Item 1. Business
Founded in 1920 and publicly traded since 1960, Forest City Enterprises, Inc. (with its subsidiaries, the “Company” or “Forest City”) is principally engaged in the ownership, development, management and acquisition of commercial and residential real estate properties in 21 states and the District of Columbia. At January 31, 2003, the Company had $5.1 billion in consolidated assets, of which approximately $4.5 billion was invested in real estate, at cost. The Company’s portfolio of real estate assets is diversified both geographically and among property types.
The Company operates through four Strategic Business Units:
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Commercial Group, the Company’s largest business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office buildings, hotels and mixed-use projects.
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Residential Group owns, develops, acquires and operates residential rental properties, including upscale and middle-market apartments, adaptive re-use developments and supported-living facilities.
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Land Development Group acquires and sells both land and developed lots to residential, commercial and industrial customers. It also owns and develops land into master-planned communities and mixed-use projects.
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Lumber Trading Group, a lumber wholesaler.
The Company has centralized the capital management, financial reporting and administrative functions of its business units. In most other respects the strategic business units operate autonomously, with the Commercial Group and Residential Group each having its own development, acquisition, leasing, property and financial management functions. The Company believes this structure enables its employees to focus their expertise and to exercise the independent leadership, creativity and entrepreneurial skills appropriate for their particular business segment.
Commercial Group
The Company has developed retail projects for more than 50 years and office and mixed-use projects for more than 30 years. Currently, the Commercial Group owns a diverse portfolio in both urban and suburban locations in 13 states. The Commercial Group targets densely populated markets where it effectively uses its expertise to develop complex projects, often employing public or private partnerships. As of January 31, 2003, the Commercial Group owned interests in 77 completed projects, including 41 retail properties, 28 office properties and eight hotels. New York City operations through the Company’s partnership with Forest City Ratner Companies are part of the Commercial Group.
The Company opened its first community retail center in 1948, and its first enclosed regional mall in 1962. Since then, it has developed regional malls and specialty retail centers. The specialty retail centers include urban retail centers, entertainment based centers, community centers and power centers (collectively, “Specialty Retail Centers”). As of January 31, 2003, the Commercial Group’s retail portfolio consisted of 12 regional malls with Gross Leasable Area (GLA) of 4.0 million square feet and 29 Specialty Retail Centers with a total GLA of 5.7 million square feet.
Regional malls are developed in collaboration with anchor stores that typically own their facilities as an integral part of the mall structure and environment but do not generate significant direct payments to the Company. In contrast, anchor stores at specialty retail centers generally are tenants under long term leases that contribute significant rental payments to the Company.
While the Company continues to develop regional malls in strong markets, the Company has also pioneered the concept of bringing specialty retailing to urban locations previously ignored by major retailers primarily in the New York metropolitan area. With high population densities and disposable income levels at or near those of the suburbs, urban development is proving to be economically advantageous for the Company, for the tenants who realize high sales per square foot and for the cities, which benefit from the new jobs and taxes created in the urban locations.
At January 31, 2003, the Company’s operating portfolio of office/mixed-use and hotel projects consists of 28 office buildings containing 7.8 million square feet, including mixed-use projects with approximately 311,000 gross leasable square feet of retail space and eight hotels with 2,941 rooms.
Item 1. Business (continued)
In its office development activities, the Company is primarily a build-to-suit developer that works with tenants to meet their highly specialized requirements. The Company’s office development has focused primarily on mixed-use projects in urban developments, often built in conjunction with hotels and/or retail centers or as part of a major office campus. As a result of this focus on new urban developments, the Company plans to concentrate future office and mixed-use developments largely in the New York City, Boston, Washington, D.C. and Denver metropolitan areas.
Residential Group
The Company’s Residential Group owns, develops, acquires, leases and manages residential rental property in 17 states and the District of Columbia. The Company has been engaged in apartment community development for over 50 years beginning in Northeast Ohio and gradually expanding nationally. Its residential portfolio includes middle-market apartments, upscale urban properties and adaptive re-use developments. The Company also owns a select number of supported-living facilities located primarily in the New York City metropolitan area.
At January 31, 2003, the Residential Group’s operating portfolio consists of 36,904 units in 125 properties in which Forest City has an ownership interest, including 5,551 units of syndicated senior citizen subsidized housing in 34 buildings that the Company manages and in which it owns a residual interest.
Land Development Group
The Company has been in the land development business since the 1930’s. The Land Development Group acquires and sells both raw land and developed lots to residential, commercial and industrial customers. The Land Development Group also owns and develops raw land into master-planned communities, mixed-use projects and other residential developments. Currently the Company owns more than 6,600 acres of undeveloped land for these commercial and residential development purposes and has an option to purchase 2,578 acres of developable land at Stapleton, Denver’s former airport. The Company currently has land development projects in nine states.
Historically, the Land Development Group’s activities focused on land development projects in Northeast Ohio. Over time, the Group’s activities expanded to larger, more complex projects. In the last 12 years, the Group has extended its activities on a national basis, first in Arizona, and more recently in North Carolina, Florida, Nevada, Colorado, Texas and New Mexico. Land development activities at the Company’s Stapleton project in Denver, Colorado and Central Station project in downtown Chicago, Illinois are reported in the Land Development Group.
In addition to sales activities of the Land Development Group, the Company also sells land acquired by its Commercial Group and Residential Group adjacent to their respective projects. Proceeds from such land sales are included in the revenues of such Groups.
Lumber Trading Group
The Company’s original business was selling lumber to homebuilders. The Company expanded this business in 1969 through its acquisition of Forest City Trading Group, Inc., a lumber wholesaler with customers in all 50 states and all Canadian provinces. Through 13 strategically located offices in the United States and Canada, employing over 280 traders, the Company sold the equivalent of over eight billion board feet of lumber in 2002, with a gross sales volume of $2.5 billion, making the Company one of the largest lumber wholesalers in North America.
The Lumber Trading Group currently has 12 sales and administrative offices in six states and one sales office in Vancouver, British Columbia. The Company opens and closes offices in response to the changing demands of the lumber industry.
The Lumber Trading Group’s core business is supplying lumber for new home construction and to the repair and remodeling markets. Approximately 64% of the Lumber Trading Group’s sales for 2002 involve back-to-back trades in which the Company brings together a buyer and seller for an immediate purchase and sale. The balance of transactions are trades in which the Company takes a short-term ownership position and is at risk for lumber market fluctuations. This risk, however, is reduced by the implementation of a lumber hedging strategy.
Item 1. Business (continued)
Competition
The real estate industry is highly competitive in all of the Company’s primary markets. With regard to the Commercial and Residential Groups, there are numerous other developers, managers and owners of commercial and residential real estate that compete with the Company nationally, regionally and/or locally, some of whom may have greater financial resources than the Company. These entities compete with the Company in seeking management and leasing revenues, land for development, properties for acquisition and disposition and tenants for properties. There can be no assurance that the Company will successfully compete for new projects or have the ability to react to competitive pressures on existing projects caused by factors such as declining occupancy rates or rental rates. In addition, tenants at the Company’s retail properties face continued competition in attracting customers from retailers at other shopping centers, catalogue companies, various websites, warehouse stores, large discounters, outlet malls, wholesale clubs and direct mail and telemarketers. The existence of competing developers, managers and owners and competition to the Company’s tenants could have a material adverse effect on the Company’s ability to lease space in its properties and on the rents charged or concessions granted and could materially and adversely affect the Company’s results of operations and cash flows and could affect the realizable value of assets upon sale.
With regard to the Lumber Trading Group, the lumber wholesale business is highly competitive. Competitors in the lumber brokerage business include numerous brokers and in-house sales departments of lumber manufacturers, many of which are larger and have greater resources than the Company.
Number of Employees
The Company had 4,430 employees as of January 31, 2003, of which 3,519 were full-time and 911 were part-time.
Segments of Business
The Company currently has four segments: Commercial Group, Residential Group, Land Development Group and Lumber Trading Group. Financial information about industry segments required by this item is included in Item 8. Financial Statements and Supplementary Data, pages 81-82 , Note M “Segment Information.”
Available Information
Forest City Enterprises, Inc. is an Ohio corporation and its executive offices are located at 50 Public Square, Suite 1100 Cleveland, Ohio 44113. The Company makes available, free of charge, on their website at www.forestcity.net, their annual, quarterly and current reports, including amendments to such reports, as soon as practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (SEC). The Company’s filings can also be obtained from the SEC website at www.sec.gov. However, the information found on the Company’s website and the SEC website is not part of this Annual Report on Form 10-K. The Company’s filings are also available by calling the SEC Office of Public Reference at (202) 942-8090 or Investor Information Service toll free at 1-800-SEC-0330, or can be read and copied at the SEC’s Public Reference Room office at 450 Fifth Street N.W., Washington, D.C. 20549.
RISK FACTORS
We Are Subject To Real Estate Development and Investment Risk.
The value of and our income from our real property investments may decline.
The value of, and our income from, our properties may decline due to developments that adversely affect real estate generally and those that are specific to our properties. General factors that may adversely affect our real estate portfolios include:
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a decline in the national economy;
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increases in interest rates;
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a general tightening of the availability of credit;
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a decline in the economic conditions in one or more of our primary markets;
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an increase in competition for tenants and customers;
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an increase in supply of our product types in our primary markets;
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an escalation in terrorist activities or other acts of violence or war in the United States that impact properties in our real estate portfolios or that may impact the general economy;
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declines in consumer spending during an economic recession that adversely affect our revenue from our retail centers; and
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the adoption on the national, state or local level of more restrictive laws and governmental regulations, including more restrictive zoning or land use regulations and increased real estate taxes.
In addition, there are factors that may adversely affect the value of, and our income from, specific properties, including:
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adverse changes in the perceptions of prospective tenants or purchasers of the attractiveness of the property;
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opposition from local community or political groups with respect to development or construction at a particular site;
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our inability to provide adequate management and maintenance or to obtain adequate insurance;
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our inability to collect rent;
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an increase in operating costs; and
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introduction of a competitor’s property in close proximity to one of our current markets.
Our Development Projects May Exceed Budget or Be Prevented From Completion For Many Reasons.
Our development projects may exceed budget or be prevented from completion for many reasons, including:
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an inability to secure sufficient financing on favorable terms, including an inability to refinance construction loans;
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construction delays or cost overruns, all of which may increase project development costs;
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an inability to obtain zoning, occupancy and other required governmental permits and authorizations;
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an inability to secure tenants or anchors necessary to support the project; and
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failure to achieve anticipated occupancy or sales levels or sustain anticipated lease or sales levels.
These risks could result in lengthy unanticipated delays or significant unexpected expenses. If any of these occur, it could adversely affect our ability to achieve our projected returns on properties under development.
In the past, we have elected not to proceed, or have been prevented from proceeding, with specific development projects and anticipate that this may occur again from time to time in the future. A development project may be stalled or terminated because a project partner or prospective anchor tenant withdraws or a third party challenges our entitlements or public financings.
We periodically serve as either the construction manager or the general contractor for our developments. The construction of real estate projects entails unique risks, including risks that the project will fail to conform to building plans, specifications and timetables. This could be caused by strikes, weather, government regulations and other conditions beyond our control. In addition, we may become liable for injuries and accidents occurring during the construction process that are not insured.
In the construction of new projects, we generally guarantee the lender under the construction loan the lien-free completion of the project. This guaranty is recourse to us and places the risk of construction delays and cost overruns on us. In addition, from time to time, we guarantee the obligations of a major tenant during the construction phase. This type of guaranty is released upon completion of the project. While we have generally been successful in completing projects on time and on budget, we may have to make significant expenditures in the future in order to comply with our lien-free completion obligations.
Furthermore, as the general partner of certain limited partnerships, we guarantee the funding of operating deficits of newly-opened apartment projects for an average of five years.
An Economic Decline in One or More of Our Primary Markets May Adversely Affect Our Operating Results and Financial Condition.
Our core markets are Boston, Denver, California, New York City and Washington, D.C. A downturn in the local economy in any of these areas may have an adverse effect on our results of operations and cash flows resulting from an adverse effect on:
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the ability of our tenants to make lease payments;
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our ability to market new developments to prospective purchasers and tenants;
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our rental and lease rates;
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hotel occupancy and room rates; and
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land sales.
In addition, local real estate market conditions may be significantly impacted by any of the following:
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business layoffs and downsizing;
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industry slowdowns;
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relocations or closings of businesses;
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changing demographics; and
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any oversupply of or reduced demand for real estate.
The occurance of any of these events could have a material adverse effect on our operating results in that particular real estate market.
Terrorists Attacks and Other Acts of Violence or War Have and May in the Future, Impact Our Operations and Profitability.
Given that our core markets include New York City and Washington, D.C., we face a heightened risk of terrorism. We were directly impacted by the September 11, 2001 terrorist attacks at our Battery Park City Hotel and Retail properties. These properties did not re-open until the second quarter of 2002. We have business interruption coverage and property damage coverage, which we believe will adequately cover our operating cash flow needs and property damage, although the ultimate resolution of our insurance claims has not yet been determined. The timing and strength of economic recovery in the area includes inherent risks that may negatively affect these properties’ operating performance and financial results.
Future terrorist attacks may directly impact physical facilities in our real estate portfolio. In addition, future terrorist attacks or related armed conflicts could cause consumer confidence and spending to decrease, adversely affect mall traffic, increasing volatility in the U.S. and worldwide financial markets and economy and resulting in economic recessions in the U.S. or abroad. Any of these occurrences could have a significant impact on our operating results, revenues, and costs.
There may be a decrease in demand for space in large metropolitan areas that are considered at risk for future terrorist attacks, and this decrease may reduce our revenues from property rentals.
We have significant investments in large metropolitan areas, including the New York, Boston, California, Washington D.C. and Denver metropolitan areas. In the aftermath of the terrorist attacks, tenants in these areas may choose to relocate their business to less populated, lower-profile areas of the United States that are not as likely to be targets of future terrorist activity. This in turn would trigger a decrease in the demand for space in these areas, which could increase vacancies in our properties and force us to lease our properties on less favorable terms. As a result, the value of our properties and the level of our revenue could decline materially.
We May Be Unable To Sell Properties To Avoid Losses or To Reposition Our Portfolio.
Because real estate investments are relatively illiquid, we may be unable to dispose of underperforming properties and may be unable to reposition our portfolio to meet changes in regional or local real estate markets. This in turn may cause us to incur operating losses in some of our properties and to write down the value of some of our properties.
Our Results of Operations and Cash Flows May Be Adversely Affected By Tenant Defaults or the Closing or Bankruptcy of Non-Tenant Anchors.
Our results of operations and cash flows may be adversely affected if a significant number of our tenants were unable to meet their obligations or renew their leases or if we were unable to lease a significant amount of space on economically favorable lease terms. In the event of a default by a tenant, we may experience delays in payments and incur substantial costs in recovering our losses. This could be even more difficult if the tenant is bankrupt or insolvent.
Ames Department Stores, Inc., one of our retail tenants that leased 236,000 square feet at three properties, filed for bankruptcy protection on August 20, 2001. Ames vacated all three properties and rejected the leases, which allows them to stop paying rent. The Hunting Park property has been re-leased, and it is anticipated, though not assured, that the replacement tenant’s rent will provide sufficient rent to cover debt service. A letter of forbearance has been signed with the lender to provide debt relief until May 2003. Currently the percentage rent from the new tenant is not sufficient enough to cover debt service and an additional forebearance agreement may be required. Strong interest has been expressed by several prospective tenants for the other two properties that were returned to us at the end of December 2002, and we are working with these potential tenants in efforts to achieve rental rates that will assure that debt service will be covered at these locations.
Additionally, Metromedia Fiber Network, Inc., one of our office tenants that leased approximately 157,800 square feet, filed for bankruptcy protection on May 20, 2002. Metromedia vacated and rejected its lease in one building, but has assumed and continued the lease in the other location. All of the vacated Metromedia premises, approximately 29,700 square feet, have already been re-leased.
The Ames and Metromedia bankruptcies and the bankruptcies of any of our other tenants could make it difficult for us to enforce our rights as lessor and protect our investment.
In the context of retail centers, we also could be adversely affected if a non-tenant anchor were to close or enter bankruptcy. Although non-tenant anchors generally do not pay us rent, they typically contribute towards common area maintenance and other charges payable by us, and the loss of these revenues could adversely affect our results of operations and cash flows. Further, the temporary or permanent loss of an anchor is likely to reduce customer traffic in the retail center, which could result in reduced levels of percentage rent paid by retail center tenants, or cause retail center tenants to close or enter bankruptcy. One or more of these factors could cause the retail center to fail to meet its debt service requirements.
We Are Controlled by the Ratner, Miller and Shafran Families, Whose Interest May Differ from Those of Other Shareholders.
Our authorized common stock consists of Class A common stock and Class B common stock. The economic rights of each class of common stock are identical, but the voting rights differ. The Class A common shareholder, voting as a separate class, is entitled to elect 25% of the members of the board of directors, while the Class B common shareholder, voting as a separate class, is entitled to elect the remaining 75% of the board of directors. On all other matters, the Class A common shareholder and Class B common shareholder vote together as a single class, with each share of Class A common stock entitled to one vote per share and each share of Class B common stock entitled to ten votes per share.
At March 3, 2003, members of the Ratner, Miller and Shafran families, which includes members of our current board of directors and executive officers, owned 74.7% of the Class B common stock. RMS, Limited Partnership, which owned 74.4% of the Class B common stock, is a limited partnership, comprised of interests of these families, with eight individual general partners, currently consisting of:
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Samuel H. Miller, treasurer of Forest City and co-chairman of the board of directors;
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Charles A. Ratner, president, chief executive officer of Forest City and a director;
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Ronald A. Ratner, executive vice president of Forest City and a director;
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Brian J. Ratner, executive vice president - East Coast Development, Inc. of Forest City and a director;
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Deborah Ratner Salzberg, president of Forest City Washington, Inc., a subsidiary of Forest City, and a director;
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Joan K. Shafran, a director;
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Joseph Shafran; and
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Abraham Miller.
Joan K. Shafran is the sister of Joseph Shafran. Charles A. Ratner, James A. Ratner, executive vice president of Forest City and a director, and Ronald A. Ratner are brothers. Albert B. Ratner, co-chairman of the board of directors, is the father of Brian J. Ratner and Deborah Ratner Salzberg and is first cousin to Charles A. Ratner, James A. Ratner, Ronald A. Ratner, Joan K. Shafran and Joseph Shafran. Samuel H. Miller was married to Ruth Ratner Miller (now deceased), a sister of Albert B. Ratner, and is the father of Abraham Miller. General partners holding 60% of the total voting power of RMS, Limited Partnership determine how to vote the Class B common stock held by RMS, Limited Partnership. No person may transfer his or her interest in the Class B common stock held by RMS, Limited Partnership without complying with various rights of first refusal.
In addition, at March 3, 2003, members of these families collectively owned 23.2% of the Class A common stock. As a result of their ownership in Forest City, these family members and RMS, Limited Partnership have the ability to elect a majority of the board of directors and to control the management and policies of Forest City. Generally, they may also determine, without the consent of our other shareholders, the outcome of any corporate transaction or other matters submitted to the shareholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets and prevent or cause a change in control of Forest City.
Even if these families or RMS, Limited Partnership reduce their level of ownership of Class B common stock below the level necessary to maintain a majority of voting power, the effect of specific provisions of Ohio law and our Restated Articles of Incorporation may have the effect of discouraging a third party from making a proposal to acquire us or delaying or preventing a change in control or management of Forest City without the approval of these families or RMS, Limited Partnership.
Some of the Relationships that Exist Between Us and Some of Our Directors and Executive Officers Create Conflicts of Interest.
RMS Investment Corp. provides property management and leasing services to us and is controlled by some of our affiliates.
