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Registrant’s telephone
number, including area code 216-621-6060
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class
which registered
Class A Common Stock ($.33 1/3 par value)
New York Stock Exchange
Class B Common Stock ($.33 1/3 par value)
New York Stock Exchange
$100,000,000 Aggregate Principal Amount of 7.375% Senior Notes
Due 2034
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
YES o NO þ
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 þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act: (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
The aggregate market value of the outstanding common equity held by non-affiliates as of the last
business day of the registrant’s most recently completed second fiscal quarter was $3,439,674,929.
The number
of shares of registrant’s common stock outstanding on
March 23, 2007 was 77,025,635 and
25,232,210 for Class A and Class B common stock, respectively.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on June 21,2007 are incorporated by reference into Part III to the extent described herein.
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 26 states and
the District of Columbia. At January 31, 2007, the Company had approximately $9.0 billion in
consolidated assets, of which approximately $8.2 billion was invested in real estate, at cost. The
Company’s core markets include the New York City/Philadelphia metropolitan area, Denver, Boston,
the Greater Washington D.C./Baltimore metropolitan area, Chicago and the state of California. The
Company has offices in Boston, Chicago, Denver, Los Angeles, New York City, San Francisco,
Washington, D.C., and the Company’s headquarters are in Cleveland, Ohio. The Company’s portfolio
of real estate assets is diversified both geographically and among property types.
The Company operates through three primary strategic business units:
•
Commercial Group, the Company’s largest business unit, owns, develops, acquires
and operates regional malls, specialty/urban retail centers, office and life science
buildings, hotels and mixed-use projects.
•
Residential Group owns, develops, acquires and operates residential rental
properties, including upscale and middle-market apartments, adaptive re-use developments
and supported-living communities. It also develops for-sale condominium projects and owns,
develops and manages military family housing.
•
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 Company has centralized the capital management, financial reporting and certain 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.
Segments of Business
The Company currently has five segments: Commercial Group, Residential Group, Land Development
Group and the New Jersey Nets (the “Nets”), in addition to Corporate Activities. Financial
information about industry segments required by this item is included in Item 8. Financial
Statements and Supplementary Data, pages 108-110, Note L — Segment Information.
Commercial Group
The Company has developed retail projects for more than 50 years and office and mixed-use projects
for more than 30 years. The Commercial Group owns a diverse portfolio in both urban and suburban
locations in 16 states and the District of Columbia. The Commercial Group targets densely populated
markets where it uses its expertise to develop complex projects, often employing public or private
partnerships. As of January 31, 2007, the Commercial Group owned interests in 90 completed
projects, including 43 retail properties (approximately 12.4 million gross leasable square feet),
41 office properties (approximately 10.3 million gross leasable square feet) and 6 hotels (2,033
rooms). The Commercial Group includes the New York City office operations.
The Company opened its first community retail center in 1948 and its first enclosed regional mall
in 1962. Since then, it has developed regional retail centers 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, 2007, the
Commercial Group’s retail portfolio consisted of 17 regional retail centers (3 under construction)
with gross leasable area (“GLA”) of 7.5 million square feet and 31 specialty retail centers (2
under construction) with a total GLA of 6.9 million square feet.
Regional retail centers 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 retail centers in strong markets, it has also
pioneered the concept of bringing specialty retailing to urban locations previously ignored by
major retailers. 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 that benefit from the new jobs
and taxes created in the urban locations.
In its office development activities, the Company is primarily a build-to-suit developer that works
with tenants to meet their 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 or life science 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, Chicago, Washington, D.C., Albuquerque and Denver metropolitan areas.
Residential Group
The Company’s Residential Group owns, develops, acquires, leases and manages residential rental
property in 19 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. Additionally, the Residential
Group develops for-sale condominium projects and also owns, develops and manages military family
housing.
At January 31, 2007, the Residential Group’s operating portfolio consisted of 32,189 units in 118
properties in which Forest City has an ownership interest. In addition, the Company owns a
residual interest in and manages 10 properties containing 1,765 units of syndicated senior citizen
subsidized housing.
Land Development Group
The Company has been in the land development business since the 1930s. The Land Development Group
acquires and sells raw land and sells fully-entitled 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. As of January31, 2007, the Company owned more than 12,090 acres of undeveloped land for these commercial and
residential development purposes. The Company has an option to purchase 1,661 acres of developable
land at its Stapleton project in Denver, Colorado, and 6,580 acres of developable land at its Mesa
del Sol project in Albuquerque, New Mexico. The Company has land development projects in 11
states.
Historically, the Land Development Group’s activities focused on land development projects in
Northeast Ohio. Over time, the Land Development Group’s activities expanded to larger, more complex
projects. The Land Development Group has extended its activities on a national basis, first in
Arizona, and more recently in Illinois, North Carolina, Florida, Colorado, Texas, New Mexico, South
Carolina, New York and Missouri. Land development activities at the Company’s Stapleton project in
Denver, Mesa del Sol project in Albuquerque and Central Station project in downtown Chicago are
reported in the Land Development Group.
As of the end of fiscal 2006, the Company had purchased 1,274 acres at Stapleton, leaving a balance
of 1,661 acres to be acquired for additional development over the course of the next 10 to 15
years. Over and above the developable land to be purchased by the Company, 1,116 acres of
Stapleton are reserved for regional parks and open space. Aside from land sales activities,
Stapleton currently has over 2,000,000 square feet of retail space, 48,000 square feet of office
space and 298 apartment units in place.
Additionally, as of the end of fiscal 2006, the Company had purchased 3,082 acres at Mesa del Sol,
leaving a balance of 6,580 acres to be acquired for additional development over the course of the
next 25 to 50 years. Aside from land sales activities, Mesa del Sol currently has 88,000 square
feet of office space, in place, which is included in the Commercial Group segment.
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 and
related costs from such land sales are included in the revenues and expenses of such groups.
The Nets
On August 16, 2004the Company purchased an ownership interest in the Nets, a franchise of the
National Basketball Association (“NBA”). The Company accounts for its investment on the equity
method of accounting. Although the Company has an ownership interest of approximately 21% in the
Nets, the Company currently recognized approximately 17%, 31% and 38% of the net loss for the years
ended January 31, 2007, 2006 and 2005, respectively, because profits and losses are allocated to
each member based on an analysis of the respective member’s claim on the net book equity assuming a
liquidation at book value at the end of the accounting period without regard to unrealized
appreciation (if any) in the fair value of the Nets.
The purchase of the interest in the Nets is the first step in the Company’s efforts to pursue
development projects, which include a new entertainment arena complex and adjacent urban
developments combining housing, offices, shops and public open space. The Nets segment is
primarily comprised of and reports on the sports operations of the basketball team.
Competition
The real estate industry is highly competitive in many of the markets in which the Company
operates. Competition could over-saturate any market, and as a result the Company may not have
sufficient cash to meet the debt service requirements on certain of its properties. Although the
Company may attempt to negotiate a restructuring with the mortgagee, it may not be successful,
which could cause a property to be transferred to the mortgagee.
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. They compete with the Company for management and leasing revenues, land for development,
properties for acquisition and disposition, for anchor department stores and tenants for
properties. The Company may not be able to successfully compete in these areas.
Tenants at the Company’s retail properties face continual competition in attracting customers from
retailers at other shopping centers, catalogue companies, online merchants, warehouse stores, large
discounters, outlet malls, wholesale clubs, direct mail and telemarketers. The Company’s
competitors and those of its tenants could have a material adverse effect on the Company’s ability
to lease space in its properties and on the rents it can charge or the concessions it can grant.
This in turn could materially and adversely affect the Company’s results of operations and cash
flows and could affect the realizable value of its assets upon sale.
In addition to real estate competition, the Company faces competition related to the operation of
the Nets, a professional sports franchise. Specifically, the Nets are in competition with other
major league sports, college athletics, other sports-related and non-sports related entertainment.
If the Company is not able to successfully manage this risk, it may incur its share of operating
losses, which are allocated to each member based on an analysis of the respective members’ net book
equity assuming a sale of the assets at depreciated historical cost at the end of the accounting
period without regard to unrealized appreciation, if any, in the value of the Nets.
Number of Employees
The Company had 4,484 employees as of January 31, 2007, of which 3,604 were full-time and 880
were part-time.
Available Information
Forest City Enterprises, Inc. is an Ohio corporation and its executive offices are located at
Suite 1100, 50 Public Square, Cleveland, Ohio44113. The Company makes available, free of charge,
on its website at www.forestcity.net, its 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 SEC. The Company’s SEC filings can also be
obtained from the SEC website at www.sec.gov. The Company’s filings can be read and copied at the
SEC’s Public Reference Room office at 100 F Street N.E., Washington, D.C. 20549. Information on
the operation of the SEC’s Public Reference Room can be obtained by calling 1-800-SEC-0330.
The Company’s corporate governance guidelines including the Company’s code of ethics and committee
charters are also available on the Company’s website at www.forestcity.net or in print to any
stockholder upon written request addressed to Corporate Secretary, Forest City Enterprises, Inc.,
Suite 1100, 50 Public Square, Cleveland, Ohio44113.
The information found on the Company’s website or the SEC website is not part of this Annual Report
on Form 10-K.
Item 1A. Risk Factors
We are Subject to Risks Associated with Investments in Real Estate
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:
•
Increases in interest rates;
•
A general tightening of the availability of credit;
•
A decline in the economic conditions in one or more of our primary markets;
An increase in competition for tenants and customers or a decrease in demand by tenants and customers;
•
An increase in supply of our property types in our primary markets;
•
A continuation of terrorist activities or other acts of violence or war in the
United States of America or abroad or the occurrence of such activities or acts that impact
properties in our real estate portfolios or that may impact the general economy;
•
Continuation or escalation of tensions in the Middle East;
•
Declines in consumer spending during an economic recession that adversely
affect our revenue from our retail centers;
•
Declines in housing markets that adversely affect our revenue from our land
segment; and
•
The adoption on the national, state or local level of more restrictive laws and
governmental regulations, including more restrictive zoning, land use or environmental
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:
•
Adverse changes in the perceptions of prospective tenants or purchasers of the
attractiveness of the property;
•
Opposition from local community or political groups with respect to
development, construction or operations at a particular site;
•
Our inability to provide adequate management and maintenance or to obtain adequate insurance;
•
The investigation, removal or remediation of hazardous materials or toxic substances at a site;
•
Our inability to collect rent or other receivables;
•
An increase in operating costs;
•
Introduction of a competitor’s property in or in close proximity to one of our current markets; and
•
Earthquakes, floods, hurricanes or underinsured or uninsured natural disasters.
The occurrence of one or more of the above risks could result in significant delays or unexpected
expenses. If any of these occur, we may not achieve our projected returns on our properties and we
could lose some or all of our investments in those properties.
We are Subject to Real Estate Development Risks
Our development projects are subject to significant risks relating to our ability to complete our
projects on time and on budget. Factors that may result in a development project exceeding budget
or being prevented from completion include:
•
An inability to secure sufficient financing on favorable terms, including an
inability to refinance construction loans;
•
Construction delays or cost overruns, either of which may increase project development costs;
•
An increase in commodity costs;
•
An inability to obtain zoning, occupancy and other required governmental permits and authorizations;
•
An inability to secure tenants or anchors necessary to support the project; and
•
Failure to achieve or sustain anticipated occupancy or sales levels.
If any of these occur, we may not achieve our projected returns on properties under development and
we could lose some or all of our investments in those properties.
In the past, we have elected not to proceed, or have been prevented from proceeding, with specific
development projects, and we anticipate that this may occur again from time to time in the future.
A development project may be delayed or terminated because a project partner or prospective anchor
withdraws or a third party challenges our entitlements or public financing.
We periodically serve as either the construction manager or the general contractor for our
development projects. The construction of real estate projects entails unique risks, including
risks that the project will fail to conform to building plans, specifications and timetables. These
failures 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 of 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 our
construction obligations to a major tenant. These types of guarantees are released upon completion
of the project, as defined. 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. We may have to make significant expenditures in the future in order to comply with our
lien-free completion obligations and funding of operating deficits.
Examples of projects that face these and other development risks include the following:
•
Brooklyn Atlantic Yards. We are in the process of developing Brooklyn Atlantic
Yards, a $4.0 billion mixed-use project in downtown Brooklyn expected to feature an 850,000
square foot sports and entertainment arena for the Nets basketball team, a franchise of the
NBA. The acquisition and development of Brooklyn Atlantic Yards has been formally approved
by the required state governmental authorities but final documentation of the transactions
are subject to the completion of negotiations with local and state governmental
authorities, including negotiation of the applicable development documentation. There is
also the possibility that condemnation of the land will be needed for the development and
potential removal, remediation or other activities to address environmental contamination
at, on, under or emanating to or from the land. There are also various lawsuits filed
challenging the approval process and use of eminent domain which may not be resolved in our
favor resulting in Brooklyn Atlantic Yards not being developed with the features we
anticipate. There is also the potential for increased costs and delays to the project as a
result of (i) increasing construction costs, (ii) scarcity of labor and supplies, (iii) our
inability to obtain tax exempt financing or the availability of financing generally, (iv)
increasing rates for financing, and (v) other potential litigation seeking to enjoin or
prevent the project for which there may not be insurance coverage. The development of
Brooklyn Atlantic Yards is being done in connection with the proposed move of the Nets to
the planned arena. While we are part of an ownership group that acquired the Nets on August16, 2004, the Arena itself (and its plans) along with any movement of the team is subject
to approval by the NBA. If we do not receive this approval, we may not be able to develop
Brooklyn Atlantic Yards to the extent intended or at all. Even if we are able to continue
with the development, we would likely not be able to do so as quickly as originally
planned.
•
Military Family Housing. Hawaii Military Communities, LLC, a wholly owned
subsidiary of ours, has been selected to form a partnership to be known as Ohana Military
Communities, LLC with the United States Department of the Navy. Ohana Military Communities,
LLC will own, redevelop and operate United States Navy and United States Marine Corp
military family housing communities comprising approximately 5,750 units on the islands of
Oahu and Kauai, Hawaii. Midwest Military Communities, LLC, a wholly owned subsidiary of
ours, has been selected to form a partnership to be known as Midwest Family Housing, LLC
with the United States Department of the Navy. Midwest Family Housing, LLC will own,
redevelop, and operate United States Navy military family housing communities, comprising
approximately 1,650 units located primarily in the Chicago, Illinois area. We have not
engaged in projects of this type before, and we cannot assure you we will be able to
complete them successfully.
•
For-Sale Condominiums. We are pursuing the development of condominiums in
selected markets. Current condominium projects include 1100 Wilshire and Mercury, both
previously unfinished office buildings in Los Angeles. While we have previously developed
for-sale condominium projects with partners, we are developing some of these projects
without the development assistance of one or more partners. We may not be able to sell the
units at the projected sales prices for a number of reasons, including, without limitation,
a rise in interest rates and the softening of the housing market.
An Economic Decline in One or More of Our Primary Markets May Adversely Affect Our Results of
Operations and Cash Flows
Our core markets include the New York City/Philadelphia metropolitan area, Denver, Boston, the
Greater Washington D.C./Baltimore metropolitan area, Chicago and the state of California. We also
have a concentration of real estate assets in Cleveland, Ohio. A downturn in any of these markets
may impair or continue to impair:
•
The ability of our tenants to make lease payments;
•
Our ability to successfully market new developments to prospective purchasers and tenants;
•
Our rental and lease rates;
•
Hotel occupancy and room rates;
•
Land sales; and
•
Occupancy rates for commercial and residential properties.
Adverse economic conditions may negatively impact our results of operations and cash flows. In
addition, local real estate market conditions have been, and may continue to be, significantly
impacted by one or more of the following events:
•
Business layoffs and downsizing;
•
Industry slowdowns;
•
Relocations or closings of businesses;
•
Changing demographics; and
•
Any oversupply of or reduced demand for real estate.
Vacancies in Our Properties May Adversely Affect Our Results of Operations and Cash Flows
Our results of operations and cash flows may be adversely affected if we are unable to continue
leasing a significant portion of our commercial and residential real estate portfolio. We depend on
commercial and residential tenants in order to collect rents and other charges. Our ability to
sustain our current and historical occupancy levels depends on many factors that are discussed
elsewhere in this section.
A Downturn in the Housing Market May Adversely Affect Our Results of Operations and Cash
Flows
Our results of operations and cash flows may be adversely affected if we are unable to continue
selling our land held for sale. We depend on sales to homebuilders and condominium buyers. Our
ability to sustain our current and historical sales levels depends in part on the strength of the
housing market. Our failure to successfully sell our land held for sale on favorable terms would
adversely affect our results of operations and cash flows.
Our Properties and Businesses Face Significant Competition
The real estate industry is highly competitive in many of the markets in which we operate.
Competition could over-saturate any market, as a result of which we may not have sufficient cash to
meet the debt service requirements on certain of our properties. Although we may attempt to
negotiate a restructuring with the mortgagee, we may not be successful, which could cause a
property to be transferred to the mortgagee.
There are numerous other developers, managers and owners of commercial and residential real estate
and undeveloped land that compete with us nationally, regionally and/or locally, some of whom have
greater financial resources than us. They compete with us for management and leasing opportunities,
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, online merchants, warehouse stores, large
discounters, outlet malls, wholesale clubs, 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.
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 in response to changes in
regional or local real estate markets. As a result, we may incur operating losses from some of our
properties and may have to write down the value of some properties due to impairment.
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 are unable to meet their obligations or do not renew their leases, or if we are unable to
lease a significant amount of space on economically favorable terms. In the event of a default by a
tenant, we may experience delays in payments and incur substantial costs in recovering our losses.
Our ability to collect rents and other charges will be even more difficult if the tenant is
bankrupt or insolvent. Our tenants have from time to time filed for bankruptcy or been involved in
insolvency proceedings and others may in the future, which could make it more difficult to enforce
our rights as lessor and protect our investment.
Based on tenants with net base rent of greater than 2% of total net base rent as of January 31,2007, our five largest office tenants by leased square feet were the City of New York, Millennium
Pharmaceuticals Inc., the U.S. Government, Morgan Stanley & Co. and Securities Industry Automation
Corp. Based on tenants with net base rent of greater than 1% of total net base rent as of January31, 2007, our five largest retail tenants by leased square feet were AMC Entertainment Inc., Regal
Entertainment Group, The Gap, The Home Depot and TJX Companies.
Current bankruptcies of some of our tenants and the potential bankruptcies of other tenants in the
future could make it difficult for us to enforce our rights as lessor and protect our investment.
With respect to our retail centers, we also could be adversely affected if one or more non-tenant
anchors were to close or enter into bankruptcy. Although non-tenant anchors generally do not pay us
rent, they typically contribute towards common area maintenance and other expenses. The loss of
these revenues could adversely affect our results of operations and cash flows. Further, the
temporary or permanent loss of an anchor likely would reduce customer traffic in the retail center,
which could reduce the percentage of rent paid by retail center tenants or cause retail center
tenants to close or to enter into bankruptcy. Rents obtained from other tenants may be adversely
impacted. One or more of these factors could cause the retail center to fail to meet its debt
service requirements.
We May Be Negatively Impacted by Department Store Consolidations
Department store consolidations may result in the closure of existing department stores. With
respect to existing department stores, we may be unable to re-lease this area or to re-lease it on
comparable terms. Additionally, department store closures could result in decreased customer
traffic, which could lead to decreased sales at other stores. Rents obtained from other tenants may
also be adversely impacted as a result of co-tenancy clauses in their leases. Consolidations may
also negatively affect current and future development and redevelopment projects.
Terrorist Attacks and Other Armed Conflicts May Adversely Affect Our Business
We have significant investments in large metropolitan areas, including New York City/Philadelphia,
Boston, Washington D.C./Baltimore, Denver, Chicago, Los Angeles and San Francisco, which face a
heightened risk related to terrorism. Some tenants in these areas may choose to relocate their
business to less populated, lower-profile areas of the United States of America that are not as
likely to be targets of terrorist activity. This could result in 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. In addition, properties in our real estate portfolio could be
directly impacted by future terrorist attacks which could cause the value of our property and the
level of our revenues to significantly decline.
Future terrorist activity, related armed conflicts or prolonged or increased tensions in the Middle
East could cause consumer confidence and spending to decrease and adversely affect mall traffic.
Additionally, future terrorist attacks could increase volatility in the U.S. and worldwide
financial markets. Any of these occurrences could have a significant impact on our revenues, costs
and operating results.
We Have Limited Experience Participating in the Operation and Management of a Professional
Basketball Team, and Future Losses Are Expected for the Nets
On August 16, 2004, we purchased a legal ownership interest in the Nets. This interest is reported
on the equity method of accounting as a separate segment. The purchase of the interest in the Nets
is the first step in our efforts to pursue development projects at Brooklyn Atlantic Yards, which
are expected to include a new entertainment arena complex and adjacent developments combining
housing, offices, shops and public open space. The relocation of the Nets is, among other items,
subject to various approvals by the NBA, and we cannot assure you we will receive these approvals
on a timely basis or at all. If we are unable to or delayed in moving the Nets to Brooklyn, we may
be unable to achieve our projected returns on the related development projects, which could result
in a delay in the return of, termination of, or losses on our investment. The Nets are currently
operating at a loss and are projected to continue to operate at a loss at least as long as they
remain in New Jersey. Even if we are able to relocate the Nets to Brooklyn, there can be no
assurance that the Nets will be profitable in the future. Losses are allocated to each member of
the limited liability company that owns the Nets based on an analysis of the respective member’s
claim on the net book equity assuming a liquidation at book value at the end of each accounting
period without regard to unrealized appreciation (if any) in the fair value of the Nets. Therefore,
losses allocated to us may exceed our legal ownership interest.
The Operation of a Professional Sports Franchise Involves Certain Risks
Our investment in the Nets is subject to a number of operational risks, including risks associated
with operating conditions, competitive factors, economic conditions and industry conditions. If we
are not able to successfully manage the following operational risks, we may incur additional
operating losses, which are allocated to each member based on an analysis of the respective
members’ claim on the net book equity assuming a liquidation at book value at the end of the
accounting period without regard to unrealized appreciation (if any) in the fair value of the Nets:
•
Competition with other major league sports, college athletics and other
sports-related and non sports-related entertainment;
•
Dependence on competitive success of the Nets;
•
Fluctuations in the amount of revenues from advertising, sponsorships,
concessions, merchandise, parking and season and other ticket sales, which are tied to the
popularity and success of the Nets;
•
Uncertainties of increases in players’ salaries;
•
Dependence on talented players;
•
Risk of injuries to key players;
•
Risk of labor actions or work stoppages by the players’ union; and
•
Dependence on television and cable network, radio and other media contracts.
We Are Controlled by the Ratner, Miller and Shafran Families, Whose Interests 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 stock, voting as a separate Class, is entitled to elect 25% of the members of our board of
directors, while the Class B common stock, voting as a separate Class, is entitled to elect the
remaining 75% of our board of directors. On all other matters, the Class A common stock and Class B
common stock vote together as a single Class, with each share of our 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 1, 2007, members of the Ratner, Miller and Shafran families, which include members of our
current board of directors and executive officers, owned 76.0% of the Class B common stock. RMS,
Limited Partnership (“RMS LP”), which owned 75.6% of the Class B common stock, is a limited
partnership, comprised of interests of these families, with eight individual general partners,
currently consisting of:
•
Samuel H. Miller, Treasurer of Forest City and Co-Chairman of our Board of Directors;
•
Charles A. Ratner, President and Chief Executive Officer of Forest City and a Director;
•
Ronald A. Ratner, Executive Vice President of Forest City and a Director;
Brian J. Ratner, Executive Vice President of Forest City and a Director;
•
Deborah Ratner Salzberg, President of Forest City Washington, Inc., a subsidiary of Forest City, and a Director;
•
Joan K. Shafran, a Director;
•
Joseph Shafran; and
•
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 our 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 LP determine how to vote the Class B common stock held by RMS LP. No person may
transfer his or her interest in the Class B common stock held by RMS LP without complying with
various rights of first refusal.
In addition, at March 1, 2007, members of these families collectively owned 17.3% of the Class A
common stock. As a result of their ownership in Forest City, these family members and RMS LP have
the ability to elect a majority of our 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 our
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 LP reduce their level of ownership of Class B common stock below the
level necessary to maintain a majority of the voting power, specific provisions of Ohio law and our
Amended 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 LP.
RMS Investment Corp. Provides Property Management and Leasing Services to Us and Is
Controlled By Some of Our Affiliates
We paid approximately $446,000 and $343,000 as total compensation during the years ended
January 31, 2007 and 2006, 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, some of whom are our directors and executive officers.
RMS Investment Corp. manages and provides leasing services to our Cleveland-area specialty retail
center, Golden Gate, which has 362,000 square feet. The current rate of compensation for this
management service is 4% of all rental income, plus a leasing fee of generally 3% to 4% of rental
income. Management believes these fees are comparable to those other management companies would
charge to non-affiliated third parties. Additionally, RMS Investment Corp. managed and provided
leasing services to Midtown Plaza, our other Cleveland-area retail center, under the same
compensation structure until its sale on June 9, 2006.
Our Directors and Executive Officers May Have Interests in Competing Properties, and We Do Not
Have Non-Compete Agreements with Certain of Our Directors and Executive Officers
Under our current policy, no director or executive officer, 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 audit committee of our board of directors. We do not have
non-compete agreements with any director, officer or employee, other than Charles Ratner, James
Ratner, Ronald Ratner and Bruce Ratner who entered into non-compete agreements on November 9, 2006.
Upon leaving Forest City any other director, officer or employee could compete with us.
Notwithstanding our policy, we permit 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. As a result of
their ownership of these properties, a conflict of interest may arise between them and Forest City,
which may not be resolved in our favor. The conflict may involve the development or expansion of
properties that may compete with our properties and the solicitation of tenants to lease 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 our liquidity and financial condition. We have a relatively high ratio of debt,
which consists of nonrecourse mortgage debt, a revolving credit
facility and senior and subordinated debt, to total market capitalization, which was approximately
50.3% and 60.3% at January 31, 2007 and January 31, 2006, respectively, based on our long-term debt
outstanding at that date and the market value of our outstanding Class A common stock and Class B
common stock. 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.
Nonrecourse mortgage debt is collateralized by completed rental properties, projects under
development and undeveloped land. We do not expect to repay a substantial amount of the principal
of our outstanding debt prior to maturity or to have available funds from operations 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 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 any debt collateralized by a
mortgage on one of our properties or to refinance that debt when it comes due, the mortgage lender
could take that property through foreclosure and, as a result, we could lose income and asset
value.
Of our outstanding debt of approximately $6.2 billion at January 31, 2007, approximately $802
million becomes due in fiscal 2007 and approximately $490 million becomes due in fiscal 2008. This
is inclusive of credit enhanced mortgage debt we have obtained 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 maturing in the year the credit enhancement
expires.
We cannot assure you that we will be able to refinance our 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 our debt when it becomes due could result
in foreclosure on the properties pledged as collateral thereof.
From time to time, a nonrecourse 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 Forest City Rental Properties Corporation, or FCRPC, under
the FCRPC credit agreement, dated as of March 22, 2004, as amended, among FCRPC, the banks named
therein, KeyBank National Association, as administrative agent, and National City Bank, as
syndication agent. This guaranty imposes a number of restrictive covenants on Forest City,
including a prohibition on certain consolidations and mergers and 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 Taxes, or EBDT.
While we are in compliance at January 31, 2007, 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 Forest City’s obligation to
repay all amounts outstanding under the FCRPC credit agreement. Forest City’s ability and FCRPC’s
ability to comply with these covenants will depend upon the future economic performance of Forest
City and FCRPC. These covenants may adversely 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 Will Increase Our Interest Costs
Including the effect of the protection provided by the interest rate swaps, caps and long-term
contracts in place as of January 31, 2007, a 100 basis point increase in taxable interest rates
(including properties accounted for under the equity method and corporate debt) would not
materially increase the annual pre-tax interest cost for the next 12 months of our variable-rate
debt at January 31, 2007. Although tax-exempt rates generally move in an amount that is smaller
than corresponding changes in taxable interest rates, a 100 basis point increase in tax-exempt
rates (including properties accounted for under the equity method and corporate debt) would
increase the annual pre-tax interest cost for the next 12 months of our tax-exempt variable-rate
debt by approximately $9,230,000 at January 31, 2007. The analysis above includes a portion of our
taxable and tax-exempt variable-rate debt related to construction loans for which the interest
expense is capitalized.
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 at rates below prevailing rates available through conventional taxable financing. We
cannot assure you that tax-exempt bonds or similar
government subsidized financing will continue to be available to us in the future, either for new
development or acquisitions, or for the refinancing of outstanding debt. Our ability 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 results of
operations, cash flows and financial position.
Our Business Will Be Adversely Impacted Should an Uninsured Loss or a Loss in Excess of
Insurance Limits Occur
We carry comprehensive general liability, special property, flood, earthquake and rental loss (and
environmental insurance on certain locations) 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, including environmental loss or losses of a catastrophic nature, such as
losses from wars, terrorism, hurricanes, earthquakes or other natural disasters, for which we may
not have 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, or
a failure by an insurer to meet its obligations under a policy, we could lose both our invested
capital in, and anticipated profits from, the affected property and could be exposed to liabilities
with respect to that which we thought we had adequate insurance to cover. Any such uninsured loss
could materially and adversely affect our results of operations, cash flows and financial position.
Under our current policies, which expire October 31, 2007, our properties are insured against acts
of terrorism, subject to various limits, deductibles and exclusions for acts of war and terrorist
acts involving biological, chemical and nuclear damage. Once these policies expire, we may not be
able to obtain adequate terrorism coverage at a reasonable cost. In addition, our insurers may not
be able to maintain reinsurance sufficient to cover any losses we may incur as a result of
terrorist acts. As a result, our insurers’ ability to provide future insurance for any damages that
we sustain as a result of a terrorist attack may be reduced.
Additionally, most of our current project mortgages require special all-risk property 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 on the first $250,000 of
property damage per occurrence. We believe our wholly-owned captive insurance company, licensed and
regulated by the state of Arizona (redomiciled from Vermont in December 2006), is adequately
capitalized to cover the per occurrence limits for liability coverage and property damage subject
to certain aggregate limits as defined in the respective policies. 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.
We May Be Adversely Impacted by Environmental Matters
We are subject to various foreign, federal, state and local environmental protection and health and
safety laws and regulations governing, among other things: the generation, storage, handling, use
and transportation of hazardous materials; the emission and discharge of hazardous materials into
the ground, air or water; and the health and safety of our employees. In some instances, federal,
state and local laws require abatement or removal of specific hazardous materials such as
asbestos-containing materials or lead based paint, in the event of demolition, renovations,
remodeling, damage or decay. Laws and regulations also impose specific worker protection and
notification requirements and govern emissions of and exposure to hazardous or toxic substances,
such as asbestos fibers in the air. We incur costs to comply with such laws and regulations, but we
cannot assure you that we have been or will be at all times in complete compliance with such laws
and regulations.
Under certain 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. Certain
contamination is difficult to remediate fully and can lead to more costly design specifications,
such as a requirement to install vapor barrier systems, or a limitation on the use of the property
and could preclude development of a site at all. The presence of hazardous substances on a property
could also result in personal injury, contribution or other claims by private parties. In addition,
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 remediation of those wastes at the disposal or
treatment facility, regardless of whether that facility is owned or operated by that person.
We have invested, and will in the future, invest in properties that are or have been used for or
are near properties that have had industrial purposes in the past. As a result, our properties are
or may become contaminated with hazardous or toxic substances. We will incur costs to investigate
and possibly to remediate those conditions and it is possible that some contamination will remain
in or under the properties even after such remediation. While we investigate these sites and work
with all relevant governmental authorities to meet their standards given our intended use of the
property, it is possible that there will be new information identified in the future that indicates
there are additional unaddressed environmental impacts, there could be technical developments that
will require new or different remedies to be undertaken in the future, and the regulatory standards
imposed by governmental authorities could change in the future.
As a result of the above, the value of our properties could decrease, our income from developed
properties could decrease, our projects could be delayed, we could become obligated to third
parties pursuant to indemnification agreements or guarantees, our expense to remediate or maintain
the properties could increase, and our ability to successfully sell, rent or finance our properties
could be adversely affected by environmental matters in a manner that could have a material adverse
effect on our financial position, cash flows or results of operation.
While we maintain insurance for certain environmental matters, we cannot assure you that we will
not incur losses related to environmental matters, including losses that may materially exceed any
available insurance. See “Our Business Will Be Adversely Impacted Should an Uninsured Loss or a
Loss in Excess of Insurance Limits Occur.”
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. Due to the economic structure and related economic substance, we have consolidated
each of these properties in our consolidated financial statements.
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 these 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 LLCs, 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 LLCs. There are, however,
instances in which we do not control or even participate in management or day-to-day operations.
The use of a structure where we do not control the management of the entity involves 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, 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 of a
particular partnership it may be exposed to the same kind of unlimited liability.
Failure to Continue to Maintain Effective Internal Controls in Accordance with Section 404 of
the Sarbanes-Oxley Act of 2002 Could Have a Material Adverse Effect on Our Ability to Ensure Timely
and Reliable Financial Reporting
Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires our management to report
on, and our independent registered public accounting firm to attest to, our internal control over
financial reporting. We will continue our ongoing process of testing and evaluating the
effectiveness of, and remediating any issues identified related to, our internal control over
financial reporting. During 2007, we are implementing an enterprise resource planning system to
optimize our processes to improve efficiency of our financial reporting process. While management
uses a formal system development approach for new systems and upgrades to existing systems as
required by Section 404, the approach and internal controls related to implementations and upgrades
are not designed to anticipate every unforeseen event or circumstance encountered within the course
of business. In addition, the process of documenting, testing and evaluating our internal control
over financial reporting is complex and time consuming. Due to this complexity and the
time-consuming nature of the process and because currently unforeseen events or circumstances
beyond our control could arise, we cannot assure you that we ultimately will be able to continue to
comply fully in subsequent fiscal periods with Section 404 in our Annual Report on Form 10-K. We
may not be able to conclude on an ongoing basis that we have effective internal control over
financial reporting in accordance
with Section 404, which could adversely affect public confidence in our ability to record, process,
summarize and report financial data to ensure timely and reliable external financial reporting.
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 adversely affect our
cash flows and results of operations.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Corporate headquarters of Forest City Enterprises, Inc. are located in Cleveland, Ohio and
are owned by the Company. The Company’s core markets include the New York City/Philadelphia
metropolitan area, Denver, Boston, the Greater Washington D.C./Baltimore metropolitan area, Chicago
and the state of California.
The following table provides summary information concerning the Company’s real estate portfolio as
of January 31, 2007. Consolidated properties are properties that we control and/or hold a variable
interest in and are the primary beneficiary. Unconsolidated properties are properties that we do
not control and/or are not the primary beneficiary.
Expansion of property under construction as of January 31, 2007.
+
Property opened or acquired in 2006.
++
Expansion of property.
^
Property to open in phases.
(1)
Represents the Company’s share of a property’s profits and losses upon settlement of any
preferred returns to which the Company or its partner(s) may be entitled.
(2)
Represents the Company’s share of a property’s profits and losses adjusted for any
preferred returns to which the Company or its partner(s) may be entitled.
(3)
This property is reported on the equity method of accounting as the U.S. Department of
Housing and Urban Development is the primary beneficiary of the property primarily due to
the fact that they are either the lender on the mortgage or the guarantor of the mortgage.
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 consolidated financial statements.
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.
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 21, 2007. 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 to be held on June 21, 2007.
Date
Name and Position(s) Held
Appointed
Age
Albert B. Ratner
Co-Chairman of the Board of Directors of the Company since June
1995, Vice Chairman of the Board of the Company from June 1993 to
June 1995, Chief Executive Officer prior to July 1995 and President
prior to July 1993.
6-13-1995
79
Samuel H. Miller
Co-Chairman of the Board of Directors of the Company since June
1995, Chairman of the Board of the Company from June 1993 to June
1995 and Vice Chairman of the Board, Chief Operating Officer of the
Company prior to June 1993, Treasurer of the Company since December
1992.
President of the Company since June 1993, Chief Executive Officer
of the Company since June 1995, Chief Operating Officer from June
1993 to June 1995 and Executive Vice President prior to June 1993;
Director.
6-13-1995
65
Bruce C. Ratner
Executive Vice President since November 2006; Director effective
February 1, 2007; Officer of various subsidiaries.
11-09-2006
62
James A. Ratner
Executive Vice President; Director; Officer of various subsidiaries.
3-09-1988
62
Ronald A. Ratner
Executive Vice President; Director; Officer of various subsidiaries.
3-09-1988
59
Brian J. Ratner
Executive Vice President since June 2001, Senior Vice President –
East Coast Development from June 1997 to June 2001, Vice President
– Urban Entertainment from June 1995 to June 1997 and Vice
President from May 1994 to June 1995; Director; Officer of various
subsidiaries.
Executive Vice President since October 2000, Senior Vice President
prior to October 2000; Chief Financial Officer, Secretary, Officer
of various subsidiaries since 1985.
Senior Vice President and Corporate Controller since June 2002,
Vice President and Corporate Controller from March 1995 to June
2002, Asset Manager – Commercial Group from July 1992 to March 1995
and Financial Manager—Residential Group from October 1990 to July
1992.
