FOREST CITY ENTERPRISES, INC.
 

\

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A

AMENDMENT NO. 1
TO
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2003

Commission file number 1-4372

FOREST CITY ENTERPRISES, INC.


(Exact Name of Registrant as Specified in its Charter)
     
Ohio   34-0863886

 
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
     
Terminal Tower 50 Public Square
Suite 1100 Cleveland, Ohio
   
44113
 

 
 
(Address of Principal Executive Offices)   Zip Code  

Registrant’s telephone number, including area code        216-621-6060



(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report).

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

Yes      X        No            

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes      X        No            

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     
Class   Outstanding at December 1, 2003

 
 
Class A Common Stock, $.33 1/3 par value   36,240,544 shares
Class B Common Stock, $.33 1/3 par value   13,715,992 shares


 

Explanatory Note

     Forest City Enterprises, Inc. (the “Registrant”) is filing this Amendment No. 1 (the “Amendment”) to its Quarterly Report on Form 10-Q for the quarter ended October 31, 2003 (the “Quarterly Report”) to amend and restate in its entirety Item 1 of Part I to add Note M to its Notes to Consolidated Financial Statements. In addition, pursuant to Rule 12b-15 promulgated under the Securities Exchange Act of 1934, the Registrant is including with this Amendment the certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350. This Amendment continues to speak as of the date of the original filing of the Quarterly Report, and the Registrant has not updated the disclosures contained herein to reflect any events that occurred at a later date.

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

                     
        October 31, 2003   January 31, 2003
       
        (Unaudited)        
        (in thousands)
Assets
               
Real Estate
               
 
Completed rental properties
  $ 4,446,313     $ 3,866,625  
 
Projects under development
    529,384       572,476  
 
Land held for development or sale
    36,432       35,036  
   
   
Total Real Estate
    5,012,129       4,474,137  
 
Less accumulated depreciation
    (706,878 )     (615,653 )
   
   
Real Estate, net
    4,305,251       3,858,484  
Cash and equivalents
    175,958       122,356  
Restricted cash
    133,455       127,046  
Notes and accounts receivable, net
    417,981       286,652  
Inventories
    35,743       38,638  
Investments in and advances to real estate affiliates
    460,345       489,205  
Other assets
    211,340       154,828  
   
   
Total Assets
  $ 5,740,073     $ 5,077,209  
   
Liabilities and Shareholders' Equity
               
Liabilities
               
Mortgage debt, nonrecourse
  $ 3,478,990     $ 3,016,107  
Notes payable
    137,730       79,484  
Long-term credit facility
    62,500       135,250  
Senior and subordinated debt
    320,400       220,400  
Accounts payable and accrued expenses
    645,078       585,042  
Deferred income taxes
    288,253       255,888  
   
   
Total Liabilities
    4,932,951       4,292,171  
Minority interest
    60,951       79,066  
   
Commitments and Contingencies
               
Company-Obligated Trust Preferred Securities
           
Shareholders' Equity
               
Preferred stock — without par value
               
 
5,000,000 shares authorized; no shares issued
           
Common stock — $.33 1/3 par value
               
 
Class A, 96,000,000 shares authorized; 36,509,636 and 35,678,086 shares issued, 36,240,344 and 35,525,067 outstanding, respectively
    12,170       11,892  
 
Class B, convertible, 36,000,000 shares authorized; 13,716,192 and 14,547,742 shares issued, 13,716,192 and 14,130,592 outstanding, respectively
    4,572       4,850  
   
 
    16,742       16,742  
Additional paid-in capital
    234,668       232,029  
Retained earnings
    505,722       470,348  
   
 
    757,132       719,119  
Less treasury stock, at cost; 269,292 Class A and 0 Class B shares and 153,019 Class A and 417,150 Class B shares, respectively
    (1,971 )     (4,425 )
Accumulated other comprehensive loss
    (8,990 )     (8,722 )
   
 
Total Shareholders' Equity
    746,171       705,972  
   
   
Total Liabilities and Shareholders' Equity
  $ 5,740,073     $ 5,077,209  
   

See notes to consolidated financial statements.

2


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)

                                     
        Three Months Ended October 31,   Nine Months Ended October 31,
       
        2003   2002   2003   2002
       
        (in thousands, except per share data)
Revenues
                               
 
Rental properties
  $ 242,532     $ 194,697     $ 666,441     $ 569,143  
 
Lumber trading
    39,627       23,296       86,508       72,896  
 
Equity in earnings of unconsolidated real estate entities
    11,433       10,735       33,103       31,493  
   
 
    293,592       228,728       786,052       673,532  
   
Expenses
                               
 
Operating expenses
    169,841       140,713       452,518       406,361  
 
Interest expense
    50,509       39,958       142,140       127,469  
 
Loss on early extinguishment of debt
          355       10,718       735  
 
Provision for decline in real estate
          957       2,728       957  
 
Depreciation and amortization
    31,062       30,356       91,300       84,285  
   
 
    251,412       212,339       699,404       619,807  
   
Loss on disposition of other investments
                (431 )     (116 )
   
Earnings before income taxes
    42,180       16,389       86,217       53,609  
   
Income tax expense
                               
   
Current
    (2,813 )     (4,320 )     1,080       4,053  
   
Deferred
    20,098       11,028       31,669       16,429  
   
 
    17,285       6,708       32,749       20,482  
   
Earnings before minority interest and discontinued operations
    24,895       9,681       53,468       33,127  
Minority interest
    (1,466 )     (183 )     (8,565 )     (2,037 )
   