We paid approximately $205,000 and $163,000 as total compensation during fiscal 2002 and 2001, respectively, to RMS Investment Corp. for property management and leasing services. RMS Investment Corp. is controlled by members of the Ratner, Miller and Shafran families, including some of whom are our directors and executive officers.
RMS Investment Corp. manages and provides leasing services to two of our Cleveland-area specialty retail centers, Golden Gate, which has 362,000 square feet, and Midtown Plaza, which has 258,000 square feet. The rate of compensation for these management services is 4% of all rental income, plus a leasing fee of 2% to 3% of rental income. Management believes these fees are comparable to those other management companies would charge.
Our Directors and Executive Officers May Have Interests in Competing Properties, and We Do Not Have Non-Compete Agreements With Our Directors and Executive Officers.
Under our current policy, no director, officer or employee, including any member of the Ratner, Miller and Shafran families, is allowed to invest in a competing real estate opportunity without first obtaining the approval of the Forest City board of directors’ audit committee. We do not have non-compete agreements with any director, officer or employee. Upon leaving Forest City, any director, officer or employee could compete with us. An exception to our conflict-of-interest policy permits those of our principal shareholders who are officers and employees to own, alone or in conjunction with others, certain commercial, industrial and residential properties that may be developed, expanded, operated and sold independently of our business. The ownership of these properties by these principal shareholders makes it possible that conflicts of interest may arise between them and Forest City. Areas of possible conflict include the development or expansion of properties that may compete with our properties and the solicitation of tenants for the use of these properties.
Our High Debt Leverage May Prevent Us from Responding to Changing Business and Economic Conditions.
Our High Degree of Debt Leverage Could Limit Our Ability to Obtain Additional Financing or Adversely Affect the Market Price of Our Common Stock.
We have a relatively high ratio of debt, consisting primarily of non-recourse mortgage debt, to total market capitalization, which was approximately 67% at January 31, 2003 based on the market value of our outstanding Class A common stock and Class B common stock, long-term debt and outstanding mortgage debt at that date. Our high leverage may adversely affect our ability to obtain additional financing for working capital, capital expenditures, acquisitions, development or other general corporate purposes and may make us more vulnerable to a downturn in the economy generally.
We do not expect to repay a substantial amount of the outstanding principal of our debt prior to maturity or to have funds on hand sufficient to repay this debt at maturity. As a result, it will be necessary for us to refinance our debt through new debt financings or through additional equity offerings. If interest rates are higher at the time of refinancing, our interest expense would increase, which would adversely affect our results of operations and cash flows. In addition, in the event we were unable to secure refinancing on acceptable terms, we might be forced to sell properties on unfavorable terms, which could result in the recognition of losses and could adversely affect our financial position, results of operations and cash flows. If we were unable to make the required payments on, or refinance when due, any debt secured by a mortgage on one of our properties, the mortgage lender could take that property through foreclosure and, as a result, we could lose income and asset value.
Approximately $545 million of principal becomes due in fiscal 2003 and approximately $281 million becomes due in fiscal 2004, which includes anticipated future draws on financing commitments. Additionally, we have obtained credit enhanced mortgage debt for a number of our properties. Generally, the credit enhancement, such as a letter of credit, expires prior to the term of the underlying mortgage debt and must be renewed or replaced to prevent acceleration of the underlying mortgage debt. We treat credit enhanced debt as expiring in the year the credit enhancement expires.
We cannot assure you that we will be able to refinance this debt, obtain renewals or replacement of credit enhancement devices, such as a letter of credit, or otherwise obtain funds by selling assets or by raising equity. Our inability to repay or refinance when the debt becomes due could cause the mortgage lender to foreclose on those properties.
As of the date of this annual report on Form 10-K, we have no mortgages that are past their stated maturity date. From time to time, a non-recourse mortgage may become past due and if we are unsuccessful in negotiating an extension or refinancing, the lender could commence foreclosure proceedings.
Our Credit Facility Covenants Could Adversely Affect Our Financial Condition.
We have guaranteed the obligations of one of our consolidated subsidiaries, Forest City Rental Properties Corporation, or FCRPC, under the FCRPC credit agreement. This guaranty imposes a number of restrictive covenants on Forest City Earning Before Depreciation and Deferred Taxes, including a prohibition on consolidations and mergers, limitations on the amount of debt, guarantees and property liens that Forest City may incur. The guaranty also requires Forest City to maintain a specified minimum cash flow coverage ratio, consolidated shareholders’ equity and Earnings Before Depreciation and Deferred Taxes (EBDT). Under the guaranty, we are also prohibited from repurchasing our Class A common stock or Class B common stock or paying dividends on our class A common stock or class B common stock to the extent the total amount of such repurchase and dividends would exceed $20.0 million in any year, measured as of the anniversary date of the guaranty.
A failure to comply with any of the covenants under the guaranty or failure by FCRPC to comply with any of the covenants under the FCRPC credit agreement could, result in an event of default, which would trigger our obligation to repay all amounts outstanding under the FCRPC credit agreement. Our ability and the ability of FCRPC to comply with these covenants will depend upon the future economic performance of Forest City and FCRPC. We cannot assure you that these covenants will not affect our ability to finance our future operations or capital needs or to engage in other business activities that may be desirable or advantageous to us.
Any Rise in Interest Rates Would Increase Our Interest Costs.
An increase in interest rates will increase the interest expenses associated with our floating-rate debt and the refinancing of any fixed-rate debt originally financed at a lower rate. At January 31, 2003, including properties accounted for on the equity method, a 100 basis point increase in taxable interest rates would have increased the pre-tax interest cost of our taxable variable-rate debt by approximately $7.0 million (including both mortgage debt and corporate borrowings) at our share. This calculation reflects the interest rate swaps and long-term LIBOR contracts in effect as of January 31, 2003. Our interest rate exposure would increase if one or more counterparties to these swap agreements defaulted. Although tax-exempt interest 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 have increased the pre-tax interest cost of our tax-exempt variable-rate debt by approximately $6.1 million at our share.
If We Are Unable to Obtain Tax-Exempt Financings, Our Interest Costs Would Rise.
We regularly utilize tax-exempt financings and tax increment financings, which generally bear interest rates below interest rates available through conventional taxable financing. We cannot assure you that tax-exempt bonds or similar government subsidized financing will continue to be available in the future, either for new development or acquisitions, or for the refinancing of outstanding debt. Our inability to obtain these financings or to refinance outstanding debt on favorable terms could significantly affect our ability to develop or acquire properties and could have a material adverse effect on our financial position, results of operations and cash flows.
Our Properties and Businesses Face Significant Competition.
The real estate industry is highly competitive in our primary markets. Competition has over-saturated the market in Southfield, Michigan where our Trowbridge property is located. As a result we did not have sufficient cash to meet the debt service requirements on the property, and although we attempted to negotiate a restructuring with the successor mortgagee, we were not successful and the mortgagee will accept the deed in lieu of foreclosure. Additionally, we have experienced a slower leasing rate in our supported-living communities located in the New York metropolitan area due to a higher level of new competition than was initially anticipated.
There are numerous other developers, managers and owners of commercial and residential real estate that compete with us nationally, regionally and/or locally, some of whom may have greater financial resources than us. They compete with us for management and leasing revenues, land for development, properties for acquisition and disposition and for anchor department stores and tenants for properties. We may not be able to successfully compete in these areas.
Tenants at our retail properties face continual competition in attracting customers from retailers at other shopping centers, catalogue companies, various websites, warehouse stores, large discounters, outlet malls, wholesale clubs and direct mail and telemarketers. Our competitors and those of our tenants could have a material adverse effect on our ability to lease space in our properties and on the rents we can charge or the concessions we can grant. This in turn could materially and adversely affect our results of operations and cash flows, and could affect the realizable value of our assets upon sale.
The lumber wholesaling business is also highly competitive. Competitors in the lumber brokerage business include numerous brokers and in-house sales departments of lumber manufacturers, many of which are larger and have greater resources than us.
Our Business Would Be Adversely Impacted Should an Uninsured Loss Occur or a Loss in Excess of Insurance Limits.
We carry comprehensive liability, fire, flood, extended coverage and rental loss and environmental insurance with respect to our properties within insured limits and policy specifications that we believe are customary for similar properties. There are, however, specific types of losses, generally of a catastrophic nature, such as wars, terrorism or earthquakes, for which we cannot obtain adequate insurance coverage or, in our judgment, for which we cannot obtain insurance at a reasonable cost. In the event of an uninsured loss or a loss in excess of our insurance limits, we could lose both our invested capital in and anticipated profits from the affected property. Any such loss could materially and adversely affect our results of operations, cash flows and financial position.
Under our current policy, which expires November 1, 2003, our properties are insured against acts of terrorism, subject to various limits, deductibles and exceptions for terrorist acts that constitute acts of war and terror acts that involve biological, chemical and nuclear materials. There was a significant increase in our insurance costs to obtain terrorism insurance and while we were able to pass some of the increase in costs to tenants, much of this increase was absorbed by us.
We cannot assure you that we will be able to obtain adequate terrorism coverage at a reasonable cost once this policy expires. In addition, we cannot assure you that our insurers will be able to maintain reinsurance sufficient to cover any losses that may be incurred as a result of terrorist acts. As a result, our insurers’ ability to pay for any damages that we sustain as a result of a terrorist attack may be reduced.
Additionally, most of our current project mortgages require all-risk insurance, and we cannot assure you that we will be able to obtain policies that will satisfy lender requirements.
We are self-insured as to the first $500,000 of liability coverage and self-insured on the first $250,000 of property damage. Our captive insurance company, licensed and regulated by the State of Vermont, is adequately funded per state regulations to cover the first $250,000 of potential property damage claims. While we believe that our self-insurance reserves are adequate, we cannot assure you that we will not incur losses that exceed these self-insurance reserves.
Our Lumber Trading Group May Suffer if Home Building or Remodeling Activities Decline.
The lumber business is highly cyclical. The Lumber Trading Group is exposed to the risk of downturns in new home building and home remodeling activities. While we believe that we have in place adequate controls to effectively manage this risk, we cannot assure you that we will not suffer a loss from or a downturn in the new home building and home remodeling markets.
We Are Subject to Market Risk Associated With Changes in Lumber Prices.
Lumber prices can be highly volatile. Although a majority of the Lumber Trading Group’s sales involve back-to-back trades in which we bring together a buyer and seller for an immediate purchase and sale, the remainder of our transactions are trades in which we take a short-term ownership position in lumber. This short-term ownership subjects us to market risk associated with fluctuations in lumber prices. Even though we may enter into lumber futures contracts as a hedge against lumber price fluctuations, we may be adversely affected by an unanticipated change in lumber prices.
We May Incur Unanticipated Costs and Liabilities Due to Environmental Problems.
Under various federal, state and local environmental laws, an owner or operator of real property may become liable for the costs of the investigation, removal and remediation of hazardous or toxic substances at that property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of hazardous or toxic substances, or the failure to remediate these substances when present, may adversely affect the owner’s ability to sell or rent that real property or to borrow funds using that real property as collateral. It may impose unanticipated costs and delays on projects. Persons who arrange for the disposal or treatment of hazardous or toxic wastes may also be liable for
the costs of the investigation, removal and remediations of those wastes at the disposal or treatment facility, regardless of whether that facility is owned or operated by that person. In some instances, federal, state and local laws require abatement or removal of specific asbestos-containing materials in the event of demolition, renovations, remodeling, damage or decay. These laws also impose specific worker protection and notification requirements and govern emissions of and exposure to asbestos fibers in the air.
We could be held liable for the environmental response costs associated with the release of some regulated substances or related claims, whether by us, our tenants, former owners or tenants of the affected property, or others. In addition to remediation actions brought by federal, state and local agencies, the presence of hazardous substances on a property could result in personal injury, contribution or other claims by private parties. These claims could result in costs or liabilities that could exceed the value of that property. We are not aware of any notification by any private party or governmental authority of any claim in connection with environmental conditions at any of our properties that we believe will involve any material expenditure. Nor are we aware of any environmental condition on any of our properties that we believe will involve any material expenditure. However, we cannot assure you that any non-compliance, liability, claim or expenditure will not arise in the future. To the extent that we are held liable for the release of regulated substances by tenants or others, we cannot assure you we would be able to recover our costs from those persons.
We Face Potential Liability from Residential Properties Accounted for on the Equity Method and Other Partnership Risks.
As part of our financing strategy, we have financed several real estate projects through limited partnerships with investment partners. The investment partner, typically a large, sophisticated institution or corporate investor, invests cash in exchange for a limited partnership interest and special allocations of expenses and the majority of tax losses and credits associated with the project. These partnerships typically require us to indemnify, on an after-tax or “grossed up” basis, the investment partner against the failure to receive or the loss of allocated tax credits and tax losses.
We believe that all the necessary requirements for qualification for such tax credits have been and will be met and that our investment partners will be able to receive expense allocations associated with the properties. However, we cannot assure you that this will, in fact, be the case or that we will not be required to indemnify our investment partners on an after-tax basis for these amounts. Any indemnification payment could have a material adverse effect on our results of operations and cash flows.
In addition to partnerships, we also use limited liability companies, or LLC’s, to finance some of our projects with third party lenders. Acting through our wholly-owned subsidiaries, we typically are a general partner or managing member in these partnerships or LLC’s. There are, however, instances in which we do not control or even participate in management or day-to-day operations.
The use of a partnership or LLC may involve special risks associated with the possibility that:
-
another partner or member may have interests or goals that are inconsistent with ours;
-
a general partner or managing member may take actions contrary to our instructions, requests, policies or objectives with respect to our real estate investments; or
-
a partner or a member could experience financial difficulties that prevent it from fulfilling its financial or other responsibilities to the project or its lender or the other partners or members.
To the extent we are a general partner or managing partner, we may be exposed to unlimited liability, which may exceed our investment or equity in the partnership. If one of our subsidiaries is a general partner or managing partner of a particular partnership, it may be exposed to the same kind of unlimited liability.
Compliance or Failure to Comply with the Americans with Disabilities Act and Other Similar Laws Could Result in Substantial Costs.
The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons.
In the event that we are not in compliance with the Americans with Disabilities Act, the federal government could fine us or private parties could be awarded damages against us. If we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our results of operations and cash flows.
We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We believe that our properties are currently in material compliance with all of these regulatory requirements. However, existing requirements may change and compliance with future requirements may require significant unanticipated expenditures that could affect our cash flows and results of operations.
Item 2.
Item 2. Properties
The Corporate headquarters of Forest City Enterprises, Inc. is located in Cleveland, Ohio and is owned by the Company. The Company’s core markets include Boston, Denver, California, New York City and Washington, D. C. Forest City Trading Group, Inc. maintains its headquarters in Portland, Oregon with 12 trading and administrative offices and one processing plant located in six states and one sales office in Canada.
The following table provides summary information concerning the Company’s real estate portfolio as of January 31, 2003.
Item 2. Properties
Forest City Rental Properties Corporation Portfolio of Real Estate
COMMERCIAL GROUP
OFFICE BUILDINGS
[Additional columns below]
[Continued from above table, first column(s) repeated]
* Property under construction at January 31, 2003.
 Property opened or acquired in 2002.
Expansion of property opened in 2002.
(1) At the completion of this project, the Company will own 171,000 square feet (approximately 15%) of the property’s 1.1 million total square feet. No leases for this space have been executed to date.
Item 2. Properties (continued)
Forest City Rental Properties Corporation Portfolio of Real Estate
COMMERCIAL GROUP
RETAIL CENTERS
Item 2. Properties (continued)
Forest City Rental Properties Corporation Portfolio of Real Estate
COMMERCIAL GROUP
RETAIL CENTERS (continued)
[Additional columns below]
[Continued from above table, first column(s) repeated]
COMMERCIAL GROUP
HOTELS
* Property under construction at January 31, 2003.
 Property opened or acquired in 2002.
 Expansion of property opened in 2002.
Item 2. Properties (continued)
Forest City Rental Properties Corporation Portfolio of Real Estate
RESIDENTIAL GROUP
APARTMENTS
Item 2. Properties (continued)
Forest City Rental Properties Corporation Portfolio of Real Estate
RESIDENTIAL GROUP
APARTMENTS (continued)
* Property under construction at January 31, 2003.
 Property opened or acquired in 2002.
 Expansion of property opened in 2002.
Item 3.
Item 3. Legal Proceedings
The Company is involved in various claims and lawsuits incidental to its business, and management and legal counsel believe that these claims and lawsuits will not have a material adverse effect on the Company’s financial statements. The Company, although not a named defendant, was providing a defense in a lawsuit relating to Emporium, a retail and office development project in San Francisco. The lawsuit challenged the Company’s right to entitlements under California environmental law. A verdict favorable to the Company was obtained in May 2001, an appeal was filed by the plaintiffs and was denied on September 30, 2002. A petition for rehearing was filed by the plaintiffs and was denied in October 28, 2002. The plaintiffs filed a petition for review by the California Supreme Court. This request was denied and the matter is now closed.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter.
Item 4 (A). Executive Officers of the Registrant
The following list is included in Part I of this Report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders to be held on June 11, 2003. The names, ages and positions held by the executive officers of the Company are presented in the following list. Each individual has been appointed to serve for the period which ends with the Annual Meeting of Shareholders scheduled for June 11, 2003.
Note: Charles A. Ratner, James A. Ratner and Ronald A. Ratner are brothers. Albert B. Ratner is the father of Brian J. Ratner and first cousin to Charles A. Ratner, James A. Ratner and Ronald A. Ratner.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters
Information required by this item is included in Item 8. Financial Statements and Supplementary Data on page 94, “Quarterly Consolidated Financial Data (unaudited).”
Item 6.
Item 6. Selected Financial Data
Item 6. Selected Financial Data (continued)
Item 6. Selected Financial Data (continued)
(1)
The Company has adopted the provisions of Statement of Financial Accounting Standard No. 145, “Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13 on Technical Corrections” (SFAS No. 145) which requires gains or losses from early extinguishment of debt to be classified in operating earnings. The Company previously reported gains or losses from early extinguishment of debt as extraordinary item, net of tax, in its Consolidated Statements of Earnings as follows:
(2)
Footnote references for the years ended January 31, 2001, 2000 and 1999 can be found in the Company’s Form 10-K filing for the year ended January 31, 2001.
(3)
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 as defined by generally accepted accounting principles and may not be directly comparable to similarly-titled measures reported by other companies. The Company believes that EBDT provides additional information about its operations, and along with net earnings, is necessary to understand its operating results. EBDT is defined as net earnings excluding the following items: i) gain (loss) on disposition of operating properties and other investments (net of tax); ii) the adjustment to recognize rental revenues and expense using straight-line method; iii) noncash charges from Forest City Rental Properties Corporation, a wholly-owned subsidiary of Forest City Enterprises, Inc., for depreciation, amortization and deferred income taxes; iv) provision for decline in real estate (net of tax); v) extraordinary items (net of tax); and vi) cumulative effect of change in accounting principle (net of tax). Early extinguishment of debt is now reported in operating earnings. However, early extinguishment of debt is excluded from EBDT through the year ended January 31, 2003. Beginning February 1, 2003, early extinguishment of debt will be included in EBDT.
(4)
Amount represents depreciation expense for certain syndicated properties accounted for on the equity method of accounting under both full consolidation and pro-rata consolidation. See Note E - Investments In and Advances to Affiliates for further discussion of these syndicated properties.
(5)
Effective for the year ended January 31, 2001, the Company recognizes minimum rents on a straight-line basis over the term of the related lease pursuant to the provision of SFAS No. 13, “Accounting for Leases.” The straight-line rent adjustment is recorded as an increase or decrease to revenue from Forest City Rental Properties Corporation, a wholly-owned subsidiary of Forest City Enterprises, Inc., with the applicable offset to either accounts receivable or accounts payable, as appropriate.