6-17-2002
49
Geralyn M. Presti
Senior Vice President, General Counsel and Assistant Secretary
since July 2002, Deputy General Counsel from January 2000 to June
2002, Associate General Counsel from December 1996 to January 2000,
Assistant General Counsel from January 1995 to December 1996 and
Corporate Counsel from November 1989 to January 1995.
7-01-2002
51
Note: Charles A. Ratner, James A. Ratner and Ronald A. Ratner are brothers. Albert B. Ratner and
Bruce C. Ratner are first cousins to each other as well as first cousins to Charles A. Ratner,
James A. Ratner and Ronald A. Ratner. Brian J. Ratner is the son of Albert B. Ratner.
Quarterly dividends declared per common share Class A and Class B (1)
$
0.06
$
0.06
$
0.06
$
0.05
Class A and Class B common stock are traded on the New York Stock Exchange under the symbols
FCEA and FCEB, respectively. As of March 1, 2007, the number of registered holders of Class A and
Class B common stock were 777 and 495, respectively.
For the three months ended January 31, 2007 there were no unregistered issuances of stock and no
repurchases of stock.
(1)
Future dividends will depend upon such factors as earnings, capital requirements and
financial condition of the Company. The Company has the ability to pay additional cash
dividends, but does not anticipate doing so due to its capital reinvestment program. Retained
earnings of $19,462,000 were available for payment of dividends as of January 31, 2007, under
the restrictions contained in the revolving credit agreement with a group of banks. On March22, 2007, the anniversary date of the bank revolving credit facility, this amount was
increased to $40,000,000.
The following graph shows a comparison of five-year cumulative total return of the Company’s
Class A Common Stock (FCEA) and Class B Common Stock (FCEB), Standard & Poor’s 500 Stock Index (S&P
500) and the Dow Jones U.S. Real Estate Index. The cumulative total return is based on a $100
investment on January 31, 2002 and the subsequent change in market prices of the securities at each
respective fiscal year end. It also assumes that dividends were reinvested quarterly.
CUMULATIVE TOTAL RETURN
Based upon an initial investment of $100 on January 31, 2002
with dividends reinvested
The Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No.
144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) on February1, 2002. The Operating Results and per share amounts presented below have been reclassified for
properties disposed of and/or classified as held for sale during the years ended January 31, 2007,
2006, 2005, 2004 and 2003. The following data should be read in conjunction with our financial
statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Form 10-K. Our historical operating results may
not be comparable to our future operating results.
This category is adjusted for discontinued operations in accordance with SFAS No. 144. See
the “Discontinued Operations” section of the Management Discussion and Analysis (“MD&A”) of
Item 7.
(2)
On December 9, 2004, the Board of Directors approved a special one-time dividend of $.10 per
share (post-split) in recognition of the sale of an entire strategic business unit, Forest
City Trading Group, Inc., a lumber wholesaler.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Corporate Description
We principally engage in the ownership, development, management and acquisition of commercial
and residential real estate and land throughout the United States. We operate through three
strategic business units. The Commercial Group, our largest business unit, owns, develops, acquires
and operates regional malls, specialty/urban retail centers, office and life science buildings,
hotels and mixed-use projects. The Residential Group owns, develops, acquires and operates
residential rental property, including upscale and middle-market apartments, adaptive re-use
developments and supported-living communities. Additionally, the Residential Group develops
for-sale condominium projects and also owns interests in entities that develop and manage military
family housing. New York City operations are part of the Commercial Group or Residential Group
depending on the nature of the operations. 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 Nets, a franchise of the NBA in which we
account for our investment on the equity method of accounting, is a reportable segment of the
Company.
We have approximately $9.0 billion of assets in 26 states and the District of Columbia at January31, 2007. Our core markets include the New York City/Philadelphia metropolitan area, Denver,
Boston, the Greater Washington D.C./Baltimore metropolitan area, Chicago and the state of
California. We have offices in Boston, Chicago, Denver, Los Angeles, New York City, San Francisco,
Washington, D.C., and our corporate headquarters are in Cleveland, Ohio.
Overview
Significant milestones occurring during 2006 included:
•
Opening 10 construction projects which included two retail center openings; San
Francisco Centre, a 1.5 million square-foot retail center in San Francisco, California,
which is jointly owned by us and Westfield America and the third phase of Northfield at
Stapleton, located in Denver, Colorado. Three Residential openings included Sky55 and 1251
S. Michigan, both located in Chicago, Illinois;
•
Four acquisitions which included Resurrection Health Care office building
adjacent to our Illinois Science and Technology Park in Skokie, Illinois, as well as the
Metreon retail center and the Bulletin Building, an office building, both in San Francisco,
California;
•
Issued Class A Common Units in exchange for Bruce C. Ratner’s minority
interests in the Forest City Ratner Companies portfolio which is composed of the Company’s
and Bruce C. Ratner’s combined interest in a total of 30 retail, office and residential
operating properties, certain service companies and seven identified development
opportunities, as well as the pursuit of new real estate opportunities, all in the greater
New York City metropolitan area (see “Class A Common Units” section);
•
Acquisition of ING Real Estate’s (“ING”) interest in the New York Times
Building in Manhattan, New York and closing on the acquisition of our partner’s interest at
Galleria at Sunset, a retail center in Henderson, Nevada;
•
Taking advantage of market conditions and relatively high valuations by
disposing of seven properties, including the Hilton Times Square, a 444-room hotel, Embassy
Suites, a 463-room hotel, and Battery Park City, a retail center, all located in Manhattan,
New York, and Mount Vernon Square, a 1,387 unit apartment community in Alexandria,
Virginia;
•
Reaching several milestones at our 9,000-acre Mesa del Sol master-planned,
mixed-use community, including: purchasing 3,000 acres of land to begin full-scale
development of the project; announcing that a Hollywood studio has completed a 50-acre film
production campus and an 88,000-square-foot research, development and manufacturing
facility for the project’s first tenant — solar technology company Advent Solar Inc. and
the New Mexico State legislature approval of the establishment of tax increment development
districts, the first tax increment districts in the state, to finance much of the public
infrastructure that will serve Mesa del Sol;
•
Announcing that New York’s Public Authorities Control Board (PACB) unanimously
approved our Atlantic Yards project, a mixed-use development in downtown Brooklyn whose
main attraction is expected to be a new sports and entertainment arena for the Nets NBA
basketball team and that Barclays PLC, a major global financial services provider, has
signed a partnership agreement for the naming rights for the arena;
•
Signing an agreement with the Fitzsimons Redevelopment Authority to develop a
160-acre life sciences office park near Denver, Colorado;
•
Increasing the bank revolving credit facility by $150,000,000 in June to allow
for borrowings up to $600,000,000;
•
Closing on our offering of $287.5 million 3.625% Puttable Equity-Linked Senior
Notes due 2011 and the related repurchase of approximately $25 million of our Class A
common stock;
•
Closing $1.29 billion in mortgage financing transactions at attractive interest
rates; and
•
Receiving two Urban Land Institute Awards For Excellence, one for our Stapleton
mixed-use urban redevelopment, and the other for our 1.2 million square-foot Victoria
Gardens open-air regional lifestyle center in Rancho Cucamonga, California.
We have a track record of past successes and a strong pipeline of future opportunities. With a
balanced portfolio concentrated in the product types and geographic markets that offer many unique,
financially rewarding opportunities, we appear to be well positioned for future growth.
Our consolidated financial statements include all majority-owned subsidiaries where we have
financial or operational control and variable interest entities (“VIEs”) where we are deemed to be
the primary beneficiary. The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires us 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, we
have identified certain critical accounting policies which are subject to judgment and
uncertainties. We have used our 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 we believe contain uncertainties
that are considered critical to understanding the consolidated financial statements are discussed
below. Our management reviews and discusses the policies below on a regular basis. These policies
have also been discussed with our audit committee of the Board of Directors.
Recognition of Revenue
Real Estate Sales – We recognize gains on sales of real estate pursuant to the provisions of SFAS
No. 66 “Accounting for Sales of Real Estate” (“SFAS No. 66”). The specific timing of a sale is
measured against various criteria in SFAS No. 66 related to the terms of the transaction and any
continuing involvement in the form of management or financial assistance associated with the
property. If the sales criteria are not met, we defer gain recognition and account for the
continued operations of the property by applying the deposit, finance, installment or cost recovery
methods, as appropriate.
We follow the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived
Assets” (“SFAS No. 144”) for reporting 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 determined by management to be held
for sale are reported as discontinued operations. We consider assets held for sale when the
transaction has been approved by the appropriate level of management and there are no significant
contingencies related to the sale that may prevent the transaction from closing. In most
transactions, these contingencies are not satisfied until the actual closing 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 – We enter into leases with tenants in our rental properties. The lease terms of
tenants occupying space in the retail centers and office buildings generally range from 1 to 25
years, excluding leases with certain anchor tenants which typically run longer. Minimum rents are
recognized on a straight-line basis over the non-cancelable term of the related leases, which
includes the effects of rent steps and rent abatements under the leases. Overage rents are
recognized in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition”, which states
that this income is to be recognized only after the contingency has been removed (i.e., sales
thresholds have been achieved). Recoveries from tenants for taxes, insurance, and other commercial
property operating expenses are recognized as revenues in the period the applicable costs are
incurred.
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.
Military
Housing Fee Revenues – Asset management fee revenues are
recognized based on a stated
percentage of the annual operating income that is generated by the
military housing privatization projects. Asset management fees of
$1,091,000, $898,000 and $-0- were recognized during the years ended January 31, 2007, 2006, and
2005, respectively, which were recorded in revenues from real estate operations in the Consolidated
Statements of Earnings.
Revenues for development fees related to our military housing projects are based on a
stated percentage of the actual development costs incurred by the
military housing projects and are recognized on a monthly basis as
the costs are incurred. We also
recognize additional development incentive fees based on a stated percent that is earned upon the
successful completion of certain subjective criteria as specified in the development agreements.
Revenues of $7,981,000, $1,697,000 and $-0- were recognized during the years ended January 31, 2007,
2006 and 2005, respectively, related to base development and development incentive fees, which were
recorded in revenues from real estate operations in the Consolidated Statements of Earnings.
Revenues related to construction management fees are recognized based on amounts paid for the cost
of each construction contract. We also recognized certain construction incentive fees based upon
successful completion of certain criteria as set forth in the construction contract. Revenues of
$4,327,000, $1,379,000 and $-0- were recognized during the years ended January 31, 2007, 2006 and
2005, respectively, related to the base construction and incentive fees, which were recorded in
revenues from real estate operations in the Consolidated Statements of Earnings.
Operating expenses primarily represent the recognition of operating costs, which are charged to
operations as incurred, administrative expenses and taxes other than income taxes. Interest expense
and real estate taxes during active development and construction are capitalized as a part of the
project cost.
Depreciation and amortization is generally computed on a straight-line method over the estimated
useful life of the asset. The estimated useful lives of buildings and certain first generation
tenant allowances that are considered by management as a component of the building are primarily 50
years. Subsequent tenant improvements are amortized over the life of the tenant’s lease. This
estimate is based on the length of time the asset is expected to generate positive operating cash
flows. In our Residential Group, we purchased our partner’s interest in contracts related to our
military family housing projects during the fiscal years ended January 31, 2007 and 2006. We have
recorded the cost of these contracts as intangible assets and the amounts will be amortized over
the life of the respective contracts.
Major improvements and tenant improvements that are considered our assets are capitalized in real
estate costs and expensed through depreciation charges. Tenant improvements that are considered
lease inducements are capitalized into other assets and amortized as a reduction of rental revenue
over the life of the tenant’s lease. Repairs, maintenance and minor improvements are expensed as
incurred.
A variety of costs are incurred in the acquisition, development and leasing of properties. After
determination is made to capitalize a cost, it is allocated to the specific component of a project
that is benefited. Determination of when a development project is substantially complete and
capitalization must cease involves a degree of judgment. Our capitalization policy on development
properties is guided by SFAS No. 34 “Capitalization of Interest Cost” and SFAS No. 67 “Accounting
for Costs and the Initial Rental Operations of Real Estate Properties.” The costs of land and
buildings under development include specifically identifiable costs. The capitalized costs include
pre-construction costs essential to the development of the property, development costs,
construction costs, interest costs, real estate taxes, salaries and related costs and other costs
incurred during the period of development. We consider a construction project as substantially
completed and held available for occupancy upon the completion of tenant improvements, but no later
than one year from cessation of major construction activity. We cease capitalization on the portion
substantially completed and occupied or held available for occupancy, and capitalize only those
costs associated with the portion under construction. 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.
We review our properties to determine if their 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 we do not expect to recover the carrying costs, an impairment
loss is recorded as a provision for decline in real estate.
Allowance for Doubtful Accounts and Reserves on Notes Receivable – We record allowances against our
rent receivables from commercial and residential tenants that we deem to be uncollectible. These
allowances are based on management’s estimate of receivables that will not be realized from cash
receipts in subsequent periods. We also maintain an allowance for receivables arising from the
straight-lining of rents. This receivable arises from earnings recognized in excess of amounts
currently due under the lease agreements. Management exercises judgment in establishing these
allowances and considers payment history and current credit status in developing these estimates.
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 our 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. We estimate the allowance for notes receivable based on our assessment
of the collectibility of the note. Our assessment of collectibility is based largely on expected
future cash flows estimated to be paid to our limited partners. If our estimate of expected future
cash flows does not accurately reflect actual events, our reserve on notes receivable may be over
or understated by the actual cash flows that occur. Our allowance for doubtful accounts, which
includes our straight-line allowance, was $12,617,000 and $11,022,000, at January 31, 2007 and
2006, respectively.
Historic Tax Credit Entities – We have certain investments in properties that have received, or we
believe are entitled to receive, historic rehabilitation tax credits on qualifying expenditures
under section 47 of the Internal Revenue Code of 1986 as well as various state credit programs. We
typically enter into these investments with sophisticated financial investors. In exchange for the
financial investors’ initial contribution into these investments, they are entitled to
substantially all of the benefits derived from the historic tax credit, but generally have no
material interest in the underlying economics of the properties. Typically, these arrangements
have put/call provisions (which range up to 7 years) whereby we may be obligated (or entitled) to
repurchase the financial investors’ interest. Due to the economic structure, we have consolidated
each of these properties in our consolidated financial statements, and have reflected the
investors’ contribution as a liability in our Consolidated Balance Sheets. We guarantee the
financial investor that in the event of a subsequent recapture by a taxing authority due to our
noncompliance with applicable tax credit guidelines that we will indemnify the financial investor
for any recaptured tax credits. Within our consolidated financial statements, we initially record
a liability for the cash received from
the financial investor. We generally record income upon completion and certification of the
qualifying development
expenditures resulting in an adjustment of the liability at each balance
sheet date to the amount that would be paid to the financial investor based upon the tax credit
compliance regulations, which range from 0 to 5 years. During the year ended January 31, 2007, we
recognized income related to federal and state tax credits of $12,681,000 and $13,038,000,
respectively, which were recorded in interest and other income in our Consolidated Statements of
Earnings.
Economic Lives – Depreciation and amortization is generally computed on a straight-line method over
the estimated useful life of the asset. The estimated useful lives of buildings and certain first
generation tenant allowances that are considered by management as a component of the building are
primarily 50 years. Subsequent tenant improvements are generally amortized over the life of the
tenant’s lease. 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
and tenant improvement to be different than the estimates made. Additionally, lease terminations
can affect the economic life of the tenant improvements. We believe the estimated useful lives and
classification of the depreciation and amortization of fixed assets and tenant improvements are
reasonable and follow industry standards. In our Residential Group, we purchased our partner’s
interest in contracts related to our military family housing projects during the fiscal years ended
January 31, 2007 and 2006. We have recorded the cost of these contracts as intangible assets and
the amounts will be amortized over the life of the respective contracts.
Asset Impairment – We review our investment portfolio to determine if its carrying costs will be
recovered from future undiscounted cash flows whenever events or changes indicate that
recoverability of long-lived assets may not be assured. In cases where we do not expect to recover
our carrying costs, an impairment loss is recorded as a provision for decline in real estate for
assets in our real estate portfolio pursuant to the guidance established in SFAS No. 144. As part
of the analysis to determine if an impairment loss has occurred, we are 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, we may not record an
impairment loss, or may record a greater impairment loss on a property.
Allowance for Projects Under Development – We record an allowance for development project
write-offs for our projects under development. A specific project is written off against this
allowance when it is determined by management that the project will not be developed. The
allowance, which is consistently applied, is adjusted on a quarterly basis based on our actual
development project write-off history. The allowance decreased by $800,000 and $3,500,000 for the
years ended January 31, 2007 and 2006, respectively and increased by $900,000 for the year ended
January 31, 2005. Any change in the allowance is reported in operating expenses in our
Consolidated Statements of Earnings.
Variable Interest Entities – Effective February 1, 2004, we adopted FIN No. 46 (R) “Consolidation
of Variable Interest Entities” (“FIN No. 46(R)”). Under FIN No. 46 (R), we are required to
consolidate a VIE if our interest in the VIE is such that we will absorb a majority of the VIE’s
expected losses and/or receive a majority of the entity’s expected residual returns, or both.
Calculating expected losses and/or expected residual returns involves estimating expected future
cash flows. If different estimates are applied in determining future cash flows, such as the
probability of the future cash flows and the risk free rate, we may have otherwise concluded on the
consolidation method of an entity.
Fiscal Year – The years 2006, 2005 and 2004 refer to the fiscal years ended January 31, 2007, 2006
and 2005, respectively.
Results of Operations
We report our results of operations by each of our three strategic business units as we
believe this provides the most meaningful understanding of our financial performance. In addition
to our three strategic business units, we have two additional segments: the Nets and Corporate
Activities.
Net Earnings – Net earnings for the year ended January 31, 2007 were $177,251,000 versus
$83,519,000 for the year ended January 31, 2006. Although we have substantial recurring revenue
sources from our properties, we also enter into significant one-time transactions, which could
create substantial variances in net earnings between periods. This variance to the prior year is
primarily attributable to the following increases, which are net of tax and minority interest:
•
$143,026,000 ($233,092,000, pre-tax) related to the 2006 gains on disposition
of six consolidated properties, Mount Vernon Square, an apartment community located in
Alexandria, Virginia, Providence at Palm Harbor, an apartment community located in Tampa,
Florida, Hilton Times Square, a 444-room hotel located in Manhattan, New York, G Street, a
specialty retail center located in Philadelphia, Pennsylvania, Embassy Suites Hotel, a
463-room hotel located in Manhattan, New York, and Battery Park City, a retail center
located in Manhattan, New York;
•
$15,781,000 ($25,719,000, pre-tax) related to income recognition on the sale of
state and federal Historical Preservation Tax Credits;
•
$5,765,000 ($9,831,000, pre-tax) related to the decreased losses from our
equity investment in the New Jersey Nets basketball team; and
•
$4,700,000 ($7,662,000, pre-tax) related to the 2006 gain on disposition of one
equity method Commercial property, Midtown Plaza, a specialty retail center located in
Parma, Ohio.
These increases were partially offset by the following decreases, net of tax and minority interest:
•
$26,505,000 ($43,198,000, pre-tax) related to the 2005 gains on disposition of
three consolidated properties, Enclave, an apartment community located in San Jose,
California, and Cherrywood Village and Ranchstone, apartment communities located in Denver,
Colorado;
•
$9,913,000 ($16,155,000, pre-tax) related to decreases in Commercial Group
sales of land, outlots, and development projects. These decreases are made up of
$7,008,000, pre-tax, related to a 2005 land sale at Twelve MetroTech Center, $7,174,000,
pre-tax, in outlot land sales for our consolidated properties primarily at Victoria
Gardens, Simi Valley and Wadsworth, and $4,528,000, pre-tax, related to the sale of a
development project in Las Vegas, Nevada. These decreases were partially offset by
increased land sales of $2,555,000, pre-tax, for our unconsolidated properties at Victor
Village and Charleston Mall;
•
$12,900,000 ($21,023,000, pre-tax) related to the 2005 gains on disposition of
three equity method properties, Showcase, a specialty retail center located in Las Vegas,
Nevada, Colony Place, an apartment community located in Fort Myers, Florida and Flower Park
Plaza, an apartment community located in Santa Ana, California;
•
$10,000,000 related to the one-time reduction of deferred income taxes which
resulted from a favorable change in our effective tax rate due to a change in the rate in
the State of Ohio during 2005;
•
$5,759,000 ($9,386,000, pre-tax) related to the fair market value adjustments
of certain of our 10-year forward swaps which were marked to market as additional interest
expense as a result of the derivatives not qualifying for hedge accounting (See the
Interest Rate Exposure section);
•
$3,583,000 ($5,840,000, pre-tax) related to our development fee revenue at
Twelve MetroTech Center that did not recur; and
•
$3,469,000 ($4,738,000, pre-tax) related to the expensing of stock options upon
our adoption of SFAS No. 123 (Revised), “Share-Based Payment” (“SFAS No. 123(R)”), on
February 1, 2006.
Net earnings for the year ended January 31, 2006 were $83,519,000 versus $85,206,000 for the year
ended January 31, 2005. This variance to the prior year is primarily attributable to the following
decreases, which are net of tax and minority interest:
•
$40,893,000 ($67,645,000, pre-tax) related to the 2004 gains on disposition of
ten consolidated properties, Regency Towers, Woodlake, Bridgewater, Pavilion,
Trellis at Lee’s Mill, Hunting Park, Arboretum, Flatbush Avenue, Colony Woods and Silver
Hill;
•
$19,341,000 ($31,996,000, pre-tax) due to the gains on disposition of three
equity method properties in 2004, Manhattan Town Center Mall, a regional mall located in
Manhattan, Kansas, Chapel Hill Suburban, a specialty retail center located in Akron, Ohio
and Chapel Hill Mall, a regional mall located in Akron, Ohio;
•
$13,745,000 ($22,737,000, pre-tax) related to Stapleton Land, LLC’s retained
interest in a trust. Of this amount, $12,445,000 was earned in 2004 but attributable to
other comprehensive income (“OCI”) in previous fiscal years and deferred until 2004 under
the cost recovery method. The remaining amount of $1,300,000 was earned and recognized
during the year ended January 31, 2005;
•
$11,501,000 ($20,920,000, pre-tax) related to the 2004 gain on disposition of
Lumber Group and a decrease of $4,545,000 ($9,390,000 pre-tax) related to Lumber Group’s
2004 earnings with no corresponding amount in 2005;
•
$9,999,000 ($13,645,000, pre-tax) related to our increased loss from our equity
investment in the New Jersey Nets basketball team, which we did not own during the first
half of 2004;
•
$8,134,000 ($13,552,000, pre-tax) related to our development fee revenue at
Twelve MetroTech Center that did not recur at the same level in 2005; and
•
$5,981,000 in interest expense as a result of the issuance of $150,000,000
senior notes in January 2005.
These decreases were partially offset by the following increases in earnings, net of tax and
minority interest:
•
$26,830,000 ($48,001,000 pre-tax) related to increases in Commercial Group
sales of land, outlots, and development projects. These increases are made up of
$7,008,000, pre-tax, related to the 2005 land sale at Twelve MetroTech Center, $34,195,000,
pre-tax, in outlot land sales for our consolidated properties primarily at Victoria Gardens
and Simi Valley, $4,528,000, pre-tax, related to the sale of a development project in Las
Vegas, Nevada, and $2,270,000, pre-tax, related to land sales for our unconsolidated
properties;
•
$26,505,000 ($43,198,000, pre-tax) related to the 2005 gains on disposition of
three consolidated residential properties, Enclave, Cherrywood Village and Ranchstone;
$23,706,000 ($37,892,000, pre-tax) related to land sales reported in the Land
Development Group primarily at Grass Farms in Manatee County, Florida, Central Station in
Chicago, Illinois and Stapleton in Denver, Colorado;
•
$12,900,000 ($21,023,000, pre-tax) related to the 2005 gains on disposition of
three equity method properties, Showcase, Colony Place and Flower Park Plaza;
•
$11,261,000 related to the prior year charge for cumulative effect of change in
accounting principle as a result of our implementation of FIN No. 46 (R), which did not
recur; and
•
$10,000,000 related to the one-time reduction of deferred income taxes which
resulted from a favorable change in our effective tax rate due to a change in the rate in
the State of Ohio during 2005.
Summary of Segment Operating Results – The following tables present a summary of revenues from real
estate operations, interest and other income, equity in earnings (loss) of unconsolidated entities,
operating expenses and interest expense incurred by each segment for the years ended January 31,2007, 2006 and 2005, respectively. See discussion of these amounts by segment in the narratives
following the tables.
Revenues from Real Estate Operations — Revenues from real estate operations for the Commercial
Group decreased by $13,022,000, or 1.58%, for the year ended January 31, 2007 compared to the prior
year. This decrease was primarily the result of:
•
Decrease of $48,317,000 ($35,073,000, net of minority interest) related to a
decrease in commercial outlot land sales primarily at Simi Valley in Simi Valley,
California, Wadsworth in Ohio, Victoria Gardens in Rancho Cucamonga, California and
Promenade Bolingbrook in Bolingbrook, Illinois;
•
Decrease of $19,456,000 ($15,565,000, net of minority interest) related to a
2005 land sale at Twelve Metrotech Center, in Brooklyn, New York, which did not recur;
•
Decrease of $9,733,000 ($5,840,000, net of minority interest) related to
development fee revenue at Twelve Metrotech Center, which did not recur; and
•
Decrease of $4,528,000 related to the 2005 sale of a development project in Las Vegas, Nevada.
These decreases were partially offset by the following increases:
•
Increase of $21,294,000 related to new property openings, as noted in the first table on page 37;
•
Increase of $15,594,000 related to revenues earned on a construction contract
from the New York City School Construction Authority related to construction of a school on
the ground floor of Beekman, a development project in Manhattan, New York;
•
Increase of $8,901,000 related to an increase in occupancy and rents primarily
at the following regional malls: Victoria Gardens, Promenade in Temecula and South Bay
Galleria, all of which are located in California;
•
Increase of $8,345,000 related to the buyout of our partner in Galleria at
Sunset, a regional mall in Henderson, Nevada, previously accounted for on the equity method
of accounting;
•
Increase of $3,039,000 primarily related to increases in occupancy and rates in
our hotel portfolio;
•
Increase of $2,264,000 related to two tenants’ lease cancellations fees, one at
M.K. Ferguson Plaza in Cleveland, Ohio and another at Quebec Square in Denver, Colorado;
and
•
Increase of $1,960,000 primarily related to the expansion of Short Pump Town
Center in Richmond, Virginia, which opened in September 2005.
The balance of the remaining increase in revenues from real estate operations of approximately
$7,615,000 was generally due to fluctuations in mature properties.
Revenues from real estate operations for the Commercial Group increased by $166,584,000, or 25.33%,
for the year ended January 31, 2006 compared to the prior year. This increase was primarily the
result of:
•
Increase of $48,386,000 related to new property openings, as noted in the
second table on page 37;
•
Increase of $95,072,000 ($79,019,000, net of minority interest) related to
commercial land sales primarily at Simi Valley, Wadsworth, Victoria Gardens, Promenade
Bolingbrook and Salt Lake City;
•
Increase of $19,456,000 ($15,565,000, net of minority interest) related to a
2005 land sale at Twelve MetroTech Center; and
•
Increase of $4,528,000 related to the sale of a development project in Las
Vegas, Nevada.
These increases were partially offset by the following decrease:
•
Decrease of $22,586,000 ($13,552,000, net of minority interest) related to
development fee revenue at Twelve MetroTech Center, that was earned in the prior year and
did not recur at the same level.
The balance of the remaining increase in revenues from real estate operations of approximately
$21,728,000 was generally due to fluctuations in mature properties.
Operating and Interest Expenses — Operating expenses increased $21,816,000, or 5.37%, for the year
ended January 31, 2007 compared to the prior year. This increase was primarily the result of:
•
Increase of $15,594,000 related to construction of a school on the ground floor
of Beekman. These costs were reimbursed by the New York City School Construction Authority
which is included in revenues from real estate operations as discussed above;
•
Increase of $9,943,000 related to new property openings, as noted in the first
table on page 37;
•
Increase of $5,453,000 related to an increase in occupancy primarily at the
following regional malls: Victoria Gardens, Promenade in Temecula and South Bay Galleria;
•
Increase of $3,713,000 related to write-offs of development projects that we
believed were no longer probable of occurring and the reduction of the projects under
development reserve during 2005 that did not recur in the current year;
•
Increase of $3,145,000 related to Issue 3 – Ohio Earn and Learn initiatives in
order to secure a gaming license in Ohio, which was not approved by the voters;
•
Increase of $2,291,000 related to the buyout of our partner in Galleria at
Sunset, previously accounted for on the equity method of accounting;
•
Increase of $1,275,000 primarily related to increases in occupancy in our hotel
portfolio;
•
Increase of $1,244,000 related to an increase in cash participation payments
under the ground leases with the City of New York at 42nd Street Retail in
Manhattan, New York and One Pierrepont Plaza in Brooklyn, New York;
•
Increase of $1,005,000 related to the expensing of stock options as a result of
the adoption of SFAS No. 123(R) on February 1, 2006; and
•
Increase of $929,000 related to non-capitalizable marketing and promotion costs
for Atlantic Yards in Brooklyn, New York.
These increases were partially offset by the following decreases:
•
Decrease of $27,873,000 ($27,899,000, net of minority interest) related to a
decrease in commercial outlot land sales primarily at Simi Valley, Wadsworth and Promenade
Bolingbrook; and
•
Decrease of $10,696,000 ($8,557,000, net of minority interest) related to a land
sale at Twelve MetroTech Center, which did not recur.
The balance of the remaining increase in operating expenses of approximately $15,793,000 was
generally due to fluctuations in mature properties and general operating activities.
Operating expenses increased $87,253,000, or 27.35%, for the year ended January 31, 2006 compared
to the prior year. This increase was primarily the result of:
•
Increase of $44,901,000 ($44,824,000, net of minority interest) related to
commercial land sales primarily at Simi Valley, Wadsworth, Victoria Gardens, Promenade
Bolingbrook, and Salt Lake City;
•
Increase of $17,329,000 related to new property openings, as noted in the
second table on page 37;
•
Increase of $10,696,000 ($8,557,000, net of minority interest) related to a
2005 land sale at Twelve MetroTech Center,
•
Increase of $2,836,000 related to non-capitalizable promotional costs for new
development projects; and
•
Increase of approximately $1,542,000 related to the Commercial Group’s
allocated share of a write-off of a portion of our enterprise resource planning project.
These increases were partially offset by the following decrease:
•
Decrease of $6,460,000 in project write-offs of abandoned development projects.
The balance of the remaining increase in operating expenses of approximately $16,409,000 was
generally due to fluctuations in mature properties and general operating activities.
Interest expense for the Commercial Group increased by $11,809,000, or 7.10%, during the year ended
January 31, 2007 compared to the prior year. The increase is primarily attributable to openings of
the properties in the first table listed below and the fair value adjustment of 10-year forward
swaps marked to market as additional interest expense that occurred during 2006. Interest expense
for the Commercial Group increased by $15,406,000, or 10.20%, during the year ended January 31,2006 compared to the prior year. The increase was primarily attributable to properties listed in
the second table below.
The following table presents the increases/decreases in revenue and operating expenses incurred by
the Commercial Group for newly-opened properties for the year ended January 31, 2007 compared to
the prior year (dollars in thousands):
Revenue
from Real
Quarter/Year
Square
Estate
Operating
Property
Location
Opened
Feet
Operations
Expenses
Retail Centers:
Q4-2005/Q1-2006/
Northfield at Stapleton
Denver, Colorado
Q3-2006
1,170,000
$
3,972
$
4,919
Simi Valley Town Center
Simi Valley, California
Q3-2005
660,000
13,692
4,028
Office Buildings:
Illinois Science and Technology Park – Building A
Skokie, Illinois
Q4-2006 (1)
225,000
616
349
Illinois Science and Technology Park – Building P
Skokie, Illinois
Q4-2006 (1)
127,000
133
476
Edgeworth Building
Richmond, Virginia
Q4-2006
142,000
144
3
Stapleton Medical Office Building
Denver, Colorado
Q3-2006
45,000
299
66
Resurrection Health Care
Skokie, Illinois
Q1-2006 (1)
40,000
323
13
Ballston Common Office Center
Arlington, Virginia
Q2-2005 (1)
176,000
2,115
89
Total
$
21,294
$
9,943
(1) Acquired property.
The following table presents the increases/decreases in revenue and operating expenses
incurred by the Commercial Group for newly-opened properties for the year ended January 31, 2006
compared to the prior year (dollars in thousands):
Revenues from real estate operations - Revenues from real estate operations for the Residential
Group increased by $44,024,000, or 22.4%, during the year ended January 31, 2007 compared to the
prior year. This increase was primarily the result of:
•
Increase of $20,822,000 related to new property openings and an acquired
property as noted in the table on page 39;
•
Increase of $11,578,000 related to military housing fee income from the
management and development of units in Hawaii and Illinois;
•
Increase of $7,268,000 related to an increase in rents and occupancies
primarily at the following properties: Grand in North Bethesda, Maryland, Pavilion in
Chicago, Illinois, Lofts at 1835 Arch in Philadelphia, Pennsylvania, Museum Towers in
Philadelphia, Pennsylvania, Sterling Glen of Stamford in Stamford, Connecticut, Sterling
Glen of Ryebrook in Ryebrook, New York, Sterling Glen of Bayshore in Bayshore, New York,
Sterling Glen of Center City in Philadelphia, Pennsylvania and Forest Trace in Lauderhill,
Florida;
•
Increase of approximately $2,100,000 related to a land sale at Bridgewater in
Hampton, Virginia; and
•
Increase of $517,000 due to the consolidation of one property previously
accounted for on the equity method of accounting as a result of the buyout of a partner on
this property.
The balance of the remaining increase of approximately $1,739,000 was generally due to fluctuations
in other mature properties.
Revenues from real estate operations for the Residential Group increased by $21,721,000, or 12.4%,
during the year ended January 31, 2006 compared to the prior year. This increase was primarily the
result of:
•
Increase of $7,145,000 related to new property openings, as noted in the table
on page 40;
•
Increase of $4,896,000 related to military housing fee income from the
management and development of units in Hawaii and Illinois;
•
Increase of $3,125,000 due to the consolidation of three properties previously
accounted for on the equity method of accounting as a result of the buyout of a partner on
these properties;
•
Increase of $2,784,000 related to an increase in occupancy primarily at the
following properties: Grand, One Franklintown in Philadelphia, Pennsylvania and Sterling
Glen of Darien in Darien, Connecticut; and
•
Increase of $805,000 related to a land sale at Tobacco Row.
These increases were partially offset by the following decrease:
•
Decrease of $1,100,000 from the sale of a parcel of land in Salem, Massachusetts in the prior year.
The balance of the remaining increase of approximately $4,066,000 was generally due to fluctuations
in mature properties.
Operating and Interest Expenses — Operating expenses for the Residential Group increased by
$27,418,000, or 20.0%, during the year ended January 31, 2007 compared to the prior year. This
increase was primarily the result of:
•
Increase of $10,641,000 related to new property openings as noted in the table on page 39;
•
Increase of approximately $2,000,000 primarily related to a land sale at Bridgewater;
•
Increase of $1,634,000 related to write-offs of development projects that we
believed were no longer probably of occurring, and the reduction of the projects under
development reserve that did not recur in the current year;
•
Increase of $734,000 related to one property previously accounted for under the
equity method of accounting as a result of the buyout of the partner on this property;
•
Increase of $686,000 related to the expensing of stock options as a result of
the adoption of SFAS No. 123(R) on February 1, 2006; and
Increase of $607,000 related to management expenditures associated with
military housing fee income.
The balance of the remaining increase of approximately $11,116,000 was generally due to
fluctuations in mature properties and general operating activities.
Operating expenses for the Residential Group increased by $21,697,000, or 18.8%, during the year
ended January 31, 2006 compared to the prior year. This increase was primarily the result of:
•
Increase of $8,151,000 related to new property openings, as noted in the table
on page 40;
•
Increase of $1,860,000 from damages incurred at Emerald Palms in Miami, Florida
and Forest Trace from hurricanes Katrina and Wilma;
•
Increase of $1,590,000 related to three properties previously accounted for
under the equity method of accounting as a result of the buyout of the partner on these
properties;
•
Increase of $1,022,000 related to marketing expenses for the following
properties under construction: Sterling Glen of Roslyn in Roslyn, New York, 1225 S.
Michigan in Chicago, Illinois, and Dallas Mercantile in Dallas, Texas, Sky55 and 1251 S.
Michigan, both located in Chicago, Illinois;
•
Increase of $908,000 related to Residential Group’s allocated share of a
write-off of a portion of our enterprise resource planning project;
•
Increase of $654,000 related to management expenditures associated with military housing fee income; and
•
Increase of $291,000 related to a land sale at Tobacco Row.
These increases were partially offset by the following decrease:
•
Decrease of $661,000 related to the sale of a parcel of land in Salem, Massachusetts in the prior year.
The balance of the remaining increase of approximately $7,882,000 was generally due to fluctuations
in mature properties and general operating activities.
Interest expense for the Residential Group increased by $18,108,000, or 44.7%, during the year
ended January 31, 2007 compared to the prior year. This increase was primarily attributable to
openings of properties in the table below and the early repayment of a participating loan on a
Residential Group property. Interest expense for the Residential Group increased by $7,798,000, or
23.8%, during the year ended January 31, 2006 compared to the prior year. This increase was
primarily attributable to openings of properties in the table on page 40 and an increase in
variable interest rates.
