-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QVvMqhi6svuUq/WOhiEiTF2hgMvs0mdWJccsuHGGfdZ9mSFWne9QTv76VO8P4UfL tJCL/EMjGxccYGm0YCLs4A== 0000038067-98-000012.txt : 19981216 0000038067-98-000012.hdr.sgml : 19981216 ACCESSION NUMBER: 0000038067-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FOREST CITY ENTERPRISES INC CENTRAL INDEX KEY: 0000038067 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 340863886 STATE OF INCORPORATION: OH FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04372 FILM NUMBER: 98769876 BUSINESS ADDRESS: STREET 1: 1100 TERMINAL TOWER STREET 2: 50 PUBLIC SQ CITY: CLEVELAND STATE: OH ZIP: 44113 BUSINESS PHONE: 2162671200 MAIL ADDRESS: STREET 1: 1100 TERMINAL TOWER STREET 2: 50 PUBLIC SQUARE CITY: CLEVLAND STATE: OH ZIP: 44113 10-Q 1 FOREST CITY ENTERPRISES THIRD QUARTER 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended October 31, 1998 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.) 1100 Terminal Tower 50 Public Square 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 _____ 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 9, 1998 Class A Common Stock, $.33 1/3 par value 19,277,706 shares Class B Common Stock, $.33 1/3 par value 10,705,196 shares FOREST CITY ENTERPRISES, INC. Index Page No. Part I. Financial Information: Item 1. Financial Statements Forest City Enterprises, Inc. and Subsidiaries Consolidated Balance Sheets - October 31, 1998 (Unaudited) and January 31, 1998 3 Consolidated Statements of Earnings and Retained Earnings (Unaudited) - Three and Nine Months Ended October 31, 1998 and 1997 4 Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended October 31, 1998 and 1997 5 - 6 Notes to Consolidated Financial Statements (Unaudited) 7 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 27 Part II. Other Information Item 1. Legal Proceedings 28 Item 6. Exhibits and Reports on Form 8-K 29 - 36 Signatures 37 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
October 31, 1998 January 31, 1998 ---------------- ---------------- (Unaudited) (dollars in thousands, except per share data) ASSETS Real Estate Completed rental properties $ 2,582,772 $ 2,409,545 Projects under development 370,987 251,416 Land held for development or sale 55,144 43,599 ------------- ------------- 3,008,903 2,704,560 Less accumulated depreciation (479,097) (448,634) ------------- ------------- Total Real Estate 2,529,806 2,255,926 Cash 52,451 54,854 Notes and accounts receivable, net 182,533 191,719 Inventories 40,934 58,696 Investments in and advances to affiliates 276,215 202,409 Other assets 199,411 199,749 ------------- ------------- $ 3,281,350 $ 2,963,353 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Mortgage debt, nonrecourse $ 2,138,346 $ 2,018,931 Accounts payable and accrued expenses 343,330 361,398 Notes payable 7,886 34,819 Long-term debt 95,000 114,000 8.5% Senior notes 200,000 - Deferred income taxes 143,407 117,723 Deferred profit 34,357 34,537 ------------- ------------- Total Liabilities 2,962,326 2,681,408 ------------- ------------- SHAREHOLDERS' EQUITY Preferred stock - convertible, without par value; 5,000,000 shares authorized; no shares issued. - - Common stock - $.33 1/3 par value Class A, 96,000,000 and 48,000,000 shares authorized, 19,900,056 and 19,813,372 shares issued, 19,277,106 and 19,186,072 outstanding, respectively. 6,635 6,602 Class B, convertible, 36,000,000 and 18,000,000 shares authorized, 10,983,896 and 11,070,580 shares issued, 10,705,796 and 10,792,480 outstanding, respectively. 3,662 3,688 ------------- -------------- 10,297 10,290 Additional paid-in capital 114,272 114,276 Retained earnings 205,881 168,864 -------------- -------------- 330,450 293,430 Less treasury stock, at cost; 622,950 Class A and 278,100 Class B shares and 627,300 Class A and 278,100 Class B shares, respectively. (11,426) (11,485) ------------- -------------- Total Shareholders' Equity 319,024 281,945 ------------- -------------- $ 3,281,350 $ 2,963,353 ============= ==============
See notes to consolidated financial statements. FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
Three Months Ended October 31, Nine Months Ended October 31, --------------------------- --------------------------- 1998 1997 1998 1997 ---------- ---------- ------- ------- (dollars in thousands, except per share data) Revenues $ 176,902 $ 154,975 $ 491,232 $ 448,078 ----------- ----------- ----------- ----------- Operating expenses 106,388 91,904 293,751 259,981 Interest expense 39,274 32,655 113,552 96,261 Depreciation and amortization 22,780 18,354 64,012 54,265 ---------- ---------- ----------- ----------- 168,442 142,913 471,315 410,507 ---------- ----------- ----------- ----------- Gain (loss) on disposition of properties 1,027 - 31,081 (38,637) ---------- ----------- ----------- ----------- EARNINGS (LOSS) BEFORE INCOME TAXES 9,487 12,062 50,998 (1,066) ---------- ----------- ----------- ----------- INCOME TAX EXPENSE (BENEFIT) Current (552) 2,737 2,548 4,387 Deferred 4,871 (1,324) 18,938 (7,785) ---------- ----------- ----------- ----------- 4,319 1,413 21,486 (3,398) ---------- ----------- ----------- ----------- NET EARNINGS BEFORE EXTRAORDINARY GAIN 5,168 10,649 29,512 2,332 Extraordinary gain, net of tax 10,618 - 10,952 14,187 ---------- ----------- ----------- ----------- NET EARNINGS 15,786 10,649 40,464 16,519 Retained earnings at beginning of period 191,294 156,144 168,864 152,077 Dividends on common stock - $.04 per share and $.115 per share in 1998, respectively, and $.03 and $.09 per share in 1997, respectively. (1,199) (900) (3,447) (2,703) ----------- ----------- ----------- ----------- Retained earnings at end of period $ 205,881 $ 165,893 $ 205,881 $ 165,893 =========== =========== =========== =========== BASIC EARNINGS PER COMMON SHARE Weighted average common shares outstanding 29,980,738 30,007,268 29,979,289 28,544,446 =========== =========== =========== =========== Net earnings before extraordinary gain, net of tax $ 0.17 $ 0.35 $ 0.98 $ 0.08 Extraordinary gain, net of tax 0.36 - 0.37 0.50 ----------- ----------- ----------- ----------- NET EARNINGS $ 0.53 $ 0.35 $ 1.35 $ 0.58 =========== =========== =========== =========== DILUTED EARNINGS PER COMMON SHARE Weighted average common shares outstanding 30,148,326 30,081,490 30,174,190 28,592,593 =========== =========== =========== =========== Net earnings before extraordinary gain, net of tax $ 0.17 $ 0.35 $ 0.98 $ 0.08 Extraordinary gain, net of tax 0.35 - 0.36 0.50 ----------- ----------- ----------- ----------- NET EARNINGS $ 0.52 $ 0.35 $ 1.34 $ 0.58 =========== =========== =========== ===========
See notes to consolidated financial statements. FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended October 31, ----------------------------- 1998 1997 ----------- ------------ (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Rents and other revenues received $ 468,440 $ 431,987 Proceeds from land sales 28,527 15,237 Land development expenditures (31,652) (17,400) Operating expenditures (290,562) (272,651) Interest paid (107,800) (96,201) ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 66,953 60,972 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (353,436) (209,999) Proceeds from disposition of assets 33,345 - Investments in and advances to affiliates (73,806) (27,121) ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES (393,897) (237,120) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of senior notes 200,000 - Payments of senior notes issuance costs (6,274) - Increase in nonrecourse mortgage and long-term debt 563,377 225,714 Principal payments on nonrecourse mortgage debt on real estate (284,069) (44,681) Payments on long-term debt (114,000) (76,557) Increase in notes payable 12,340 35,470 Payments on notes payable (39,273) (46,754) Decrease in restricted cash 6,830 3,600 Payment of deferred financing costs (11,155) (5,448) Net proceeds from sale of common stock - 76,084 Sale (purchase) of treasury stock 62 (2,896) Dividends paid to shareholders (3,297) (2,590) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 324,541 161,942 ---------- ----------- NET DECREASE IN CASH (2,403) (14,206) CASH AT BEGINNING OF PERIOD 54,854 41,302 ---------- ----------- CASH AT END OF PERIOD $ 52,451 $ 27,096 ========== ===========
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended October 31, ------------------------------ 1998 1997 ------------ ------------- (in thousands) RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES NET EARNINGS $ 40,464 $ 16,519 Depreciation 46,525 42,974 Amortization 17,487 11,291 Increase (decrease) in deferred income taxes 25,684 (2,241) (Gain) loss on disposition of properties (31,081) 38,637 Extraordinary gain (18,118) (18,272) Increase in land held for development or sale (11,545) (7,296) Decrease in notes and accounts receivable 8,621 7,193 Decrease in inventories 17,762 2,124 Increase in other assets (7,688) (3,566) Decrease in accounts payable and accrued expenses (20,978) (25,344) Decrease in deferred profit (180) (1,047) ---------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 66,953 $ 60,972 ========== ===========
SUPPLEMENTAL NON-CASH DISCLOSURE: The effect of the following non-cash transactions for 1998 are summarized in the table below: * Disposition of interest in Summit Park Mall * Disposition of interest in Trolley Plaza The effect of the following non-cash transactions for 1997 are summarized in the table below: * Increase in interest in Skylight Office Tower * Disposition of interest in Toscana * Reduction of interest in MIT Phase II * Exchange of Woodridge Operating Activities Notes and accounts receivable $ 565 $ (5,072) Other assets 1,138 (121) Accounts payable and accrued expenses 2,760 (6,900) Deferred taxes - 164 ---------- ----------- Total effect on operating activities $ 4,463 $ (11,929) ========== =========== Investing Activities Additions to completed rental property $ - $ (3,498) Dispositions of completed rental property 42,312 56,568 Investments in and advances to affiliates - 4,131 ---------- ----------- Total effect on investing activities $ 42,312 $ 57,201 ========== =========== Financing Activities Assumption of non-recourse mortgage debt $ - $ 3,185 Reduction of non-recourse mortgage debt (46,775) (48,988) Notes payable - 531 ---------- ----------- Total effect on financing activities $ (46,775) $ (45,272) ========== ===========
