
and minority interest |
— | (0.01 | ) | 0.23 | (0.01 | ) | ||||||||||
Cumulative effect of change in accounting principle, net of tax |
— | — | (0.23 | ) | — | |||||||||||
Net earnings |
$ | 0.70 | $ | 0.13 | $ | 0.84 | $ | 0.43 | ||||||||
Diluted earnings per common share |
||||||||||||||||
Earnings from continuing operations |
$ | 0.69 | $ | 0.14 | $ | 0.82 | $ | 0.43 | ||||||||
(Loss) earnings from discontinued operations, net of tax
and minority interest |
(0.01 | ) | (0.01 | ) | 0.23 | (0.01 | ) | |||||||||
Cumulative effect of change in accounting principle, net
of tax |
— | — | (0.22 | ) | — | |||||||||||
Net earnings |
$ | 0.68 | $ | 0.13 | $ | 0.83 | $ | 0.42 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Forest City Enterprises, Inc. and Subsidiaries
| Six Months Ended July 31, |
||||||||
| 2004 |
2003 (restated) |
|||||||
| (in thousands) | ||||||||
Net earnings |
$ | 42,026 | $ | 21,395 | ||||
Other comprehensive income, net of tax: |
||||||||
Unrealized (loss) gain on investments in securities: |
||||||||
Unrealized (loss) gain on securities, net of minority interest |
(1,099 | ) | 4,088 | |||||
Unrealized derivative gain: |
||||||||
Change in unrealized gain on interest rate contracts, net of
minority interest |
3,567 | 1,901 | ||||||
Other comprehensive income, net of tax |
2,468 | 5,989 | ||||||
Comprehensive income |
$ | 44,494 | $ | 27,384 | ||||
Forest City Enterprises, Inc. and Subsidiaries
| Common Stock |
||||||||||||||||||||||||||||||||||||||||
| Class A |
Class B |
Additional | ||||||||||||||||||||||||||||||||||||||
| Paid-In | Retained | Treasury Stock |
Accumulated Other Comprehensive |
|||||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Capital |
Earnings |
Shares |
Amount |
Income (Loss) |
Total |
|||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||
Six
Months Ended July 31, 2004 |
||||||||||||||||||||||||||||||||||||||||
Balances at January 31, 2004 |
36,510 | $ | 12,170 | 13,716 | $ | 4,572 | $ | 235,398 | $ | 496,537 | 239 | $ | (1,752 | ) | $ | 1,986 | $ | 748,911 | ||||||||||||||||||||||
Net earnings |
42,026 | 42,026 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
2,468 | 2,468 | ||||||||||||||||||||||||||||||||||||||
Dividends $.19 per share |
(9,509 | ) | (9,509 | ) | ||||||||||||||||||||||||||||||||||||
Conversion of Class B to Class A shares |
402 | 133 | (402 | ) | (133 | ) | — | |||||||||||||||||||||||||||||||||
Exercise of stock options |
462 | (40 | ) | 295 | 757 | |||||||||||||||||||||||||||||||||||
Income tax benefit from stock option exercises |
505 | 505 | ||||||||||||||||||||||||||||||||||||||
Amortization of unearned compensation |
816 | 816 | ||||||||||||||||||||||||||||||||||||||
Balances at July 31, 2004 |
36,912 | $ | 12,303 | 13,314 | $ | 4,439 | $ | 237,181 | $ | 529,054 | 199 | $ | (1,457 | ) | $ | 4,454 | $ | 785,974 | ||||||||||||||||||||||
Six Months Ended July 31, 2003 |
||||||||||||||||||||||||||||||||||||||||
Balances at January 31, 2003 |
35,678 | $ | 11,892 | 14,548 | $ | 4,850 | $ | 232,029 | $ | 470,348 | 570 | $ | (4,425 | ) | $ | (332 | ) | $ | 714,362 | |||||||||||||||||||||
Net earnings |
21,395 | 21,395 | ||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax (restated) |
5,989 | 5,989 | ||||||||||||||||||||||||||||||||||||||
Dividends $.15 per share |
(7,473 | ) | (7,473 | ) | ||||||||||||||||||||||||||||||||||||
Conversion of Class B to Class A shares |
502 | 168 | (502 | ) | (168 | ) | — | |||||||||||||||||||||||||||||||||