(6)
Effective January 31, 2001, the Company implemented a change in the presentation of its financial results. Prior to January 31, 2001, the Company used the pro-rata method of consolidation to report its partnership investments proportionate to its share of ownership for each line item of its consolidated financial statements. In accordance with the FASB’s Emerging Issues Task Force Issue No. 00-1, “Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures,” the Company no longer uses the pro-rata consolidation method for partnerships. Accordingly, partnership investments that were previously reported on the pro-rata method are now reported as consolidated at 100% if deemed under the Company’s control, or otherwise on the equity method of accounting. While a number of the line items on the Company’s consolidated financial statements have changed under the new full consolidation method, there is no impact on EBDT, net earnings or shareholders’ equity for all years presented. Certain data for the years ended January 31, 2000 and 1999 have been re-presented from its original reporting.
(7)
The Company adopted the provisions of Statement of Financial Accounting Standard (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective February 1, 2002. Pursuant to the definition of a component of an entity of SFAS No. 144, assuming no significant continuing involvement, all earnings of properties which have been sold or held for sale are reported as discontinued operations. See Note T - Discontinued Operations for more information.
(8)
The following table provides detail of Income Tax Expense (Benefit):
(1) Related to Non-Real Estate Groups.
Item 6. Selected Financial Data (continued)
Forest City Rental Properties Corporation - Real Estate Activity
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CORPORATE DESCRIPTION
The Company principally engages in the ownership, development, management and acquisition of commercial and residential real estate throughout the United States. The Company consists of four strategic business units. The Commercial Group, the Company’s largest business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office buildings, hotels and mixed-use projects. New York City operations through the Company’s partnership with Forest City Ratner Companies are part of the Commercial Group. The Residential Group owns, develops, acquires and operates residential rental property, including upscale and middle-market apartments, adaptive re-use developments and supported-living facilities. Real Estate Groups are the combined Commercial and Residential Groups. The Land Development Group acquires and sells both land and developed lots to residential, commercial and industrial customers. It also owns and develops land into master-planned communities and mixed-use projects. The Lumber Trading Group, a wholesaler, sells lumber to customers in all 50 states and Canadian provinces. The Company has more than $5.0 billion of consolidated assets in 21 states and the District of Columbia. Core markets include New York City, Denver, Boston, Washington D.C. and California. The Corporate headquarters of the Company is in Cleveland, Ohio.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements of the Company include accounts of the Company and all majority-owned subsidiaries where the Company has financial or operational control. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, the Company has identified certain critical accounting policies which are subject to judgment and uncertainties. The Company has used its best judgment to determine estimates of certain amounts included in the financial statements as a result of these policies, giving due consideration to materiality. As a result of uncertainties surrounding these events at the time the estimates are made, actual results could differ from these estimates causing adjustments to be made in subsequent periods to reflect more current information. The accounting policies that the Company believes contain uncertainties that are considered critical to understanding the consolidated financial statements are discussed below. The policies discussed below are reviewed on a regular basis by the Company and have been discussed with the Company’s audit committee of the Board of Directors.
Allowance for Doubtful Accounts - The Company records allowances for probable uncollectible rent receivables from commercial tenants based on an estimate of the amount of the receivables that will not be realized from cash receipts in subsequent periods. This estimate is calculated based on a three year history of early tenant lease terminations as well as an estimate for expected activity of current tenants in the case of the straight-line rent adjustments. There is a risk that the Company’s estimate of the expected activity of current tenants may not accurately reflect future events. If the estimate does not accurately reflect future tenant vacancies, the reserve for straight-line rent receivable may be over or understated by the actual tenant vacancies that occur. The Company’s allowance for doubtful accounts at January 31, 2003, 2002 and 2001 was $30,666,000, $33,506,000 and $49,565,000, respectively.
Notes Receivable - During the years ended January 31, 2003 and 2002, the Company reduced reserves previously recorded on certain notes receivable at certain syndicated residential properties. These reserves were reduced due to the occurrence of a series of events. In the course of evaluation of these events and their effect on the collectibility of the notes, the Company used estimates. These estimates included, but were not limited to, estimated appraisal values as well as future cash flows at these properties. These estimates can be affected by market conditions at the time that will not only affect the appraisal value but operating cash flow projections. Had different estimates been applied, the amount of the reserves reversed might have been different than the amounts actually recorded. For the years ended January 31, 2003 and 2002, the Company reduced reserves of $4,866,000 and $26,335,000, respectively.
Economic Lives - Depreciation and amortization is generally computed on a straight-line method over the estimated useful life of the asset. Tenant improvements are amortized over the life of the tenant’s lease. The estimated useful lives of buildings are primarily 50 years. This estimate is based on the length of time the asset is expected to generate positive operating cash flows. Actual events and circumstances can cause the life of the building to be different than the estimates made. Additionally, lease terminations can affect the economic life of the tenant improvements. The Company believes the estimated useful lives of fixed assets are reasonable and follow industry standards.
Asset Impairment - The Company reviews its investment portfolio to determine if its carrying costs will be recovered from future cash flows whenever events or changes indicate that recoverability of long-lived assets may not be assured. In cases where the Company does not expect to recover its carrying costs, an impairment loss is recorded as a provision for decline in real estate for assets in the Company’s real estate portfolio pursuant to the guidance established in FASB No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” As part of the analysis to determine if an impairment loss has occurred the Company is required to make estimates to determine future operating cash flows. If different estimates are applied in determining future operating cash flows, such as occupancy rates and rent and expense increases, the Company may not record an impairment loss, or may record a greater impairment loss on a property.
RESULTS OF OPERATIONS
The Company reports its results of operations by each of its four strategic business units as it believes it provides the most meaningful understanding of the Company’s financial performance.
Net Earnings - Net Earnings for the Company for 2002 were $48,831,000 versus $103,029,000 in 2001 and $91,637,000 in 2000. The fluctuation is primarily attributable to the gain on disposition of operating properties and other investments, net of tax of $55,076,000 and $51,821,000 in 2001 and 2000, respectively, compared to $4,056,000 in 2002.
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 as defined by generally accepted accounting principles (GAAP) and may not be directly comparable to similarly-titled measures reported by other companies. The Company believes that EBDT provides additional information about its operations and, along with net earnings, is necessary to understand its operating results. EBDT is defined and discussed in detail under “Results of Operations - EBDT”.
The Company’s EBDT for 2002 grew by 15.7% to $194,399,000 from $167,970,000. The increase in EBDT is primarily attributable to the opening or acquisition of 24 new projects in 2002 and the full year impact in 2002 of the 12 property additions in 2001.
Net Operating Income from Real Estate Groups - 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. Under the full consolidation method which is in accordance with GAAP, NOI from the combined Commercial Group and Residential Group (“Real Estate Groups”) for 2002 was $373,865,000 compared to $342,306,000 for 2001, a 9.2% increase.
Management analyzes property NOI using the pro-rata consolidation method because it provides operating data at the Company’s ownership share and the Company publicly discloses and discusses its performance using this method of consolidation to compliment its GAAP disclosures. Under the pro-rata consolidation method, NOI from the Real Estate Groups for 2002 was $373,598,000 compared to $334,787,000 for 2001, an 11.6% increase. Comparable NOI for Real Estate Groups (NOI for stabilized properties in operation throughout both years) decreased by 2.9% for the year due to weak real estate fundamentals, particularly in the residential portfolio. Comparable NOI was flat for 2001 compared to 2000. Including the expected NOI for the twelve months following stabilization for the properties that were opened, expanded or acquired in 2002, net of property disposals, NOI for Real Estate Groups would be approximately $420,000,000 for 2002.
The information in the table entitled “Earnings Before Depreciation, Amortization and Deferred Taxes” at the end of this Management’s Discussion and Analysis of Financial Condition and Results of Operations presents amounts for both full consolidation and pro-rata consolidation, providing a reconciliation of the difference between the two methods, as well as a reconciliation from EBDT to Net Earnings. Under the pro-rata consolidation method, the Company presents its partnership investments proportionate to its share of ownership for each line item of its consolidated financial statements. Under full consolidation, partnership assets and liabilities are reported as consolidated at 100 percent if deemed under the Company’s control, or on the equity method of accounting if the Company does not have control.
All amounts discussed in the narrative below are based on the full consolidation method unless otherwise noted.
Commercial Group
The following table presents the significant increases in revenues and operating expenses incurred by the Commercial Group for newly opened or acquired properties for 2002 compared to 2001 (dollars in thousands):
* Revenues represent the change from prior year of the Company’s share of net earnings.
N/A - not applicable - property recorded under equity method of accounting.
(a) Acquired property.
The following table presents the significant increases in revenues and operating expenses incurred by the Commercial Group for newly-opened or acquired properties for 2001 compared to 2000 (dollars in thousands):
* Revenues represent the change from prior year of the Company’s share of net earnings.
N/A - not applicable - property recorded under equity method of accounting.
(a) Acquired property.
(b) Property temporarily closed September 11, 2001. Amounts include $1,036 of business interruption insurance proceeds.
(c) Property temporarily closed September 11, 2001. Amounts include $7,031 of business interruption insurance proceeds.
Revenues - Revenues for the Commercial Group increased by $32,965,000 or 5.9% in 2002 compared to 2001. Revenues, adjusted for straight-line rent and equity method depreciation, for the Commercial Group increased by $35,106,000 or 6.2% in 2002 compared to 2001. These increases are primarily the result of $48,018,000 from acquisitions made and the opening of new properties as noted in the first table above. Additionally, increases in revenues resulted from the impact of the expansion at the Sheraton Station Square Hotel of $4,671,000, an increase of $9,099,000 in the Company’s remaining hotel portfolio due to a partial recovery of the travel industry from the prior year, a lease termination fee of $7,540,000 at a retail center in New York in 2002, an increase of $1,528,000 in garage and warehouse revenue at Station Square in Pittsburgh, Pennsylvania primarily due to the impact of the opening of Bessemer Court and an increase in construction fees at Twelve MetroTech Center of $6,391,000. In the second quarter of 2001, the Company broke ground onTwelve MetroTech Center in Brooklyn, New York and, when complete in 2005, this building will have 32 stories totaling over 1,100,000 square feet owned in condominium by the Company and the City of New York. These increases in revenues were partially offset by: $11,540,000 due to property dispositions in 2001 of Tucson Mall in Tucson, Arizona and Bowling Green Mall in Bowling Green, Kentucky; payment of past due rentals from a former tenant of $918,000 which was received in 2001 at Hunting Park in Philadelphia, Pennsylvania that did not recur in 2002; decreased commercial land sales of $472,000; a non-recurring retail lease termination fee in 2001 of $3,500,000; and $7,950,000 as a result of the non-recurring sale in 2001 of a non-operating property at Ballston Common Mall in Arlington, Virginia and the sale of a participating interest in a regional mall. Additionally, revenues decreased by $6,985,000 as a result of Bay Street and Courtland Center being classified as discontinued operations in 2002. Bay Street, a 16,000 square foot retail center located in Staten Island, New York and Courtland Center, a 458,000 square foot retail center located in Flint, Michigan were both sold in the fourth quarter of 2002. The balance of the decrease in revenue in the Commercial Group of approximately $11,000,000 was generally due to fluctuations in mature properties.
Revenues for the Commercial Group increased by $22,716,000 or 4.2% in 2001 compared to 2000. Revenues, adjusted for straight-line rent and equity method depreciation, for the Commercial Group increased by $24,659,000 or 4.6% in 2001 compared to 2000. These increases are primarily the result of $35,924,000 in acquisitions made and the opening of new properties as noted in the second table above. In addition, Twelve MetroTech Center construction fees resulted in an increase in net revenue of $8,220,000. Net revenues also increased as a result of a retail lease termination fee of $3,500,000 and from increased rental income $2,481,000 from Knight Ridder Building at Fairmont Plaza, an office building in San Jose; $1,138,000 from 45/75 Sidney Street and $751,000 from the Richards Building, both located in University Park at MIT in Cambridge, Massachusetts. Additionally, revenues increased by $7,950,000 as the result of the sale of a non-operating property at Ballston Common Mall in Arlington, Virginia and the sale of a participating interest in a regional mall. These increases were partially offset by decreases of $15,401,000 as a result of commercial land sales in 2000 that did not recur in 2001 in addition to decreases in the Company’s hotel portfolio primarily as a result of the overall decline in the travel industry. Excluding the increase for the two New York City hotels in the table above, the Company’s remaining hotel portfolio revenues decreased during 2001 by $8,995,000. Additional decreases resulted from the dispositions in 2000 of three specialty retail centers, Tucson Place, Canton Centre Mall and Gallery at MetroTech and the disposition in 2001 of Tucson Mall totaling $21,056,000. The balance of the remaining increase in revenues in the Commercial Group of approximately $10,200,000 was generally due to improvements in operations and increase in rental income at mature office properties.
Operating and Interest Expenses - Operating expenses decreased $6,909,000 or 2.2% in 2002 compared to 2001. Operating expenses, excluding straight-line rent adjustments on ground rent, for the Commercial Group decreased $8,469,000 or 2.7% in 2002 compared to 2001. The decrease in operating expenses was primarily attributable to a decrease in abandoned development project write-offs of $15,858,000 compared to 2001, a decrease of $6,846,000 as a result of property dispositions in 2001 of Tucson Mall in 2001 and Bowling Green Mall and a decrease of $1,965,000 for lease buy-out costs in the retail portfolio. Additionally, costs decreased by $4,300,000 due to a sale in 2001 of a non-operating property and participating interest in a regional mall, by $3,322,000 for Bay Street and Courtland Center which in 2002 are being shown as discontinued operations and by $945,000 due to charges in 2001 resulting from the Company taking over the operations of the theater at Columbia Park Center, an urban retail center in North Bergen, New Jersey. The decrease in operating expenses was partially offset by costs associated with the acquisitions made and properties opened of $15,053,000 as noted in the first table above, greater operating costs of $11,485,000 at three hotels due to the impact of the expansion at Sheraton Station Square Hotel and as a result of taking over the operations at the restaurant at Hilton Times Square Hotel and Embassy Suites Hotel as well as an accrual of $1,834,000 for an expected settlement to the prior manager and related obligations of the restaurant operations at the Company’s two New York hotels. Increased expenses of $1,835,000 were also noted in the remainder of the Company’s hotel portfolio compared to last year due to increased occupancy rates. Additionally, costs increased by $2,425,000 for commercial land sales, by $913,000 at Station Square garage and warehouse operations due to the opening of Bessemer Court and by $2,321,000 from a participation payment associated with the ground lease at the Richards Building located in University Park at MIT in Cambridge, Massachusetts. The balance of the decrease in operating expenses of approximately $11,000,000 was due to fluctuations in operating costs at mature properties. Interest expense for the Commercial Group increased by $644,000 or .5% in 2002 compared to 2001. The increase is primarily attributable to increased borrowings during 2002.
Operating expenses increased $53,665,000 or 20.0% in 2001 compared to 2000. Operating expenses, excluding straight-line rent adjustments on ground rent, for the Commercial Group increased $52,423,000 or 19.9% in 2001 compared to 2000. The increase in operating expenses was primarily attributable to costs associated with the acquisitions made and the opening of new properties of $30,160,000 as noted in the second table above and an increase in development project write-offs. Due to the challenging economic conditions in 2001, the Company chose to withdraw from certain projects in New York City and increased development project write-offs by $14,348,000 over the prior year. The risk-adjusted returns of the projects that were written off had deteriorated when compared to other projects in the development program and, by exiting these projects, the Company moved forward on new development opportunities having a more favorable anticipated return. Additional costs of $4,300,000 were incurred in 2001 in connection with the sale of a non-operating property and participating interest in a regional mall. Higher occupancy and utility charges in 2001 compared to 2000 increased combined operating expenses of $7,211,000 at One Pierrepont Plaza and 42nd Street retail center, both located in Manhattan, New York, Knight Ridder Building at Fairmont Plaza and 45/75 Sidney Street. Operating costs increased by $1,566,000 due to the Company taking over operations of the theater in 2001 at Columbia Park Center. These increases were partially offset by $12,479,000 relating to reduced expenses from the 2000 dispositions of Tucson Place, Canton Centre Mall and Gallery at MetroTech. Operating expenses also decreased by $2,661,000 at the Company’s hotel properties excluding those listed in the table above due to a decrease in occupancy. Additionally, expenses decreased as a result of lower costs of commercial land sales in 2001 compared to 2000 by $4,742,000 primarily from the outlot sales at two commercial malls. The balance of the change in operating expenses of approximately $14,700,000 was generally due to fluctuations in operating costs at mature properties, including insurance. Interest expense for the Commercial Group increased by $3,428,000 or 2.9% in 2001 compared to 2000. The increase is primarily attributable to the net increase in interest expense from the opening and acquisition of new properties in 2001 and 2000 and expansion of existing properties greater than the decrease in interest expense from asset dispositions during 2001 and 2000.
Residential Group
The following table presents the significant increases (decreases) in revenues and operating expenses incurred by the Residential Group for newly opened or acquired properties for 2002 compared to 2001 (dollars in thousands):
Openings/Acquisitions
* Revenues represent the change from prior year of the Company’s share of net earnings (loss).
N/A - not applicable - property recorded under equity method of accounting.
(a) Acquired property.
(b) Phased opening.
The following table presents the significant increases (decreases) in revenues and operating expenses incurred by the Residential Group for newly opened or acquired properties for 2001 compared to 2000 (dollars in thousands):
*
Revenues represent the change from prior year of the Company’s share of net earnings (loss).
N/A - not applicable - property recorded under equity method of accounting.
(a)
Acquired property.
(b)
Phased opening.
The following table presents the significant decreases in revenues and operating expenses incurred by the Residential Group for disposed properties for 2002 compared to 2001 (dollars in thousands):
Revenues - Revenues for the Residential Group decreased $15,693,000 or 9.5% for 2002 compared to 2001. Revenues, adjusted for equity method depreciation, for the Residential Group decreased by $13,895,000, or 7.9% for 2002 compared to 2001. These decreases were primarily the result of a reduction of reserves of $4,866,000 in 2002 versus a reduction of reserves of $26,335,000 in 2001 for notes receivable and related accrued interest from syndications. During 2002 and 2001, the Company completed a series of events that led to the reversal of these reserves. The first of these was the modification or expiration of the Government contracts that now allow for market rate apartment rentals, which provide a significant increase in expected future cash flows. This, in turn, increased the appraised values of these properties. As a result, the Company determined that the collection of a portion of these notes receivable and related accrued interest was now probable. Additionally, a decrease in revenues of $5,082,000 occurred from the gain on disposition in 2001 of Chapel Hill Towers in Akron, Ohio accounted for on the equity method. Revenues also decreased by $996,000 from land sales and by $4,568,000 from dispositions as noted in the third table above. Decreases also occurred from investment earnings of $538,000 in 101 San Fernando, a newly constructed 323-unit community and $2,112,000 for Enclave, a 637-unit community, both in San Jose, California resulting from the over supply of rental property in the San Jose market, $771,000 for Pavilion, a 1,115-unit community near the airport in Chicago, Illinois, resulting from occupancy decline due to airline layoffs from a distressed travel market and $5,363,000 for Trowbridge, a 305-unit community in Southfield, Michigan which in 2002 is being shown as discontinued operations. The Company did not have sufficient cash to meet the debt service requirements on Trowbridge, and although the Company attempted to negotiate a restructuring of the debt with the buyer of the mortgage, the end result is that the mortgagee accepted the deed in lieu of foreclosure on the property in March 2003. These decreases were partially offset by $22,782,000 from the acquisitions made and properties opened during fiscal 2002 and 2001 as noted in the first table above. Additionally, revenues increased from investment earnings of $572,000 in Grand, a 546-unit luxury high rise community in North Bethesda, Maryland, $348,000 in Lenox Club, a 385-unit luxury high rise community in Arlington, Virginia, $322,000 in Lenox Park, a 406-unit luxury high rise community in Silver Spring, Maryland and $793,000 in Drake, a newly rehabilitated 280-unit community under lease up in Philadelphia, Pennsylvania. Increases also occurred from earnings of $1,142,000 for Classic Residence by Hyatt, a newly constructed 310-unit assisted living community under lease up in Yonkers, New York accounted for on the equity method and an increase in revenues of $419,000 from increased supported-living service fees. The balance of the increase in revenue in the Residential Group of approximately $600,000 was generally due to fluctuations in mature properties.