See notes to consolidated financial statements. FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. Extraordinary Gain The extraordinary gain recorded in the third quarter represents extinguishment of non-recourse debt related to Terminal Tower ($13,947,000 pre-tax) and Skylight Office Tower ($3,619,000 pre tax), both located in Cleveland, Ohio. An extraordinary gain of $552,000 (pre-tax) was recorded in the second quarter as a result of the disposition of Trolley Plaza. B. Senior Notes On March 16, 1998, the Company issued $200,000,000 of 8.50% Senior Notes, due March 15, 2008, in a public offering. Proceeds were used to repay $114,000,000 of its term loan and revolving credit loans. The remaining proceeds are being used to finance projects currently under development and to pursue new real estate opportunities. 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. The indenture contains covenants providing, among other things, limitations on the incurrence of additional debt and payment of dividends. The Senior Notes may be redeemed by the Company, in whole or in part, at any time on or after March 15, 2003 at redemption prices beginning at 104.25% for the year beginning March 15, 2003 and systematically reduced to 100% in the years thereafter. The Company may also redeem up to 33% of the original principal amount prior to March 15, 2001 from proceeds of one or more common stock public offerings at a redemption price of 108.50%. C. Stock Split A two-for-one stock split of the Company's Class A and Class B common stock was paid on July 16, 1998 to shareholders of record on July 1, 1998. The stock split is given retroactive effect to the beginning of the earliest period presented in the accompanying Consolidated Balance Sheets 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 presented in these financial statements have been restated to reflect the stock split. D. Authorized Shares On June 9, 1998, the shareholders approved amendments to the Company's Articles of Incorporation to increase the Company's capitalization to a) 96,000,000 shares of Class A common stock from 48,000,000 shares; and b) 36,000,000 shares of Class B common stock from 18,000,000 shares. E. Dividends The Board of Directors declared regular quarterly cash dividends on both Class A and Class B common shares as follows: Amount Date Date of Payment Per Share Declared Record Date (Post-Split) March 18, 1998 June 1, 1998 June 15, 1998 $.035 June 9, 1998 September 1, 1998 September 15, 1998 $.04 September 8, 1998 December 1, 1998 December 15, 1998 $.04 December 10, 1998 March 1, 1999 March 15, 1999 $.04 F. Earnings per Share The reconciliation of the numerator and denominator of basic earnings per share (EPS) with diluted EPS is as follows: Net Earnings Weighted Net Earnings Before Average Before Extraordinary Shares Extraordinary Gain Outstanding Gain (Numerator) (Denominator) Per Share Three Months Ended October 31, 1998: Basic EPS $ 5,168,000 29,980,738 $0.17 Dilutive effect of stock options - 167,588 Diluted EPS $ 5,168,000 30,148,326 $0.17 Nine Months Ended October 31, 1998: Basic EPS $29,512,000 29,979,289 $0.98 Dilutive effect of stock options - 194,901 Diluted EPS $29,512,000 30,174,190 $0.98 Three Months Ended October 31, 1997: Basic EPS $10,649,000 30,007,268 $0.35 Dilutive effect of stock options - 74,222 Diluted EPS $10,649,000 30,081,490 $0.35 Nine Months Ended October 31, 1997: Basic EPS $ 2,332,000 28,544,446 $0.08 Dilutive effect of stock options - 48,147 Diluted EPS $ 2,332,000 28,592,593 $0.08 G. Treasury Stock During the third quarter, 4,350 shares of Class A treasury stock were sold to employees upon the exercise of their stock options. A gain of $4,024 was recorded to Additional Paid-in Capital as a result of these transactions. H. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. Management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. The enclosed financial statements have been prepared on a basis consistent with accounting principles applied in the prior periods and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the periods presented. All such adjustments were of a normal recurring nature. Results of operations for the nine months ended October 31, 1998 are not necessarily indicative of results of operations which may be expected for the full year. The following Management's Discussion and Analysis of Financial Condition and Results of Operations of Forest City Enterprises, Inc. should be read in conjunction with the financial statements and the footnotes thereto contained in the January 31, 1998 annual report ("Form 10-K"). Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ----------------------------------------------------------------------- GENERAL The Company develops, acquires, owns and manages commercial and residential real estate properties in 21 states and the District of Columbia. The Company owns a portfolio that is diversified both geographically and by property types and operates through four principal business groups: Commercial Group, Residential Group, Land Group and Lumber Trading Group. The Company uses an additional measure, along with net earnings, to report its operating results. This measure, referred to as Earnings Before Depreciation, Amortization and Deferred Taxes ("EBDT"), is not a measure of operating results or cash flows from operations as defined by generally accepted accounting principles. However, the Company believes that EBDT provides additional information about its operations and, along with net earnings, is necessary to understand its operating results. The Company's view is that EBDT is also an indicator of the Companys ability to generate cash to meet its funding requirements. EBDT is defined and discussed in detail under "Results of Operations - EBDT." The Company's EBDT grew by 12.8% (or 12.2% per share) in the third quarter of 1998 to $30,393,000, or $1.01 per share of common stock, from $26,947,000, or $.90 per share of common stock, for the third quarter of 1997. EBDT for the nine months ended October 31, 1998 was $82,211,000, or $2.72 per share, compared to $80,119,000, or $2.80 per share, for the nine months ended October 31, 1997. EBDT for the nine months ended October 31, 1998 grew by 12.4%, excluding $6,991,000 in EBDT in 1997 related to the litigation settlement for Toscana, a 563-unit apartment complex in Irvine, California (see "-Other Transactions - Sale of Toscana"). All per share figures are fully diluted and are adjusted for the Company's two-for-one stock split paid in July 1998. The increase in EBDT is primarily attributable to the acquisitions or openings of fifteen properties during 1998 and a full nine months of operations for the eleven properties that opened during 1997. RESULTS OF OPERATIONS The Company reports its results of operations by each of its four principal business groups as it believes it provides the most meaningful understanding of the Company's financial performance. The major components of EBDT are Revenues, Operating Expenses and Interest Expense, each of which is discussed below. Net Operating Income ("NOI") is defined as Revenues less Operating Expenses. See the information in the table "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 the third quarter of 1998 was $66,357,000 compared to $58,480,000 for the third quarter of 1997, an increase of 13.5%. NOI from the combined Commercial Group and Residential Group for the nine months ended October 31, 1998 was $188,757,000 compared to $175,136,000 for 1997, an increase of 7.8%. NOI in 1997 was affected by the non-recurring $15,000,000 Toscana litigation settlement income (see "Sale of Toscana" below). Adjusting for this item, NOI for the nine months ended October 31, 1998 increased by 17.9% over the comparable period of 1997. COMMERCIAL GROUP REVENUES. Revenues of the Commercial Group increased $8,825,000, or 10.5%, to $93,236,000 in the third quarter of 1998 from $84,411,000 in the third quarter of 1997. This increase is primarily the result of property openings and acquisitions. During 1998, Forest City acquired the 292-room Sheraton Hotel at Station Square in Pittsburgh, Pennsylvania and the 325,000-square-foot Fairmont Plaza office building and adjacent 189,000-square-foot Pavilion retail center in San Jose, California, which increased revenues over last year's third quarter by $4,464,000 and $3,193,000, respectively. Phase II of University Park at MIT in Cambridge, Massachusetts opened during the second quarter of 1998. This mixed-use facility, owned in partnership with MIT, consists of 76,000 square feet of office space, 95,000 square feet of retail space, a 210-room hotel and a 960-space parking facility and generated $1,849,000 of revenues during the third quarter of 1998. Revenues for the third quarter also increased from the openings of properties in the New York City area during 1997 including Nine MetroTech office building in Brooklyn, New York ($1,198,000) and two retail properties in Queens, New York, Northern Boulevard ($1,129,000) and Grand Avenue ($463,000). Richmond Avenue, a retail center in Staten Island, New York, opened in 1998 and generated additional revenues of $444,000. In addition, the Company's increased ownership in two properties resulted in increases to revenues: Antelope Valley Mall in Palmdale, California increased from 40% in 1997 to 78% in 1998 ($1,041,000) and Station Square in Pittsburgh, Pennsylvania increased from 25% in 1997 to 100% in 1998 ($1,907,000). These increases were partially offset by decreases in revenues due to the disposition of the Company's interest in three commercial properties in 1998: the 469,000-square-foot San Vicente office building in Brentwood, California ($897,000), the 695,000-square-foot Summit Park Mall in Wheatfield, New York ($1,319,000) and the Courtyard strip shopping center in Flint, Michigan ($139,000). Additionally, the Commercial Group recorded $4,541,000 of revenues in the third quarter of 1997 from the sale of commercial land that did not recur in the third quarter of 1998. Revenues of the Commercial Group increased $36,319,000, or 15.4%, to $271,593,000 for the nine months ended October 31, 1998 from $235,274,000 for the comparable period of 1997. This increase is primarily the result of the 1998 acquisitions of Sheraton Hotel at Station Square ($9,312,000) and Fairmont Plaza and Pavilion ($4,050,000) and the 1997 acquisitions of additional interests in Antelope Valley Mall ($2,739,000) and Station Square ($5,384,000). Additionally, the openings of several properties in the New York City area in 1997 and 1998 resulted in increased revenues: Nine MetroTech ($4,007,000), Northern Boulevard ($2,972,000), Grand Avenue ($1,328,000), Richmond Avenue ($1,040,000). In addition, Phase II of University Park at MIT opened in 1998 and generated $2,451,000 in revenues, the Ritz-Carlton Hotel recorded revenues of $642,000 over the 1997 results for nine months and the existing Commercial Group portfolio revenues improved by approximately $3,600,000. Revenues also improved for two properties that opened in 1996: Atlantic Center in Brooklyn, New York ($754,000) and Marketplace at Riverpark in Fresno, California ($311,000). These increases were partially offset by a decrease in revenues due to the disposition of the Company's interest in three commercial properties during 1998: San Vicente ($2,315,000), Summit Park Mall ($2,518,000) and Courtyard ($420,000). OPERATING AND INTEREST EXPENSES. During the third quarter of 1998, operating expenses for the Commercial Group increased $6,023,000, or 14.6%, to $47,294,000 from $41,271,000 in the third quarter of 1997. The increase in operating expenses was attributable primarily to costs associated with the acquisitions of the Sheraton Hotel at Station Square ($3,168,000) and Fairmont Plaza ($1,157,000) and the openings of Phase II at University Park at MIT ($1,510,000) and