Earnings from continuing operations
    23,429       9,498       44,903       31,090  
Discontinued operations, net of tax and minority interest
                               
   
(Loss) earnings from operations
    (1,301 )     (557 )     (1,433 )     670  
   
Gain on disposition of operating properties
    3,844             3,897        
   
 
    2,543       (557 )     2,464       670  
   
Net earnings
  $ 25,972     $ 8,941     $ 47,367     $ 31,760  
   
Basic earnings per common share
                               
   
Earnings from continuing operations
  $ 0.47     $ 0.19     $ 0.90     $ 0.63  
   
Earnings from discontinued operations, net of tax and minority interest
    0.05       (0.01 )     0.05       0.01  
   
   
Net earnings
  $ 0.52     $ 0.18     $ 0.95     $ 0.64  
   
Diluted earnings per common share
                               
   
Earnings from continuing operations
  $ 0.46     $ 0.19     $ 0.89     $ 0.62  
   
Earnings from discontinued operations, net of tax and minority interest
    0.05       (0.01 )     0.05       0.01  
   
   
Net earnings
  $ 0.51     $ 0.18     $ 0.94     $ 0.63  
   

See notes to consolidated financial statements.

3


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)

                       
          Nine Months Ended October 31,
         
          2003   2002
         
          (in thousands)
Net earnings
  $ 47,367     $ 31,760  
   
Other comprehensive (loss) income, net of tax:
               
   
Unrealized gains (losses) on investments in securities:
               
     
Unrealized gain (loss) on securities
    305       (512 )
   
Unrealized derivative (losses) gains:
               
     
Change in unrealized losses and gains on interest rate contracts, net of minority interest
    (573 )     694  
   
Other comprehensive (loss) income, net of tax
    (268 )     182  
   
Comprehensive income
  $ 47,099     $ 31,942  
   

 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
(Unaudited)

                                                                                   
      Common Stock                                
     
                            Accumulated    
      Class A   Class B   Additional           Treasury Stock   Other    
     
 
  Paid-In   Retained  
  Comprehensive    
      Shares   Amount   Shares   Amount   Capital   Earnings   Shares   Amount   Income (Loss)   Total
     
 
 
 
 
 
 
 
 
 
      (in thousands)
Nine Months Ended October 31, 2003
                                                                               
 
Balances at January 31, 2003
    35,678     $ 11,892       14,548     $ 4,850     $ 232,029     $ 470,348       570     $ (4,425 )   $ (8,722 )   $ 705,972  
 
Net earnings
                                            47,367                               47,367  
 
Other comprehensive loss, net of tax
                                                                  (268 )     (268 )
 
Dividends $.24 per share
                                            (11,993 )                             (11,993 )
 
Conversion of Class B to Class A shares
    832       278       (832 )     (278 )                                              
 
Exercise of stock options
                                    1,700               (188 )     1,441               3,141  
 
Income tax benefit from stock option exercises
                                    1,065                                       1,065  
 
Restricted stock issued
                                    (1,013 )             (113 )     1,013                
 
Amortization of unearned compensation
                                    887                                       887  
   
 
Balances at October 31, 2003
    36,510     $ 12,170       13,716     $ 4,572     $ 234,668     $ 505,722       269     $ (1,971 )   $ (8,990 )   $ 746,171  
   
Nine Months Ended October 31, 2002
                                                                               
 
Balances at January 31, 2002
    35,101     $ 11,700       15,125     $ 5,042     $ 228,263     $ 432,939       762     $ (6,140 )   $ (9,291 )   $ 662,513  
 
Net earnings
                                            31,760                               31,760  
 
Other comprehensive income, net of tax
                                                                  182     182  
 
Dividends $.17 per share
                                            (8,441 )                             (8,441 )
 
Conversion of Class B to Class A shares
    543       181       (543 )     (181 )                                              
 
Exercise of stock options
                                    1,418               (187 )     1,671               3,089  
 
Income tax benefit from stock option exercises
                                    1,412                                       1,412  
 
Amortization of unearned compensation
                                    715                                       715  
   
 
Balances at October 31, 2002
    35,644     $ 11,881       14,582     $ 4,861     $ 231,808     $ 456,258       575     $ (4,469 )   $ (9,109 )   $ 691,230  
   

See notes to consolidated financial statements.

4


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

                     
        Nine Months Ended October 31,
       
        2003   2002
       
        (in thousands)
Cash Flows from Operating Activities
               
 
Rents and other revenues received
  $ 621,494     $ 609,281  
 
Cash distributions from unconsolidated entities
    13,331       13,705  
 
Proceeds from land sales
    55,800       46,958  
 
Land development expenditures
    (56,962 )     (28,232 )
 
Operating expenditures
    (404,622 )     (390,606 )
 
Interest paid
    (134,577 )     (128,873 )
   
   
Net cash provided by operating activities
    94,464       122,233  
   
Cash Flows from Investing Activities
               
 
Capital expenditures
    (304,962 )     (433,997 )
 
Proceeds from disposition of operating properties and other investments
    2,549        
 
Changes in investments in and advances to real estate affiliates
    36,911       (69,822 )
   
   
Net cash used in investing activities
    (265,502 )     (503,819 )
   
Cash Flows from Financing Activities
               
 
Proceeds from issuance of senior notes
    300,000        
 
Retirement of senior notes
    (208,500 )      
 
