Forest City Enterprises (FCEPP) 10-Q/A 2001 Q3 Quarterly report (amended)

TABLE OF CONTENTS

PART 1 — FINANCIAL INFORMATION
	Item 1. Financial Statements
	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF EARNINGS
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II – OTHER INFORMATION
	Item l. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES

FORM 10-Q/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended             October 31, 2001                

Commission file number                 1-4372                    

FOREST CITY ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

Ohio	34-0863886
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Terminal Tower Suite 1100	50 Public Square Cleveland, Ohio	44113
(Address of principal executive offices)		Zip Code
Registrant’s telephone number, including area code		216-621-6060

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       YES  X          NO      

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

Class	Outstanding at December 7, 2001
Class A Common Stock, $.33 1/3 par value	34,674,167 shares
Class B Common Stock, $.33 1/3 par value	14,743,790 shares

Our form 10-Q for the quarter ended October 31, 2001 was filed timely on December 17, 2001, however, due to technical difficulties, our signature page did not transmit to the EDGAR system. The signature page is included in this Form 10-Q/A.

FOREST CITY ENTERPRISES, INC.

Index

			Page No.
Part I. Financial Information:
	Item 1. Financial Statements Forest City Enterprises, Inc. and Subsidiaries
		Consolidated Balance Sheets – October 31, 2001 (Unaudited) and January 31, 2001		3
		Consolidated Statements of Earnings (Unaudited) – Three Months and Nine Months Ended October 31, 2001 and 2000		4
		Consolidated Statements of Comprehensive Income (Unaudited) — Nine Months Ended October 31, 2001 and 2000		5
		Consolidated Statements of Shareholders’ Equity (Unaudited) – Nine Months Ended October 31, 2001 and 2000		6
		Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended October 31, 2001 and 2000		7
		Notes to Consolidated Financial Statements (Unaudited)		8 - 21
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22 - 45
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			46 - 49
Part II. Other Information
	Item 1. Legal Proceedings			50
	Item 6. Exhibits and Reports on Form 8-K			51 - 57
Signatures				58

2

PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

				October 31, 2001			January 31, 2001
				(Unaudited)
				(in thousands)
Assets
Real Estate
	Completed rental properties			$	3,267,110		$	3,134,667
	Projects under development				460,668			432,808
	Land held for development or sale				23,451			22,744
			Real Estate, at cost		3,751,229			3,590,219
	Less accumulated depreciation				(487,543	)		(496,050	)
			Total Real Estate		3,263,686			3,094,169
Cash and equivalents					90,699			64,265
Restricted cash					90,505			80,743
Notes and accounts receivable, net					245,441			187,618
Inventories					31,431			39,234
Investments in and advances to real estate affiliates					434,140			394,685
Other assets					130,264			166,756
	Total Assets			$	4,286,166		$	4,027,470
Liabilities and Shareholders’ Equity
Liabilities
Mortgage debt, nonrecourse				$	2,525,215		$	2,439,912
Accounts payable and accrued expenses					417,312			410,869
Notes payable					61,107			55,392
Long-term credit facility					110,000			189,500
Senior and subordinated debt					220,400			220,400
Deferred income taxes					214,195			176,671
		Total Liabilities			3,548,229			3,492,744
Minority interest					91,177			78,090
Shareholders’ Equity
Preferred stock — convertible, without par value 5,000,000 shares authorized; no shares issued					—			—
Common stock — $.33 1/3 par value
	Class A, 96,000,000 shares authorized, 34,776,967 and 30,542,898 shares issued, 34,384,896 and 29,730,760 outstanding, respectively				11,592			10,181
	Class B, convertible, 36,000,000 shares authorized, 15,448,961 and 15,783,030 shares issued, 15,031,811 and 15,365,880 outstanding, respectively				5,150			5,261
					16,742			15,442
Additional paid-in capital					225,949			108,863
Retained earnings					422,663			338,792
					665,354			463,097
Less treasury stock, at cost; 392,071 Class A and 417,150 Class B shares and 812,137 Class A and 417,150 Class B shares, respectively					(6,563	)		(10,330	)
Accumulated other comprehensive (loss) income					(12,031	)		3,869
	Total Shareholders’ Equity				646,760			456,636
			Total Liabilities and Shareholders’ Equity	$	4,286,166		$	4,027,470

See notes to consolidated financial statements.

3

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

		Three Months Ended October 31,						Nine Months Ended October 31,
		2001			2000			2001			2000
					(in thousands, except per share data)
Revenues
	Rental properties	$	195,141		$	180,417		$	532,575		$	473,560
	Lumber trading		27,034			26,202			88,963			80,143
	Equity in earnings of unconsolidated entities		10,486			4,907			33,069			14,953
			232,661			211,526			654,607			568,656
Expenses
	Operating expenses		139,027			121,267			381,756			317,032
	Interest expense		44,023			44,021			135,189			129,397
	Provision for decline in real estate		7,452			—			7,452			1,231
	Depreciation and amortization		24,271			26,832			71,418			70,561
			214,773			192,120			595,815			518,221
Gain on disposition of operating properties and other investments			89,961			2,521			91,224			57,467
Earnings before income taxes			107,849			21,927			150,016			107,902
Income tax expense
	Current		3,596			1,850			11,083			14,156
	Deferred		40,864			6,497			48,714			4,881
			44,460			8,347			59,797			19,037
Earnings before minority interest, extraordinary loss and cumulative effect of a change in accounting principle			63,389			13,580			90,219			88,865
Minority interest			3,209			(501	)		1,498			(1,404	)
Earnings before extraordinary loss and cumulative effect of a change in accounting principle			66,598			13,079			91,717			87,461
Extraordinary loss, net of tax			(870	)		—			(233	)		—
Cumulative effect of a change in accounting principle, net of tax			—			—			(1,202	)		—
Net earnings		$	65,728		$	13,079		$	90,282		$	87,461
Basic earnings per common share
	Earnings before extraordinary loss and cumulative effect of a change in accounting principle	$	1.42		$	0.29		$	2.01		$	1.94
	Extraordinary loss, net of tax		(0.02	)		—			(0.01	)		—
	Cumulative effect of a change in accounting principle, net of tax		—			—			(0.03	)		—
	Net earnings	$	1.40		$	0.29		$	1.97		$	1.94
Diluted earnings per common share
	Earnings before extraordinary loss and cumulative effect of a change in accounting principle	$	1.40		$	0.29		$	1.98		$	1.92
	Extraordinary loss, net of tax		(0.02	)		—			(0.01	)		—
	Cumulative effect of a change in accounting principle, net of tax		—			—			(0.03	)		—
	Net earnings	$	1.38		$	0.29		$	1.94		$	1.92

See notes to consolidated financial statements.

4

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

			Nine Months Ended October 31,
			2001			2000
			(in thousands)
Net earnings			$	90,282		$	87,461
Other comprehensive loss, net of tax:
	Unrealized gains (losses) on investments in securities:
		Unrealized (loss) gain on securities		(4,096	)		148
		Less: reclassification adjustment for loss (gain) included in net earnings		799			(14,758	)
	Unrealized derivative losses:
		Cumulative effect of a change in accounting principle-transition adjustment of interest rate contracts, net of minority interest		(7,820	)		—
		Change in unrealized losses on interest rate contracts, net of minority interest		(4,783	)		—
Other comprehensive loss, net of tax				(15,900	)		(14,610	)
Comprehensive income			$	74,382		$	72,851

See notes to consolidated financial statements.

5

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

			Common Stock
	Class A				Class B						Additional
											Paid-In			Retained
	Shares		Amount		Shares			Amount			Capital			Earnings
				(in thousands)
Nine Months Ended October 31, 2001
Balances at January 31, 2001, as previously reported		20,362	$	6,787		10,522		$	3,508		$	114,010		$	338,792
Three-for-two stock split effective November 14, 2001 applied retroactively		10,181		3,394		5,261			1,753			(5,147	)
Balances at January 31, 2001, as restated		30,543		10,181		15,783			5,261			108,863			338,792
Net earnings															90,282
Other comprehensive loss, net of tax
Dividends $.1367 per share															(6,411	)
Issuance of 3,900,000 Class A common shares in equity offering		3,900		1,300								116,585
Conversion of Class B to Class A shares		334		111		(334	)		(111	)
Exercise of stock options												1,151
Restricted stock issued												(1,009	)
Amortization of unearned compensation												362
Cash in lieu of fractional shares from three-for-two stock split												(3	)
Balances at October 31, 2001		34,777	$	11,592		15,449		$	5,150		$	225,949		$	422,663
Nine Months Ended October 31, 2000
Balances at January 31, 2000, as previously reported		19,947	$	6,649		10,937		$	3,646		$	113,764		$	254,063
Three-for-two stock split effective November 14, 2001 applied retroactively		9,973		3,324		5,469			1,823			(5,147	)
Balances at January 31, 2000, as restated		29,920		9,973		16,406			5,469			108,617			254,063
Net earnings															87,461
Other comprehensive loss, net of tax
Dividends $.1133 per share															(5,105	)
Exercise of stock options												1
Amortization of unearned compensation												105
Balances at October 31, 2000, as restated		29,920	$	9,973		16,406		$	5,469		$	108,723		$	336,419

[Additional columns below]

[Continued from above table, first column(s) repeated]

								Accumulated
		Treasury Stock						Other
								Comprehensive
		Shares			Amount			(Loss) Income			Total
	(in thousands)
Nine Months Ended October 31, 2001
Balances at January 31, 2001, as previously reported			820		$	(10,330	)	$	3,869		$	456,636
Three-for-two stock split effective November 14, 2001 applied retroactively			410									—
Balances at January 31, 2001, as restated			1,230			(10,330	)		3,869			456,636
Net earnings												90,282
Other comprehensive loss, net of tax									(15,900	)		(15,900	)
Dividends $.1367 per share												(6,411	)
Issuance of 3,900,000 Class A common shares in equity offering												117,885
Conversion of Class B to Class A shares												—
Exercise of stock options			(308	)		2,758						3,909
Restricted stock issued			(113	)		1,009						—
Amortization of unearned compensation												362
Cash in lieu of fractional shares from three-for-two stock split												(3	)
Balances at October 31, 2001			809		$	(6,563	)	$	(12,031	)	$	646,760
Nine Months Ended October 31, 2000
Balances at January 31, 2000, as previously reported			852		$	(10,773	)	$	19,157		$	386,506
Three-for-two stock split effective November 14, 2001 applied retroactively			426									—
Balances at January 31, 2000, as restated			1,278			(10,773	)		19,157			386,506
Net earnings												87,461
Other comprehensive loss, net of tax									(14,610	)		(14,610	)
Dividends $.1133 per share												(5,105	)
Exercise of stock options			(1	)		21						22
Amortization of unearned compensation												105
Balances at October 31, 2000, as restated			1,277		$	(10,752	)	$	4,547		$	454,379

See notes to consolidated financial statements.

6

FOREST CITY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

				Nine Months Ended October 31,
				2001			2000
				(in thousands)
Cash Flows from Operating Activities
	Rents and other revenues received			$	535,646		$	529,561
	Cash distributions from unconsolidated entities				23,816			20,803
	Proceeds from land sales				14,563			14,138
	Land development expenditures				(34,615	)		(26,002	)
	Operating expenditures				(370,810	)		(306,219	)
	Interest paid				(132,887	)		(128,030	)
			Net cash provided by operating activities		35,713			104,251
Cash Flows from Investing Activities
	Capital expenditures				(297,095	)		(375,037	)
	Proceeds from disposition of properties and other investments				190,011			131,468
	Changes in investments in and advances to real estate affiliates				(30,109	)		(21,625	)
		Net cash used in investing activities			(137,193	)		(265,194	)
Cash Flows from Financing Activities
	Increase in nonrecourse mortgage debt and long-term credit facility				402,574			618,809
	Principal payments on nonrecourse mortgage debt on real estate				(292,771	)		(367,260	)
	Payments on long-term credit facility				(104,000	)		—
	Increase in notes payable				39,244			12,819
	Payments on notes payable				(33,530	)		(34,196	)
	Change in restricted cash and book overdrafts				(3,642	)		(50,342	)
	Payment of deferred financing costs				(10,600	)		(25,531	)
	Exercise of stock options				3,909			22
	Sale of common stock, net				117,885			—
	Dividends paid to shareholders				(5,741	)		(4,806	)
	Increase (decrease) in minority interest				14,586			(4,700	)
			Net cash provided by financing activities		127,914			144,815
Net increase (decrease) in cash and equivalents					26,434			(16,128	)
Cash and equivalents at beginning of period					64,265			84,082
Cash and equivalents at end of period				$	90,699		$	67,954
Reconciliation of Net Earnings to Cash Provided by Operating Activities
Net Earnings				$	90,282		$	87,461
	Minority interest				(1,498	)		1,404
	Depreciation				59,081			54,099
	Amortization				12,337			16,462
	Equity in earnings of unconsolidated entities				(33,069	)		(14,953	)
	Cash distributions from unconsolidated entities				23,816			20,803
	Deferred income taxes				47,927			4,881
	Gain on disposition of operating properties and other investments				(91,224	)		(57,467	)
	Provision for decline in real estate				7,452			1,231
	Extraordinary loss				386			—
	Cumulative effect of a change in accounting principle				1,988			—
	Increase in land included in projects under development				(27,919	)		(8,525	)
	(Increase) decrease in land held for development or sale				(708	)		2,207
	Increase in notes and accounts receivable				(57,825	)		(11,073	)
	Decrease in inventories				7,803			26,926
	Decrease (increase) in other assets				12,839			(20,759	)
	(Decrease) increase in accounts payable and accrued expenses				(15,955	)		1,554
			Net cash provided by operating activities	$	35,713		$	104,251

See notes to consolidated financial statements.

7

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

A.	New Accounting Standard — Adoption of SFAS No. 133
	On February 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended, (referred to hereafter as “SFAS 133”), which requires all derivative instruments to be carried at fair value on the Balance Sheet. In accordance with the transition provisions of SFAS 133, the Company recorded cumulative effect adjustments, net of tax, of approximately $1,200,000 and $7,800,000 as a reduction of earnings and Other Comprehensive Loss, respectively, relating to the fair value of hedging instruments previously designated as cash flow hedges. The Company expects that the transition adjustments that will be reclassified from Accumulated Other Comprehensive Income (Loss) into earnings during the twelve months following the date of initial application will be approximately $600,000, net of tax, of which approximately $100,000 and $400,000, net of tax, for the three and nine months ended October 31, 2001, respectively, was recorded and reflected as interest expense in the Consolidated Statement of Operations.
	During the third quarter, the Company began assessing hedge effectiveness based on the total changes in cash flows on its LIBOR interest rate caps and treasury options as described by Derivatives Implementation Group Issue G20,Cash Flow Hedges: Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge.Accordingly, the Company will record all of the subsequent changes in the fair value, including the changes in the option’s time value, in Other Comprehensive Income (Loss). Gains or losses on LIBOR interest rate caps used to hedge interest rate risk on variable-rate debt will be reclassified out of Accumulated Other Comprehensive Income (Loss) into earnings when the forecasted transaction occurs using the “caplet” methodology. Gains or losses on Treasury Options used to hedge the interest rate risk associated with the anticipated issuance of fixed-rate debt will be reclassified from Accumulated Other Comprehensive Income (Loss) into earnings over the term of the debt, based on an effective-yield method.
	For the three and nine months ended October 31, 2001, the Company recorded approximately $-0- and $600,000, respectively, as an increase of interest expense in the Consolidated Statements of Operations representing the total ineffectiveness of its LIBOR interest rate caps and Treasury Options, consisting primarily of the changes in the time value of option contracts. The amount of hedge ineffectiveness relating to hedges designated and qualifying as fair value hedges and interest rate swaps designated and qualifying as cash flow hedges, was not material. At October 31, 2001, LIBOR interest rate caps and Treasury Options were reported at their fair value of approximately $800,000, in the Consolidated Balance Sheet as Other Assets. The fair value of the interest rate swap agreements at October 31, 2001 is approximately $8,200,000 and is included in the Consolidated Balance Sheet as Other Liabilities. As of October 31, 2001, the Company expects that within the next twelve months it will reclassify amounts recorded in Accumulated Other Comprehensive Income (Loss) as a reduction of earnings of approximately $4,700,000, net of tax. For further discussion of the Company’s use and accounting for derivatives and hedging activities, see Note A of the Company’s April 30, 2001 Form 10-Q.

8

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

B.	Financial Statement Presentation
	Effective January 31, 2001, the Company implemented a change in the presentation of its financial results from the pro-rata method of consolidation to the full consolidation method. The following statements provide a reconciliation of the Company’s current financial statement presentation to its historical presentation.