Nine MetroTech ($463,000). In addition, operating expenses increased due to the 1997 acquisitions of increased ownership percentages in Antelope Valley Mall ($378,000) and Station Square ($1,298,000). These increases were partially offset by decreases in operating expenses of $883,000 and $356,000 as a result of the dispositions of Summit Park Mall and San Vicente, respectively. Interest expense for the third quarter of 1998 increased by $3,668,000, or 18.2%, to $23,864,000 from $20,196,000 for the third quarter of 1997. The increase in interest expense is attributable primarily to the openings of Phase II at University Park at MIT and new properties in the New York City area and the acquisitions of Sheraton Hotel at Station Square and Fairmont Plaza and increased ownership percentages in Antelope Valley Mall and Station Square. During the nine months ended October 31, 1998, operating and interest expenses increased $18,268,000 and $7,871,000 (15.6% and 12.9%), respectively, over the comparable period in 1997 to $135,578,000 and $68,890,000, respectively. The increase in operating expenses is primarily attributable to costs associated with the acquisitions of the Sheraton Hotel at Station Square ($6,302,000) and Fairmont Plaza ($1,568,000), the openings of Phase II at University Park at MIT ($1,954,000), Nine MetroTech ($1,393,000) and new retail properties in the New York City boroughs ($1,414,000), and increased occupancy at the Ritz-Carlton Hotel ($518,000). In addition, operating expenses increased due to the 1997 acquisitions of increased ownership percentages in Antelope Valley Mall ($1,129,000) and Station Square ($3,824,000), and general portfolio operating expenses increased approximately $3,000,000 as a result of increased occupancy. These increases were partially offset by decreases in operating expenses of $1,585,000 and $1,141,000 as a result of the dispositions of Summit Park Mall and San Vicente, respectively. The increase in interest expense is attributable primarily to the openings of Phase II at University Park at MIT and new properties in the New York City area and the acquisitions of Sheraton Hotel at Station Square and Fairmont Plaza and additional interests in Antelope Valley Mall and Station Square. RESIDENTIAL GROUP REVENUES. Revenues for the Residential Group increased by $4,359,000, or 14.0%, in the third quarter of 1998 to $35,599,000 from $31,240,000 in the third quarter of 1997. This increase was primarily attributable to the sale of Forest City Capital Corporation ($1,329,000), which was a mortgage servicing division of Residential Group and the recognition of development and syndication fees on several projects of $1,038,000 in excess of the third quarter of 1997. Revenues also increased as a result of 1997 acquisitions of Whitehall Terrace in Kent, Ohio ($350,000) and Colony Woods in Bellevue, Washington ($276,000) as well as the 1998 acquisitions of the 534-unit Woodlake Apartments in Silver Spring, Maryland ($1,062,000), a 50% interest in the 342-unit Park Plaza in Mayfield Heights, Ohio ($319,000) and an additional 20% interest in the 450-unit Studio Colony apartment community in Los Angeles, California ($391,000). In addition, revenues increased $271,000 over the third quarter of last year from the expansion of 294 units during 1997 to three apartment communities in Cleveland, Ohio. These increases are partially offset by the decrease in revenues of $697,000 as the result of the 1998 disposition of Trolley Plaza in Detroit, Michigan. Revenues for the Residential Group decreased by $4,227,000 in the nine months ended October 31, 1998 to $99,860,000 from $104,087,000 for the comparable period in 1997. Excluding the $15,000,000 in proceeds from the Toscana litigation settlement received in 1997 (see "Other Transactions - Sale of Toscana" below), revenues for the nine months ended October 31, 1998 increased $10,773,000, or 12.1%, over the comparable period of 1997. This increase was primarily attributable to the 1997 acquisitions of Museum Towers ($1,128,000) and Whitehall Terrace ($1,017,000) and the 1998 acquisitions of Woodlake ($1,062,000), Park Plaza ($464,000) and an additional 20% interest in Studio Colony ($1,198,000). In addition, revenues increased $878,000 over last year from the expansion of 294 units during 1997 at three apartment communities in Cleveland, Ohio. Revenues of the existing operating portfolio of the Residential Group increased approximately $2,600,000, $785,000 more in revenues were recorded over last year due to the sale of Forest City Capital Corporation and development and syndication fees increased $2,236,000 for the nine months ended October 31, 1998 compared to 1997. These increases were partially offset by a decrease in revenues of $619,000 as a result of the disposition of Trolley Plaza. OPERATING AND INTEREST EXPENSES. Operating expenses for the Residential Group for the third quarter of 1998 decreased by $716,000, or 4.5%, to $15,184,000 from $15,900,000 in the third quarter of 1997. The decrease in operating expenses is attributable primarily to the $2,500,000 reduction in a reserve for collection of the note receivable from Millender Center, a mixed-use facility in downtown Detroit, Michigan. This decrease was partially offset by increases in operating expenses from the 1997 acquisitions of Colony Woods ($94,000) and Whitehall Terrace ($123,000) and the 1998 acquisitions of Woodlake ($460,000), Park Plaza ($152,000) and an additional 20% interest in Studio Colony ($92,000). In addition, operating expenses increased $175,000 over last year due to the expansion of 294 units at three apartment communities in Cleveland, Ohio and $547,000 in additional costs were associated with the generation of increased development fees. Interest expense for the third quarter of 1998 decreased by $1,580,000, or 20.4%, to $6,167,000 from $7,747,000 in the third quarter of 1997. This decrease is the result of an increase in capitalized interest of $2,695,000 related to the increased Residential development program. This decrease was partially offset by increases in interest expense from debt incurred to acquire Woodlake ($297,000), Park Plaza ($97,000), Whitehall Terrace ($90,000) and an additional 20% interest in Studio Colony ($88,000) and to renovate Colony Woods ($237,000). Operating expenses for the Residential Group for the nine months ended October 31, 1998 increased by $203,000, or .4%, to $47,118,000 from $46,915,000 for the comparable period of 1997. The increase in operating expenses is attributable primarily to the 1997 acquisitions of Museum Towers ($317,000), Colony Woods ($658,000) and Whitehall Terrace ($421,000), the 1998 acquisition of Woodlake ($460,000) and the addition of 294 units at three apartment communities in Cleveland, Ohio ($414,000). In addition, the Residential Group incurred $1,310,000 in additional costs associated with the generation of development fees. These increases were partially offset by a $3,500,000 reduction in a reserve for collection of the note receivable from Millender Center. Interest expense for the nine months ended October 31, 1998 decreased by $1,573,000, or 7.2%, to $20,144,000 from $21,717,000 for the comparable period of 1997. This decrease is primarily due to increased capitalized interest of $3,746,000 related to the increased Residential development program. This decrease was partially offset by an increase in interest expense from debt incurred to acquire Museum Towers ($182,000), Woodlake ($297,000), Park Plaza ($110,000), Whitehall Terrace ($271,000) and an additional 20% interest in Studio Colony ($191,000). In addition, interest expense increased in the Residential Group for the nine months ended October 31, 1998 over the comparable period of 1997 as a result of additional debt incurred to renovate Colony Woods ($281,000) and the addition of 294 apartment units to three existing communities in Cleveland, Ohio ($264,000). LAND GROUP REVENUES. Revenues for the Land Group increased by $10,183,000 to $15,090,000 in the third quarter of 1998 from $4,907,000 in the third quarter of 1997. Revenues for the Land Group increased by $15,713,000 from $12,224,000 in the nine months ended October 31, 1997 to $27,937,000 for the comparable period of 1998. Sales of land and related earnings vary from period to period, depending on management's decisions regarding the disposition of significant land holdings. OPERATING AND INTEREST EXPENSES. Operating expenses and interest expense increased by $8,875,000 and $1,023,000, respectively, in the third quarter of 1998 to $12,739,000 and $2,633,000, respectively, from $3,864,000 and $1,610,000, respectively, in the third quarter of 1997. The fluctuation in operating expenses primarily reflects costs associated with land sales volume in each period. The increase in interest expense was due primarily to a higher level of interest-bearing debt. Operating expenses and interest expense increased by $12,931,000 and $2,624,000, respectively, in the nine months ended October 31, 1998 to $23,205,000 and $6,927,000, respectively, from $10,274,000 and $4,303,000, respectively, in the nine months ended October 31, 1997. The fluctuation in operating expenses primarily reflects costs associated with land sales volume in each period. The increase in interest expense was due primarily to a higher level of interest-bearing debt. LUMBER TRADING GROUP REVENUES. Revenues of the Lumber Trading Group decreased by $1,193,000, or 3.5%, to $32,781,000 in the third quarter of 1998 from $33,974,000 in the third quarter of 1997. The decrease was due primarily to a lower level of trading activity in 1998 compared to 1997 ($405,000) and an decrease in volume at Forest City/Babin, a wholesaler of major appliances, cabinets and hardware to housing contractors ($788,000). Revenues for the Lumber Trading Group for the nine months ended October 31, 1998 decreased $3,718,000, or 3.9%, to $90,659,000 from $94,377,000 for the comparable period of 1997. The decrease was due primarily to a reduced level of trading activity in 1998 compared to 1997 ($2,572,000) and a decrease in volume at Forest City/Babin, a wholesaler of major appliances, cabinets and hardware to housing contractors ($1,146,000). OPERATING AND INTEREST EXPENSES. Operating expenses in the Lumber Trading Group increased in the third quarter of 1998 by $833,000, or 2.9%, to $29,483,000 from $28,650,000 in the third quarter of 1997. This increase reflected the fluctuation in variable expenses due to lower trading margins compared to last year ($1,559,000), net of decreased operating expenses at Forest City/Babin ($726,000) as a result of a decrease in sales volume compared to last year. Interest expense for the third quarter of 1998 decreased by $162,000, or 11.9% to $1,197,000 from $1,359,000 in the third quarter of 1997. This increase in interest expense was primarily due to lower average borrowings under Lumber Trading Group's credit facility. Operating expenses in the Lumber Trading Group decreased in the nine months ended October 31, 1998 by $139,000, or .2%, to $82,033,000 from $82,172,000 for the comparable period of 1997. This decrease reflected the reduction in operating expenses at Forest City/Babin ($934,000) as a result of a decrease in sales volume compared to last year, partially offset by an increase in expenses due to lower trading margins compared to last year ($795,000). Interest expense for the nine months ended October 31, 1998 increased by $304,000, or 7.7% to $4,253,000 from $3,949,000 for the nine months ended October 31, 1997. This increase in interest expense was primarily due to higher average borrowings under Lumber Trading Group's credit facility. CORPORATE ACTIVITIES REVENUES. Corporate Activities' revenues decreased $247,000 in the third quarter of 1998 to $196,000 from $443,000 in the third quarter of 1997. Corporate Activities' revenues decreased $933,000 for the nine months ended October 31, 1998 to $1,183,000 compared to $2,116,000 for the same period in 1997. 