The following table presents the increases in revenues and operating expenses incurred by the
Residential Group for newly-opened properties which have not yet reached stabilization for the year
ended January 31, 2007 compared to the prior year (dollars in thousands):
The following table presents the increases in revenue and operating expenses incurred by the
Residential Group for newly-opened properties which have not yet reached stabilization for the year
ended January 31, 2006 compared to the prior year (dollars in thousands):
Revenue
from
Quarter/Year
Number
Real Estate
Operating
Property
Location
Opened
of Units
Operations
Expenses
Sterling Glen of Lynbrook
Lynbrook, New York
Q4-2005
100
$
656
$
1,306
100 Landsdowne Street
Cambridge, Massachusetts
Q3-2005
203
369
1,411
Ashton Mill
Providence, Rhode Island
Q3-2005
193
282
985
Metro 417
Los Angeles, California
Q2-2005
277
501
1,437
23 Sidney Street
Cambridge, Massachusetts
Q1-2005
51
427
565
Emerald Palms Expansion
Miami, Florida
Q2-2004
86
719
302
East 29th Avenue
Town Center
Denver, Colorado
Q1-2004
156
1,202
638
Sterling Glen of Rye Brook
Rye Brook, New York
Q1-2004
165
2,989
1,507
Total
$
7,145
$
8,151
Land Development Group
Revenues from real estate operations – Land sales and the related gross margins vary from period to
period depending on timing of sales and general market conditions relating to the disposition of
significant land holdings. We have an inventory of land in good markets throughout the country.
Our land sales were impacted by slowing demand from home buyers in certain core markets for the
land business, reflecting conditions throughout the housing industry that are anticipated to
continue into 2007. Interest income for the Land Development Group is discussed beginning on page
42. Revenues from real estate operations for the Land Development Group increased by $9,361,000
for the year ended January 31, 2007 compared to the prior year. This increase is primarily the
result of:
•
Increase of $19,000,000 in land sales at Bal Gra in Edenton, North Carolina;
•
Increase of $13,980,000 in land sales at Tangerine Crossing in Tucson, Arizona; and
•
Increase of $8,349,000 primarily at three land development projects, Mill Creek
in York County, South Carolina, Wheatfield Lake in Wheatfield, New York and Rockport Square
in Lakewood, Ohio combined with several smaller sales increases at various other land
development projects.
These increases were partially offset by the following decreases:
•
Decrease of $11,965,000 in land sales at Stapleton in Denver, Colorado;
•
Decrease of $9,072,000 in land sales at Suncoast Lakes in Pasco County, Florida;
•
Decrease of $5,415,000 in land sales at Thornbury in Solon, Ohio;
•
Decrease of $2,880,000 in land sales primarily at LaDue Reserve in Mantua,
Ohio, combined with several smaller sales decreases at various land development projects;
and
•
Decrease of $2,636,000 in land sales at Waterbury in North Ridgeville, Ohio.
Revenues from real estate operations for the Land Development Group increased by $15,212,000 for
the year ended January 31, 2006 compared to the prior year. This increase is primarily the result
of:
•
Increase of $14,444,000 in land sales at Stapleton;
•
Increase of $6,758,000 in land sales at Suncoast Lakes; and
•
Increase of $5,170,000 in land sales primarily at three major land development
projects, Waterbury, LaDue Reserve and New Haven in Barberton, Ohio, combined with several
smaller sales increases at various land development projects.
These increases were partially offset by the following decrease:
•
Decrease of $11,160,000 primarily at five major land development projects,
Central Station in Chicago, Illinois, Mill Creek, Thornbury, Creekstone in Copley, Ohio and
Wheatfield Lake, combined with several smaller sales decreases at various other land
development projects.
Operating and Interest Expenses — Operating expenses increased $10,644,000 for the year ended
January 31, 2007 compared to the prior year. The increase is primarily the result of:
•
Increase of $10,909,000 at Bal Gra primarily related to increased land sales;
•
Increase of $7,910,000 primarily related to increased land sales at three major
land development projects, Mill Creek, Rockport Square and Wheatfield combined with several
smaller increases at various other land development projects; and
•
Increase of $6,862,000 at Tangerine Crossings primarily related to increased land sales.
These increases were offset by:
•
Decrease of $5,939,000 at Suncoast Lakes primarily related to decreased land sales;
•
Decrease of $4,303,000 primarily related to decreased land sales at LaDue
Reserve, Central Station and New Haven combined with several smaller decreases at various
land development projects;
•
Decrease of $2,498,000 at Waterbury, primarily related to decreased land sales; and
•
Decrease of $2,297,000 at Stapleton, primarily related to decreased land sales.
Operating expenses increased by $9,337,000 for the year ended January 31, 2006 compared to the
prior year. This increase is primarily the result of:
•
Increase of $7,974,000 primarily at four major land development projects,
Central Station, LaDue Reserve, Waterbury, and New Haven, combined with several smaller
expense increases at various land development projects;
•
Increase of $5,581,000 at Stapleton, primarily related to decreased land sales; and
•
Increase of $3,545,000 at Suncoast Lakes, primarily related to decreased land sales.
These increases were partially offset by the following decrease:
•
Decrease of $7,763,000 primarily at three major land development projects,
Thornbury, Wheatfield Lake and Creekstone combined with several other expense decreases at
various land development projects.
Interest expense increased by $1,269,000 for the year ended January 31, 2007 compared to the prior
year. Interest expense increased by $445,000 for the year ended January 31, 2006 compared to the
prior year. Interest expense varies from year to year depending on the level of interest-bearing
debt within the Land Development Group.
The Nets
Our equity investment in the Nets incurred a pre-tax loss of $14,703,000 and $24,534,000 for the
years ended January 31, 2007 and 2006, respectively, representing a decrease in expense of
$9,831,000 compared to the prior year. For the period August 16, 2004 (inception) through January31, 2005, our equity investment in the Nets incurred a pre-tax loss of $10,889,000, representing an
increase in expense of $13,645,000 over the partial period of the previous year. For the years
ended January 31, 2007, 2006 and 2005, we recognized approximately 17%, 31% and 38% of the net
loss, respectively, because profits and losses are allocated to each member based on an analysis of
the respective member’s claim on the net book equity assuming a liquidation at book value at the
end of the accounting period without regard to unrealized appreciation (if any) in the fair value
of the Nets. The increase in our share of the pre-tax loss for the year ending January 31, 2006
compared to January 31, 2005 relates to the fact that the Nets investment closed on August 16,2004, with fiscal year 2004 results reflecting a shortened period compared to fiscal year 2005.
Included in the losses for the years ended January 31, 2007, 2006 and 2005, are approximately
$8,081,000, $16,213,000, and $7,750,000, respectively, of amortization, at our share, of certain
assets related to the purchase of the team and our share of insurance premiums purchased on
policies related to the standard indemnification required by the NBA. The remainder of
the loss substantially relates to the operations of the team. The team is expected to operate at a
loss in 2007 and will require
additional capital to fund the loss. We have agreed to advance up to
$13,000,000, in the form of a member loan, which is senior to both common and preferred equity of
the partnership that owns an interest in the Nets, but subordinated to third party debt.
Corporate Activities
Operating and Interest Expenses – Operating expenses for Corporate Activities increased by
$4,700,000 in 2006 compared to 2005 and increased $2,955,000 in 2005 compared to 2004. The increase
in operating expenses in 2006 compared to 2005 was primarily related to $3,614,000 of stock-based
compensation accounted for under SFAS No. 123 (R), $776,000 of payroll and related costs, and the
remaining amount related to general corporate expenses.
The increase in operating expenses for 2005 compared to 2004 primarily related to $1,000,000
charitable contribution to Tulane University Katrina Relief Fund, $2,600,000 in incentive
compensation, $560,000 related to the write-off of a portion of enterprise resource planning
project, $360,000 related to our insurance program, $177,000 related to registration costs of the
stock split and the remaining amount related to general corporate expenses. These increases were
partially offset by a reduction of $3,035,000 in costs related to our compliance with Section 404
of the Sarbanes-Oxley Act of 2002 (“Section 404”).
Interest expense for Corporate Activities consists primarily of interest expense on the senior
notes and the bank revolving credit facility, excluding the portion allocated to the Land
Development Group (see “Financial Condition and Liquidity” section). Interest expense for
Corporate Activities increased by $3,083,000 in 2006 compared to 2005 primarily associated with
increased borrowings on the bank revolving credit facility during the first nine months of 2006 and
the issuance of an additional $287,500,000 of senior notes at 3.625% in October 2006. Interest
expense increased by $9,208,000 in 2005 compared to 2004 primarily related to the issuance of an
additional $150,000,000 of senior notes at 6.5% in January 2005.
Other Activity
The following items are discussed on a consolidated basis.
Interest and Other Income
Interest and other income was $61,737,000 for the year ended January 31, 2007 compared to
$27,773,000 for the year ended January 31, 2006 representing an increase of $33,964,000. This
increase was primarily the result of the following:
-
Commercial Group
•
Increase of $1,341,000 related to interest income earned on sales proceeds
placed in escrow for future acquisitions.
-
Land Development Group
•
Increase of $1,416,000 related to changes in the fair value of a derivative
held by Stapleton Land, LLC on the Denver Urban Renewal Authority (“DURA”) bonds (see
“Financing Arrangements” section);
•
Increase of $746,000 related to interest income earned by Stapleton Land, LLC
on an interest rate swap related to the $75,000,000 Tax Increment Financing (“TIF”) bonds
(see “Financing Arrangements” section); and
•
Increase of $515,000 related to interest income earned by Stapleton Land II,
LLC on the collateral and the 1% fee related to an agreement on the $65,000,000 Senior
Subordinate Limited Property Tax Supported Revenue Refinancing and Improvement Bonds
(“Senior Subordinate Bonds”) (see “Financing Arrangements” section).
-
Residential Group
•
Increase of $25,719,000 related to the income recognition on the sale of state
and federal Historic Preservation Tax Credits.
-
Corporate Activities
•
Increase of $490,000 related to interest income earned on a note receivable due
from the buyer of our Lumber Group segment, which was sold to its employees in 2005.
These increases were partially offset by the following decreases:
-
Land Development Group
•
Decrease of $2,670,000 related to interest income earned by Stapleton Land II,
LLC on the Residual Interest Tax-Exempt Securities Receipts (“RITES”) and the collateral
which were redeemed in July, 2005 (see “Financing Arrangements” section); and
•
Decrease of $362,000 related to interest income earned by Stapleton Land, LLC’s
other financing arrangements.
The balance of the remaining increase in interest and other income of approximately $6,769,000 was
due to other general investing activities.
Interest and other income was $27,773,000 for the year ended January 31, 2006 compared to
$42,976,000 for the year ended January 31, 2005 representing a decrease of $15,203,000. This
decrease was primarily the result of the following:
-
Land Development Group
•
Decrease of $25,262,000 related to the recognition of income on Stapleton Land,
LLC’s retained interest in a trust holding bonds of $145,000,000. As the bonds were
successfully removed from the trust, Stapleton Land, LLC recognized $25,262,000 of interest
income during the year ended January 31, 2005. Of this amount, $22,870,000 was recognized
in other comprehensive income, but deferred under the cost recovery method, until 2004 upon
receipt of the proceeds. Stapleton Land, LLC is not obligated to pay, nor is it entitled
to, any further amounts related to this retained interest; and
•
Decrease of $408,000 related to interest income earned by Stapleton Land II,
LLC on the RITES and the collateral.
These decreases were partially offset by the following increases:
-
Land Development Group
•
Increase of $516,000 related to interest income earned by Stapleton Land II,
LLC on the collateral and the 1% fee related to an agreement on the Senior Subordinate
Bonds;
•
Increase of $5,618,000 related to changes in the fair value of a derivative
held by Stapleton Land, LLC on the DURA bonds;
•
Increase of $2,546,000 related to interest income and changes in the fair value
of a derivative held by Stapleton Land, LLC on an interest rate swap related to the
$75,000,000 TIF bonds; and
•
Increase of $466,000 related to interest income earned by Stapleton Land, LLC’s other financing arrangements.
-
Corporate Activities
•
Increase of $1,543,000 which primarily relates to additional cash investments
generated from the issuance of $150,000,000 6.50% senior notes in January 2005.
The balance of the remaining decrease of approximately $222,000 was due to other general investing
activities.
Equity in Earnings of Unconsolidated Entities
Equity in earnings of unconsolidated entities was $48,542,000 for the year ended January 31, 2007
compared to $55,201,000 for the year ended January 31, 2006, representing a decrease of $6,659,000.
This decrease was primarily the result of the following activities that occurred within our equity
method investments:
-
Commercial Group
•
Decrease of $13,145,000 related to our portion of the 2005 gain on disposition
of Showcase, a specialty retail center located in Las Vegas, Nevada.
Decrease of $5,352,000 related to our portion of the 2005 gain on disposition
of Colony Place, an apartment community located in Fort Myers, Florida; and
•
Decrease of $2,526,000 related to our portion of the 2005 gain on disposition
of Flower Park Plaza, an apartment community located in Santa Ana, California.
-
Land Development Group
•
Decrease of $11,130,000 related to decreased land sales at Grass Farms, located in Manatee County, Florida; and
•
Decrease of $5,224,000 related to decreased land sales at Central Station, located in Chicago, Illinois.
These decreases were partially offset by the following increases:
-
Commercial Group
•
Increase of $7,662,000 related to our portion of the 2006 gain on disposition
of Midtown Plaza, a specialty retail center located in Parma, Ohio; and
•
Increase of $2,555,000 related to increased Commercial Group sales of land,
outlots and development projects primarily at Victor Village, located in Victorville,
California and Charleston Mall, located in Charleston, West Virginia.
-
The Nets
•
Increase of $9,831,000 due to lower pre-tax loss related to our equity investment in the Nets.
-
Land Development Group
•
Increase of $10,657,000 related to increased land sales at Sweetwater Ranch, located in Austin, Texas; and
•
Increase of $4,197,000 related to increased land sales in Mayfield Village, Ohio.
The balance of the remaining decrease of $4,184,000 was due to fluctuations in the operations of
equity method investments.
Equity in earnings of unconsolidated entities was $55,201,000 for the year ended January 31, 2006
compared to $54,392,000 for the year ended January 31, 2005, representing an increase of $809,000.
This increase was primarily the result of the following activities that occurred within our equity
method investments:
-
Commercial Group
•
Increase of $13,145,000 related to our portion of the gain on disposition of Showcase.
-
Residential Group
•
Increase of $5,352,000 related to our portion of the gain on disposition of Colony Place; and
•
Increase of $2,526,000 related to our portion of the gain on disposition of Flower Park Plaza.
-
Land Development Group
•
Increase of $11,416,000 related to increased land sales at Central Station;
•
Increase of $10,566,000 related to increased land sales at Grass Farms; and
•
Increase of $3,528,000 related to increased land sales at Gladden Farms, located in Marana, Arizona.
These increases were partially offset by the following decreases:
-
Commercial Group
•
Decrease of $31,996,000 related to our portion of the gains on disposition of
Chapel Hill Mall, a regional mall located in Akron, Ohio, Chapel Hill Suburban, a specialty
retail center located in Akron, Ohio, and Manhattan Town Center, a regional mall located in
Manhattan, Kansas, that occurred in 2004.
-
The Nets
•
Decrease of $13,645,000 due to the pre-tax loss related to our equity investment in the Nets.
The balance of the remaining decrease of approximately $83,000 was due to fluctuations in the
operations of equity method investments.
Amortization of Mortgage Procurement Costs
Mortgage procurement costs are amortized on a straight-line basis over the life of the related
nonrecourse mortgage debt, which approximates the effective interest method. For the years ended
January 31, 2007, 2006 and 2005, we recorded amortization of mortgage procurement costs of
$10,903,000, $9,979,000 and $10,497,000, respectively. Amortization of mortgage procurement costs
increased $924,000 for the year ended January 31, 2007 compared to the same period in the prior
year. Amortization of mortgage procurement costs decreased $518,000 for the year ended January 31,2006 compared to the same period in the prior year.
Loss on Early Extinguishment of Debt
For the years ended January 31, 2007, 2006 and 2005, we recorded $2,175,000, $5,300,000 and
$4,734,000, respectively, as loss on early extinguishment of debt. For the year ended January 31,2007, the loss primarily represents the early extinguishment of a construction loan at Simi Valley
Town Center, a retail center located in Simi Valley, California, in order to obtain permanent
financing and the early extingishment of other borrowings at 101 San Fernando, an apartment
community located in San Jose, California. For the year ended January 31, 2006, the loss primarily
represents the impact of early extinguishment of nonrecourse mortgage debt at One MetroTech Center
and Ten MetroTech Center, office buildings located in Brooklyn, New York, and Sterling Glen of
Ryebrook, a 166-unit supported living residential community located in Ryebrook, New York, in order
to secure more favorable financing terms. For the year ended January 31, 2005, the loss primarily
represents the impact of early extinguishment of nonrecourse mortgage debt in order to secure more
favorable financing terms at Victoria Gardens and Mall at Stonecrest, retail centers located in
Rancho Cucamonga, California, and Atlanta, Georgia, respectively, and 2 Hanson Place, an office
building located in Brooklyn, New York.
The following table summarizes early extinguishment of debt included in discontinued operations.
We review our real estate portfolio to determine if our carrying costs will be recovered from
future undiscounted cash flows whenever events or changes indicate that recoverability of
long-lived assets may not be assured. In cases where we do not expect to recover our carrying
costs, an impairment loss is recorded as a provision for decline in real estate for assets in our
real estate portfolio pursuant to the guidance established in SFAS No. 144.
We recorded a provision for decline in real estate of $1,923,000, $7,874,000 and $-0- for the years
ended January 31, 2007, 2006 and 2005, respectively. For the year ended January 31, 2007, we
recorded a provision for decline in real estate of $1,923,000 related to Saddle Rock Village, a 354,000 square-foot Commercial specialty retail center
and its adjacent outlots located in Aurora, Colorado. For the year ended January 31, 2006, we
recorded a provision for decline in real estate in the Land Development Group of $1,330,000 related
to Rockport Square, a 174,000 square-foot residential and retail development project located in
Lakewood, Ohio, a provision of $256,000 related to Syracuse Village, an affordable housing
community located in Denver, Colorado and a provision of $188,000 related to Kline’s Farm, a 378
acre planned residential community located in Girard, Ohio. We also recorded a provision of
$4,600,000 related to Sterling Glen of Forest Hills, an 84-unit supported living Residential
community located in Queens, New York and $1,500,000 related to the Ritz Carlton, a 206 room
Commercial hotel located in Cleveland, Ohio. These provisions represent a write down to the
estimated fair value, less cost to sell due to a change in events, such as an offer to purchase,
related to the estimated future cash flows of these properties.
Depreciation and Amortization
We recorded depreciation and amortization of $181,129,000, $164,397,000 and $144,081,000 for the
years ended January 31, 2007, 2006 and 2005, respectively. Depreciation and amortization increased
$16,732,000 and $20,316,000 for the years ended January 31, 2007 and 2006, respectively, compared
to same periods in the prior years. These increases are primarily attributable to acquisitions,
new property openings and amortization of intangible assets related to acquired contracts in
military housing projects. For the years ended January 31, 2007, 2006 and 2005, we recorded
$6,218,000, $1,073,000 and $164,000, respectively, of amortization expense related to the
intangible assets associated with military housing.
Income Taxes
Income tax expense totaled $34,412,000, $25,564,000 and $41,336,000 for the years ended January 31,2007, 2006 and 2005, respectively. The variation in income tax expense reflected in the
Consolidated Statements of Earnings for the year ended January 31, 2007 versus the income tax
expense computed at the statutory federal income tax rate is primarily attributable to state income
taxes and various permanent differences between pre-tax GAAP income and taxable income. At January31, 2007, we had a net operating loss carryforward for tax purposes of $90,825,000 (generated
primarily from the impact on our net earnings of tax depreciation expense from real estate
properties) that will expire in the years ending January 31, 2022 through January 31, 2027, a
charitable contribution deduction carryforward of $37,942,000 that will expire in the years ending
January 31, 2008 through January 31, 2012, general business credit carryovers of $12,865,000 that
will expire in the years ending January 31, 2008 through 2027 and an alternative minimum tax
(“AMT”) credit carryforward of $27,067,000 that is available until used to reduce Federal tax to
the AMT amount. We have a full valuation allowance against the deferred tax asset associated with
our charitable contributions because management believes at this time it is more likely than not
that we will not realize these benefits. Our policy is to consider a variety of tax-deferral
strategies, including tax deferred exchanges, when evaluating our future tax position.
On June 30, 2005, the State of Ohio enacted a tax law change that replaced the Ohio income-based
franchise tax and the Ohio personal property tax with a commercial activity tax. As a result of
the State of Ohio tax law change, there was a decrease in our effective state tax rate. The impact
of the tax rate change of approximately $10,000,000 is reflected as a deferred tax benefit in the
Consolidated Statements of Earnings for the year ended January 31, 2006 and as a reduction of the
cumulative deferred tax liability. The effective tax rate reflected on our financial statements
for the years ended January 31, 2007, 2006 and 2005 fluctuated primarily due to permanent
differences between book and taxable income and the impact of the tax rate change in the State of
Ohio discussed above.
Discontinued Operations
Pursuant to the definition of a component of an entity in SFAS No. 144 all earnings of discontinued
operations sold or held for sale, assuming no significant continuing involvement, have been
reclassified in the Consolidated Statements of Earnings for the years ended January 31, 2007, 2006
and 2005. We anticipate reinvesting the capital proceeds from these dispositions as further
described in the Financial Condition and Liquidity Section of the MD&A on page 49.
The following table lists the consolidated rental properties included in discontinued operations:
Square Feet/
Quarter/
Year
Year
Year
Number
Year
Ended
Ended
Ended
Property
Location
of Units
Disposed
1/31/2007
1/31/2006
1/31/2005
Commercial Group:
Battery Park City Retail
Manhattan, New York
166,000 square feet
Q3-2006
Yes
Yes
Yes
Embassy Suites Hotel
Manhattan, New York
463 rooms
Q3-2006
Yes
Yes
Yes
G Street Retail
Philadelphia, Pennsylvania
13,000 square feet
Q1-2006
Yes
Yes
Yes
Hilton Times Square
Manhattan, New York
444 rooms
Q1-2006
Yes
Yes
Yes
Flatbush Avenue
Brooklyn, New York
142,000 square feet
Q3-2004
—
—
Yes
Pavilion
San Jose, California
250,000 square feet
Q3-2004
—
—
Yes
Hunting Park
Philadelphia, Pennsylvania
125,000 square feet
Q2-2004
—
—
Yes
Residential Group:
Mount Vernon Square
Alexandria, Virginia
1,387 units
Q4-2006
Yes
Yes
Yes
Providence at Palm Harbor
Tampa, Florida
236 units
Q2-2006
Yes
Yes
Yes
Enclave
San Jose, California
637 units
Q4-2005
—
Yes
Yes
Cherrywood Village
Denver, Colorado
360 units
Q3-2005
—
Yes
Yes
Ranchstone
Denver, Colorado
368 units
Q3-2005
—
Yes
Yes
Arboretum Place
Newport News, Virginia
184 units
Q4-2004
—
—
Yes
Bridgewater
Hampton, Virginia
216 units
Q4-2004
—
—
Yes
Colony Woods
Bellevue, Washington
396 units
Q4-2004
—
—
Yes
Silver Hill
Newport News, Virginia
153 units
Q4-2004
—
—
Yes
Trellis at Lee’s Mill
Newport News, Virginia
176 units
Q4-2004
—
—
Yes
Regency Towers
Jackson, New Jersey
372 units
Q3-2004
—
—
Yes
Woodlake
Silver Spring, Maryland
534 units
Q1-2004
—
—
Yes
In addition, our Lumber Group strategic business unit was included in discontinued operations
for the year ended January 31, 2005. Lumber Group was a lumber wholesaler that was sold to its
employees on November 12, 2004. Also included in discontinued operations is Babin Building
Centers, Inc. (“Babin”), a division of Lumber Group, which was sold in July 2004. Babin sold
building materials to the new construction industry and to home remodelers.
Substantially all of the assets of the Lumber Group were sold for $39,085,902, $35,000,000 of which
was paid in cash at closing. Pursuant to the terms of a note receivable with a 6% interest rate
from the buyer, the remaining purchase price will be paid in four annual installments which
commenced November 12, 2006. During the year ended January 31, 2005, we reported a gain on
disposition of this segment of $20,920,000 ($11,501,000, net of tax) net of $1,093,000 loss related
to the sale of Babin. We have deferred a gain of $4,085,902 (approximately $2,400,000, net of tax)
relating to the note receivable due, in part, to the subordination to the buyer’s senior financing.
The gain and interest income is recognized as the note receivable principal and interest are
collected. During the year ended January 31, 2007, we received the first annual installment of
$1,250,000, which includes $760,000 ($466,000, net of tax) of the deferred gain and $490,000 of
interest income which is included in continuing operations.
We consider assets as held for sale when the transaction has been approved and there are no
significant contingencies related to the sale that may prevent the transaction from closing. There
were no properties classified as held for sale as of January 31, 2007. Summarized financial
information for Hilton Times Square Hotel’s assets, liabilities and minority interest that were
held for sale as of January 31, 2006 were as follows:
Gain on disposition of rental properties and Lumber Group (see below)
351,861
43,198
92,245
Earnings before income taxes
357,953
33,549
90,135
Income tax expense (benefit)
Current
15,371
(6,960
)
10,919
Deferred
77,210
18,940
25,737
92,581
11,980
36,656
Earnings before minority interest
265,372
21,569
53,479
Minority interest, net of tax
Gain on disposition of rental properties
118,009
—
3,680
Operating earnings from rental properties
351
2,562
(486
)
118,360
2,562
3,194
Net earnings from discontinued operations
$
147,012
$
19,007
$
50,285
Gain on Disposition of Rental Properties and Lumber Group
The following table summarizes the gain on disposition of Rental Properties and Lumber Group,
before tax and minority interest, for the years ended January 31, 2007, 2006 and 2005:
Net of $1,093 loss on the disposition of Babin Building Centers, Inc. for the year ended
January 31, 2005.
(2)
We elected to deposit the sales proceeds with a qualified intermediary for purposes of
acquiring replacement assets under Section 1031 of the Internal Revenue Code.
Investments accounted for on the equity method are not subject to the provisions of SFAS No.
144, and therefore the gains or losses on the sales of equity method properties are reported in
continuing operations when sold. The following table summarizes our proportionate share of gains
on equity method investments disposed of during the years ended January 31, 2007, 2006 and 2005,
which are included in equity in earnings of unconsolidated entities in the Consolidated Statements
of Earnings.
Cumulative Effect of Change in Accounting Principle
For the year ended January 31, 2005, we recorded a charge for the cumulative effect of change in
accounting principle in accordance with FIN No. 46 (R) which has resulted in a reduction of net
earnings of $18,628,000 ($11,261,00, net of tax). This charge consisted primarily of accumulated
depreciation and amortization expense, net of minority interest, of the newly-consolidated VIEs
which were previously accounted for on the cost method. See the “Variable Interest Entities”
section of the MD&A for further information.
The overall impact resulting from the adoption of FIN No. 46 (R) to the Commercial Group was a
pre-tax charge of $789,000 from the consolidation of a development project located in Las Vegas,
Nevada that was previously accounted for under the equity method of accounting.
The overall impact resulting from the adoption of FIN No. 46 (R) to the Residential Group was a
pre-tax charge of $17,839,000. The following summarizes the key components of the impact of the
adoption of FIN No. 46 (R):
•
Cumulative effect of $4,403,000 resulting from us being deemed the primary
beneficiary in VIEs that hold notes payable to the Residential Group and have equity method
investments in 16 properties that are subsidized by the U.S. Department of Housing and
Urban Development. Our investments were previously accounted for under the cost method;
•
Cumulative effect of $3,801,000 resulting from us being deemed the primary
beneficiary in a VIE that holds a note payable to the Residential Group and has an equity
method investment in Millender Center, a mixed-use residential, office and retail complex
in Detroit, Michigan. Our investment was previously accounted for under the cost method;
•
Cumulative effect of $3,301,000 resulting from us being deemed the primary
beneficiary in a VIE that holds a note payable to the Residential Group and has an equity
method investment in 101 San Fernando, a residential community in San Jose, California. Our
investment was previously accounted for under the equity method; and
•
Cumulative effect of $6,334,000 resulting from us being deemed the primary
beneficiary in a VIE, Queenswood, a residential community in Corona, New York. Our
investment was previously accounted for under the equity method.
FINANCIAL CONDITION AND LIQUIDITY
We believe that our sources of liquidity and capital are adequate to meet our funding obligations.
Our principal sources of funds are cash provided by operations, the bank revolving credit facility,
refinancings of nonrecourse mortgage debt, dispositions of mature properties and proceeds from the
issuance of senior notes. Our principal use of funds are the financing of development and
acquisitions of real estate projects, capital expenditures for our existing portfolio, payments on
nonrecourse mortgage debt, payments on our bank revolving credit facility and retirement of senior
notes previously issued. The discussion below under Bank Revolving Credit Facility and Senior and
Subordinated Debt outline recent events that have significantly enhanced our liquidity and
financial flexibility which will be important in our efforts to continue to develop and acquire
quality real estate assets.
Effective December 1, 2005, the Securities and Exchange Commission (“SEC”) adopted new rules which
substantially modify the registration, communications and offering procedures under the Securities
Act of 1933. These new rules streamline the shelf registration process for “well-known seasoned
issuers” (“WKSI”) by allowing them to file shelf registration statements that automatically become
effective. Based upon the criteria set forth in the new rules, we have determined that we are a
WKSI as of January 31, 2007. In the meantime, we may still issue securities under our existing
shelf registration statement described below.
Bank Revolving Credit Facility
The bank revolving credit facility as amended June 30, 2006 provides, among other things, for 1) an
increase of $150,000,000 in available borrowings up to $600,000,000; 2) at our election, interest
rates of 1.75% over the London Interbank Offered Rate (“LIBOR”) or 1/2% over the prime rate (we
generally elect 1.75% over LIBOR); 3) a maturity date of March 2009; 4) maintenance of debt service
coverage ratios and specified levels of net worth (as defined in the credit facility); 5) dividend
and stock repurchase limitation of $40,000,000 per annual period; and 6) the ability to use up to
$100,000,000 of available borrowings for letters of credit or surety bonds. On October 3, 2006,
the bank revolving credit facility was further amended to provide us the ability to repurchase
shares of outstanding Class A common stock using proceeds from the issuance of the 3.625% Puttable
Equity-Linked Senior Notes (as described below) in an aggregate amount not to exceed $50,000,000.
There were $72,324,000 and $67,071,000 in letters of credit and $-0- in surety bonds outstanding at
January 31, 2007 and 2006, respectively.
As of January 31, 2006 and until June 30, 2006, the bank revolving credit facility provided for
borrowings of up to $450,000,000 with a $100,000,000 accordion provision subject to bank approval.
The revolving credit facility also provided for interest rates, at our election, of 1.95% over
LIBOR or 1/2% over the prime rate and an annual dividend and stock repurchase limitation of
$30,000,000. Other terms of the facility were similar to our current arrangement.
At January 31, 2007, retained earnings of $19,462,000 were available for payment of dividends.
Under the amended credit facility, this limitation will be reset each March 22 to $40,000,000.
The outstanding balance of the revolving credit facility was $-0- and $82,500,000 at January 31,2007 and 2006, respectively.
Interest incurred and paid on the bank revolving credit facility was as follows:
On October 10, 2006, we issued $287,500,000 of 3.625% puttable equity-linked senior notes due
October 15, 2011 in a private placement. The proceeds from this offering (net of approximately
$25,000,000 of offering costs, underwriting fees and the cost of the puttable note hedge and
warrant transactions described below) were used to repurchase $24,962,000 of our Class A common
stock, to repay the outstanding balance of $190,000,000 under our bank revolving credit facility
(see above) and for general working capital purposes. The notes were issued at par and accrued
interest is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on
April 15, 2007. We may not redeem these notes prior to maturity. The notes are unsecured
unsubordinated obligations and rank equally with all other unsecured and unsubordinated
indebtedness.
Holders may put their notes to us at their option on any day prior to the close of business on the
scheduled trading day immediately preceding July 15, 2011 only under the following circumstances:
(1) during the five business-day period after any five consecutive trading-day period (the
“measurement period”) in which the trading price per note for each day of that measurement period
was less than 98% of the product of the last reported sale price of our Class A common stock and
the put value rate (as defined) on each such day; (2) during any fiscal quarter after the fiscal
quarter ending January 31, 2007, if the last reported sale price of our Class A common stock for 20
or more trading days in a period of 30 consecutive trading days ending on the last trading day of
the immediately preceding fiscal quarter exceeds 130% of the applicable put value price in effect
on the last trading day of the immediately preceding fiscal quarter; or (3) upon the occurrence of
specified corporate events as set forth in the applicable indenture. On and after July 15, 2011
until the close of business on the scheduled trading day immediately preceding the maturity date,
holders may put their notes to us at any time, regardless of the foregoing circumstances. In
addition, upon a change in control, as defined, the holders may require us to purchase for cash all
or a portion of their notes for 100% of the principal amount of the notes plus accrued and unpaid
interest, if any, plus a number of additional make-whole shares of our Class A common stock, as set
forth in the applicable indenture.
If a note is put to us, a holder would receive (i) cash equal to the lesser of the principal amount
of the note or the put value and (ii) to the extent the put value exceeds the principal amount of
the note, shares of our Class A common stock, cash, or a combination of Class A common stock and
cash, at our option. The initial put value rate will be 15.0631 shares of Class A common stock per
$1,000 principal amount of notes (equivalent to a put value price of $66.39 per share of Class A
common stock). The put value rate will be subject to adjustment in some events but will not be
adjusted for accrued interest. In addition, if a “fundamental change,” as defined, occurs prior to
the maturity date, we will in some cases increase the put value rate for a holder that elects to
put its notes to us.
We entered into a registration rights agreement that required a shelf registration statement to be
filed within 90 days and declared effective under the United States Securities Act of 1933
(“Securities Act”) within 180 days after October 10, 2006. We filed a shelf registration statement
for the resale of the notes and the Class A common stock issuable upon our exercise of the net
share settlement option under the Securities Act on January 4, 2007 and it was immediately
effective due to our status as a WKSI. We will use our best efforts to keep the shelf registration
statement effective until the earliest of: (1) the date all of the registrable securities have been
sold pursuant to the shelf registration statement; (2) the expiration of the holding period under
Rule 144(k) under the Securities Act, or any successor provision; or (3) two years from the date
the shelf registration statement is declared effective. We refer to each of the following as an
effective failure: (1) the shelf registration statement ceases to be effective, or (2) we suspend
the use of the prospectus or the holders are otherwise prevented or restricted by us from effecting
sales pursuant to the shelf registration statement, and either continues for more than 30 days,
whether or not consecutive, in any 90-day period, or for more than 90 days, whether or not
consecutive, during any 12-month period.
Upon the occurrence of an effective failure, we will be required to pay additional amounts, in
cash, to holders of the notes. Such additional amounts will accrue on the notes that are
registrable securities, from and including the day following the effective failure to but
excluding, the earlier of the time such holders are again able to make resales under the shelf
registration statement and the date the shelf registration statement is no longer required to be
kept effective. Additional amounts will be paid semiannually in arrears on each April 15 and
October 15 and will accrue at a rate per annum equal to 0.25% for the first 90 days after the
occurrence of the event and 0.50% after the first 90 days. In no event will additional amounts
exceed 0.50% per annum. The maximum potential additional amounts that could be required to be paid
by us is approximately $2,674,000 for the two year period in which the shelf registration is
required to be effective. At January 31, 2007, we, in accordance with FASB Statement No. 5,
“Accounting for Contingencies”, have concluded that it is not probable we will be required to pay
additional amounts as a result of an effective failure.
Concurrent with the issuance of the notes, we purchased a call option on our Class A common stock
in a private transaction. The purchased call option allows us to receive shares of our Class A
common stock and/or cash from counterparties equal to the amounts of Class A common stock and/or
cash related to the excess put value that we would pay to the holders of the notes if put to us.
These purchased call options will terminate upon the earlier of the maturity dates of the notes or
the first
day all of the notes are no longer outstanding due to a put or otherwise. The purchased
call options, which cost an aggregate $45,885,000 ($28,155,000 net of the related tax benefit),
were recorded net of tax as a reduction of shareholders’ equity through additional paid-in capital.
In a separate transaction, we sold warrants to issue shares of our Class A common stock at an
exercise price of $74.35 per share in a private transaction. If the average price of our Class A
common stock during a defined period ending on or about the respective settlement dates exceeds the
exercise price of the warrants, the warrants will be settled in shares of our Class A common stock.
Proceeds received from the issuance of the warrants totaled approximately $28,923,000 and were
recorded as an addition to shareholders’ equity through additional paid-in capital.
Other Senior Notes
Along with our wholly-owned subsidiaries, Forest City Enterprises Capital Trust I (“Trust I”) and
Forest City Enterprises Capital Trust II (“Trust II”), we filed an amended shelf registration
statement with the SEC on May 24, 2002. This shelf registration statement amended the registration
statement previously filed with the SEC in December 1997. This registration statement is intended
to provide us flexibility to raise funds from the offering of Class A common stock, preferred
stock, depositary shares and a variety of debt securities, warrants and other securities. Trust I
and Trust II have not issued securities
to date and, if issued, would represent the sole net assets of the trusts. We have $292,180,000
available under our shelf registration at January 31, 2007.