Payment of senior notes issuance costs
    (8,092 )      
 
Increase in nonrecourse mortgage debt
    785,387       334,829  
 
Increase in long-term credit facility
    19,000       231,000  
 
Principal payments on nonrecourse mortgage debt
    (549,839 )     (58,284 )
 
Payments on long-term credit facility
    (91,750 )     (90,500 )
 
Increase in notes payable
    77,441       15,355  
 
Payments on notes payable
    (18,638 )     (20,785 )
 
Repayment of Lumber Trading Group securitization agreement
    (55,000 )      
 
Change in restricted cash and book overdrafts
    16,263       (31,490 )
 
Payment of deferred financing costs
    (27,168 )     (7,897 )
 
Exercise of stock options
    3,141       3,089  
 
Dividends paid to shareholders
    (10,464 )     (7,933 )
 
(Decrease) increase in minority interest
    (7,141 )     5,799  
   
   
Net cash provided by financing activities
    224,640       373,183  
   
Net increase (decrease) in cash and equivalents
    53,602       (8,403 )
Cash and equivalents at beginning of period
    122,356       50,054  
   
Cash and equivalents at end of period
  $ 175,958     $ 41,651  
   

See notes to consolidated financial statements.

5


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(Unaudited)

                     
        Nine Months Ended October 31,
       
        2003   2002
       
        (in thousands)
       
Reconciliation of Net Earnings to Cash Provided by Operating Activities
               
Net Earnings
  $ 47,367     $ 31,760  
 
Discontinued operations:
               
   
Minority interest
    218       (278 )
   
Depreciation
    659       2,524  
   
Amortization
    121       98  
   
Gain on disposition of operating properties
    (6,769 )      
   
Loss on early extinguishment of debt
    190        
 
Minority interest
    8,565       2,037  
 
Depreciation
    75,234       70,204  
 
Amortization
    16,066       14,081  
 
Equity in earnings of unconsolidated entities
    (33,103 )     (31,493 )
 
Cash distributions from unconsolidated entities
    13,331       13,705  
 
Deferred income taxes
    32,541       13,578  
 
Loss on disposition of other investments
    431       116  
 
Provision for decline in real estate
    2,728       957  
 
Loss on early extinguishment of debt
    10,718       735  
 
(Increase) decrease in land included in projects under development
    (6,329 )     3,638  
 
Decrease in land included in completed rental properties
          341  
 
Increase in land held for development or sale
    (1,396 )     (11,164 )
 
(Increase) decrease in notes and accounts receivable
    (76,124 )     2,658  
 
Decrease in inventories
    2,895       6,519  
 
Increase in other assets
    (29,941 )     (11,566 )
 
Increase in accounts payable and accrued expenses
    37,062       13,783  
   
   
Net cash provided by operating activities
  $ 94,464     $ 122,233  
   

Supplemental Non-Cash Disclosures:

The schedule below represents the effect of the following non-cash transactions for the nine months ended October 31:

         
  2003 *   Increase in interest in Station Square Freight House, a specialty retail center
      Disposition of interest in Trowbridge, a supported-living community
      Acquisitions of additional interests in ten syndicated residential properties:
        Arboretum Place, Bowin, Bridgewater, Drake, Enclave, Grand,
Lakeland, Lofts at 1835 Arch, Silver Hill and Trellis at Lee's Mill
      Acquisition of Grove, an apartment community
      Change to equity method of accounting from full consolidation due to the admission of a 50% partner in
Emporium, a retail project under development
  2002 *   None
                     
Operating Activities
               
 
Notes and accounts receivable
  $ (204 )   $  
 
Other assets
    (13,151 )      
 
Accounts payable and accrued expenses
    21,370        
   
   
Total effect on operating activities
  $ 8,015     $  
   
Investing Activities
               
 
Investments in and advances to affiliates
  $ 11,887     $  
 
Acquisition of completed rental properties
    (227,499 )      
   
   
Total effect on investing activities
  $ (215,612 )   $  
   
Financing Activities
               
 
Decrease in notes and loans payable
  $ (557 )   $  
 
Increase in nonrecourse mortgage debt
    227,911        
 
Decrease in minority interest
    (19,757 )      
   
   
Total effect on financing activities
  $ 207,597     $  
   

See notes to consolidated financial statements.

6


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A.     Accounting Policies

Basis of Presentation

The interim financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended January 31, 2003. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included.

The Company uses the pro-rata method of consolidation to analyze its properties as the pro-rata method of consolidation provides operating data at the Company’s ownership share. The pro-rata method of consolidation is not a method of consolidation acceptable under GAAP. Thus, all information the Company has historically provided under pro-rata consolidation has been removed from the Company’s financial statements and related footnotes. This information is now provided in the Company’s Management Discussion and Analysis on pages 38-46 of this filing.

Accounting for Derivative Instruments and Hedging Activities

During the three and nine months ended October 31, 2003, the Company recorded approximately $25,000 and $565,000, respectively, as interest expense in the Consolidated Statements of Earnings, which represented the total ineffectiveness of all cash flow hedges. During the three and nine months ended October 31, 2002, the Company recorded approximately $19,000 and $204,000, respectively, as an increase of interest expense due to the ineffective portion of its cash flow hedges. The amount of net derivative losses reclassified into earnings from other comprehensive income 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 $-0- for the three and nine months ended October 31, 2003, and was $58,000 and $738,000, for the three and nine months ended October 31, 2002, respectively. As of October 31, 2003, the Company expects that within the next twelve months it will reclassify amounts recorded in accumulated other comprehensive loss into earnings as interest expense associated with the effectiveness of cash flow hedges of approximately $2,298,000, net of tax. The amount of hedge ineffectiveness relating to hedges designated and qualifying as fair value hedges was not material.