Revenues for the Residential Group decreased $42,255,000 or 33.4% in 2001 compared to 2000. Revenues, adjusted for equity method depreciation, for the Residential Group increased by $42,857,000 or 32.0% in 2001 compared to 2000. These increases were primarily the result of the acquisitions made and properties opened of $21,739,000 as noted in the second table above, an increase of $24,620,000, for reduction of reserves for notes receivable and related accrued interest in the syndicated property portfolio as described above and an increase in investment earnings from the Grand of $1,199,000 and Drake of $1,040,000. These increases are offset by the dispositions of properties of $4,085,000 for Studio Colony, a 450-unit apartment complex in Los Angeles, California, Palm Villas, a 350-unit apartment complex in Henderson, Nevada, Whitehall Terrace , a 188-unit apartment complex in Kent, Ohio, Oaks, a 248-unit apartment complex in Bryan, Texas and Peppertree, a 208-unit apartment complex in College Station, Texas. The remaining decrease in revenue was generally due to a decline in results of mature properties.
Operating and Interest Expenses - Operating expenses for the Residential Group decreased $1,879,000 or 2.3% for 2002 compared to 2001. These decreases were primarily the result of decreases in expenses of $2,523,000 due to dispositions of properties as noted in the third table above, decreases in abandoned development project write-offs of $11,149,000 in 2002 from 2001 and $4,380,000 for Trowbridge which in 2002 is being shown as discontinued operations. These decreases were partially offset primarily by increases as a result of acquisitions made and properties opened during 2002 and 2001 of $15,459,000 as noted in the first table above. Additionally, expenses associated with supported-living service fee income increased by $395,000. The remaining increase of approximately $300,000 was generally due to increased operating costs of mature properties. Interest expense for the Residential Group decreased by $158,000 or 0.7% for 2002 compared to 2001. The decrease in interest expense is primarily the result of the lower variable interest rates.
Operating expenses for the Residential Group increased by $32,118,000 or 66.8% in 2001 compared to 2000. The increase in operating expenses was primarily due to the reduction in the reserve for the collection of a note receivable in 2000 from Millender Center of $10,775,000 that did not recur in 2001. Operating expenses also increased by $7,779,000 due to the write-off in 2001 of abandoned development projects, primarily in New York City and Northern California. Additionally, increases from acquisitions made and properties opened during fiscal 2001 and 2000 of $14,100,000 are noted in the second table above. Interest expense decreased by $72,000 or 0.3% in 2001 compared to 2000. The increase in interest expense is the result of acquisitions and openings of new properties.
Land Development Group
Revenues - Sales of land and related gross margins vary from period to period depending on market conditions relating to the disposition of significant land holdings. Revenues for the Land Development Group increased by $22,101,000 in 2002 compared to 2001. This increase is primarily the result of increases in land sales of $39,751,000 at four major land development projects: Stapleton in Denver, Colorado, Willowbrook in Twinsburg, Ohio, New Haven in Barberton, Ohio and Waterbury in North Ridgeville, Ohio combined with several smaller sales increases at various land development projects. In addition, revenues increased by $1,682,000 as a result of the sale of land options at Paseo del Este in El Paso, Texas. These increases were partially offset by decreases of $19,331,000 at five major land development projects: Central Station in Chicago, Illinois, Chestnut Lakes in Elyria, Ohio, Westwood Lakes in Tampa, Florida, The Greens at Birkdale Village in Huntersville, North Carolina and Avalon in North Ridgeville, Ohio combined with several smaller sales decreases at various land development projects. Westwood Lakes, The Greens at Birkdale Village and Avalon properties have completely sold out.
Revenues for the Land Development Group increased by $36,426,000 in 2001 compared to 2000. These increases are primarily the result of increases in land sales of $48,314,000 compared to the prior year at five major land development projects: Stapleton, Central Station, Waterbury, Avalon and Greens at Birkdale Village combined with several smaller sales increases at various land development projects. These increases were partially offset by decreases of $10,779,000 primarily from Westwood Lakes, Old Stone Crossing at Caldwell Creek in Charlotte, North Carolina and Aberdeen in Highland Heights, Ohio combined with several smaller sales decreases at various land development projects.
Operating and Interest Expenses - The fluctuation in Land Development Group operating expenses primarily reflects costs associated with land sales volume in each period. Operating expenses increased by $15,286,000 in 2002 compared to 2001. This increase is due to increased combined expenses of $23,132,000 primarily at five land development projects: Stapleton, Central Station, Willowbrook, New Haven and Waterbury combined with several smaller expense increases at various land development projects. These increases were partially offset by decreases of $7,845,000 primarily at four land development projects: Chestnut Lakes, The Greens at Birkdale Village, Westwood Lakes and Avalon along with several smaller expense decreases at various land development projects.
Operating expenses increased in 2001 compared to 2000 by $8,247,000 primarily from increased combined expenses of $16,443,000 at four major land development projects: Stapleton, Central Station, Waterbury and Avalon. These increases were partially offset by decreases in expenses of $7,655,000 as the result of decreases in land sales volume at Westwood Lakes, Old Stone Crossing at Caldwell Creek and Aberdeen.
Interest expense decreased by $225,000 in 2002 compared to 2001 and decreased by $1,341,000 in 2001 compared to 2000. Interest expense varies from year to year depending on the level of interest-bearing debt within the Land Development Group.
Lumber Trading Group
Revenues - Revenues for the Lumber Trading Group decreased by $18,668,000 in 2002 compared to 2001. The decrease was primarily due to an extreme downward movement of commodity lumber prices. The downward movement was the result of an extreme oversupply situation.
Revenues for the Lumber Trading Group increased by $10,301,000 in 2001 compared to 2000. The increase was primarily due to an increase in lumber trading margins in 2001 compared to 2000. The increase in lumber trading margins in 2001 results from improved market conditions for portions of the year including the spring when lumber prices increased significantly.
Operating and Interest Expenses - Operating expenses for the Lumber Trading Group decreased by $13,829,000 in 2002 compared to 2001. This decrease was primarily due to lower variable expense resulting from the decreased revenue explained above. Interest expense decreased $476,000 in 2002 compared to 2001 primarily due to a reduction in interest rates.
Operating expenses for the Lumber Trading Group increased by $8,569,000 in 2001 compared to 2000. This increase was primarily due to increased variable expenses, principally traders’ commissions, due to increased lumber trading margins compared to 2000. Interest expense decreased $2,453,000 in 2001 compared to 2000 due to a reduction in both the amount of borrowing levels and interest rates.
Corporate Activities
Revenues - Corporate Activities’ revenues increased $545,000 in 2002 compared to 2001 and increased $87,000 in 2001 compared to 2000. Corporate Activities’ revenues consist primarily of interest income from investments and loans made by the Company and vary from year to year depending on interest rates and the amount of loans outstanding.
Operating and Interest Expenses - Operating expenses for Corporate Activities decreased $234,000 in 2002 compared to 2001 and increased $6,307,000 in 2001 compared to 2000. Operating expenses for 2001 increased over 2000 primarily as the result of an increase in general insurance accruals and additional information technology costs. Interest expense decreased by $2,781,000 in 2002 compared to 2001 as a result of reduced variable interest rates and by $3,976,000 in 2001 compared to 2000 as a result of decreased borrowings and reduced variable interest rates. Corporate Activities’ interest expense consists primarily of interest expense on the 8.50% Senior Notes and the long-term credit facilities that have not been allocated to a strategic business unit (see “Financial Condition and Liquidity”).
Depreciation and Amortization - Depreciation and amortization increased $17,159,000 in 2002 compared to 2001 and decreased $522,000 in 2001 compared to 2000. Depreciation and amortization for 2002 increased over 2001 primarily as a result of acquisitions made and the opening of new properties offset by property dispositions and properties classified as discontinued operations. The decrease in depreciation and amortization in 2001 over 2000 was primarily the result of property dispositions offset by acquisitions made and the opening of new properties.
Discontinued Operations
The Company adopted the provisions of Statement of Financial Accounting Standard (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective February 1, 2002. This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It also retains the basic provisions for presenting discontinued operations in the income statement but broadened the scope to include a component of an entity rather than a segment of business. Pursuant to the definition of a component of an entity in SFAS No. 144, assuming no significant continuing involvement, all earnings of properties which have been sold or held for sale are reported as discontinued operations. The Company considers assets held for sale when the transaction has been approved by the appropriate level of management and there are no contingencies related to the sale that may prevent the transaction from closing. In most transactions, these contingencies are not satisfied until the actual closing of the transaction and, accordingly, the property is not identified as held for sale until the closing actually occurs. However, each potential transaction is evaluated based on its separate facts and circumstances. Three properties classified as discontinued operations were reclassified as such in the Statement of Earnings for the year ended January 31, 2003. Due to the immateriality of the operating results of these three entities for the years ended January 31, 2002 and 2001, no reclassification was made in the Consolidated Statement of Earnings for those years.
Included in discontinued operations for the year ended January 31, 2003 are three properties: Bay Street, Courtland Center and Trowbridge. Bay Street, a 16,000 square foot retail center located in Staten Island, New York, was sold in the fourth quarter of fiscal 2002. Courtland Center, a 458,000 square foot retail center located in Flint, Michigan, was also sold during the fourth quarter of fiscal 2002. Trowbridge is located in Southfield, Michigan, has 305 supported-living units, and its deed was accepted by its lender in lieu of foreclosure in April 2003. Bay Street and Courtland Center were previously included in the Commercial Group and Trowbridge is included in the Residential Group.
Using the full consolidation method, the assets and liabilities and operating results relating to assets sold and assets held for sale are as follows.
(1)
Amounts have not been restated as discontinued operations on the Consolidated Statement of Earnings and have been included here for informational purposes only.
(1)
Amounts have not been restated as discontinued operations on the Consolidated Statement of Earnings and have been included here for informational purposes only.
Other Transactions
Gain (Loss) on Disposition of Operating Properties and Other Investments, Provision for Decline in Real Estate and Extraordinary Items - The following table summarizes the gain (loss) on disposition of operating properties and other investments by year.
*
Sold in a tax-deferred exchange for a replacement property through an intermediary.
Provision for Decline in Real Estate - During the years ended January 31, 2003, and 2002, the Company recorded a Provision for Decline in Real Estate totaling $8,221,000 and $8,783,000, respectively. The provisions represent the adjustment to fair market value of land held by the Commercial and Residential Groups. During the year ended January 31, 2001, the Company recorded a Provision for Decline in Real Estate totaling $1,231,000. The provision represents the write-down to estimated fair value, less cost to sell, of Canton Centre Mall.
Extraordinary Items - The Company adopted the provisions of Statement of Financial Accounting Standard No. 145, “Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13 on Technical Corrections” (SFAS No. 145), which requires gains or losses from early extinguishment of debt to be classified in operating income or loss. The Company previously recorded gains or losses from early extinguishment of debt as an extraordinary item, net of tax, in its Statement of Earnings. For the years ended January 31, 2003 and 2002, the Company has reclassified $1,653,000 and $386,000, respectively, of early extinguishment of debt to interest expense. There were no early extinguishments of debt for the year ended January 31, 2001.
Income Taxes - Income tax expense totaled $31,826,000, $63,334,000 and $22,312,000 in 2002, 2001 and 2000, respectively. At January 31, 2003, the Company had a net operating loss carryforward for tax purposes of $8,516,000 (generated primarily from the impact of depreciation expense from real estate properties on the Company’s net earnings) that will expire in the year ending January 31, 2022, General Business Credit carryovers of $7,581,000 that will expire in the years ending January 31, 2004 through 2023 and Alternative Minimum Tax (“AMT”) carryforward of $34,096,000 that is available until used to reduce Federal tax to the AMT amount. The Company’s policy is to consider a variety of tax-saving strategies when evaluating its future tax position.
EBDT - Earnings Before Depreciation, Amortization and Deferred Taxes (EBDT) is defined as net earnings excluding the following items: i) gain (loss) on disposition of operating properties and other investments (net of tax); ii) the adjustment to recognize rental revenues and rental expense using the straight-line method; iii) noncash charges from Forest City Rental Properties Corporation, a wholly-owned subsidiary of Forest City Enterprises, Inc., for depreciation, amortization and deferred income taxes; iv) provision for decline in real estate (net of tax); v) extraordinary items (net of tax); and vi) cumulative effect of change in accounting principle (net of tax). The Company excludes gain (loss) on the disposition of operating properties and other investments 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 operating properties and other investments, other than commercial land and airrights or land held by the Land Development Group, as non-recurring items. Early extinguishment of debt, which was formerly reported as an extraordinary item, is now reported in operating earnings. However, early extinguishment of debt will be excluded from EBDT through the year ended January 31, 2003. Beginning February 1, 2003, early extinguishment of debt will be included in EBDT. The adjustment to recognize rental revenues and rental expenses on the straight-line method is excluded because it is management’s opinion that rental revenues and expenses should be recognized when due from the tenants or due to the landlord. The Company excludes depreciation and amortization expense related to real estate operations from EBDT because they are noncash 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 noncash items. The provision for decline in real estate is excluded from EBDT because it is a noncash item that varies from year to year based on factors unrelated to the Company’s overall financial performance. The Company’s EBDT may not be directly comparable to similarly-titled measures reported by other companies. See Item 6. Selected Financial Data on pages 20-23.
FINANCIAL CONDITION AND LIQUIDITY
The Company believes that its sources of liquidity and capital are adequate to meet its funding obligations. The Company’s principal sources of funds are cash provided by operations, the long-term credit facility and refinancings and dispositions of mature properties. The Company’s principal use of funds are the financing of development and acquisitions of real estate projects, capital expenditures for its existing portfolio, payments on nonrecourse mortgage debt on real estate and payments on the long-term credit facility.
Stock Offering - On September 28, 2001, the Company sold 3,900,000 shares of Class A common stock at an initial price of $32.23 per share and realized net proceeds, after offering costs, of $117,663,000. The proceeds were used to reduce borrowings under the previous revolving credit facility by $104,000,000 and to fund development projects.
Long-Term Credit Facility - At January 31, 2003, the Company had $135,250,000 outstanding under its $350,000,000 long-term credit facility which became effective March 5, 2002. The credit facility includes a $100,000,000 term loan with an outstanding balance of $81,250,000 as of January 31, 2003 and a $250,000,000 revolving line of credit, both of which mature in March 2006 and allow for up to a combined amount of $40,000,000 in outstanding letters of credit or surety bonds ($26,788,000 in letters of credit outstanding and $-0- surety bonds at January 31, 2003). Quarterly principal payments of $6,250,000 on the new term loan commenced July 1, 2002.
At January 31, 2002, the Company had $54,000,000 outstanding under its $265,000,000 revolving credit facility. The balance was paid in full on March 5, 2002 with the proceeds from the new term loan discussed above. The revolving credit facility was scheduled to mature on March 31, 2003 and allowed for up to a combined amount of $30,000,000 in outstanding letters of credit and surety bonds ($17,087,000 and $9,675,000, respectively, were outstanding at January 31, 2002). The revolving credit available was reduced quarterly by $2,500,000 and at January 31, 2002, the revolving credit line was $250,000,000.
The long-term credit facility provides, among other things, for: 1) at the Company’s election, interest rates of 2.125% over London Interbank Offered Rate (LIBOR) or 1/2% over the prime rate except for the last $50,000,000 of borrowings in the case of the revolving loans which is based on 2.75% over LIBOR or 3/4% over the prime rate; 2) maintenance of debt service coverage ratios and specified levels of net worth and cash flow (as defined in the credit facility); and 3) restriction of $20,000,000 on dividend payments and stock repurchases. At January 31, 2003, retained earnings of $9,088,000 were available for payment of dividends. On March 5, 2003, the anniversary date of the long-term credit facility, this amount was reset to the $20,000,000 limitation.
In order to mitigate the short-term variable interest rate risk on its long-term credit facility, the Company has entered into LIBOR interest rate swaps and purchased LIBOR interest rate caps. Swaps are in effect through January 31, 2004 which effectively fix the LIBOR rate at 1.78% for a notional amount of $56,250,000 beginning February 1, 2003, and effectively fix the LIBOR rate at 1.77% for a notional amount of $75,000,000 beginning December 1, 2002. LIBOR interest rate caps for 2003 were purchased at an average rate of 5.13% at a notional amount of $75,651,000 covering the period February 1, 2003 through February 1, 2004. LIBOR interest rate caps for 2004 were purchased at an average rate of 5.00% at a notional amount of $147,882,000 covering the period February 1, 2004 through August 1, 2004.
Interest incurred on the long-term credit facility was $7,033,000 in 2002, $10,969,000 in 2001 and $16,163,000 in 2000. Interest paid on the long-term credit facility was $6,430,000 in 2002, $11,540,000 in 2001 and $15,162,000 in 2000.
Lumber Trading Group - The Lumber Trading Group is financed separately from the rest of the Company’s strategic business units. The financing obligations of Lumber Trading Group are without recourse to the Company. Accordingly, the liquidity of Lumber Trading Group is discussed separately below under “Lumber Trading Group Liquidity.”
Mortgage Financings
The Company is actively working to extend the maturities and/or refinance the nonrecourse debt that is coming due in 2003 and 2004, generally pursuing long-term fixed-rate debt. During the year ended January 31, 2003, the Company completed the following financings:
For maturing debt, the Company continues to seek long-term debt for those project loans which mature within the next 12 months as well as for those projects which will begin operation within the next 12 months, generally pursuing fixed-rate loans. For construction loans, the Company generally pursues floating-rate financings with maturities ranging from two to five years.
Interest Rate Exposure
At January 31, 2003, the composition of nonrecourse mortgage debt was as follows.
(1)
Reflects weighted average interest rate including both the base index and lender margin.
(2)
Taxable variable-rate debt of $805,574 at full consolidation and $850,339 at pro-rata consolidation is protected with LIBOR swaps and caps described below. These LIBOR-based hedges protect current debt outstanding as well as the anticipated increase in debt outstanding for projects currently under development or anticipated to be under development during the year ending January 31, 2004.
At January 31, 2003, the composition of nonrecourse mortgage debt (included in the figures above) related to projects under development was as follows.
To mitigate short-term variable interest rate risk, the Company has purchased London Interbank Offered Rate (“LIBOR”) interest rate caps and swaps for its nonrecourse mortgage debt portfolio as follows:
The Company generally does not hedge tax-exempt debt because, since 1990, the base rate of this type of financing has averaged 3.37% and has not exceeded 7.90%.
Including properties accounted for under the equity method, a 100 basis point increase in taxable interest rates would increase the annual pre-tax interest cost for the next 12 months of the Company’s taxable variable-rate debt by approximately $7,000,000 at January 31, 2003. This increase is net of the protection provided by the interest rate swaps and long-term LIBOR contracts in place as of January 31, 2003. 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 rates would increase the annual pre-tax interest cost for the next 12 months of the Company’s tax-exempt variable-rate debt by approximately $6,100,000 at January 31, 2003.