On May 19, 2003, we issued $300,000,000 of 7.625% senior notes due June 1, 2015 in a public
offering under our shelf registration statement. The proceeds from this offering (net of $8,151,000
of offering costs) were used to redeem all of the outstanding 8.5% senior notes originally due in
2008 at a redemption price equal to 104.25%, or $208,500,000. The remaining proceeds were used to
repay the balance outstanding under our previous credit facility and for general working capital
purposes. Accrued interest is payable semi-annually on December 1 and June 1. These senior notes
may be redeemed by us, at any time on or after June 1, 2008 at a redemption price of 103.813%
beginning June 1, 2008 and systematically reduced to 100% in years thereafter. However, if we
completed one or more public equity offerings prior to June 1, 2006, up to 35% of the original
principal amount of the notes may have been redeemed using all or a portion of the net proceeds
within 75 days of the completion of the public equity offering at 107.625% of the principal amount
of the notes. As there were no public equity offerings completed prior to June 1, 2006, we did not
redeem the original principal amount of any of the notes.
On
January 25, 2005, we issued $150,000,000 of 6.500% senior notes due February 1, 2017 in a public
offering under our shelf registration statement. The proceeds from this offering (net of
$4,185,000 of offering costs) were used to repay the outstanding balance under our bank revolving
credit facility and for general working capital purposes. Accrued interest is payable
semi-annually on February 1 and August 1, commencing on August 1, 2005. These senior notes may be
redeemed by us, at any time on or after February 1, 2010 at a redemption price of 103.250%
beginning February 1, 2010 and systematically reduced to 100% in the years thereafter. However, if
we complete one or more public equity offerings prior to February 1, 2008, up to 35% of the
original principal amount of the notes may be redeemed using all or a portion of the net proceeds
within 75 days of the completion of the public equity offering at 106.50% of the principal amount
of the notes.
On February 10, 2004, we issued $100,000,000 of 7.375% senior notes due February 1, 2034 in a
public offering under our shelf registration statement. The proceeds from this offering (net of
$3,808,000 of offering costs) were used to repay the outstanding term loan balance of $56,250,000
under our previous credit facility and for general working capital purposes. Accrued interest is
payable quarterly on February 1, May 1, August 1, and November 1. These senior notes may be
redeemed by us, in whole or in part, at any time on or after February 10, 2009 at a redemption
price equal to 100% of their principal amount plus accrued interest.
Our senior notes are unsecured senior obligations and rank equally with all existing and future
unsecured indebtedness; however, they are effectively subordinated to all existing and future
secured indebtedness and other liabilities of our subsidiaries to the extent of the value of the
collateral securing such other debt, including our bank revolving credit facility. The indentures
governing our senior notes contain covenants providing, among other things, limitations on
incurring additional debt and payment of dividends.
Subordinated Debt
In November 2000, we issued $20,400,000 of redevelopment bonds in a private placement. The bonds
bear a fixed interest rate of 8.25% and are due September 15, 2010. We have entered into a total
rate of return swap (“TRS”) for the benefit of these bonds that expires on September 15, 2008.
Under this TRS, we receive a rate of 8.25% and pay the Bond Market Association (“BMA”) rate plus a
spread (1.15% through September 2006 and 0.90% thereafter). Interest is payable semi-annually on
March 15 and September 15. This debt is unsecured and subordinated to the senior notes and the bank
revolving credit facility.
In May 2003, we purchased $29,000,000 of subordinate tax revenue bonds that were contemporaneously
transferred to a custodian, which in turn issued custodial receipts that represent ownership in the
bonds to unrelated third parties. We evaluated the transfer pursuant to the provisions of SFAS No.
140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities”
(“SFAS No. 140”), and have determined that the transfer does not qualify for sale accounting
treatment principally because we have guaranteed the payment of principal and interest in the
unlikely event that there is insufficient tax revenue to support the bonds when the custodial
receipts are subject to mandatory tender on December 1, 2013. As such, we are the primary
beneficiary of this VIE (see the “Variable Interest Entities” section of the MD&A) and the book
value (which approximates amortized costs) of the bonds was recorded as a collateralized borrowing
reported as senior and subordinated debt and as held-to-maturity securities reported as other
assets in the Consolidated Balance Sheets.
The following table summarizes interest incurred and paid on senior and subordinated debt.
In 2001, Stapleton Land, LLC purchased $75,000,000 in TIF bonds and $70,000,000 in revenue bonds
(for an aggregate of $145,000,000, collectively the “Bonds”) from the Park Creek Metropolitan
District (the “District”). The Bonds were immediately sold to Lehman Brothers, Inc. (“Lehman”) and
were subsequently acquired by a qualified special purpose entity (the “Trust”), which in turn
issued trust certificates to third parties. The District had a call option on the revenue bonds
that began in August 2003 and had a call option on the TIF bonds that began in August 2004. In the
event the Bonds were not removed from the Trust, Stapleton Land, LLC had the obligation to
repurchase the Bonds from the Trust. Upon removal of the Bonds from the Trust, Stapleton Land, LLC
was entitled to the difference between the interest paid on the Bonds and the cumulative interest
paid to the certificate holders less trustee fees, remarketing fees and credit enhancement fees
(the “Retained Interest”).
We assessed our transfer of the Bonds to Lehman at inception and determined that it qualified for
sale accounting treatment pursuant to the provisions of SFAS No. 140 because we did not maintain
control over the Trust and the Bonds were legally isolated from our creditors. At inception, the
Retained Interest had no determinable fair value as the cash flows were not practical to estimate
because of the uncertain nature of the tax base still under development. In accordance with SFAS
No. 140, no gain or loss was recognized on the sale of the Bonds to Lehman. As a result, the
Retained Interest was recorded at zero with all future income to be recorded under the cost
recovery method. We separately assessed the obligation to redeem the Bonds from the Trust pursuant
to the provisions of SFAS No. 140 and concluded the liability was not material. The original
principal outstanding under the securitization structure described above was $145,000,000, which
was not recorded on the Consolidated Balance Sheets.
We reassessed the fair value and adjusted the amount of the Retained Interest through OCI on a
quarterly basis. We measured our Retained Interest in the Trust at its estimated fair value based
on the present value of the expected future cash flows, which were determined based on the expected
future cash flows from the underlying Bonds and from expected changes in the rates paid to the
certificate holders discounted at market yield, which considered the related risk. The difference
between the amortized cost of the Retained Interest (approximately zero) and the fair value was
recorded, net of the related tax and minority interest, in shareholders’ equity as a change in
accumulated OCI. The quarterly fair value calculations were determined based on the application of
key assumptions determined at the time of transfer including an estimated weighted average life of
two years and a 6.50% residual cash flows discount rate.
In August 2004, the $75,000,000 TIF bonds were defeased and removed from the Trust with the
proceeds of a new $75,000,000 bond issue by DURA, and the $70,000,000 revenue bonds, which bear
interest at a rate of 8.5%, were removed from the Trust through a third party purchase. Upon
removal of the $70,000,000 revenue bonds from the Trust, the third party deposited the bonds into a
special-purpose entity (the “Entity”). As the TIF and revenue bonds were successfully removed from
the Trust, Stapleton Land, LLC recognized $25,262,000 ($13,745,000 net of tax and minority
interest) of interest income for the year ended January 31, 2005 in the Consolidated Statements of
Earnings upon receipt of the Retained Interest. Of this amount, the fair value of $22,870,000
($12,445,000 net of tax and minority interest) was recognized in OCI in previous fiscal years and
deferred until August 2004 under the cost recovery method of revenue recognition. The remaining
amount of $2,392,000 ($1,300,000 net of tax and minority interest) was earned and recognized during
the year ended January 31, 2005. Stapleton Land, LLC is not obligated to pay, nor is entitled to,
any further amounts related to this Retained Interest.
Also in August 2004, the Entity issued two types of securities, 1) Puttable Floating Option
Tax-Exempt Receipts (“P-FLOATs”), which bear interest at a short-term floating rate as determined
by the remarketing agent and 2) Residual Interest Tax-Exempt Securities Receipts (“RITES”), which
receive the residual interest from the revenue bonds after the P-FLOAT
interest and various program
fees have been paid. The P-FLOATs were sold to third parties. Stapleton Land II, LLC, a
consolidated affiliate of Stapleton Land, LLC, acquired the RITES for a nominal amount and provided
credit enhancement to the trustor of the Entity including an initial collateral contribution of
$10,000,000. During the year ended January 31, 2005, we contributed additional net collateral of
$2,094,000. We consolidated the collateralized borrowing given our obligation to absorb the
majority of the expected losses. The book value (which approximates amortized cost) of the P-FLOATs
was reported as nonrecourse mortgage debt until terminated in July 2005. As the bonds were
redeemed in July 2005, there are no balances reported for the revenue bonds or collateral at
January 31, 2007 and 2006 in the Consolidated Balance Sheets and no amounts are recorded in the
Consolidated Statement of Earnings for the year ended January 31, 2007 related to this
collateralized borrowing. For the year ended January 31, 2006, we recorded $2,670,000 of interest
income and $1,162,000 of interest expense related to this collateralized borrowing in the
Consolidated Statement of Earnings. Of the interest income amount, $2,588,000 is interest income
on the RITES and $82,000 is interest income on the collateral. For the year ended January 31,2005, we recorded $3,078,000 of interest income and $1,159,000 of interest expense related to this
collateralized borrowing in the Consolidated Statement of Earnings. Of the interest income
amount, $2,958,000 is interest income on the RITES and $120,000 is interest income on the
collateral.
On July 13, 2005, the District issued $63,000,000 Senior Limited Property Tax Supported Revenue
Refunding Bonds (“Senior Limited Bonds”), Series 2005 and $65,000,000 Senior Subordinate Limited
Property Tax Supported Revenue Refunding and Improvement Bonds (“Senior Subordinate Bonds”), Series
2005 (collectively, the “2005 Bonds”). Proceeds from the issuance of the 2005 Bonds were used to
redeem the $70,000,000 revenue bonds held by the Entity, which were then removed from our
Consolidated Balance Sheet. The Entity, in turn, redeemed the outstanding P-FLOATs. As holder
of the RITES, Stapleton Land II, LLC was entitled to the remaining capital balances of the Entity
after payment of P-FLOAT interest and other program fees. The District used additional proceeds of
$30,271,000 to repay developer advances and accrued interest to Stapleton Land, LLC. Stapleton
Land II, LLC was refunded $12,060,000 of collateral provided as credit enhancement under this
borrowing.
On July 13, 2005, Stapleton Land II, LLC entered into an agreement whereby it will receive a 1% fee
on the $65,000,000 Senior Subordinate Bonds described above in exchange for providing certain
credit enhancement. In connection with this transaction, Stapleton Land II, LLC provided
collateral of approximately $10,000,000 which is recorded as restricted cash in the Consolidated
Balance Sheets. For the year ended January 31, 2007, we recorded $1,031,000 of interest income
related to this arrangement in the Consolidated Statement of Earnings. Of the interest income
amount, $650,000 is fee interest income and $381,000 is interest income on the collateral. For the
year ended January 31, 2006, we recorded $516,000 of interest income related to this arrangement in
the Consolidated Statement of Earnings. Of the interest income amount, $362,000 is fee interest
income and $154,000 is interest income on the collateral. The counterparty to the credit
enhancement arrangement also owns the underlying Senior Subordinate Bonds and can exercise its
rights requiring payment from Stapleton Land II, LLC upon an event of default of the Senior
Subordinate Bonds, a refunding of the Senior Subordinate Bonds, or failure of Stapleton Land II,
LLC to post required collateral. The agreement is scheduled to expire on July 1, 2009. The
maximum potential amount of payments Stapleton Land II, LLC could be required to make under the
agreement is the par value of the Senior Subordinate Bonds. We do not have any rights or
obligations to acquire the $65,000,000 Senior Subordinate Bonds under this agreement. At January31, 2007, the fair value of this agreement, which is deemed to be a derivative financial
instrument, was immaterial. Subsequent changes in fair value, if any, will be marked to market
through earnings.
On August 16, 2005, the District issued $58,000,000 Junior Subordinated Limited Property Tax
Supported Revenue Bonds, Series 2005 (the “Junior Subordinated Bonds”). The Junior Subordinated
Bonds initially pay a variable rate of interest. Upon issuance, the Junior Subordinated Bonds were
purchased by a third party and the sales proceeds were deposited with a trustee pursuant to the
terms of the Series 2005 Investment Agreement. Under the terms of the Series 2005 Investment
Agreement, after March 1, 2006, the District may elect to withdraw funds from the trustee for
reimbursement for certain qualified infrastructure and interest expenditures (“Qualifying
Expenditures”). In the event that funds from the trustee are used for Qualifying Expenditures, a
corresponding amount of the Junior Subordinated Bonds converts to an 8.5% fixed rate and matures in
December 2037 (“Converted Bonds”). On August 16, 2005, Stapleton Land, LLC entered into a Forward
Delivery Placement Agreement (“FDA”) whereby Stapleton Land, LLC is entitled to and obligated to
purchase the converted fixed rate Junior Subordinated Bonds through June 2, 2008. Prior to the
incurrence of Qualifying Expenditures and the resulting Converted Bonds, Stapleton Land, LLC has no
rights or obligations relating to the Junior Subordinated Bonds. In the event the District does not
incur Qualifying Expenditures, the Junior Subordinated Bonds will mature on June 2, 2008. During
2006, the District withdrew $20,000,000 of funds from the trustee for reimbursement of certain
Qualifying Expenditures. Therefore, a corresponding amount of the Junior Subordinated Bonds became
Converted Bonds and were acquired by Stapleton Land, LLC under the terms of the FDA. Stapleton
Land, LLC immediately sold the Converted Bonds to investment banks (“Investment Banks”) and
simultaneously entered into total rate of return swaps (“TRS”) with a notional amount of
$20,000,000. We receive a fixed rate of 8.5% and pays BMA rate plus a
spread on the TRS. We determined the sale of the Converted Bonds to the Investment Banks and
simultaneous execution of the TRS did not surrender control, and therefore has been recorded as a
secured borrowing in the Consolidated Balance Sheet. We have classified the Converted Bonds as
available for sale, with unrealized holding gains and losses recorded in accumulated other
comprehensive income. The fair value of the Converted Bonds was approximately $20,000,000 at
January 31, 2007. For the year ended January 31, 2007, we recorded $508,000 of interest income and
$240,000 of interest expense related to the TRS in the Consolidated Statement of Earnings.
Other Financing Arrangements
In May 2004, a third party purchased $200,000,000 in tax increment revenue bonds issued by DURA,
with a fixed-rate coupon of 8.0% and maturity date of October 1, 2024, which were used to fund the
infrastructure costs associated with phase II of the Stapleton development project. The DURA bonds
were transferred to a trust that issued floating rate trust certificates. Stapleton Land, LLC
entered into an agreement with the third party to purchase the DURA bonds from the trust if they
are not repurchased or remarketed between June 1, 2007 and June 1, 2009. Stapleton Land, LLC will
receive a fee upon removal of the DURA bonds from the trust equal to the 8.0% coupon rate, less the
BMA index (fixed at 2.85% through June 1, 2007), plus 40 basis points, less all fees and expenses
due to the third party (collectively, the “Fee”).
We have concluded that the trust described above is considered a qualified special purpose entity
pursuant to the provisions of SFAS No. 140 and thus is excluded from the scope of the FIN No.
46(R). As a result, the DURA bonds and the activity of the trust have not been recorded in the
consolidated financial statements. The purchase obligation and the Fee have been accounted for as a
derivative with changes in fair value recorded through earnings.
The fair market value of the purchase obligation and the Fee is determined based on the present
value of the estimated amount of future cash flows considering possible variations in the amount
and/or timing. The fair value of $15,090,000 at January 31, 2007 and $7,244,000 at January 31,2006 is recorded in other assets in the Consolidated Balance Sheets. For the years ended January31, 2007, 2006 and 2005 we reported interest income of $7,847,000, $6,431,000 and $813,000,
respectively, related to the Fee in the Consolidated Statements of Earnings.
Also in May 2004, Stapleton Land, LLC entered into a TRS and an interest rate swap both with
notional amounts of $75,000,000. Stapleton Land, LLC receives a rate of 6.3% and pays BMA plus 60
basis points on the TRS (Stapleton Land, LLC paid BMA plus 160 basis points for the first 6 months
under this agreement). On the interest rate swap, Stapleton Land, LLC pays a rate of 2.85% and
receives BMA. Stapleton Land, LLC does not hold the underlying borrowings on the TRS. The change
in the fair value of the TRS is marked to market through earnings. The fair value of the TRS was
$255,000 and $1,100,000 at January 31, 2007 and 2006, respectively.
Stapleton Land, LLC has committed to fund $24,500,000 to the Park Creek Metropolitan District to be
used for certain infrastructure projects. The first $4,500,000 is due in August 2007. The
remaining balance is due no later than May 2009.
Mortgage Financings
Our primary capital strategy seeks to isolate the financial risk at the property level to maximize
returns and reduce risk on and of our equity capital. Our mortgage debt is nonrecourse, including
our construction loans. We operate as a C-corporation and retain substantially all of our
internally generated cash flows. We recycle this cash flow, together with refinancing and property
sale proceeds to fund new development and acquisitions that drive favorable returns for our
shareholders. This strategy provides us with the necessary liquidity to take advantage of
investment opportunities.
We use taxable and tax-exempt nonrecourse debt for our real estate projects. For those operating
projects financed with taxable debt, we generally seek long-term, fixed-rate financing for those
real estate project loans which mature within the next 12 months, as well as those real estate
projects which are projected to open and achieve stabilized operations during that same time frame.
For real estate projects financed with tax-exempt debt, we generally utilize variable-rate debt.
For construction loans, we generally pursue variable-rate financings with maturities ranging from
two to five years.
We are actively working to extend the maturities and/or refinance the nonrecourse debt that is
coming due in 2007 and 2008. During the year ended January 31, 2007, we completed the following
financings:
At January 31, 2007, the composition of nonrecourse mortgage debt was as follows:
Operating
Development
and Land
Total
Weighted
Properties
Projects
Total
Average Rate
(dollars in thousands)
Fixed (2)
$
3,694,323
$
36,044
$
3,730,367
6.17
%
Variable(1)
Taxable
410,987
459,144
870,131
6.84
%
Tax-Exempt
647,413
90,461
737,874
4.52
%
$
4,752,723
$
585,649
$
5,338,372
6.05
%
Commitment from lenders
$
1,123,993
(1)
Taxable variable-rate debt of $870,131 and a portion of tax-exempt variable-rate
debt of $737,874 as of January 31, 2007 is protected with swaps and caps described
below.
(2)
Fixed-rate debt of $3,730,367 as of January 31, 2007, includes $95,065 of
Urban Development Action Grants (“UDAGs”) at 2.07%.
To mitigate short-term variable-interest rate risk, we have purchased interest rate hedges for
our mortgage debt portfolio as follows:
Taxable (Priced off of London Interbank Offered Rate (“LIBOR”) Index)
Caps
Swaps (1)
Period Covered
Amount
Average
Base Rate
Amount
Average
Base Rate
(dollars in thousands)
02/01/07-02/01/08(2)
$
977,609
6.06
%
$
350,878
4.72
%
02/01/08-02/01/09
1,056,089
7.19
49,690
4.54
02/01/09-02/01/10
91,354
5.20
48,432
4.54
02/01/10-02/01/11
73,500
5.00
47,081
4.54
(1)
Excludes the 10-year forward swaps discussed below.
(2)
These LIBOR-based hedges as of February 1, 2007 protect the debt currently
outstanding as well as the anticipated increase in debt outstanding for projects under
development or anticipated to be under development during the year ending January 31,2008.
Tax-Exempt (Priced off of Bond Municipal Association (“BMA”) Index)
Caps
Period Covered
Amount
Average
Base Rate
(dollars in thousands)
02/01/07-02/01/08
$
266,558
5.83
%
02/01/08-02/01/09
208,510
5.92
02/01/09-02/01/10
147,200
6.00
The tax-exempt caps expressed above mainly represent protection that was purchased in
conjunction with lender hedging requirements that require the borrower to protect against
significant fluctuations in interest rates. Outside of such requirements, we generally do not
hedge tax-exempt debt because, since 1990, the base rate of this type of financing has averaged
3.07% and has never exceeded 7.90%.
The interest rate hedges summarized in the tables above were purchased to mitigate variable
interest rate risk. We currently intend to convert a significant portion of our committed
variable-rate debt to fixed-rate debt. In order to protect against significant increases in
long-term interest rates, we entered into a number of 10-year forward swaps. During 2006, we
executed a notional amount of $883,045,000 of 10-year forward swaps at an average rate of 5.72% to
protect us against interest rate fluctuations on forecasted financings on fully consolidated
properties that are anticipated to occur over the next three years. At the time we secure and lock
an interest rate on an anticipated financing, we intend to simultaneously terminate the forward
swaps attributed to that financing. To the extent effective, the receipt or payment of cash at
termination will be recorded in other accumulated comprehensive income and will be amortized as
either an increase or decrease to interest expense in the same periods as the interest payments on
the financing. During 2006, a notional amount of $92,500,000 of the forward swaps included in the
figure above was terminated in conjunction with the locking of the interest rate on the financing.
During 2006, we also executed $270,000,000 of 10-year forward swaps at an average rate of 5.87% to
hedge the interest rate risk associated with our proportionate share of nonrecourse mortgage debt
for two properties accounted for under the equity method of accounting. Under the provisions of
SFAS No. 133, we cannot designate these swaps as cash flow hedges because
they relate to unconsolidated properties. Therefore, the change in the fair value of these swaps
must be marked to market through earnings on a quarterly basis. During 2006, $150,000,000 of the
forward swaps included in the figure above were terminated in conjunction with the locking of the
interest rate on the financing.
For the year ended January 31, 2007, we recorded $9,386,000 of interest expense related to our
10-year forward swaps in our Consolidated Statements of Earnings, which represents the change in
fair value of the swaps that do not qualify for hedge accounting.
Including the effect of the protection provided by the interest rate swaps, caps and long-term
contracts in place as of January 31, 2007, a 100 basis point increase in taxable interest rates
(including properties accounted for under the equity method and corporate debt) would not
materially increase the annual pre-tax interest cost for the next 12 months of our variable-rate
debt at January 31, 2007. Although tax-exempt rates generally move in an amount that is smaller
than corresponding changes in taxable interest rates, a 100 basis point increase in tax-exempt
rates (including properties accounted for under the equity method and corporate debt) would
increase the annual pre-tax interest cost for the next 12 months of our tax-exempt variable-rate
debt by approximately $9,230,000 at January 31, 2007. The analysis above includes a portion of our
taxable and tax-exempt variable-rate debt related to construction loans for which the interest
expense is capitalized.
From time to time, we and/or certain of our joint ventures (the “Joint Ventures”) enter into TRS on
various tax-exempt fixed-rate borrowings generally held by us and/or within the Joint Ventures. The
TRS convert these borrowings from a fixed rate to a variable rate and provide an efficient
financing product to lower the cost of capital. In exchange for a fixed rate, the TRS require that
we and/or the Joint Ventures pay a variable rate, generally equivalent to the BMA rate.
Additionally, we and/or the Joint Ventures have guaranteed the principal balance of the underlying
borrowing. Any fluctuation in the value of the guarantee would be offset by the fluctuation in the
value of the underlying borrowing, resulting in no financial impact to us or the Joint Ventures.
At January 31, 2007, the aggregate notional amount of TRS in which we and the Joint Ventures have
an interest is $370,453,000. The fair value of such contracts is immaterial at January 31, 2007
and 2006. We believe the economic return and related risk associated with a TRS is generally
comparable to that of nonrecourse variable-rate mortgage debt.
Cash Flows
Operating Activities
Net cash
provided by operating activities was $309,879,000, $356,410,000 and $366,361,000 for the
years ended January 31, 2007, 2006 and 2005, respectively. The decrease in net cash provided by
operating activities for the year ended January 31, 2007 compared to the year ended January 31,2006 of $46,531,000 and for the year ended January 31, 2006 compared to the year ended January 31,2005 of $9,951,000 are the result of the following:
Net cash
used in investing activities was $821,168,000, $912,795,000 and $836,626,000 for the years
ended January 31, 2007, 2006 and 2005, respectively. The net cash used in investing activities
consisted of the following:
Change in investments in and advances to affiliates — (Investment in) or return of investment:
Dispositions:
Midtown Plaza, an unconsolidated retail project in Parma, Ohio
$
6,944
$
—
$
—
Victor Village, an unconsolidated land development project in Victorville, California
3,604
—
—
Showcase, an unconsolidated development project in Las Vegas, Nevada
—
13,623
—
Flower Park Plaza, an unconsolidated apartment complex in Santa Ana, California
—
7,337
—
Colony Place, an unconsolidated apartment complex in Fort Myers, Florida
—
6,747
—
Chapel Hill Mall, an unconsolidated commercial property in Akron, Ohio
—
—
13,355
Land Development:
Sweetwater Ranch, an unconsolidated land development project in Austin, Texas
21,081
(32
)
(11,369
)
Mesa Del Sol, an unconsolidated land development project in Covington, New Mexico
(14,248
)
(3,578
)
(692
)
Central Station, an unconsolidated land development project in Chicago, Illinois
(3,905
)
(772
)
14,672
Grass Farms, an unconsolidated land development project in Manatee City, Florida
—
12,108
(1,590
)
Residential Projects:
Classic Residence by Hyatt, primarily refinancing proceeds at unconsolidated apartment
complexes in Teaneck, New Jersey and Chevy Chase, Maryland
18,331
—
—
Mercury, an unconsolidated condominium development project in Los Angeles, California
(6,226
)
751
—
Uptown Apartments, an unconsolidated apartment complex in Oakland, California
(2,352
)
—
—
1100 Wilshire Condominiums, an unconsolidated condominium development project in Los
Angeles, California
(1,718
)
572
(9,432
)
Enclave, return of advance on behalf of partner in a consolidated apartment complex in
San Jose, California
—
10,724
—
Clarkwood Apartments, an unconsolidated apartment complex in Warrensville Heights, Ohio
—
3,790
—
Granada Gardens, an unconsolidated apartment complex in Warrensville Heights, Ohio
—
2,410
—
Metropolitan Lofts, an unconsolidated apartment complex in Los Angeles, California
—
(4,276
)
—
On behalf of partner in residential supported-living development projects
—
—
(10,057
)
New York City Projects:
Sports arena complex and related development projects in Brooklyn, New York
(23,345
)
(10,658
)
(23,166
)
East River Plaza, an unconsolidated retail development project in Manhattan, New York
(15,279
)
283
(22,331
)
Unconsolidated land component associated with Ridge Hill, a commercial mixed-use project in
Yonkers, New York
—
(8,930
)
—
Acquisition of the Nets, a National Basketball Association Franchise
—
—
(50,250
)
Commercial Projects:
San Francisco Centre — Emporium, primarily refinancing proceeds at an unconsolidated
development and acquisition of a retail project in San Francisco, California
61,514
(7,050
)
(25,338
)
Metreon, acquisition of an unconsolidated retail project in San Francisco, California
(20,836
)
—
—
Bulletin Building, acquisition of an unconsolidated office building in San Francisco,
California
(13,722
)
—
—
Summit at Lehigh Valley, an unconsolidated retail development project in Bethlehem
Township, Pennsylvania
(6,253
)
—
—
The Village at Gulfstream Park, an unconsolidated development project in Hallendale, Florida
(5,660
)
—
—
Advent Solar, an unconsolidated office building in Albuquerque, New Mexico
(2,537
)
—
—
Golden Gate, an unconsolidated retail development project in Mayfield Heights, Ohio
—
5,700
—
Clark Building, an unconsolidated retail development project in Cambridge, Massachusetts
—
4,400
—
Victoria Gardens, a commercial development project in Rancho Cucamonga, California
—
—
17,317
Other net (investments in) returns of investment of equity method investments and other
advances to affiliates
Net cash provided by the financing activities was $510,768,000, $534,627,000 and $615,076,000 in
the years ended January 31, 2007, 2006 and 2005, respectively.
Net cash provided by financing activities reflected the following:
On November 8, 2006, we issued Class A Common Units (“Units”) in a newly-formed jointly-owned
limited liability company (the “Joint LLC”) to Bruce C. Ratner (“Mr. Ratner”) and certain
individuals and entities affiliated with Mr. Ratner (collectively with Mr. Ratner the “Ratner
Entities”) in exchange for their interests in a total of 30 retail, office and residential
operating properties, and certain service companies, all in the greater New York City metropolitan
area. The Joint LLC will be controlled and consolidated by us, subject to limited rights of the
Ratner Entities to vote on certain matters affecting their interests. We have accounted for the
issuance of the Units in exchange for the minority interests under the purchase method of
accounting. The majority of the combined interests was and will continue to be consolidated into
our financial statements. Mr. Ratner will continue to be President and Chief Executive Officer of
FCRC, which is one of our wholly owned subsidiaries at January 31, 2007. Mr. Ratner was also
appointed as one of our Executive Vice Presidents and as a Class B Member of our Board of
Directors.
Upon issuance of the Units, the Ratner Entities contributed their ownership interests in the 30
operating properties, the service companies and participation rights in all future developments,
except seven identified development opportunities, to the Joint LLC. After a one-year lock-up
period, the Units may be exchanged for an equal number of shares of our Class A common stock or,
solely at our option, cash based on the value of the stock at the time of conversion. We have no
rights to redeem or repurchase the Units. For the first five years only, the Units that have not
been exchanged are entitled to their proportionate share of an annual preferred payment of
$2,500,000 plus an amount equal to the dividends paid on the same number of shares of our common
stock. After five years, the Units that have not been exchanged are entitled to a payment equal to
the dividends paid on an equivalent number of shares of our common stock. At January 31, 2007, we
have recorded approximately $898,000 related to one quarter’s share of the annual preferred payment
which is classified as minority interest expense on our consolidated statement of earnings. In
addition, we will indemnify Mr. Ratner and certain members of his family for tax liabilities they
may incur as a result of the sale of certain of these properties during the 12-year period
following the closing of the transaction.
We have also agreed to terms and conditions under which we will value and possibly increase our
ownership in seven existing development projects upon stabilization, as defined. Prior to
stabilization, each of these development properties will remain jointly owned under its existing
structure with Mr. Ratner. Upon stabilization, each of these properties will be valued, either by
negotiation, through arbitration or by obtaining a bona fide third-party offer. Once the value of
the property has been determined, we may, in our sole discretion, cause the property either to be
contributed to the Joint LLC in exchange for additional Units, sold to the Joint LLC for cash, sold
to a third party or remain jointly owned by us and Mr. Ratner.
The total consideration we exchanged for the minority interests, including associated expenses and
the book value of previous advances made to Mr. Ratner totaling $28,655,000, was approximately
$273,600,000. Mr. Ratner received cash of approximately $46,300,000 and was issued 3,894,232 Units
in the Joint LLC described above. The Units were valued based on the average of the closing prices
of our Class A common stock over the 3-day period before and after the announcement of the
transaction, giving consideration to the one-year lock-up period and the annual preferred payment
of $2,500,000 referred to above. The value of Mr. Ratner’s Class A Common Units, approximately
$198,645,000, is classified as minority interest on our consolidated balance sheet. The issuance
of the Units did not have a material impact on the current or prior period consolidated statements
of earnings.
The following table summarizes the allocation of the total consideration exchanged for the minority
interests. The amounts reported below are based on our preliminary allocation and certain
estimates. As a result, the allocation is preliminary and subject to change. We will finalize the
allocation during 2007.
Allocation of
Total
Consideration at
Date of Exchange
(in thousands)
Completed rental properties (1)
$
229,000
Notes and accounts receivable, net (2)
11,000
Investments in and advances to affiliates (3)
11,300
Other assets (4)
59,700
Mortgage debt, nonrecourse (5)
(12,000
)
Accounts payable and accrued expenses (6)
(25,400
)
$
273,600
Represents allocation for:
(1)
Land, building, site improvements, and tenant improvements associated with the
underlying real estate
(2)
Above market leases
(3)
Equity method property
(4)
In-place leases, tenant relationships, and leasing
commissions
We have adopted the provisions of FIN No. 45 “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”). We believe
the risk of payment under these guarantees as described below is remote and, to date, no payments
have been made under these guarantees.
As of January 31, 2007, we have a guaranteed loan of $1,400,000 relating to our share of a bond
issue made by the Village of Woodridge, relating to a Land Development Group project in suburban
Chicago, Illinois. This guarantee was entered into prior to January 31, 2003, and therefore, has
not been recorded in our Consolidated Financial Statements at January 31, 2007, pursuant to the
provisions of FIN No. 45. This bond issue guarantee terminates April 30, 2015, unless the bonds are
paid sooner, and is limited to $500,000 in any one year. We also had outstanding letters of credit
of $72,324,000 as of January 31, 2007. The maximum potential amount of future payments on the
guaranteed loans and letters of credit we could be required to make are the total amounts noted
above.
As a general partner for certain limited partnerships, we guaranteed the funding of operating
deficits of newly-opened apartment projects for an average of five years. These guarantees were
entered into prior to January 31, 2003, and therefore, have not been recorded in our consolidated
financial statements at January 31, 2007, pursuant to the provisions of FIN No. 45. At January 31,2007, the maximum potential amount of future payments on these operating deficit guarantees we
could be required to make was approximately $2,000,000. We would seek to recover any amounts paid
through refinancing or sales proceeds of the apartment 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. At January 31, 2007, the
maximum potential payment under these tax indemnity guarantees was approximately $68,535,000. We
believe that all necessary requirements for qualifications for such tax credits have been and will
continue to be met and that our investment partners will be able to receive expense allocations
associated with the properties. We have obtained legal opinions from nationally recognized law
firms supporting the validity of the tax credits. We do not expect to make any payments under these
guarantees.
Our mortgage loans are nonrecourse, however in some cases lenders carve out certain items from the
nonrecourse provisions. These carve-out items enable the lenders to seek recourse if we or the
joint venture commit fraud, voluntarily file for bankruptcy, intentionally misapply funds, transfer
title without lender consent, or intentionally misrepresent facts. We have also provided certain
environmental guarantees. Under these environmental remediation guarantees, we must remediate any
hazardous materials brought onto the property in violation of environmental laws. The maximum
potential amount of future payments we 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, we believe any liability would not exceed our partners’ share of the outstanding
principal balance of the loans in which these carve-outs and environmental guarantees have been
made. At January 31, 2007, the outstanding balance of the partners’ share of these loans was
approximately $461,440,000. We believe the risk of payment on the carve-out guarantees is
mitigated in most cases by the fact we manage the property, and in the event our partner did
violate one of the carve-out items, we would seek recovery from our partner for any payments we
would make. Additionally, we further mitigate our exposure through environmental insurance and
insurance coverage for items such as fraud.
We have guaranteed the obligations of Forest City Rental Properties Corporation, or FCRPC, under
the FCRPC credit agreement, dated as of March 22, 2004, as amended, among FCRPC, the banks named
therein, KeyBank National Association, as administrative agent, and National City Bank, as
syndication agent. This guaranty imposes a number of restrictive covenants on us, including a
prohibition on certain consolidations and mergers and limitations on the amount of debt, guarantees
and property liens that we may incur. The guaranty also requires us to maintain a specified
minimum cash flow coverage ratio, consolidated shareholders’ equity and Earnings Before
Depreciation, Amortization and Deferred Taxes, or EBDT. We were in compliance with the covenants
under the guaranty at January 31, 2007.
We monitor our properties for the presence of hazardous or toxic substances. Other than those
environmental matters identified during the acquisition of a site (which are generally remediated
prior to the commencement of development), we are not aware of any environmental liability with
respect to our operating properties that would have a material adverse effect on our financial
position, cash flows, or results of operations. However, there can be no assurance that such a
material environmental liability does not exist. The existence of any such material environmental
liability could have an adverse effect on our results of operations and cash flow. We carry
environmental insurance and believe that the policy terms, conditions, limits and deductibles are
adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such
coverage and current industry practice.
We customarily guarantee lien-free completion of projects under construction. Upon completion, the
guarantees are released. Additionally, we also provide lien-free completion guarantees on the
infrastructure on the land we develop and is later sold to customers or is held for master-planned
communities or mixed-use projects. At January 31, 2007, we had provided the following completion
guarantees:
Total
External
Outstanding
Total
Percent
Funding
Loan
Costs
Completed
Sources
Balance
(dollars in thousands)
Projects under construction
$
4,008,894
46
%
$
3,182,812
$
1,229,177
Land
$
725,770
72
%
$
646,853
$
122,059
Our subsidiaries have been successful in consistently delivering lien-free completion of
construction and land projects, without calling our guarantees of completion.
We are also involved in certain claims and litigation related to our 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 our
financial condition, results of operations or cash flows.
On August 16, 2004, we purchased an ownership interest in the NBA franchise known as the Nets that
is reported on the equity method of accounting. Although we have an ownership interest of
approximately 21% in the Nets, we currently recognized approximately 17%, 31% and 38% of the net
loss for the years ended January 31, 2007, 2006 and 2005, respectively, because profits and losses
are allocated to each member based on an analysis of the respective member’s claim on the net book
equity assuming a liquidation at book value at the end of the accounting period without regard to
unrealized appreciation (if any) in the fair value of the Nets. In connection with the purchase of
the franchise, we and certain of our partners have provided an indemnity guarantee to the NBA for
any losses arising from the transaction, including the potential relocation of the team. Our
indemnity is limited to $100,000,000 and is effective as long as we own an interest in the team.
