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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

     
(Mark One)
 
x
   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT Of 1934
For the quarterly period ended October 31, 2004
 
    
o
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT Of 1934
For the transition period from           to          

Commission file number 1-4372

FOREST CITY ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)
     
Ohio   34-0863886
  		 
 
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
         
Terminal Tower   50 Public Square    
Suite 1100   Cleveland, Ohio   44113
  		 
 
(Address of principal executive offices)   (Zip Code)
 
Registrant’s telephone number, including area code   216-621-6060

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO 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 December 7, 2004
 
 		  
 
  Class A Common Stock, $.33 1/3 par value   36,998,177 shares
  Class B Common Stock, $.33 1/3 par value   13,248,480 shares

 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

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Forest City Enterprises, Inc. and Subsidiaries

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    8-25  
    27-48  
    49-51  
    52  
       
    52  
    53-56  
    57  
Certifications
        
 EX-31.1 Certification
 EX-31.2 Certification
 EX-32.1 Certification

 

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Balance Sheets
                 
    October 31, 2004
   January 31, 2004
    (Unaudited)        
    (in thousands)
Assets
                
Real Estate
                
Completed rental properties
   $ 5,646,613     $ 4,504,756  
Projects under development
     589,473       506,986  
Land held for development or sale
     96,922       70,853  
 
    
 		      
 		  
Total Real Estate
     6,333,008       5,082,595  
Less accumulated depreciation
     (850,845 )     (715,482 )
 
    
 		      
 		  
Real Estate, net
     5,482,163       4,367,113  
 
                
Cash and equivalents
     70,684       107,491  
Restricted cash
     426,266       257,795  
Notes and accounts receivable, net
     203,951       217,258  
Investments in and advances to real estate affiliates
     456,900       432,584  
Other assets
     367,198       285,423  
Lumber Group assets — held for sale
     248,725       256,408  
 
    
 		      
 		  
Total Assets
   $ 7,255,887     $ 5,924,072  
 
    
 		      
 		  
Liabilities and Shareholders’ Equity
                
 
Liabilities
                
Mortgage debt, nonrecourse
   $ 4,559,298     $ 3,634,177  
Notes payable
     91,567       86,030  
Long-term credit facility
     115,000       56,250  
Senior and subordinated debt
     449,400       349,400  
Accounts payable and accrued expenses
     544,355       463,023  
Deferred income taxes
     340,472       294,925  
Lumber Group liabilities — held for sale
     231,554       242,882  
 
    
 		      
 		  
Total Liabilities
     6,331,646       5,126,687  
 
                
Minority interest
     114,059       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; 36,987,377 and 36,509,836 shares issued, 36,987,377 and 36,270,496 outstanding, respectively
     12,329       12,170  
Class B, convertible, 36,000,000 shares authorized; 13,248,480 and 13,715,992 shares issued and outstanding, respectively
     4,416       4,572  
 
    
 		      
 		  
 
     16,745       16,742  
Additional paid-in-capital
     242,206       235,398  
Retained earnings
     561,375       496,537  
 
    
 		      
 		  
 
     820,326       748,677  
Less treasury stock, at cost; -0- and 239,340 Class A shares, respectively
     —       (1,752 )
Accumulated other comprehensive (loss) income
     (10,144 )     1,986  
 
    
 		      
 		  
Total Shareholders’ Equity
     810,182       748,911  
 
    
 		      
 		  
Total Liabilities and Shareholders’ Equity
   $ 7,255,887     $ 5,924,072  
 
    
 		      
 		  

The accompanying notes are an integral part of these consolidated financial statements.

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Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Earnings
 (Unaudited)
                                 
    Three Months Ended October 31,
   Nine Months Ended October 31,
    2004
2003
2004
2003
    (in thousands, except per share data)
 
Revenues from real estate operations
   $ 256,108     $ 236,043     $ 762,152     $ 646,709  
 
                                
Expenses
                                
Operating expenses
     149,562       132,716       434,704       366,614  
Interest expense
     66,496       47,449       182,519       133,556  
Loss on early extinguishment of debt
     1,275       —       1,275       10,718  
Provision for decline in real estate
     —       —       —       1,624  
Depreciation and amortization
     41,759       29,643       124,501       86,953  
 
    
 		      