At October 31 and January 31, 2003, interest rate caps were reported at their fair value of approximately $3,917,000 and $753,000 respectively, in the Consolidated Balance Sheets as Other Assets. The fair value of interest rate swap and floor agreements at October 31 and January 31, 2003 is an unrealized loss of approximately $7,376,000 and $4,340,000, respectively, and is included in Accounts Payable and Accrued Expenses in the Consolidated Balance Sheets.

Stock-Based Compensation

During the nine months ended October 31, 2003, the Company granted 661,900 Class A fixed stock options to key employees and nonemployee members of the Board of Directors. The options have a term of 10 years, vest 25% after two years, 50% after three years and 100% after four years and have a weighted average exercise price of $31.03. The exercise price of the options granted was equal to the market price of the underlying stock on the date of grant resulting in no intrinsic value and no compensation expense under APBO No. 25.

7


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A.     Accounting Policies continued

Stock-Based Compensation (continued)

The Company also granted 112,500 shares of restricted Class A common stock to key employees. The restricted shares were awarded out of treasury stock, having a cost basis of $1,012,500, 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. The market value on the date of grant of $3,487,500 was recorded as unearned compensation to be charged to expense over the respective vesting periods. The unearned compensation of this award along with previously issued restricted stock is reported as an offset of Additional Paid-In Capital in the accompanying consolidated financial statements. At October 31, 2003, the unamortized unearned compensation relating to all restricted stock amounted to $5,227,000.

Stock based compensation costs, net of tax, relating to restricted stock awards were charged to net earnings in the amount of $186,000 and $121,000, respectively, during the three months ended October 31, 2003 and 2002, and $536,000 and $432,000, respectively, during the nine months ended October 31, 2003 and 2002. 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 per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock options.

                                   
      Three months ended   Nine months ended
      October 31,   October 31,
     
 
      2003   2002   2003   2002
     
 
 
 
Net earnings (in thousands)
                               
 
As reported
  $ 25,972     $ 8,941     $ 47,367     $ 31,760  
 
Deduct stock-based employee compensation expense for stock options determined under the fair value based method, net of related tax effect
    (896 )     (644 )     (2,443 )     (1,932 )
 
   
     
     
     
 
 
Pro forma
  $ 25,076     $ 8,297     $ 44,924     $ 29,828  
 
   
     
     
     
 
Basic earnings per share
                               
 
As reported
  $ .52     $ .18     $ .95     $ .64  
 
Pro forma
  $ .50     $ .17     $ .90     $ .60  
Diluted earnings per share
                               
 
As reported
  $ .51     $ .18     $ .94     $ .63  
 
Pro forma
  $ .49     $ .17     $ .89     $ .59  

New Accounting Standards

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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.

8


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A.     Accounting Policies continued

New Accounting Standards (continued)

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 quarterly 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 the fiscal year ended January 31, 2004. The new requirements for quarterly disclosure were effective for the quarter ended 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 No. 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 and the related FASB Staff Position (“FSP”) apply immediately to variable interest entities created after January 31, 2003 and to existing variable interest entities in the first year or interim period ending after December 15, 2003. The FASB issued an Exposure Draft and a number of FSP’s that address certain implementation issues that have arisen since the FASB issued FIN No. 46. The Company is in the process of quantifying the full impact of FIN No. 46 on its financial statements based on its understanding of FIN No. however, 46, the related Exposure Draft and FSPs issued to date as they are currently written. However, as of the date of this filing the guidance on FIN No. 46 has not yet been finalized. The Company believes it is reasonably possible it is the primary beneficiary of many of its equity method investments. As a result, full consolidation of these investments may be required under FIN No. 46, however, a final assessment cannot be made at this time. The financial position and results of operations for the Company’s equity method investments, which the Company is currently assessing under FIN No. 46 are presented in Note K — Investments In and Advances to Affiliates on page 17 of this Form 10-Q.

In April 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS No. 149). This statement amends and clarifies financial accounting and reporting for derivative instruments and for hedging activities under FAS 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for certain contracts entered into or modified after June 30, 2003 and for certain hedging relationships designated after June 30, 2003. This statement did not have a material impact on the Company’s financial position, results of operations or cash flows.

9


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

A.     Accounting Policies continued

New Accounting Standards (continued)

In March 2003, the Emerging Issues Task Force (EITF) issued EITF No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” (EITF No. 00-21). This issue addresses certain aspects of accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. This issue is effective for revenue arrangements entered into by the Company subsequent to January 31, 2004. The Company does not expect this statement to have a current material impact on the Company’s financial position, results of operations or cash flows.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The minority interests associated with certain of the Company’s consolidated joint ventures that have finite lives under the terms of the agreements represent mandatorily redeemable interests as defined in SFAS 150. On November 7, 2003, the FASB indefinitely deferred the effective date of paragraphs nine and ten of SFAS No. 150 as they apply to mandatorily redeemable noncontrolling interests in order to address a number of interpretation and implementation issues. However, the disclosure provisions of SFAS 150 are still required. Although no such obligation exists, if the Company were to dissolve the entities or sell the underlying real estate assets and satisfy any outstanding obligations, in all of its consolidated finite life entities as of October 31, 2003, the estimated aggregate settlement value of these noncontrolling interests would approximate book value due to the Company’s preferred returns upon settlement. The Company’s assessment of the settlement value is based on the estimated liquidation values of the assets and liabilities and the resulting proceeds that the Company would distribute to its noncontrolling interests, as required under the terms of the respective agreements. While additional guidance from the FASB relating to noncontrolling interests in consolidated finite life partnerships is pending, the Company does not expect the remainder of this statement to have an immediate material impact on the Company’s financial position, results of operations or cash flows.