The indemnification provisions are standard provisions that are required by the NBA. We have
insurance coverage of approximately $100,000,000 in connection with such indemnity. We evaluated
the indemnity guarantee in accordance with FIN No. 45 and determined that the fair value for our
liability for our obligations under the guarantee was not material.
Certain of our ground leases include provisions requiring us to indemnify the ground lessor against
claims or damages occurring on or about the leased property during the term of the ground lease.
These indemnities generally were entered into prior to January 31, 2003, and therefore, have not
been recorded in our consolidated financial statements at January 31, 2007 in accordance with FIN
No. 45. The maximum potential amount of future payments we could be required to make is limited to
the actual losses suffered. We mitigate our exposure to loss related to these indemnities through
insurance coverage.
We are party to an easement agreement under which we have agreed to indemnify a third party for any
claims or damages arising from the use of the easement area of one of our development projects. We
have also entered into an environmental indemnity at one of our development projects whereby we
agree to indemnify a third party for the cost of remediating any environmental condition. The
maximum potential amount of future payments we could be required to make is limited to the actual
losses suffered or actual remediation costs incurred. We mitigate our exposure to loss related to
the easement agreement and environmental indemnity through insurance coverage.
We are party to an agreement whereby we have issued a $40,000,000 guarantee in connection with
certain environmental work at a mixed-use development project in Brooklyn, New York. As stipulated
in the agreement, the guaranty expires at some point in time between six and nine years after
completion of the investigative work, which occurred on July 16, 2006. We have recorded a
liability of $2,850,000 related to this agreement for the year ended January 31, 2007, which is
included in accounts payable and accrued expenses in the Consolidated Balance Sheets. We mitigate
our exposure to loss related to this agreement through an environmental insurance policy.
Stapleton Land, LLC has committed to fund $24,500,000 to the Park Creek Metropolitan District to be
used for certain infrastructure projects. The first $4,500,000 is due in August 2007. The
remaining balance is due no later than May 2009.
CONTRACTUAL OBLIGATIONS AND OFF BALANCE SHEET ARRANGEMENTS
As of January 31, 2007, we were subject to certain contractual payment obligations, some of which
are off balance sheet as described in the table below. Refer to the “Financing Arrangements”
section of the MD&A for information related to certain off balance sheet arrangements related to
Stapleton that are not included in the table below.
Payments Due by Period
January 31,
Total
2008
2009
2010
2011
2012
Thereafter
(in thousands)
Long-Term Debt:
Nonrecourse mortgage debt (4)
$
5,338,372
$
801,879
$
469,426
$
585,759
$
287,082
$
378,202
$
2,816,024
Share of nonrecourse mortgage debt of
unconsolidated investments
1,308,209
202,549
114,126
182,735
37,171
37,611
734,017
Notes payable
96,127
80,214
10,903
289
96
102
4,523
Share of notes payable of unconsolidated
investments
These amounts primarily represent obligations at 100% to be paid under various player and
executive contracts. The Company has an effective ownership interest of approximately 21% in
the Nets for the year ended January 31, 2007. The timing of these obligations can be
accelerated or deferred due to player retirements, trades and renegotiation.
(2)
These amounts represent funds that we are legally obligated to pay under various service
contracts, employment contracts and licenses over the next several years. These contracts are
typically greater than one year and either do not contain a cancellation clause or cannot be
terminated without substantial penalty. We have several service contracts with vendors related
to our property management including maintenance, landscaping, security, phone service, etc.
In addition, we have other service contacts that we enter into during our normal course of
business which extend beyond one year and are based on usage including snow plowing, answering
services, copier maintenance and cycle painting. As we are unable to predict the usage
variables, these contracts have been excluded from our summary of contractual obligations at
January 31, 2007.
(3)
Refer to Item 7A – Quantitative and Qualitative Disclosures About Market Risk.
(4)
We have a substantial amount of non-recourse mortgage debt, the details of which are further
described within the Interest Rate Exposure section of this MD&A. We are contractually
obligated to pay the interest and principal when due on these mortgages. Because we utilize
mortgage debt as one of our primary sources of capital, the balances and the terms of the
mortgages and therefore the estimate of future contractual obligations are subject to frequent
changes due to property dispositions, mortgage refinancings, changes in variable interest
rates and new mortgage debt in connection with property additions. We believe that the
information contained within the MD&A provides reasonable information to assist an investor in
estimating the future interest obligations related to the non-recourse mortgage debt reflected
on our Consolidated Balance Sheets.
STOCK SPLIT
On June 21, 2005, the Board of Directors declared a two-for-one stock split of our outstanding
Class A and Class B common stock effective July 11, 2005 to shareholders of record on June 27,2005. The stock split is given retroactive effect to the beginning of the earliest period
presented in the accompanying Consolidated Balance Sheets and Consolidated Statements of
Shareholders’ Equity by transferring the par value of the additional shares issued from the
additional paid-in-capital account to the common stock accounts. All share and per share data
included in this annual report have been restated to reflect the stock split.
Since this dividend was declared after January 31, 2007, it is not reflected in the
consolidated financial statements.
INFLATION
Substantially all of our long-term leases contain provisions designed to mitigate the adverse
impact of inflation. Such provisions include clauses enabling us to receive additional rental
income from escalation clauses, which generally increase rental rates during the terms of the
leases and/or percentage rentals based on tenants’ gross sales. Such escalations are determined by
negotiation, increases in the consumer price index or similar inflation indices. In addition, we
seek increased rents upon renewal at market rates for our short-term leases. Most of our leases
require the tenants to pay a share of operating expenses, including common area maintenance, real
estate taxes, insurance and utilities, thereby reducing our exposure to increases in costs and
operating expenses resulting from inflation.
LEGAL PROCEEDINGS
We are involved in various claims and lawsuits incidental to our business, and management and legal
counsel believe that these claims and lawsuits will not have a material adverse effect on our
consolidated financial statements.
NEW ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159 “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits
a company to irrevocably elect fair value as the initial and subsequent measurement attribute for
certain financial assets and liabilities, with changes in fair value recognized as they occur.
SFAS No. 159 permits the fair value option on an instrument by instrument basis at initial
recognition of an asset or liability or upon an event that gives rise to a new basis of accounting
for that instrument. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
We are currently assessing the impact SFAS No. 159 will have on our consolidated financial
statements.
In December 2006, the FASB issued FASB Staff Position (“FSP”) EITF No. 00-19-2, “Accounting for
Registration Payment Arrangements” (“EITF No. 00-19-2”). This FSP specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, “Accounting for Contingencies.” EITF No. 00-19-2 is effective for fiscal years
beginning after December 15, 2006. The adoption of EITF No. 00-19-2 did not have a material impact
on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about the use of fair value
measurements. SFAS No. 157 does not require new fair value measurements, but applies to accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 is not expected to
have a material impact on our consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108 “Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB No. 108”). SAB No. 108 provides interpretative guidance on how the effects of
uncorrected prior year misstatements should be considered when quantifying current year
misstatements for the purpose of a materiality assessment. SAB No. 108 requires registrants to
quantify financial statement misstatements using both a balance sheet approach and an income
statement approach and to
evaluate whether either approach results in quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. SAB No. 108 is effective for
fiscal years ending after November 15, 2006. The adoption of SAB No. 108 did not have any impact
on our consolidated financial statements.
On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 prescribes a
comprehensive model for how a company should recognize, measure, present and disclose in its
financial statements uncertain tax positions that a company has taken or expects to take on a tax
return (including a decision whether to file or not to file a return in a particular jurisdiction).
Under FIN No. 48, the financial statements will reflect expected future tax consequences of such
positions presuming the taxing authorities’ full knowledge of the position and all relevant facts,
but without considering time values. FIN No. 48 also revises disclosure requirements and
introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits. FIN No.
48 is effective for fiscal years beginning after December 15, 2006. We will adopt FIN No. 48 on
February 1, 2007. We are currently assessing the impact FIN No. 48 will have on our consolidated
financial statements.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an
Amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 requires separate recognition
of a servicing asset and a servicing liability each time an entity undertakes an obligation to
service a financial asset by entering into a servicing contract. This statement also requires that
all separately recognized servicing assets and liabilities be initially measured at fair value and
subsequently measured at fair value at the end of each reporting period. This statement is
effective in fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156 did not
have a material impact on our consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
Instruments — an Amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 (i)
permits fair value remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133, (iii) establishes a
requirement to evaluate interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives and (v) amends SFAS No. 140 to eliminate the prohibition
on a qualifying special-purpose entity from holding a derivative financial instrument that pertains
to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is
effective for all financial instruments acquired or issued in fiscal years beginning after
September 15, 2006. The adoption of SFAS No. 155 did not have a material impact on our consolidated
financial statements.
VARIABLE INTEREST ENTITIES
In January 2003, FIN No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46”), was
issued. In December 2003, the FASB published a revision of the interpretation (“FIN No. 46 (R)”) to
clarify some of the provisions of FIN No. 46 and to exempt certain entities from its requirements.
The objective of this interpretation is to provide guidance on how to identify a 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 a
VIE consolidates the entity if the company’s interest is such that the company will absorb a
majority of the VIE’s expected losses and/or receive a majority of the VIE’s expected residual
returns, if they occur. FIN No. 46 (R) also requires additional disclosures by primary
beneficiaries and other significant variable interest holders.
We implemented FIN No. 46 (R) on February 1, 2004. Previously, we adopted the consolidation
requirements for VIEs created after January 31, 2003, and the disclosure provisions of the
interpretation that were effective upon issuance. As a result, we determined that we are the
primary beneficiary of 25 previously unconsolidated VIEs representing 14 properties (19 VIEs
representing 8 properties in Residential Group, 5 VIEs/properties in Commercial Group, and 1
VIE/property in Land Development Group). Of these 25 VIEs, 14 VIEs representing 13 properties (9
VIEs representing 8 properties in Residential Group, 4 VIEs/properties in Commercial Group, and 1
VIE/property in Land Development Group) that were previously accounted for using the equity method
of accounting have been fully consolidated. The remaining 11 VIEs representing 1 property (10 VIEs
in Residential Group and 1 VIE/property in Commercial Group) that were previously accounted for
using the cost method of accounting have also been fully consolidated.
In addition, 5 properties in the Residential Group, which were determined to be VIEs, have been
deconsolidated because we are not considered the primary beneficiary of these properties. Although
we are an equity investor in these properties, we lack certain decision-making authority.
Specifically, these properties are part of government sponsored housing programs that are
administered by the U.S. Department of Housing and Urban Development (“HUD”). We determined
through a review of the contractual agreements for these government-sponsored programs that the
decision-making rights of HUD, a non-equity investor, are restrictive rights that have a
significant impact on these 5 properties. We determined that HUD is the primary
beneficiary of these VIEs because it is most closely associated with the VIEs. The VIEs’
activities include providing affordable housing for those individuals that qualify as low-income
individuals, which is also HUD’s primary goal, mission, or purpose. Consistent with the provisions
of FIN No. 46 (R), we do not consider the activities of these VIEs significant as they only have a
de minimus effect on all the principal captions in the Consolidated Balance Sheet.
For the year ended January 31, 2005, we recorded a charge of $18,628,000 ($11,261,000 net of tax)
for the cumulative effect of change in accounting principle in accordance with FIN No. 46 (R),
which resulted in a reduction of net earnings. This charge consisted primarily of our share of
accumulated depreciation and amortization expense of the newly-consolidated VIEs that were
previously accounted for on the cost method.
Upon implementation of FIN No. 46 (R) on February 1, 2004, we determined that we held variable
interests in 39 other VIEs representing 39 properties (38 in Residential Group and 1 in Land
Development Group) for which we are not the primary beneficiary. Of the 38 Residential entities, 5
that were previously consolidated have been subsequently deconsolidated as disclosed above in
accordance with the provisions of FIN No. 46 (R). We are involved with these unconsolidated VIEs
as an equity holder, lender, management agent, or through other contractual relationships. The
maximum exposure to loss as a result of our involvement with these unconsolidated VIEs was limited
to our recorded investments in those VIEs totaling approximately $25,000,000 at February 1, 2004,
which are recorded as investments in and advances to affiliates. In addition, we have various VIEs
that were previously consolidated that remain consolidated under FIN No. 46 (R).
As of January 31, 2007, we determined that we are the primary beneficiary of 33 VIEs representing
19 properties (19 VIEs representing 8 properties in Residential Group, 12 VIEs representing 9
properties in Commercial Group, and 2 VIEs/properties in Land Development Group). As of January31, 2007, we held variable interests in 44 VIEs for which we are not the primary beneficiary. The
maximum exposure to loss as a result of our involvement with these unconsolidated VIEs is limited
to our recorded investments in those VIEs totaling approximately $67,000,000 at January 31, 2007.
In addition, we have various VIEs that were previously consolidated that remain consolidated under
FIN No. 46 (R). These VIEs consist of joint ventures that are engaged, directly or indirectly, in
the ownership, development and management of office buildings, regional malls, specialty retail
centers, apartment communities, military housing, supported-living apartments and land development.
The total assets, nonrecourse mortgage debt, total liabilities and minority interest of VIEs
consolidated due to the implementation of FIN No. 46 (R) for which we are the primary beneficiary
(net of the 5 deconsolidated properties) are as follows:
Total liabilities (including nonrecourse mortgage debt)
$
918,000
$
900,000
Minority interest
$
42,000
$
40,000
In addition to the VIEs described above, we have also determined that we are the primary
beneficiary of a VIE which holds collateralized borrowings of $29,000,000 (see the “Senior and
Subordinated Debt” section of the MD&A) as of January 31, 2007.
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
This Annual Report on 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 in Item 1A. of this Form 10-K and other factors that might cause
differences, some of which could be material, include, but are not limited 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, risks associated
with an investment in a professional sports franchise, the rate revenue increases versus the rate
of expense increases, as well as other risks listed from time to time in the Company’s reports
filed with the United States 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our primary market risk exposure is interest rate risk. At January 31, 2007, our outstanding
variable-rate debt portfolio consisted of $870,131,000 of taxable debt and $758,274,000 of
tax-exempt variable-rate debt (which includes $20,400,000 of subordinated debt). Upon opening and
achieving stabilized operations, we generally pursue long-term fixed-rate nonrecourse financing for
our 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, we have purchased interest rate hedges for our
variable-rate debt as follows:
Taxable (Priced off of London Interbank Offered Rate (“LIBOR”) Index)
Caps
Swaps (1)
Average
Average
Period Covered
Amount
Base Rate
Amount
Base Rate
(dollars in thousands)
02/01/07-02/01/08 (2)
$
977,609
6.06
%
$
350,878
4.72
%
02/01/08-02/01/09
1,056,089
7.19
49,690
4.54
02/01/09-02/01/10
91,354
5.20
48,432
4.54
02/01/10-02/01/11
73,500
5.00
47,081
4.54
(1)
Excludes the 10-year forward swaps discussed below.
(2)
These LIBOR-based hedges as of February 1, 2007 protect the debt currently
outstanding as well as the anticipated increase in debt outstanding for projects under
development or anticipated to be under development during the year ending January 31,2008.
Tax-Exempt (Priced off of Bond Municipal Association (“BMA”) Index)
Caps
Average
Amount
Base Rate
(dollars in thousands)
Period Covered
02/01/07-02/01/08
$
266,558
5.83
%
02/01/08-02/01/09
208,510
5.92
02/01/09-02/01/10
147,200
6.00
The tax-exempt caps expressed above mainly represent protection that was purchased in conjunction
with lender hedging requirements that require the borrower to protect against significant
fluctuations in interest rates. Outside of such requirements, we generally do not hedge tax-exempt
debt because, since 1990, the base rate of this type of financing has averaged 3.07% and has never
exceeded 7.90%.
The interest rate hedges summarized in the tables above were purchased to mitigate variable
interest rate risk. We currently intend to convert a significant portion of our committed
variable-rate debt to fixed-rate debt. In order to protect against significant increases in
long-term interest rates, we entered into a number of 10-year forward swaps. During 2006, we
executed a notional amount of $883,045,000 of 10-year forward swaps at an average rate of 5.72% to
protect us against interest rate fluctuations on forecasted financings on fully consolidated
properties that are anticipated to occur over the next three years. At the time we secure and lock
an interest rate on an anticipated financing, it is our intention to simultaneously terminate the
forward swaps attributed to that financing. To the extent effective, the receipt or payment of
cash at termination will be recorded in other accumulated comprehensive income and will be
amortized as either an increase or decrease to interest expense in same periods as the interest
payments on the financing. During the year ended January 31, 2007, $92,500,000 of the forward
swaps, included in the figure above, were terminated in conjunction with the locking of the
interest rate on the financing.
During 2006, we also executed $270,000,000 of 10-year forward swaps at an average rate of 5.87% to
hedge the interest rate risk associated with our proportionate share of nonrecourse mortgage debt
for two properties accounted for under the equity method of accounting. Under the provisions of
SFAS No. 133, we cannot designate these swaps as cash flow hedges because they relate to
unconsolidated properties. Therefore, the change in the fair value of these swaps must be marked
to market through earnings on a quarterly basis. During the year ended January 31, 2007,
$150,000,000 of the forward swaps included in the figure above were terminated in conjunction with
the locking of the interest rate on the anticipated financing.
For year ended January 31, 2007, we recorded $9,386,000 of interest expense related to its 10-year
forward swaps in our Consolidated Statements of Earnings, which represents the change in fair value
of the swaps that do not qualify for hedge accounting.
We estimate the fair value of our hedging instruments based on interest rate market pricing models.
At January 31, 2007 and 2006, interest rate caps were reported at fair value of approximately
$2,372,000 and $2,454,000, respectively, in other assets in the Consolidated Balance Sheets. At
January 31, 2007, interest rate swap agreements, which had a negative fair value of $21,961,000
(which includes the 10-year forward swaps), were included in accounts payable and accrued expenses
in the Consolidated Balance Sheets. At January 31, 2007 and 2006, interest rate swap agreements,
which had a positive fair value of $6,059,000 and $7,887,000, respectively, were included in other
assets in the Consolidated Balance Sheets. Included in the fair value of the interest rate swap
agreements is a total rate of return swap (“TRS”) held by Stapleton Land, LLC. Stapleton Land, LLC
does not hold the underlying borrowings on this TRS and the change in the fair value is marked to
market through earnings. The fair value of the TRS at January 31, 2007 and 2006 was approximately
$255,000 and $1,100,000, respectively.
We estimate the fair value of our debt instruments by market rates, if available, or by discounting
future cash payments at interest rates that approximate the current market. Based on these
parameters, the carrying amount of our total fixed-rate debt at January 31, 2007 was $4,596,867,000
compared to an estimated fair value of $4,575,165,000. We estimate that a 100 basis point decrease
in market interest rates would change the fair value of this fixed-rate debt to approximately
$4,870,180,000 at January 31, 2007.
The following tables provide information about our financial instruments that are sensitive to
changes in interest rates.
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.
Individual financial statements of entities accounted for by the
equity method have been omitted because such entities would not
constitute a significant subsidiary.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of Forest City Enterprises, Inc.:
We have completed integrated audits of Forest City Enterprises, Inc.’s consolidated financial
statements and of its internal control over financial reporting as of January 31, 2007, in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Forest City Enterprises, Inc. and its
subsidiaries (the “Company”) at January 31, 2007 and 2006, and the results of their operations and
their cash flows for each of the three years in the period ended January 31, 2007 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 accompanying index 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit of financial statements 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, on February 1, 2004, the Company
adopted FIN 46(R), “Consolidation of Variable Interest Entities – an Interpretation ARB 51,” as
interpreted.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control
Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal
control over financial reporting as of January 31, 2007 based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of January 31, 2007, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express opinions on management’s assessment and
on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Preferred stock — without par value; 10,000,000 and 5,000,000 shares
authorized, respectively; no shares issued
—
—
Common stock — $.33 1/3 par value
Class A, 271,000,000 and 96,000,000 shares authorized, 76,692,955 and
75,695,084 shares issued and 76,628,006 and 75,695,084 shares
outstanding, respectively
25,564
25,232
Class B, convertible, 56,000,000 and 36,000,000 shares authorized,
25,254,210 and 26,149,070 shares issued and outstanding; 26,257,961
and 6,257,961 shares issuable, respectively
8,418
8,716
33,982
33,948
Additional paid-in capital
247,884
251,991
Unearned compensation
—
(4,151
)
Retained earnings
762,062
612,371
Less treasury stock, at cost; 64,949 and -0- Class A shares, respectively
(3,449
)
—
1,040,479
894,159
Accumulated other comprehensive (loss) income
(14,668
)
223
Total Shareholders’ Equity
1,025,811
894,382
Total Liabilities and Shareholders’ Equity
$
8,981,604
$
7,990,341
The accompanying notes are an integral part of these consolidated financial statements.
(Increase) decrease in
notes and accounts receivable
(1)(3)(4)(9)(11)(14)
$
(21,685
)
$
(8,104
)
$
37,078
Increase in land held for development or sale (4)(8)(9)(11)
(32,332
)
(5,413
)
(13,450
)
(Increase) decrease in other assets (1)(3)(4)(10)(11)(14)
(66,470
)
70,000
(127,735
)
Increase in restricted cash (4)(11)
(423
)
—
(9,070
)
Increase in deferred profit (14)
—
—
4,086
Decrease in deferred taxes (11)
—
—
(3,038
)
Increase in accounts payable and accrued expenses (1)(3)(4)(6)(8)(9)(11)(12)
77,219
38,975
95,580
Total effect on operating activities
$
(43,691
)
$
95,458
$
(16,549
)
Investing Activities
Decrease in investments in and advances to affiliates (1)(4)(11)(12)(13)
$
45,341
$
—
$
44,766
Increase in projects under development (3)(4)(5)(6)(9)
(184,951
)
(24,425
)
(51,916
)
Increase in completed rental properties (1)(4)(11)(14)
(279,345
)
—
(559,145
)
Non-cash proceeds from disposition of properties (2)
332,080
120,315
—
Total effect on investing activities
$
(86,875
)
$
95,890
$
(566,295
)
Financing Activities
Increase in notes and loans payable (4)(11)(13)
$
105,600
$
—
$
7,065
(Decrease) increase in nonrecourse mortgage debt (1)(2)(3)(4)(10)(11)(14)
(301,264
)
(190,315
)
542,363
Decrease (increase) in restricted cash (3)(4)
150,418
—
(5,661
)
Decrease in deferred tax liability (7)
(17,730
)
—
—
Increase in minority interest (1)(2)(4)(11)(12)(13)
172,953
—
39,615
Increase in additional paid-in capital (5)(7)
21,637
—
—
Dividends declared but not yet paid
(1,048
)
(1,033
)
(538
)
Total effect on financing activities
$
130,566
$
(191,348
)
$
582,844
(1)
Issued Class A Common Units in exchange for Bruce C. Ratner’s minority interests in the
Forest City Ratner Companies portfolio (See Footnote U).
(2)
Assumption of nonrecourse mortgage debt and direct payment to partner by the buyer upon
sale of Hilton Times Square Hotel, G Street, Embassy Suites Hotel and Battery Park City
Retail properties in the Commercial Group and Mount Vernon Square and Providence at Palm
Harbor properties in the Residential Group during the year ended January 31, 2007 and
Enclave, Cherrywood Village and Ranchstone properties in the Residential Group during the
year ended January 31, 2006.
(3)
Change to equity method of accounting from full consolidation due to admission of a 50%
partner in Uptown Apartments, a residential development project in Oakland, California,
during the year ended January 31, 2007.
(4)
Change to full consolidation method of accounting from equity method due to acquisition
of partners’ interest in New York Times Building and Galleria at Sunset properties in the
Commercial Group, Village Green, an apartment community in the Residential Group and
Rockport Square in the Land Development Group during the year ended January 31, 2007 and
Lenox Park, Lenox Club and Pavilion, apartment communities in the Residential Group and
Tangerine in the Land Development Group during the year ended January 31, 2005.
(5)
Capitalization of stock-based compensation granted to employees directly involved with
the acquisition, development and construction of real estate.
(6)
Estimate for environmental liabilities in the Commercial Group.
(7)
Recording of a deferred tax asset on the purchased call option in conjunction with the
issuance of the Company’s 3.625% Puttable Equity-Linked Senior Notes during the year ended
January 31, 2007 (See Footnote H).
(8)
Investment at risk, net of the cost of the option to purchase a piece of land in
Prosper, Texas in the Land Group during the year ended January 31, 2007.
(9)
Change in construction payables included in accounts payable and accrued expenses.
The accompanying notes are an integral part of these consolidated financial statements.
Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(10)
Retired $70,000,000 Stapleton Revenue Bonds consolidated by the Company in accordance
with FIN No. 46 (R), but owned by a third party special purpose entity, during the year
ended January 31, 2006 (See Footnote I).
(11)
Change in consolidation methods due to FIN No. 46 (R) during the year ended January 31,2005.
(12)
Modification of certain provisions of the Company’s arrangement with its partner in the
New York operations for certain property partnerships during the year ended January 31,2005.
(13)
Decrease of ownership interest in Victoria Gardens, a retail center in Rancho
Cucamonga, California, due to admission of an additional partner during the year ended
January 31, 2005.
(14)
Disposition of Regency Towers, Woodlake, Bridgewater, Trellis at Lee’s Mill, Hunting
Park, Arboretum, Flatbush Avenue, Colony Woods and Silver Hill and disposition of the
Lumber Group during the year ended January 31, 2005.
The accompanying notes are an integral part of these consolidated financial statements.
Forest City Enterprises, Inc. (the “Company”) principally engages in the ownership, development,
management and acquisition of commercial and residential real estate and land throughout the United
States. The Company operates through three strategic business units and five reportable segments.
The Commercial Group, the Company’s largest business unit, owns, develops, acquires and operates
regional malls, specialty/urban retail centers, office and life science buildings, hotels and
mixed-use projects. The Residential Group owns, develops, acquires, and operates residential
rental property, including upscale and middle-market apartments, adaptive re-use developments and
supported-living communities. It also develops for-sale condominium projects and owns interests in
entities that develop and manage military housing. New York City operations are part of the
Commercial Group or Residential Group depending on the nature of the operations. 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. Corporate
Activities and the Nets, a franchise of the National Basketball Association (“NBA”) in which the
Company accounts for its investment on the equity method of accounting, are reportable segments of
the Company.
The Company has approximately $9.0 billion in total assets in 26 states and the District of
Columbia at January 31, 2007. The Company’s core markets include the New York City/Philadelphia
metropolitan area, Denver, Boston, the Greater Washington, D.C./Baltimore metropolitan area,
Chicago and the state of California. The Company has offices in Boston, Chicago, Denver, Los
Angeles, New York City, San Francisco, Washington, D.C. and the Company’s corporate headquarters
are in Cleveland, Ohio.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Forest City Enterprises,
Inc., its wholly-owned subsidiaries and entities in which it has a controlling interest in
accordance with accounting principles generally accepted in the United States of America. All
intercompany balances and transactions have been eliminated in consolidation.
In accordance with the Financial Accounting Standards Board Interpretation (“FIN”) No. 46 (R)
“Consolidation of Variable Interest Entities” (“FIN No. 46 (R)”), the Company consolidates variable
interest entities (“VIEs”) in which it has a variable interest (or a combination of variable
interests) that will absorb a majority of the entity’s expected losses, receive a majority of the
entity’s expected residual returns, or both, based on an assessment performed at the time the
Company becomes involved with the entity. VIEs are entities in which the equity investors do not
have a controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. The Company reconsiders
this assessment only if the entity’s governing documents or the contractual arrangements among the
parties involved change in a manner that changes the characteristics or adequacy of the entity’s
equity investment at risk, some or all of the equity investment is returned to the investors and
other parties become exposed to expected losses of the entity, the entity undertakes additional
activities or acquires additional assets beyond those that were anticipated at inception or at the
last reconsideration date that increase its expected losses, or the entity receives an additional
equity investment that is at risk, or curtails or modifies its activities in a way that decreases
its expected losses (Refer to the Variable Interest Entities section of this Note).
For entities not deemed to be VIEs, the Company consolidates those entities in which it exerts
effective control or owns a majority of the voting securities or interests, except in those
instances in which the minority voting interest owner effectively participates through substantive
participative rights. Substantive participatory rights include the ability to select, terminate,
and set compensation of the investee’s management, approve refinancings, participate in capital and
operating decisions of the investee (including budgets), in the ordinary course of business.
Use of Estimates
The preparation of consolidated 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, provisions for decline in real estate and the
computation of expected losses on VIEs. As a result of the nature of estimates made by the Company,
actual results could differ.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
Reclassification
and Other
Certain prior year amounts in the accompanying consolidated financial statements have been
reclassified to conform to the current year’s presentation.
During the year ended January 31, 2007, the Company reported the prior period impact of adjustments
primarily related to cumulative differences in earnings (loss) recognition on three of the
Company’s joint ventures in which one or more partners had preferred return provisions on and of
their equity over the other partners. All of the joint ventures were unconsolidated entities
accounted for on the equity method of accounting. The differences in the cumulative loss
recognition on the three unconsolidated joint ventures, which resulted from not allocating
earnings/losses among all partners using the hypothetical liquidation at book value method,
accumulated over many years and are reflected as a reduction of equity in earnings of
unconsolidated investments for the year ended January 31, 2007.
The impact discussed above is a reduction of net earnings and earnings from continuing operations
of $2,900,000 for the year ended January 31, 2007. Management has assessed the impact of the
adjustments, both individually and in the aggregate, and does not believe these amounts are
material to any previously issued financial statements or to the results of operations for the
Company for the year ended January 31, 2007.
Fiscal Year
The years 2006, 2005 and 2004 refer to the fiscal years ended January 31, 2007, 2006 and 2005,
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 recognizes gains on sales of real estate pursuant to the provisions
of Statement of Financial Accounting Standards (“SFAS”) No. 66 “Accounting for Sales of Real
Estate” (“SFAS No. 66”). The specific timing of a sale is measured against various criteria in SFAS
No. 66 related to the terms of the transaction and any continuing involvement in the form of
management or financial assistance associated with the property. If the sales criteria are not met,
the Company defers gain recognition and accounts for the continued operations of the property by
applying the deposit, finance, installment or cost recovery methods, as appropriate.
The Company follows the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”) for reporting 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 determined by management to be 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
significant contingencies related to the sale that may prevent the transaction from closing. In
most transactions, these contingencies are not satisfied until the actual closing 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 generally range
from 1 to 25 years, excluding leases with certain anchor tenants which typically run longer.
Minimum rents are recognized on a straight-line basis over the non-cancelable term of the related
leases, which includes the effects of rent steps and rent abatements under the leases. Overage
rents are recognized in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition”,
which states that this income is to be recognized only after the contingency has been removed
(i.e., sales thresholds have been achieved). Recoveries from tenants for taxes, insurance, and
other commercial property operating expenses are recognized as revenues in the period the
applicable costs are incurred. See Note M — Leases for further information on tenant
reimbursements.
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.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
Military
Housing Fee Revenues – Asset management fee revenues are
recognized based on a stated
percentage of the annual operating income that is generated by the
military housing privatization projects. Asset management fees of
$1,091,000, $898,000 and $-0- were recognized during the years ended January 31, 2007, 2006, and
2005, respectively, which were recorded in revenues from real estate operations in the Consolidated
Statements of Earnings.
Revenues
for development fees related to the Company’s military housing
projects are based on a stated percentage of the actual development
costs incurred by the military housing projects and are recognized on
a monthly basis as the costs are incurred. The
Company also recognizes additional development incentive fees based on a stated percent that is
earned upon the successful completion of certain subjective criteria as specified in the
development agreements. Revenues of $7,981,000, $1,697,000 and $-0- were recognized during the
years ended January 31, 2007, 2006 and 2005, respectively, related to base development and
development incentive fees, which were recorded in revenues from real estate operations in the
Consolidated Statements of Earnings.
Revenues related to construction management fees are recognized based on amounts paid for the cost
of each construction contract. The Company also recognized certain construction incentive fees
based upon successful completion of certain criteria as set forth in the construction contract.
Revenues of $4,327,000, $1,379,000 and $-0- were recognized during the years ended January 31,2007, 2006 and 2005, respectively, related to the base construction and incentive fees, which were
recorded in revenues from real estate operations in the Consolidated Statements of Earnings.
Recognition of Costs and Expenses
Operating expenses primarily represent the recognition of operating costs, which are charged to
operations as incurred, 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 and amortization is generally computed on a straight-line method over the estimated
useful life of the asset. The estimated useful lives of buildings and certain first generation
tenant allowances that are considered by management as a component of the building are primarily 50
years. Subsequent tenant improvements are amortized over the life of the tenant’s lease. This
estimate is based on the length of time the asset is expected to generate positive operating cash
flows. In the Company’s Residential Group, the Company purchased its partner’s interest in contracts related to
its military family housing projects during the fiscal years ended January 31, 2007 and 2006. The
Company has recorded the cost of these contracts as intangible assets and the amounts will be
amortized over the life of the respective contracts.
Major improvements and tenant improvements that are considered the Company’s assets are capitalized
in real estate costs and expensed through depreciation charges. Tenant improvements that are
considered lease inducements are capitalized into other assets and amortized as a reduction of
rental revenue over the life of the tenant’s lease. Repairs, maintenance and minor improvements
are expensed as income.
A variety of costs are incurred in the acquisition, development and leasing of properties. After
determination is made to capitalize a cost, it is allocated to the specific component of a project
that is benefited. Determination of when a development project is substantially complete and
capitalization must cease involves a degree of judgment. The Company’s capitalization policy on
development properties is guided by SFAS No. 34 “Capitalization of Interest Cost” and SFAS No. 67
“Accounting for Costs and the Initial Rental Operations of Real Estate Properties.” The costs of
land and buildings under development include specifically identifiable costs. The capitalized costs
include pre-construction costs essential to the development of the property, development costs,
construction costs, interest costs, real estate taxes, salaries and related costs and other costs
incurred during the period of development. The Company considers a construction project as
substantially completed and held available for occupancy upon the completion of tenant
improvements, but no later than one year from cessation of major construction activity. The Company
ceases capitalization on the portion substantially completed and occupied or held available for
occupancy, and capitalizes only those costs associated with the portion under construction. 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.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 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. The Company records income or loss in certain
unconsolidated entities based on the distribution priorities, which may change upon the achievement
of certain return thresholds. The Company evaluates the fair value of its investments in
unconsolidated entities and any decreases in fair value which are other than temporary are
recognized as incurred.
Minority Interest
Interests held by partners in real estate partnerships consolidated by the Company are reflected in
minority interest on the Consolidated Balance Sheets. Minority interest represents the minority
partners’ share of the underlying net assets of our consolidated subsidiaries. Distributions to
minority partners in excess of their recorded minority interest balance related to refinancing
proceeds from nonrecourse debt, which generally arise from appreciation of the underlying real
estate assets, are reported as a reduction of additional paid-in-capital in the Consolidated
Statements of Shareholders’ Equity. In situations where distributions and losses otherwise
allocable to a partner’s minority interest balance exceeds its partner’s recorded capital account,
such excess amounts are charged against the Company’s interests in its Consolidated Statements of
Earnings when there is no legal obligation for the partner to restore their deficit capital
account, except as described above involving distributions on nonrecourse debt refinancing
proceeds. If a partner has a legal obligation to repay its deficit capital account, the Company
will record such amount as an investment in and advances to affiliates on its Consolidated Balance
Sheets if management determines such amounts are collectible and legally enforceable (subject to a
contractual obligation).
Allowance for Projects Under Development
The Company records an allowance for development project write-offs for its projects under
development. Specific projects are written off against this allowance when it is determined by
management that the project will not be developed. The allowance is adjusted on a quarterly basis
based on the Company’s actual development project write-off history. The allowance decreased by
$800,000 and $3,500,000 for the years ended January 31, 2007 and 2006, respectively and increased
$900,000 for the year ended January 31, 2005. Any change in the allowance is reported in operating
expenses in the Consolidated Statements of Earnings.
Acquisition of Rental Properties
Upon acquisition of rental property, the Company allocates the purchase price of properties to net
tangible and identified intangible assets acquired based on fair values. Above-market and
below-market in-place lease values for acquired properties are recorded based on the present value
(using an interest rate which reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii)
the Company’s estimate of the fair market lease rates for the corresponding in-place leases,
measured over a period equal to the remaining non-cancelable term of the lease. Capitalized
above-market lease values are amortized as a reduction of rental income (or rental expense for
ground leases in which the Company is the lessee) over the remaining non-cancelable terms of the
respective leases. Capitalized below-market lease values are amortized as an increase to rental
income (or rental expense for ground leases in which the Company is the lessee) over the remaining
non-cancelable terms of the respective leases, including any fixed-rate renewal periods.