Lumber Trading Group Liquidity
Lumber Trading Group is separately financed with a revolving line of credit and an asset securitization facility which totaled $80,000,000 and $86,000,000 at January 31, 2003 and 2002, respectively. The bank line of credit allows for up to $5,000,000 in outstanding letters of credit (none outstanding at January 31, 2003 and 2002) which reduce the credit available to the Lumber Trading Group. Borrowings under the bank line of credit, which are nonrecourse to the Company, are collateralized by all the assets of the Lumber Trading Group, bear interest at the lender’s prime rate or LIBOR plus an applicable margin ranging from 1.375% to 1.75%, and have a fee of 0.2% to 0.4% per year on the unused portion of the available commitment. The LIBOR loan margin and unused commitment fee are based on a quarterly interest coverage ratio. The bank line of credit is subject to review and extension annually, and expires on June 30, 2003. At January 31, 2003, $1,770,000 was outstanding under this revolving line of credit. A second $6,000,000 line of credit was reduced to $5,000,000 in June 2002 and was closed prior to January 31, 2003.
The Lumber Trading Group has entered into a three-year agreement, expiring in July 2005 under which it is selling an undivided interest in a pool of receivables up to a maximum of $102,000,000 to a large financial institution (the “Financial Institution”). The Company bears no risk regarding the collectability of the accounts receivable once sold, and cannot modify the pool of receivables. At January 31, 2003 and 2002, the Financial Institution held an interest of $41,000,000 and $44,000,000, respectively, in the pool of receivables. Sales of accounts receivable have averaged $48,900,000 and $44,300,000 per month during the years ended January 31, 2003 and 2002, respectively.
To protect against risks associated with the variable interest rates on current and future borrowings on the liquidity banking agreement supporting the facility through which the pools of receivables are sold, the Lumber Trading Group entered into an interest rate swap with a notional amount of $20,000,000. The swap fixes the LIBOR interest rate at 4.28% and is effective through December 31, 2005.
These credit facilities are without recourse to the Company. The Company believes that the amount available under these credit facilities will be sufficient to meet the Lumber Trading Group’s liquidity needs.
Cash Flows - Full Consolidation
Net cash provided by operating activities was $214,570,000, $81,595,000 and $187,427,000 for 2002, 2001 and 2000, respectively. The increase in net cash provided by operating activities in 2002 from 2001 is the result of an increase of $113,637,000 in rents and other revenues received (primarily attributable to an increase in operating revenues of $30,622,000, a decrease in net notes and accounts receivable for Lumber Trading Group of $19,675,000 in 2002 compared to an increase in net notes and accounts receivable of $36,465,000 in 2001, and the non-recurring reduction of $24,620,000 of reserves against Residential Group notes receivable in 2001), an increase in land sales of $28,605,000, a decrease of $10,951,000 in operating expenditures (primarily due to an increase in accounts payable), and a decrease in interest paid of $6,505,000. These increases were partially offset by an increase in land development expenditures of $17,335,000 and a decrease in cash distributions from operations of unconsolidated entities of $9,388,000.
The decrease in net cash provided by operating activities in 2001 from 2000 is the result of an increase of $83,992,000 in operating expenditures, a decrease in cash distributions from operations of unconsolidated entities of $30,079,000, a decrease of $8,341,000 in rents and other revenues received (primarily attributable to an increase in operating revenues of $94,448,000, offset by an increase in net notes and accounts receivable of $36,465,000 in 2001 for Lumber Trading Group compared to a decrease in net notes and accounts receivable of $56,942,000 in 2000, as well as the reversal of $24,620,000 of reserves against Residential Group notes receivable), and an increase in interest paid of $2,505,000. These decreases were partially offset by an increase in proceeds from land sales of $11,969,000 and a decrease of $7,116,000 in land development expenditures.
Net cash used in investing activities totaled $605,249,000, $213,286,000 and $500,136,000 for 2002, 2001 and 2000, respectively. Capital expenditures totaled $564,809,000, $425,991,000 and $505,284,000 for 2002, 2001 and 2000, respectively, and were financed with cash provided from operating activities, new nonrecourse mortgage indebtedness of $395,000,000, $267,000,000 and $337,000,000 incurred in 2002, 2001 and 2000, respectively, borrowings on the long-term credit facility and proceeds from disposition of operating properties and other investments.
In 2002, 2001 and 2000, $25,913,000, $190,011,000 and $130,751,000, respectively, was collected in proceeds from the disposition of operating properties and other investments. In 2002, the Company collected proceeds from the sale of Courtland Center and Bay Street, which were partially used to reduce total mortgage debt by $22,161,000 (see “Mortgage Financings”). In 2001, proceeds from the sale of Tucson and Bowling Green Malls and Chapel Hill, Whitehall Terrace, Peppertree, Palm Villas and The Oaks, residential apartment properties, were partially used to reduce total mortgage debt by $111,952,000. In 2000, proceeds from the sale of Studio Colony, Highlands,Tucson Place and the sale of available-for-sale equity securities were used to reduce total mortgage debt by $188,545,000.
In 2002, the Company invested $66,353,000 in investments in and advances to real estate affiliates, received a return on its investments in and advances to real estate affiliates of $22,694,000 in 2001 and invested $125,603,000 in investments in and advances to real estate affiliates in 2000. The 2002 investments were primarily related to the following development projects: Short Pump Town Center ($42,285,000), a regional mall under construction in Richmond, Virginia, various projects in New York City ($26,359,000), Stone Gate at Bellefair ($5,668,000), a supported-living project under construction in Ryebrook, New York, offset by a return on investment of $9,576,000 from Mall at Robinson in Pittsburgh, Pennsylvania. The 2000 investments were primarily related to advances on behalf of the Company’s joint venture partner in the New York City area urban retail development ($18,754,000), two commercial shopping centers: Mall at Stonecrest in Atlanta, Georgia ($8,648,000) and Mall at Robinson ($6,896,000) and unconsolidated entities of $88,656,000.
Net cash provided by financing activities totaled $462,981,000, $117,480,000 and $292,892,000 in 2002, 2001 and 2000, respectively. The Company’s refinancing of mortgage indebtedness is discussed above (see “Mortgage Financings”), and borrowings under new nonrecourse mortgage indebtedness for acquisition and development activities is included above in the discussion of net cash used in investing activities.
Financing activities for 2002 also reflected a repayment of borrowings under the long-term credit facility of $78,000,000 from proceeds of the new $100,000,000 term loan, $18,750,000 of quarterly repayments of the term loan, an increase of $17,317,000 in restricted cash (primarily from residential construction and tenant cancellation fees held in escrow for future improvements for 42nd Street), an increase in book overdrafts of $2,552,000 (representing checks issued but not yet paid), payment of deferred financing costs of $10,944,000, a net increase of $14,930,000 in notes payable, an increase in minority interest of $4,776,000, proceeds of $3,137,000 from the exercise of stock options and payments of $10,912,000 of dividends to shareholders.
Financing activities for 2001 also reflected proceeds from the sale of common stock through a public offering of $117,663,000, of which $104,000,000 was used to reduce the long-term credit facility, and an additional repayment of $56,000,000 on the long-term credit facility, an increase of $37,002,000 in restricted cash (primarily from the Stapleton project in Denver, Colorado and a supported-living residential project in Long Island, New York), an increase in book overdrafts of $5,406,000 (representing checks issued but not yet paid), payment of deferred financing costs of $17,080,000, a net increase of $9,162,000 in notes payable, a decrease in minority interest of $2,219,000, proceeds of $4,577,000 from the exercise of stock options and payments of $8,213,000 of dividends to shareholders.
Financing activities for 2000 reflected a decrease in book overdrafts of $30,993,000 (representing checks issued but not yet paid), an increase in minority interest of $2,084,000, an increase in borrowings of subordinated debt of $20,400,000, a net decrease of $17,278,000 in notes payable (primarily comprised of a reduction in borrowings outstanding against the line of credit in the Lumber Trading Group), payment of deferred financing costs of $30,682,000 and payments of $6,608,000 of dividends to shareholders.
COMMITMENTS AND CONTINGENCIES
The Company has adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). The guarantees discussed below were entered into prior to January 1, 2003 and, therefore, have not been recorded in the Company’s Consolidated Financial Statements at January 31, 2003, pursuant to the provisions of FIN No. 45. The Company believes the risk of payment under these guarantees is remote and, to date, no payments have been made under these guarantees.
As of January 31, 2003, the Company has guaranteed loans totaling $3,200,000, relating to a $1,800,000 bank loan for the Stone Gate at Bellefair supported-living Residential Group project in Ryebrook, New York and the Company’s $1,400,000 share of a bond issue made by the Village of Woodridge, relating to a Land Development Group project in suburban Chicago, Illinois. The bank loan guaranty is expected to terminate in early 2003. The bond issue guarantee terminates April 30, 2015, unless the bonds are paid sooner, and is limited to $500,000 in any one year. The Company had outstanding letters of credit of $26,788,000 as of January 31, 2003. The maximum potential amount of future payments on the guaranteed loans and letters of credit the Company could be required to make is the total amounts noted above.
The Company, as a general partner for certain limited partnerships, guarantees the funding of operating deficits of newly-opened apartment projects for an average of five years. At January 31, 2003, the maximum potential amount of future payments on these operating deficit guarantees the Company could be required to make is approximately $21,000,000. The Company would seek to recover any amounts paid through refinancing or sales proceeds of the apartment project. These partnerships typically require the Company to identify, on an after-tax or “grossed up” basis, the investment partner against the failure to receive, or the loss of allocated tax credits and tax losses. At January 31, 2003 the maximum potential payment under these tax indemnity guarantees was approximately $112,000,000. The Company believes that all necessary requirements for qualifications for such tax credits have been and will be met and that the Company’s investment partners will be able to receive expense allocations associated with the properties. The Company has obtained legal opinions from major law firms supporting the validity of the tax credits.
The Company’s mortgage loans are all non-recourse, however in some cases lenders carve-out certain items from the non-recourse provisions. These carve-out items enable the lenders to seek recourse if the Company or the joint venture commit fraud, voluntarily file for bankruptcy, intentionally misapply funds, transfer title without lender consent, or intentionally misrepresent facts. The Company has also provided certain environmental guarantees. Under these environmental remediation guarantees, the Company must remediate any hazardous materials brought onto the property in violation of environmental laws. The maximum potential amount of future payments the Company could be required to make is limited to the actual losses suffered or actual remediation costs incurred. A portion of these carve-outs and guarantees have been made on behalf of joint ventures and while the amount of the potential liability is currently indeterminable, the Company believes any liability would not exceed its partners’ share of the outstanding principal balance of the loans in which these carve-outs and environmental guarantees have been made. At January 31, 2003 the outstanding balance of the partners’ share of these loans was approximately $380,000,000. The Company believes the risk of payment on the carve-out guarantees is mitigated in most cases by the fact the Company manages the property, and in the event the Company’s partner did violate one of the carve-out items, the Company would seek recovery from its partner for any payments the Company would make. Additionally, the Company further mitigates its exposure through environmental insurance and insurance coverage for items such as fraud.
The Company customarily guarantees lien-free completion of projects under construction. Upon completion, the guarantees are released. At January 31, 2003, the Company has guaranteed completion of construction of development projects with a total cost of $2,078,000,000 which are approximately 53% complete in the aggregate. The projects have total loan commitments of $1,683,000,000, of which approximately $822,000,000 was outstanding at January 31, 2003. To date, the Company's subsidiaries have been successful in consistently delivering lien-free completion of construction projects, without calling the Company’s guarantee of completion.
The Company is also involved in certain claims and litigation related to its operations. Based on the facts known at this time, management has consulted with legal counsel and is of the opinion that the ultimate outcome of all such claims and litigation will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
LEGAL PROCEEDINGS
The Company is involved in various claims and lawsuits incidental to its business, and management and legal counsel are of the opinion that these claims and lawsuits will not have a material adverse effect on the Company’s financial statements. The Company, although not a named defendant, was providing a defense in a lawsuit relating to Emporium, a retail and office development project in San Francisco. The lawsuit challenged the Company’s right to entitlements under California environmental law. A verdict favorable
to the Company was obtained in May 2001, an appeal was filed by the plaintiffs and was denied on September 30, 2002. A petition for rehearing was filed by the plaintiffs and was denied in October 28, 2002. The plaintiffs filed a petition for review by the California Supreme Court. This request was denied and the matter is now closed.
SHELF REGISTRATION
The Company, along with its wholly-owned subsidiary Forest City Enterprises Capital Trust I and Forest City Enterprises Capital Trust II, filed an amended shelf registration statement with the Securities and Exchange Commission (SEC) on May 24, 2002. This shelf registration statement amends the registration statement previously filed with the SEC in December 1997. This registration statement is intended to provide Forest City flexibility to raise, from time to time, up to an aggregate of $842,180,000 from the offering of Class A common stock, preferred stock, depositary shares and a variety of debt securities, warrants and other securities.
DIVIDENDS
On June 11, 2002, the Board of Directors voted to increase the 2002 quarterly dividend to $.06 per share on both Class A and Class B Common Stock, representing a 20% annual increase over the previous quarterly dividend.
The first, second, third and fourth 2002 quarterly dividends of $.05, $.06, $.06 and $.06, respectively, per share on shares of both Class A and Class B Common Stock were paid June 17, 2002, September 17, 2002, December 16, 2002 and March 17, 2003, respectively.
The first 2003 quarterly dividend of $.06 per share on both Class A and Class B Common Stock was declared on March 12, 2003 and will be paid on June 16, 2003 to shareholders of record at the close of business on June 2, 2003.
NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” which eliminates the requirement to report gains and losses from extinguishment of debt as extraordinary items unless they meet the criteria of Accounting Principles Board Opinion (APBO) No. 30. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company has elected to adopt the provision of SFAS No. 145 for the year ended January 31, 2003 and, as a result, an extraordinary loss of $1,653,000 (pre-tax) and $386,000 (pre-tax) related to early extinguishment of debt has been reclassified to interest expense for the year ended January 31, 2003 and January 31, 2002 respectively. The Company does not expect this pronouncement to have any other material impact on the Company’s financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” This statement requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect this statement to have a an immediate material impact on the Company’s financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaking in issuing the guarantee. The disclosure requirements of this interpretation are effective for financial statements of periods ending after December 15, 2002. The initial recognition and initial measurement provisions of this Interpretation will impact the Company’s financial position, results of operations and cash flows through the recording of a liability and related increase in investment, or expense depending on the nature of the guarantee issued. The Company has disclosed the significant guarantees it has outstanding at January 31, 2003 in Note O to the Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No. 148). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 “Accounting for Stock-Based Compensation” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The alternative
methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation is effective for the Company for fiscal year ended January 31, 2004. The new requirements for interim disclosure will be effective for interim periods beginning in the quarter ending April 30, 2003. The Company will continue to apply APBO No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for its stock-based employee compensation and does not expect SFAS No. 148 to have a material impact on the Company’s financial position, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE are to be included in the consolidated financial statements. A company that holds a variable interest in an entity will consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN No. 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The disclosure provisions of this Interpretation became effective upon issuance. The consolidation requirements of this Interpretation apply immediately to variable interest entities created after January 31, 2003 and in the first year or interim period beginning after June 15, 2003 to existing variable interest entities. The Company is in the process of assessing the impact of this interpretation and believes it is reasonably possible the Company is the primary beneficiary on many of its equity method investments and will be required to fully consolidate these investments as variable interest entities beginning in the quarter ending October 31, 2003. The financial position and results of operations for the Company’s equity method investments are presented in Note E - Investments In and Advances to Affiliates on page 74 of this Form 10-K.
SUBSEQUENT EVENTS
The Company currently wholly-owns a major retail development project (the “Project”) in California, which is included in Projects Under Development in the Company’s Consolidated Balance Sheet at January 31, 2003. During the fourth quarter of 2002, the Company entered into negotiations to form a joint venture with another party (“partner”) to develop, lease and own the project. The partner currently owns a completed retail center which will connect to the Project upon completion. The Project will be jointly owned and controlled by the Company and its partner in the newly-formed joint venture. If formation of this joint venture is completed, the project will no longer be consolidated and will be accounted for under the equity method of accounting.
Granite Development Partners, L.P. (“Granite”) is a limited partnership which owns interests in several land developments held for resale, the most significant of which is a one-third interest in Seven Hills in Henderson, Nevada. Granite is scheduled to terminate and liquidate when it completes its land resale activity in 2005. The Company, as general partner of Granite, has all of the economic risk. Granite has the wherewithal to retire in full its $20,000,000 of 10.83% senior notes outstanding from its own cash flow through 2005. However, the Company’s effective borrowing rate on its long-term credit facility is much lower than 10.83%. The amount of the spread between Granite’s and the Company’s borrowing rate resulted in the Company’s decision to invest an additional amount that was sufficient for Granite to retire its notes in full in March 2003. The Company invested $14,000,000 in March 2003 and $4,000,000 in the fourth quarter of 2002. In March 2003, the Company was redeemed of $6,251,550 of those senior notes which it owned and which were included in Investments In and Advances To Affiliates in the Company’s Consolidated Balance Sheet at January 31, 2003. The Company also received a return of $2,405,550 of its $18,000,000 additional investment.
In March 2003 grants to key employees and directors of 653,800 Class A common stock options and 112,500 shares of restricted Class A common stock were approved.
The Company executed $200,000,000 of LIBOR interest rate swaps in March 2003 at an average rate of 2.21%.
In April 2003, the Company returned the deed on Trowbridge to the lender. Trowbridge is a 305-unit supported-living facility located in Southfield, Michigan. The deed was accepted by the lender in lieu of foreclosure resulting in a net gain on the disposal of approximately $250,000 which will be recorded by the Company in the first quarter of 2003.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This Form 10-K, 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. Risk factors discussed on pages 5-12 and other factors that might cause differences, some of which could be material, include, but are not lim-
ited to, real estate development and investment risks including lack of satisfactory financing, construction and lease-up delays and cost overruns, the effect of economic and market conditions on a nationwide basis as well as regionally in areas where the Company has a geographic concentration of properties, reliance on major tenants, the impact of terrorist acts, the Company’s substantial leverage and the ability to obtain and service debt, guarantees under the Company’s credit facility, the level and volatility of interest rates, continued availability of tax-exempt government financing, the sustainability of substantial operations at the subsidiary level, illiquidity of real estate investments, dependence on rental income from real property, conflicts of interest, financial stability of tenants within the retail industry, which may be impacted by competition and consumer spending, potential liability from syndicated properties, effects of uninsured loss, environmental liabilities, partnership risks, litigation risks, the rate revenue increases versus the rate of expense 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, other than imposed by law, as a result of future events or new information. Readers are cautioned not to place undue reliance on such forward-looking statements.
SUMMARY OF EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES (EBDT)
Management analyzes its properties using the pro-rata consolidation method because it provides operating data at the Company’s ownership share and the Company publicly discloses and discusses its performance using this method of consolidation to compliment its GAAP disclosures. The information in the tables below present amounts for both full consolidation and pro-rata consolidation, providing a reconciliation of the difference between the two methods, as well as a reconciliation from EBDT to Net Earnings. Under the pro-rata consolidation method, the Company presents its partnership investments proportionate to its share of ownership for each line item of its consolidated financial statements. Under full consolidation, partnership assets and liabilities are reported as consolidated at 100 percent if deemed under the Company’s control, or on the equity method of accounting if the Company does not have control.
Summary of Earnings Before Depreciation, Amortization and Deferred Taxes (EBDT) -Year Ended January 31, 2003
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Summary of Earnings Before Depreciation, Amortization and Deferred Taxes (EBDT)-Year Ended January 31, 2003 (continued)
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[Continued from above table, first column(s) repeated]
(a)
Loss on early extinguishment of debt, which was formerly reported as an extraordinary item, is now reported as interest expense. However, early extinguishment of debt will be excluded from EBDT through the year ended January 31, 2003. Beginning February 1, 2003, early extinguishment of debt will be included in EBDT.