10


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

B.     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. The Company 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.

For the three months ended October 31, 2003, two properties, Vineyards and Laurels, were included in discontinued operations. Vineyards, a 366-unit apartment complex in Broadview Heights, Ohio and Laurels, a 520-unit apartment complex in Justice, Illinois, were both sold during the third quarter. For the nine months ended October 31, 2003, three properties, Vineyards, Laurels, and Trowbridge, were included in discontinued operations. The Company turned over the deed to Trowbridge, a supported-living community located in Southfield, Michigan, in lieu of foreclosure in April 2003. Vineyards, Laurels and Trowbridge were previously included in the Residential Group.

For the three and nine months ended October 31, 2002, five properties were included in discontinued operations: Bay Street, Courtland Center, Trowbridge, Vineyards and Laurels. 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. Bay Street and Courtland Center were both previously included in the Commercial Group.

11


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

B.     Discontinued Operations (continued)

The assets and liabilities relating to Trowbridge being held for sale and operating results relating to assets sold and assets held for sale from Bay Street, Courtland Center, Trowbridge, Vineyards and Laurels are as follows.

                   
      October 31,   January 31,
      2003   2003
     
 
      (in thousands)
Assets
               
 
Real estate, net
  $     $ 20,004  
 
Other assets
          1,021  
 
   
     
 
 
  $     $ 21,025  
 
   
     
 
Liabilities
               
 
Mortgage debt, nonrecourse
  $     $ 20,822  
 
Other liabilities
          574  
 
   
     
 
 
  $     $ 21,396  
 
   
     
 
                                   
      Three Months Ended   Nine Months Ended
      October 31,   October 31,
     
 
      2003   2002   2003   2002
     
 
 
 
      (in thousands)   (in thousands)
 
Revenues
  $ 880     $ 4,787     $ 5,702     $ 14,819  
 
   
     
     
     
 
Expenses
                               
 
Operating expenses
    1,086       3,001       4,788       9,108  
 
Interest expense
    382       942       1,143       2,767  
 
Loss on early extinguishment of debt
    190             190        
 
Depreciation and amortization
    154       1,367       780       2,622  
 
   
     
     
     
 
 
    1,812       5,310       6,901       14,497  
 
   
     
     
     
 
Gain on disposition of operating properties
    6,358             6,769        
 
   
     
     
     
 
Earnings (loss) before income taxes
    5,426       (523 )     5,570       322  
Income tax expense (benefit)
                               
 
Current
    382       276       2,083       2,654  
 
Deferred
    2,501       (116 )     805       (2,724 )
 
   
     
     
     
 
 
    2,883       160       2,888       (70 )
 
   
     
     
     
 
Earnings before minority interest
    2,543       (683 )     2,682       392  
Minority interest
          126       (218 )     278  
 
   
     
     
     
 
Net earnings (loss) from discontinued operations
  $ 2,543     $ (557 )   $ 2,464     $ 670  
 
   
     
     
     
 

The following table summarizes the gain (loss) on disposition of operating properties for the three and nine months ended October 31, 2003 and 2002.

                                   
      Three Months Ended   Nine Months Ended
      October 31,   October 31,
     
 
      2003   2002   2003   2002
     
 
 
 
      (in thousands)   (in thousands)
Discontinued operations
                               
 
Laurels
  $ 4,249     $     $ 4,249     $  
 
Vineyards
    2,109             2,109        
 
Trowbridge
                538        
 
Other
                (127 )      
 
   
     
     
     
 
Total
  $ 6,358     $     $ 6,769     $  
 
   
     
     
     
 

12


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

C.     Senior Notes

On May 19, 2003, the Company issued $300,000,000 of its 7.625% senior notes due June 1, 2015 in a public offering under its shelf registration statement. Accrued interest is payable semi-annually beginning on December 1, 2003. $208,500,000 of the proceeds from this offering were used to redeem all of the outstanding 8.5% senior notes originally due in 2008 at a redemption price equal to 104.25%. The remainder of the proceeds was used for offering costs of $8,092,000, to repay $73,000,000 outstanding under the revolving portion of the long-term credit facility and for general working capital purposes. The new 7.625% senior notes contain covenants comparable to the previously outstanding 8.5% senior notes. The Company currently has $542,180,000 available under its shelf registration.

D.     Provision for Decline in Real Estate

The following table summarizes the Company’s Provision for Decline in Real Estate for the three and nine months ended October 31, 2003 and 2002. The provision represents the adjustment to fair market value of land held by the Residential Group and a retail center held by the Commercial Group.

                                                 
                    Three Months Ended   Nine Months Ended
                    October 31,   October 31,
                   
 
                    2003   2002   2003   2002
                   
 
 
 
                    (in thousands)   (in thousands)
                         
Leggs Hill
  Land   Salem, MA   $     $ 957     $ 1,624     $ 957  
Hunting Park
  Retail Center   Philadelphia, PA                 1,104        
 
                   
     
     
     
 
Total
                  $     $ 957     $ 2,728     $ 957  
 
                   
     
     
     
 

E.     Reclassification

Certain items in the consolidated financial statements for 2002 have been reclassified to conform to the 2003 presentation (see Notes B and F).