Other intangible assets also include amounts representing the value of tenant relationships and
in-place leases based on the Company’s evaluation of the specific characteristics of each tenant’s
lease and the Company’s overall relationship with the respective tenant. The Company estimates the
cost to execute leases with terms similar to the remaining lease terms of the in-place leases,
including leasing commissions, legal and other related expenses. This intangible asset is amortized
to expense over the remaining term of the respective leases. The Company estimates of value are
made using methods similar to those used by independent appraisers or by using independent
appraisals. Factors considered by the Company in this analysis include an estimate of the carrying
costs during the expected lease-up periods considering current market conditions and costs to
execute similar leases. In estimating carrying costs, the Company includes real estate taxes,
insurance and other operating expenses and estimates of lost rentals at market rates during the
expected lease-up periods, which primarily range from three to twelve months. The Company also
considers information obtained about each property as a result of its pre-
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
acquisition due diligence, marketing and leasing activities in estimating the fair value of
the tangible and intangible assets acquired. The Company also uses the information obtained as a
result of its pre-acquisition due diligence as part of its consideration of FIN No. 47 “Accounting
for Conditional Asset Retirement Obligations,” and when necessary, will record a conditional asset
retirement obligation as part of its purchase price.
Characteristics considered by the Company in allocating value to its tenant relationships include
the nature and extent of the Company’s business relationship with the tenant, growth prospects for
developing new business with the tenant, the tenant’s credit quality and expectations of lease
renewals, among other factors. The value of tenant relationship intangibles is amortized over the
remaining initial lease term and expected renewals, but in no event longer than the remaining
depreciable life of the building. The value of in-place leases is amortized over the remaining
non-cancelable term of the respective leases and any fixed-rate renewal periods.
In the event that a tenant terminates its lease, the unamortized portion of each intangible,
including market rate adjustments, in-place lease values and tenant relationship values, would be
charged to expense.
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.
Cash flows associated with items intended as hedges of identifiable transactions or events are
classified in the same category as the cash flows from the items being hedged. Cash flows from
derivatives not designated as cash flow or fair value hedges are generally classified in the
investing section in our consolidated statements of cash flows.
The Company maintains operating cash and reserves 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 legally restricted deposits with financial institutions for taxes and
insurance, security deposits, capital replacement, improvement and operating reserves, bond funds,
development escrows, construction escrows and collateral on total rate of return swaps, as well as
certain internally restricted deposits with qualified intermediaries related to like-kind
exchanges.
Allowance for Doubtful Accounts and Reserves on Notes Receivable
The Company records allowances for rent receivables from commercial tenants that are deemed to be
uncollectible. These allowances are based on management’s estimate of receivables that will not be
realized from cash receipts in subsequent periods. The Company also maintains an allowance for
receivables arising from the straight-lining of rents. This receivable arises from earnings
recognized in excess of amounts currently due under the lease agreements. Management exercises
judgment in establishing these allowances and considers payment history and current credit status
in developing these estimates. The allowance against the Company’s straight-line rent receivable
is based on the Company’s historical experience with early lease terminations. 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 estimates the allowance for notes receivable based on its assessment of the
collectibility of the note. The assessment of collectibility is based largely on expected future
cash flows estimated to be paid to the Company’s limited partners. If the estimate of expected
future cash flows does not accurately reflect actual events, the Company’s reserve on notes
receivable may be over or understated by the actual cash flows that occur.
Historic Tax Credit Entities
The Company has certain investments in properties that have received, or the Company believes are
entitled to receive, historic rehabilitation tax credits on qualifying expenditures under section
47 of the Internal Revenue Code of 1986 as well as various state credit programs. The Company
typically enters into these investments with sophisticated financial investors. In exchange for
the financial investors’ initial contribution into these investments, they are entitled to
substantially all of the benefits derived from the historic tax credit, but generally have no
material interest in the underlying economics of the properties. Typically, these arrangements
have put/call provisions (which range up to 7 years) whereby the Company may be obligated (or
entitled) to repurchase the financial investors’ interest. Due to the economic structure, the
Company has consolidated each of these properties in its consolidated financial statements, and has
reflected the investors’ contribution as a liability in its Consolidated Balance Sheets. The
Company guarantees the financial investor that in the event of a subsequent
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
recapture by a taxing authority due to the Company’s noncompliance with applicable tax credit
guidelines that it will indemnify the financial investor for any recaptured tax credits. Within
the Company’s consolidated financial statements, the Company initially records a liability for the
cash received from the financial investor. The Company generally records income upon completion
and certification of the qualifying development expenditures resulting in an adjustment of the
liability at each balance sheet date to the amount that would be paid to the financial investor
based upon the tax credit compliance regulations, which range from 0 to 5 years. During the year
ended January 31, 2007, the Company recognized income related to federal and state tax credits of
$12,681,000 and $13,038,000, respectively, which were recorded in interest and other income in our
Consolidated Statements of Earnings.
Investments in Partnerships
As is customary within the real estate industry, the Company invests in certain projects through
partnerships and limited liability entities. The Company may provide funding for certain of its
partners’ equity contributions. Such advances are typically interest-bearing or entitle the Company
to a preference on and of such advances on property cash flows and are included in investments in
and advances to affiliates in the accompanying Consolidated Balance Sheets.
Other Assets
Included in other assets are costs incurred in connection with obtaining financings 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 the Consolidated Statements of Shareholders’ Equity. Unrealized gains or losses were not
material for the three years ending January 31, 2007, 2006 and 2005.
Intangible Assets – Upon an acquisition of a business, the Company records intangible assets
acquired at their estimated fair value separate and apart from goodwill. The Company amortizes
identified intangible assets that are determined to have finite lives which are based on the period
over which the assets are expected to contribute directly or indirectly to the future cash flows of
the business acquired. Intangible assets subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that their carrying amount may not be
recoverable. An impairment loss is recognized if the carrying amount of an intangible asset is not
recoverable and its carrying amount exceeds its estimated fair value.
Included with the Nets, an investment accounted for by the Company on the equity method of
accounting, is the Company’s share of approximately $55,615,000 and $64,252,000 (net of accumulated
amortization of $20,919,000 and $12,282,000) of intangible assets for the years ended January 31,2007 and 2006, respectively, consisting primarily of the fair value of the franchise asset,
players’ contracts and the arena lease that were acquired in connection with the team in August
2004. With exception of the franchise asset, which the management of the Nets has determined is an
indefinite-lived intangible asset, such intangibles are generally amortized over their estimated
useful lives, which has been determined to be five years. The amortization of these intangible
assets is included as a component of the Company’s proportionate share of loss from the Nets within
equity in earnings of unconsolidated entities in the Company’s Consolidated Statements of Earnings.
The Company’s portion of amortization expense recorded by the Nets was $6,846,000 and $12,546,000
for the years ended January 31, 2007 and 2006, respectively.
Refer to Note D – Other Assets for additional information on intangible assets.
Capitalized Software Costs – Costs related to software developed or obtained for internal use are
capitalized pursuant to Statement of Position No. 98-1 “Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,” and amortized using the straight-line method over
their estimated useful life, which is primarily three years. The Company capitalizes significant
costs incurred in the acquisition or development of software for internal use, including the costs
of the software, materials, consultants, interest and payroll and payroll-related costs for
employees incurred in developing internal-use computer software once final selection of the
software is made. Costs incurred prior to the final selection of software and costs not qualifying
for capitalization are charged to expense. At January 31, 2007 and 2006, the Company has
capitalized $24,659,000 (net of $1,626,000 of accumulated amortization) and $13,484,000 (net of
$881,000 of accumulated amortization) of software costs respectively. The increase in software
costs between 2007 and 2006 primarily relates to the enterprise resource planning project the
Company is currently implementing. The Company recorded $745,000, $282,000 and $220,000 of
amortization expense related to capitalized software for the years ended January 31, 2007, 2006 and
2005, respectively. During the year ended January 31, 2006, following consolidations in the
software industry, the Company modified its implementation plan involving an enterprise resource
planning project resulting in an impairment charge of $3,162,000, which is recorded within
operating expenses in our 2005 Consolidated Statements of Earnings.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
Accounting for Derivative Instruments and Hedging Activities
The Company maintains an overall interest rate risk management strategy that incorporates the use
of derivative instruments to minimize significant unplanned decreases in earnings and cash flows
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 or forward starting swaps to hedge the changes in benchmark interest rates on
forecasted financings. Option products utilized include interest rate caps, floors, interest rate
swaptions 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
primarily attributable to changes in benchmark rates relating to forecasted financings, and the
variability in cash flows attributable to increases relating to interest payments on its
floating-rate debt. The caps and floors have typical durations ranging from one to three years
while the Treasury options are for periods of five to ten years. The Company also enters into
interest rate swap agreements for hedging purposes for periods that are generally one to five
years. The Company does not have any Treasury options outstanding at January 31, 2007.
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 generally purchases its derivative
financial instruments from either the institution that holds the debt or from institutions with a
minimum A- credit rating.
Derivatives are reported in the Consolidated Balance Sheets at their fair value. On the date that
the Company enters into a derivative contract, it typically 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 variable-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 (“OCI”) until earnings are affected by the variability of cash flows of
the hedged transaction. The ineffective portion of all hedges is immediately recognized in the
Consolidated Statements of Earnings.
The Company assesses 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” and records subsequent changes in fair value in OCI, 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 OCI 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 OCI 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 OCI 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, or a portion of the gains and losses, that were accumulated in
OCI will be recognized immediately in net 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, immediately recognizing changes in the fair value in
the Consolidated Statements of Earnings.
For the year ended January 31, 2007, the Company recorded interest expense of approximately $54,000
in the Consolidated Statements of Earnings, which represented the total ineffectiveness of all cash
flow hedges. For the years ended January 31, 2006 and 2005, the Company recorded interest income
of approximately $25,000 and $1,064,000, respectively,
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary
of Significant Accounting Policies (continued)
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 under SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS No. 133”), was not material. The amount of net derivative losses reclassified
into earnings from OCI 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
$543,000, $218,000 and $-0- for the years ended January 31, 2007, 2006 and 2005, respectively. As
of January 31, 2007, the Company expects that within the next twelve months it will reclassify
amounts recorded in accumulated OCI into earnings as interest income of approximately $306,000, net
of tax.
During 2006, the Company executed a notional amount of $883,045,000 of 10-year forward swaps at an
average rate of 5.72% to protect it against interest rate fluctuations on forecasted financings on
consolidated properties that are anticipated to occur over the next three years. At the time the
Company secures and locks an interest rate on an anticipated financing, it intends to
simultaneously terminate the forward swaps attributed to that financing. To the extent effective,
the receipt or payment of cash at termination will be recorded in accumulated OCI and will be
amortized as either an increase or decrease to interest expense in the same periods as the interest
payments on the financing. As these 10-year forward swaps have been designated and qualified as
cash flow hedges under SFAS No. 133, the Company’s portion of the unrealized gains and losses on
the effective portion of the hedges has been recorded in accumulated OCI. During 2006, a notional
amount of $92,500,000 of the forward swaps included in the figure above were terminated in
conjunction with the locking of the interest rate on the financing.
During 2006, the Company also executed $270,000,000 of 10-year forward swaps at an average rate of
5.87% to hedge the interest rate risk associated with its proportionate share of nonrecourse
mortgage debt for two properties accounted for under the equity method of accounting. Under the
provisions of SFAS No. 133, the Company cannot designate these swaps as cash flow hedges as they
relate to unconsolidated properties. Therefore, the change in the fair value of these swaps was
marked to market through earnings on a quarterly basis. During 2006, a notional amount of
$150,000,000 of the forward swaps included in the figure above were terminated in conjunction with
the locking of the interest rate on the financing.
For year ended January 31, 2007, the Company recorded $9,386,000 of interest expense related to its
10-year forward swaps in its Consolidated Statements of Earnings, which represents the change in
fair value of the swaps that do not qualify for hedge accounting.
From time to time, the Company and/or certain of its joint ventures (the “Joint Ventures”) enter
into total rate of return swaps (“TRS”) on various tax-exempt fixed-rate borrowings generally held
by the Company and/or within the Joint Ventures. The TRS convert these borrowings from a fixed
rate to a variable rate and provide an efficient financing product to lower the cost of capital.
In exchange for a fixed rate, the TRS require that the Company and/or the Joint Ventures pay a
variable rate, generally equivalent to the Bond Market Association (“BMA”) rate. Additionally, the
Company and/or the Joint Ventures have guaranteed the principal balance of the underlying
borrowing. Any fluctuation in the value of the guarantee would be offset by the fluctuation in the
value of the underlying borrowing, resulting in no financial impact to the Company and/or the Joint
Ventures. At January 31, 2007, the aggregate notional amount of TRS in which the Company and/or
the Joint Ventures have an interest is $390,853,000. The fair value of such contracts is
immaterial at January 31, 2007 and 2006. The Company believes the economic return and related risk
associated with a TRS is generally comparable to that of nonrecourse variable-rate mortgage debt.
In addition, in May 2004 Stapleton Land, LLC entered into an agreement to purchase $200,000,000 of
tax increment revenue bonds issued by the Denver Urban Renewal Authority (“DURA”) from a trust if
they are not repurchased or remarketed between June 1, 2007 and June 1, 2009 (see the Other
Financing Arrangements section of Note I). Stapleton Land, LLC will receive a fee upon removal of
the DURA bonds from the trust. This purchase obligation and related fee have been accounted for as
a derivative with changes in fair value recorded through earnings. The fair value at January 31,2007 and 2006 of approximately $15,090,000 and $7,244,000, respectively, is recorded in other
assets in the Consolidated Balance Sheets.
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, 2007 was $4,596,867,000 compared to an estimated
fair value of $4,575,165,000.
The Company estimates the fair value of its hedging instruments based on interest rate market
pricing models. At January 31, 2007 and 2006, interest rate caps were reported at fair value of
approximately $2,372,000 and $2,454,000, respectively, in other assets in the Consolidated Balance
Sheets. At January 31, 2007, interest rate swap agreements, which had a negative fair value of
$21,961,000 (which includes the 10-year forward swaps), were included in accounts payable and
accrued expenses in the Consolidated Balance Sheet. At January 31, 2007 and 2006, interest rate
swap agreements, which
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
had a positive fair value of $6,059,000 and $7,887,000, respectively, were included in other
assets in the Consolidated Balance Sheets. Included in the fair value of the interest rate swap
agreements is a TRS held by Stapleton Land, LLC. Stapleton Land, LLC does not hold the underlying
borrowings on this TRS and the change in the fair value is marked to market through earnings. The
fair value of the TRS at January 31, 2007 and 2006 was approximately $255,000 and $1,100,000,
respectively.
Other Comprehensive Income (Loss)
Net unrealized gains or losses on securities are included in accumulated OCI and represent 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 accumulated
OCI is the Company’s portion of the unrealized gains and losses on the effective portions of
derivative instruments designated and qualifying as cash flow hedges. The amount of income tax
(benefit) expense related to OCI was $(9,237,000), $141,000 and $(5,397,000) for the years ended
January 31, 2007, 2006 and 2005, respectively.
The following table summarizes the components of accumulated OCI included within the Company’s
Consolidated Balance Sheets, net of tax and minority interest.
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
On February 1, 2006, the Company adopted SFAS No. 123 (Revised), “Share-Based Payment” (“SFAS No.
123(R)”) which, among other things, requires the recognition of stock option costs at its estimated
fair value. The Company elected to use the modified prospective application method which requires
the provisions of SFAS No. 123(R) to be applied to unvested awards outstanding at the date of
adoption and all new awards. The Company recognizes compensation costs for its stock option and
restricted stock awards over the requisite service period using the straight-line attribution
method. The current 1994 Stock Plan (the “Plan”), as amended, which covers awards granted in 2006,
permits the acceleration of vesting upon the retirement of a grantee who retires on or after
reaching the prescribed retirement age, as defined in the Plan. The cost of an award subject to
this retirement provision is recognized immediately for grantees that are retirement eligible at
the date of grant or on a straight-line basis over the period ending with the first anniversary
from the date of grant which the individual reaches retirement age. This retirement provision did
not apply to awards granted prior to 2006. The Company recognized $1,170,000 of compensation
expense related to stock-based compensation awards that were granted during 2006 to retirement
eligible grantees.
As a result of adopting SFAS No. 123(R) on February 1, 2006, the Company’s earnings before income
taxes, earnings from continuing operations and net earnings were lower for the year ended January31, 2007 by $4,738,000, $3,469,000 and $3,469,000, respectively, and basic and diluted earnings per
share were lower by $.04 and $.03, respectively, than if the Company had continued to account for
stock-based compensation under APB No. 25 “Accounting for Stock Issued to Employees” (“APB No.
25”).
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
During the year ended January 31, 2007, the Company recognized stock-based compensation costs
of $12,064,000. Prior to adoption of SFAS No. 123(R), the Company did not capitalize stock-based
compensation costs. The composition of the stock-based compensation costs, the amount charged to
operating expenses and the amount capitalized into the basis of qualifying real estate projects
under development are as follows:
Deferred
Income Tax
Operating
Benefit
Expense
Capitalized
Total
Recognized
(in thousands)
Stock Option Costs
$
4,738
$
2,949
$
7,687
$
1,269
(1)
Restricted Stock Costs
3,419
958
4,377
1,321
$
8,157
$
3,907
$
12,064
$
2,590
(1)
The Company grants incentive stock awards to certain of its employees, which do
not provide the Company with a tax deduction, unless a disqualifying disposition
occurs. In the event of a disqualifying disposition, a deferred tax benefit is
recognized in the period in which the event occurs.
Prior to February 1, 2006, the Company followed the provisions of APB No. 25, and related
interpretations. As such, stock-based compensation was measured using the intrinsic value method,
that is, the excess, if any, of the quoted market price of the Company’s stock on the date of grant
over the amount the employee is required to pay for the stock. None of the stock option awards
were expensed under APB No. 25 because their intrinsic value was zero at the date of grant. The
restricted stock awards were expensed under APB No. 25 because their intrinsic value was equal to
the fair market value of the stock at the date of grant. The amount of stock-based compensation
costs recognized in operating expenses for restricted stock awards under APB No. 25 was $1,793,000
and $1,832,000 and the related deferred income tax benefit was $693,000 and $725,000 for the years
ended January 31, 2006 and 2005, respectively.
The following table shows the pro forma 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 in the
prior years:
Deduct stock-based employee
compensation expense for stock
options determined under the fair
value based method, net of tax
(2,925
)
(3,303
)
Pro forma
$
80,594
$
81,903
Basic earnings per share
As reported
$
.83
$
.85
Pro forma
$
.80
$
.82
Diluted earnings per share
As reported
$
.81
$
.84
Pro forma
$
.79
$
.80
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions
resulting from exercises of stock options and vesting of restricted stock as operating cash flows
in the Consolidated Statements of Cash Flows. SFAS No. 123(R) requires the cash flows resulting
from the tax benefits from tax deductions in excess of the compensation cost recognized for those
options or shares (excess tax benefits) to be classified as financing cash flows. The Company does
not record an excess deduction on exercises of stock options until such deduction reduces taxes
payable computed on a with and without basis. There were no excess tax benefits recorded during
2006 under SFAS No. 123(R). In addition, upon adoption of SFAS 123(R), the unearned compensation
costs of $4,151,000 relating to 258,750 shares of unvested restricted stock at January 31, 2006,
which was reported as a reduction of shareholders’ equity at January 31, 2006 under APB No. 25, was
eliminated against common stock and additional paid-in capital.
See Note O — Stock-Based Compensation for additional disclosures relating to stock-based
compensation.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
Capital Stock
The Company’s 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 stock, voting as a separate class, is entitled to elect 25% of the members of the
Company’s board of directors, while the Class B common stock, voting as a separate class, is
entitled to elect the remaining 75% of the Company’s board of directors. When the Class A common
stock and Class B common stock vote together as a single class, each share of Class A common stock
is entitled to one vote per share and each share of Class B common stock is entitled to ten votes
per share. Class B Common Stock is convertible into Class A common stock on a share-for-share
basis at the option of the holder.
Earnings Per Share
Earnings per share (“EPS”) has been computed under the provisions of SFAS No. 128 “Earnings Per
Share”. Pursuant to EITF No. 03-6 “Participating Securities and the Two-Class Method under FASB
128”, the Class A Common Units issued in exchange for Bruce C. Ratner’s minority interests in the
Forest City Ratner Companies (“FCRC”) portfolio in November 2006 (see Note U – Class A Common
Units), which are reflected as minority interest in the Company’s Consolidated Balance Sheets, are
considered participating securities and therefore are included in the computation of basic and
diluted earnings per share to the extent the Class A units would participate in the Company’s
undistributed earnings and if the effect of applying the if-converted method is dilutive.
New Accounting Standards
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159 “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits
a company to irrevocably elect fair value as the initial and subsequent measurement attribute for
certain financial assets and liabilities, with changes in fair value recognized as they occur.
SFAS No. 159 permits the fair value option on an instrument by instrument basis at initial
recognition of an asset or liability or upon an event that gives rise to a new basis of accounting
for that instrument. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.
The Company is currently assessing the impact SFAS No. 159 will have on its consolidated financial
statements.
In December 2006, the FASB issued FASB Staff Position (“FSP”) EITF No. 00-19-2, “Accounting for
Registration Payment Arrangements” (“EITF No. 00-19-2”). This FSP specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, “Accounting for Contingencies.” EITF No. 00-19-2 is effective for fiscal years
beginning after December 15, 2006. The adoption of EITF No. 00-19-2 did not have a material impact
on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about the use of fair value
measurements. SFAS No. 157 does not require new fair value measurements, but applies to accounting
pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 is not expected to
have a material impact on the Company’s consolidated financial statements.
In September 2006, the United States Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 108 “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108
provides interpretative guidance on how the effects of uncorrected prior year misstatements should
be considered when quantifying current year misstatements for the purpose of a materiality
assessment. SAB No. 108 requires registrants to quantify financial statement misstatements using
both a balance sheet approach and an income statement approach and to evaluate whether either
approach results in quantifying a misstatement that, when all relevant quantitative and qualitative
factors are considered, is material. SAB No. 108 is effective for fiscal years ending after
November 15, 2006. The adoption of SAB No. 108 did not have any impact on the Company’s
consolidated financial statements.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN No. 48 prescribes a
comprehensive model for how a company should recognize, measure, present and disclose in its
financial statements uncertain tax positions that a company has taken or expects to take on a tax
return (including a decision whether to file or not to file a return in a particular jurisdiction).
Under FIN No. 48, the financial statements will reflect expected future tax consequences of such
positions presuming the taxing authorities’ full knowledge of the position and all relevant facts,
but without considering time values. FIN No. 48 also revises disclosure requirements and
introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits. FIN No.
48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN No.
48 on February 1, 2007. The Company is currently assessing the impact FIN No. 48 will have on its
consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an
Amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 requires separate recognition
of a servicing asset and a servicing liability each time an entity undertakes an obligation to
service a financial asset by entering into a servicing contract. This statement also requires that
all separately recognized servicing assets and liabilities be initially measured at fair value and
subsequently measured at fair value at the end of each reporting period. This statement is
effective in fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156 did not
have a material impact on the Company’s consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial
Instruments — an Amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 (i)
permits fair value remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133, (iii) establishes a
requirement to evaluate interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives and (v) amends SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140”), to eliminate
the prohibition on a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all financial instruments acquired or issued in fiscal
years beginning after September 15, 2006. The adoption of SFAS No. 155 did not have a material
impact on the Company’s consolidated financial statements.
Variable Interest Entities
In January 2003, FIN No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46”), was
issued. In December 2003, the FASB published a revision of the interpretation FIN No. 46 (R) to
clarify some of the provisions of FIN No. 46 and to exempt certain entities from its requirements.
The objective of this interpretation is to provide guidance on how to identify a 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 a
VIE consolidates the entity if the company’s interest is such that the company will absorb a
majority of the VIE’s expected losses and/or receive a majority of the VIE’s expected residual
returns, if they occur. FIN No. 46 (R) also requires additional disclosures by primary
beneficiaries and other significant variable interest holders.
The Company implemented FIN No. 46 (R) on February 1, 2004. Previously, the Company adopted the
consolidation requirements for VIEs created after January 31, 2003 and the disclosure provisions of
the interpretation that were effective upon issuance. As a result, the Company determined that it
is the primary beneficiary of 25 previously unconsolidated VIEs representing 14 properties (19 VIEs
representing 8 properties in Residential Group, 5 VIEs/properties in Commercial Group, and 1
VIE/property in Land Development Group). Of these 25 VIEs, 14 VIEs representing 13 properties (9
VIEs representing 8 properties in Residential Group, 4 VIEs/properties in Commercial Group, and 1
VIE/property in Land Development Group) that were previously accounted for using the equity method
of accounting have been fully consolidated. The remaining 11 VIEs representing 1 property (10 VIEs
in Residential Group and 1 VIE/property in Commercial Group) that were previously accounted for
using the cost method of accounting have also been fully consolidated.
In addition, 5 properties in the Residential Group, which were determined to be VIEs, have been
deconsolidated because the Company is not considered the primary beneficiary of these properties.
Although the Company is an equity investor in these properties, it lacks certain decision-making
authority. Specifically, these properties are part of government sponsored housing programs that
are administered by the U.S. Department of Housing and Urban Development (“HUD”). The Company
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies (continued)
determined through a review of the contractual agreements for these government sponsored
programs that the decision- making rights of HUD, a non-equity investor, are restrictive rights
that have a significant impact on these 5 properties. The Company determined that HUD is the
primary beneficiary of these VIEs because it is most closely associated with the VIEs. The VIEs’
activities include providing affordable housing for those individuals that qualify as low-income
individuals; which is also HUD’s primary goal, mission, or purpose. Consistent with the provisions
of FIN No. 46 (R), the Company does not consider the activities of these VIEs significant as they
only have a de minimus effect on all the principal captions in the Consolidated Balance Sheets.
For the year ended January 31, 2005, the Company recorded a charge of $18,628,000 ($11,261,000 net
of tax) for the cumulative effect of change in accounting principle in accordance with FIN No. 46
(R), which resulted in a reduction of net earnings. This charge consisted primarily of the
Company’s share of accumulated depreciation and amortization expense of the newly-consolidated VIEs
that were previously accounted for on the cost method.
Upon implementation of FIN No. 46 (R) on February 1, 2004, the Company determined that it held
variable interests in 39 other VIEs representing 39 properties (38 in Residential Group and 1 in
Land Development Group) for which it is not the primary beneficiary. Of the 38 Residential
entities, 5 that were previously consolidated have been subsequently deconsolidated as disclosed
above in accordance with the provisions of FIN No. 46 (R). The Company is involved with these
unconsolidated VIEs as an equity holder, lender, management agent, or through other contractual
relationships. The maximum exposure to loss as a result of the Company’s involvement with these
unconsolidated VIEs was limited to its recorded investments in those VIEs totaling approximately
$25,000,000 at February 1, 2004, which are recorded as investments in and advances to affiliates.
In addition, the Company has various VIEs that were previously consolidated that remain
consolidated under FIN No. 46 (R).
As of January 31, 2007, the Company determined that it is the primary beneficiary of 33 VIEs
representing 19 properties (19 VIEs representing 8 properties in Residential Group, 12 VIEs
representing 9 properties in Commercial Group, and 2 VIEs/properties in Land Development Group).
As of January 31, 2007, the Company held variable interests in 44 VIEs for which it is not the
primary beneficiary. The maximum exposure to loss as a result of the Company’s involvement with
these unconsolidated VIEs is limited to its recorded investments in those VIEs totaling
approximately $67,000,000 at January 31, 2007. In addition, the Company has various VIEs that were
previously consolidated that remain consolidated under FIN No. 46 (R). These VIEs consist of joint
ventures that are engaged, directly or indirectly, in the ownership, development and management of
office buildings, regional malls, specialty retail centers, apartment communities, military
housing, supported-living apartments and land development.
The total assets, nonrecourse mortgage debt, total liabilities and minority interest of VIEs
consolidated due to the implementation of FIN No. 46 (R) for which the Company is the primary
beneficiary (net of the 5 deconsolidated properties) are as follows:
Total liabilities (including nonrecourse mortgage debt)
$
918,000
$
900,000
Minority interest
$
42,000
$
40,000
In addition to the VIEs described above, the Company has also determined that it is the
primary beneficiary of a VIE which holds collateralized borrowings of $29,000,000 (see Note H –
Senior and Subordinated Debt) as of January 31, 2007.
Allowance for doubtful accounts and notes receivable
(12,617
)
(11,022
)
Notes and Accounts Receivable, Net
$
287,615
$
265,264
Weighted average interest rate on notes receivable
5.07
%
6.71
%
Notes receivable due within one year
$
13,671
$
2,529
Stapleton Advances
Stapleton Land, LLC has made certain advances to the Park Creek Metropolitan District (the
“District”) for in-tract infrastructure. The advances are subordinate to the District’s senior and
subordinated bonds (See Note I – Financing Arrangements). For the years ended January 31, 2007 and
2006, Stapleton Land, LLC had advances outstanding of $14,699,000 and $3,883,000, respectively,
included in other receivables in the Company’s Consolidated Balance Sheets. The Company recorded
approximately $753,000 and $1,201,000 of interest income related to these advances in the
Consolidated Statements of Earnings, for the years ended January 31, 2007 and 2006, respectively.
The Company believes the amount outstanding as of January 31, 2007 is fully collectible.
C. Investments in and Advances to Affiliates
Included in investments in and advances to affiliates are unconsolidated investments in
entities which the Company does not control and/or is not deemed to be the primary beneficiary, and
which are accounted for under the equity method of accounting, as well as advances to partners and
other affiliates.
Following is a reconciliation of members’ and partners’ equity to the Company’s carrying value in
the accompanying Consolidated Balance Sheets:
As is customary within the real estate industry, the Company invests in certain projects
through joint ventures. The Company provides funding for certain of its partners’ equity
contributions. Historically, the most significant partnership for which the Company provides
funding relates to FCRC, representing the Commercial Group’s New York City operations and one
unconsolidated project reported in the Residential Group. The Company consolidates the
majority of its investments in these Commercial Group projects. The Company’s partner, Bruce
C. Ratner, is the President and Chief Executive Officer of FCRC and is the cousin to five
executive officers of the Company. The FCRC portfolio became a wholly-owned subsidiary of the
Company upon the issuance of the Class A Common Units in exchange for Bruce C. Ratner’s
minority interests. At January 31, 2007 and 2006, amounts advanced for projects on behalf of
this partner were $0 and
$38,817, respectively, of the $238,072 and $206,697 presented above for “Advances to and on
behalf of other affiliates.” These advances entitled the Company to a preferred return on and
of the outstanding balances, which are payable solely from cash flows of each respective
property, as well as a deficit restoration obligation provided by the partner. These advances
were repaid upon the issuance of the Class A Common Units on November 8, 2006 (See Footnote U
– Class A Common Units).
The increase in restricted cash and nonrecourse debt is primarily related to bond proceeds
held in escrow related to Phase 2 and Phase 3 of development at Ohana Military Communities.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
D. 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.
Included in deferred costs, net is $57,653 (net of accumulated amortization of $2,034) of
intangible assets that were recorded in connection with the issuance of Class A Common Units
in exchange for Bruce C. Ratner’s minority interests in the FCRC Portfolio (see Note U — Class
A Common Units). These intangible assets consist of lease-in-place values, tenant
relationships and leasing commissions. During the year ended January 31, 2007, the Company
recorded $2,034 of amortization expense related to these intangible assets. The
lease-in-place values and leasing commissions cost are generally being amortized over
approximately 1 month to 28 years, which represents the remaining lease term. The tenant
relationships are generally being amortized over approximately 5 to 33 years, which generally
represents the expected life of the tenant relationship. The estimated aggregate amortization
expense is $6,064, $5,368, $5,133, $4,848 and $4,490 for the years ended January 31, 2008,
2009, 2010, 2011 and 2012, respectively.
E. Mortgage Debt, Nonrecourse
Nonrecourse mortgage debt, which is collateralized solely by completed rental properties,
projects under development and undeveloped land, was as follows:
Taxable variable-rate debt of $870,131 and a portion of tax-exempt variable-rate debt of
$737,874 as of January 31, 2007 is protected with swaps and caps described below.
(2)
Fixed-rate debt of $3,730,367 and $3,649,330 as of January 31, 2007 and 2006,
respectively, includes $95,065 and $103,423 of Urban Development Action Grants (“UDAGs”) at
2.07% and 1.69%, respectively.
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.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
E. Mortgage Debt, Nonrecourse (continued)
To mitigate short-term variable-interest rate risk, the Company has purchased interest rate
hedges for its mortgage debt portfolio as follows:
Taxable (Priced off of London Interbank Offered Rate (“LIBOR”) Index)
Caps
Swaps (1)
Average
Average
Period Covered
Amount
Base Rate
Amount
Base Rate
(dollars in thousands)
02/01/07-02/01/08(2)
$
977,609
6.06%
$
350,878
4.72%
02/01/08-02/01/09
1,056,089
7.19
49,690
4.54
02/01/09-02/01/10
91,354
5.20
48,432
4.54
02/01/10-02/01/11
73,500
5.00
47,081
4.54
(1)
Excludes the 10-year forward swaps discussed below.
(2)
These LIBOR-based hedges as of February 1, 2007 protect the debt currently outstanding
as well as the anticipated increase in debt outstanding for projects under development or
anticipated to be under development during the year ending January 31, 2008.
Tax-Exempt (Priced off of Bond Municipal Association (“BMA”) Index)
Caps
Average
Period Covered
Amount
Base Rate
(dollars in thousands)
02/01/07-02/01/08
$
266,558
5.83%
02/01/08-02/01/09
208,510
5.92
02/01/09-02/01/10
147,200
6.00
The interest rate hedges summarized in the tables above were purchased to mitigate variable
interest rate risk. The Company currently intends to convert a significant portion of its
committed variable-rate debt to fixed-rate debt. In order to protect against significant increases
in long-term interest rates, the Company entered into a number of 10-year forward swaps. During
2006, the Company executed a notional amount of $883,045,000 of 10-year forward swaps at an average
rate of 5.72% to protect the Company against interest rate fluctuations on forecasted financings on
fully consolidated properties that are anticipated to occur over the next three years. At the time
the Company secures and locks an interest rate on an anticipated financing, it is the Company’s
intention to simultaneously terminate the forward swaps attributed to that financing. The receipt
or payment of cash at termination will be recorded in other accumulated comprehensive income and
will be amortized as either an increase or decrease to interest expense in the same periods as the
interest payments on the financing. During 2006, a notional amount of $92,500,000 of the forward
swaps included in the figure above were terminated in conjunction with the locking of the interest
rate on the financing.
During 2006, the Company also executed $270,000,000 of 10-year forward swaps at an average rate of
5.87% to hedge the interest rate risk associated with its proportionate share of nonrecourse
mortgage debt for two properties accounted for under the equity method of accounting. Under the
provisions of SFAS No. 133, the Company cannot designate these swaps as cash flow hedges because
they relate to unconsolidated properties. Therefore, the change in the fair value of these swaps
must be marked to market through earnings on a quarterly basis. During 2006, $150,000,000 of the
forward swaps included in the figure above were terminated in conjunction with the locking of the
interest rate on the anticipated financing.
The Company is engaged in discussions with its current lenders, and is actively working to extend
and/or refinance maturing mortgage debt. As of January 31, 2007, the composition of mortgage debt
maturities including scheduled amortization and balloon payments is as follows:
Notes payable, composed of notes due to lenders other than banks are primarily nonrecourse to
the Company and relate to various financing arrangements for our partnerships. The outstanding
Notes Payable balance at January 31, 2007 and 2006, are $96,127,000 and $73,823,000, respectively.
The weighted average interest rate at January 31, 2007 and 2006 are 5.39% and 5.30%, respectively.
These notes payable mature between 2007 and 2054. The estimated payments are as follows for the
next five years: $80,214,000 in 2007, $10,903,000 in 2008, $289,000 in 2009, $96,000 in 2010, and
$102,000 in 2011.
The following table summarizes interest incurred and paid on notes payable:
The bank revolving credit facility as amended June 30, 2006 provides, among other things, for
1) an increase of $150,000,000 in available borrowings up to $600,000,000; 2) at the Company’s
election, interest rates of 1.75% over the London Interbank Offered Rate (“LIBOR”) or 1/2% over the
prime rate (the Company generally elects LIBOR); 3) a maturity date of March 2009; 4) maintenance
of debt service coverage ratios and specified levels of net worth (as defined in the credit
facility); 5) dividend and stock repurchase limitation of $40,000,000 per annual period; and 6) the
ability to use up to $100,000,000 of available borrowings for letters of credit or surety bonds.
On October 3, 2006, the bank revolving credit facility was further amended to provide the Company
the ability to repurchase shares of outstanding Class A common stock using proceeds from the
issuance of the 3.625% Puttable Equity-Linked Senior Notes (see Note H — Senior and Subordinated
Debt) in an aggregate amount not to exceed $50,000,000. There were $72,324,000 and $67,071,000 in
letters of credit and $-0- in surety bonds outstanding at January 31, 2007 and 2006, respectively.
As of January 31, 2006 and until June 30, 2006, the bank revolving credit facility provided for
borrowings of up to $450,000,000 with a $100,000,000 accordion provision subject to bank approval.
The revolving credit facility also provided for interest rates, at the Company’s election, of 1.95%
over LIBOR or 1/2% over the prime rate and an annual dividend and stock repurchase limitation of
$30,000,000. Other terms of the facility were similar to the Company’s current arrangement.
At January 31, 2007, retained earnings of $19,462,000 were available for payment of dividends.
Under the amended credit facility, this limitation will be reset each March 22 to $40,000,000.
The outstanding balance of the revolving credit facility was $-0- and $82,500,000 at January 31,2007 and 2006, respectively.