Consolidated Balance Sheet - October 31, 2001
									Plus
						Less			Unconsolidated
			Full			Minority			Investments			Pro-Rata
			Consolidation			Interest			at Pro-Rata			Consolidation
			(in thousands)
Assets
Real Estate
	Completed rental properties		$	3,267,110		$	560,258		$	765,081		$	3,471,933
	Projects under development			460,668			51,123			120,242			529,787
	Land held for development or sale			23,451			—			36,350			59,801
		Real Estate, at cost		3,751,229			611,381			921,673			4,061,521
	Less accumulated depreciation			(487,543	)		(66,946	)		(171,441	)		(592,038	)
		Total Real Estate		3,263,686			544,435			750,232			3,469,483
Cash and equivalents				90,699			8,164			32,347			114,882
Restricted cash				90,505			15,218			37,076			112,363
Notes and accounts receivable, net				245,441			17,870			6,051			233,622
Inventories				31,431			—			—			31,431
Investments in and advances to real estate affiliates				434,140			—			(48,517	)		385,623
Other assets				130,264			25,973			28,979			133,270
		Total Assets	$	4,286,166		$	611,660		$	806,168		$	4,480,674
Liabilities and Shareholders’ Equity
Liabilities
Mortgage debt, nonrecourse			$	2,525,215		$	468,148		$	767,010		$	2,824,077
Accounts payable and accrued expenses				417,312			37,471			42,354			422,195
Notes payable				61,107			14,864			(3,196	)		43,047
Long-term credit facility				110,000			—			—			110,000
Senior and subordinated debt				220,400			—			—			220,400
Deferred income taxes				214,195			—			—			214,195
	Total Liabilities			3,548,229			520,483			806,168			3,833,914
Minority interest				91,177			91,177			—			—
Total Shareholders’ Equity				646,760			—			—			646,760
		Total Liabilities and Shareholders’ Equity	$	4,286,166		$	611,660		$	806,168		$	4,480,674

9

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

B. Financial Statement Presentation (continued)

Consolidated Statement of Earnings - Three Months Ended October 31, 2001
								Plus
								Unconsolidated
		Full			Less Minority			Investments at			Pro-Rata
		Consolidation			Interest			Pro-Rata			Consolidation
								(in thousands)
Revenues
	Rental properties	$	195,141		$	29,252		$	51,909		$	217,798
	Lumber trading		27,034			—			—			27,034
	Equity in earnings of unconsolidated entities		10,486			—			(6,686	)		3,800
			232,661			29,252			45,223			248,632
Expenses
	Operating expenses		139,027			18,062			30,619			151,584
	Interest expense		44,023			8,733			11,295			46,585
	Provision for decline in real estate		7,452			1,574			—			5,878
	Depreciation and amortization		24,271			4,092			3,957			24,136
			214,773			32,461			45,871			228,183
Gain on disposition of operating properties and other investments			89,961			—			648			90,609
Earnings before income taxes			107,849			(3,209	)		—			111,058
Income tax expense
	Current		3,596			—			—			3,596
	Deferred		40,864			—			—			40,864
			44,460			—			—			44,460
Earnings before minority interest and extraordinary loss			63,389			(3,209	)		—			66,598
Minority interest			3,209			3,209			—			—
Earnings before extraordinary loss			66,598			—			—			66,598
Extraordinary loss, net of tax			(870	)		—			—			(870	)
Net earnings		$	65,728		$	—		$	—		$	65,728

10

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

B. Financial Statement Presentation (continued)

Consolidated Statement of Earnings - Nine Months Ended October 31, 2001
								Plus
								Unconsolidated
		Full			Less Minority			Investments at			Pro-Rata
		Consolidation			Interest			Pro-Rata			Consolidation
			(in thousands)
Revenues
	Rental properties	$	532,575		$	89,821		$	143,413		$	586,167
	Lumber trading		88,963			—			—			88,963
	Equity in earnings of unconsolidated entities		33,069			—			(20,595	)		12,474
			654,607			89,821			122,818			687,604
Expenses
	Operating expenses		381,756			50,750			80,607			411,613
	Interest expense		135,189			26,574			33,857			142,472
	Provision for decline in real estate		7,452			1,574			—			5,878
	Depreciation and amortization		71,418			12,421			14,035			73,032
			595,815			91,319			128,499			632,995
Gain on disposition of operating properties and other investments			91,224			—			5,681			96,905
Earnings before income taxes			150,016			(1,498	)		—			151,514
Income tax expense
	Current		11,083			—			—			11,083
	Deferred		48,714			—			—			48,714
			59,797			—			—			59,797
Earnings before minority interest, extraordinary loss and cumulative effect of a change in accounting principle			90,219			(1,498	)		—			91,717
Minority interest			1,498			1,498			—			—
Earnings before extraordinary loss and cumulative effect of a change in accounting principle			91,717			—			—			91,717
Extraordinary loss, net of tax			(233	)		—			—			(233	)
Cumulative effect of a change in accounting principle, net of tax			(1,202	)		—			—			(1,202	)
Net earnings		$	90,282		$	—		$	—		$	90,282

11

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

B. Financial Statement Presentation (continued)

Consolidated Statement of Earnings - Three Months Ended October 31, 2000
								Plus
								Unconsolidated
		Full			Less Minority			Investments at			Pro-Rata
		Consolidation			Interest			Pro-Rata			Consolidation
		(in thousands)
Revenues
	Rental properties	$	180,417		$	29,352		$	47,651		$	198,716
	Lumber trading		26,202			—			—			26,202
	Equity in earnings of unconsolidated entities		4,907			—			(2,089	)		2,818
			211,526			29,352			45,562			227,736
Expenses
	Operating expenses		121,267			14,527			28,831			135,571
	Interest expense		44,021			8,222			12,072			47,871
	Depreciation and amortization		26,832			6,102			5,422			26,152
			192,120			28,851			46,325			209,594
Gain on disposition of operating properties and other investments			2,521			—			763			3,284
Earnings before income taxes			21,927			501			—			21,426
Income tax expense
	Current		1,850			—			—			1,850
	Deferred		6,497			—			—			6,497
			8,347			—			—			8,347
Earnings before minority interest			13,580			501			—			13,079
Minority interest			(501	)		(501	)		—			—
Net earnings		$	13,079		$	—		$	—		$	13,079

12

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

B. Financial Statement Presentation (continued)

Consolidated Statement of Earnings - Nine Months Ended October 31, 2000
								Plus
								Unconsolidated
		Full			Less Minority			Investments at			Pro-Rata
		Consolidation			Interest			Pro-Rata			Consolidation
					(in thousands)
Revenues
	Rental properties	$	473,560		$	80,299		$	136,965		$	530,226
	Lumber trading		80,143			—			—			80,143
	Equity in earnings of unconsolidated entities		14,953			—			(9,827	)		5,126
			568,656			80,299			127,138			615,495
Expenses
	Operating expenses		317,032			39,097			79,671			357,606
	Interest expense		129,397			25,616			35,156			138,937
	Provision for decline in real estate		1,231			—			—			1,231
	Depreciation and amortization		70,561			14,182			14,670			71,049
			518,221			78,895			129,497			568,823
Gain on disposition of operating properties and other investments			57,467			—			2,359			59,826
Earnings before income taxes			107,902			1,404			—			106,498
Income tax expense
	Current		14,156			—			—			14,156
	Deferred		4,881			—			—			4,881
			19,037			—			—			19,037
Earnings before minority interest			88,865			1,404			—			87,461
Minority interest			(1,404	)		(1,404	)		—			—
Net earnings		$	87,461		$	—		$	—		$	87,461

13

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

B. Financial Statement Presentation (continued)

Consolidated Statement of Cash Flows — Nine Months Ended October 31, 2001
										Plus
										Unconsolidated
				Full			Less Minority			Investments at			Pro-Rata
				Consolidation			Interest			Pro-Rata			Consolidation
							(in thousands)
Cash Flows from Operating Activities
	Rents and other revenues received			$	535,646		$	80,445		$	123,948		$	579,149
	Cash distributions from unconsolidated entities				23,816			—			(23,816	)		—
	Proceeds from land sales				14,563			760			24,427			38,230
	Land development expenditures				(34,615	)		(1,715	)		(11,671	)		(44,571	)
	Operating expenditures				(370,810	)		(43,737	)		(72,302	)		(399,375	)
	Interest paid				(132,887	)		(26,791	)		(33,434	)		(139,530	)
			Net cash provided by operating activities		35,713			8,962			7,152			33,903
Cash Flows from Investing Activities
	Capital expenditures				(297,095	)		(140	)		(101,056	)		(398,011	)
	Proceeds from disposition of properties and other investments				190,011			—			7,791			197,802
	Change in investments in and advances to real estate affiliates				(30,109	)		—			20,849			(9,260	)
		Net cash used in investing activities			(137,193	)		(140	)		(72,416	)		(209,469	)
Cash Flows from Financing Activities
	Increase in nonrecourse mortgage debt and long-term credit facility				402,574			62,045			147,889			488,418
	Principal payments on nonrecourse mortgage debt on real estate				(292,771	)		(81,911	)		(54,898	)		(265,758	)
	Payments on long-term credit facility				(104,000	)		—			—			(104,000	)
	Increase in notes payable				39,244			170			8,285			47,359
	Payments on notes payable				(33,530	)		(1	)		(12,898	)		(46,427	)
	Change in restricted cash and book overdrafts				(3,642	)		(3,389	)		(16,212	)		(16,465	)
	Payment of deferred financing costs				(10,600	)		(811	)		(906	)		(10,695	)
	Exercise of stock options				3,909			—			—			3,909
	Sale of common stock, net				117,885			—			—			117,885
	Dividends paid to shareholders				(5,741	)		—			—			(5,741	)
	Increase in minority interest				14,586			14,586			—			—
			Net cash provided by (used in) financing activities		127,914			(9,311	)		71,260			208,485
Net increase (decrease) in cash and equivalents					26,434			(489	)		5,996			32,919
Cash and equivalents at beginning of period					64,265			8,653			26,351			81,963
Cash and equivalents at end of period				$	90,699		$	8,164		$	32,347		$	114,882
Reconciliation of Net Earnings to Cash Provided by Operating Activities
Net Earnings				$	90,282		$	—		$	—		$	90,282
	Minority Interest				(1,498	)		(1,498	)		—			—
	Depreciation				59,081			9,483			12,112			61,710
	Amortization				12,337			2,938			1,923			11,322
	Equity in earnings of unconsolidated entities				(33,069	)		—			20,595			(12,474	)
	Cash distributions from unconsolidated entities				23,816			—			(23,816	)		—
	Deferred income taxes				47,927			—			—			47,927
	Gain on disposition of operating properties and other investments				(91,224	)		—			(5,681	)		(96,905	)
	Provision for decline in real estate				7,452			1,574			—			5,878
	Extraordinary loss				386			—			—			386
	Cumulative effect of a change in accounting principle				1,988			—			—			1,988
	(Increase) decrease in land included in projects under development				(27,919	)		(2,130	)		9,712			(16,077	)
	Decrease in commercial land included in completed rental properties				—			—			191			191
	Increase in land held for development or sale				(708	)		—			(5,890	)		(6,598	)
	(Increase) decrease in notes and accounts receivable				(57,825	)		(5,620	)		4,763			(47,442	)
	Decrease in inventories				7,803			—			—			7,803
	Decrease (increase) in other assets				12,839			1,924			(6,931	)		3,984
	(Decrease) increase in accounts payable and accrued expenses				(15,955	)		2,291			174			(18,072	)
			Net cash provided by operating activities	$	35,713		$	8,962		$	7,152		$	33,903

14

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

B. Financial Statement Presentation (continued)

Consolidated Statement of Cash Flows — Nine Months Ended October 31, 2000
										Plus
										Unconsolidated
				Full			Less Minority			Investments at			Pro-Rata
				Consolidation			Interest			Pro-Rata			Consolidation
							(in thousands)
Cash Flows from Operating Activities
	Rents and other revenues received			$	529,561		$	74,318		$	133,798		$	589,041
	Cash distributions from unconsolidated entities				20,803			—			(20,803	)		—
	Proceeds from land sales				14,138			—			22,934			37,072
	Land development expenditures				(26,002	)		—			(24,629	)		(50,631	)
	Operating expenditures				(306,219	)		(41,653	)		(59,625	)		(324,191	)
	Interest paid				(128,030	)		(25,042	)		(36,130	)		(139,118	)
			Net cash provided by operating activities		104,251			7,623			15,545			112,173
Cash Flows from Investing Activities
	Capital expenditures				(375,037	)		(48,582	)		(65,439	)		(391,894	)
	Proceeds from disposition of properties and other investments				131,468			—			2,703			134,171
	Change in investments in and advances to real estate affiliates				(21,625	)		—			15,479			(6,146	)
		Net cash used in investing activities			(265,194	)		(48,582	)		(47,257	)		(263,869	)
Cash Flows from Financing Activities
	Increase in nonrecourse mortgage debt and long-term credit facility				618,809			164,658			46,594			500,745
	Principal payments on nonrecourse mortgage debt on real estate				(367,260	)		(99,963	)		(10,897	)		(278,194	)
	Increase (decrease) in notes payable				12,819			(55	)		(3,272	)		9,602
	Payments on notes payable				(34,196	)		(190	)		(2,329	)		(36,335	)
	Change in restricted cash and book overdrafts				(50,342	)		(899	)		(1,486	)		(50,929	)
	Payment of deferred financing costs				(25,531	)		(10,179	)		(1,229	)		(16,581	)
	Exercise of stock options				22			—			—			22
	Dividends paid to shareholders				(4,806	)		—			—			(4,806	)
	Decrease in minority interest				(4,700	)		(4,700	)		—			—
			Net cash provided by financing activities		144,815			48,672			27,381			123,524
Net (decrease) increase in cash and equivalents					(16,128	)		7,713			(4,331	)		(28,172	)
Cash and equivalents at beginning of period					84,082			6,685			19,798			97,195
Cash and equivalents at end of period				$	67,954		$	14,398		$	15,467		$	69,023
Reconciliation of Net Earnings to Cash Provided by Operating Activities
Net Earnings				$	87,461		$	—		$	—		$	87,461
	Minority Interest				1,404			1,404			—			—
	Depreciation				54,099			8,908			12,589			57,780
	Amortization				16,462			5,274			2,081			13,269
	Equity in earnings of unconsolidated entities				(14,953	)		—			9,827			(5,126	)
	Cash distributions from unconsolidated entities				20,803			—			(20,803	)		—
	Deferred income taxes				4,881			—			—			4,881
	Gain on disposition of properties and other investments				(57,467	)		—			(2,359	)		(59,826	)
	Provision for decline in real estate				1,231						—			1,231
	(Increase) decrease in land included in projects under development				(8,525	)		—			1,353			(7,172	)
	Decrease (increase) in land held for development or sale				2,207			—			(2,965	)		(758	)
	(Increase) decrease in notes and accounts receivable				(11,073	)		(5,968	)		19,951			14,846
	Decrease in inventories				26,926			—			—			26,926
	Increase in other assets				(20,759	)		(3,211	)		(3,966	)		(21,514	)
	Increase (decrease) in accounts payable and accrued expenses				1,554			1,216			(163	)		175
			Net cash provided by operating activities	$	104,251		$	7,623		$	15,545		$	112,173

15

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

C.	Provision for Decline in Real Estate During both the three and nine months ended October 31, 2001, the Company recorded a Provision for Decline in Real Estate totaling $7,452,000, or $5,127,000 net of estimated taxes, representing the adjustment to fair market value of land held by the Commercial and Residential Groups.
	During the nine months ended October 31, 2000, the Company recorded a Provision for Decline in Real Estate of $1,231,000, or $744,000 net of estimated taxes, related to the write-down to estimated fair value, less cost to sell, ofCanton Centre Mall.
D.	Gain on Disposition of Operating Properties and Other Investments During the nine months ended October 31, 2001, the Company recorded gains on the disposition of operating properties and other investments totaling $91,224,000, or $55,121,000 net of estimated taxes. The Company recognized gains on the disposition of two shopping centers,Bowling Green Mall, located in Bowling Green, Kentucky, of $1,892,000 andTucson Mall,located in Tucson, Arizona, of $86,096,000, both structured as tax-deferred exchanges.
	The Company also recognized gains on the disposition of three apartment communities, all structured as tax-deferred exchanges:Whitehall Terrace, located in Kent, Ohio, for $1,105,000,Peppertree, located in College Station, Texas, for $1,682,000, andPalm Villas, located in Henderson, Nevada, for $7,259,000. A loss of $1,010,000 was recognized on the sale ofThe Oaks, an apartment community located in Bryan, Texas. The Company also recognized a loss from the sale of available-for-sale equity securities of $1,321,000 and a loss on other investments totaling $4,479,000.
	During the nine months ended October 31, 2000, the Company recorded gains on disposition of properties and other investments totaling $57,467,000, or $33,966,000 net of estimated taxes. The Company recognized gains on dispositions of two apartment communities in California: $26,241,000 forStudio Colonyand $578,000 forHighlands, and the disposition ofTucson Place, a specialty retail center located in Tucson, Arizona for $8,594,000. TheStudio Colonydisposition was structured as a tax-deferred exchange. The Company also recognized gains totaling $22,054,000 from the sale of available-for-sale equity securities.
E.	Extraordinary Loss During the nine months ended October 31, 2001, the Company recorded an extraordinary loss, net of tax, of $233,000 ($386,000 pre-tax) representing the impact of early extinguishment of nonrecourse debt. The Company recognized an extraordinary gain, net of tax, of $637,000 ($1,054,000 pre-tax) in the first quarter of 2001 related toEnclave, a residential property located in San Jose, California and an extraordinary loss, net of tax, of $870,000 ($1,440,000 pre-tax) in the third quarter of 2001 related toMount Vernon, a residential property located in Alexandria, Virginia.