13


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

F.     Loss on Early Extinguishment of Debt

On February 1, 2002, the Company adopted the provisions of SFAS 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 extraordinary items, net of tax, in its Statement of Earnings. For the three and nine months ended October 31, 2003, the Company has recorded $190,000 relating to the dispositions of Laurels and Vineyards as Loss on Early Extinguishment of Debt in Discontinued Operations. Laurels is a residential property located in Justice, Illinois, and Vineyards is a residential property located in Broadview Heights, Ohio. For the nine months ended October 31, 2003, the Company recorded $10,718,000 as Loss on Early Extinguishment of Debt. This amount is primarily the result of the payment in full of the Company’s $200,000,000 8.5% senior notes due in 2008 at a premium of 104.25% for a loss on extinguishment of $8,500,000 for redemption premium and approximately $3,000,000 related to the write-off of unamortized debt issue costs. These changes were offset, in part, by net gains on early extinguishment of debt of approximately $800,000 on several residential properties.

For the three and nine months ended October 31, 2002, the Company reclassified $355,000 ($214,000, net of tax) and $735,000 ($444,000, net of tax) of early extinguishment of debt from Extraordinary Loss to Loss on Early Extinguishment of Debt to conform to the new guidance. These losses represented the impact of early extinguishment of nonrecourse debt in order to secure more favorable financing terms. The Company recorded extraordinary losses related to Lofts at 1835 Arch, a residential property located in Philadelphia, Pennsylvania, Autumn Ridge and Cambridge Towers, residential properties located in Michigan and Regency Towers, a residential property located in Jackson, New Jersey.

G.     Dividends

The Board of Directors declared regular quarterly cash dividends on both Class A and Class B common shares as follows:

                         
Date   Date of   Payment   Amount
Declared   Record   Date   Per Share

 
 
 
March 12, 2003
  June 2, 2003   June 16, 2003   $ .06  
June 11, 2003
  September 2, 2003   September 15, 2003   $ .09  
September 10, 2003
  December 1, 2003   December 15, 2003   $ .09  
December 4, 2003*
  March 1, 2004   March 15, 2004   $ .09  


*   Since this dividend was declared after October 31, 2003, it is not reflected in the consolidated financial statements.

14


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

H.     Earnings per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for “earnings from continuing operations.”

                           
              Weighted        
      Earnings   Average        
      From   Common        
      Continuing   Shares   Per
      Operations   Outstanding   Common
      (Numerator)   (Denominator)   Share
     
 
 
      (in thousands)
Three Months Ended
                       
October 31, 2003:
                       
 
Basic EPS
  $ 23,429       49,939,452     $ 0.47  
 
Effect of dilutive securities — stock options
          732,522       (0.01 )
 
   
     
     
 
 
Diluted EPS
  $ 23,429       50,671,974     $ 0.46  
 
   
     
     
 
October 31, 2002:
                       
 
Basic EPS
  $ 9,498       49,650,529     $ 0.19  
 
Effect of dilutive securities — stock options
          502,356        
 
   
     
     
 
 
Diluted EPS
  $ 9,498       50,152,885     $ 0.19  
 
   
     
     
 
Nine Months Ended
                       
October 31, 2003:
                       
 
Basic EPS
  $ 44,903       49,842,969     $ 0.90  
 
Effect of dilutive securities — stock options
          656,729       (0.01 )
 
   
     
     
 
 
Diluted EPS
  $ 44,903       50,499,698     $ 0.89  
 
   
     
     
 
October 31, 2002:
                       
 
Basic EPS
  $ 31,090       49,594,305     $ 0.63  
 
Effect of dilutive securities — stock options
          598,641       (0.01 )
 
   
     
     
 
 
Diluted EPS
  $ 31,090       50,192,946     $ 0.62  
 
   
     
     
 

I.     Commitments and Contingencies

In October 2003, the Company admitted Westfield America, Inc. as a partner into its Emporium project, a retail development in San Francisco. Pursuant to that agreement, the Company agreed to purchase a 50% interest in a partnership owned by Westfield America at a cost of $75,000,000. This acquisition will entitle the Company to a 50% economic interest in One San Francisco Centre, a retail property in operation located adjacent to Emporium. The purchase of this interest is planned for 2006 to coincide with the opening of Emporium.

15


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

J.     Reduction of Reserves On Notes Receivable and Recognition of Contingent Interest Income

The Company, through its Residential Group, is the 1% general partner in 23 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 these reserves. The first event 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. For the three and nine months ended October 31, 2003, reductions of $1,813,000 and $2,043,000, and reductions for the three and nine months ended October 31, 2002 of $319,000 and $4,169,000, respectively, are included in revenue 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 future cash flows from these properties.

In addition, during the nine months ended October 31, 2003, the Company recognized $5,300,000 in interest income on an unreserved note receivable from one of these 20 properties, representing participation proceeds from the sale of the property.

Millender Center — The Company owns a 1% general partnership interest in Millender Center (the “Project”), a mixed-use apartment, retail and hotel project located in downtown Detroit, Michigan, and loaned $14,775,000 to the 99% limited partners in 1985, as evidenced by a note. A full reserve against the note and accrued interest 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. At the same time, the note was restructured with the limited partners to extend the term from December 31, 2000 to December 31, 2022. The Company believes that the current and anticipated improved performance of the Project supports its assessment that the original principal of the note is now fully collectible.