Interest incurred and paid on the bank revolving credit facility was as follows:
3.625% Puttable Equity-Linked Senior Notes due 2011
$
287,500
$
—
Other Senior Notes:
7.625% Senior Notes due 2015
300,000
300,000
6.500% Senior Notes due 2017
150,000
150,000
7.375% Senior Notes due 2034
100,000
100,000
Total Senior Notes
837,500
550,000
Subordinated Debt:
Redevelopment Bonds due 2010
20,400
20,400
Subordinate Tax Revenue Bonds due 2013
29,000
29,000
Total Subordinated Debt
49,400
49,400
Total Senior and Subordinated Debt
$
886,900
$
599,400
Puttable Equity-Linked Senior Notes
On October 10, 2006, the Company issued $287,500,000 of 3.625% puttable equity-linked senior notes
due October 15, 2011 in a private placement. The proceeds from this offering (net of approximately
$25,000,000 of offering costs, underwriting fees and the cost of the puttable note hedge and
warrant transactions described below) were used to repurchase $24,962,000 of the Company’s Class A
common stock, to repay the outstanding balance of $190,000,000 under the bank revolving credit
facility (see Note G — Bank Revolving Credit Facility) and for general working capital purposes.
The notes were issued at par and accrued interest is payable semi-annually in arrears on April 15
and October 15 of each year, beginning on April 15, 2007. The Company may not redeem these notes
prior to maturity. The notes are unsecured unsubordinated obligations and rank equally with all
other unsecured and unsubordinated indebtedness.
Holders may put their notes to the Company at their option on any day prior to the close of
business on the scheduled trading day immediately preceding July 15, 2011 only under the following
circumstances: (1) during the five business-day period after any five consecutive trading-day
period (the “measurement period”) in which the trading price per note for each day of that
measurement period was less than 98% of the product of the last reported sale price of the
Company’s Class A common stock and the put value rate (as defined) on each such day; (2) during any
fiscal quarter after the fiscal quarter ending January 31, 2007, if the last reported sale price of
the Company’s Class A common stock for 20 or more trading days in a period of 30 consecutive
trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds
130% of the applicable put value price in effect on the last trading day of the immediately
preceding fiscal quarter; or (3) upon the occurrence of specified corporate events as set forth in
the applicable indenture. On and after July 15, 2011 until the close of business on the scheduled
trading day immediately preceding the maturity date, holders may put their notes to the Company at
any time, regardless of the foregoing circumstances. In addition, upon a change in control, as
defined, the holders may require the Company to purchase for cash all or a portion of their notes
for 100% of the principal amount of the notes plus accrued and unpaid interest, if any, plus a
number of additional make-whole shares of the Company’s Class A common stock, as set forth in the
applicable indenture.
If a note is put to the Company, a holder would receive (i) cash equal to the lesser of the
principal amount of the note or the put value and (ii) to the extent the put value exceeds the
principal amount of the note, shares of the Company’s Class A common stock, cash, or a combination
of Class A common stock and cash, at the Company’s option. The initial put value rate will be
15.0631 shares of Class A common stock per $1,000 principal amount of notes (equivalent to a put
value price of $66.39 per share of Class A common stock). The put value rate will be subject to
adjustment in some events but will not be adjusted for accrued interest. In addition, if a
“fundamental change,” as defined, occurs prior to the maturity date, the Company will in some cases
increase the put value rate for a holder that elects to put its notes.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
H. Senior and Subordinated Debt (continued)
The Company entered into a registration rights agreement that required a shelf registration
statement to be filed within 90 days and declared effective under the United States Securities Act
of 1933 (“Securities Act”) within 180 days after October 10, 2006. The Company filed a shelf
registration statement for the resale of the notes and the Class A common stock issuable upon the
Company’s exercise of the net share settlement option under the Securities Act on January 4, 2007
and it was immediately effective due to our status as a Well-Known Seasoned Issuer. The Company
will use its best efforts to keep the shelf registration statement effective until the earliest of:
(1) the date all of the registrable securities have been sold pursuant to the shelf registration
statement; (2) the expiration of the holding period under Rule 144(k) under the Securities Act, or
any successor provision; or (3) two years from the date the shelf registration statement is
declared effective. The Company refers to each of the following as an effective failure: (1) the
shelf registration statement ceases to be effective, or (2) the Company suspends the use of the
prospectus or the holders are otherwise prevented or restricted by the Company from effecting sales
pursuant to the shelf registration statement, and either continues for more than 30 days, whether
or not consecutive, in any 90-day period, or for more than 90 days, whether or not consecutive,
during any 12-month period.
Upon the occurrence of an effective failure, the Company will be required to pay additional
amounts, in cash, to holders of the notes. Such additional amounts will accrue on the notes that
are registrable securities, from and including the day following the effective failure to but
excluding, the earlier of the time such holders are again able to make resales under the shelf
registration statement and the date the shelf registration statement is no longer required to be
kept effective. Additional amounts will be paid semiannually in arrears on each April 15 and
October 15 and will accrue at a rate per annum equal to 0.25% for the first 90 days after the
occurrence of the event and 0.50% after the first 90 days. In no event will additional amounts
exceed 0.50% per annum. The maximum potential additional amounts that could be required to be paid
by the Company is approximately $2,674,000 for the two year period in which the shelf registration
is required to be effective. At January 31, 2007, the Company, in accordance with FASB Statement
No. 5, “Accounting for Contingencies”, has concluded that it is not probable it will be required to
pay additional amounts as a result of an effective failure.
Concurrent with the issuance of the notes, the Company purchased a call option on its Class A
common stock in a private transaction. The purchased call option allows the Company to receive
shares of its Class A common stock and/or cash from counterparties equal to the amounts of Class A
common stock and/or cash related to the excess put value that it would pay to the holders of the
notes if put to the Company. These purchased call options will terminate upon the earlier of the
maturity dates of the notes or the first day all of the notes are no longer outstanding due to a
put or otherwise. The purchased call options, which cost an aggregate $45,885,000 ($28,155,000 net
of the related tax benefit), were recorded net of tax as a reduction of shareholders’ equity
through additional paid-in capital. In a separate transaction, the Company sold warrants to issue
shares of the Company’s Class A common stock at an exercise price of $74.35 per share in a private
transaction. If the average price of the Company’s Class A common stock during a defined period
ending on or about the respective settlement dates exceeds the exercise price of the warrants, the
warrants will be settled in shares of the Company’s Class A common stock. Proceeds received from
the issuance of the warrants totaled approximately $28,923,000 and were recorded as an addition to
shareholders’ equity through additional paid-in capital.
Other Senior Notes
Along with its wholly-owned subsidiaries, Forest City Enterprises Capital Trust I (“Trust I”) and
Forest City Enterprises Capital Trust II (“Trust II”), the Company filed an amended shelf
registration statement with the SEC on May 24, 2002. This shelf registration statement amended the
registration statement previously filed with the SEC in December 1997. This registration statement
is intended to provide the Company flexibility to raise funds from the offering of Class A common
stock, preferred stock, depositary shares and a variety of debt securities, warrants and other
securities. Trust I and Trust II have not issued securities to date and, if issued, would
represent the sole net assets of the trusts.
On May 19, 2003, the Company issued $300,000,000 of 7.625% senior notes due June 1, 2015 in a
public offering under its shelf registration statement. The proceeds from this offering (net of
$8,151,000 of offering costs) were used to redeem all of the outstanding 8.5% senior notes
originally due in 2008 at a redemption price equal to 104.25%, or $208,500,000. The remaining
proceeds were used to repay the balance outstanding under the Company’s previous credit facility
and for general working capital purposes. Accrued interest is payable semi-annually on December 1
and June 1. These senior notes may be redeemed by the Company, at any time on or after June 1, 2008
at a redemption price of 103.813% beginning June 1, 2008 and systematically reduced to 100% in
years thereafter. However, if the Company completed one or more public equity offerings prior to
June 1, 2006, up to 35% of the original principal amount of the notes may have been redeemed using
all or a portion of the net proceeds within 75 days of the completion of the public equity offering
at 107.625% of the principal amount of the notes. As there were no public equity offerings
completed prior to June 1, 2006, the Company did not redeem the original principal amount of any of
the notes.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
H. Senior and Subordinated Debt (continued)
On January 25, 2005, the Company issued $150,000,000 of 6.500% senior notes due February 1,2017 in a public offering under its shelf registration statement. The proceeds from this offering
(net of $4,185,000 of offering costs) were used to repay the outstanding balance under the
Company’s bank revolving credit facility and for general working capital purposes. Accrued
interest is payable semi-annually on February 1 and August 1, commencing on August 1, 2005. These
senior notes may be redeemed by the Company, at any time on or after February 1, 2010 at a
redemption price of 103.250% beginning February 1, 2010 and systematically reduced to 100% in the
years thereafter. However, if the Company completes one or more public equity offerings prior to
February 1, 2008, up to 35% of the original principal amount of the notes may be redeemed using all
or a portion of the net proceeds within 75 days of the completion of the public equity offering at
106.50% of the principal amount of the notes.
On February 10, 2004, the Company issued $100,000,000 of 7.375% senior notes due February 1, 2034
in a public offering under its shelf registration statement. The proceeds from this offering (net
of $3,808,000 of offering costs) were used to repay the outstanding term loan balance of
$56,250,000 under the previous credit facility and for general working capital purposes. Accrued
interest is payable quarterly on February 1, May 1, August 1, and November 1. These senior notes
may be redeemed by the Company, in whole or in part, at any time on or after February 10, 2009 at a
redemption price equal to 100% of their principal amount plus accrued interest.
The Company’s senior notes are unsecured senior obligations and rank equally with all existing and
future unsecured indebtedness; however, they are effectively subordinated to all existing and
future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of
the value of the collateral securing such other debt, including the bank revolving credit facility.
The indentures governing the senior notes contain covenants providing, among other things,
limitations on incurring additional debt and payment of dividends.
Subordinated Debt
In November 2000, the Company issued $20,400,000 of redevelopment bonds in a private placement. The
bonds bear a fixed interest rate of 8.25% and are due September 15, 2010. The Company has entered
into a TRS for the benefit of these bonds that expires on September 15, 2008. Under this TRS, the
Company receives a rate of 8.25% and pays BMA plus a spread (1.15% through September 2006 and 0.90%
thereafter). Interest is payable semi-annually on March 15 and September 15. This debt is
unsecured and subordinated to the senior notes and the bank revolving credit facility.
In May 2003, the Company purchased $29,000,000 of subordinate tax revenue bonds that were
contemporaneously transferred to a custodian, which in turn issued custodial receipts that
represent ownership in the bonds to unrelated third parties. The Company evaluated the transfer
pursuant to the provisions of SFAS No. 140 and has determined that the transfer does not qualify
for sale accounting treatment principally because the Company has guaranteed the payment of
principal and interest in the unlikely event that there is insufficient tax revenue to support the
bonds when the custodial receipts are subject to mandatory tender on December 1, 2013. As such,
the Company is the primary beneficiary of this VIE (see the “Variable Interest Entities” section of
Note A) and the book value (which approximates amortized costs) of the bonds was recorded as a
collateralized borrowing reported as senior and subordinated debt and as held-to-maturity
securities reported as other assets in the Consolidated Balance Sheets.
The following table summarizes interest incurred and paid on senior and subordinated debt.
In 2001, Stapleton Land, LLC purchased $75,000,000 in Tax Increment Financing (“TIF”) bonds and
$70,000,000 in revenue bonds (for an aggregate of $145,000,000, collectively the “Bonds”) from the
Park Creek Metropolitan District (the “District”). The Bonds were immediately sold to Lehman
Brothers, Inc. (“Lehman”) and were subsequently acquired by a qualified special purpose entity (the
“Trust”), which in turn issued trust certificates to third parties. The District had a call option
on the revenue bonds that began in August 2003 and had a call option on the TIF bonds that began in
August 2004. In the event the Bonds were not removed from the Trust, Stapleton Land, LLC had the
obligation to repurchase the Bonds from the Trust. Upon removal of the Bonds from the Trust,
Stapleton Land, LLC was entitled to the difference between the interest paid on the Bonds and the
cumulative interest paid to the certificate holders less trustee fees, remarketing fees and credit
enhancement fees (the “Retained Interest”).
The Company assessed its transfer of the Bonds to Lehman at inception and determined that it
qualified for sale accounting treatment pursuant to the provisions of SFAS No. 140 because the
Company did not maintain control over the Trust and the Bonds were legally isolated from the
Company’s creditors. At inception, the Retained Interest had no determinable fair value as the
cash flows were not practical to estimate because of the uncertain nature of the tax base still
under development. In accordance with SFAS No. 140, no gain or loss was recognized on the sale of
the Bonds to Lehman. As a result, the Retained Interest was recorded at zero with all future
income to be recorded under the cost recovery method. The Company separately assessed the
obligation to redeem the Bonds from the Trust pursuant to the provisions of SFAS No. 140 and
concluded the liability was not material. The original principal outstanding under the
securitization structure described above was $145,000,000, which was not recorded on the
Consolidated Balance Sheets.
The Company reassessed the fair value and adjusted the amount of the Retained Interest through OCI
on a quarterly basis. The Company measured its Retained Interest in the Trust at its estimated fair
value based on the present value of the expected future cash flows, which were determined based on
the expected future cash flows from the underlying Bonds and from expected changes in the rates
paid to the certificate holders discounted at market yield, which considered the related risk. The
difference between the amortized cost of the Retained Interest (approximately zero) and the fair
value was recorded, net of the related tax and minority interest, in shareholders’ equity as a
change in accumulated OCI. The quarterly fair value calculations were determined based on the
application of key assumptions determined at the time of transfer including an estimated weighted
average life of two years and a 6.50% residual cash flows discount rate.
In August 2004, the $75,000,000 TIF bonds were defeased and removed from the Trust with the
proceeds of a new $75,000,000 bond issue by the Denver Urban Renewal Authority (“DURA”), and the
$70,000,000 revenue bonds, which bear interest at a rate of 8.5%, were removed from the Trust
through a third party purchase. Upon removal of the $70,000,000 revenue bonds from the Trust, the
third party deposited the bonds into a special-purpose entity (the “Entity”). As the TIF and
revenue bonds were successfully removed from the Trust, Stapleton Land, LLC recognized $25,262,000
($13,745,000 net of tax and minority interest) of interest income for the year ended January 31,2005 in the Consolidated Statements of Earnings upon receipt of the Retained Interest. Of this
amount, the fair value of $22,870,000 ($12,445,000 net of tax and minority interest) was recognized
in OCI in previous fiscal years and deferred until August 2004 under the cost recovery method of
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
I. Financing Arrangements (continued)
revenue recognition. The remaining amount of $2,392,000 ($1,300,000 net of tax and minority
interest) was earned and recognized during the year ended January 31, 2005. Stapleton Land, LLC is
not obligated to pay, nor is entitled to, any further amounts related to this Retained Interest.
Also in August 2004, the Entity issued two types of securities, 1) Puttable Floating Option
Tax-Exempt Receipts (“P-FLOATs”), which bear interest at a short-term floating rate as determined
by the remarketing agent and 2) Residual Interest Tax-Exempt Securities Receipts (“RITES”), which
receive the residual interest from the revenue bonds after the P-FLOAT interest and various program
fees have been paid. The P-FLOATs were sold to third parties. Stapleton Land II, LLC, a
consolidated affiliate of Stapleton Land, LLC, acquired the RITES for a nominal amount and provided
credit enhancement to the trustor of the Entity including an initial collateral contribution of
$10,000,000. During the year ended January 31, 2005, the Company contributed additional net
collateral of $2,094,000. The Company consolidated the collateralized borrowing given its
obligation to absorb the majority of the expected losses. The book value (which approximates
amortized cost) of the P-FLOATs was reported as nonrecourse mortgage debt until terminated in July
2005. As the bonds were redeemed in July 2005, there are no balances reported for the revenue
bonds or collateral at January 31, 2007 and 2006 in the Consolidated Balance Sheets and no amounts
are recorded in the Consolidated Statements of Earnings for the year ended January 31, 2007 related
to this collateralized borrowing. For the year ended January 31, 2006, the Company recorded
$2,670,000 of interest income and $1,162,000 of interest expense related to this collateralized
borrowing in the Consolidated Statements of Earnings. Of the interest income amount, $2,588,000 is
interest income on the RITES and $82,000 is interest income on the collateral. For the year ended
January 31, 2005, the Company recorded $3,078,000 of interest income and $1,159,000 of interest
expense related to this collateralized borrowing in the Consolidated Statements of Earnings. Of
the interest income amount, $2,958,000 is interest income on the RITES and $120,000 is interest
income on the collateral.
On July 13, 2005, the District issued $63,000,000 Senior Limited Property Tax Supported Revenue
Refunding Bonds (“Senior Limited Bonds”), Series 2005 and $65,000,000 Senior Subordinate Limited
Property Tax Supported Revenue Refunding and Improvement Bonds (“Senior Subordinate Bonds”), Series
2005 (collectively, the “2005 Bonds”). Proceeds from the issuance of the 2005 Bonds were used to
redeem the $70,000,000 revenue bonds held by the Entity, which were then removed from the Company’s
Consolidated Balance Sheets. The Entity, in turn, redeemed the outstanding P-FLOATs. As holder of
the RITES, Stapleton Land II, LLC was entitled to the remaining capital balances of the Entity
after payment of P-FLOAT interest and other program fees. The District used additional proceeds of
$30,271,000 to repay developer advances and accrued interest to Stapleton Land, LLC. Stapleton
Land II, LLC was refunded $12,060,000 of collateral provided as credit enhancement under this
borrowing.
On July 13, 2005, Stapleton Land II, LLC entered into an agreement whereby it will receive a 1% fee
on the $65,000,000 Senior Subordinate Bonds described above in exchange for providing certain
credit enhancement. In connection with this transaction, Stapleton Land II, LLC provided
collateral of approximately $10,000,000 which is recorded as restricted cash in the Consolidated
Balance Sheets. For the year ended January 31, 2007, the Company recorded $1,031,000 of interest
income related to this arrangement in the Consolidated Statements of Earnings. Of the interest
income amount, $650,000 is fee interest income and $381,000 is interest income on the collateral.
For the year ended January 31, 2006, the Company recorded $516,000 of interest income related to
this arrangement in the Consolidated Statements of Earnings. Of the interest income amount,
$362,000 is fee interest income and $154,000 is interest income on the collateral. The
counterparty to the credit enhancement arrangement also owns the underlying Senior Subordinate
Bonds and can exercise its rights requiring payment from Stapleton Land II, LLC upon an event of
default of the Senior Subordinate Bonds, a refunding of the Senior Subordinate Bonds, or failure of
Stapleton Land II, LLC to post required collateral. The agreement is scheduled to expire on July1, 2009. The maximum potential amount of payments Stapleton Land II, LLC could be required to make
under the agreement is the par value of the Senior Subordinate Bonds. The Company does not have
any rights or obligations to acquire the $65,000,000 Senior Subordinate Bonds under this agreement.
At January 31, 2007, the fair value of this agreement, which is deemed to be a derivative
financial instrument, was immaterial. Subsequent changes in fair value, if any, will be marked to
market through earnings.
On August 16, 2005, the District issued $58,000,000 Junior Subordinated Limited Property Tax
Supported Revenue Bonds, Series 2005 (the “Junior Subordinated Bonds”). The Junior Subordinated
Bonds initially pay a variable rate of interest. Upon issuance, the Junior Subordinated Bonds were
purchased by a third party and the sales proceeds were deposited with a trustee pursuant to the
terms of the Series 2005 Investment Agreement. Under the terms of the Series 2005 Investment
Agreement, after March 1, 2006, the District may elect to withdraw funds from the trustee for
reimbursement for certain qualified infrastructure and interest expenditures (“Qualifying
Expenditures”). In the event that funds from the trustee are used for Qualifying Expenditures, a
corresponding amount of the Junior Subordinated Bonds converts to an 8.5% fixed rate and matures in
December 2037 (“Converted Bonds”). On August 16, 2005, Stapleton Land, LLC entered into a Forward
Delivery Placement Agreement (“FDA”) whereby Stapleton Land, LLC is entitled to and obligated to
purchase the converted
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
I. Financing Arrangements (continued)
fixed rate Junior Subordinated Bonds through June 2, 2008. Prior to the incurrence of
Qualifying Expenditures and the resulting Converted Bonds, Stapleton Land, LLC has no rights or obligations relating to the Junior
Subordinated Bonds. In the event the District does not incur Qualifying Expenditures, the Junior
Subordinated Bonds will mature on June 2, 2008. During 2006, the District withdrew $20,000,000 of
funds from the trustee for reimbursement of certain Qualifying Expenditures. Therefore, a
corresponding amount of the Junior Subordinated Bonds became Converted Bonds and were acquired by
Stapleton Land, LLC under the terms of the FDA. Stapleton Land, LLC immediately sold the Converted
Bonds to investment banks (“Investment Banks”) and simultaneously entered into TRS with a notional
amount of $20,000,000. The Company receives a fixed rate of 8.5% and pays BMA plus
a spread on the TRS. The Company determined the sale of the Converted Bonds to the Investment
Banks and simultaneous execution of the TRS did not surrender control, and therefore has been
recorded as a secured borrowing in the Consolidated Balance Sheets. The Company has classified the
Converted Bonds as available for sale, with unrealized holding gains and losses recorded in
accumulated other comprehensive income. The fair value of the Converted Bonds was approximately
$20,000,000 at January 31, 2007. For the year ended January 31, 2007, the Company recorded
$508,000 of interest income and $240,000 of interest expense related to the TRS in the Consolidated
Statement of Earnings.
Other Financing Arrangements
In May 2004, a third party purchased $200,000,000 in tax increment revenue bonds issued by DURA,
with a fixed-rate coupon of 8.0% and maturity date of October 1, 2024, which were used to fund the
infrastructure costs associated with phase II of the Stapleton development project. The DURA bonds
were transferred to a trust that issued floating rate trust certificates. Stapleton Land, LLC
entered into an agreement with the third party to purchase the DURA bonds from the trust if they
are not repurchased or remarketed between June 1, 2007 and June 1, 2009. Stapleton Land, LLC will
receive a fee upon removal of the DURA bonds from the trust equal to the 8.0% coupon rate, less the
BMA index (fixed at 2.85% through June 1, 2007) plus 40 basis points, less all fees and expenses
due to the third party (collectively, the “Fee”).
The Company has concluded that the trust described above is considered a qualified special purpose
entity pursuant to the provisions of SFAS No. 140 and thus is excluded from the scope of FIN No. 46
(R). As a result, the DURA bonds and the activity of the trust have not been recorded in the
consolidated financial statements. The purchase obligation and the Fee have been accounted for as a
derivative with changes in fair value recorded through earnings.
The fair market value of the purchase obligation and the Fee is determined based on the present
value of the estimated amount of future cash flows considering possible variations in the amount
and/or timing. The fair value of $15,090,000 at January 31, 2007 and $7,244,000 at January 31,2006 is recorded in other assets in the Consolidated Balance Sheets. For the years ended January31, 2007, 2006 and 2005, the Company has reported interest income of $7,847,000, $6,431,000 and
$813,000, respectively, related to the Fee in the Consolidated Statements of Earnings.
Also in May 2004, Stapleton Land, LLC entered into a TRS and an interest rate swap both with
notional amounts of $75,000,000. Stapleton Land, LLC receives a rate of 6.3% and pays BMA plus 60
basis points on the TRS (Stapleton Land, LLC paid BMA plus 160 basis points for the first 6 months
under this agreement). On the interest rate swap, Stapleton Land, LLC pays a rate of 2.85% and
receives BMA. Stapleton Land, LLC does not hold the underlying borrowings on the TRS. (See the
Accounting for Derivative Instruments and Hedging Activities section in Note A). The change in the
fair value of the TRS is marked to market through earnings. The fair value of the TRS was $255,000
and $1,100,000 at January 31, 2007 and 2006, respectively.
Stapleton Land, LLC has committed to fund $24,500,000 to the Park Creek Metropolitan District to be
used for certain infrastructure projects. The first $4,500,000 is due in August 2007. The
remaining balance is due no later than May 2009.
J. Accounts Payable and Accrued Expenses
Included in accounts payable and accrued expenses at January 31, 2007 and 2006 are book
overdrafts of approximately $25,919,000 and $22,587,000, 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.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
K. Income Taxes (continued)
The components of the deferred income tax liability are as follows.
January 31,
Temporary Differences
Deferred Tax
2007
2006
2007
2006
(in thousands)
Depreciation
$
353,418
$
306,690
$
136,561
$
118,505
Capitalized costs (1)
527,972
539,022
204,008
208,278
Tax loss carryforward
(67,309
)
(110,229
)
(23,558
)
(38,580
)
State loss carryforward, net of federal benefit
—
—
(18,730
)
(17,888
)
Valuation allowance
—
—
30,914
29,049
Federal tax credits and other carryforwards
—
—
(52,416
)
(49,584
)
Other comprehensive income (loss)
(23,905
)
364
(9,237
)
141
Basis in unconsolidated entities
227,209
210,017
87,794
81,150
Other (1)
282,106
88,662
130,993
56,717
Total
$
1,299,491
$
1,034,526
$
486,329
$
387,788
(1)
Additions to capitalized costs and other during the year ended January 31, 2007 and 2006
include $248,047 and $73,556, respectively, related to replacement property of tax-deferred
exchanges (see Note S).
Income taxes (refunded) paid were $(1,429,000), $(8,170,000) and $4,582,000 for the years
ended January 31, 2007, 2006 and 2005, respectively. At January 31, 2007, the Company had a
federal net operating loss carryforward of $90,825,000 (generated primarily from the impact on its
net earnings of tax depreciation expense from real estate properties) that will expire in the years
ending January 31, 2022 through January 31, 2027, a charitable contribution deduction carryforward
of $37,942,000 that will expire in the years ending January 31, 2008 through January 31, 2012,
General Business Credit carryovers of $12,865,000 that will expire in the years ending January 31,2008 through January 31, 2027, and an alternative minimum tax (“AMT”) credit carryforward of
$27,067,000 that is available until used to reduce Federal tax to the AMT amount. The Company has
a full valuation allowance against the deferred tax asset associated with its charitable
contributions because management believes at this time it is more likely than not that the Company
will not realize these benefits. The Company’s policy is to consider a variety of tax-deferral
strategies, including tax deferred exchanges, when evaluating its future tax position.
The Company applies the “with-and-without” methodology for computing its tax benefit on exercised
stock options. The carryforwards reported in the preceding paragraph reflect the amounts that will
be presented on the January 31, 2007 tax return and include a stock option deduction of
$26,129,000. Under the “with and without” approach, no current income tax benefit from the
exercise of stock options is recorded by the Company until it has utilized its existing net
operating losses. Accordingly, the Company has not recorded a net deferred tax asset of
approximately $7,797,000 from the exercise of stock options.
The components of the net deferred tax liability are as follows:
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
L. Segment Information
The Company uses a measure defined as Earnings Before Depreciation, Amortization and Deferred
Taxes (“EBDT”) to report its operating results. EBDT is defined as net earnings excluding the
following items: i) gain (loss) on disposition of rental properties, division and other investments
(net of tax); ii) the adjustment to recognize rental revenues and rental expense using the
straight-line method; iii) non-cash charges from real estate operations of Forest City Rental
Properties Corporation, a wholly-owned subsidiary of the Company, for depreciation, amortization,
amortization of mortgage procurement costs 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 believes that, although its business has many facets such as development, acquisitions,
disposals, and property management, the core of its business is the recurring operations of its
portfolio of real estate assets. The Company’s Chief Executive Officer (“CEO”), the chief operating
decision maker, uses EBDT, as presented, to assess performance of its portfolio of real estate
assets by operating segment because it provides information on the financial performance of the
core real estate portfolio operations. EBDT tells the CEO how profitable a real estate segment is
simply by operating for the sole purpose of collecting rent, paying operating expenses and
servicing its debt. The Company’s segments adhere to the accounting policies further described in
Note A.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
L. Segment Information (continued)
The following tables summarize financial data for the following strategic business units:
Commercial Group, Residential Group, Land Development Group and the following additional segments:
the Nets (an equity method investment) and Corporate Activities. All amounts are presented in
thousands.
Depreciation and amortization – Real Estate Groups
(114,016
)
(45,468
)
(41
)
—
—
—
(159,525
)
Amortization of mortgage procurement costs – Real Estate Groups
(5,539
)
(2,954
)
—
—
—
—
(8,493
)
Deferred taxes – Real Estate Groups
(23,679
)
(10,294
)
(2,532
)
—
4,755
—
(31,750
)
Straight-line rent adjustment
4,338
(92
)
—
—
—
—
4,246
Gain on disposition of other investments, net of tax
—
—
—
—
265
—
265
Gain on disposition recorded on equity method, net of tax
19,341
—
—
—
—
—
19,341
Cumulative effect of change in accounting principle, net of tax
(477
)
(10,784
)
—
—
—
—
(11,261
)
Discontinued operations, net of tax and minority interest: (3)
Depreciation and amortization – Real Estate Groups
(9,385
)
(10,299
)
—
—
—
—
(19,684
)
Amortization of mortgage procurement costs – Real Estate Groups
(3,377
)
(230
)
—
—
—
—
(3,607
)
Deferred taxes – Real Estate Groups
(1,451
)
663
—
—
—
—
(788
)
Straight-line rent adjustment
(964
)
—
—
—
—
—
(964
)
Gain on disposition of Lumber Group
—
—
—
—
—
11,501
11,501
Gain on disposition of rental properties
4,574
36,319
—
—
—
—
40,893
Net earnings
$
51,848
$
24,952
$
40,174
$
(6,108
)
$
(41,706
)
$
16,046
$
85,206
(1)
Expenditures for additions to real estate, EBDT and net earnings presented under the
caption “Other” relates to the Lumber Group, which was sold in November 2004 and is no longer
a reportable segment.
(2)
See Consolidated Statements of Earnings on page 76 for reconciliation of EBIT to net
earnings.
(3)
See Note S – Discontinued Operations starting on page 118 for more information.
(4)
The preference payment of $898,000 represents one quarter’s share of the annual preferred
payment in connection with the issuance of Class A Common Units in exchange for Bruce C.
Ratner’s minority interests in the FCRC portfolio. See Note U — Class A Common Units
starting on page 122 for more information.
The following table summarizes the minimum future rental income to be received on non-cancelable
operating leases of commercial properties that generally extend for periods of more than one year.
Years Ending January 31,
(in thousands)
2008
$
445,204
2009
440,891
2010
427,340
2011
406,738
2012
368,221
Later years
2,249,651
$
4,338,045
Most of the commercial leases include provisions for reimbursements of other charges including
real estate taxes, utilities and operating costs which is included in revenues from real estate
operations in the Consolidated Statements of Earnings. The following table summarizes total
reimbursements.
The Company is a lessee under various operating leasing 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 2035 and 2100, excluding optional renewal periods.
Minimum fixed rental payments under long-term leases (over one year) in effect at January 31, 2007
are as follows.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
N. Commitments and Contingencies
The Company has adopted the provisions of FIN No. 45 “Guarantor’s Accounting and
Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No.
45”). The Company believes the risk of payment under these guarantees, as described below, is
remote and, to date, no payments have been made under these guarantees.
As of January 31, 2007, the Company has a guaranteed loan of $1,400,000 relating to the
Company’s
share of a bond issue made by the Village of Woodridge, relating to a Land Development Group
project in suburban Chicago, Illinois. This guarantee was entered into prior to January 31, 2003,
and therefore, has not been recorded in the Company’s consolidated financial statements at January31, 2007, pursuant to the provisions of FIN No. 45. This 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
also had outstanding letters of credit of $72,324,000 as of January 31, 2007. 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.
As a general partner for certain limited partnerships, the Company guaranteed the funding of
operating deficits of newly-opened apartment projects for an average of five years. These
guarantees were entered into prior to January 31, 2003, and therefore, have not been recorded in
the Company’s consolidated financial statements at January 31, 2007, pursuant to the provisions of
FIN No. 45. At January 31, 2007, the maximum potential amount of future payments on these operating
deficit guarantees the Company could be required to make was approximately $2,000,000. 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 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. At January 31, 2007, the maximum potential payment under these tax
indemnity guarantees was approximately $68,535,000. The Company believes that all necessary
requirements for qualifications for such tax credits have been and will continue to 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 nationally recognized law firms supporting
the validity of the tax credits. The Company does not expect to make any payments under these
guarantees.
The Company’s mortgage loans are nonrecourse, however in some cases lenders carve out certain
items
from the nonrecourse 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, 2007, the outstanding
balance of the partners’ share of these loans was approximately $461,440,000. 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 has guaranteed the obligations of Forest City Rental Properties Corporation, or FCRPC,
under the FCRPC credit agreement, dated as of March 22, 2004, as amended, among FCRPC, the banks
named therein, KeyBank National Association, as administrative agent, and National City Bank, as
syndication agent. This guaranty imposes a number of restrictive covenants on the Company,
including a prohibition on certain consolidations and mergers and limitations on the amount of
debt, guarantees and property liens that the Company may incur. The guaranty also requires the
Company to maintain a specified minimum cash flow coverage ratio, consolidated shareholders’ equity
and Earnings Before Depreciation, Amortization and Deferred Taxes, or EBDT. The Company was in
compliance with the covenants under the guaranty at January 31, 2007.
The Company monitors its properties for the presence of hazardous or toxic substances. Other than
those environmental matters identified during the acquisition of a site (which are generally
remediated prior to the commencement of development), the Company is not aware of any environmental
liability with respect to its operating properties that would have a material adverse effect on its
financial position, cash flows, or results of operations. However, there can be no assurance that
such a material environmental liability does not exist. The existence of any such material
environmental
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
N. Commitments and Contingencies (continued)
liability could have an adverse effect on the Company’s results of operations and cash flow.
The Company carries environmental insurance and believes that the policy terms, conditions, limits
and deductibles are adequate and appropriate under the circumstances, given the relative risk of
loss, the cost of such coverage and current industry practice.
The Company customarily guarantees lien-free completion of projects under construction. Upon
completion, the guarantees are released. Additionally, the Company also provides lien-free
completion guarantees on the infrastructure on the land it develops and is later sold to customers
or is held for master-planned communities or mixed-use projects. At January 31, 2007, the Company
has provided the following completion guarantees:
Total
External
Outstanding
Total
Percent
Funding
Loan
Costs
Completed
Sources
Balance
(dollars in thousands)
Projects under construction
$
4,008,894
46
%
$
3,182,812
$
1,229,177
Land
$
725,770
72
%
$
646,853
$
122,059
The Company’s subsidiaries have been successful in consistently delivering lien-free
completion of construction and land 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.
On August 16, 2004, the Company purchased an ownership interest in the NBA franchise known as
the
Nets that is reported on the equity method of accounting. Although the Company has an ownership
interest of approximately 21% in the Nets, the Company currently recognized approximately 17%, 31%
and 38% of the net loss for the years ended January 31, 2007, 2006 and 2005, respectively, because
profits and losses are allocated to each member based on an analysis of the respective member’s
claim on the net book equity assuming a liquidation at book value at the end of the accounting
period without regard to unrealized appreciation (if any) in the fair value of the Nets. In
connection with the purchase of the franchise, the Company and certain of its partners have
provided an indemnity guarantee to the NBA for any losses arising from the transaction, including
the potential relocation of the team. The Company’s indemnity is limited to $100,000,000 and is
effective as long as the Company owns an interest in the team. The indemnification provisions are
standard provisions that are required by the NBA. The Company has insurance coverage of
approximately $100,000,000 in connection with such indemnity. The Company evaluated the indemnity
guarantee in accordance with FIN No. 45 and determined that the fair value for the Company’s
liability for its obligations under the guarantee was not material.
Certain of the Company’s ground leases include provisions requiring it to indemnify the ground
lessor against claims or damages occurring on or about the leased property during the term of the
ground lease. These indemnities generally were entered into prior to January 31, 2003, and
therefore, have not been recorded in the Company’s consolidated financial statements at January 31,2007 in accordance with FIN No. 45. The maximum potential amount of future payments the Company
could be required to make is limited to the actual losses suffered. The Company mitigates its
exposure to loss related to these indemnities through insurance coverage.
The Company is party to an easement agreement under which it has agreed to indemnify a third party
for any claims or damages arising from the use of the easement area of one of its development
projects. The Company has also entered into an environmental indemnity at one of its development
projects whereby it agrees to indemnify a third party for the cost of remediating any environmental
condition. 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. The Company
mitigates its exposure to loss related to the easement agreement and environmental indemnity
through insurance coverage.
The Company is party to an agreement whereby it has issued a $40,000,000 guarantee in connection
with certain environmental work at a mixed-use development project in Brooklyn, New York. As
stipulated in the agreement, the guaranty expires at some point in time between six and nine years
after completion of the investigative work, which occurred
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
N. Commitments and Contingencies (continued)
on July 16, 2006. The Company has recorded a liability of $2,850,000 related to this agreement
for the year ended January 31, 2007, which is included in accounts payable and accrued expenses in
the Consolidated Balance Sheets. The Company mitigates its exposure to loss related to this
agreement through an environmental insurance policy.
Stapleton Land, LLC has committed to fund $24,500,000 to the Park Creek Metropolitan District to be
used for certain infrastructure projects. The first $4,500,000 is due in August 2007. The
remaining balance is due no later than May 2009.