16

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

F.

Stock Split On September 4, 2001, the Board of Directors declared a three-for-two stock split of the Company’s Class A and Class B common stock effective November 14, 2001 to shareholders of record on October 31, 2001. The stock split was effected as a stock dividend. The stock split is given retroactive effect to the beginning of the earliest period presented in the accompanying Consolidated Balance Sheets and Consolidated Statement 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 quarterly report have been restated to reflect the stock split.

G.

Stock Offering On September 28, 2001, the Company sold 3,900,000 shares of Class A common stock at an initial price of $32.23 per share on a post-split basis. The offering generated net proceeds of $117,885,000 of which $104,000,000 was used to reduce borrowings under the revolving credit facility.

H. Dividends
The Board of Directors declared regular quarterly cash dividends on both Class A and Class B common stock as follows:

Date	Date of	Payment	Amount
Declared	Record	Date	Per Share
March 9, 2001	June 1, 2001	June 15, 2001	$	.0400
June 6, 2001	September 4, 2001	September 19, 2001	$	.0467
September 4, 2001	December 3, 2001	December 17, 2001	$	.0500
December 6, 2001	March 1, 2002	March 15, 2002	$	.0500

17

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

I. Earnings per Share
Reconciliations of the numerator and denominator of basic earnings per share (EPS) with diluted EPS follows:

		Earnings		Weighted
		Before		Average Common		Per
		Extraordinary Loss		Shares Outstanding		Common
		(Numerator)		(Denominator)		Share
Nine Months Ended
October 31, 2001:
	Basic EPS	$	91,717,000		45,834,365	$	2.01
	Dilutive effect of stock options		—		626,829		(.03	)
	Diluted EPS	$	91,717,000		46,461,194	$	1.98
Nine Months Ended
October 31, 2000:
	Basic EPS	$	87,461,000		45,047,727	$	1.94
	Dilutive effect of stock options		—		397,930		(.02	)
	Diluted EPS	$	87,461,000		45,445,657	$	1.92

J.

Stock-Based Compensation In March 2001, the Compensation Committee of the Board of Directors granted fixed options covering 625,800 Class A common shares to key employees and non-employee members of the Board of Directors. The options have a term of 10 years, vest over two to four years and have an exercise price of $28.53.

The Compensation Committee also granted 112,500 shares of restricted Class A common stock to key employees. The restricted shares were awarded out of treasury stock, having a cost basis of $1,009,000, with rights to vote the shares and receive dividends while being subject to restrictions on disposition and transferability and risk of forfeiture. The shares become nonforfeitable over a period of four years. In accordance with APB No. 25, the market value on the date of grant of $3,190,500 was recorded as unearned compensation to be charged to expense over the respective vesting periods. The unearned compensation is being reported as an offset to Additional Paid-In Capital in the accompanying consolidated financial statements. At October 31, 2001, the unamortized unearned compensation relating to all restricted stock amounted to $3,710,000.

18

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

K.	Reversal of Reserves on Notes Receivable During the three months ended October 31, 2001, the Company reversed $10,152,000 of reserves, representing a portion of the reserves recorded over the past 20 years against certain notes receivable and related accrued interest. These notes receivable represent development and other fees that were earned upon formation of six Federally-subsidized housing partnerships in which the Company is the 1% general partner. During the three months ended October 31, 2001, these six properties completed a series of events. The first of these was the modification of government contracts that now allow for market rate apartment rentals, which provide a significant increase in expected future cash flows. This, in turn, increased the appraised values of these six properties. As a result, the Company determined that the collection of a portion of these notes receivable and related accrued interest is now probable.
L.	Reclassification Certain items in the consolidated financial statements for 2000 have been reclassified to conform to the 2001 presentation.
M.	Recent Developments The Company owns 67.19% of Granite Development Partners, L.P. (“Granite”), a land developer whose primary development is theSeven Hillsproject in Henderson, Nevada. In November, 2001 the Company purchased 27.6% of Granite’s total outstanding 10.83% unsecured senior notes payable from an independent third party. Notes having a face value of $9,379,000 were purchased at an 18% discount. The maturity date of the notes is November 15, 2003, with interest payable semiannually on May 15 and November 15.

19

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

N.  Investments in and Advances to Real Estate Affiliates

Included in Investments in and Advances to Real Estate Affiliates are unconsolidated investments accounted for on the equity method. Summarized combined financial information for these investments, along with the Company’s pro-rata share, is as follows.

			Combined			Pro-Rata Share
October 31,			2001			2001
			(in thousands)
Balance Sheet:
	Completed rental properties		$	2,216,441		$	765,081
	Projects under development			234,025			120,242
	Land held for development or sale			77,781			36,350
	Investment in and advances to real estate affiliates			—			92,463
	Accumulated depreciation			(422,211	)		(171,441	)
	Other assets			274,234			104,453
		Total Assets	$	2,380,270		$	947,148
	Mortgage debt, nonrecourse		$	2,087,412		$	767,010
	Advances from general partner			42,365			—
	Other liabilities			153,689			39,158
	Partners’ equity			96,804			140,980
		Total Liabilities and Partners’ Equity	$	2,380,270		$	947,148
Nine Months Ended October 31,
Operations:
	Revenues		$	366,362		$	143,413
	Equity in earnings of unconsolidated entities on a pro-rata basis			—			12,474
	Operating expenses			(201,063	)		(80,607	)
	Interest expense			(90,645	)		(33,857	)
	Depreciation and amortization			(49,424	)		(14,035	)
	Gain on disposition of operating properties and other investments			12,392			5,681
	Extraordinary gain			1,110			1,054
		Net Income	$	38,732		$	34,123
Following is a reconciliation of partners’ equity to the Company’s carrying value in the accompanying Consolidated Balance Sheet.
Partners’ equity, as above			$	96,804
Deficit of other partners				(1,811	)
Company’s investment in partnerships				98,615
Advances to partnerships, as above				42,365
Advances to other real estate affiliates				293,160
Investments in and Advances to Real Estate Affiliates			$	434,140

20

FOREST CITY ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

O. Segment Information

The following tables summarize financial data for the Commercial, Residential, Land and Lumber Trading Groups and Corporate. The table is presented by using the pro-rata consolidation method, which is the method used by management for internal reporting. Reconciliation to the full consolidation method is included for certain information. All amounts, including footnotes, are presented in thousands.

														Three Months						Nine Months Ended
														Ended October 31,						October 31,
								October 31,			January 31,
								2001			2001			2001			2000			2001			2000
								Identifiable Assets						Expenditures for Additions to Real Estate
Commercial Group								$	3,010,028		$	2,759,969		$	210,624		$	19,431		$	358,458		$	158,376
Residential Group									1,050,212			1,010,889			32,961			82,028			101,515			234,177
Land Group									188,241			153,582			10,675			4,321			41,335			31,969
Lumber Trading Group									147,334			136,175			293			311			547			1,474
Corporate									84,859			68,368			504			250			941			808
	Consolidated at pro-rata								4,480,674			4,128,983		$	255,057		$	106,341		$	502,796		$	426,804
	Minority interest and unconsolidated entities								(194,508	)		(101,513	)
	Consolidated							$	4,286,166		$	4,027,470
		Three Months						Nine Months						Three Months						Nine Months Ended
		Ended October 31,						Ended October 31,						Ended October 31,						October 31,
		2001			2000			2001			2000			2001			2000			2001			2000
		Revenues												Interest Expense
Commercial Group		$	138,072		$	140,497		$	397,731		$	381,756		$	27,811		$	27,968		$	84,144		$	84,831
Residential Group			60,010			42,091			157,458			115,753			9,717			8,894			30,546			21,520
Land Group			23,474			18,887			43,247			37,458			1,190			1,381			2,572			4,207
Lumber Trading Group (1)			27,034			26,202			88,963			80,143			660			1,196			2,584			4,473
Corporate			42			59			205			385			7,207			8,432			22,626			23,906
	Consolidated at pro-rata		248,632			227,736			687,604			615,495			46,585			47,871			142,472			138,937
	Minority interest and unconsolidated entities		(15,971	)		(16,210	)		(32,997	)		(46,839	)		(2,562	)		(3,850	)		(7,283	)		(9,540	)
	Consolidated	$	232,661		$	211,526		$	654,607		$	568,656		$	44,023		$	44,021		$	135,189		$	129,397
			Depreciation and Amortization Expense												Earnings Before Income Taxes (EBIT) (2)
Commercial Group		$	17,886		$	20,193		$	53,911		$	55,414		$	10,921		$	21,117		$	43,198		$	46,362
Residential Group			5,165			4,959			15,951			12,734			16,666			7,067			34,261			35,934
Land Group			218			85			529			241			9,499			2,142			13,311			(642	)
Lumber Trading Group			512			582			1,599			1,751			843			741			5,032			1,209
Corporate			355			333			1,042			909			(11,602	)		(12,925	)		(35,315	)		(34,960	)
Provision for decline in real estate			—			—			—			—			(5,878	)		—			(5,878	)		(1,231	)
Gain on disposition of operating properties and other investments			—			—			—			—			90,609			3,284			96,905			59,826
	Consolidated at pro-rata		24,136			26,152			73,032			71,049			111,058			21,426			151,514			106,498
	Minority interest and unconsolidated entities		135			680			(1,614	)		(488	)		(3,209	)		501			(1,498	)		1,404
	Consolidated	$	24,271		$	26,832		$	71,418		$	70,561		$	107,849		$	21,927		$	150,016		$	107,902
														Earnings Before Depreciation, Amortization
														and Deferred Taxes (EBDT)
Commercial Group														$	24,780		$	35,411		$	84,307		$	80,164
Residential Group															21,497			9,912			44,584			42,562
Land Group															5,732			1,294			6,311			(311	)
Lumber Trading Group															152			391			2,698			544
Corporate															(8,898	)		(7,507	)		(24,224	)		(21,132	)
	Consolidated EBDT														43,263			39,501			113,676			101,827
Reconciliation of EBDT to net earnings:
Depreciation and amortization — Real Estate Groups															(23,292	)		(25,154	)		(70,539	)		(68,149	)
Deferred taxes — Real Estate Groups															(6,278	)		(4,774	)		(11,116	)		(12,722	)
Straight-line rent adjustment															1,709			2,081			4,694			7,335
Provision for decline in real estate, net of tax															(3,553	)		—			(3,553	)		(744	)
Gain on disposition of operating properties and other investments, net of tax															54,749			1,425			58,555			59,914
Extraordinary loss, net of tax															(870	)		—			(233	)		—
Cumulative effect of change in accounting principle, net of tax															—			—			(1,202	)		—
	Net earnings													$	65,728		$	13,079		$	90,282		$	87,461

(1)	The Company recognizes the gross margin on lumber brokerage sales as Revenues. Sales invoiced for the three months ended October 31, 2001 and 2000 were $653,557 and $616,703, respectively. Sales invoiced for the nine months ended October 31, 2001 and 2000 were $2,038,232 and $2,139,891, respectively.
(2)	See Consolidated Statements of Earnings for reconciliation of EBIT to net earnings.

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The enclosed financial statements have been prepared on a basis consistent with accounting principles applied in the prior periods and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the periods presented. Results of operations for the nine months ended October 31, 2001 are not necessarily indicative of results of operations which may be expected for the full year.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Forest City Enterprises, Inc. should be read in conjunction with the financial statements and the footnotes thereto contained in the January 31, 2001 annual report (“Form 10-K”).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

The Company owns, develops, acquires and operates commercial and residential real estate properties in 19 states and the District of Columbia. The Company owns a portfolio that is diversified both geographically and by property type and operates through four strategic business units: Commercial Group, Residential Group, Land Group and Lumber Trading Group.

The Company uses an additional measure, along with net earnings, to report its operating results. This measure, referred to as Earnings Before Depreciation, Amortization and Deferred Taxes (“EBDT”), is not a measure of operating results or cash flows from operations as defined by generally accepted accounting principles and may not be directly comparable to similarly-titled measures reported by other companies. The Company believes that EBDT provides additional information about its operations and, along with net earnings, is necessary to understand its operating results. The Company’s view is that EBDT is an indicator of the Company’s ability to generate cash to meet its funding requirements. EBDT is defined and discussed in detail under “Results of Operations — EBDT”.

The Company’s EBDT for the three months ended October 31, 2001 grew by 9.5% to $43,263,000 from $39,501,000 for the three months ended October 31, 2000. For the nine months ended October 31, 2001, EBDT increased by 11.6% to $113,676,000 from $101,827,000 for the nine months ended October 31, 2000.

RESULTS OF OPERATIONS

The Company reports its results of operations by each of its four strategic business units as it believes it provides the most meaningful understanding of the Company’s financial performance.

The major components of EBDT are Revenues, Operating Expenses and Interest Expense, each of which is discussed below. Net Operating Income (“NOI”) is defined as Revenues less Operating Expenses. See the information in the table entitled “Earnings before Depreciation, Amortization and Deferred Taxes” at the end of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Net Operating Income from Real Estate Groups— Management analyzes property NOI using the pro-rata consolidation method. NOI from the combined Commercial Group and Residential Group (“Real Estate Groups”) for the three months ended October 31, 2001 was $86,585,000 compared to $88,119,000 for the three months ended October 31, 2000, a 1.7% decrease. This decrease is primarily attributable to a decline in our hotel portfolio, which has been impacted by the overall decline in the travel industry. NOI for the Real Estate Groups for the nine months ended October 31, 2001 was $257,751,000 compared to $249,461,000 for the nine months ended October 31, 2000, a 3.3% increase.

Commercial Group
The following table presents the significant increases (decreases) in revenues and operating expenses reported by the Commercial Group for newly-opened or acquired properties for the three months ended October 31, 2001 compared to the same period in the prior year (dollars in thousands):

																Full
			Quarter		Sq.Ft./					Full			Pro-Rata			Consolidation
			& Year		No.of		Pro-Rata			Consolidation			Operating			Operating
Property		Location	Opened		Rooms		Revenues			Revenues			Expenses			Expenses
Retail Centers:
Galleria at South Bay(a)		Redondo Beach, CA		Q3 - 2001		955,000	$	577		$	577		$	(119	)	$	(119	)
Queens Place		Queens, NY		Q3 - 2001		455,000		755			1,079			313			447
Mall at Robinson		Pittsburgh, PA		Q3 - 2001		858,000		159			(233	)		397			N/A
Mall at Stonecrest		Atlanta, GA		Q3 - 2001		1,209,000		266			(145	)		412			N/A
Battery Park City		Manhattan, NY		Q2 - 2000		167,000		77	(b)		110	(b)		581			830
Court Street		Brooklyn, NY		Q2 - 2000		103,000		(24	)		(34	)		136			194
Eastchester		Bronx, NY		Q2 - 2000		63,000		248			355			87			124
Forest Avenue		Staten Island, NY		Q2 - 2000		68,000		(24	)		(35	)		154			219
Office Building:
65/80 Landsdowne		Cambridge, MA		Q3 - 2001		122,000		1,651			1,651			234			234
Hotels:
Embassy Suites Hotel		Manhattan, NY		Q2 - 2000	463 rooms			(828	)(c)		(1,643	)(c)		(81	)		(160	)
Hilton Times Square		Manhattan, NY		Q2 - 2000	444 rooms			(1,293	)		(2,308	)		662			1,183
	Total						$	1,564		$	(626	)	$	2,776		$	2,952

N/A – not applicable – property recorded under equity method of accounting.
(a)	Acquired property
(b)	Property closed September 11, 2001. Amounts include $320 and $457 of business interruption insurance proceeds under pro-rata and full consolidation, respectively.
(c)	Property closed September 11, 2001. Amounts include $2,019 and $4,005 of business interruption insurance proceeds under pro-rata and full consolidation, respectively

The following table presents the significant increases in revenues and operating expenses reported by the Commercial Group for newly-opened or acquired properties for the nine months ended October 31, 2001 compared to the same period in the prior year (dollars in thousands):