(b)
See Item 6. Selected Financial Data on pages 20-23 of this filing for additional information regarding the reconciliation of EBDT to Net earnings.
Summary of Earnings Before Depreciation, Amortization and Deferred Taxes (EBDT)-Year Ended January 31, 2002
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Summary of Earnings Before Depreciation, Amortization and Deferred Taxes (EBDT)-Year Ended January 31, 2002 (continued)
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[Continued from above table, first column(s) repeated]
(a)
Loss on early extinguishment of debt, which was formerly reported as an extraordinary item, is now reported as interest expense. However, early extinguishment of debt will be excluded from EBDT through the year ended January 31, 2003. Beginning February 1, 2003, early extinguishment of debt will be included in EBDT.
(b)
See Item 6. Selected Financial Data on pages 20-23 of this filing for additional information regarding the reconciliation of EBDT to Net earnings.
Summary of Earnings Before Depreciation, Amortization and Deferred Taxes (EBDT)-Year Ended January 31, 2001
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Summary of Earnings Before Depreciation, Amortization and Deferred Taxes (EBDT)-Year Ended January 31, 2001 (continued)
[Additional columns below]
[Continued from above table, first column(s) repeated]
(a)
See Item 6. Selected Financial Data on pages 20-23 of this filing for additional information regarding the reconciliation of EBDT to Net earnings.
Item 7(A). Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary market risk exposure is interest rate risk. At January 31, 2003, the Company had $1,046,000,000 of variable-rate debt outstanding. This is inclusive of the $135,250,000 outstanding under its long-term credit facility at January 31, 2003. Upon opening and achieving stabilized operations, the Company generally pursues long-term fixed-rate nonrecourse financing for its rental properties. Additionally, when the properties’ fixed-rate debt matures, the maturing amounts are subject to interest rate risk.
To mitigate short-term variable interest rate risk, the Company has purchased London Interbank Offered Rate (“LIBOR”) interest rate caps and swaps as follows.
The Company estimates the fair value by discounting future cash payments at interest rates that approximate the current market. Based on these parameters, the carrying amount of the Company’s total fixed-rate debt at January 31, 2003 was $2,325,933,000 compared to an estimated fair value of $2,377,201,000. The Company estimates that a 100 basis point decrease in market interest rates would change the fair value of this fixed-rate debt to a liability of approximately $2,511,000,000.
The Company estimates the fair value of its hedging instruments based on interest rate market pricing models. At January 31, 2003, LIBOR interest rate caps were reported at their fair value of approximately $753,000 in the Consolidated Balance Sheet as Other Assets. The fair value of interest rate swap agreements at January 31, 2003 is an unrealized loss of approximately $4,340,000 and is included in the Consolidated Balance Sheet as Other Liabilities.
The following tables provide information about the Company’s financial instruments that are sensitive to changes in interest rates.
Item 7(A). Quantitative and Qualitative Disclosure About Market Risk (continued)
January 31, 2003
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(1)
Represents recourse debt.
Item 7(A). Quantitative and Qualitative Disclosure About Market Risk (continued)
January 31, 2002
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[Continued from above table, first column(s) repeated]
(1)
Represents recourse debt.
Item 8.
Item 8. Financial Statements and Supplementary Data
All other schedules are omitted because they are not applicable or the required information is presented in the consolidated financial statements or the notes thereto.
MANAGEMENT’S REPORT
The management of Forest City Enterprises, Inc. is responsible for the accompanying consolidated financial statements. These statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and include amounts based on judgments of management. The financial information contained elsewhere in this annual report conforms with that in the consolidated financial statements.
The Company maintains a system of internal accounting control which provides reasonable assurance in all material respects that the assets are safeguarded and transactions are executed in accordance with management’s authorization and accurately recorded in the Company’s books and records. The concept of reasonable assurance recognizes that limitations exist in any system of internal accounting control based upon the premise that the cost of such controls should not exceed the benefits derived.
The Audit Committee, composed of three independent members of the Board of Directors who are not employees of the Company, meets regularly with representatives of management, the independent accountants and the Company’s internal auditor to monitor the functioning of the accounting and control systems and to review the results of the auditing activities. The Audit Committee recommends the independent accountants to be appointed by the Board of Directors for approval by the shareholders. The Committee approves the scope of the audit and the fee arrangements. The independent accountants conduct an objective, independent examination of the consolidated financial statements.
The Audit Committee reviews results of the annual audit with the independent accountants. The Audit Committee also meets with the independent accountants and the internal auditor without management present to ensure that they have open access to the Audit Committee.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Forest City Enterprises, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 16(a)(1) on page 96, present fairly, in all material respects, the financial position of Forest City Enterprises, Inc. and its Subsidiaries (the “Company”) at January 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 16(a)(2) on page 96, present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note A to the consolidated financial statements, effective February 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Also, as discussed in Note A to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” for the year ended January 31, 2003.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
March 11, 2003
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Earnings
The accompanying notes are an integral part of these consolidated financial statements.
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
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The accompanying notes are an integral part of these consolidated financial statements.
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
The accompanying notes are an integral part of these consolidated financial statements.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies
Nature of Business
Forest City Enterprises, Inc. principally engages in the ownership, development, acquisition and management of commercial and residential real estate throughout the United States. The Company operates under four Strategic Business Units. The Commercial Group, the Company’s largest business unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office buildings, hotels and mixed-use projects. The Residential Group owns, develops, acquires, leases and manages residential rental property, including upscale and middle-market apartments, adaptive re-use developments and supported-living facilities. Real Estate Groups are the combined Commercial and Residential Groups. The Land Development Group acquires and sells both land and developed lots to residential, commercial and industrial customers. It also owns and develops land into master-planned communities and mixed-use projects. The Lumber Trading Group is a lumber wholesaler.
Forest City Enterprises, Inc. has $5.1 billion in total assets in 21 states and the District of Columbia. The Company’s core markets include Boston, Denver, California, New York City and Washington, D.C. The Company is headquartered in Cleveland, Ohio.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of Forest City Enterprises, Inc., its wholly-owned subsidiaries and entities which it controls. Entities which the Company does not control are accounted for on the equity method. Significant intercompany balances and transactions are eliminated in consolidation.
Earnings before minority interest are allocated to the minority interest holders based on their respective ownership percentages of the Company’s controlled but less-than-wholly-owned real estate investments. Minority interest in the accompanying Consolidated Balance Sheets represents the minority interest holders’ proportionate share of the equity of the Company’s controlled but less- than-wholly-owned real estate investments.
The Company does not necessarily own or hold any direct ownership interest in the various real estate assets consolidated in its financial statements but generally holds this ownership through its direct or indirect subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates made by the Company include, but are not limited to, estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, and provisions for decline in real estate. Actual results could differ.
Reclassification
Certain prior years’ amounts in the accompanying financial statements have been reclassified to conform to the current year’s presentation.
Fiscal Year
The years 2002, 2001 and 2000 refer to the fiscal years ended January 31, 2003, 2002 and 2001, respectively.
Land Operations
Land held for development or sale is stated at the lower of carrying amount or fair market value less cost to sell.
Recognition of Revenue
Real Estate Sales - The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) No. 66, “Accounting for Sales of Real Estate” for reporting the disposition of operating properties and land held for development or sale.
The Company follows the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” for the reporting of dispositions of operating properties. Pursuant to the definition of a component of an entity in SFAS No. 144, assuming no significant continuing involvement, all earnings of properties which have been sold or held for sale are reported as discontinued operations. The Company considers assets held for sale when the transaction has been approved by the appropriate level of management and there are no contingencies related to the sale that may prevent the transaction from closing. In most transactions, these contingencies are not satisfied until the actual closing of the transaction and, accordingly, the property is not identified as held for sale until the closing actually occurs. However, each potential sale is evaluated based on its separate facts and circumstances.
Leasing Operations - The Company enters into leases with tenants in its rental properties. The lease terms of tenants occupying space in the retail centers and office buildings range from 1 to 25 years, excluding leases with anchor tenants which typically run longer. Minimum rents are recognized on a straight-line basis over the term of the related leases. Overage rents are recognized as revenues when tenants’ sales exceed contractual amounts. Recoveries from tenants for taxes, insurance, and other commercial property operating expenses are recognized as revenues in the period the applicable costs are incurred.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
A. Summary of Significant Accounting Policies (continued)
Investments in Unconsolidated Entities - The Company accounts for its investments in unconsolidated entities (included in Investments in and Advances to Real Estate Affiliates on the Consolidated Balance Sheets) using the equity method of accounting whereby the cost of an investment is adjusted for the Company’s share of income or loss from the date of acquisition, and reduced by distributions received. The income or loss for each unconsolidated entity is allocated in accordance with the provisions of the applicable operating agreements, which may differ from the ownership interest held by each investor. Differences between the Company’s carrying value of its investment in the unconsolidated entities and the Company’s underlying equity of such unconsolidated entities are amortized over the respective lives of the underlying assets or liabilities, as applicable.
Lumber Trading - The Lumber Trading Group sells to a large number of customers across many regions of North America. The Company fills customer orders either through the simultaneous purchase of products from various third parties with delivery directly to the customer, or from relieving its existing short-term inventory position of previously purchased lumber products. Revenue is recorded when title to the goods transfers to the customers. The Company reports the gross margin on these sales as revenues in the accompanying Consolidated Statements of Earnings.
Construction - Revenue and profit on long-term fixed-price contracts are recorded using the percentage-of-completion method. On reimbursable cost-plus fee contracts, revenues are recorded in the amount of the accrued reimbursable costs plus proportionate fees at the time the costs are incurred.
Recognition of Costs and Expenses
Operating expenses primarily represent the recognition of operating costs, administrative expenses and taxes other than income taxes. Interest expense and real estate taxes during development and construction are capitalized as a part of the project cost.
The Company provides an allowance for doubtful accounts against the portion of accounts or notes receivable that is estimated to be uncollectible. Such allowances are reviewed and updated quarterly for changes in expected collectibility.
Depreciation is generally computed using the straight-line method over the estimated useful life of the asset. The estimated useful lives of buildings are primarily 50 years.
Major improvements and tenant improvements are capitalized and expensed through depreciation charges. Repairs, maintenance and minor improvements are expensed as incurred. Costs and accumulated depreciation applicable to assets retired or sold are eliminated from the respective accounts and any resulting gains or losses are reported in the Consolidated Statements of Earnings.
The Company reviews its properties to determine if its carrying costs will be recovered from future operating cash flows whenever events or changes indicate that recoverability of long-lived assets may not be assured. In cases where the Company does not expect to recover its carrying costs, an impairment loss is recorded as a provision for decline in real estate.
Cash and Equivalents
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value.
The Company maintains operating cash and reserve for replacement balances in financial institutions which, from time to time, may exceed Federally-insured limits. The Company periodically assesses the financial condition of these institutions and believes that the risk of loss is minimal.
Restricted Cash
Restricted cash represents deposits with mortgage lenders for taxes and insurance, security deposits, capital replacement, improvement and operating reserves, bond funds and development and construction escrows.
Investments in Partnerships
As is customary within the real estate industry, the Company invests in certain real estate projects through partnerships. The Company provides funding for certain of its partners’ equity contributions. Such advances are interest-bearing or entitle the Company to a preference on property cash flows and are included in “Investments in and Advances to Real Estate Affiliates” in the accompanying Consolidated Balance Sheets.
Inventories
The lumber trading inventories are stated at the lower of cost or market. Inventory cost is determined by specific identification and average cost methods.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
A. Summary of Significant Accounting Policies (continued)
Other Assets
Included in Other Assets are costs incurred in connection with obtaining financing which are deferred and amortized on a straight-line basis, which approximates the effective interest method, over the life of the related debt. Costs incurred in connection with leasing space to tenants are also included in Other Assets and are deferred and amortized using the straight-line method over the lives of the related leases.
Investments in securities classified as available-for-sale are reflected in Other Assets at market value with the unrealized gains or losses reflected as Accumulated Other Comprehensive Income (Loss) in Shareholders’ Equity.
Other Comprehensive Income
Net unrealized gain or loss on securities, net of tax, is included in Other Comprehensive Income and represents the difference between the market value of investments in unaffiliated companies that are available for sale at the balance sheet date and the Company’s cost. Also included in Other Comprehensive Income are unrealized gains and losses, net of tax, on the effective portions of derivative instruments designated and qualified as cash flow hedges.
Fair Value of Financial Instruments
The Company estimates the fair value of its debt instruments by discounting future cash payments at interest rates that the Company believes approximates the current market. The carrying amount of the Company’s total fixed-rate debt at January 31, 2003 was $2,325,933,000 compared to an estimated fair value of $2,377,201,000.
The Company estimates the fair value of its hedging instruments based on interest rate market pricing models. At January 31, 2003 and 2002, LIBOR interest rate caps and Treasury options were reported at their fair value of $753,000 and $1,600,000, respectively, in Other Assets in the Consolidated Balance Sheets. The fair value of interest rate swap agreements at January 31, 2003 and 2002 is an unrealized loss of $4,340,000 and $5,300,000, respectively, and is included in Accounts Payable and Accrued Expenses in the Consolidated Balance Sheets.
Accounting for Derivative Instruments and Hedging Activities
The Company generally maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned decreases in earnings and cash flow that may be caused by interest rate volatility. Derivative instruments that are used as part of the Company’s strategy include interest rate swaps and option contracts that have indices related to the pricing of specific balance sheet liabilities. The Company enters into interest rate swaps to convert certain floating-rate debt to fixed-rate long-term debt, and vice-versa, depending on market conditions. Option products utilized have included interest rate caps and Treasury options. The use of these option products is consistent with the Company’s risk management objective to reduce or eliminate exposure to variability in future cash flows attributable to changes in the Treasury rate relating to forecasted financings, and the variability in cash flows attributable to increases relating to interest payments on its floating-rate debt. The caps have typical duration ranging from one to three years while the Treasury options are for periods of five to 10 years. The Company also enters into interest rate swap agreements for hedging purposes for periods that are generally one to five years.
The principal credit risk to the Company through its interest rate risk management strategy is the potential inability of the financial institution from which the derivative financial instruments were purchased to cover all of its obligations. If a counterparty fails to fulfill its performance obligations under a derivative contract, the Company’s credit risk will equal the fair-value gain in a derivative. To mitigate this exposure, the Company purchases its derivative financial instruments from either the institution that holds the debt or from institutions with a minimum A- credit rating.
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS Nos. 137 and 138, which requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain firm commitments and liabilities or on future cash flows. On February 1, 2001, the Company adopted SFAS No. 133, and at that time, designated the derivative instruments in accordance with the requirements of the new standard. On February 1, 2001, the after-tax impact, net of minority interest, of the transition amounts of the derivative instruments resulted in a reduction of net income and other comprehensive income of approximately $1,200,000 and $7,800,000, respectively. The transition adjustments are presented as cumulative effect adjustments, as described in Accounting Principles Board Opinion APBO No. 20 “Accounting Changes” in the 2001 consolidated financial statements. The transition amounts were determined based on the interpretive guidance issued by the FASB to date.
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Notes to Consolidated Financial Statements - continued
A. Summary of Significant Accounting Policies (continued)
The FASB continues to issue interpretive guidance that could require changes in the Company’s application of the standard and may increase or decrease reported net income and shareholders’ equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on the Consolidated Statements of Cash Flows.
All derivatives are reported in the Consolidated Balance Sheets at their fair value. On the date that the Company enters into a derivative contract, it designates the derivative as a hedge of a forecasted transaction or the variability of cash flows that are to be paid in connection with a recognized or forecasted liability (a “cash flow” hedge), or to convert certain fixed-rate long-term debt to floating-rate debt (a “fair value hedge”). The effective portion of the change in fair value of a derivative that is designated and qualifies as a cash flow hedge is recorded in other comprehensive income until earnings are affected by the variability of cash flows of the hedged transaction. The ineffective portion of all hedges is recognized in current-period earnings as interest expense in the Consolidated Statements of Earnings.
On August 1, 2001, the Company began assessing hedge effectiveness based on the total changes in cash flows on its interest rate caps and Treasury options as described by the Derivative Implementation Group (DIG) Issue G20, “Cash Flow Hedges: Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge.” Accordingly, the Company has elected to record in Other Comprehensive Income (Loss) all of the subsequent changes in the fair value, including the changes in the option’s time value. Gains or losses on interest rate caps used to hedge interest rate risk on variable-rate debt will be reclassified out of Accumulated Other Comprehensive Income (Loss) into earnings when the forecasted transaction occurs using the “caplet” methodology. Gains or losses on Treasury options used to hedge the interest rate risk associated with the anticipated issuance of fixed-rate debt will be reclassified from Accumulated Other Comprehensive Income (Loss) into earnings over the term of the debt, based on an effective-yield method.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods.
The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) management determines that designating the derivative as a hedging instrument is no longer appropriate. When the Company discontinues hedge accounting because it is no longer probable that the forecasted transaction will occur in the originally expected period, the gain or loss on the derivative remains in Accumulated Other Comprehensive Income (Loss) and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in Other Comprehensive Income (Loss) will be recognized immediately in earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the Company will report the derivative at its fair value in the Consolidated Balance Sheets, recognizing changes in the fair value in current period earnings.
During the year ended January 31, 2003, as a result of substantial decreases in short-term interest rates, the Company de-designated and subsequently discontinued hedge accounting on certain interest rate caps that had an aggregate notional amount of approximately $150,000,000, strike rates averaging 7.72% and maturities extending through November 1, 2004. During the year ended January 31, 2002, the Company de-designated and subsequently discontinued hedge accounting on certain interest rate caps that had an aggregate notional amount of approximately $260,000,000, strike rates averaging 7.75% and maturities extending through February 1, 2003. Subsequent changes in the fair value of these de-designated interest rate caps were recorded as interest expense of approximately $162,000 and $102,000 for the years ended January 31, 2003 and 2002, respectively.
For the years ended January 31, 2003 and 2002, the Company recorded approximately $217,000 and $1,912,000, respectively, as interest expense in the Consolidated Statements of Earnings, which represented the total ineffectiveness of all cash flow hedges. The amount of hedge ineffectiveness relating to hedges designated and qualifying as fair value hedges was not material. The amount of net derivative losses reclassified into earnings from Other Comprehensive Income (Loss) as a result of forecasted transactions that did not occur by the end of the originally specified time period or within an additional two-month period of time thereafter was $738,000 and $1,574,000 for the years ended January 31, 2003 and 2002, respectively. As of January 31, 2003, the Company expects that within the next twelve months it will reclassify amounts recorded in Accumulated Other Comprehensive Income (Loss) into earnings as interest expense associated with the effectiveness of cash flow hedges of approximately $2,483,000, net of tax.
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Notes to Consolidated Financial Statements - continued
A. Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred tax assets and liabilities reflect the tax consequences on future years of differences between the tax and financial statement basis of assets and liabilities at year-end. The Company has recognized the benefits of its tax loss carryforward and general business tax credits which it expects to use as a reduction of the deferred tax expense.
Stock-Based Compensation
The Company follows the recognition and measurement principles of Accounting Principles Board Opinion (APBO) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations to account for stock-based compensation. All options granted under the Plan had an exercise price equal to the market value of the underlying common stock on the date of grant, therefore, under the “intrinsic value” method no stock-based compensation costs have been reflected in net earnings for stock options. Stock-based compensation costs, net of tax, relating to restricted stock awards were charged to net earnings in the amount of $553,000, $321,000 and $84,000, respectively, during the years ended January 31, 2003, 2002 and 2001. While these amounts were computed under APBO No. 25, they are equal to the fair value based amounts as computed under SFAS No. 123 “Accounting for Stock-Based Compensation”. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock options.
Capital Stock
The Company has 5,000,000 authorized shares of preferred stock without par value, none of which have been issued.