During the three and nine months ended October 31, 2003 the Company reduced $-0- and $5,633,000, respectively, of the reserve recorded against interest receivable from Millender Center. During the three and nine months ended October 31, 2002 the Company reduced $-0- and $690,000, respectively, of the reserve recorded against Millender Center. The reductions of this reserve was primarily the result of increased cash flow projections due to the extension of the Project’s tax advantaged bonds. The recorded balance of the note was $20,917,000 and $16,332,000 at October 31, 2003 and 2002, respectively. As of October 31, 2003, a $5,382,000 reserve against this note remains.

16


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

K.     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 as well as advances on behalf of other partners. Summarized financial information for the equity method investments is as follows.

                     
        October 31,   January 31,
        2003   2003
       
 
        (in thousands)
Balance Sheet:
               
 
Completed rental properties
  $ 2,367,862     $ 2,384,920  
 
Projects under development
    260,986       307,566  
 
Land held for development or sale
    95,016       85,663  
 
Accumulated depreciation
    (491,314 )     (484,845 )
 
Other assets
    252,733       278,024  
 
   
     
 
   
Total Assets
  $ 2,485,283     $ 2,571,328  
 
   
     
 
 
Mortgage debt, nonrecourse
  $ 2,111,819     $ 2,226,384  
 
Advances from general partner
    1,385       18,355  
 
Other liabilities
    162,313       166,286  
 
Partners’ equity
    209,766       160,303  
 
   
     
 
   
Total Liabilities and Partners’ Equity
  $ 2,485,283     $ 2,571,328  
 
   
     
 
                                     
        Three Months   Three Months   Nine Months   Nine Months
        Ended   Ended   Ended   Ended
        October 31,   October 31,   October 31,   October 31,
        2003   2002   2003   2002
       
 
 
 
                (in thousands)        
Operations:
                               
 
Revenues
  $ 121,894     $ 143,634     $ 415,624     $ 391,583  
 
Operating expenses
    (67,586 )     (76,213 )     (226,294 )     (205,485 )
 
Interest expense
    (26,213 )     (38,898 )     (95,987 )     (98,251 )
 
Depreciation and amortization
    (17,327 )     (16,507 )     (55,370 )     (48,553 )
 
   
     
     
     
 
   
Net Earnings (pre-tax)
  $ 10,768     $ 12,016     $ 37,973     $ 39,294  
 
   
     
     
     
 
 
Company’s portion of Net Earnings (pre-tax)
  $ 11,433     $ 10,735     $ 33,103     $ 31,493  
 
   
     
     
     
 

     Following is a reconciliation of partners’ equity to the Company’s carrying value in the accompanying Consolidated Balance Sheets:

                 
    October 31,   January 31,
    2003   2003
   
 
    (in thousands)
Partners’ equity, as above
  $ 209,766     $ 160,303  
Equity of other partners
    65,306       30,178  
 
   
     
 
Company’s investment in partnerships
    144,460       130,125  
Advances to partnerships, as above
    1,385       18,355  
Advances to other real estate affiliates
    314,500       340,725  
 
   
     
 
Investments in and Advances to Real Estate Affiliates
  $ 460,345     $ 489,205  
 
   
     
 

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 for the development and construction of real estate projects. 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 October 31, 2003 and January 31, 2003, amounts advanced in the normal course of business for development and construction of real estate projects on behalf of this partner collateralized by this partnership interest were $110,586,000 and $98,264,000, respectively, of the $314,500,000 and $340,725,000 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.

17


 

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

L.     Segment Information

The following tables summarize financial data for the Commercial, Residential, Land Development and Lumber Trading Groups and Corporate. All amounts, including footnotes, are presented in thousands.

                                                 
            Three Months   Nine Months
        Ended October 31,   Ended October 31,
    October 31,   January 31,  
 
    2003   2003   2003   2002   2003   2002
   
 
 
 
 
 
    Identifiable Assets   Expenditures for Additions to Real Estate
   
 
Commercial Group
  $ 3,809,954     $ 3,628,251     $ 57,489     $ 101,396     $ 209,070     $ 311,559  
Residential Group
    1,312,348       990,192       78,384       22,228       128,554       146,785  
Land Development Group
    246,837       193,899       10,007       4,337       42,732       16,080  
Lumber Trading Group
    249,518       149,236       90       293       940       981  
Corporate
    121,416       115,631       88       290       721       793  
 
   
     
     
     
     
     
 
 
  $ 5,740,073     $ 5,077,209     $ 146,058     $ 128,544     $ 382,017     $ 476,198  
 
   
     
     
     
     
     
 
                                                 
    Three Months   Nine Months   Three Months   Nine Months
    Ended October 31,   Ended October 31,   Ended October 31,   Ended October 31,
   
 
 
 
    2003   2002   2003   2002   2003   2002   2003   2002
   
 
 
 
 
 
 
 
            Revenues                   Interest Expense        
   
 
 
Commercial Group
  $ 157,582     $ 152,922     $ 481,411     $ 430,852     $ 36,011     $ 26,362     $ 98,965     $ 89,175  
Residential Group
    40,817       36,931       132,678       109,704       6,268       5,788       18,724       16,234  
Land Development Group
    55,455       15,194       85,044       59,226       806       398       2,233       807  
Lumber Trading Group (1)
    39,627       23,296       86,508       72,896       966       649       2,385       2,044  
Corporate
    111       385       411       854       6,458       6,761       19,833       19,209  
 