23

																Full
			Quarter		Sq.Ft./					Full			Pro-Rata			Consolidation
			& Year		No.of		Pro-Rata			Consolidation			Operating			Operating
Property		Location	Opened		Rooms		Revenues			Revenues			Expenses			Expenses
Retail Centers:
Galleria at South Bay(a)		Redondo Beach, CA		Q3 - 2001		955,000	$	577		$	577		$	(119	)	$	(119	)
Queens Place		Queens, NY		Q3 - 2001		455,000		755			1,079			313			447
Mall at Robinson		Pittsburgh, PA		Q3 - 2001		858,000		159			(238	)		397			N/A
Mall at Stonecrest		Atlanta, GA		Q3 - 2001		1,209,000		387			(24	)		412			N/A
Battery Park City		Manhattan, NY		Q2 - 2000		167,000		1,954	(b)		2,792	(b)		1,915			2,736
Court Street		Brooklyn, NY		Q2 - 2000		103,000		1,126			1,608			617			882
Eastchester		Bronx, NY		Q2 - 2000		63,000		949			1,356			411			587
Forest Avenue		Staten Island, NY		Q2 - 2000		68,000		196			281			621			886
Office Building:
65/80 Landsdowne		Cambridge, MA		Q3 - 2001		122,000		1,651			1,651			234			234
Hotels:
Embassy Suites Hotel		Manhattan, NY		Q2 - 2000	463 rooms			6,872	(c)		13,636	(c)		5,646			11,202
Hilton Times Square		Manhattan, NY		Q2 - 2000	444 rooms			5,541			9,894			5,527			9,869
	Total						$	20,167		$	32,612		$	15,974		$	26,724

N/A – not applicable – property recorded under equity method of accounting.
(a)	Acquired property
(b)	Property closed September 11, 2001. Amounts include $320 and $457 of business interruption insurance proceeds under pro-rata and full consolidation, respectively.
(c)	Property closed September 11, 2001. Amounts include $2,019 and $4,005 of business interruption insurance proceeds under pro-rata and full consolidation, respectively

Revenues —Under the pro-rata consolidation method, revenues for the three months ended October 31, 2001 for the Commercial Group decreased $2,341,000 or 1.7% over the same period in the prior year. Under full consolidation, revenues for the three months ended October 31, 2001 decreased $8,276,000 or 5.6% over the same period in the prior year. These decreases are primarily the result of decreases in our hotel portfolio, which decreased during the third quarter by $3,887,000 under pro-rata consolidation and $2,802,000 under full consolidation, in addition to the decrease for the two New York City hotels in the table above. The decreases in our hotel portfolio were primarily the result of the overall decline in the travel industry. Additional decreases resulted from the dispositions in 2000 of three specialty retail centers,Tucson Place,Canton Centre MallandGallery at Metrotechand the disposition in 2001 ofTucson Malltotaling $4,931,000 and $6,916,000 for pro-rata consolidation and full consolidation, respectively. These decreases were offset by increases in commercial land sales of $5,880,000 under pro-rata consolidation and increases in net revenue from $1,071,000 and $1,785,000 under pro-rata and full consolidation, respectively, from construction fee revenue atTwelve MetroTech Centerin Brooklyn, New York. The balance of the remaining decrease in revenues in the Commercial Group of approximately $2,038,000 under pro-rata and the net increase of $283,000 under full consolidation was generally due to fluctuations in operations at mature properties.

Under the pro-rata consolidation method, revenues for the Commercial Group increased $16,914,000 or 4.5% in the nine months ended October 31, 2001 compared to the same period in the prior year. Under full consolidation, revenues increased $27,585,000 or 7.1% in the nine months ended October 31, 2001 over the same period in the prior year. These increases are primarily the result of opening new properties as noted in the table above.

24

Twelve MetroTech Centerconstruction fees resulted in an increase in net revenue of $3,597,000 and $5,995,000 under pro-rata and full consolidation, respectively. Net revenues also increased as a result of lease termination fees of $2,689,000 and $3,578,000 under pro-rata and full consolidation, respectively. Additionally, revenues increased as a result of commercial land sales of $2,977,000 under pro-rata consolidation, but decreased by $7,734,000 under full consolidation. These increases were offset by dispositions in 2000 of three specialty retail centers,Tucson Place,Canton Centre MallandGallery at Metrotechand the disposition ofTucson Mallin 2001, which resulted in a decrease in revenue of $7,368,000 and $12,757,000 under pro-rata consolidation and full consolidation, respectively and a decrease in net revenue of $7,608,000 under pro-rata consolidation and $5,849,000 under full consolidation at our hotel properties in excess of the change noted at the New York hotels in the table above. The balance of the increase in revenues in the Commercial Group of approximately $2,460,000 under pro-rata consolidation and $11,740,000 under full consolidation was generally due to improved operations at mature properties.

Operating and Interest Expenses —During the three months ended October 31, 2001, operating expenses for the Commercial Group increased $9,950,000 or 14.2% over the same period of the prior year under pro-rata consolidation. Under full consolidation during the three months ended October 31, 2001, operating expenses increased $7,151,000 or 9.9% over the same period of the prior year. The increase in operating expenses was attributable primarily to costs associated with the opening and acquisition of new properties as noted in the table above, higher cost of sales relating to increased land sales activity in the third quarter of 2001 compared to the same period of the prior year of $6,189,000 under pro-rata consolidation, and project write-offs during the third quarter of 2001 of $5,863,000 under pro-rata and $7,156,000 under full consolidation. These increases were partially offset by $1,033,000 under pro-rata consolidation and $1,177,000 under full consolidation relating to reduced expenses from the disposition ofTucson Place, Canton Centre MallandGallery at Metrotechand by a reduction of expenses at our hotel properties not noted in the table above of $1,971,000 under pro-rata and $1,232,000 under full consolidation. The balance of the change in operating expenses was generally due to fluctuations in operating costs at mature properties.

Interest expense, under the pro-rata consolidation method decreased during the three months ended October 31, 2001 for the Commercial Group by $157,000 or 0.6%. The decrease under pro-rata consolidation is primarily in connection with asset dispositions during 2000 and 2001. Under the full consolidation method, interest expense for the Commercial Group increased by $1,219,000 or 4.2% over the prior year. The increase under full consolidation is primarily attributable to the opening and acquisition of new properties in 2000 and 2001.

During the nine months ended October 31, 2001, operating expenses for the Commercial Group increased $19,628,000 or 10.2 % over the same period of the prior year under pro-rata consolidation. Under full consolidation during the nine months ended October 31, 2001, operating expenses increased $27,259,000 or 14.2% over the same period of the prior year. The increase in operating expenses was attributable primarily to costs associated with the opening and acquisition of new properties as noted in the table above, higher cost of sales relating to increased land sales activity of $7,727,000 under pro-rata consolidation and project write-offs of $5,863,000 under pro-rata and $7,156,000 under full consolidation. These increases were partially offset by a reduction of operating expenses of $3,440,000 under pro-rata consolidation and $3,885,000 under full consolidation relating to the disposition ofTucson Place, Canton Centre MallandGallery at Metrotechof $2,082,000 under pro-rata

25

consolidation and $1,622,000 under full consolidation resulting from reduced expenses at our hotel properties not included in the table above. The balance of the change in operating expenses was generally due to fluctuations in operating costs at mature properties.

Interest expense, under the pro-rata consolidation method decreased during the nine months ended October 31, 2001 for the Commercial Group by $687,000 or 0.8% from the prior year. The decrease under pro-rata consolidation is primarily in connection with asset dispositions in 2000 and 2001. Under the full consolidation method, interest expense for the Commercial Group increased by $ 5,492,000 or 6.4% over the prior year. The increase under full consolidation is primarily attributable to the opening and acquisition of new properties in 2000 and 2001.

Residential Group
The following table presents the significant increases (decreases) in revenues and operating expenses incurred by the Residential Group for newly opened or acquired properties for the three months ended October 31, 2001 compared to the same period in the prior year (dollars in thousands):

					Quarter													Full
					& Year							Full			Pro-Rata			Consolidation
					Opened/		No. of		Pro-Rata			Consolidation			Operating			Operating
Property				Location	Acquired		Units		Revenues			Revenues			Expenses			Expenses
	Consolidated
Pine Cove				Bayshore, NY		Q3 - 2001		85	$	23		$	28		$	26		$	33
Mount Vernon Square(a)				Alexandria, VA		Q2 - 2000		1,387		395			404			46			52
Forest Trace(a)				Lauderhill, FL		Q3 - 2000		324		611			611			383			383
Chestnut Grove				Plainview, NY		Q3 - 2000		79		416			519			436			544
Westfield Court(a)				Stamford, CT		Q4 - 2000		167		1,333			1,666			895			1,119
		Unconsolidated
Lofts at 1835 Arch				Philadelphia, PA		Q1 - 2001		191		(377	)		(377	)		N/A	(s)		N/A	(s)
Arbor Glen				Twinsburg, OH		Q2 - 2001		96		34			(12	)		35			N/A
Parkwood Village				Brunswick, OH		Q2 - 2001		204		32			(32	)		43			N/A
Settler’s Landing				Streetsboro, OH		Q3 - 2001		152		138			(10	)		66			N/A
Willow Court				Forest Hills, NY		Q3 - 2001		84		*			*			*			N/A
Classic Residence By Hyatt				Yonkers, NY		Q3 - 2000		310		273			(63	)		197			N/A
Mayfair at Great Neck(a)				Great Neck, NY		Q3 - 2000		144		139			49			115			N/A
Mayfair at Glen Cove(a)				Long Island, NY		Q3 - 2000		79		304			(66	)		29			N/A
			Total						$	3,321		$	2,717		$	2,271		$	2,131

N/A – not applicable – property recorded under equity method of accounting.
N/A (s) — not applicable — syndicated residential property accounted for on the equity method under both pro-rata and full consolidation.
(a)	Acquired property
*	Property opened near the end of the third quarter of 2001 and thus has minimal revenues and operating expenses for the three and nine months ended October 31, 2001.

The following table presents the significant increases (decreases) in revenues and operating expenses incurred by the Residential Group for newly opened or acquired properties for the nine months ended October 31, 2001 compared to the same period in the prior year (dollars in thousands):

26

				Quarter													Full
				& Year							Full			Pro-Rata			Consolidation
				Opened/		No.of		Pro-Rata			Consolidation			Operating			Operating
Property			Location	Acquired		Units		Revenues			Revenues			Expenses			Expenses
	Consolidated
Pine Cove			Bayshore, NY		Q3 - 2001		85	$	105		$	131		$	26		$	33
Mount Vernon Square(a)			Alexandria, VA		Q2 - 2000		1,387		6,475			954			2,092			187
Forest Trace(a)			Lauderhill, FL		Q3 - 2000		324		6,522			6,522			3,968			3,968
Chestnut Grove			Plainview, NY		Q3 - 2000		79		1,865			2,331			1,542			1,927
Westfield Court(a)			Stamford, CT		Q4 - 2000		167		4,067			5,084			2,913			3,641
	Unconsolidated
Lofts at 1835 Arch			Philadelphia, PA		Q1 - 2001		191		(613	)		(613	)		N/A	(s)		N/A	(s)
Arbor Glen			Twinsburg, OH		Q2 - 2000		96		51			(121	)		82			N/A
Parkwood Village			Brunswick, OH		Q2 - 2000		204		32			(45	)		49			N/A
Settler’s Landing			Streetsboro, OH		Q3 - 2000		152		299			*			164			N/A
Willow Court			Forest Hills, NY		Q3 - 2001		84		*			*			*			N/A
Classic Residence By Hyatt			Yonkers, NY		Q3 - 2000		310		1,185			(831	)		1,523			N/A
Mayfair at Great Neck(a)			Great Neck, NY		Q3 - 2000		144		1,454			175			904			N/A
Mayfair at Glen Cove(a)			Long Island, NY		Q3 - 2000		79		897			268			395			N/A
		Total						$	22,339		$	13,855		$	13,658		$	9,756

N/A – not applicable – property recorded under equity method of accounting.
N/A (s) — not applicable — syndicated residential property accounted for on the equity method under both pro-rata and full consolidation.
(a)	Acquired property
*	Property opened near the end of the third quarter of 2001 and thus has minimal revenue and expenses for the three and nine months ended October 31, 2001.

Revenues —Revenues for the Residential Group increased by $18,046,000, or 42.9% for the three months ended October 31, 2001, under pro-rata consolidation, over the same period in the prior year. Under full consolidation, revenues for the Residential Group increased by $18,195,000 or 59.3% for the three months ended October 31, 2001 over the same period in the prior year. These increases were the result, in part, of increases in revenues for the acquisitions made and properties opened as noted in the table above. Revenues also increased as a result of the reversal of reserves for notes receivable at six Federally-subsidized housing properties of $10,152,000 under both pro-rata and full consolidation. The remaining increases in revenue of approximately $4,573,000 under pro-rata and $5,326,000 under full consolidation were generally due to overall improved results of mature properties.

Revenues for the Residential Group increased by $42,138,000, or 36.4% for the nine months ended October 31, 2001, under pro-rata consolidation, over the same period in the prior year. Under full consolidation, revenues for the Residential Group increased by $36,314,000 or 40.0% for the nine months ended October 31, 2001 over the same period in the prior year. These increases were primarily the result of the acquisitions made and properties opened as noted in the table above. Additionally, there was an increase of $10,152,000 for both pro-rata and full consolidation due to the reversal of reserves for notes receivable. An additional increase was noted for a gain on the disposition ofChapel Hill Towers, a mid-rise apartment complex in Akron, Ohio, ($5,033,000) that was recognized in income from unconsolidated subsidiaries under full consolidation. Additional increases in revenues were reported under both pro-rata and full consolidation of $2,958,000 forEnclaveand $2,455,000 forGrand.

27

The remaining increases in revenue of approximately $4,234,000 under pro-rata and $1,213,000 under full consolidation was generally due to overall improved results of mature properties.

Operating and Interest Expenses —Operating expenses for the Residential Group increased during the three months ended October 31, 2001 compared to the same period in the prior year by $7,289,000 or 34.4% under pro-rata consolidation and $7,742,000 or 56.6% for full consolidation. These increases were primarily the result of the acquisitions made and properties opened during 2000 and 2001 as noted in the table above. An additional increase was noted of $3,248,000 under pro-rata consolidation and $3,294,000 under full consolidation for development project write-offs. The balance of the increases of $1,770,000 under pro-rata consolidation and $2,317,000 under full consolidation were generally due to increased operating costs of mature properties.

Under the pro-rata consolidation method, interest expense for the three months ended October 31, 2001 increased by $823,000 or 9.3%, over the same period in the prior year. Under the full consolidation method, interest expense increased by $577,000 or 11.6% for the three months ended October 31, 2001 over the same period in the prior year. The increase in interest expense is primarily the result of acquisition and opening of new properties.

Operating expenses for the Residential Group increased during the nine months ended October 31, 2001 compared to the same period in the prior year by $31,134,000 or 68.3% under pro-rata consolidation and $26,412,000 or 97.1% under full consolidation. This increase is primarily due to a reduction in the reserve for the collection of a note receivable in the nine months ended October 31, 2000 fromMillender Centerof $10,775,000 under both pro-rata and full consolidation. Excluding the effects of the reduction in the reserve for the note receivable fromMillender Center, operating expenses for the nine months ended October 31, 2001 increased $20,359,000 or 44.7% under pro-rata and $15,637,000 or 57.5% under full consolidation over the same period of the prior year. This increase is primarily the result of acquisitions made and properties opened during 2000 and 2001 as noted in the table above. In addition, development project write-offs increased $3,248,000 and $3,294,000 under pro-rata consolidation and full consolidation, respectively. The balance of the increases of $3,453,000 under pro-rata consolidation and $2,587,000 under full consolidation was generally due to increased operating costs of mature properties.

Under the pro-rata consolidation method, interest expense for the nine months ended October 31, 2001 increased by $9,026,000 or 41.9%, over the same period in the prior year. Under the full consolidation method, interest expense increased by $4,814,000 or 36.5% for the nine months ended October 31, 2001 over the same period in the prior year. The increase in interest expense is primarily the result of acquisition and opening of new properties.

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Land Group
Revenues –Beginning in 2000, theCentral Stationproject in Chicago, Illinois and theStapletonproject in Denver, Colorado, are reported in the Land Group. Sales of land and related gross margins vary from period to period depending on market conditions relating to the disposition of significant land holdings.

Revenues for the Land Group increased by $4,587,000 in the three months ended October 31, 2001 compared to the same period in the prior year under pro-rata consolidation. This increase is primarily due to the addition of revenues fromStapleton($6,955,000) and increases in revenues fromCentral Station ($4,688,000),Case Roadin North Ridgeville, Ohio ($2,930,000) andChestnut Lakesin Elyria, Ohio ($2,220,000) compared to the third quarter of 2000. These increases were partially offset by a decrease in revenue fromCaldwell Roadin Charlotte, North Carolina ($3,573,000),Quincy Roadin Cleveland, Ohio ($2,750,000),Seven Hillsin Henderson, Nevada ($1,750,000),Westwood Lakesin Tampa, Florida ($1,141,000),Canterberry Crossingin Parker, Colorado ($1,078,000),The Cascadesin Brooklyn, Ohio ($950,000),Abramsin Twinsburg, Ohio ($594,000) andSolon Estatesin Solon, Ohio ($133,000).