Class A common shareholders elect 25% of the members of the Board of Directors and Class B common shareholders elect the remaining directors annually. The Company currently has 13 directors. Class B common stock is convertible into Class A common stock on a share-for-share basis.
Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilutive effect of the Company’s stock option plan by adjusting the denominator using the treasury stock method. The sum of the four quarters’ earnings per share may not equal the annual earnings per share due to the weighting of stock and option activity occurring during the year. All earnings per share disclosures appearing in these financial statements were computed assuming dilution unless otherwise indicated. Further, as discussed in Note Q, in 2001 the Company paid a three-for-two stock split effected as a stock dividend. All years presented have been adjusted to reflect this stock split.
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Notes to Consolidated Financial Statements - continued
A. Summary of Significant Accounting Policies (continued)
New Accounting Standards
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” which eliminates the requirement to report gains and losses from extinguishment of debt as extraordinary items unless they meet the criteria of Accounting Principles Board Opinion (APBO) No. 30. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The Company has elected to adopt the provision of SFAS No. 145 for the year ended January 31, 2003 and, as a result, an extraordinary loss of $1,653,000 (pre-tax) and $386,000 (pre-tax) related to early extinguishment of debt has been reclassified to interest expense for the year ended January 31, 2003 and January 31, 2002, respectively. The Company does not expect this pronouncement to have any other material impact on the Company’s financial position, results of operations or cash flows.
In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” This statement requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect this statement to have an immediate material impact on the Company’s financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaking in issuing the guarantee. The disclosure requirements of this interpretation are effective for financial statements of periods ending after December 15, 2002. The initial recognition and measurement provisions of this Interpretation will impact the Company’s financial position, results of operations and cash flows through the recording of a liability and related increase in investment, or expense depending on the nature of the guarantee issued. The Company has disclosed the significant guarantees it has outstanding at January 31, 2003 in Note O to the Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No. 148). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 “Accounting for Stock-Based Compensation” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation is effective for the Company for fiscal year ended January 31, 2004. The new requirements for interim disclosure will be effective for interim periods beginning in the quarter ending April 30, 2003. The Company will continue to apply APBO No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for its stock-based employee compensation and does not expect SFAS No. 148 to have a material impact on the Company’s financial position, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46) “Consolidation of Variable Interest Entities.” The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE are to be included in the consolidated financial statements. A company that holds a variable interest in an entity will consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The disclosure provisions of this Interpretation became effective upon issuance. The consolidation requirements of this Interpretation apply immediately to variable interest entities created after January 31, 2003 and in the first year or interim period beginning after June 15, 2003 to existing variable interest entities. The Company is in the process of assessing the impact of this Interpretation and believes it is reasonably possible the Company is the primary beneficiary on many of its equity method investments and will be required to fully consolidate these investments as variable interest entities beginning in the quarter ending October 31, 2003. The financial position and results of operations for the Company’s equity method investments are presented in Note E - Investments In and Advances to Affiliates on page 74 of this Form 10-K.
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Notes to Consolidated Financial Statements - continued
B. Financial Statement Presentation
Management analyzes its properties using the pro-rata consolidation method because it provides operating data at the Company’s ownership share and the Company publicly discloses and discusses its performance using this method of consolidation to compliment its GAAP disclosures. The information in the tables below present amounts for both full consolidation and pro- rata consolidation, providing a reconciliation of the difference between the two methods. Under the pro-rata consolidation method, the Company presents its partnership investments proportionate to its share of ownership for each line item of its consolidation financial statements. Under full consolidation, partnership assets and liabilities are reported as consolidated at 100 percent if deemed under the Company’s control, or on the equity method of accounting if the Company does not have control.
Consolidated Balance Sheet - January 31, 2003
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B. Financial Statement Presentation (continued)
Consolidated Balance Sheet - January 31, 2002
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B. Financial Statement Presentation (continued)
Consolidated Statement of Earnings - Year Ended January 31, 2003
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B. Financial Statement Presentation (continued)
Consolidated Statement of Earnings - Year Ended January 31, 2002
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B. Financial Statement Presentation (continued)
Consolidated Statement of Earnings - Year Ended January 31, 2001
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B. Financial Statement Presentation (continued)
Consolidated Statement of Cash Flows - Year Ended January 31, 2003
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B. Financial Statement Presentation (continued)
Consolidated Statement of Cash Flows - Year Ended January 31, 2002
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B. Financial Statement Presentation (continued)
Consolidated Statement of Cash Flows - Year Ended January 31, 2001
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C. Real Estate and Related Nonrecourse Mortgage Debt
The components of real estate cost and related nonrecourse mortgage debt are presented below on the pro-rata consolidation method. See Note B.
D. Notes and Accounts Receivable, Net
The components of notes and accounts receivable, net are as follows.
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Notes to Consolidated Financial Statements - continued
D. Notes and Accounts Receivable, Net (continued)
Lumber Trading Group
The Lumber Trading Group has entered into a three-year agreement expiring in July 2005 under which it is selling an undivided interest in a pool of receivables up to a maximum of $102,000,000 to a large financial institution (the “Financial Institution”). The Company bears no risk regarding the collectibility of the accounts receivable once sold, and cannot modify the pool of receivables. At January 31, 2003 and 2002, the Financial Institution held an interest of $41,000,000 and $44,000,000, respectively, in the pool of receivables. Sales of accounts receivable have averaged $48,900,000 and $44,300,000 per month during the years ended January 31, 2003 and 2002, respectively. This arrangement is without recourse to the Company.
To protect against risks associated with the variable interest rates on current and future borrowings on the liquidity banking agreement supporting the facility through which the pools of receivables are sold, the Lumber Trading Group entered into an interest rate swap with a notional amount of $20,000,000. The swap fixes the LIBOR interest rate at 4.28% and is effective through December 31, 2005.
Reduction of Reserves on Notes Receivable
The Company, through its Residential Group, is the 1% general partner in 25 Federally Subsidized housing projects owned by syndicated partnerships. Upon formation of these partnerships approximately 20 years ago, the Company received interest-bearing notes receivable as consideration for development and other fee services. At their inception, these notes were fully reserved as their collection was doubtful based on the limited cash flows generated by the properties pursuant to their government subsidy contracts. Likewise, a reserve for the related accrued interest was established each year.
During the years ended January 31, 2003 and 2002, 20 of these properties completed a series of events that led to the reduction of a portion of ($4,176,000 and $24,620,000 in 2002 and 2001, respectively) these reserves. The first of these events was the modification or expiration of the Government contracts that now allow for market rate apartment rentals, which provide a significant increase in expected future cash flows. This, in turn, increased the appraised values of these properties and in some instances resulted in a settlement with the limited partners to obtain their ownership share of these properties in exchange for the balance of the notes and related accrued interest. As a result, the Company determined that the collection of a portion of these notes receivable and related accrued interest is now probable. The reductions are included in revenues in the Consolidated Statements of Earnings. The Company will continue to review the level of reserves against these notes receivable in relation to events that could change expected cash flows from these properties. At January 31, 2003 and 2002, $9,268,000 and $12,615,000, respectively, were included in allowance for doubtful accounts for principal and interest on these notes receivable.
Millender Center - During the year ended January 31, 2003, the Company reduced $690,000 of the reserve recorded against interest receivable from Millender Center (the Project), a mixed-use apartment, retail and hotel project located in downtown Detroit, Michigan. The reduction of this reserve was primarily the result of increased cash flow projections due to lower variable rate interest expense. The Company had previously reversed and recorded interest income of $1,715,000 in the year ended January 31, 2002, $10,775,000 in the year ended January 31, 2001 and $4,000,000 in previous years. Repayments on the Note were received in the amount of $1,048,000 in the year ended January 31, 2003 and $848,000 in the year ended January 31, 2002. The recorded balance of the Note was $15,284,000 and $15,642,000 at January 31, 2003 and January 31, 2002, respectively.
The Company owns a 1% general partner interest in the Project and loaned $14,775,000 to the 99% limited partners in 1985, as evidenced by the Note. A full reserve against the Note was recorded in 1995 when the Company determined that collection was doubtful due to the operating performance of the Project at that time.
In October 1998, the Project entered into a lease agreement with General Motors (GM) whereby the Project, except for the apartments, is leased to GM through 2010, when it is expected that GM will exercise a purchase option. This lease arrangement, coupled with the resurgence of downtown Detroit’s economy as a result of GM’s relocation of its corporate headquarters to a location adjacent to the Project and the entry of gaming has significantly improved the operating performance of the Project. The Company believes that the current and anticipated improved performance of the Project supports its assessment that the principal of the Note is now fully collectible. During the year ended January 31, 2003 and 2002, the Company recognized interest income on the Note of $-0- and $1,715,000 respectively. At January 31, 2003 and 2002, $11,015,000 and $10,165,000, respectively, related to the Project were included in allowance for doubtful accounts for principal and interest receivable on this Note.
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Notes to Consolidated Financial Statements - continued
E. Investments in and Advances to Real Estate Affiliates
Included in Investments in and Advances to Real Estate Affiliates are unconsolidated investments in entities which the Company does not control and which are accounted for on the equity method. Summarized combined financial information for these investments, along with the Company’s pro-rata share, is as follows.
As is customary within the real estate industry, the Company invests in certain real estate projects through partnerships. The Company provides funding for certain of its partners’ equity contributions. The most significant partnership for which the Company provides funding relates to Forest City Ratner Companies, representing the Commercial Group’s New York City operations. The Company’s partner is the President and Chief Executive Officer of Forest City Ratner Companies and is the first cousin to four executive officers of the Company. At January 31, 2003 and January 31, 2002, amounts advanced for real estate projects on behalf of this partner secured by this partnership interest were $98,264,000 and $81,970,000, respectively, of the $340,725,000 and $286,058,000 presented above for “Advances to other real estate affiliates”. These advances entitle the Company to a preferred return on and of the outstanding balances, which are payable from cash flows of each respective property.
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F. Other Assets
Included in other assets are costs incurred in connection with obtaining financing which are deferred and amortized over the life of the related debt. Costs incurred in connection with leasing space to tenants are also included in other assets and are deferred and amortized using the straight-line method over the lives of the related leases.
G. Accounts Payable and Accrued Expenses
Included in accounts payable and accrued expenses at January 31, 2003 and 2002 are book overdrafts of approximately $62,384,000 and $59,832,000, respectively. The overdrafts are a result of the Company’s cash management program and represent checks issued but not yet presented to a bank for collection.
H. Notes Payable
The components of notes payable, which represent indebtedness whose original maturity dates are within one year of issuance, are as follows.
Notes Payable to banks reflect borrowings on the Lumber Trading Group’s bank line of credit of $80,000,000 and $86,000,000 at January 31, 2003 and 2002, respectively. The bank line of credit allows for up to $5,000,000 in outstanding letters of credit (none outstanding at January 31, 2003 and 2002) which reduce the credit available to the Lumber Trading Group. Borrowings under the bank line of credit, which are nonrecourse to the Company, are collateralized by all the assets of the Lumber Trading Group, bear interest at the lender’s prime rate or LIBOR plus an applicable margin ranging from 1.375% to 1.75%, and have a fee of 0.2% to 0.4% per year on the unused portion of the available commitment. The LIBOR loan margin and unused commitment fee are based on a quarterly interest coverage ratio. The bank line of credit is subject to review and extension annually, and expires on June 30, 2003.
Other notes payable relate primarily to improvements and construction funded by tenants, property and liability insurance premium financing and advances from affiliates and partnerships.
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Notes to Consolidated Financial Statements - continued
H. Notes Payable (continued)
The following table summarizes interest incurred and paid on notes payable.
I. Mortgage Debt, Nonrecourse
Mortgage debt, which is collateralized by completed rental properties, projects under development and certain undeveloped land, is as follows.
(1)
Reflects weighted average interest rates including both the base index and lender margin.
(2)
Taxable variable-rate debt of $805,574 at full consolidation and $850,339 at pro-rata consolidation is protected with LIBOR swaps and caps described below. These LIBOR-based hedges protect current debt outstanding as well as the anticipated increase in debt outstanding for projects currently under development or anticipated to be under development during the year ending January 31, 2004.
On January 31, 2003, the composition of nonrecourse mortgage debt (included in the figures above) related to projects under development is as follows.
The Company generally borrows funds for development and construction projects with maturities of two to five years utilizing variable-rate financing. Upon opening and achieving stabilized operations, the Company generally pursues long-term fixed-rate financing.
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I. Mortgage Debt, Nonrecourse (continued)
The Company has purchased London Interbank Offered Rate (“LIBOR”) interest rate hedges for its nonrecourse mortgage debt portfolio as follows.
The Urban Development Action Grants and other subsidized loans bear interest at rates which are below prevailing historical commercial lending rates and are granted to the Company by government agencies as an inducement to develop real estate in targeted areas. A right to participate by the local government in the future cash flows of the project is generally a condition of these loans. Participation in annual cash flows generated from operations or appreciation resulting from sales or refinancings are recognized as expenses in the period earned.
The Company is engaged in discussions with its current lenders and is actively pursuing new lenders to extend and refinance maturing mortgage debt. As of January 31, 2003, the composition of mortgage debt maturities (including scheduled amortization and balloon payments) along with refinancing commitments and extension options for the next five years is as follows.
The following table summarizes interest incurred and paid on mortgage debt, nonrecourse.
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J. Long-Term Credit Facility
At January 31, 2003, the Company had $135,250,000 outstanding under its $350,000,000 long-term credit facility which became effective March 5, 2002. The credit facility includes a $100,000,000 term loan with an outstanding balance of $81,250,000 as of January 31, 2003 and a $250,000,000 revolving line of credit, both of which mature in March 2006 and allow for up to a combined amount of $40,000,000 in outstanding letters of credit or surety bonds ($26,788,000 in letters of credit outstanding and $-0- surety bonds at January 31, 2003). Quarterly principal payments of $6,250,000 on the new term loan commenced July 1, 2002.
At January 31, 2002, the Company had $54,000,000 outstanding under its $265,000,000 revolving credit facility. The balance was paid in full on March 5, 2002 with the proceeds from the new term loan discussed above. The revolving credit facility was scheduled to mature on March 31, 2003 and allowed for up to a combined amount of $30,000,000 in outstanding letters of credit and surety bonds ($17,087,000 and $9,675,000, respectively, were outstanding at January 31, 2002). The revolving credit available was reduced quarterly by $2,500,000 and at January 31, 2002, the revolving credit line was $250,000,000.
The long-term credit facility provides, among other things, for: 1) at the Company’s election, interest rates of 2.125% over LIBOR or 1/2% over the prime rate except for the last $50,000,000 of borrowings in the case of the revolving loans which is based on 2.75% over LIBOR or 3/4% over the prime rate; 2) maintenance of debt service coverage ratios and specified levels of net worth and cash flow (as defined in the credit facility); and 3) restriction of $20,000,000 on dividend payments and stock repurchases. At January 31, 2003, retained earnings of $9,088,000 were available for payment of dividends. On March 5, 2003, the anniversary date of the long-term credit facility, this amount was reset to the $20,000,000 limitation.
In order to mitigate the short-term variable interest rate risk on its long-term credit facility, the Company has entered into LIBOR interest rate swaps and purchased LIBOR interest rate caps. Swaps are in effect through January 31, 2004 which effectively fixed the LIBOR rate at 1.78% for a notional amount of $56,250,000 beginning February 1, 2003, and effectively fixed the LIBOR rate at 1.77% for a notional amount of $75,000,000 beginning December 1, 2002. LIBOR interest rate caps for 2003 were purchased at an average rate of 5.50% at a notional amount of $75,651,000 covering the period February 1, 2003 through February 1, 2004. LIBOR interest rate caps for 2004 were purchased at an average rate of 5.00% at a notional amount of $147,882,000 covering the period February 1, 2004 through August 1, 2004.
Interest incurred on long-term credit facility was $7,033,000 in 2002, $10,969,000 in 2001 and $16,163,000 in 2000. Interest paid on the long-term credit facility was $6,430,000 in 2002, $11,540,000 in 2001 and $15,162,000 in 2000.
K. Senior and Subordinated Debt
On March 16, 1998, the Company issued $200,000,000 of 8.50% senior notes, due March 15, 2008, in a public offering. Accrued interest is payable semi-annually on March 15 and September 15. The senior notes are unsecured senior obligations of the Company; however, they are subordinated to all existing and future indebtedness and other liabilities of the Company’s subsidiaries, including the long-term credit facility. The indenture contains covenants providing, among other things, limitations on incurring additional debt and payment of dividends. The dividend limitation is not as restrictive as that imposed by the Company’s long-term credit facility (Note J).
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.
In November 2000, the Company issued $20,400,000 of redevelopment bonds in a private placement. The bonds bear interest at 8.25% and are due September 15, 2010. Interest is payable semi-annually on March 15 and September 15. This debt is unsecured and subordinated to the senior notes and the revolving credit facility. Financial covenants associated with this debt are similar to that of the senior notes. The Company, from time to time, may purchase its Senior Notes on the open market.
Interest incurred on the above debt was $18,683,000 in 2002, $18,591,000 in 2001 and $17,234,000 in 2000. Interest paid was $18,683,000 in 2002, $18,194,000 in 2001 and $17,000,000 in 2000.
On May 24, 2002, the Company, along with its wholly-owned subsidiaries Forest City Enterprises Capital Trust I (Trust I) and Forest City Capital Trust I) (Trust II), filed an amended shelf registration statement with the Securities and Exchange Commission. This registered an undetermined number of shares of the preferred securities of Trusts I and II along with the guarantee by the Company of the preferred securities. No securities have been issued by Trusts I and II to date. These securities, if issued, will be the sole assets of the Trusts.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
K. Senior and Subordinated Debt (continued)
Consolidated Interest
The following table summarizes interest incurred, capitalized and paid on all forms of indebtedness (included in Notes H, I, J and K).
L. Income Taxes
The income tax provision related to continuing operations consists of the following:
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
L. Income Taxes (continued)
The effective tax rate for income taxes varies from the federal statutory rate of 35% due to the following items.
The components of the deferred tax provision for continuing operations are as follows.
(1)
Gain on disposition of Courtland Center, which was structured as a tax-deferred exchange, has been reported in Discontinued Operations in the Consolidated Statement of Earnings for the year ended January 31, 2003.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
L. Income Taxes (continued)
The components of the deferred income tax liability are as follows.
Total income taxes paid were $3,001,000, $11,419,000 and $15,511,000 for the years ended January 31, 2003, 2002 and 2001, respectively. At January 31, 2003, the Company had a tax loss carryforward of $8,516,000 that will expire in the year ending January 31, 2022, General Business Credit carryovers of $7,581,000 that will expire in the years ending January 31, 2004 through January 31, 2023, and an Alternative Minimum Tax credit carryforward of $34,096,000.
The Company’s net deferred tax liability at January 31, 2003 is comprised of deferred tax liabilities of $468,041,000, deferred tax assets of $213,061,000, and a valuation allowance related to state taxes and general business credits of $908,000.
M. Segment Information
Strategic Business Units are determined by the type of customers served or the products sold. The Company operates with four Strategic Business Units. The Commercial Group, the Company’s largest unit, owns, develops, acquires and operates regional malls, specialty/urban retail centers, office buildings, hotels and mixed-use projects. New York City operations through the Company’s partnership with Forest City Ratner Companies are part of the Commercial Group. The Residential Group owns, develops, acquires, leases and manages residential rental property, including upscale and middle-market apartments in urban locations, adaptive re-use developments and supported-living facilities. Real Estate Groups are the combined Commercial and Residential Groups. The Land Development Group acquires and sells both raw land and developed lots to residential, commercial and industrial customers. It also owns and develops raw land into master-planned communities, mixed-use and other residential developments. The Lumber Trading Group is a lumber wholesaler.