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 of loans outstanding. OPERATING AND INTEREST EXPENSES. Operating expenses of Corporate Activities decreased $443,000 in the third quarter of 1998 to $2,605,000 from $3,048,000 in the third quarter of 1997. Operating expenses increased for the nine months ended October 31, 1998 by $2,786,000 to $8,397,000 from $5,611,000 for the comparable period of 1997. These increases represent general corporate expenses, including amortization of costs associated with the 1998 public offering of Senior Notes (see "Financial Condition and Liquidity"). Interest expense increased $3,670,000 in the third quarter of 1998 to $5,413,000 from $1,743,000 in the third quarter of 1997. Interest expense for the nine months ended October 31, 1998 increased $8,065,000 to $13,338,000 from $5,273,000 for the comparable period of 1997. Corporate Activities interest expense consists primarily of interest expense on the 8.50% Senior Notes (issued on March 16, 1998) and the FCRPC Credit Facility that has not been allocated to a principal business group (see "Financial Condition and Liquidity"). Beginning in the fourth quarter of 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 GAIN (LOSS) ON DISPOSITION OF PROPERTIES - Gain (loss) on disposition of properties, net of tax, totaled a gain of $554,000 in the third quarter of 1998. Gain (loss) on disposition of properties, net of tax, totaled a gain of $18,722,000 for the nine months ended October 31, 1998 compared to a loss of $23,356,000 for the nine months ended October 31, 1997. During the third quarter of 1998, the Company sold its 20% interests in three apartment buildings in Houston, Texas (Copper Creek, Greenbriar and Woodforest Glen) and recorded a pre-tax gain on disposition of $1,027,000. During the second quarter of 1998, the Company disposed of its interests in Summit Park Mall, a regional shopping center in suburban Buffalo, New York and Trolley Plaza, an apartment community in downtown Detroit, Michigan and recognized pre-tax gains of $14,088,000 and $4,941,000, respectively. During the first quarter of 1998, the Company sold its interests in San Vicente, an office building in Brentwood, California and Courtyard, a strip shopping center in Flint, Michigan. The Company recognized pre-tax gains on disposition of $10,403,000 on San Vicente and $622,000 on Courtyard. During the second quarter of 1997, the Company recorded a pre-tax loss of $3,133,000 on the disposition of its interest in Woodridge, a land development project in suburban Chicago, Illinois. During the first quarter of 1997, the Company recorded a loss on disposition of Toscana of $35,505,000 ($21,462,000 after tax / see "- Sale of Toscana"). EXTRAORDINARY GAIN - Extraordinary gain, net of tax, totaled $10,618,000 in the third quarter of 1998. Extraordinary gain, net of tax, totaled $10,952,000 and $14,187,000 for the nine months ended October 31, 1998 and 1997, respectively. The 1998 extraordinary gain recorded in the third quarter represents extinguishment of non-recourse debt related to Terminal Tower ($13,947,000 pre-tax) and Skylight Office Tower ($3,619,000 pre-tax), both located in Cleveland, Ohio. In addition, extraordinary gain of $552,000 (pre-tax) was recorded in the second quarter as a result of the disposition of Trolley Plaza. The 1997 extraordinary gain represented pre-tax earnings of $18,272,000 for the extinguishment of nonrecourse debt and related accrued interest of Toscana (see "- Sale of Toscana"). SALE OF TOSCANA - During the first quarter of 1997, the Company sold Toscana, a 563-unit apartment complex in Irvine, California, back to the original landowner and settled litigation related to the property. As a result, the Company recorded operating income of $9,157,000, after tax, a loss on disposition of property of $21,462,000, after tax, and an extraordinary gain of $14,187,000, 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 was after-tax income of $1,882,000. INCOME TAXES - Income tax expense for the third quarter of 1998 and 1997 totaled $4,319,000 and $1,413,000, respectively. Income tax expense (benefit) for the nine months ended October 31, 1998 and 1997 totaled $21,486,000 and ($3,398,000), respectively. 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. NET EARNINGS - In the third quarter of 1998, the Company's net earnings grew to $15,786,000, or $.52 per share of common stock, from $10,649,000, or $.35 per share of common stock, in the third quarter of 1997. For the nine months ended October 31, 1998, the Company's net earnings grew to $40,464,000, or $1.34 per share of common stock, from $16,519,000, or $.58 per share of common stock, for the nine months ended October 31, 1997. All per share amounts are diluted and adjusted for the two-for-one stock split that was effective July 16, 1998. EBDT - Earnings Before Depreciation, Amortization and Deferred Taxes ("EBDT") is defined as net earnings from operations before depreciation, amortization and deferred taxes on income, and excludes provision for decline in real estate, gain (loss) on disposition of properties and extraordinary gain. The Company excludes depreciation and amortization expense related to real estate operations from EBDT because they are non-cash items and the Company believes the values of its properties, in general, have appreciated, over time, in excess of their original cost. Deferred income taxes from real estate operations are excluded because they are a non-cash item. 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 in 8.50% senior notes due March 15, 2008 in a public offering. Proceeds from the sale of these notes were initially 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 that arise from current favorable market conditions. On December 10, 1997, and as amended on January 20, 1998 and March 6, 1998, 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", a significant subsidiary of the Company) Credit Agreement. The FCRPC Credit Agreement with a group of nine banks is a $225,000,000 revolving credit facility maturing December 10, 2000, unless extended, and provides for 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 October 31, 1998, the Company had $95,000,000 recourse debt outstanding under the FCRPC Credit Agreement. The FCRPC Credit Agreement provides, among other things, for 1) interest rates ranging from 1/4% to 3/4% over the prime rate or 2% to 2-1/2% over the London Interbank Offered Rate ("LIBOR"); 2) maintenance of debt service coverage ratio, 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 non-recourse 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." MORTGAGE REFINANCINGS During the nine months ended October 31, 1998, the Company completed $714,000,000 in financings, including $364,000,000 in refinancings, $239,000,000 for new development projects and $111,000,000 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 the recent low interest rate levels. The Company has purchased $170,850,000 (including its partners' share) in Treasury options to ensure Treasury rates will not exceed 6.00% for construction debt which is anticipated to be converted to permanent fixed-rate debt by February 1, 2000. INTEREST RATE EXPOSURE At October 31, 1998, the composition of nonrecourse mortgage debt is as follows: Amount Rate (1) ------------- -------- (in thousands) Fixed $ 1,494,032 7.64% Variable - Swapped (2) 184,881 8.09% Adjustable 231,517 6.76% Tax-Exempt 155,424 5.14% UDAG and other subsidized loans (fixed) 72,492 2.73% ---------- $2,138,346 7.22% ========== (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 1.0 years as of October 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 interest rate cap protection for its variable-rate debt portfolio in the amount of $293,675,000, $394,503,000 and $366,751,000 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 October 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 $2,300,000. 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 $1,600,000. LUMBER TRADING GROUP LIQUIDITY The Lumber Trading Group is separately financed with two revolving lines of credit and a non-recourse accounts receivable sale program. These credit facilities are without recourse to the Company. At October 31, 1998 Lumber Trading Group's two lines of credit totaled a $67,000,000 commitment expiring June 30, 1999. These credit lines are secured by the assets of the Lumber Trading Group and are used by the Trading Group to finance its working capital needs. At October 31, 1998, $4,056,000 was outstanding under these facilities. The Lumber Trading Group also has sold an undivided ownership interest in a pool of accounts receivable of up to a maximum of $91,800,000 and uses this program to finance its working capital needs. At October 31, 1998, $58,000,000 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 $66,953,000 and $60,972,000 for the nine months ended October 31, 1998 and 1997, respectively. The increase in net cash provided by operating activities in 1998 from 1997 is the result of an increase in rents and other revenues received of $36,453,000, partially offset by an increase of $17,911,000 in operating expenses and a $11,599,000 increase in interest paid. Net cash used in investing activities totaled $393,897,000 and $237,120,000 for the nine months ended October 31, 1998 and 1997, respectively. Capital expenditures, other than development and acquisition activities, totaled $43,664,000 during the nine months of 1998 (including both recurring and investment capital expenditures) and were financed primarily from cash on hand at the beginning of the year. During the nine months ended October 31, 1998, net cash used in investing activities reflected the Company's use of $309,772,000 of funds for acquisition and development activities, which were financed with $188,739,000 in new mortgage indebtedness, proceeds from the issuance of senior notes, and borrowings under the FCRPC Credit Agreement. In addition, $73,806,000 was used for investments in and advances to affiliates, and includes investments in the following Residential Group projects, which have been syndicated: The Grand in North Bethesda, Maryland ($5,556,000); The Enclave ($12,754,000) and 101 San Fernando ($19,312,000), both located in San Jose, California; Tobacco Row in Richmond, Virginia ($3,358,000); The Drake in Philadelphia, Pennsylvania ($12,125,000) and four apartment communities in the Hamptons/Newport News area of Virginia ($7,950,000). The four properties are known as Bridgewater, Trellis, Arboretum and Silver Hills. In addition, the Company has advanced $4,224,000 on behalf of its partner in the Promenade at Temecula regional mall that is currently under construction and scheduled to open in Fall of 1999 and $7,700,000 was advanced on behalf of Forest City's partner in the various real estate projects in the New York City area. Net cash used in investing activities for the nine months ended October 31, 1997 included $31,609,000 in capital expenditures other than development and acquisition activities (including both recurring and investment capital expenditures) and were financed primarily with cash provided by operating activities. The nine months ended October 31, 1997 also reflected the use of $178,390,000 of funds for development and acquisition activities, which were financed with approximately $135,000,000 in new mortgage indebtedness and proceeds from the sale of common stock. In addition, $27,121,000 was used for investments in and advances to affiliates, primarily related to Forest City's partner in New York City ($8,400,000), The Grand ($9,700,000) and temporary advances for financing commitments ($6,000,000). Net cash provided by financing activities totaled $324,541,000 and $161,942,000 in the nine months ended October 31, 1998 and 1997, respectively. Net proceeds from the issuance of senior notes in March 1998 were $193,726,000, which were initially used to repay $114,000,000 outstanding under the FCRPC Credit Agreement. The Company's refinancing of mortgage indebtedness is discussed above in "Mortgages Refinancings" and borrowings under new mortgage indebtedness for acquisition and development activities is included in the preceding paragraph discussing net cash used in investing activities. Net cash provided by financing activities for the nine months ended October 31, 1998 reflected a reduction of $6,830,000 in restricted cash related to the financing of The Enclave apartment project in San Jose, California. In addition, the Company reported a net decrease of $26,933,000 in notes payable (primarily as a result of repayment of $14,968,000 of borrowings under Lumber Trading Group's lines of credit and $8,117,000 repayment of notes payable by the Land Group), payment of deferred financing costs of $11,155,000 and payment of $3,297,000 of dividends. During the nine months ended October 31, 1997, cash provided by financing activities included proceeds from the sale of common stock of $76,084,000, repayment of $17,628,000 on Lumber Trading Group's lines of credit, the release of $3,600,000 in restricted cash related to the Atlantic Center retail project in Brooklyn, New York, 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, and repayment of a land note of $5,521,000. In addition, financing activities for the nine months ended October 31, 1997 included the payment of deferred financing costs of $5,448,000, purchase of treasury stock for $2,896,000 and payment of $2,590,000 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 has sold approximately $82,000,000 through an equity offering completed on May 20, 1997, $200,000,000 through a debt offering completed on March 16, 1998 and currently has available on the second shelf registration statement approximately $218,000,000 of debt, equity or any combination thereof. STOCK SPLIT, CAPITALIZATION AND DIVIDENDS The Board of Directors approved a two-for-one stock split of both the Company's Class A and Class B Common Stock, effective July 16, 1998 to shareholders of record at the close of business on July 1, 1998. The stock split was effected as a stock dividend. On June 9, 1998, the Board of Directors voted to increase the 1998 quarterly dividend, adjusted for the two-for-one stock split, to $.04 per share on both Class A and Class B, representing a 14.3% annual increase in the previous quarterly dividend. The first 1998 quarterly dividend of $.07 per share (on a pre-split basis) 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 a pre-split basis) on shares of both Class A and Class B Common Stock was paid on June 15, 1998 to shareholders of record at the close of business on June 1, 1998. The third 1998 quarterly dividend of $.04 per share (post-split) on shares of both Class A and Class B Common Stock was paid on September 15, 1998 to shareholders of record at the close of business on September 1, 1998. The fourth 1998 quarterly dividend of $.04 per share (post-split) on shares of both Class A and Class B Common Stock will be paid on December 15, 1998 to shareholders of record at the close of business on December 1, 1998. The first 1999 quarterly dividend of $.04 per share on shares of both Class A and Class B will be paid on March 15, 1999 to shareholders of record at the close of business on March 1, 1999. On June 9, 1998, the shareholders approved an amendment to the Company's Articles of Incorporation to increase the Company's capitalization to a) 96,000,000 shares of Class A Common Stock from 48,000,000 shares and b) 36,000,000 shares of Class B Common Stock from 18,000,000 shares. The 5,000,000 Preferred shares remained unchanged. YEAR 2000 Forest City Enterprises, Inc. has undertaken a program to prepare the Company's financial and operating computer systems and embedded applications for the Year 2000. All necessary modifications are expected to occur in a timely manner at a cost which is not expected to be material to the Company's operating results. During 1997, the Company completed the final phases of the replacement of older mainframe systems. All major systems were replaced with newly purchased Year 2000 compliant software or software with definitive plans for upgrades to Year 2000 code. This conversion covered the Company's corporate organization and three business groups, Commercial, Residential and Land. Also in 1997, Lumber Trading Group successfully converted their internal systems to Year 2000 compliant code. Finally, Forest City/Babin, a division of Lumber Trading Group, has also completed the upgrade of its software to Year 2000 compliant code. The Company's policy is to acquire Year 2000 compliant software and to avoid developing internal software. With most of the Company's core businesses now using Year 2000 compliant software code, Forest City's plan is concentrating on testing the compliant systems and identifying other systems, such as embedded systems, that are not part of the new software. The specific steps of the Company's plan include: * Capturing an inventory of all systems including: * The new Year 2000 compliant software. * Computer related hardware and peripherals. * Internal systems that may have been developed utilizing the compliant code. * Embedded systems, including the Company's environmental, water, power, utilities, telecommunications, lighting, elevator, fire control, parking, security and internal administrative systems. * Obtaining compliance letters from all vendors in the inventory; * Contacting the Company's major business partners (suppliers, contractors, utilities, financial institutions, etc.) to insure that they have an active Year 2000 compliance program. * Testing systems for compliance; * Upgrading or replacing software and operational or embedded systems as needed. In September 1996 senior management and the audit committee were alerted of the Year 2000 issue and have been provided a quarterly report regarding the Company's Year 2000 compliance plan. Forest City's external auditors have been reviewing our plan and progress. Each principal business group has formed a Year 2000 compliance committee under senior management direction. Each committee is coordinated at the company level to share issues and eliminate duplication of efforts. All employees and business associates have been informed of the issues and their help has been solicited in identifying systems that may have not been discovered in the inventory process. As part of the due diligence in the acquisitions of new properties, the Company reviews Year 2000 compatibility. Forest City has updated the terms and conditions of its purchasing function to require goods and services purchased to be Year 2000 compliant. The collection of the inventory for both software and embedded systems is complete. The inventory gathering and testing for embedded systems, particularly for our shopping centers and offices, included over 70 different systems to be considered for review. For each property, the Company gathered information related to environmental (HVAC, energy management, programmable thermostats), water (cooling, heating, purification, irrigation), power (generation, uninterrupted power supply power management systems), utilities, telecommunications, lighting, elevator/elevator, fire control, parking, security, and internal administrative systems. Forest City has made excellent progress in notifying vendors and business partners. This phase of the Year 2000 project, originally planned for completion in the 3rd quarter 1998, will now be completed in the 4th quarter 1998. The responses have not always been definitive and reliance, in some cases, must be made on the MD&A discussions in the quarterly and yearly filings of certain vendors and partners where appropriate. The Company is actively testing its systems for Year 2000 compliance. Software has been acquired to review systems that have been written in Year 2000 compliant code, but may be generating non-compliant dates or logic. Through the 3rd quarter 1998, testing has discovered some Year 2000 issues, which have been corrected. Specifically, certain data communications equipment was not compliant and has been replaced. Forest City's project cost accounting software, originally documented by the vendor as compliant, is not compliant. The Company escalated the upgrade to the next version and that software is now compliant. The general ledger system had generated some historical data with dates that might not be compliant and these were corrected. The upgrading of the general ledger software is proceeding as planned to be Year 2000 compliant. Finally, a possible issue with one of our automated software scheduling systems has been identified and will be corrected with the upgrade of the general ledger system. The Company expects to complete the testing phase by the end of the 4th quarter 1998 and does not foresee any major difficulties in becoming Year 2000 compliant. Forest City has tested most of the embedded systems, particularly those related to the safety of our employees, tenants and customers. Where the Company has not received Year 2000 certification from the embedded systems vendors, instructions for resolution have been received. The testing has determined that an energy management system interface at one of the Company's facilities will need to be upgraded at a cost to be determined. At the end of 1997, Forest City completed the migration of its