Revenues for the Land Group increased by $9,178,000 in the three months ended October 31, 2001 compared to the same period in the prior year under the full consolidation method. This increase is primarily due to the addition of revenues fromStapleton($7,624,000), increases in revenues fromCentral Station($3,860,000),Case Road($2,930,000),Chestnut Lakes($2,220,000) and an increase in equity of unconsolidated entities ($1,841,000) primarily fromSeven Hills. These increases were partially offset by decreases fromCaldwell Road, ($3,573,000),Quincy Road($2,750,000),Westwood Lakes($1,141,000),The Cascades($950,000),Abrams($594,000) andSolon Estates($133,000).

Revenues for the Land Group increased by $5,789,000 in the nine months ended October 31, 2001 compared to the same period in the prior year under pro-rata consolidation. This increase is primarily due to the addition of revenues fromStapleton($8,336,000) and an increase in revenues compared to the third quarter of 2000 fromCentral Station($9,339,000),Case Road($2,930,000) andChestnut Lakes($2,220,000). These increases were partially offset by a decrease in revenue fromCaldwell Road($3,573,000),Westwood Lakes ($2,895,000),Quincy Road($2,750,000),Seven Hills($2,718,000),Canterberry Crossing($2,120,000),The Cascades($950,000),Abrams($594,000) andSolon Estates($509,000).

Revenues for the Land Group increased by $14,141,000 in the nine months ended October 31, 2001 compared to the same period in the prior year under the full consolidation method. This increase is primarily due to the addition of revenues fromStapleton($9,096,000) and the increase in revenues fromCentral Station($7,856,000),Case Road($2,930,000),Chestnut Lakes($2,220,000) and an increase in equity of unconsolidated entities ($4,344,000) primarily fromSeven Hills. These increases were partially offset by decreases in revenue fromCaldwell Road($3,573,000),Westwood Lakes($2,895,000),Quincy Road ($2,750,000),The Cascades($950,000),Abrams($594,000) andSolon Estates ($509,000).

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Operating and Interest Expenses —The fluctuation in Land Group operating expenses primarily reflects costs associated with land sales volume in each period. Operating expenses decreased by $2,693,000 for the three months ended October 31, 2001 compared to the same period in the prior year under the pro-rata consolidation method. This decrease is primarily due to lower land sales atCaldwell Road($2,273,000),Westwood Lakes($1,722,000),Silver Canyon ($2,808,000),Quincy Road($1,415,000),The Cascades($955,000),Canterberry Crossing($352,000),Abrams($351,000) andSolon Estates($95,000). These decreases are partially offset by an increase in costs relating increases toStapleton($3,349,000),Central Station($1,190,000),Case Road($1,799,000) andChestnut Lakes($1,246,000).

Operating expenses increased by $1,431,000 for the three months ended October 31, 2001 compared to the same period in the prior year under the full consolidation method. This increase is due to an increase in costs atStapleton ($3,709,000),Central Station($381,000),Case Road($1,799,000) andChestnut Lakes($1,246,000). This increase is partially offset by a decrease in costs of sales relating to lower land sales atCaldwell Road($2,273,000),Westwood Lakes($1,722,000),Quincy Road($1,415,000),The Cascades($955,000),Abrams ($351,000) andSolon Estates($95,000).

Interest expense decreased for the three months ended October 31, 2001 compared to the same period in the prior year by $191,000 and $33,000 under the pro-rata consolidation and full consolidation methods, respectively. Interest expense varies from year to year depending on the level of interest-bearing debt within the Land Group.

Operating expenses decreased by $6,774,000 in the nine months ended October 31, 2001 compared to the same period in the prior year under the pro-rata consolidation method. This decrease is primarily due to a decrease in costs relating to lower land sales atWestwood Lakes($3,024,000),Caldwell Road ($2,273,000),Quincy Road($1,415,000),Canterberry Crossing($1,187,000),The Cascades($971,000),Solon Estates($355,000),Abrams($351,000), andSilver Canyon($6,404,000). These decreases were partially offset by increases atStapleton($4,705,000),Central Station($2,287,000),Case Road($1,799,000) andChestnut Lakes($1,179,000).

Operating expenses increased by $1,026,000 in nine months ended October 31, 2001 compared to the same period in the prior year under the full consolidation method. This increase is due to increased costs atStapleton($5,204,000),Central Station($804,000),Case Road($1,799,000), andChestnut Lakes ($1,179,000). These increases were partially offset by a decrease in costs of sales relating to lower land sales atWestwood Lakes($3,024,000),Caldwell Road($2,273,000),Quincy Road($1,415,000),The Cascades($971,000),Solon Estates($355,000) andAbrams($351,000).

Interest expense decreased in the nine months ended October 31, 2001 compared to the same period in the prior year by $1,635,000 and $1,345,000 under the pro-rata consolidation and full consolidation methods, respectively. Interest expense varies from year to year depending on the level of interest-bearing debt within the Land Group.

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Lumber Trading Group
Revenues — Revenues for the Lumber Trading Group increased by $832,000 for the three months ended October 31, 2001 compared to the same period in the prior year. Revenues for the Lumber Trading Group increased by $8,820,000 for the nine months ended October 31, 2001 compared to the same period in the prior year. The increases are due to significantly increased lumber trading margins that resulted from improved market conditions.

Operating and Interest Expenses —Operating expenses for the Lumber Trading Group increased by $1,267,000 for the three months ended October 31, 2001 compared to the same period in the prior year. Operating expenses for the Lumber Trading Group increased by $6,886,000 for the nine months ended October 31, 2001 compared to the same period in the prior year. These increases are primarily due to increased variable expenses, principally traders’ commissions, due to increased lumber trading margins compared to 2000. Interest expense decreased by $536,000 in the third quarter of 2001 compared to the same period in the prior year, and decreased $1,889,000 for the nine months ended October 31, 2001 compared to the same period in the prior year. This decrease is due to a reduction in both the amount of borrowing levels and interest rates.

Corporate Activities
Revenues —Corporate Activities’ revenues decreased $17,000 for the three months ended October 31, 2001 and $180,000 in the nine months ended October 31, 2001 compared to the same period in the prior year. Corporate Activities’ revenues consist primarily of interest income from investments and loans made by the Company and vary from year to year depending on interest rates and the amounts of loans outstanding.

Operating and Interest Expenses —Operating expenses for Corporate Activities decreased $114,000 for the three months ended October 31, 2001 and increased $1,456,000 for the nine months ended October 31, 2001 compared to the same periods in the prior year. This variance represents a fluctuation in general corporate expenses. Interest expense decreased $1,225,000 in the third quarter of 2001, and $1,281,000 in the nine months ended October 31, 2001 compared to the same periods in the prior year. Corporate Activities’ interest expense consists primarily of interest expense on the Company’s 8.50% Senior Notes and a portion of borrowings under the revolving credit agreement that has not been allocated to a strategic business unit (see “Financial Condition and Liquidity”).

Other Transactions
Provision for Decline in Real Estate — During both the three and nine months ended October 31, 2001, the Company recorded a Provision for Decline in Real Estate totaling $7,452,000, or $5,127,000 net of estimated taxes, representing the adjustment to fair market value of land held by the Commercial and Residential Groups.

During the nine months ended October 31, 2000, the Company recorded a Provision for Decline in Real Estate of $1,231,000, or $744,000 net of estimated taxes, related to the write-down to estimated fair value, less cost to sell, ofCanton Centre Mall.

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Gain on Disposition of Operating Properties and Other Investments — During the nine months ended October 31, 2001, the Company recorded gains on the disposition of operating properties and other investments totaling $91,224,000 or $55,121,000 net of estimated taxes. The Company recognized gains on the disposition of two shopping centers,Bowling Green Mall, located in Bowling Green, Kentucky, of $1,892,000 andTucson Mall, located in Tucson, Arizona, of $86,096,000 both structured as tax-deferred exchanges.

The Company also recognized gains on the disposition of three apartment communities, all structured as tax-deferred exchanges:Whitehall Terrace, located in Kent, Ohio, for $1,105,000,Peppertree, located in College Station, Texas, for $1,682,000 andPalm Villas, located in Henderson, Nevada, for $7,259,000. A loss of $1,010,000 was recognized on the sale ofThe Oaks, an apartment community located in Bryan, Texas. The Company also recognized a loss from the sale of available-for-sale equity securities of $1,321,000 and a loss on other investments totaling $4,479,000.

During the nine months ended October 31, 2000, the Company recorded gains on the disposition of operating properties and other investments totaling $57,467,000 or $33,966,000 net of estimated taxes. The Company recognized gains on dispositions of two apartment communities in California: $26,241,000 forStudio Colonyand $578,000 forHighlands, and the disposition ofTucson Place, a specialty retail center in Tucson, Arizona for $8,594,000. TheStudio Colonydisposition was structured as a tax-deferred exchange. The Company also recognized non-recurring gains totaling $22,054,000 from the sale of available-for-sale equity securities.

Extraordinary Loss —During the nine months ended October 31, 2001, the Company recorded an extraordinary loss, net of tax of $233,000 ($386,000 pre-tax) representing the impact of early extinguishment of nonrecourse debt. The Company recognized an extraordinary gain, net of tax, of $637,000 ($1,054,000 pre-tax) in the first quarter of 2001 related toEnclave, a residential property located in San Jose, California and an extraordinary loss, net of tax of $870,000 ($1,440,000 pre-tax) in the third quarter of 2001 related toMount Vernon, a residential property located in Alexandria, Virginia.

Cumulative Effect of a Change in Accounting Principle —On February 1, 2001, the Company recorded a cumulative effect of a change in accounting principle of ($1,202,000), net of tax, representing a one-time transition adjustment related to the Company’s adoption of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities.

Income Taxes —Income tax expense for the third quarter of 2001 and 2000 totaled $44,460,000 and $8,347,000, respectively. Income tax expense for the nine months ended October 31, 2001 and 2000 totaled $59,797,000 and $19,037,000, respectively. Included in the tax expense recorded in 2000 is a reversal of a portion of a deferred tax liability recorded in 1994 relating to the cancellation of debt income ofPark Labrea Towers, a residential property which was sold that same year. The Company reversed a portion of this deferred tax liability and recognized a deferred tax benefit of $23,589,000 for the nine months ended October 31, 2000.

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At January 31, 2001, the Company had a net operating loss carryover of $10,026,000 and alternative minimum tax credits of $31,289,000. The alternative minimum tax credits have the potential to reduce the tax on $208,700,000 of regular taxable income from a 35% to a 20% rate and have no expiration date. The Company also seeks to defer tax on the gain from property dispositions by reinvesting the proceeds in additional properties as permitted by Section 1031 of the Internal Revenue Code. The Company has used this strategy in a majority of dispositions over the past four years and expects to continue the practice in the future. The Company continually examines other avenues to minimize taxes.

EBDT —Earnings Before Depreciation, Amortization and Deferred Taxes (“EBDT”) is defined as net earnings before extraordinary items, excluding the following items: i) gain (loss) on disposition of operating properties and other investments (net of tax); ii) beginning in the year ended January 31, 2001, the adjustment to recognize rental revenues and rental expense using the straight-line method; iii) noncash charges from Forest City Rental Properties Corporation, a wholly-owned subsidiary of Forest City, for depreciation, amortization and deferred income taxes; iv) provision for decline in real estate; and v) cumulative effect of change in accounting principle (net of tax). The provision for decline in real estate is excluded from EBDT because it is a non-cash item that varies from year to year based on factors unrelated to the Company’s overall financial performance. The Company excludes gain (loss) on the disposition of operating properties and other investments from EBDT because it develops and acquires properties for long-term investment, not short-term trading gains. As a result, the Company views dispositions of operating properties and other investments, other than commercial land and airrights or land held by the Land Group, as nonrecurring items. Extraordinary items are generally the result of early extinguishment and restructuring of nonrecourse debt obligations and are not considered to be a component of the Company’s operating results. The adjustment to recognize rental revenues and rental expenses on the straight-line method is excluded because it is management’s opinion that rental revenues and expenses should be recognized when due from the tenants or due to the landlord. The Company excludes depreciation and amortization expense related to real estate operations from EBDT because they are non-cash items and the Company believes the values of its properties, in general, have appreciated, over time, in excess of their original cost. Deferred income taxes from real estate operations are excluded because they are non-cash items. The Company’s EBDT may not be directly comparable to similarly-titled measures reported by other companies.

FINANCIAL CONDITION AND LIQUIDITY

The Company believes that its sources of liquidity and capital are adequate. The Company’s principal sources of funds are cash provided by operations, the revolving credit facility and refinancings of existing properties. The Company’s principal use of funds are the financing of development and acquisitions of real estate projects, capital expenditures for its existing portfolio and payments on nonrecourse mortgage debt on real estate.

Stock Offering —On September 28, 2001, the Company sold 3,900,000 shares of Class A common stock at an initial price of $32.23 per share on a post split basis and realized net proceeds, after offering costs, of $117,885,000. The proceeds were used primarily to reduce borrowings under the revolving credit facility by $104,000,000.

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Revolving Credit Facility —At October 31, 2001, the Company had $110,000,000 outstanding under its revolving credit facility. The Company’s revolving credit facility matures March 31, 2003, unless extended, and allows for up to a combined amount of $30,000,000 in outstanding letters of credit or surety bonds ($10,456,000 and $9,675,000 outstanding at October 31, 2001, respectively). The outstanding letters of credit reduce the credit available to the Company. Annually, within 60 days of January 31, the revolving credit facility may be extended by unanimous consent of the participating banks. At its maturity date, the outstanding revolving credit loans, if any, may be converted by the Company to a four-year term loan. At October 31, 2001, the revolving credit line was $252,500,000. The revolving credit available is reduced quarterly by $2,500,000.

The revolving credit facility provides, among other things, for: 1) interest rates of 2.125% over LIBOR or 1/2% over the prime rate; 2) maintenance of debt service coverage ratios and specified levels of net worth and cash flow (as defined); and 3) restriction on dividend payments and stock repurchases.

To protect against variable interest rates on the revolving credit facility, the Company has purchased LIBOR interest rate caps at an average rate of 6.86% for 2001 and 7.75% for 2002 at notional amounts of $65,593,000 and $54,161,000, respectively, and LIBOR swaps at an average rate of 4.38% for 2001 and 2002 at notional amounts of $100,000,000 and $75,000,000, respectively.

Lumber Trading Group —The Lumber Trading Group is financed separately from the rest of the Company’s strategic business units. The financing obligations of Lumber Trading Group are without recourse to the Company. Accordingly, the liquidity of Lumber Trading Group is discussed separately below under “Lumber Trading Group Liquidity.”

Mortgage Financings —The Company is actively working to extend the maturities and/or refinance the nonrecourse debt that is coming due in 2001 and 2002, generally pursuing long-term fixed-rate debt. During the nine months ended October 31, 2001, the Company completed the following financings:

	Full		Pro-Rata
Purpose of Financing	Consolidation		Consolidation
	(in thousands)
Refinancings	$	244,200	$	268,433
Development projects (commitment)		147,900		257,077
Loan extensions		76,202		73,144
Acquisitions		14,006		13,826
Other fundings		1,116		14,760
	$	483,424	$	627,240
Reduction of mortgage debt due to property dispositions	$	111,952	$	95,869

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Interest Rate Exposure

At October 31, 2001, the composition of nonrecourse mortgage debt was as follows:

									Plus
							Less		Unconsolidated
		Full					Minority		Investments		Pro-Rata
		Consolidation		Rate (1)			Interest		at Pro-Rata		Consolidation		Rate (1)
		(dollars in thousands)
Fixed		$	1,550,970		7.48	%	$	254,682	$	502,069	$	1,798,357		7.55	%
Variable Taxable(2)			851,301		5.46	%		197,227		189,280		843,354		5.44	%
	Tax-Exempt		54,150		3.37	%		5,638		63,799		112,311		3.13	%
UDAG			68,794		1.71	%		10,601		11,862		70,055		2.71	%
		$	2,525,215		6.56	%	$	468,148	$	767,010	$	2,824,077		6.62	%

(1)

The weighted average interest rates shown above include both the base index and the lender margin.

(2)

The $851,301 at full consolidation and $843,354 at pro-rata consolidation of taxable variable rate debt is protected with LIBOR swaps and caps as described below. These LIBOR-based hedges protect the current debt outstanding as well as the anticipated increase in debt outstanding for projects currently under development or anticipated to be under development during the year ending January 31, 2002.

Debt related to projects under development at October 31, 2001 is as follows:

						Plus
				Less		Unconsolidated
		Full		Minority		Investments		Pro-Rata
		Consolidation		Interest		at Pro-Rata		Consolidation
		(in thousands)
Variable (1)		$	77,449	$	7,597	$	60,685	$	130,537
Fixed			1,351		357		10,992		11,986
	Total	$	78,800	$	7,954	$	71,677	$	142,523
Commitment from lenders		$	243,144	$	28,427	$	107,096	$	321,813

(1) This includes tax-exempt debt which is $16,000,000 at full consolidation and $30,650,000 at pro-rata.