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 defined as net earnings excluding the following items: i) gain (loss) on disposition of operating properties and other investments (net of tax) ii) the adjustment to recognize rental revenues and rental expense using the straight-line method; iii) noncash charges from Forest City Rental Properties Corporation, a wholly-owned subsidiary of Forest City Enterprises, Inc., for depreciation, amortization and deferred income taxes; iv) provision for decline in real estate (net of tax); v) extraordinary items (net of tax); and vi) cumulative effect of change in accounting principle (net of tax). The Company excludes gain (loss) on the disposition of operating properties and other investments 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 operating properties and other investments, other than commercial land and airrights or land held by the Land Development Group, as nonrecurring items. Early extinguishment of debt, which was formerly reported as an extraordinary item, is now reported in operating earnings. However, early extinguishment of debt will be excluded from EBDT through the year ended January 31, 2003. Beginning February 1, 2003, early extinguishment of debt will be included in EBDT. The adjustment to recognize rental revenues and rental expenses on the straight-line method is excluded because it is management’s opinion that rental revenues and expenses should be recognized when due from the tenants or due to the landlord. The Company excludes depreciation and amortization expense related to real estate operations from EBDT because they are noncash 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 noncash items. The provision for decline in real estate is excluded from EBDT because it is a noncash item that varies from year to year based on factors unrelated to the Company’s overall financial performance. The Company’s EBDT may not be directly comparable to similarly-titled measures reported by other companies.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
M. Segment Information (continued)
The following tables summarize financial data for the Commercial, Residential, Land Development Lumber Trading Groups and Corporate. All amounts, including footnotes, are presented in thousands.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
N. Leases
The Company as Lessor
The following table summarizes the minimum future rental income to be received on noncancelable operating leases of commercial properties that generally extend for periods of more than one year.
Most of the commercial leases include provisions for reimbursements of other charges including real estate taxes and operating costs. The following table summarizes total reimbursements.
The Company as Lessee
The Company is a lessee under various operating lease arrangements for real property and equipment. The most significant of these involve ground leases in Boston and New York City, the majority of which expire between the years 2070 and 2095, excluding optional renewal periods.
Minimum fixed rental payments under long-term leases (over one year) in effect at January 31, 2003 are as follows.
The following table summarizes rent expense paid.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
O. Commitments and Contingencies
The Company has adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). The guarantees discussed below were entered into prior to January 1, 2003 and, therefore, have not been recorded in the Company’s Consolidated Financial Statements at January 31, 2003, pursuant to the provisions of FIN No. 45. The Company believes the risk of payment under these guarantees is remote and, to date, no payments have been made under these guarantees.
As of January 31, 2003, the Company has guaranteed loans totaling $3,200,000, relating to a $1,800,000 bank loan for the Stone Gate at Bellefair supported-living Residential Group project in Ryebrook, New York and the Company’s $1,400,000 share of a bond issue made by the Village of Woodridge, relating to a Land Development Group project in suburban Chicago, Illinois. The bank loan guaranty is expected to terminate in early 2003. The bond issue guarantee terminates April 30, 2015, unless the bonds are paid sooner, and is limited to $500,000 in any one year. The Company had outstanding letters of credit of $26,788,000 as of January 31, 2003. The maximum potential amount of future payments on the guaranteed loans and letters of credit the Company could be required to make is the total amounts noted above.
The Company, as a general partner for certain limited partnerships, guarantees the funding of operating deficits of newly-opened apartment projects for an average of five years. At January 31, 2003, the maximum potential amount of future payments on these operating deficit guarantees the Company could be required to make is approximately $21,000,000. The Company would seek to recover any amounts paid through refinancing or sales proceeds of the apartment project. These partnerships typically require the Company to idemnify, on an after-tax or “grossed up” basis, the investment partner against the failure to receive, or the loss of allocated tax credits and tax losses. At January 31, 2003 the maximum potential payment under these tax indemnity guarantees was approximately $112,000,000. The Company believes that all necessary requirements for qualifications for such tax credits have been and will be met and that the Company’s investment partners will be able to receive expense allocations associated with the properties. The Company has obtained legal opinions from major law firms supporting the validity of the tax credits.
The Company’s mortgage loans are all non-recourse, however in some cases lenders carve-out certain items from the non-recourse provisions. These carve-out items enable the lenders to seek recourse if the Company or the joint venture commit fraud, voluntarily file for bankruptcy, intentionally misapply funds, transfer title without lender consent, or intentionally misrepresent facts. The Company has also provided certain environmental guarantees. Under these environmental remediation guarantees, the Company must remediate any hazardous materials brought onto the property in violation of environmental laws. The maximum potential amount of future payments the Company could be required to make is limited to the actual losses suffered or actual remediation costs incurred. A portion of these carve-outs and guarantees have been made on behalf of joint ventures and while the amount of the potential liability is currently indeterminable, the Company believes any liability would not exceed its partners’ share of the outstanding principal balance of the loans in which these carve-outs and environmental guarantees have been made. At January 31, 2003 the outstanding balance of the partners’ share of these loans was approximately $380,000,000. The Company believes the risk of payment on the carve-out guarantees is mitigated in most cases by the fact the Company manages the property, and in the event the Company’s partner did violate one of the carve-out items, the Company would seek recovery from its partner for any payments the Company would make. Additionally, the Company further mitigates its exposure through environmental insurance and insurance coverage for items such as fraud.
The Company customarily guarantees lien-free completion of projects under construction. Upon completion, the guarantees are released. At January 31, 2003, the Company has guaranteed completion of construction of development projects with a total cost of $2,078,000,000 which are approximately 53% complete in the aggregate. The projects have total loan commitments of $1,683,000,000, of which approximately $822,000,000 was outstanding at January 31, 2003. To date, the Company’s subsidiaries have been successful in consistently delivering lien-free completion of construction projects, without calling the Company’s guarantees of completion.
The Company is also involved in certain claims and litigation related to its operations. Based on the facts known at this time, management has consulted with legal counsel and is of the opinion that the ultimate outcome of all such claims and litigation will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
P. Stock-Based Compensation
Class A fixed options in the form of either incentive stock options or non-qualified stock options may be awarded under the 1994 Stock Option Plan (“Plan”) to key employees and non-employee members of the Company’s Board of Directors. The maximum number of options that may be awarded under the Plan is 3,375,000. The maximum award to a person during any calendar year is 112,500 and the maximum term of an option is 10 years. The exercise price of all options must equal the fair market value of the stock on the date of grant, except, if incentive stock options are granted to someone who owns more than 10% of the total combined voting power of all classes of stock of the Company, then the exercise price will be110% of the fair market value of the stock on the date of grant and the term of the option will be five years. The Planis administered by the Compensation Committee of the Board of Directors. The Company granted 625,795 options in 2001 and 22,500 options in 2000. All options granted under the Plan to date have been for a term of 10 years and vest over two to four years.
The information required by SFAS No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure” relating to the pro forma effect on net earnings and earnings per share had the fair value based method under SFAS No. 123 been used for stock options is located in Note A - Summary of Significant Accounting Policies, Stock-Based Compensation.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for the grants in 2001 and 2000, respectively: dividend yield of .7% in both years; expected volatility of 34.2%, and 34.9%; risk-free interest rate of 4.9% and 6.0%; expected life of 8.7 years in both years; and turnover of 3.7% in both years. A summary of stock option activity is presented below.
The following table summarizes information about fixed stock options outstanding at January 31, 2003.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
P. Stock-Based Compensation (continued)
The Compensation Committee granted 112,500 shares of restricted Class A common stock to key employees in 2001. The restricted shares were awarded out of treasury stock, having a cost basis of $1,009,000, with rights to vote the shares and receive dividends while being subject to restrictions on disposition and transferability and risk of forfeiture. The shares become nonforfeitable over a period of four years. In accordance with APBO No. 25, the market value on the date of grant of $3,191,000 was recorded as unearned compensation to be charged to expense over the respective vesting periods. The unearned compensation of this restricted stock award along with previously issued restricted stock is reported as an offset of Additional Paid-In Capital in the accompanying consolidated financial statements. At January 31, 2003, the unamortized unearned compensation relating to all restricted stock amounted to $2,627,000.
Subsequent Event - In March 2003 grants to key employees and directors were approved of 653,800 Class A common stock options and 112,500 shares of restricted Class A common stock.
Q. Capital Stock
The Company paid a three-for-two common stock split of both the Company’s Class A and Class B Common Stock on November 14, 2001 effected as a stock dividend. The stock split was given retroactive effect to the beginning of the earliest period presented in the accompanying Consolidated Balance Sheets and Consolidated Statements of Shareholders’ Equity. All share and per share data included in this annual report, including stock option plan information, have been restated to reflect the stock split. On September 28, 2001, the Company sold to the public 3,900,000 shares of Class A common stock for $32.23 per share. The offering generated net proceeds of $117,663,000 of which $104,000,000 was used to reduce borrowings under the revolving credit facility.
Class A common stock totaling 191,887, 354,731 and 49,387 shares in 2002, 2001 and 2000, respectively, were issued out of treasury stock upon the exercise of stock options, net of swapped shares (See Note P).
R. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for “earnings from continuing operations.”
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
S. Summarized Financial Information
Forest City Rental Properties Corporation (“Rental Properties”) is a wholly-owned subsidiary of Forest City Enterprises, Inc. engaged in the ownership, development, acquisition and management of real estate projects, including apartment complexes, regional malls and retail centers, hotels, office buildings and mixed-use facilities, as well as large land development projects. Consolidated balance sheets and statements of earnings for Rental Properties and its subsidiaries follow.
Forest City Rental Properties Corporation and Subsidiaries
Consolidated Balance Sheet - January 31, 2003
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
S. Summarized Financial Information (continued)
Consolidated Balance Sheet - January 31, 2002
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
S. Summarized Financial Information (continued)
Consolidated Statements of Earnings
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
S. Summarized Financial Information (continued)
Consolidated Statements of Earnings (continued)
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
T. Discontinued Operations
The Company adopted the provisions of Statement of Financial Accounting Standard (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” effective February 1, 2002. This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It also retains the basic provisions for presenting discontinued operations in the income statement but broadened the scope to include a component of an entity rather than a segment of business. Pursuant to the definition of a component of an entity in SFAS No. 144, assuming no significant continuing involvement, all earnings of properties which have been sold or held for sale are reported as discontinued operations. The Company considers assets held for sale when the transaction has been approved by the appropriate level of management and there are no contingencies related to the sale that may prevent the transaction from closing. In most transactions, these contingencies are not satisfied until the actual closing of the transaction and, accordingly, the property is not identified as held for sale until the closing actually occurs. However, each potential transaction is evaluated based on its separate facts and circumstances. Three properties classified as discontinued operations were reclassified as such in the Statement of Earnings for the year ended January 31, 2003. Due to the immateriality of the operating results of these three entities for the years ended January 31, 2002 and 2001, no reclassification was made in the Statement of Earnings for those years.
Included in discontinued operations for the year ended January 31, 2003 are three properties: Bay Street, Courtland Center and Trowbridge. Bay Street, a 16,000 square foot retail center located in Staten Island, New York, was sold in the fourth quarter of fiscal 2002. Courtland Center, a 458,000 square foot retail center located in Flint, Michigan, was also sold during the fourth quarter of fiscal 2002. Trowbridge is located in Southfield, Michigan, has 305 supported-living units, and its deed was accepted by its lender in lieu of foreclosure in April 2003. Bay Street and Courtland Center were previously included in the Commercial Group and Trowbridge is included in the Residential Group.
Using the full consolidation method, the assets and liabilities and operating results relating to assets sold and assets held for sale are as follows.
(1)
Amounts have not been restated as discontinued operations on the Consolidated Statement of Earnings and have been included here for informational purposes only.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
U.
Gain (Loss) on Disposition of Operating Properties and Other Investments,
Provision for Decline in Real Estate and Extraordinary Items
The following table summarizes the gain (loss) on disposition of operating properties and other investments by year.
*
Sold in a tax-deferred exchange for a replacement property through an intermediary.
Provision for Decline in Real Estate - During the years ended January 31, 2003, and 2002, the Company recorded a Provision for Decline in Real Estate totaling $8,221,000 and $8,783,000 respectively. The provisions represent the adjustment to fair market value of land held by the Commercial and Residential Groups.
During the year ended January 31, 2001, the Company recorded a Provision for Decline in Real Estate totaling $1,231,000. The provision represents the write-down to estimated fair value, less cost to sell, of Canton Centre Mall.
Extraordinary Items - The Company adopted the provisions of Statement of Financial Accounting Standard No. 145, “Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13 on Technical Corrections” (SFAS No. 145), which requires gains or losses from early extinguishment of debt to be classified in operating income or loss. The Company previously recorded gains or losses from early extinguishment of debt as an extraordinary item, net of tax, in its Statement of Earnings. For the years ended January 31, 2003 and 2002, the Company has reclassified $1,653,000 and $386,000, respectively, of early extinguishment of debt to interest expense. There were no early extinguishments of debt for the year ended January 31, 2001.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - continued
V. Subsequent Events
The Company currently wholly-owns a major retail development project (the “Project”) in California, which is included in Projects Under Development in the Company’s Consolidated Balance Sheet at January 31, 2003. During the fourth quarter of 2002, the Company entered into negotiations to form a joint venture with another party (“partner”) to develop, lease and own the project. The partner currently owns a completed retail center which will connect to the Project upon completion. The Project will be jointly owned and controlled by the Company and its partner in the newly-formed joint venture. If formation of this joint venture is completed, the project will no longer be consolidated and will be accounted for under the equity method of accounting.
Granite Development Partners, L.P. (“Granite”) is a limited partnership which owns interests in several land developments held for resale, the most significant of which is a one-third interest in Seven Hills in Henderson, Nevada. Granite is scheduled to terminate and liquidate when it completes its land resale activity in 2005. The Company, as general partner of Granite, has all of the economic risk. Granite has the wherewithal to retire in full its $20,000,000 of 10.83% senior notes outstanding from its own cash flow through 2005. However, the Company’s effective borrowing rate on its long-term credit facility is much lower than 10.83%. The amount of the spread between Granite’s and the Company’s borrowing rate resulted in the Company’s decision to invest an additional amount that was sufficient for Granite to retire its notes in full in March 2003. The Company invested $14,000,000 in March 2003 and $4,000,000 in the fourth quarter of 2002. In March 2003, the Company was redeemed of $6,251,550 of those senior notes which it owned and which were included in Investments In and Advances To Affiliates in the Company’s Consolidated Balance Sheet at January 31, 2003. The Company also received a return of $2,405,550 of its $18,000,000 additional investment.
In March 2003 grants to key employees and directors of 653,800 Class A common stock options and 112,500 shares of restricted Class A common stock were approved.
The Company executed $200,000,000 of LIBOR interest rate swaps in March 2003 at an average rate of 2.21%.
In April 2003, the Company returned the deed on Trowbridge to the lender. Trowbridge is a 305-unit supported-living facility located in Southfield, Michigan. The deed was accepted by the lender in lieu of foreclosure resulting in a net gain on the disposal of approximately $250,000 which will be recorded by the Company in the first quarter of 2003.
Forest City Enterprises, Inc. and Subsidiaries
Quarterly Consolidated Financial Data (Unaudited)
Both classes of common stock are traded on the New York Stock Exchange under the symbols FCEA and FCEB. As of March 3, 2003, the number of registered holders of Class A and Class B common stock were 879 and 552, respectively.
(1)
Excludes the cumulative effect of change in accounting principle, net of tax of $(1,202) (($.03) basic and diluted per share) for the year ended January 31, 2002. This item is explained in Note A in the Notes to Consolidated Financial Statements.
(2)
The sum of quarterly earnings per share may not equal annual earnings per share due to the weighting of stock and option activity during the year.
(3)
Future dividends will depend upon such factors as earnings, capital requirements and financial condition of the Company. Retained earnings of $9,088 was available for payment of dividends as of January 31, 2003, under the restrictions contained in the revolving credit agreement with a group of banks. On March 5, 2003, the anniversary date of the long-term credit facility, this amount was reset to the $20,000 limitation.
(4)
Early extinguishment of debt, which was formerly reported as an extraordinary item, is now reported in operating earnings to reflect the Company’s adoption of Statement of Financial Accounting Standard No. 145, “Rescission of FASB Statement No. 4, 44 and 64, amendment of FASB Statement No. 13 on Technical Corrections”. This item is explained in Note U in the Notes to the Consolidated Financial Statements.
(5)
The Company has adopted the provisions of Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. This item is explained in Note T in the Notes to the Consolidated Financial Statements. Quarterly data for the periods ended April 30, July 31 and October 31, 2002 is shown as reported and reconciled to the Company’s year-end presentation. No adjustment is shown for the Quarter ended January 31, 2003.
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
(a)
Identification of Directors is contained in a definitive proxy statement which the registrant anticipates will be filed by April 24, 2003 and is incorporated herein by reference.
(b)
Pursuant to General Instruction G of Form 10-K and Item 401(b) of Regulation S-K, Executive Officers of the registrant are reported in Part I of this Form 10-K.
(c)
The disclosure of delinquent filers, if any, under Section 16(a) of the Securities Exchange Act of 1934 is contained in a definitive proxy statement which the registrant anticipates will be filed by April 24, 2003 and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation;
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters; and
Item 13.
Item 13. Certain Relationships and Related Transactions
Information required under these sections is contained in a definitive proxy statement which the registrant anticipates will be filed by April 24, 2003 and is incorporated herein by reference.
Item 14.
Item 14. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures. The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective.
(b)
Changes in internal controls. Subsequent to the date of the evaluation, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls.
Item 15.
Item 15. Principal Accountant Fees and Services
The information required by this item is contained in a definitive proxy statement which the registrant anticipates will be filed by April 24, 2003 and is incorporated herein by reference.
PART IV
Item 16. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a)
List of Documents filed as part of this report.
The report of the independent accountants with respect to the above listed financial statement schedules appears on page 52.
Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. Columns omitted from schedules filed have been omitted because the information is not applicable.
3.
Exhibits - see (c) below.
+
Management contract or compensatory arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 16(c).
*
Filed herewith.
(d) Financial Statement Schedules
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(d) Financial Statement Schedules (continued)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Forest City Enterprises, Inc. and Subsidiaries
[Additional columns below]
[Continued from above table, first column(s) repeated]
[Additional columns below]
[Continued from above table, first column(s) repeated]
(d) Financial Statement Schedules (continued)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: April 10, 2003
BY:
/s/ Charles A. Ratner
(Charles A. Ratner, President and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
The Registrant plans to distribute to security holders a copy of the Annual Report and Proxy material by April 30, 2003.
* The undersigned, pursuant to a Power of Attorney executed by each of the Directors and Officers identified above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this Form 10-K on behalf of each of the persons noted above, in the capacities indicated.
By: /s/ Charles A. Ratner
(Charles A. Ratner, Attorney-in-Fact)
April 10, 2003
CERTIFICATION
I, Charles A. Ratner, certify that:
(1)
I have reviewed this annual report for the fiscal year ended January 31, 2003 on Form 10-K of Forest City Enterprises, Inc. (“Registrant”);
(2)
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
(4)
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
(a)
designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; and
(b)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; and
(5)
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and
(6)
The Registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 10, 2003
/s/ CHARLES A. RATNER
Name: Charles A. Ratner
Title: President and Chief Executive Officer
CERTIFICATION
I, Thomas G. Smith, certify that:
(1)
I have reviewed this annual report for the fiscal year ended January 31, 2003 on Form 10-K of Forest City Enterprises, Inc. (“Registrant”);
(2)
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
(3)
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
(4)
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
(a)
designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; and
(b)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; and
(5)
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of the board of directors (or persons fulfilling the equivalent function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and
(6)
The Registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 10, 2003
/s/ THOMAS G. SMITH
Name: Thomas G. Smith
Title: Executive Vice President,
Chief Financial Officer and Secretary