property management, development accounting, and company-wide general ledger and reporting systems from the older mainframe environment. The total project costs including hardware, software, implementation and training were approximately $4 million. The intent of this conversion was to move from the mainframe to newer technology, support planned company growth and improve reporting systems. As a by-product, Year 2000 compliant software was installed or software with planned upgrades to be compliant and the costly process of converting our internally developed systems into Year 2000 code was avoided. Through testing, it has been determined that some hardware will need to be replaced. Regardless of the Year 2000 issue, this hardware would have been upgraded in a normal replacement cycle. Most all of the required software upgrades are part of our normal operating expenses and have not generated additional expense specifically for Year 2000 compliance. Except for the one energy management system interface that will need upgrading, the Company does not foresee any major additional costs and believes that the costs incurred will not have a material impact on operations. Since Forest City's major hardware, software and embedded systems are or will be compliant, the Company does not foresee any major risks. The Company has identified concerns in each area and the contingency plan to respond to each concern. Related to hardware, the most likely worst case scenario would be if a specific computer or server would not be compatible. In that case, the Company would use other hardware, provided by our business continuity/disaster recovery program, that is compliant and available to regenerate data from our backup systems. Related to software, the most likely worst case scenario would be if the automated software scheduling routines would not properly schedule in the Year 2000 and beyond. Each of these automated scheduling systems has a manual function, which has been tested, and the Company is confident that the scheduling software can be reset to perform properly in the Year 2000 and beyond. Related to embedded systems, the Company's primary concern is that these systems, despite testing, would not function properly in the Year 2000. All of these systems have manual reset functions and Year 2000 date issues can be corrected. Additionally, Forest City will have appropriate personnel, and outside contractors if necessary, on site starting the evening of December 31, 1999 and the ensuing weekend to reset the functions if necessary. The Company does not believe any of the systems related to the safety of the properties' tenants or customers will be affected. Similar to other companies, Forest City is highly dependent upon systems in the public sector, such as utilities, mail, and transportation systems. Failures in those systems, upon which the Company has no control, could materially affect operations. The property sites have well defined emergency plans in place, and these would be activated if necessary. The Year 2000 plan is aimed at identifying and correcting all issues upon which Forest City has direct control or indirect control through its vendors and business partners. The Company feels that the successful completion of its Year 2000 program will minimize the effect on operations. INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS This 10Q, 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. FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES FOR THE THIRD QUARTER ENDED OCTOBER 31, 1998 AND 1997 (IN THOUSANDS)
Commercial Group Residential Group Land Group -------------------- -------------------- --------------------- 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- ---------- ---------- Revenues $ 93,236 $ 84,411 $ 35,599 $ 31,240 $15,090 $ 4,907 Operating expenses, including depreciation and amortization for non- real estate Groups 47,294 41,271 15,184 15,900 12,739 3,864 Interest expense 23,864 20,196 6,167 7,747 2,633 1,610 Income tax provision (benefit) (770) 1,756 3,041 940 (76) (2,199) --------- --------- --------- --------- ---------- ---------- 70,388 63,223 24,392 24,587 15,296 3,275 --------- --------- --------- --------- ---------- ---------- Earnings before depreciation, amortization and deferred taxes (EBDT) $ 22,848 $ 21,188 $11,207 $ 6,653 $ (206) $ 1,632 ========= ========= ========= ========= ========== ========== Lumber Trading Group Corporate Activities Total -------------------- -------------------- --------------------- 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- ---------- ---------- Revenues $ 32,781 $ 33,974 $ 196 $ 443 $ 176,902 $ 154,975 Operating expenses, including depreciation and amortization for non- real estate Groups 29,483 28,650 2,605 3,048 107,305 92,733 Interest expense 1,197 1,359 5,413 1,743 39,274 32,655 Income tax provision (benefit) 933 1,376 (3,198) 767 (70) 2,640 --------- --------- --------- --------- ---------- ---------- 31,613 31,385 4,820 5,558 146,509 128,028 --------- --------- --------- --------- ---------- ---------- Earnings before depreciation, amortization and deferred taxes (EBDT) $ 1,168 $ 2,589 ($4,624) ($ 5,115) $ 30,393 $ 26,947 ========= ========= ========= ========= ========== ========== Reconciliation to net earnings: Earnings before depreciation, amortization and deferred taxes (EBDT) $ 30,393 $ 26,947 Depreciation and amortization - real estate Groups (21,863) (17,525) Deferred taxes - real estate Groups (3,916) 1,227 Gain on disposition of properties, net of tax 554 0 Extraordinary gain, net of tax 10,618 0 ---------- ---------- Net earnings $ 15,786 $ 10,649 ========== ==========
FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 AND 1997 (IN THOUSANDS)
Commercial Group Residential Group Land Group -------------------- -------------------- --------------------- 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- ---------- ---------- Revenues $271,593 $235,274 $ 99,860 $104,087 $27,937 $ 12,224 Operating expenses, including depreciation and amortization for non- real estate Groups 135,578 117,310 47,118 46,915 23,205 10,274 Interest expense 68,890 61,019 20,144 21,717 6,927 4,303 Income tax provision (benefit) 2,573 2,326 4,769 9,039 (830) (2,897) --------- --------- --------- --------- ---------- ---------- 207,041 180,655 72,031 77,671 29,302 11,680 --------- --------- --------- --------- ---------- ---------- Earnings before depreciation, amortization and deferred taxes (EBDT) $ 64,552 $ 54,619 $27,829 $26,416 $(1,365) $ 544 ========= ========= ========= ========= ========== ========== Lumber Trading Group Corporate Activities Total -------------------- -------------------- --------------------- 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- ---------- ---------- Revenues $ 90,659 $ 94,377 $ 1,183 $ 2,116 $ 491,232 $ 448,078 Operating expenses, including depreciation and amortization for non- real estate Groups 82,033 82,172 8,397 5,611 296,331 262,282 Interest expense 4,253 3,949 13,338 5,273 113,552 96,261 Income tax provision (benefit) 2,089 3,260 (9,463) (2,312) (862) 9,416 --------- --------- --------- --------- ---------- ---------- 88,375 89,381 12,272 8,572 409,021 367,959 --------- --------- --------- --------- ---------- ---------- Earnings before depreciation, amortization and deferred taxes (EBDT) $ 2,284 $ 4,996 ($11,089) ($ 6,456) $ 82,211 $ 80,119 ========= ========= ========= ========= ========== ========== Reconciliation to net earnings: Earnings before depreciation, amortization and deferred taxes (EBDT) $ 82,211 $ 80,119 Depreciation and amortization - real estate Groups (61,432) (51,964) Deferred taxes - real estate Groups (9,989) (2,467) Gain (loss) on disposition of properties, net of tax 18,722 (23,356) Extraordinary gain, net of tax 10,952 14,187 ---------- ---------- Net earnings $ 40,464 $ 16,519 ========== ==========
PART II - OTHER INFORMATION Item 1. Legal Proceedings An action was filed in August 1997 against Forest City Trading Group, Inc. (a wholly-owned subsidiary of the Company) and 10 of its subsidiaries, all of which are in the business of trading lumber. The complaint alleged improper calculation and underpayment of commissions and other related claims. On September 11, 1998 Plaintiffs filed a Motion for Class Certification. On December 8, 1998 the court posted an order denying class certification. The lawsuit is now limited to the original four Plaintiffs which has eliminated any materiality of the lawsuit. The Company, through subsidiaries, owns a 14.6% interest in the Seven Hills housing development, located in Henderson, Nevada, which is owned by the Silver Canyon Partnership and is being developed in conjunction with a golf course. In August 1997, a class-action lawsuit was filed by the current homeowners in Seven Hills against the Silver Canyon Partnership, the golf course developers and other entities, including the Company. In addition, separate lawsuits were filed by some of the production homebuilding companies at Seven Hills, against some of the same parties, not including the Company. Each of these lawsuits sought a commitment for public play on the golf course, as well as damages and in October 1998, the court granted play rights. Sales efforts are continuing at the Seven Hills development, and because these events are recent, it is not yet possible to determine the extent of any impact on the Partnership's financial performance. The Company believes that any exposure will be limited to the Silver Canyon Partnership and is not expected to have a material adverse effect upon the financial condition, results of operations or cash flows of the Company. Item 6. Exhibits and Reports on Form 8-K. Exhibit Number Description of Document - ------- ----------------------- 3.1 Amended Articles of Incorporation adopted as of October 11, 1983, incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended October 31, 1983 (File No. 1-4372). 3.2 Code of Regulations as amended June 14, 1994, incorporated by reference to Exhibit 3.2 to the Company's Form 10-K for the fiscal year ended January 31, 1997 (File No.1-4372). 3.3 Certificate of Amendment by Shareholders to the Articles of Incorporation of Forest City Enterprises, Inc. dated June 24, 1997, incorporated by reference to Exhibit 4.14 to the Company's Registration Statement on Form S-3 (Registration No. 333-41437). 3.4 Certificate of Amendment by Shareholders to the Articles of Incorporation of Forest City Enterprises, Inc. dated June 16, 1998, incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Registration No. 333-61925). 4.1 Form of Senior Subordinated Indenture between the Company and National City Bank, as Trustee thereunder, incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-3 (Registration No. 333-22695). 4.2 Form of Junior Subordinated Indenture between the Company and National City Bank, as Trustee thereunder, incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 (Registration No. 333-22695). 4.3 Form of Senior Subordinated Indenture between the Company and The Bank of New York, as Trustee thereunder, incorporated by reference to Exhibit 4.22 to the Company's Registration Statement on Form S-3 (Registration No. 333-41437). 