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.

The Company has purchased London Interbank Offered Rate (“LIBOR”) interest rate hedges for its nonrecourse mortgage debt portfolio as follows:

	Full Consolidation
	Caps					Swaps (1)
			Average					Average
Period Covered	Amount		Rate			Amount		Rate
	(dollars in thousands)
11/01/01 - 02/01/02	$	717,498		7.09	%	$	476,734		4.10	%
02/01/02 - 02/01/03		608,255		7.52	%		184,437		4.26	%
02/01/03 - 02/01/04		431,900		7.52	%
02/01/04 - 02/01/05		168,400		8.00	%
02/01/05 - 02/01/06		133,900		8.00	%

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	Pro-Rata Consolidation
	Caps						Swaps (1)
			Average						Average
Period Covered	Amount			Rate			Amount		Rate
	(dollars in thousands)
11/01/01 - 02/01/02	$	839,924			7.10	%	$	452,270		4.13	%
02/01/02 - 02/01/03		644,432			7.62	%		193,757		4.33	%
02/01/03 - 02/01/04		450,665			7.64	%
02/01/04 - 02/01/05		263,638			8.00	%
02/01/05 - 02/01/06		155,600			8.00	%

(1) Swaps include long-term LIBOR contracts that have an average maturity greater than six months.

The interest rate hedges summarized in the tables above were purchased to mitigate short-term 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 has purchased Treasury Options. For 2001 and 2002, we currently own $377,400,000 at full consolidation and $245,200,000 at pro-rata of Treasury Options that have a weighted average strike rate that is approximately 200 basis points over the current 10-year Treasury and thus have only limited value remaining.

The Company generally does not hedge tax-exempt debt because, since 1990, the base rate of this type of financing has averaged 3.60% and has not exceeded 7.90%.

Including properties accounted for under the equity method, a 100 basis point increase in taxable interest rates would increase the annual pre-tax interest cost of the Company’s taxable variable-rate debt by approximately $4,200,000 at October 31, 2001. This increase is net of the protection provided by the interest rate swaps and long-term LIBOR contracts in place as of October 31, 2001. Although tax-exempt rates generally increase in an amount that is smaller than corresponding changes in taxable interest rates, a 100 basis point increase in tax-exempt rates would increase the annual pre-tax interest cost of the Company’s tax-exempt variable-rate debt by approximately $3,300,000.

Lumber Trading Group Liquidity

Lumber Trading Group is separately financed with two revolving lines of credit and an asset securitization facility.

At October 31, 2001, Lumber Trading Group’s two revolving lines of credit totaled $86,000,000, expiring June 30, 2002. These credit lines are secured by the assets of the Lumber Trading Group and are used to finance its working capital needs. At October 31, 2001, $4,028,000 was outstanding under these revolving lines of credit.

In July 1999, the Lumber Trading Group entered into a three-year agreement (the “Agreement”) under which it is selling an undivided interest in a pool of receivables up to a maximum of $102,000,000 to a large financial institution (the “Financial Institution”). The agreement expires in July 2002. Sales under the agreement are nonrecourse to the Company. The Company bears no risk regarding the collectability of the accounts receivable once sold and cannot modify the pool of receivables. At October 31, 2001 and 2000, the financial

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institution held an interest of $35,000,000 and $49,000,000, respectively, in the pool of receivables. Sales of accounts receivable have averaged $48,000,000 and $64,000,000 per month during the nine months ended October 31, 2001 and 2000, respectively.

These credit facilities are without recourse to the Company. The Company believes that the amounts available under these credit facilities will be sufficient to meet the Lumber Trading Group’s liquidity needs.

Cash Flows — Pro-rata Consolidation

Net cash provided by operating activities was $33,903,000 for the nine months ended October 31, 2001 compared to $112,173,000 for the nine months ended October 31, 2000. The decrease in net cash provided by operating activities is the result of an increase of $75,184,000 in operating expenditures (primarily from an increase in operating expenses from newly-opened and acquired properties), a decrease in rents and other revenues received of $9,892,000 primarily due to an increase in notes and accounts receivable in Lumber Trading Group and an increase in interest paid of $412,000. These decreases were partially offset by a decrease in land development expenditures of $6,060,000 and an increase in proceeds from land sales of $1,158,000.

Net cash used in investing activities was $209,469,000 for the nine months ended October 31, 2001 compared to $263,869,000 for the nine months ended October 31, 2000. Capital expenditures, other than development and acquisition activities, totaled $48,312,000 and $32,550,000 (including both recurring and investment capital expenditures) for the nine months ended October 31, 2001 and 2000, respectively, and were financed with cash provided from operating activities and cash on hand at the beginning of the year. The Company invested $349,699,000 and $359,344,000 in acquisition and development of real estate projects in the nine months ended October 31, 2001 and 2000, respectively. The Company invested $9,260,000 and $6,146,000 in investments and advances to affiliates in the nine months ended October 31, 2001 and 2000, respectively and were primarily related to New York City area urban retail development. These expenditures were financed with approximately $123,000,000 and $294,000,000 in new nonrecourse mortgage indebtedness incurred in the nine months ended October 31, 2001 and 2000, respectively, borrowings on the revolving credit facility and, in 2001, proceeds from the sale of common stock through a public offering of $117,885,000 (of which $104,000,000 was used to reduce borrowings under the revolving credit facility). During the nine months ended October 31, 2001, the Company collected $197,802,000 from the sale ofBowling Green MallandChapel Hill Mall,both specialty retail centers,Chapel Hill Towers,Whitehall Terrace,Peppertree,Palm VillasandThe Oaks, residential apartment properties, all of which were partially used to reduce total mortgage debt by $95,869,000. During the nine months ended October 31, 2000, the Company collected $134,171,000 in proceeds from dispositions of two residential apartment properties,Studio ColonyandHighlands,one specialty retail center,Tucson Place, and the sale of available-for-sale equity securities all of which were partially used to reduce total mortgage debt by $117,600,000 (see “Mortgage Financings”).

37

Net cash provided by financing activities totaled $208,485,000 for the nine months ended October 31, 2001 and $123,524,000 in the nine months ended October 31, 2000. The Company’s refinancing of mortgage indebtedness is discussed above in “Mortgage Financings” and borrowings under new mortgage indebtedness for acquisition and development activities and proceeds from the issuance of common stock is included in the preceding paragraph discussing net cash used in investing activities. Net cash provided by financing activities for the nine months ended October 31, 2001 also reflects repayment of borrowings under the long-term credit facility of $104,000,000 from the proceeds of the sale of common stock, net increase in notes payable of $932,000 primarily from the Lumber Trading Group, an increase in restricted cash of $26,559,000 (primarily related toFoley Square, a residential project in Manhattan, New York and theStapletonproject in Denver, Colorado), a decrease in book overdrafts (representing checks issued but not yet paid) of $10,094,000, payment of deferred financing costs of $10,695,000, exercise of stock options of $3,909,000 and payment of dividends of $5,741,000. Net cash provided by financing activities for the nine months ended October 31, 2000 also reflected a decrease in restricted cash of $6,379,000, primarily from the release of the collateral deposit held for the acquisition ofMount Vernon Square, a 1,387-unit residential community in Alexandria, Virginia. Additionally, net cash used in financing activities for the nine months ended October 31, 2000 also reflected a decrease in book overdrafts of $57,308,000, a net decrease of $26,733,000 in notes payable (primarily comprised of a $26,463,000 reduction in borrowings outstanding against the line of credit in the Lumber Trading Group), payment of deferred financing costs of $16,581,000 and payment of $4,806,000 of dividends.

Cash Flows — Full Consolidation

Net cash provided by operating activities was $35,713,000 for the nine months ended October 31, 2001 and $104,251,000 for the nine months ended October 31, 2000. The decrease in net cash provided by operating activities is the result of an increase in operating expenditures of $64,591,000 (primarily from an increase in operating expenses from newly-opened and acquired properties), an increase of $8,613,000 in land development expenditures and an increase of $4,857,000 in interest paid. These decreases were partially offset by an increase in rents and other revenues received of $6,085,000, an increase in cash distributions from operations of unconsolidated entities of $3,013,000 and an increase in proceeds from land sales of $425,000.

Net cash used in investing activities was $137,193,000 for the nine months ended October 31, 2001 and $265,194,000 for the nine months ended October 31, 2000. Capital expenditures totaled $297,095,000 and $375,037,000 in the nine months ended October 31, 2001 and 2000, respectively, and were financed with cash provided from operating activities, approximately $58,000,000 and $274,000,000 in new nonrecourse mortgage indebtedness incurred in the nine months ended October 31, 2001 and 2000, respectively, net borrowings under the revolving credit facility, cash on hand at the beginning of the year, and in 2001, net proceeds of $117,885,000 from the sale of common stock through a public offering of which $104,000,000 was used to reduce the revolving credit facility. During the nine months ended October 31, 2001, the Company collected $190,011,000 from the sale ofBowling Green MallandChapel Hill Mall,both specialty retail centers,Whitehall Terrace,Peppertree,Palm

38

VillasandThe Oaks, residential apartment properties all of which were partially used to reduce total mortgage debt by $111,952,000 (see “Mortgage Financings”). Additionally, the Company invested $30,109,000 in investments in and advances to real estate affiliates primarily related to New York City area urban retail development ($14,191,000) and four commercial retail centers:Mall at Stonecrestin Atlanta, Georgia ($1,896,000),Mall at Robinsonin Pittsburgh, Pennsylvania ($949,000),Short Pump Town Centerin Richmond, Virginia ($7,258,000) andShowcasein Las Vegas, Nevada ($1,992,000). During the nine months ended October 31, 2000, $131,468,000 was collected in proceeds from dispositions of two residential apartment properties,Studio ColonyandHighlands,one specialty retail center,Tucson Place, and the sale of available-for-sale equity securities all of which were partially used to reduce total mortgage debt by $126,254,000 and invested $21,625,000 in investments in and advances to real estate affiliates which were primarily related to the New York City urban retail development.

Net cash provided by financing activities totaled $127,914,000 for the nine months ended October 31, 2001 and $144,815,000 in the nine months ended October 31, 2000. The Company’s refinancing of mortgage indebtedness is discussed above in “Mortgage Financings”, borrowings under new mortgage indebtedness for acquisition and development activities and the proceeds on the issuance of the public stock offering are included in the preceding paragraph discussing net cash used in investing activities. Net cash provided by financing activities for the nine months ended October 31, 2001 also reflects a repayment of borrowings under the long-term credit facility of $104,000,000 from the proceeds of the sale of common stock, an increase in restricted cash of $13,611,000 primarily related to the Stapleton project, an decrease in book overdrafts of $9,969,000 (representing checks issued but not yet paid), payment of deferred financing costs of $10,600,000, payment of $5,741,000 of dividends, net increase in notes payable of $5,714,000 primarily relating to an increase in net borrowings under the Lumber Trading Group’s lines of credit, exercise of stock options of $3,909,000 and an increase of $14,586,000 in minority interest. Net cash provided by financing activities for the nine months ended October 31, 2000 also reflected a decrease in book overdrafts of $57,326,000, payment of deferred financing costs of $25,531,000, a net decrease in notes payable of $21,377,000 primarily relating to a decrease in net borrowings under Lumber Trading Group’s lines of credit, a decrease in restricted cash of $6,984,000 primarily as a result of the release of the collateral deposit held for the acquisition of Mount Vernon Square, payment of $4,806,000 of dividends and a decrease in minority interest of $4,700,000.

STOCK SPLIT

On September 4, 2001, the Board of Directors declared a three-for-two stock split of the Company’s Class A and Class B common stock effective November 14, 2001 to shareholders of record on October 31, 2001. The stock split was effected as a stock dividend. The stock split is given retroactive effect to the beginning of the earliest period presented in the accompanying Consolidated Balance Sheets and Consolidated Statement 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 quarterly report have been restated to reflect the stock split.

39

INCREASED DIVIDENDS

The Company pays regular quarterly dividends on shares of its Class A and Class B Common Stock. During 2001, the Company paid regular quarterly dividends of $.04 per share (post-split) on June 15, 2001 and $.0467 (post-split) on September 19, 2001, and will pay dividends of $.05 per share on December 17, 2001. On December 6, 2001 the Company declared a regular quarterly dividend of $.05 per share payable on March 15, 2002 to shareholders of record at the close of business on March 1, 2002.

LEGAL PROCEEDINGS

The Company is involved in various claims and lawsuits incidental to its business. The Company’s General Counsel is of the opinion that none of these claims and lawsuits will have a material adverse effect on the Company.

RECENT DEVELOPMENTS

The Company owns 67.19% of Granite Development Partners, L.P. (“Granite”), a land developer whose primary development is the Seven Hills project in Henderson, Nevada. In November, 2001 the Company purchased 27.6% of Granite’s total outstanding 10.83% unsecured senior notes payable from an independent third party. Notes having a face value of $9,379,000 were purchased at an 18% discount. The maturity date of the notes is November 15, 2003, with interest payable semiannually on May 15 and November 15.

NEW ACCOUNTING STANDARDS

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company uses derivative instruments to protect against the risk of adverse price or interest rate movements on the value of certain firm commitments and liabilities or on future cash flows. On February 1, 2001, the Company adopted SFAS No. 133, and at that time, designated the derivative instruments in accordance with the requirements of the new standard. On February 1, 2001, the after-tax impact, net of minority interest, of the transition amounts of the derivative instruments resulted in a reduction of net income and other comprehensive income of approximately $1,200,000 and $7,800,000, respectively. The transition adjustments are presented as cumulative effect adjustments, as described in (APB) Opinion No. 20, Accounting Changes, in the 2001 consolidated financial statements. The transition amounts were determined based on the interpretive guidance issued by the FASB to date. The FASB continues to issue interpretive guidance that could require changes in the Company’s application of the standard and adjustments to the transition amounts. SFAS No. 133 may increase or decrease reported net income and shareholder’s equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on statements of cash flows.

40

In October 2001, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This standard harmonizes the accounting for impaired assets and resolves some of the implementation issues as originally described in SFAS 121. It retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. It also retains the basic provisions for presenting discontinued operations in the income statement but broadens the scope to include a component of an entity rather than a segment of a business. The new standard becomes effective for the Company for the year ending January 31, 2003. The Company does not expect this pronouncement to have a material impact on the Company’s financial position results of operations, or cash flows.

INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS

This Form 10-Q, together with other statements and information publicly disseminated by the Company, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements reflect management’s current views with respect to financial results related to future events and are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial or otherwise, may differ from the results discussed in the forward-looking statements. Risks and other factors that might cause differences, some of which could be material, include, but are not limited to, the effect of economic and market conditions on a nationwide basis as well as regionally in areas where the Company has a geographic concentration of properties; failure to consummate financing arrangements; development risks, including lack of satisfactory financing, construction and lease-up delays and cost overruns; the level and volatility of interest rates; financial stability of tenants within the retail industry, which may be impacted by competition and consumer spending; the rate of revenue increases versus expense increases; the cyclical nature of the lumber wholesaling business; as well as other risks listed from time to time in the Company’s reports filed with the Securities and Exchange Commission. The Company has no obligation to revise or update any forward-looking statements as a result of future events or new information. Readers are cautioned not to place undue reliance on such forward-looking statements.

41

FOREST CITY ENTERPRISES, INC.