O. Stock-Based Compensation
The Company’s 1994 Stock Plan, as amended, (the “Plan”) permits the award of
Class A stock
options, restricted shares, and other equity awards to key employees and non-employee directors of
the Company. The aggregate maximum number of shares that may be issued during the term of the Plan
is 500,000 for restricted shares or units granted after June 21, 2005 and 11,750,000 for all types
of awards. As of January 31, 2007, the total number of shares available for granting of all types
of awards was 3,985,560, of which 309,000 may be restricted shares or units. The maximum annual
award to an individual is 400,000 stock options or rights and 225,000 restricted shares or units.
Stock options have a maximum term of 10 years and are awarded with an exercise price at least equal
to the market value of the stock on the date of grant. Class A common stock issued upon the
exercise of stock options may be issued out of unissued shares or treasury stock. The Plan, which
is administered by the Compensation Committee of the Board of Directors, does not allow the
reduction of option prices without shareholder approval, except for the anti-dilution adjustments
permitted by the Plan. The Company has not amended the terms of any previously issued equity
award. All outstanding stock options have an exercise price equal to the fair market value of the
underlying stock at the date of grant, a 10-year term, and graded vesting over four years. All
outstanding restricted shares have graded vesting over four years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for options granted in
2006 and 2005. No options were granted in 2004.
2006
2005
Risk-free interest rate
4.89
%
4.34
%
Expected volatility
20.00
%
22.90
%
Expected dividend yield
.70
%
.70
%
Expected term (in years)
6.60
6.60
The risk-free interest rate was based on published yields of U.S. Treasury Strips having a
maturity date approximating the expected term of the options. Expected volatility was based on the
historical volatility of the Company’s stock using the daily closing prices of the Company’s Class
A common stock over a period of time equivalent to the expected term of the options. The expected
dividend yield was based on the Company’s recent annual dividend divided by the average price of
the Company’s stock during that period. The Company used the simplified method for plain vanilla
options, as provided in SAB No. 107 to compute the expected term of the options granted in 2006 and
2005.
The following table provides a summary of stock option activity for the year ended January 31,2007:
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
O. Stock-Based Compensation (continued)
The weighted average grant-date fair value of stock options granted during 2006 and 2005 was
$14.32 and $10.01, respectively. The total intrinsic value of stock options exercised during 2006,
2005 and 2004 was $30,486,000, $27,951,000 and $14,684,000, respectively. Cash received from stock
options exercised during 2006, 2005 and 2004 was $9,725,000, $12,590,000 and $5,360,000,
respectively. Income tax benefit realized as a reduction of income taxes payable from stock
options exercised was $151,000, $178,000 and $345,000 during the year ended January 31, 2007, 2006
and 2005, respectively. At January 31, 2007, there was $14,023,000 of unrecognized compensation
cost related to unvested stock options that is expected to be recognized over a weighted-average
period of 2.9 years.
The following table provides a summary of restricted stock activity for the year ended January 31,2007:
Restricted stock represents a grant of Class A common stock to key employees subject to
restrictions on disposition, transferability and risk of forfeiture, while having the rights to
vote the shares and receive dividends. The restrictions generally lapse on the second, third and
fourth anniversary of the date of grant. Restricted shares subject to the restrictions mentioned
above are considered to be nonvested shares under SFAS No. 123(R) and are not reflected as issued
and outstanding shares until the restrictions lapse. At that time, the shares are released to the
employee and the Company records the issuance of the shares. At January 31, 2007, 393,500 unvested
shares of restricted stock were excluded from issued and outstanding shares of Class A common stock
in the accompanying consolidated financial statements.
The total fair value of shares that vested during 2006, 2005 and 2004 was $872,000, $2,467,000 and
$798,000, respectively. At January 31, 2007, there was $8,630,000 of unrecognized compensation
cost related to unvested restricted stock that is expected to be recognized over a weighted-average
period of 2.9 years.
In connection with the vesting of restricted stock during the years ended January 31, 2007 and
2006, the Company repurchased into treasury 17,970 shares and 61,584 shares, respectively, of Class
A common stock to satisfy the employees’ related minimum statutory tax withholding requirements.
These shares were placed in treasury with an aggregate cost basis of $826,000 and $1,945,000,
respectively.
P. Earnings Per Share
Earnings per share (“EPS”) has been computed under the provisions of SFAS No. 128
“Earnings
Per Share”. Pursuant to EITF No. 03-6 “Participating Securities and the Two-Class Method under FASB
128”, the Class A Common Units issued in exchange for Bruce C. Ratner’s minority interests in the
FCRC portfolio in November 2006 (see Note U — Class A Common Units), which are reflected as
minority interest in the Company’s Consolidated Balance Sheets, are considered participating
securities as they are entitled to participate in any dividends paid to the Company’s common stock
holders and therefore are included in the computation of basic and diluted earnings per share if
the effect of applying the if-converted method is dilutive.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
P. Earnings Per Share (continued)
The following table presents the computation of EPS for the periods indicated (in thousands,
except per share amounts):
Allocable
Weighted
Undistributed
Average
Earnings of
Common
Class A
Adjusted
Shares
Per
Common
Amount
Outstanding
Common
Years Ended January 31,
Amount
Units
(Numerator)
(Denominator)
Share
2007 - Basic EPS
Earnings from continuing operations
$
30,239
$
(24
)
$
30,215
$
0.30
Discontinued operations
147,012
(1,300
)
145,712
1.43
Net earnings
$
177,251
$
(1,324
)
$
175,927
101,654,626
$
1.73
2007 - Diluted EPS
Earnings from continuing operations
$
30,239
$
—
$
30,239
101,654,626
Preferred distribution on Class A Common
Units
551
—
551
906,876
Effect of dilutive securities (1)
—
—
—
1,893,396
Diluted earnings from continuing operations
per share
30,790
—
30,790
104,454,898
$
0.29
Discontinued operations
147,012
—
147,012
1.41
Diluted net earnings per share
$
177,802
$
—
$
177,802
$
1.70
Earnings from
Weighted
Continuing
Average
Operations
Common Shares
Per
(Numerator)
Outstanding
Common
Years Ended January 31,
(in thousands)
(Denominator)
Share
2006
Basic earnings per share
$
64,512
101,079,578
$
0.64
Effect of dilutive securities
—
1,524,354
(0.01
)
Diluted earnings per share
$
64,512
102,603,932
$
0.63
2005
Basic earnings per share
$
46,182
100,201,634
$
0.46
Effect of dilutive securities
—
1,644,422
(0.01
)
Diluted earnings per share
$
46,182
101,846,056
$
0.45
(1)
The Puttable Equity-Linked Senior Notes issued in October 2006 can be put to the Company by
the holders under certain circumstances (see Note H — Senior and Subordinated Debt). If the
Company exercises its net share settlement option upon a put of the notes by the holders, it
will be required to issue shares of its Class A common stock. The effect of these shares was
not included in the computation of diluted earnings per share for the year ended January 31,2007 as the Company’s stock price did not exceed the put value price of the Puttable
Equity-Linked Senior Notes. Additionally, the Company sold a warrant with an exercise price
of $74.35, which has also been excluded from diluted earnings per share for the year ended
January 31, 2007 as the Company’s stock price did not exceed the exercise price.
Q. Stock Split
On June 21, 2005, the Board of Directors declared a two-for-one stock split of the Company’s
outstanding Class A and Class B common stock effective July 11, 2005 to shareholders of record on
June 27, 2005. The stock split is given retroactive effect to the beginning of the earliest period
presented in the accompanying Consolidated Balance Sheets and Consolidated Statements of
Shareholders’ Equity by transferring the par value of the additional shares issued from the
additional paid-in-capital account to the common stock accounts. All share and per share data
included in this annual report have been restated to reflect the stock split.
Since this dividend was declared after January 31, 2007, it is not reflected in the
consolidated financial statements.
S. Discontinued Operations and Gain on Disposition of Rental Properties and Lumber
Group
Discontinued Operations
Pursuant to the definition of a component of an entity in SFAS No. 144, all earnings of
discontinued operations sold or held for sale, assuming no significant continuing involvement, have
been reclassified in the Consolidated Statements of Earnings for the years ended January 31, 2007,
2006 and 2005.
The following table lists the consolidated rental properties included in discontinued operations:
Square Feet/
Number
Quarter/
of Units
Year
Year Ended
Year Ended
Year Ended
Property
Location
(unaudited)
Disposed
1/31/2007
1/31/2006
1/31/2005
Commercial Group:
Battery Park City Retail
Manhattan, New York
166,000 square feet
Q3-2006
Yes
Yes
Yes
Embassy Suites Hotel
Manhattan, New York
463 rooms
Q3-2006
Yes
Yes
Yes
G Street Retail
Philadelphia, Pennsylvania
13,000 square feet
Q1-2006
Yes
Yes
Yes
Hilton Times Square
Manhattan, New York
444 rooms
Q1-2006
Yes
Yes
Yes
Flatbush Avenue
Brooklyn, New York
142,000 square feet
Q3-2004
—
—
Yes
Pavilion San
Jose, California
250,000 square feet
Q3-2004
—
—
Yes
Hunting Park
Philadelphia, Pennsylvania
125,000 square feet
Q2-2004
—
—
Yes
Residential Group:
Mount Vernon Square
Alexandria, Virginia
1,387 units
Q4-2006
Yes
Yes
Yes
Providence at Palm Harbor
Tampa, Florida
236 units
Q2-2006
Yes
Yes
Yes
Enclave
San Jose, California
637 units
Q4-2005
—
Yes
Yes
Cherrywood Village
Denver, Colorado
360 units
Q3-2005
—
Yes
Yes
Ranchstone
Denver, Colorado
368 units
Q3-2005
—
Yes
Yes
Arboretum Place
Newport News, Virginia
184 units
Q4-2004
—
—
Yes
Bridgewater
Hampton, Virginia
216 units
Q4-2004
—
—
Yes
Colony Woods
Bellevue, Washington
396 units
Q4-2004
—
—
Yes
Silver Hill
Newport News, Virginia
153 units
Q4-2004
—
—
Yes
Trellis at Lee’s Mill
Newport News, Virginia
176 units
Q4-2004
—
—
Yes
Regency Towers
Jackson, New Jersey
372 units
Q3-2004
—
—
Yes
Woodlake
Silver Spring, Maryland
534 units
Q1-2004
—
—
Yes
In addition, the Company’s Lumber Group strategic business unit was included in discontinued
operations for the year ended January 31, 2005. Lumber Group was a lumber wholesaler that was sold
to its employees on November 12, 2004. Also included in discontinued operations is Babin Building
Centers, Inc. (“Babin”), a division of Lumber Group, which was sold in July 2004. Babin sold
building materials to the new construction industry and to home remodelers.
Substantially all of the assets of the Lumber Group were sold for $39,085,902, $35,000,000 of which
was paid in cash at closing. Pursuant to the terms of a note receivable with a 6% interest rate
from the buyer, the remaining purchase price will be paid in four annual installments which
commenced November 12, 2006. During the year ended January 31, 2005, the Company reported a gain
on disposition of this segment of $20,920,000 ($11,501,000, net of tax) net of $1,093,000 loss
related to the sale of Babin. The Company has deferred a gain of $4,085,902 (approximately
$2,400,000, net of tax) relating to the note receivable due, in part, to the subordination to the
buyer’s senior financing. The gain and interest income is recognized as the note receivable
principal and interest are collected. During the year ended January 31, 2007, the Company received
the first annual installment of $1,250,000, which includes $760,000 ($466,000, net of tax) of the
deferred gain and $490,000 of interest income which is included in continuing operations.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
S. Discontinued Operations and Gain on Disposition of Rental Properties and Lumber Group
(continued)
The Company considers assets as held for sale when the transaction has been approved and there
are no significant contingencies related to the sale that may prevent the transaction from closing.
There were no properties classified as held for sale as of January 31, 2007. Summarized financial
information for Hilton Times Square Hotel’s assets, liabilities and minority interest that were
held for sale as of January 31, 2006 were as follows:
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
S. Discontinued Operations and Gain on Disposition of Rental Properties and Lumber Group
(continued)
Gain on Disposition of Rental Properties and Lumber Group
The following table summarizes the gain on disposition of rental properties and Lumber Group,
before tax and minority interest, for the years ended January 31, 2007, 2006 and 2005:
Net of $1,093 loss on the disposition of Babin Building Centers, Inc. for the year ended
January 31, 2005.
(2)
The Company elected to deposit the sales proceeds with a qualified intermediary for purposes
of acquiring replacement assets under Section 1031 of the Internal Revenue Code.
Investments accounted for on the equity method are not subject to the provisions of SFAS No.
144, and therefore the gains or losses on the sales of equity method properties are reported in
continuing operations when sold. The following table summarizes the Company’s proportionate share
of gains on equity method investments disposed of during the years ended January 31, 2007, 2006 and
2005, which are included in equity in earnings of unconsolidated entities in the Consolidated
Statements of Earnings:
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
T.
Provision for Decline in Real Estate, Early Extinguishment of Debt and Cumulative
Effect of Change in Accounting Principle
Provision for Decline in Real Estate
The Company reviews its real estate portfolio to determine if its carrying costs will be recovered
from future undiscounted 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 its real estate portfolio pursuant to the guidance established in SFAS No. 144.
The Company recorded a provision for decline in real estate of $1,923,000, $7,874,000 and $-0- for
the years ended January 31, 2007, 2006 and 2005, respectively. For the year ended January 31,2007, the Company recorded a provision for decline in real estate of $1,923,000 related to Saddle
Rock Village, a commercial specialty retail center and its adjacent outlots
located in Aurora, Colorado. For the year ended January 31, 2006, the Company recorded a provision
for decline in real estate in the Land Development Group of $1,330,000 related to Rockport Square,
a residential and retail development project located in Lakewood, Ohio, a
provision of $256,000 related to Syracuse Village, an affordable housing community located in
Denver, Colorado and a provision of $188,000 related to Kline’s Farm, a planned
residential community located in Girard, Ohio. The Company also recorded a provision of $4,600,000
related to Sterling Glen of Forest Hills, a supported living Residential community located
in Queens, New York and $1,500,000 related to the Ritz Carlton, a Commercial hotel located
in Cleveland, Ohio. These provisions represent a write down to the estimated fair value, less cost
to sell due to a change in events, such as an offer to purchase, related to the estimated future
cash flows of these properties.
Loss on Early Extinguishment of Debt
For the years ended January 31, 2007, 2006 and 2005, the Company recorded $2,175,000,
$5,300,000
and $4,734,000, respectively, as loss on early extinguishment of debt. For the year ended January31, 2007, the loss primarily represents early extinguishment of a construction loan at Simi Valley
Town Center, a retail center located in Simi Valley, California, in order to obtain permanent
financing and the early extinguishment of other borrowings at 101 San Fernando, an apartment
community located in San Jose, California. For the year ended January 31, 2006, the loss primarily
represents the impact of early extinguishment of nonrecourse mortgage debt at One MetroTech Center
and Ten MetroTech Center, office buildings located in Brooklyn, New York, and Sterling Glen of
Ryebrook, a supported living residential community located in Ryebrook, New York, in order
to secure more favorable financing terms. For the year ended January 31, 2005, the loss primarily
represents the impact of early extinguishment of nonrecourse mortgage debt in order to secure more
favorable financing terms at Victoria Gardens and Mall at Stonecrest, retail centers located in
Rancho Cucamonga, California and Atlanta, Georgia, respectively, and 2 Hanson Place, an office
building located in Brooklyn, New York.
The following table summarizes early extinguishment of debt included in discontinued operations.
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
T.
Provision for Decline in Real Estate, Early Extinguishment of Debt and Cumulative
Effect of Change in Accounting Principle (continued)
Cumulative Effect of Change in Accounting Principle
For the year ended January 31, 2005, the Company recorded a charge for the cumulative effect of
change in accounting principle in accordance with FIN No. 46 (R) which has resulted in a reduction
of net earnings of $18,628,000 ($11,261,000, net of tax). This charge consisted primarily of
accumulated depreciation and amortization expense, net of minority interest, of the
newly-consolidated VIEs which were previously accounted for on the cost method. See the Variable
Interest Entities section in Note A for further information.
The overall impact resulting from the adoption of FIN No. 46 (R) to the Commercial Group was
a
pre-tax charge of $789,000 from the consolidation of a development project located in Las Vegas,
Nevada that was previously accounted for under the equity method of accounting.
The overall impact resulting from the adoption of FIN No. 46 (R) to the Residential Group was a
pre-tax charge of $17,839,000. The following summarizes the key components of the impact of the
adoption of FIN No. 46 (R):
•
Cumulative effect of $4,403,000 resulting from the Company being deemed the
primary beneficiary in VIEs that hold notes payable to the Residential Group and have
equity method investments in 16 properties that are subsidized by the U.S. Department of
Housing and Urban Development. These investments were previously accounted for under the
cost method;
•
Cumulative effect of $3,801,000 resulting from the Company being deemed the
primary beneficiary in a VIE that holds a note payable to the Residential Group and has an
equity method investment in Millender Center, a mixed-use residential, office and retail
complex in Detroit, Michigan. This investment was previously accounted for under the cost
method;
•
Cumulative effect of $3,301,000 resulting from the Company being deemed the
primary beneficiary in a VIE that holds a note payable to the Residential Group and has an
equity method investment in 101 San Fernando, a residential community in San Jose,
California. This investment was previously accounted for under the equity method; and
•
Cumulative effect of $6,334,000 resulting from the Company being deemed the
primary beneficiary in a VIE, Queenswood, a residential community in Corona, New York. This
investment was previously accounted for under the equity method.
U.
Class A Common Units
On November 8, 2006, the Company issued Class A Common Units (“Units”) in a
newly-formed
jointly-owned limited liability company (the “Joint LLC”) to Bruce C. Ratner (“Mr. Ratner”) and
certain individuals and entities affiliated with Mr. Ratner (collectively with Mr. Ratner the
“Ratner Entities”) in exchange for their interests in a total of 30 retail, office and residential
operating properties, and certain service companies, all in the greater New York City metropolitan
area. The Joint LLC will be controlled and consolidated by the Company, subject to limited rights
of the Ratner Entities to vote on certain matters affecting their interests. The Company has
accounted for the issuance of the Units in exchange for the minority interests under the purchase
method of accounting. The majority of the combined interests was and will continue to be
consolidated into the financial statements of the Company. Mr. Ratner will continue to be
President and Chief Executive Officer of FCRC, which is a wholly owned subsidiary of the Company at
January 31, 2007. Mr. Ratner was also appointed as Executive Vice President of the Company and as
a Class B Member of the Board of Directors of the Company.
Upon issuance of the Units, the Ratner Entities contributed their ownership interests in the 30
operating properties, the service companies and participation rights in all future developments,
except seven identified development opportunities, to the Joint LLC. After a one-year lock-up
period, the Units may be exchanged for an equal number of shares of the Company’s Class A common
stock or, solely at the Company’s option, cash based on the value of the stock at the time of
conversion. The Company has no rights to redeem or repurchase the Units. For the first five years
only, the Units that have not been exchanged are entitled to their proportionate share of an annual
preferred payment of $2,500,000 plus an amount equal to the dividends paid on the same number of
shares of the Company’s common stock. After five years, the Units that have not been exchanged are
entitled to a payment equal to the dividends paid on an equivalent number of shares of the
Company’s common stock. At January 31, 2007, the Company has recorded approximately $898,000
related to one quarter’s share of the
Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
U.
Class A Common Units (continued)
annual preferred payment which is classified as minority interest expense on the Company’s
consolidated statement of earnings. In addition, the Company will indemnify Mr. Ratner and certain
members of his family for tax liabilities they may incur as a result of the sale of certain of
these properties during the 12-year period following the closing of the transaction.
The Company has also agreed to terms and conditions under which it will value and possibly increase
its ownership in seven existing development projects upon stabilization, as defined. Prior to
stabilization, each of these development properties will remain jointly owned under its existing
structure with Mr. Ratner. Upon stabilization, each of these properties will be valued, either by negotiation,
through arbitration or by obtaining a bona fide third-party offer. Once the value of the property
has been determined, the Company may, in its sole discretion, cause the property either to be
contributed to the Joint LLC in exchange for additional Units, sold to the Joint LLC for cash, sold
to a third party or remain jointly owned by the Company and Mr. Ratner.
The total consideration exchanged by the Company for the minority interests, including associated
expenses and the book value of previous advances made to Mr. Ratner totaling $28,655,000, was
approximately $273,600,000. Mr. Ratner received cash of approximately $46,300,000 and was issued
3,894,232 Units in the Joint LLC described above. The Units were valued based on the average of
the closing prices of the Company’s Class A common stock over the 3-day period before and after the
announcement of the transaction, giving consideration to the one-year lock-up period and the annual
preferred payment of $2,500,000 referred to above. The value of Mr. Ratner’s Class A Common Units,
approximately $198,645,000, is classified as minority interest on the Company’s consolidated
balance sheet. The issuance of the Units did not have a material impact on the current or prior
period consolidated statements of earnings.
The following table summarizes the allocation of the total consideration exchanged for the minority
interests. The amounts reported below are based on the Company’s preliminary allocation and
certain estimates. As a result, the allocation is preliminary and subject to change. The Company
will finalize the allocation during 2007.
Allocation of
Total
Consideration
at Date of
Exchange
(in thousands)
Completed rental properties (1)
$
229,000
Notes and accounts receivable, net (2)
11,000
Investments in and advances to affiliates (3)
11,300
Other assets (4)
59,700
Mortgage debt, nonrecourse (5)
(12,000
)
Accounts payable and accrued expenses (6)
(25,400
)
$
273,600
Represents allocation for:
1)
Land, building, site improvements, and tenant improvements associated with the
underlying real estate
2)
Above market leases
3)
Equity method property
4)
In-place leases, tenant relationships, and leasing
commissions
Revenues from real estate operations and earnings before income taxes have been reclassified
for properties disposed of and for properties qualifying for discontinued operations presentation
under SFAS No. 144.
During the quarter ended July 31, 2006, we reported the prior period impact of adjustments
primarily related to cumulative differences in earnings (loss) recognition on three of our joint
ventures in which one or more partners had preferred return provisions on and of their equity over
the other partners. All of the joint ventures are unconsolidated entities accounted for on the
equity method of accounting. The differences in the cumulative loss recognition on these
unconsolidated joint ventures, which resulted from not allocating earnings/losses among all
partners using the hypothetical liquidation at book value method, accumulated over many years and
are reflected as a reduction of equity in earnings of unconsolidated investments for the year ended
January 31, 2007. The impact of these adjustments is a reduction of net earnings and earnings from
continuing operations of $2,900,000 for the year ended January 31, 2007. Management has assessed
the impact of the adjustments, both individually and in the aggregate, and does not believe these
amounts are material to any previously issued financial statements or to the results of operations
for the Company for the year ended January 31, 2007.
Basic and diluted earnings per share have been computed under the provisions of SFAS No.
128 “Earnings Per Share”. Pursuant to EITF No. 03-6 “Participating Securities and the
Two-Class Method Under FASB 128”, the Class A Common Units issued in exchange for Bruce C.
Ratner’s minority interests in the FCRC portfolio in November 2006, which are reflected as
minority interest in the Company’s Consolidated Balance Sheets, are considered participating
securities as they are entitled to participate in any dividends paid to the Company’s common
stockholders and therefore are included in the computation of basic and diluted earnings per
share if the effect of applying the if-converted method is dilutive. Basic earnings per share
is computed by dividing net earnings less the allocable undistributed earnings of Bruce C.
Ratner’s Class A Common Units by the weighted average number of common shares outstanding
during the period. Diluted earnings per share includes the effect of applying the if-converted
method to the Class A Common Units and 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.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
DISCLOSURE CONTROLS
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 furnishes under the
Securities Exchange Act of 1934 (“Securities Exchange Act”) is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms.
In addition, the Company’s disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports that it files or furnishes under
the Securities Exchange Act is accumulated and communicated to the Company’s management, including
the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow
timely decisions regarding required disclosure. As of the end of the period covered by this annual
report, an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, was carried out under
the supervision and with the participation of the Company’s management, which includes the CEO and
CFO. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure
controls and procedures were effective as of January 31, 2007.
There have been no changes in the Company’s internal control over the financial reporting
identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange
Act during the Company’s most recently completed fiscal quarter that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process designed by, or under
the supervision of the President and Chief Executive Officer and Chief Financial Officer, and
effected by our board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles, and includes those
policies and procedures that:
(1)
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
the transactions involving our assets;
(2)
Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
(3)
Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our
consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our management has used the framework set forth in the report entitled “Internal Control —
Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway
Commission to evaluate the effectiveness of our internal control over financial reporting. Based on
our evaluation under the framework in “Internal Control — Integrated Framework,” our management has
concluded that our internal control over financial reporting was effective as of January 31, 2007.
Our management’s assessment of the effectiveness of our internal control over financial reporting
as of January 31, 2007 has been audited by our independent registered public accounting firm,
PricewaterhouseCoopers LLP, as stated in their report, which appears on page 74 of this Annual
Report on Form 10-K and is incorporated herein by reference.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
fourth quarter ended January 31, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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 will be contained in a definitive proxy statement, which the registrant
anticipates will be filed by April 30, 2007 and is incorporated herein by reference.
The Company’s Code of Legal and Ethical Conduct can be found on the Company’s website at
www.forestcity.net. The Company intends to disclose on its website any amendment to, or waiver of,
any provision of this code applicable to its directors and executive officers that would otherwise
be required to be disclosed under the rules of the SEC or New York Stock Exchange.
Item 11. Executive Compensation
The information required by this item is contained in a definitive proxy statement, which the
registrant anticipates will be filed by April 30, 2007 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information required by this item will be contained in a definitive proxy statement, which the
registrant anticipates will be filed by April 30, 2007 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be contained in a definitive proxy statement, which the
registrant anticipates will be filed by April 30, 2007 and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item will be contained in a definitive proxy statement, which the
registrant anticipates will be filed by April 30, 2007 and is incorporated herein by reference.
Item 15. Exhibits and Financial Statements Schedules
(a) List of Documents filed as part of this report.
1.
Financial statements and supplementary data included in Part II, Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – January 31, 2007 and 2006
Consolidated Statements of Earnings for the years ended January 31, 2007, 2006 and 2005
Consolidated Statements of Comprehensive Income for the years ended January 31, 2007, 2006 and 2005
Consolidated Statements of Shareholders’ Equity for the years ended January 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended January 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
Supplementary Data – Quarterly Consolidated Financial Data (Unaudited)
Individual financial statements of entities accounted for by the equity method have
been omitted because such entities would not constitute a significant subsidiary.
2.
Financial statements and schedules required by Part II, Item 8 are included
in Part IV Item 15(c):
Page No.
Schedule II – Valuation and Qualifying Accounts for the years
ended January 31, 2007, 2006 and 2005
The report of the independent registered public accounting firm with respect to the
above listed financial statement schedules appears on page 74.
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.
Indenture, dated as of October 10, 2006, between Forest City Enterprises, Inc., as issuer, and The
Bank of New York Trust Company, N.A., as trustee, including, as Exhibit A thereto, the Form of 3.625%
Puttable Equity-Linked Senior Note due 2011, incorporated by reference to Exhibit 4.1 to the
Company’s Form 8-K filed on October 16, 2006 (File No. 1-4372).
*9.1
-
Voting Agreement, dated November 8, 2006, by and among Forest City Enterprises, Inc., RMS Limited
Partnership, Powell Partners, Limited, Joseph M. Shafran and Bruce C. Ratner.
+10.1
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between
Deborah Ratner-Salzberg and Forest City Enterprises, Inc., insuring the lives of Albert Ratner and
Audrey Ratner, dated June 26, 1996, incorporated by reference to Exhibit 10.19 to the Company’s Form
10-K for the year ended January 31, 1997 (File No. 1-4372).
+10.2
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Brian
J. Ratner and Forest City Enterprises, Inc., insuring the lives of Albert Ratner and Audrey Ratner,
dated June 26, 1996, incorporated by reference to Exhibit 10.20 to the Company’s Form 10-K for the
year ended January 31, 1997 (File No. 1-4372).
+10.3
-
Letter Supplement to Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as
Collateral between Brian J. Ratner and Forest City Enterprises, Inc., insuring the lives of Albert
Ratner and Audrey Ratner, effective June 26, 1996, incorporated by reference to Exhibit 10.21 to the
Company’s Form 10-K for the year ended January 31, 1997 (File No. 1-4372).
Letter Supplement to Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as
Collateral between Deborah Ratner-Salzberg and Forest City Enterprises, Inc., insuring the lives of
Albert Ratner and Audrey Ratner, effective June 26, 1996, incorporated by reference to Exhibit 10.22
to the Company’s Form 10-K for the year ended January 31, 1997 (File No. 1-4372).
+10.5
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert
B. Ratner and James Ratner, Trustees under the Charles Ratner 1992 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the lives of Charles Ratner and Ilana Horowitz (Ratner),
dated November 2, 1996, incorporated by reference to Exhibit 10.23 to the Company’s Form 10-K for the
year ended January 31, 1997 (File No. 1-4372).
+10.6
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert
B. Ratner and James Ratner, Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996,
incorporated by reference to Exhibit 10.24 to the Company’s Form 10-K for the year ended January 31,1997 (File No. 1-4372).
+10.7
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert
B. Ratner and James Ratner, Trustees under the Max Ratner 1988 Grandchildren’s Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996,
incorporated by reference to Exhibit 10.25 to the Company’s Form 10-K for the year ended January 31,1997 (File No. 1-4372).
+10.8
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert
B. Ratner and James Ratner, Trustees under the Max Ratner 1988 Grandchildren’s Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996,
incorporated by reference to Exhibit 10.26 to the Company’s Form 10-K for the year ended January 31,1997 (File No. 1-4372).
+10.9
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert
B. Ratner and James Ratner, Trustees under the Max Ratner 1988 Grandchildren’s Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996,
incorporated by reference to Exhibit 10.27 to the Company’s Form 10-K for the year ended January 31,1997 (File No. 1-4372).
+10.10
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert
B. Ratner and James Ratner, Trustees under the Max Ratner 1988 Grandchildren’s Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996,
incorporated by reference to Exhibit 10.28 to the Company’s Form 10-K for the year ended January 31,1997 (File No. 1-4372).
+10.11
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert
B. Ratner and James Ratner, Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996,
incorporated by reference to Exhibit 10.29 to the Company’s Form 10-K for the year ended January 31,1997 (File No. 1-4372).
+10.12
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert
B. Ratner and James Ratner, Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996,
incorporated by reference to Exhibit 10.30 to the Company’s Form 10-K for the year ended January 31,1997 (File No. 1-4372).
+10.13
-
Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert
B. Ratner and James Ratner, Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and
Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996,
incorporated by reference to Exhibit 10.31 to the Company’s Form 10-K for the year ended January 31,1997 (File No. 1-4372).
+10.14
-
Letter Supplement to Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as
Collateral between James Ratner and Albert Ratner, Trustees under the Charles Ratner 1992 Irrevocable
Trust Agreement and Forest City Enterprises, Inc., insuring the lives of Charles Ratner and Ilana
Ratner, effective November 2, 1996, incorporated by reference to Exhibit 10.32 to the Company’s Form
10-K for the year ended January 31, 1997 (File No. 1-4372).
Amended and Restated Form of Restricted Stock Agreement, effective as of June 8, 2004, incorporated
by reference to Exhibit 10.18 to the Company’s Form 10-Q for the quarter ended April 30, 2005 (File
No. 1-4372).
Deferred Compensation Plan for Nonemployee Directors, effective as of January 1, 1999, incorporated
by reference to Exhibit 10.44 to the Company’s Form 10-K for the year ended January 31, 1999 (File
No. 1-4372).
Summary of Forest City Enterprises, Inc. Management Incentive Plan as adopted in 1997, incorporated
by reference to Exhibit 10.51 to the Company’s Form 10-Q for the quarter ended July 31, 2001 (File
No. 1-4372).
+10.30
-
Summary of Forest City Enterprises, Inc. Long-Term Performance Plan as adopted in 2000, incorporated
by reference to Exhibit 10.52 to the Company’s Form 10-Q for the quarter ended July 31, 2001 (File
No. 1-4372).
10.31
-
Credit Agreement, dated as of March 22, 2004, by and among Forest City Rental Properties Corporation,
the banks named therein, KeyBank National Association, as administrative agent, and National City
Bank, as syndication agent, incorporated by reference to Exhibit 10.40 to the Company’s Form 10-K for
the year ended January 31, 2004 (File No. 1-4372).
Guaranty of Payment of Debt, dated as of March 22, 2004, by and among Forest City Enterprises, Inc.,
the banks named therein, KeyBank National Association, as administrative agent, and National City
Bank, as syndication agent, incorporated by reference to Exhibit 10.41 to the Company’s Form 10-K for
the year ended January 31, 2004 (File No. 1-4372).
10.33
-
First Amendment to Credit Agreement, dated as of January 19, 2005, by and among Forest City Rental
Properties Corporation, the banks named therein, KeyBank National Association, as administrative
agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 10.37 to
the Company’s Form 10-K for the year ended January 31, 2005 (File No. 1-4372).
10.34
-
First Amendment to Guaranty of Payment of Debt, dated as of January 19, 2005 by and among Forest City
Enterprises, Inc., the banks named therein, KeyBank National Association, as administrative agent,
and National City Bank, as syndication agent, incorporated by reference to Exhibit 10.38 to the
Company’s Form 10-K for the year ended January 31, 2005 (File No. 1-4372).
Second Amendment to Credit Agreement, dated as of April 7, 2005, by and among Forest City Rental
Properties Corporation, the banks named therein, KeyBank National Association, as administrative
agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 10.43 to
the Company’s Form 10-Q for quarter ended April 30, 2005 (File No. 1-4372).
10.38
-
Second Amendment to Guaranty of Payment of Debt, dated as of April 7, 2005, by and among Forest City
Enterprises, Inc., the banks named therein, KeyBank National Association, as administrative agent,
and National City Bank, as syndication agent, incorporated by reference to Exhibit 10.2 to the
Company’s Form 8-K filed on April 13, 2005 (File No. 1-4372).
Forest City Enterprises, Inc. Unfunded Nonqualified Supplemental Pension Plan for Executives (As
Amended and Restated Effective January 1, 2005), incorporated by reference to Exhibit 10.3 to the
Company’s Form 8-K filed on December 16, 2005 (File No. 1-4372).
10.50
-
Consent Letter to Credit Agreement and Guaranty of Payment of Debt, dated January 20, 2006 by and
among Forest City Enterprises, Inc., the banks named therein, KeyBank National Association, as
Administrative Agent, and National City Bank, as Syndication Agent, incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K filed on February 24, 2006 (File No. 1-4372).
Third Amendment to Credit Agreement, dated as of June 30, 2006, by and among Forest City Rental
Properties Corporation, KeyBank National Association, as Administrative Agent, National City Bank, as
Syndication Agent, Bank of America, N.A. and LaSalle Bank National Association, as Co-Documentation
Agents, and the banks named therein, incorporated by reference to Exhibit 10.1 to the Company’s Form
8-K filed on June 30, 2006 (File No. 1-4372).
10.53
-
Third Amendment to Guaranty of Payment of Debt, dated as of June 30, 2006, by and among Forest City
Enterprises, Inc., KeyBank National Association, as Administrative Agent, National City Bank, as
Syndication Agent, Bank of America, N.A. and LaSalle Bank National Association, as Co-Documentation
Agents, and the banks named therein, incorporated by reference to Exhibit 10.2 to the Company’s Form
8-K filed on June 30, 2006 (File No. 1-4372).
10.54
-
Master Contribution and Sale Agreement, dated as of August 10, 2006, by and among Forest City
Enterprises, Inc., certain entities affiliated with Forest City Enterprises, Inc., Forest City Master
Associates III, LLC, certain entities affiliated with Forest City Master Associates III, LLC, certain
entities affiliated with Bruce C. Ratner and certain individuals affiliated with Bruce C. Ratner,
incorporated by reference to Exhibit 10.54 to the Company’s Form 10-Q for the quarter ended July 31,2006 (File No. 1-4372).
10.55
-
Fourth Amendment to Credit Agreement, dated as of October 3, 2006, by and among Forest City Rental
Properties Corporation, KeyBank National Association, as Administrative Agent, National City Bank, as
Syndication Agent, and the banks named therein, incorporated by reference to Exhibit 10.1 to the
Company’s Form 8-K filed on October 10, 2006 (File No. 1-4372).
10.56
-
Fourth Amendment to Guaranty of Payment of Debt, dated as of October 3, 2006, by and among Forest
City Enterprises, Inc., KeyBank National Association, as Administrative Agent, National City Bank, as
Syndication Agent, and the banks named therein, incorporated by reference to Exhibit 10.2 to the
Company’s Form 8-K filed on October 10, 2006 (File No. 1-4372).
Uncollectible accounts written off and $1,429 related to the disposition of the Lumber
Group in the year ended January 31, 2005.
(b)
Additions charged to costs and expenses were recorded net of abandoned development projects
written off of $9,969, $7,321 and $12,998 for the years ended January 31, 2007, 2006, and
2005, respectively.
(c)
Reserves on notes related to equity investments were eliminated as a result of the new
consolidation requirements under FIN No. 46 (R).
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.
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, 2007.
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.
Voting Agreement, dated November 8, 2006, by and among Forest City Enterprises, Inc., RMS Limited Partnership, Powell Partners, Limited, Joseph M. Shafran and Bruce C. Ratner.