10.1 Credit Agreement, dated as of December 10, 1997, by and among Forest City Rental Properties Corporation, the banks named therein, KeyBank National Association, as administrative agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 10.38 to the Company's Form 10-Q for the quarter ended October 31, 1997 (File No.1-4372). 10.2 Guaranty of Payment of Debt, dated as of December 10, 1997, by and among Forest City Enterprises, Inc., the banks named therein, KeyBank National Association, as administrative agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 10.39 to the Company's Form 10-Q for the quarter ended October 31, 1997 (File No.1-4372). 10.3 First Amendment to Credit Agreement, dated as of January 20, 1998, by and among Forest City Rental Properties Corporation, the banks named therein, KeyBank National Association, as administrative agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 4.19 to the Company's Registration Statement on Form S-3 (File No. 333-41437). 10.4 First Amendment to Guaranty of Payment of Debt, dated as of the banks namedtherein, KeyBank National Association, as administrative agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 4.20 to the Company's Registration Statement on Form S-3 (File No. 333-41437). 10.5 Letter Agreement, dated as of February 25, 1998, by and among Forest City Enterprises, Inc., Forest City Rental Properties Corporation, the banks named therein, KeyBank National Association, as administrative agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 4.21 to the Company's Registration Statement on Form S-3 (File No.333-41437). 10.6 Second Amendment to Credit Agreement, dated as of March 6, 1998, by and among Forest City Rental Properties Corporation, the banks named therein, KeyBank National Association, as administrative agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 10.1 to the Company's Form 8-K, dated March 6, 1998 (File No. 1-4372). 10.7 Second Amendment to Guaranty of Payment of Debt, dated as of March 6, 1998, by and among Forest City Enterprises, Inc., the banks named therein, KeyBank National Association, as administrative agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 10.2 to the Company's Form 8-K, dated March 6, 1998 (File No. 1-4372). 10.8 Stock Purchase Agreement, dated May 7, 1997, between Forest City Enterprises, Inc. and Richard Miller, Aaron Miller and Gabrielle Miller, incorporated by reference to Exhibit 10.34 to the Company's Form 10-Q for the quarter ended April 30, 1997 (File No. 1-4372). 10.9 Letter Agreement, dated August 14, 1997, adjusting the interest rate in the Stock Purchase Agreement, dated May 7, 1997, between Forest City Enterprises, Inc. and Richard Miller, Aaron Miller and Gabrielle Miller, incorporated by reference to Exhibit 10.35 to the Company's Form 10-Q for the quarter ended July 31, 1997 (File No. 1-4372). 10.10 Supplemental Unfunded Deferred Compensation Plan for Executives, incorporated by reference to Exhibit 10.9 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.11 Deferred Compensation Agreement between Forest City Enterprises, Inc. and Thomas G. Smith, dated December 27, 1995, incorporated by reference to Exhibit 10.33 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.12 1994 Stock Option Plan, including forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 10.10 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.13 Employment Agreement entered into as of September 25, 1989 by the Company and Albert B. Ratner, incorporated by reference to Exhibit 10.11 to the Company's Form 10-K for the year ended January 31, 1997 (File No.1-4372). 10.14 First Amendment to Employment Agreement entered into as of December 6, 1996 by the Company and Albert B. Ratner, incorporated by reference to Exhibit 10.12 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.15 Employment Agreement entered into on April 6, 1998, effective as of February 1, 1997, by the Company and Samuel H. Miller, incorporated by reference to Exhibit 10.15 to the Company's Form 10-K for the year ended January 31, 1998 (File No. 1-4372). 10.16 Employment Agreement entered into on April 6, 1998, effective as of February 1, 1997, by the Company and Charles A. Ratner, incorporated by reference to Exhibit 10.16 to the 10-K for the year ended January 31, 1998 (File No. 1-4372). 10.17 First Amendment to Employment Agreement (dated April 6, 1998) entered into as of April 24, 1998 by the Company and Charles A. Ratner, incorporated by reference to Exhibit 10.17 to the Company's Form 10-K for the year ended January 31, 1998 (File No. 1-4372). 10.18 First Amendment to Employment Agreement (dated December 6, 1996 and superseded by Employment Agreement dated April 6, 1998) entered into as of December 6, 1996 by the Company and Charles A. Ratner, incorporated by reference to Exhibit 10.18 to the Company's Form 10-K for the year ended January 31, 1997 (File No.1-4372). 10.19 Employment Agreement entered into on April 6, 1998, effective as of February 1, 1997, by the Company and James A. Ratner,incorporated by reference to Exhibit 10.19 to the Company's Form 10-K for the year ended January 31, 1998 (File No. 1-4372). 10.20 Employment Agreement entered into on April 6, 1998, effective as of February 1, 1997, by the Company and Ronald A. Ratner, incorporated by reference to Exhibit 10.20 to the Company's Form 10-K for the year ended January 31, 1998 (File No. 1-4372). 10.21 Employment Agreement entered into as of September 25, 1989 by the Company and Nathan P. Shafran, incorporated by reference to Exhibit 10.14 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.22 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Deborah Ratner Salzberg and Forest City Enterprises, Inc., insuring the lives of Albert Ratner and Audrey Ratner, dated June 26, 1996, incorporated by reference to Exhibit 10.19 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.23 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Brian J. Ratner and Forest City Enterprises, Inc., insuring the lives of Albert Ratner and Audrey Ratner, dated June 26, 1996, incorporated by reference to Exhibit 10.20 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.24 Letter Supplement to Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Brian J. Ratner and Forest City Enterprises, Inc., insuring the lives of Albert Ratner and Audrey Ratner, effective June 26, 1996, incorporated by reference to Exhibit 10.21 to the Company's Form 10-K for the year ended January 31, 1997 (File No.1-4372). 10.25 Letter Supplement to Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Deborah Ratner Salzberg and Forest City Enterprises, Inc., insuring the lives of Albert Ratner and Audrey Ratner, effective June 26, 1996, incorporated by reference to Exhibit 10.22 to the Company's Form 10-K for the year ended January 31, 1997 (File No.1-4372). 10.26 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Charles Ratner 1992 Irrevocable Trust Agreement and Forest City Enterprises, Inc., insuring the lives of Charles Ratner and Ilana Horowitz (Ratner), dated November 2, 1996, incorporated by reference to Exhibit 10.23 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.27 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996, incorporated by reference to Exhibit 10.24 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.28 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Max Ratner 1988 Grandchildren's Trust Agreement and Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996, incorporated by reference to Exhibit 10.25 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.29 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Max Ratner 1988 Grandchildren's Trust Agreement and Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996, incorporated by reference to Exhibit 10.26 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.30 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Max Ratner 1988 Grandchildren's Trust Agreement and Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996, incorporated by reference to Exhibit 10.27 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.31 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Max Ratner 1988 Grandchildren's Trust Agreement and Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996, incorporated by reference to Exhibit 10.28 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.32 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996, incorporated by reference to Exhibit 10.29 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.33 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996, incorporated by reference to Exhibit 10.30 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.34 Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996, incorporated by reference to Exhibit 10.31 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.35 Letter Supplement to Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between James Ratner and Albert Ratner, Trustees under the Charles Ratner 1992 Irrevocable Trust Agreement and Forest City Enterprises, Inc., insuring the lives of Charles Ratner and Ilana Ratner, effective November 2, 1996, incorporated by reference to Exhibit 10.32 to the Company's Form 10-K for the year ended January 31, 1997 (File No. 1-4372). 10.36 First Amendment to the 1994 Stock Option Plan dated as of June 9, 1998, incorporated by reference to Exhibit 4.7 to the Company's Registration Statement on Form S-8 (Registration No. 333-61925). 10.37 First Amendment to the forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 4.8 to the Company's Registration Statement on Form S-8 (Registration No.333-61925). * 10.38 Amended and Restated form of Stock Option Agreement effective as of July 16,1998. * 27 Financial Data Schedules. * - Filed herewith. (b) Reports on Form 8-K: none SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FOREST CITY ENTERPRISES, INC. (Registrant) Date December 15, 1998 /s/ Thomas G. Smith Thomas G. Smith, Senior Vice President and Chief Financial Officer Date December 15, 1998 /s/ Linda M. Kane Linda M. Kane, Vice President, Corporate Controller Exhibit 10.38 AMENDED AND RESTATED 1996 STOCK OPTION GRANT AGREEMENT THIS AMENDED AND RESTATED 1996 STOCK OPTION GRANT AGREEMENT (the "Agreement"), effective as of this 16th day of July, 1998, by and between FOREST CITY ENTERPRISES, INC., an Ohio corporation of Cleveland, Ohio, hereinafter referred to as "Company," and __________________, hereinafter referred to as "Employee." WITNESSETH: WHEREAS, the Board of Directors of the Company is of the opinion that the interests of the Company and its shareholders will be advanced by affording present and future participants an opportunity to secure stock ownership in the Company; and WHEREAS, pursuant to that certain Agreement effective September 9, 1996, as amended by that certain First Amendment effective February 17, 1997 (collectively called the "Original Agreement"), the Company granted to the Participant a nonqualified stock option to purchase shares of the presently authorized $0.33 1/3 par value Class A Common Stock of the Company; and WHEREAS, the Company now desires to amend and restate the Original Agreement in its entirety to, inter alia, adjust the number of option shares and the option price in relation to the two-for-one stock split effective July 16, 1998, to add a form of written notice to exercise the option and to add a schedule of vesting and exercise rights. NOW THEREFORE, in consideration of the premises and the mutual covenants, agreements and promises set forth herein, the parties hereto agree as follows: 1. GRANT OF OPTION. The Company granted to the Employee as of September 9, 1996 (the "Option Date"), as amended as of February 17, 1997, an incentive stock option ("ISO") to purchase under the 1994 Stock Option Plan (the "Plan") shares of the presently authorized $0.33 1/3 par value Class A Common Stock of the Company. Subsequent to the February 17, 1997 three-for-two stock split and the July 16, 1998 two-for-one stock split, the Employee may purchase an aggregate ______ shares of Class A Common Stock (the "Option") which Option, subject to all the terms and conditions hereinafter set forth, shall be exercisable by the Employee over the option period as hereinafter described. 