 		      
 		      
 		  
 
     259,092       209,808       742,999       599,465  
 
    
 		      
 		      
 		      
 		  
Retained interest and interest income—Stapleton
     24,169       —       29,337       —  
Equity in earnings of unconsolidated entities
     10,777       11,433       60,671       33,103  
 
    
 		      
 		      
 		      
 		  
Loss on disposition of other investments
     —       —       —       (431 )
 
    
 		      
 		      
 		      
 		  
Earnings before income taxes
     31,962       37,668       109,161       79,916  
 
    
 		      
 		      
 		      
 		  
Income tax expense (benefit)
                                
Current
     (9,168 )     (2,914 )     (10,417 )     36  
Deferred
     20,654       19,000       46,679       30,542  
 
    
 		      
 		      
 		      
 		  
 
     11,486       16,086       36,262       30,578  
 
    
 		      
 		      
 		      
 		  
Earnings before minority interest, discontinued operations and cumulative effect of change in accounting principle
     20,476       21,582       72,899       49,338  
 
                                
Minority interest
     (3,677 )     (1,382 )     (19,782 )     (8,583 )
 
    
 		      
 		      
 		      
 		  
Earnings from continuing operations
     16,799       20,200       53,117       40,755  
 
Discontinued operations, net of tax and minority interest
                                
Operating earnings from Lumber Group
     1,409       2,069       5,764       2,158  
Operating earnings from rental properties
     153       (141 )     950       557  
Loss on disposition of one division of Lumber Group
     —       —       (661 )     —  
Gain on disposition of rental properties
     18,979       3,844       31,457       3,897  
 
    
 		      
 		      
 		      
 		  
 
     20,541       5,772       37,510       6,612  
 
    
 		      
 		      
 		      
 		  
Cumulative effect of change in accounting principle, net of tax (Note A)
     —       —       (11,261 )     —  
 
    
 		      
 		      
 		      
 		  
Net earnings
   $ 37,340     $ 25,972     $ 79,366     $ 47,367  
 
    
 		      
 		      
 		      
 		  
Basic earnings per common share
                                
Earnings from continuing operations
   $ .34     $ .40     $ 1.06     $ .82  
Earnings from discontinued operations, net of tax and minority interest
     .41       .12       .75       .13  
Cumulative effect of change in accounting principle, net of tax
     —       —       (.22 )     —  
 
    
 		      
 		      
 		      
 		  
Net earnings
   $ .75     $ .52     $ 1.59     $ .95  
 
    
 		      
 		      
 		      
 		  
Diluted earnings per common share
                               
Earnings from continuing operations
   $ .33     $ .40     $ 1.04     $ .81  
Earnings from discontinued operations, net of tax and minority interest
     .40       .11       .74       .13  
Cumulative effect of change in accounting principle, net of tax
     —       —       (.22 )     —  
 
    
 		      
 		      
 		      
 		  
Net earnings
   $ .73     $ .51     $ 1.56     $ .94  
 
    
 		      
 		      
 		      
 		  

The accompanying notes are an integral part of these consolidated financial statements.

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Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income
 (Unaudited)
                 
    Nine Months Ended October 31,
    2004
2003 (restated)
    (in thousands)
Net earnings
   $ 79,366     $ 47,367  
Other comprehensive (loss) income, net of tax:
                
Unrealized (losses) gains on investments in securities:
                
Unrealized (losses) gains on securities, net of minority interest
     (503 )     305  
Unrealized derivative gains (losses):
                
Change in unrealized gains (losses) on interest rate contracts, net of minority interest
     815       (573 )
Change in fair value of retained interest (Note A)
     (12,442 )     3,798  
 
    
 		      
 		  
Other comprehensive (loss) income, net of tax
     (12,130 )     3,530  
 
    
 		      
 		  
Comprehensive income
   $ 67,236     $ 50,897  
 
    
 		      
 		  

Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity
(Unaudited)
                                                                                 