Earnings Before Depreciation, Amortization and Deferred Taxes

For the Third Quarter Ended October 31, 2001

(in thousands)

		Commercial Group 2001											Residential Group 2001
							Plus												Plus
					Less		Unconsolidated									Less			Unconsolidated
		Full			Minority		Investments at			Pro-Rata			Full			Minority			Investments at			Pro-Rata
		Consolidation			Interest		Pro-Rata			Consolidation			Consolidation			Interest			Pro-Rata			Consolidation
Revenues		$	139,745		$	27,000	$	25,327		$	138,072		$	47,530		$	1,583		$	14,063		$	60,010
Exclude straight-line rent adjustment			(3,120	)		—		—			(3,120	)		—			—			—			—
Add back equity method depreciation expense			2,701			—		(2,701	)		—			1,333			—			(1,206	)		127
Adjusted revenues			139,326			27,000		22,626			134,952			48,863			1,583			12,857			60,137
Operating expenses, including depreciation and amortization for non-real estate Groups			80,715			16,423		17,163			81,455			21,421			1,279			8,318			28,460
Exclude straight-line rent adjustment			(1,411	)		—		—			(1,411	)		—			—			—			—
Operating expenses excluding straight-line rent adjustment			79,304			16,423		17,163			80,044			21,421			1,279			8,318			28,460
Gain on disposition recorded on equity method			674			—		(674	)		—			(26	)		—			26			—
Minority interest in earnings before depreciation and amortization			2,185			2,185		—			—			(37	)		(37	)		—			—
Interest expense			30,066			8,392		6,137			27,811			5,545			341			4,513			9,717
Income tax provision			2,317			—		—			2,317			463			—			—			463
			114,546			27,000		22,626			110,172			27,366			1,583			12,857			38,640
Earnings before depreciation, amortization and deferred taxes (EBDT)		$	24,780		$	—	$	—		$	24,780		$	21,497		$	—		$	—		$	21,497
		Land Group 2001											Lumber Trading Group 2001
Revenues		$	18,310		$	669	$	5,833		$	23,474		$	27,034		$	—		$	—		$	27,034
Operating expenses, including depreciation and amortization for non-real estate Groups			7,843			360		5,188			12,671			25,532			—			—			25,532
Minority interest in earnings before depreciation and amortization			309			309		—			—			—			—			—			—
Interest expense			545			—		645			1,190			660			—			—			660
Income tax provision			3,881			—		—			3,881			690			—			—			690
			12,578			669		5,833			17,742			26,882			—			—			26,882
Earnings before depreciation, amortization and deferred taxes (EBDT)		$	5,732		$	—	$	—		$	5,732		$	152		$	—		$	—		$	152
		Corporate Activities 2001											Total 2001
Revenues		$	42		$	—	$	—		$	42		$	232,661		$	29,252		$	45,223		$	248,632
Exclude straight-line rent adjustment			—			—		—			—			(3,120	)		—			—			(3,120	)
Add back equity method depreciation expense			—			—		—			—			4,034			—			(3,907	)		127
Adjusted revenues			42			—		—			42			233,575			29,252			41,316			245,639
Operating expenses, including depreciation and amortization for non-real estate Groups			4,437			—		—			4,437			139,948			18,062			30,669			152,555
Exclude straight-line rent adjustment			—			—		—			—			(1,411	)		—			—			(1,411	)
Operating expenses excluding straight-line rent adjustment			4,437			—		—			4,437			138,537			18,062			30,669			151,144
Gain disposition recorded on equity method			—			—		—			—			648			—			(648	)		—
Minority interest in earnings before depreciation and amortization			—			—		—			—			2,457			2,457			—			—
Interest expense			7,207			—		—			7,207			44,023			8,733			11,295			46,585
Income tax (benefit) provision			(2,704	)		—		—			(2,704	)		4,647			—			—			4,647
			8,940			—		—			8,940			190,312			29,252			41,316			202,376
Earnings before depreciation, amortization and deferred taxes (EBDT)		$	(8,898	)	$	—	$	—		$	(8,898	)	$	43,263		$	—		$	—		$	43,263
Reconciliation to net earnings:
	Earnings before depreciation, amortization and deferred taxes (EBDT)												$	43,263		$	—		$	—		$	43,263
	Depreciation and amortization — Real Estate Groups													(23,292	)		—			—			(23,292	)
	Deferred taxes — Real Estate Groups													(6,278	)		—			—			(6,278	)
	Straight-line rent adjustment													1,709			—			—			1,709
	Provision for decline in real estate, net of tax													(5,127	)		(1,574	)		—			(3,553	)
	Minority interest in provision for decline in real estate													1,574			1,574			—			—
	Gain on disposition of operating properties and other investments, net of tax													54,357			—			392			54,749
	Gain on disposition reported on equity method													392			—			(392	)		—
	Extraordinary loss, net of tax													(870	)		—			—			(870	)
	Net earnings												$	65,728		$	—		$	—		$	65,728
																								��

42

FOREST CITY ENTERPRISES, INC.

Earnings Before Depreciation, Amortization and Deferred Taxes

For the Nine Months Ended October, 2001

(in thousands)

	Commercial Group 2001											Residential Group 2001
						Plus												Plus
				Less		Unconsolidated									Less			Unconsolidated
	Full			Minority		Investments at			Pro-Rata			Full			Minority			Investments at			Pro-Rata
	Consolidation			Interest		Pro-Rata			Consolidation			Consolidation			Interest			Pro-Rata			Consolidation
Revenues	$	416,549		$	84,702	$	65,884		$	397,731		$	120,944		$	4,359		$	40,873		$	157,458
Exclude straight-line rent adjustment		(8,606	)		—		—			(8,606	)		—			—			—			—
Add back equity method depreciation expense		8,011			—		(8,011	)		—			6,268			—			(5,835	)		433
Adjusted revenues		415,954			84,702		57,873			389,125			127,212			4,359			35,038			157,891
Operating expenses, including depreciation and amortization for non-real estate Groups		223,264			46,833		40,047			216,478			53,618			3,419			26,500			76,699
Exclude straight-line rent adjustment		(3,912	)		—		—			(3,912	)		—			—			—			—
Operating expenses excluding straight-line rent adjustment		219,352			46,833		40,047			212,566			53,618			3,419			26,500			76,699
Gain on disposition recorded on equity method		674			—		(674	)		—			5,007			—			(5,007	)		—
Minority interest in earnings before depreciation and amortization		12,290			12,290		—			—			(55	)		(55	)		—			—
Interest expense		91,223			25,579		18,500			84,144			17,996			995			13,545			30,546
Income tax provision		8,108			—		—			8,108			6,062			—			—			6,062
		331,647			84,702		57,873			304,818			82,628			4,359			35,038			113,307
Earnings before depreciation, amortization and deferred taxes (EBDT)	$	84,307		$	—	$	—		$	84,307		$	44,584		$	—		$	—		$	44,584
	Land Group 2001											Lumber Trading Group 2001
Revenues	$	27,946		$	760	$	16,061		$	43,247		$	88,963		$	—		$	—		$	88,963
Operating expenses, including depreciation and amortization for non-real estate Groups		13,368			498		14,249			27,119			81,348			—			—			81,348
Minority interest in earnings before depreciation and amortization		262			262		—			—			—			—			—			—
Interest expense		760			—		1,812			2,572			2,584			—			—			2,584
Income tax provision		7,245			—		—			7,245			2,333			—			—			2,333
		21,635			760		16,061			36,936			86,265			—			—			86,265
Earnings before depreciation, amortization and deferred taxes (EBDT)	$	6,311		$	—	$	—		$	6,311		$	2,698		$	—		$	—		$	2,698

FOREST CITY ENTERPRISES, INC.

Earnings Before Depreciation, Amortization and Deferred Taxes

For the Nine Months Ended October, 2001 - Continued

(in thousands)

	Corporate Activities 2001										Total 2001
						Plus											Plus
				Less		Unconsolidated								Less			Unconsolidated
	Full			Minority		Investments at		Pro-Rata			Full			Minority			Investments at			Pro-Rata
	Consolidation			Interest		Pro-Rata		Consolidation			Consolidation			Interest			Pro-Rata			Consolidation
Revenues	$	205		$	—	$	—	$	205		$	654,607		$	89,821		$	122,818		$	687,604
Exclude straight-line rent adjustment		—			—		—		—			(8,606	)		—			—			(8,606	)
Add back equity method depreciation expense		—			—		—		—			14,279			—			(13,846	)		433
Adjusted revenues		205			—		—		205			660,280			89,821			108,972			679,431
Operating expenses, including depreciation and amortization for non-real estate Groups		12,894			—		—		12,894			384,492			50,750			80,796			414,538
Exclude straight-line rent adjustment		—			—		—		—			(3,912	)		—			—			(3,912	)
Operating expenses excluding straight-line rent adjustment		12,894			—		—		12,894			380,580			50,750			80,796			410,626
Gain disposition recorded on equity method		—			—		—		—			5,681			—			(5,681	)		—
Minority interest in earnings before depreciation and amortization		—			—		—		—			12,497			12,497			—			—
Interest expense		22,626			—		—		22,626			135,189			26,574			33,857			142,472
Income tax (benefit) provision		(11,091	)		—		—		(11,091	)		12,657			—			—			12,657
		24,429			—		—		24,429			546,604			89,821			108,972			565,755
Earnings before depreciation, amortization and deferred taxes (EBDT)	$	(24,224	)	$	—	$	—	$	(24,224	)	$	113,676		$	—		$	—		$	113,676
Reconciliation to net earnings:
Earnings before depreciation, amortization and deferred taxes (EBDT)											$	113,676		$	—		$	—		$	113,676
Depreciation and amortization — Real Estate Groups												(70,539	)		—			—			(70,539	)
Deferred taxes — Real Estate Groups												(11,116	)		—			—			(11,116	)
Straight-line rent adjustment												4,694			—			—			4,694
Provision for decline in real estate, net of tax												(5,127	)		(1,574	)		—			(3,553	)
Minority interest in provision for decline in real estate												1,574			1,574			—			—
Gain on disposition of operating properties and other investments, net of tax												55,121			—			3,434			58,555
Gain on disposition reported on equity method												3,434			—			(3,434	)		—
Extraordinary loss, net of tax												(233	)		—			—			(233	)
Cumulative effect of change in accounting principle, net of tax												(1,202	)		—			—			(1,202	)
Net earnings											$	90,282		$	—		$	—		$	90,282

43

FOREST CITY ENTERPRISES, INC.

Earnings Before Depreciation, Amortization and Deferred Taxes

For the Third Quarter Ended October 31, 2000

(in thousands)

	Commercial Group 2000											Residential Group 2000
						Plus												Plus
				Less		Unconsolidated									Less			Unconsolidated
	Full			Minority		Investments at			Pro-Rata			Full			Minority			Investments at			Pro-Rata
	Consolidation			Interest		Pro-Rata			Consolidation			Consolidation			Interest			Pro-Rata			Consolidation
Revenues	$	147,460		$	28,493	$	21,530		$	140,497		$	28,673		$	859		$	14,277		$	42,091
Exclude straight-line rent adjustment		(3,204	)		—		—			(3,204	)		—			—			—			—
Add back equity method depreciation expense		3,346			—		(3,346	)		—			1,995			—			(1,995	)		—
Adjusted revenues		147,602			28,493		18,184			137,293			30,668			859			12,282			42,091
Operating expenses, including depreciation and amortization for non-Real Estate Groups		73,276			13,890		11,831			71,217			13,679			637			8,129			21,171
Exclude straight-line rent adjustment		(1,123	)		—		—			(1,123	)		—			—			—			—
Operating expenses excluding straight-line rent adjustment		72,153			13,890		11,831			70,094			13,679			637			8,129			21,171
Gain on disposition recorded on equity method		763			—		(763	)		—			—			—			—			—
Minority interest in earnings before depreciation and amortization		6,608			6,608		—			—			(5	)		(5	)		—			—
Interest expense		28,847			7,995		7,116			27,968			4,968			227			4,153			8,894
Income tax provision (benefit)		3,820			—		—			3,820			2,114			—			—			2,114
		112,191			28,493		18,184			101,882			20,756			859			12,282			32,179
Earnings before depreciation, amortization and deferred taxes (EBDT)	$	35,411		$	—	$	—		$	35,411		$	9,912		$	—		$	—		$	9,912
	Land Group 2000											Lumber Trading Group 2000
Revenues	$	9,132		$	—	$	9,755		$	18,887		$	26,202		$	—		$	—		$	26,202
Operating expenses, including depreciation and amortization for non-Real Estate Groups		6,412			—		8,952			15,364			24,265			—			—			24,265
Interest expense		578			—		803			1,381			1,196			—			—			1,196
Income tax provision (benefit)		848			—		—			848			350			—			—			350
		7,838			—		9,755			17,593			25,811			—			—			25,811
Earnings before depreciation, amortization and deferred taxes (EBDT)	$	1,294		$	—	$	—		$	1,294		$	391		$	—		$	—		$	391
	Corporate Activities 2000											Total 2000
Revenues	$	59		$	—	$	—		$	59		$	211,526		$	29,352		$	45,562		$	227,736
Exclude straight-line rent adjustment		—			—		—			—			(3,204	)		—			—			(3,204	)
Add back equity method depreciation expense		—			—		—			—			5,341			—			(5,341	)		—
Adjusted revenues		59			—		—			59			213,663			29,352			40,221			224,532
Operating expenses, including depreciation and amortization for non-Real Estate Groups		4,551			—		—			4,551			122,183			14,527			28,912			136,568
Exclude straight-line rent adjustment		—			—		—			—			(1,123	)		—			—			(1,123	)
Operating expenses excluding straight-line rent adjustment		4,551			—		—			4,551			121,060			14,527			28,912			135,445
Gain disposition recorded on equity method		—			—		—			—			763			—			(763	)		—
Minority interest in earnings before depreciation and amortization		—			—		—			—			6,603			6,603			—			—
Interest expense		8,432			—		—			8,432			44,021			8,222			12,072			47,871
Income tax provision (benefit)		(5,417	)		—		—			(5,417	)		1,715			—			—			1,715
		7,566			—		—			7,566			174,162			29,352			40,221			185,031
Earnings before depreciation, amortization and deferred taxes (EBDT)	$	(7,507	)	$	—	$	—		$	(7,507	)	$	39,501		$	—		$	—		$	39,501
Reconciliation to net earnings:
Earnings before depreciation, amortization and deferred taxes (EBDT)												$	39,501		$	—		$	—		$	39,501
Depreciation and amortization — Real Estate Groups													(25,154	)		—			—			(25,154	)
Deferred taxes — Real Estate Groups													(4,774	)		—			—			(4,774	)
Straight-line rent adjustment													2,081			—			—			2,081
Provision for decline in real estate, net of tax													—			—			—			—
Gain on disposition of properties and other investments, net of tax													662			—			763			1,425
Gain on disposition reported on equity method													763			—			(763	)		—
Net earnings												$	13,079		$	—		$	—		$	13,079

44

FOREST CITY ENTERPRISES, INC.

Earnings Before Depreciation, Amortization and Deferred Taxes

For the Nine Months Ended October 31, 2000

(in thousands)

	Commercial Group 2000											Residential Group 2000
						Plus											Plus
				Less		Unconsolidated									Less		Unconsolidated
	Full			Minority		Investments at			Pro-Rata			Full			Minority		Investments at			Pro-Rata
	Consolidation			Interest		Pro-Rata			Consolidation			Consolidation			Interest		Pro-Rata			Consolidation
Revenues	$	388,648		$	71,075	$	64,183		$	381,756		$	85,675		$	9,224	$	39,302		$	115,753
Exclude straight-line rent adjustment		(9,545	)		—		—			(9,545	)		—			—		—			—
Add back equity method depreciation expense		9,266			—		(9,266	)		—			5,223			—		(5,223	)		—
Adjusted revenues		388,369			71,075		54,917			372,211			90,898			9,224		34,079			115,753
Operating expenses, including depreciation and amortization for non-Real Estate Groups		194,303			35,160		36,005			195,148			27,206			3,937		22,296			45,565
Exclude straight-line rent adjustment		(2,210	)		—		—			(2,210	)		—			—		—			—
Operating expenses excluding straight-line rent adjustment		192,093			35,160		36,005			192,938			27,206			3,937		22,296			45,565
Gain on disposition recorded on equity method		2,359			—		(2,359	)		—			—			—		—			—
Minority interest in earnings before depreciation and amortization		13,744			13,744		—			—			1,842			1,842		—			—
Interest expense		85,731			22,171		21,271			84,831			13,182			3,445		11,783			21,520
Income tax provision (credit)		14,278			—		—			14,278			6,106			—		—			6,106
		308,205			71,075		54,917			292,047			48,336			9,224		34,079			73,191
Earnings before depreciation, amortization and deferred taxes (EBDT)	$	80,164		$	—	$	—		$	80,164		$	42,562		$	—	$	—		$	42,562
	Land Group 2000											Lumber Trading Group 2000
Revenues	$	13,805		$	—	$	23,653		$	37,458		$	80,143		$	—	$	—		$	80,143
Operating expenses, including depreciation and amortization for non-Real Estate Groups		12,342			—		21,551			33,893			74,462			—		—			74,462
Interest expense		2,105			—		2,102			4,207			4,473			—		—			4,473
Income tax provision (benefit)		(331	)		—		—			(331	)		664			—		—			664
		14,116			—		23,653			37,769			79,599			—		—			79,599
Earnings before depreciation, amortization and deferred taxes (EBDT)	$	(311	)	$	—	$	—		$	(311	)	$	544		$	—	$	—		$	544
	Corporate Activities 2000											Total 2000
Revenues	$	385		$	—	$	—		$	385		$	568,656		$	80,299	$	127,138		$	615,495
Exclude straight-line rent adjustment		—			—		—			—			(9,545	)		—		—			(9,545	)
Add back equity method depreciation expense		—			—		—			—			14,489			—		(14,489	)		—
Adjusted revenues		385			—		—			385			573,600			80,299		112,649			605,950
Operating expenses, including depreciation and amortization for non-Real Estate Groups		11,438			—		—			11,438			319,751			39,097		79,852			360,506
Exclude straight-line rent adjustment		—			—		—			—			(2,210	)		—		—			(2,210	)
Operating expenses excluding straight-line rent adjustment		11,438			—		—			11,438			317,541			39,097		79,852			358,296
Gain disposition recorded on equity method		—			—		—			—			2,359			—		(2,359	)		—
Minority interest in earnings before depreciation and amortization		—			—		—			—			15,586			15,586		—			—
Interest expense		23,906			—		—			23,906			129,397			25,616		35,156			138,937
Income tax provision (benefit)		(13,827	)		—		—			(13,827	)		6,890			—		—			6,890
		21,517			—		—			21,517			471,773			80,299		112,649			504,123
Earnings before depreciation, amortization and deferred taxes (EBDT)	$	(21,132	)	$	—	$	—		$	(21,132	)	$	101,827		$	—	$	—		$	101,827
Reconciliation to net earnings:
Earnings before depreciation, amortization and deferred taxes (EBDT)												$	101,827		$	—	$	—		$	101,827
Depreciation and amortization — Real Estate Groups													(68,149	)		—		—			(68,149	)
Deferred taxes — Real Estate Groups													(12,722	)		—		—			(12,722	)
Straight-line rent adjustment													7,335			—		—			7,335
Provision for decline in real estate, net of tax													(744	)		—		—			(744	)
Gain on disposition of properties and other investments, net of tax													57,555			—		2,359			59,914
Gain on disposition reported on equity method													2,359			—		(2,359	)		—
Net earnings												$	87,461		$	—	$	—		$	87,461

45

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary market risk exposure is interest rate risk. At October 31, 2001, the Company had $1,015,451,000 of variable-rate debt outstanding for full consolidation and $1,065,665,000 for pro-rata consolidation. This is inclusive of the $110,000,000 outstanding under its revolving credit facility at October 31, 2001. Additionally, the Company has interest rate risk associated with fixed-rate debt at maturity.