2. OPTION PRICE. In connection with the July 16, 1998 two-for-one stock split, the option price with respect to the shares of stock covered by this Agreement (the "Option Shares") shall be $14.375 per share. 3. VESTING AND TIME OF EXERCISE OF OPTION. The Option granted hereunder shall continue in effect for a period of ten (10) years from the date of the granting of the same, except as such period may be reduced as hereinafter provided with respect to termination of employment, retirement or death of the Employee (the "Term"). The Option shall be exercisable cumulatively over the option period only in accordance with the following terms, conditions and provisions: (a) Except as otherwise provided in the Plan or this Agreement, this Option shall not be exercisable prior to the first business day after the second anniversary of the Option Date, and upon such day the Option shall automatically become vested and exercisable with respect to 25 percent (25%) of the total Option Shares. Thereafter, upon the first business day after the third anniversary of the Option Date, Employee may exercise an additional 25 percent (25%) up to 50 percent (50%) of the aggregate total Option Shares. Upon the first business day after the fourth anniversary and thereafter until the tenth anniversary of the Option Date, the Employee may exercise an additional 50 percent (50%) up to 100 percent (100%) of the aggregate total Option Shares. Schedule I, attached hereto, lists the number of Option Shares the Employee may exercise upon the second, third and fourth through tenth anniversaries of the ten-year Term. (b) Except as hereinafter provided, no Option may be exercised unless the Employee is, at the date of such exercise, in the employ of the Company or a subsidiary of the Company, and shall have been continuously so employed since the date his Option was granted. Absence or leave from the Company, or a subsidiary of the Company, shall not be considered an interruption of employment for the purposes of this Agreement. 4. METHOD OF EXERCISE. Option Shares may be purchased pursuant to this Agreement only upon receipt by the Secretary of the Company of notice in writing from Employee of his intention to purchase, specifying the number of shares as to which he desires to exercise his Option, and said notice shall be accompanied by the full amount of the purchase price in the form of: cash, a certified or official bank check, a money order, a cashier's check, or in shares of stock currently owned by the Employee and valued at the fair market value of the shares on the date of exercise. Such form of written notice is attached hereto. In no event shall an Option be exercisable as to less than twenty-five (25) shares at any one time [or all of the remaining shares then subject to the Option, if less than twenty-five (25)]. 5. OPTION CONFERS NO RIGHTS AS COMMON STOCK HOLDER. The Employee shall not be entitled to any privileges of ownership with respect to shares of Class A Common Stock subject to this Option, unless and until purchased and delivered upon the exercise of this Option, in whole or in part, and the Employee becomes a stockholder of record with respect to such delivered shares. The Employee shall not be considered a stockholder of the Company with respect to any such shares not so purchased and delivered. 6. TERMINATION OF OPTION. In the event the employment of the Employee with the Company, or its subsidiary, shall terminate and prevent him from performing his regular duties for any reason other than disability, death, or retirement with the consent of the Company, all rights to purchase shares pursuant to his Option (including rights to purchase shares thereunder which have accrued but which then remain unexercised) shall forthwith cease and terminate. In the event of the termination of the Employee's employment because of Disability (as defined in the Plan), the Option may be exercised by the Employee, to the extent he was entitled to do so on the date of termination of his employment, at any time, but not later than the expiration date stated herein. If the Employee's employment shall terminate (i) by reason of his retirement in accordance with the Company's retirement plan, or (ii) with the consent of the Compensation Committee, his right to exercise shall terminate and be forfeited on the expiration date specified herein or three (3) months after the date of such termination, whichever is the shorter period. If the Employee shall die during his employment or during a period of Disability, his Option can be exercised by his legal representative at any time during its original term. To the extent that the Option of the Employee shall not have been exercised within the period above provided due to his death, retirement or termination because of disability, all further rights to purchase shares pursuant to such Option shall cease and terminate at the expiration of such period. 7. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred by the Employee other than by Will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Ohio Revised Code or Title I of the Employee Retirement Income Security Act. During the Employee's lifetime, this Option is exercisable only by the Employee or his guardian or legal representative, PROVIDED that if so determined by the Board of Directors, the Employee may, in a manner designated by the Board of Directors, designate a beneficiary to exercise the rights of the Employee under this Option upon the death of the Employee. Absent such a designation, in a case of death, such Option shall be exercisable by the executor, administrator or legal representative of the deceased Employee. 8. CHANGE IN STOCK CAPITALIZATION. If after the effective date of the Stock Option there is any change in the Common Stock of the Company through the declaration of stock dividends or reclassification, reorganization, redesignation or recapitalization resulting in stock split-ups or combinations or exchanges of shares, or through merger, consolidation, liquidation, or other similar event, the number of shares available for option and the shares subject to any option, and the price per share, shall be appropriately adjusted as determined by the Compensation Committee of the Board of Directors to prevent dilution or enlargement of option rights. The Company shall give the Employee written notice of any change described in this Section 8. 9. EMPLOYMENT RIGHTS. Nothing contained in the Plan, however, or in any Option granted pursuant to the Plan, shall confer upon any Employee any right to be continued in the employment of the Company or any subsidiary of the Company, or interfere in any way with the right of the Company, or such subsidiary, to terminate his employment at any time. 10. RIGHTS OF AMENDMENTS TO OPTION PLAN. The Board of Directors may, without further action by the shareholders, from time to time, amend, alter, suspend or terminate the Plan, except as otherwise required by applicable federal securities laws. The Plan shall be administered by the Board of Directors of the Company whose interpretation of the terms and provisions thereof shall be final and conclusive. 11. DELIVERING OF SHARES. The Employee shall give notice of his intent to exercise an Option, and shares shall be delivered by the Company against full payment of the Option Price in respect of the shares delivered, subject to the conditions of Item 4 hereof. 12. CANCELLATION OF OPTION RIGHTS. The Board of Directors may cancel all unexercised options hereunder if the Employee, after retirement and while having rights to purchase hereunder, engages in employment or activities which in any way directly or indirectly, divert or attempt to divert from the Company any business whatsoever, and which in the opinion of the Board of Directors are contrary to the best interests of the Company. 13. NOTICES. Any notice to be given hereunder by the Employee shall be sent by certified or registered mail addressed to the Company for the attention of the Chairman of the Board, or the President, at its principle office, 1160 Terminal Tower, 50 Public Square, Cleveland, Ohio 44113, and any notice by the Company to the Employee shall be sent by certified or registered mail addressed to the Employee at _______________________. Either party may, by notice given to the other in accordance with the provisions of this Section, change the address to which subsequent notices shall be sent. 14. AGREEMENT SUBJECT TO THE PLAN. This Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith. The Employee hereby acknowledges receipt of a copy of the Plan. 15. GOVERNING LAWS. It is intended that (a) this Agreement shall come within the provisions of the Plan and shall qualify as an Incentive Stock Option within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly, and (b) the Company will treat any deduction under the Internal Revenue Code of 1986, as amended, in respect of shares acquired by the Employee pursuant hereto in such manner as to accord to the Employee the full benefit of Section 422(b) of the Internal Revenue Code of 1986, as amended. This Agreement shall be governed by the laws of the State of Ohio. THIS AGREEMENT SUPERSEDES THE ORIGINAL AGREEMENT. Further, this Agreement may not be modified orally. It is understood that wherever the masculine pronouns are used in this Agreement, it is intended to include the feminine pronouns as well as the masculine. IN WITNESS WHEREOF, we have hereunto set our hands this ____ day of_______, 1998. FOREST CITY ENTERPRISES, INC. ____________________________________ Charles A. Ratner, President ____________________________________ ________________, Employee EX-27 2 ARTICLE 5 FDS FOR 3RD QUARTER 10-Q
5 1000 9-MOS JAN-31-1999 FEB-01-1998 OCT-31-1998 52451 0 189325 6792 40934 0 3008903 479097 3281350 0 2233346 10297 0 0 320153 3281350 0 491232 0 357763 0 0 113552 50998 21486 40464 0 10952 0 40464 1.35 1.34
-----END PRIVACY-ENHANCED MESSAGE-----