    Common Stock
                               Accumulated    
    Class A
Class B
   Additional
Paid-In		   Retained
Retained		   Treasury Stock
   Other
Comprehensive		    
Shares
Amount
Shares
Amount
Capital
Earnings
Shares
Amount
(Loss) Income
Total
    (in thousands)
Nine Months Ended October 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
                                             79,366                               79,366  
Other comprehensive loss, net of tax
                                                                     (12,130 )     (12,130 )
Dividends $.29 per share
                                             (14,528 )                             (14,528 )
Conversion of Class B to Class A shares
     467       156       (467 )     (156 )                                             —  
Exercise of stock options
     10       3                       1,816               (239 )     1,752               3,571  
Income tax benefit from stock option exercises
                                     3,668                                       3,668  
Amortization of unearned compensation
                                     1,324                                       1,324  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Balances at October 31, 2004
     36,987     $ 12,329       13,249     $ 4,416     $ 242,206     $ 561,375       —     $ —     $ (10,144 )   $ 810,182  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Nine Months Ended October 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
                                             47,367                               47,367  
Other comprehensive income, net of tax (restated)
                                                                     3,530       3,530  
Dividends $.24 per share
                                             (11,993 )                             (11,993 )
Conversion of Class B to Class A shares
     832       278       (832 )     (278 )                                             —  
Exercise of stock options
                                     1,700               (188 )     1,441               3,141  
Income tax benefit from stock option exercises
                                     1,065                                       1,065  
Restricted stock issued
                                     (1,013 )             (113 )     1,013               —  
Amortization of unearned compensation
                                     887                                       887  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		  
Balances at October 31, 2003
     36,510     $ 12,170       13,716     $ 4,572     $ 234,668     $ 505,722       269     $ (1,971 )   $ 3,198     $ 758,359  
 
    
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		      
 		  

The accompanying notes are an integral part of these consolidated financial statements.

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Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
 (Unaudited)
                 
    Nine Months Ended October 31,
    2004
2003
    (in thousands)
Cash Flows from Operating Activities
                
Rents and other revenues received
   $ 805,793     $ 621,494  
Cash distributions from unconsolidated entities
     63,296       13,331  
Proceeds from land sales
     101,952       55,800  
Land development expenditures
     (53,215 )     (56,962 )
Operating expenditures
     (478,752 )     (404,622 )
Interest paid
     (174,151 )     (134,577 )
 
    
 		      
 		  
Net cash provided by operating activities
     264,923       94,464  
 
    
 		      
 		  
Cash Flows from Investing Activities
                
Capital expenditures
     (535,202 )     (304,962 )
Proceeds from disposition of rental properties and other investments
     50,462       2,549  
Change in investments in and advances to real estate affiliates
     (103,316 )     36,911  
 
    
 		      
 		  
Net cash used in investing activities
     (588,056 )     (265,502 )
 
    
 		      
 		  
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
     115,000       19,000  
Payments on long-term credit facility
     (56,250 )     (91,750 )
Proceeds from nonrecourse mortgage debt
     684,521       785,387  
Principal payments on nonrecourse mortgage debt
     (426,441 )     (549,839 )
Proceeds from notes payable
     65,276       77,441  
Payments on notes payable
     (83,897 )     (18,638 )
Repayment of Lumber Group securitization agreement
     —       (55,000 )
Change in restricted cash and book overdrafts
     (106,922 )     16,263  
Payment of deferred financing costs
     (10,368 )     (27,168 )
Exercise of stock options
     3,571       3,141  
Dividends paid to shareholders
     (14,005 )     (10,464 )
Increase (decrease) in minority interest
     19,649       (7,141 )
 
    
 		      
 		  
Net cash provided by financing activities
     286,326       224,640  
 
    
 		      
 		  
Net (decrease) increase in cash and equivalents
     (36,807 )     53,602  
Cash and equivalents at beginning of period
     107,491       122,356  
 
    
 		      
 		  
Cash and equivalents at end of period
   $ 70,684     $ 175,958  
 
    
 		      
 		  

The accompanying notes are an integral part of these consolidated financial statements.

5

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Forest City Enterprises, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (continued)
 (Unaudited)
                 
    Nine Months Ended October 31,
    2004
   2003
    (in thousands)
Reconciliation of Net Earnings to Cash Provided by Operating Activities
                
 
Net Earnings
   $ 79,366     $ 47,367  
 
Minority interest
     19,782       8,583  
Depreciation
     100,801       71,254  
Amortization
     23,700       15,699  
Equity in earnings of unconsolidated entities
     (60,671 )