Exercise of stock options |
1,361 | (146 | ) | 1,128 | 2,489 | |||||||||||||||||||||||||||||||||||
Income tax benefit from stock option exercises |
661 | 661 | ||||||||||||||||||||||||||||||||||||||
Restricted stock issued |
(1,013 | ) | (113 | ) | 1,013 | — | ||||||||||||||||||||||||||||||||||
Amortization of unearned compensation |
579 | 579 | ||||||||||||||||||||||||||||||||||||||
Balances at July 31, 2003 |
36,180 | $ | 12,060 | 14,046 | $ | 4,682 | $ | 233,617 | $ | 484,270 | 311 | $ | (2,284 | ) | $ | 5,657 | $ | 738,002 | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Forest City Enterprises, Inc. and Subsidiaries
| Six Months Ended July 31, |
||||||||
| 2004 |
2003 |
|||||||
| (in thousands) | ||||||||
Cash Flows from Operating Activities |
||||||||
Rents and other revenues received |
$ | 482,755 | $ | 418,089 | ||||
Cash distributions from unconsolidated entities |
18,178 | 9,688 | ||||||
Proceeds from land sales |
61,874 | 22,471 | ||||||
Land development expenditures |
(30,404 | ) | (39,893 | ) | ||||
Operating expenditures |
(318,905 | ) | (284,123 | ) | ||||
Interest paid |
(112,199 | ) | (91,829 | ) | ||||
Net cash provided by operating activities |
101,299 | 34,403 | ||||||
Cash Flows from Investing Activities |
||||||||
Capital expenditures |
(427,151 | ) | (212,037 | ) | ||||
Proceeds from disposition of operating properties, division
and other investments |
27,969 | 54 | ||||||
Change in investments in and advances to real estate affiliates |
(38,987 | ) | 2,419 | |||||
Net cash used in investing activities |
(438,169 | ) | (209,564 | ) | ||||
Cash Flows from Financing Activities |
||||||||
Proceeds from issuance of senior notes |
100,000 | 300,000 | ||||||
Payment of senior notes issuance costs |
(3,808 | ) | (8,092 | ) | ||||
Retirement of senior notes |
— | (208,500 | ) | |||||
Proceeds from borrowings under the long-term credit facility |
128,000 | 34,000 | ||||||
Payments on long-term credit facility |
(56,250 | ) | (85,500 | ) | ||||
Proceeds from nonrecourse mortgage debt |
419,285 | 491,674 | ||||||
Principal payments on nonrecourse mortgage debt |
(162,506 | ) | (299,681 | ) | ||||
Proceeds from notes payable |
54,906 | 23,212 | ||||||
Payments on notes payable |
(29,788 | ) | (13,158 | ) | ||||
Change in restricted cash and book overdrafts |
(118,090 | ) | (22,169 | ) | ||||
Payment of deferred financing costs |
(6,752 | ) | (6,571 | ) | ||||
Exercise of stock options |
757 | 2,489 | ||||||
Dividends paid to shareholders |
(9,002 | ) | (5,970 | ) | ||||
Decrease in minority interest |
1,885 | (12,433 | ) | |||||
Net cash provided by financing activities |
318,637 | 189,301 | ||||||
Net (decrease) increase in cash and equivalents |
(18,233 | ) | 14,140 | |||||
Cash and equivalents at beginning of period |
107,491 | 122,356 | ||||||
Cash and equivalents at end of period |
$ | 89,258 | $ | 136,496 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended July 31, |
||||||||
| 2004 |
2003 |
|||||||
| (in thousands) | ||||||||
Reconciliation of Net Earnings to Cash Provided by Operating Activities |
||||||||
Net Earnings |
$ | 42,026 | $ | 21,395 | ||||
Minority interest |
16,379 | 7,485 | ||||||
Depreciation |
69,454 | 48,860 | ||||||
Amortization |
15,971 | 10,486 | ||||||
Equity in earnings of unconsolidated entities |
(49,894 | ) | (21,670 | ) | ||||
Cash distributions from operations of unconsolidated entities |
||||||||