   
     
     
     
     
     
     
     
 
 
  $ 293,592     $ 228,728     $ 786,052     $ 673,532     $ 50,509     $ 39,958     $ 142,140     $ 127,469  
 
   
     
     
     
     
     
     
     
 
                                                 
    Three Months   Nine Months   Three Months   Nine Months
    Ended October 31,   Ended October 31,   Ended October 31,   Ended October 31,
   
 
 
 
    2003   2002   2003   2002   2003   2002   2003   2002
   
 
 
 
 
 
 
 
    Depreciation and Amortization   Earnings Before Income Taxes (2)
   
 
Commercial Group
  $ 25,194     $ 24,036     $ 73,356     $ 68,518     $ 16,358     $ 17,039     $ 60,058     $ 37,870  
Residential Group
    4,884       5,099       14,999       12,401       9,448       7,135       36,669       26,657  
Land Development Group
    65       46       185       147       25,920       7,955       38,854       26,934  
Lumber Trading Group (1)
    481       536       1,408       1,604       3,728       (488 )     4,306       (406 )
Corporate
    438       639       1,352       1,615       (13,274 )     (14,295 )     (50,511 )     (36,373 )
Loss on disposition of other investments
                                        (431 )     (116 )
Provision for decline in real estate
                                  (957 )     (2,728 )     (957 )
 
   
     
     
     
     
     
     
     
 
 
  $ 31,062     $ 30,356     $ 91,300     $ 84,285     $ 42,180     $ 16,389     $ 86,217     $ 53,609  
 
   
     
     
     
     
     
     
     
 
                                   
      Earnings Before Depreciation, Amortization
      and Deferred Taxes (EBDT) (3)
     
Commercial Group
  $ 40,398     $ 43,340     $ 120,636     $ 101,178  
Residential Group
    18,625       17,643       55,942       45,453  
Land Development Group
    16,303       1,783       25,199       10,589  
Lumber Trading Group
    2,070       (372 )     2,158       (431 )
Corporate
    (6,336 )     (12,466 )     (31,633 )     (25,640 )
Discontinued Operations (4)
    (1,164 )     579       (721 )     2,831  
 
   
     
     
     
 
Consolidated EBDT
    69,896       50,507       171,581       133,980  
Reconciliation of EBDT to net earnings: (5)
                               
Depreciation and amortization — Real Estate Groups
    (34,838 )     (30,973 )     (98,500 )     (86,131 )
Deferred taxes — Real Estate Groups
    (15,447 )     (10,502 )     (32,374 )     (15,778 )
Straight-line rent adjustment
    2,654       1,839       5,185       2,943  
Provision for decline in real estate
          (579 )     (1,449 )     (579 )
Early extinguishment of debt, net of tax
          (214 )           (444 )
Loss on disposition of other investments, net of tax
                (261 )     (70 )
Discontinued operations not included in EBDT, net of tax and minority interest (4)
                               
 
Depreciation and amortization
    (154 )     (1,283 )     (731 )     (2,376 )
 
Deferred taxes
  17       116       19       158  
 
Straight-line rent adjustment
          30             57  
 
Gain on disposition of operating properties
    3,844             3,897        
 
   
     
     
     
 
Net earnings
  $ 25,972     $ 8,941     $ 47,367     $ 31,760  
 
   
     
     
     
 

(1)   The Company recognizes the gross margin on lumber brokerage sales as Revenues. Sales invoiced for the three months ended October 31, 2003 and 2002 were $897,732 and $614,410, respectively. Sales invoiced for the nine months ended October 31, 2003 and 2002 were $2,083,523 and $1,951,959, respectively.
(2)   See Consolidated Statements of Earnings on page 3 for reconciliation of Earnings Before Income Tax “EBIT” to Net Earnings.
(3)   Early extinguishment of debt, which was formerly reported as an extraordinary item, is now recorded as an operating 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.
(4)   See Note B — Discontinued Operations on Pages 11 and 12 for more information.
(5)   See Page 47 through 57 of this filing for additional information regarding the reconciliation of EBDT to Net Earnings.

M.     Subsequent Event

In November, 2003, the Company agreed to provide certain concessions to its partner relating to a property accounted for under the equity method of accounting. These concessions involved the Company agreeing to forgive their partner's deficit restoration obligations, as well as modifying the liquidating distribution provisions of the partnership agreement. As a result of these concessions, upon the sale of the property and the resulting dissolution of the partnership in November 2003, the Company recognized a loss of approximately $3.5 million.

18


 

Item 6. Exhibits and Reports on Form 8-K.

             (a) Exhibits

         
Exhibit
Number Description of Document


31.1 Principal Executive Officer's certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Principal Financial Officer's certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as amended, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

19


 

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

     
    FOREST CITY ENTERPRISES, INC.
    (Registrant)
         
Date   January 28, 2004   /S/ THOMAS G. SMITH
   
 
        Thomas G. Smith
Executive Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
 
Date   January 28, 2004   /S/ LINDA M. KANE
   
 
        Linda M. Kane
Senior Vice President
and Corporate Controller
(Principal Accounting Officer)

20


 

Exhibit Index

                 
Exhibit                
Number   Description of Document            

 
           
 
31.1 -   Principal Executive Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 -   Principal Financial Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1 -   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002