The Company has entered into London Interbank Offered Rate (“LIBOR”) interest rate hedges as follows:

			Full Consolidation
	Caps						Swaps
				Average					Average
Coverage	Amount			Rate			Amount		Rate
	(dollars in thousands)
11/01/01 - 02/01/02	$	783,091			7.07	%	$	576,734		4.15	%
02/01/02 - 02/01/03		662,416			7.54	%		259,437		4.29	%
02/01/03 - 02/01/04		431,900			7.52	%
02/01/04 - 02/01/05		168,400			8.00	%
02/01/05 - 02/01/06		133,900			8.00	%

	Pro-Rata Consolidation
	Caps					Swaps
			Average					Average
Coverage	Amount		Rate			Amount		Rate
	(dollars in thousands)
11/01/01 - 02/01/02	$	905,517		7.08	%	$	552,270		4.18	%
02/01/02 - 02/01/03		698,593		7.63	%		268,757		4.34	%
02/01/03 - 02/01/04		450,665		7.64	%
02/01/04 - 02/01/05		263,638		8.00	%
02/01/05 - 02/01/06		155,600		8.00	%

The interest rate caps and swaps highlighted above were purchased to mitigate short-term variable interest rate risk. The Company 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 has purchased Treasury Options. For 2001 and 2002, we currently own $377,400,000 at full consolidation and $245,200,000 at pro-rata of Treasury Options that have a weighted average strike rate that is approximately 200 basis points over the current 10-year Treasury and thus have only limited value remaining.

Based upon SEC requirements on assessing the value of debt instruments, the Company estimates the fair value by discounting future cash payments at interest rates that approximate the current market. Based on these parameters, the carrying amount of the Company’s total fixed-rate debt at October 31, 2001 was $1,840,164,000 compared to an estimated fair value of $1,849,642,000 for full consolidation and $2,088,812,000 compared to an estimated fair value of $2,115,091,000 for pro-rata consolidation. The Company estimates that a 100 basis point decrease in market interest rates would change the fair value of this fixed-rate debt for full consolidation and pro-rata consolidation to a liability of approximately $1,961,095,000 and $2,235,773,000, respectively.

46

The Company estimates the fair value of its hedging instruments based on interest rate market pricing models. At October 31, 2001, LIBOR interest rate caps and Treasury Options were reported at their fair value of approximately $800,000, in the Consolidated Balance Sheet as Other Assets. The fair value of interest rate swap agreements at October 31, 2001 is approximately $8,200,000 and is included in the Consolidated Balance Sheet as Other Liabilities.

The following tables provide information about the Company’s financial instruments that are sensitive to changes in interest rates.

47

Full Consolidation Method

October 31, 2001

		Expected Maturity Date																		Total			Fair Market
																				Outstanding			Value
Long-Term Debt		2001			2002			2003			2004			2005			Thereafter			10/31/2001			10/31/2001
		(dollars in thousands)
Fixed:
	Fixed-rate debt (1)	$	8,410		$	62,641		$	47,812		$	34,815		$	109,246		$	1,288,046		$	1,550,970		$	1,595,380
	Weighted average interest rate		7.74	%		7.66	%		7.38	%		7.44	%		7.27	%		7.50	%		7.48	%
	UDAG (1)		43			241			763			508			11,042			56,197			68,794			40,682
	Weighted average interest rate		3.44	%		2.55	%		2.51	%		1.81	%		3.90	%		1.27	%		1.71	%
	Senior & Subordinated Debt		—			—			—			—			—			220,400			220,400			213,580
	Weighted average interest rate																	8.48	%		8.48	%
Total Fixed-Rate Debt			8,453			62,882			48,575			35,323			120,288			1,564,643			1,840,164			1,849,642
Variable:
	Variable-rate debt (1)		272,246			185,747			275,495			21,462			320			96,031			851,301			851,301
	Weighted average interest rate																				5.46	%
	Tax Exempt (1)		9,750			44,400			—			—			—			—			54,150			54,150
	Weighted average interest rate																				3.37	%
	Revolving Credit Facility		—			—			110,000			—			—			—			110,000			110,000
	Weighted average interest rate																				6.34	%
Total Variable-Rate Debt			281,996			230,147			385,495			21,462			320			96,031			1,015,451			1,015,451
Total Long-Term Debt		$	290,449		$	293,029		$	434,070		$	56,785		$	120,608		$	1,660,674		$	2,855,615		$	2,865,093

(1)  Represents nonrecourse debt.

48

Full Consolidation Method

October 31, 2000

		Expected Maturity Date																		Total			Fair Market
																				Outstanding			Value
Long-Term Debt		2000			2001			2002			2003			2004			Thereafter			10/31/2000			10/31/2000
		(dollars in thousands)
Fixed:
	Fixed-rate debt (1)	$	28,403		$	300,716		$	61,919		$	63,907		$	33,805		$	1,201,654		$	1,690,404		$	1,624,565
	Weighted average interest rate		8.56	%		7.80	%		7.65	%		7.66	%		7.42	%		7.74	%		7.54	%
	UDAG (1)		20			82			102			225			454			67,528			68,411			34,696
	Weighted average interest rate		6.95	%		7.00	%		6.01	%		2.93	%		1.56	%		1.60	%		1.61	%
	Senior notes		—			—			—			—			—			200,000			200,000			184,180
	Weighted average interest rate																	8.50	%		8.50	%
Total Fixed-Rate Debt			28,423			300,798			62,021			64,132			34,259			1,469,182			1,958,815			1,843,441
Variable:
	Variable-rate debt (1)		89,765			67,640			82,863			266,067			24,718			73,000			604,053			604,053
	Weighted average interest rate																				8.75	%
	Tax Exempt (1)		28,400			33,374			—			—			—			—			61,774			61,774
	Weighted average interest rate																				5.59	%
	Revolving Credit Facility		—			—			—			182,500			—			—			182,500			182,500
	Weighted average interest rate																				8.69	%
Total Variable-Rate Debt			118,165			101,014			82,863			448,567			24,718			73,000			848,327			848,327
Total Long-Term Debt		$	146,588		$	401,812		$	144,884		$	512,699		$	58,977		$	1,542,182		$	2,807,142		$	2,691,768

(1)  Represents nonrecourse debt.

49

PART II – OTHER INFORMATION

Item l. Legal Proceedings

The Company is involved in various claims and lawsuits incidental to its business. The Company’s General Counsel is of the opinion that none of these claims and lawsuits will have a material adverse effect on the Company.

50

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

Exhibit
Number	Description of Document
3.1     -	Amended Articles of Incorporation adopted as of October 11, 1983, incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q for the quarter ended October 31, 1983 (File No. 1-4372).
3.2     -	Code of Regulations as amended June 14, 1994, incorporated by reference to Exhibit 3.2 to the Company’s Form 10-K for the fiscal year ended January 31, 1997 (File No.1-4372).
3.3     -	Certificate of Amendment by Shareholders to the Articles of Incorporation of Forest City Enterprises, Inc. dated June 24, 1997, incorporated by reference to Exhibit 4.14 to the Company’s Registration Statement on Form S-3 (Registration No. 333-41437).
3.4     -	Certificate of Amendment by Shareholders to the Articles of Incorporation of Forest City Enterprises, Inc. dated June 16, 1998, incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-8 (Registration No. 333-61925).
4.1     -	Form of Senior Subordinated Indenture between the Company and National City Bank, as Trustee thereunder, incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 (Registration No. 333-22695).
4.2     -	Form of Junior Subordinated Indenture between the Company and National City Bank, as Trustee thereunder, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-3 (Registration No. 333-22695).
4.3     -	Form of Senior Subordinated Indenture between the Company and The Bank of New York, as Trustee thereunder, incorporated by reference to Exhibit 4.22 to the Company’s Registration Statement on Form S-3 (Registration No. 333-41437).
10.11 -	Amended and Restated Credit Agreement, dated as of June 25, 1999, 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 20.1 to the Company’s Form 8-K, dated June 25, 1999 (File No. 1-4372).

51

Exhibit
Number	Description of Document
10.12   -	Amended and Restated Guaranty of Payment of Debt, dated as of June 25, 1999, 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 20.2 to the Company’s Form 8-K, dated June 25, 1999 (File No. 1-4372).
10.13   -	First Amendment to Amended and Restated Credit Agreement, dated August 9, 2000, 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 10.51 to the Company’s Form 10-Q for the quarter ended July 31, 2000 (File No. 1-4372).
10.14   -	First Amendment to Amended and Restated Guaranty of Payment of Debt, dated August 9, 2000, by and among Forest City Enterprises, the banks named therein, KeyBank National Association, as administrative agent, and National City Bank, as syndication agent, incorporated by reference to Exhibit 10.52 to the Company’s Form 10-Q for the quarter ended July 31, 2000 (File No. 1-4372).
10.17   -	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).
10.18   -	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).
10.19   -	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).

52

Exhibit
Number	Description of Document
10.20   -	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).
10.21   -	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).
10.22   -	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).
10.23   -	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).
10.24   -	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).
10.25   -	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).

53

Exhibit
Number	Description of Document
10.26   -	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).
10.27   -	Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the Charles Ratner 1989 Irrevocable Trust Agreement and Forest City Enterprises, Inc., insuring the life of Charles Ratner, dated October 24, 1996, incorporated by reference to Exhibit 10.29 to the Company’s Form 10-K for the year ended January 31, 1997 (File No. 1-4372).
10.28   -	Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between Albert B. Ratner and James Ratner, Trustees under the 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).
10.29   -	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).
10.30   -	Letter Supplement to Split Dollar Insurance Agreement and Assignment of Life Insurance Policy as Collateral between James Ratner and Albert Ratner, Trustees under the Charles Ratner 1992 Irrevocable Trust Agreement and Forest City Enterprises, Inc., insuring the lives of Charles Ratner and Ilana Ratner, effective November 2, 1996, incorporated by reference to Exhibit 10.32 to the Company’s Form 10-K for the year ended January 31, 1997 (File No. 1-4372).
10.31   -	Supplemental Unfunded Deferred Compensation Plan for Executives, incorporated by reference to Exhibit 10.9 to the Company’s Form 10-K for the year ended January 31, 1997 (File No. 1-4372).

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Exhibit
Number	Description of Document
10.32   -	1994 Stock Option Plan, including forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 10.10 to the Company’s Form 10-K for the year ended January 31, 1997 (File No. 1-4372).
10.33   -	First Amendment to the 1994 Stock Option Plan dated as of June 9, 1998, incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-8 (Registration No. 333-61925).
10.34   -	First Amendment to the forms of Incentive Stock Option Agreement and Nonqualified Stock Option Agreement, incorporated by reference to Exhibit 4.8 to the Company’s Registration Statement on Form S-8 (Registration No.333-61925).
10.35   -	Amended and Restated form of Stock Option Agreement, effective as of July 16, 1998, incorporated by reference to Exhibit 10.38 to the Company’s Form 10-Q for the quarter ended October 31, 1998 (File No. 1-4372).
10.36   -	Dividend Reinvestment and Stock Purchase Plan, incorporated by reference to Exhibit 10.42 to the Company’s Form 10-K for the year ended January 31, 1999 (File No. 1-4372).
10.37   -	Deferred Compensation Plan for Executives, effective as of January 1, 1999, incorporated by reference to Exhibit 10.43 to the Company’s Form 10-K for the year ended January 31, 1999 (File No. 1-4372).
10.38   -	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).
10.39   -	First Amendment to the Deferred Compensation Plan for Nonemployee Directors, effective October 1, 1999, incorporated by reference to Exhibit 4.6 to the Company’s Registration Statement on Form S-8 (Registration No. 333-38912).
10.40   -	Second Amendment to the Deferred Compensation Plan for Nonemployee Directors, effective March 10, 2000, incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-8 (Registration No. 333-38912).

55

Exhibit
Number	Description of Document
10.41   -	Employment Agreement entered into on April 6, 1998, effective as of February 1, 1997, by the Company and Charles A. Ratner, incorporated by reference to Exhibit 10.16 to the Form 10-K for the year ended January 31, 1998. (File No. 1-4372).
10.42   -	First Amendment to Employment Agreement (dated April 6, 1998), entered into as of April 24, 1998, by the Company and Charles A. Ratner, incorporated by reference to Exhibit 10.17 to the Company’s Form 10-K for the year ended January 31,1998. (File No. 1-4372).
10.43   -	Second Amendment to Employment Agreement entered into February 28, 2000, by and between Forest City Enterprises, Inc. and Charles A. Ratner, incorporated by reference to Exhibit 10.48 to the Company’s Form 10-K for the year ended January 31, 2000 (File No. 1-4372).
10.44   -	Employment Agreement entered into on May 31, 1999, effective January 1, 1999, by the Company and Albert B. Ratner, incorporated by reference to Exhibit 10.47 to the Company’s Form 10-Q for the quarter ended July 31, 1999 (File No. 1-4372).
10.45   -	First Amendment to Employment Agreement effective as of February 28, 2000 between Forest City Enterprises, Inc. and Albert B. Ratner, incorporated by reference to Exhibit 10.45 to the Company’s Form 10-K for the year ended January 31, 2000 (File No. 1-4372).
10.46   -	Employment Agreement entered into on May 31, 1999, effective January 1, 1999, by the Company and Samuel H. Miller, incorporated by reference to Exhibit 10.48 to the Company’s Form 10-Q for the quarter ended July 31, 1999. (File No. 1-4372).
10.47   -	Employment Agreement entered into on May 3, 2000, effective February 1, 2000, by the Company and James A. Ratner incorporated by reference to Exhibit 10.49 to the Company’s Form 10-Q for the quarter ended July 31, 2000 (File No. 1-4372).
10.48   -	Employment Agreement entered into on May 3, 2000, effective February 1, 2000, by the Company and Ronald A. Ratner incorporated by reference to Exhibit 10.50 to the Company’s Form 10-Q for the quarter ended July 31, 2000 (File No. 1-4372).
10.49   -	Deferred Compensation Agreement between Forest City Enterprises, Inc. and Thomas G. Smith dated December 27, 1995, incorporated by reference to Exhibit 10.33 to the Company’s Form 10-K for the year ended January 31, 1997 (File No. 1-4372).

56

Exhibit
Number	Description of Document
10.50   -	Employment Agreement (re death benefits) entered into on May 31, 1999, by the Company and Thomas G. Smith dated December 27, 1995, incorporated by reference to Exhibit 10.49 to the Company’s Form 10-Q for the quarter ended October 31, 1999 (File No. 1-4372).
10.51   -	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).
10.52   -	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).

(b)	Reports on Form 8-K:
	On September 6, 2001, the Company filed Form 8-K, dated September 4, 2001, to submit a press release announcing the three-for-two stock split of the Company’s Class A and Class B common stock effective November 14, 2001.
	On September 24, 2001, the Company filed Form 8-K, dated September 21, 2001, to discuss the impact on the Company of the September 11, 2001 terrorists’ attack on the World Trade Center and the Pentagon.
	On September 26, 2001, the Company filed Form 8-K, dated September 24, 2001, to file the opinion of counsel in connection with the offering to sell 2,600,000 shares of Class A common stock through underwriters.

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SIGNATURES

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

FOREST CITY ENTERPRISES, INC.
(Registrant)

DateDecember 18, 2001	/S/ THOMAS G. SMITH Thomas G. Smith, Executive Vice President and Chief Financial Officer
DateDecember 18, 2001	/S/ LINDA M. KANE Linda M. Kane, Vice President, Corporate Controller (Chief Accounting Officer)

58