UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT Of 1934

For the quarterly period ended April 30, 2006

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT Of 1934

For the transition period from                      to                     

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 þ      NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o       NO þ

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

Class		Outstanding at June 6, 2006
Class A Common Stock, $.33 1/3 par value		76,178,135 shares
Class B Common Stock, $.33 1/3 par value		25,890,660 shares

 

 

Forest City Enterprises, Inc. and Subsidiaries

Table of Contents

				Page
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Forest City Enterprises, Inc. and Subsidiaries
		Consolidated Balance Sheets April 30, 2006 and January 31, 2006			2
		Consolidated Statements of Earnings Three Months Ended April 30, 2006 and 2005			3
		Consolidated Statements of Comprehensive Income Three Months Ended April 30, 2006 and 2005			4
		Consolidated Statements of Shareholders’ Equity Three Months Ended April 30, 2006 and 2005			5
		Consolidated Statements of Cash Flows Three Months Ended April 30, 2006 and 2005			6-8
		Notes to Consolidated Financial Statements			9-25
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26-45
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			46-48
Item 4.		Controls and Procedures			49
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			49
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 6.		Exhibits			50-54
Signatures					55
Certifications
EX-31.1 PEO Certification Pursuant to Section 302
EX-31.2 PFO Certification Pursuant to Section 302
EX-32.1 Certification Pursuant to 18 USC Section 1350

PART I – FINANCIAL INFORMATION

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		April 30, 2006				January 31, 2006
		(in thousands)
Assets
Real Estate
Completed rental properties		$	6,145,259			$	6,162,995
Projects under development			924,985				886,256
Land held for development or sale			122,918				105,875
Total Real Estate			7,193,162				7,155,126
Less accumulated depreciation			(1,005,531	)			(986,594	)
Real Estate, net			6,187,631				6,168,532
Cash and equivalents			141,510				254,734
Restricted cash			348,225				430,264
Notes and accounts receivable, net			242,005				265,264
Investments in and advances to affiliates			403,799				361,942
Other assets			515,280				509,605
Total Assets		$	7,838,450			$	7,990,341
Liabilities and Shareholders’ Equity
Liabilities
Mortgage debt, nonrecourse		$	5,036,592			$	5,159,432
Notes payable			70,653				89,174
Bank revolving credit facility			—				82,500
Senior and subordinated debt			599,400				599,400
Accounts payable and accrued expenses			624,917				674,949
Deferred income taxes			424,696				387,788
Total Liabilities			6,756,258				6,993,243
Minority Interest			136,252				102,716
Commitments and Contingencies			—				—
Company-Obligated Trust Preferred Securities			—				—
Shareholders’ Equity
Preferred stock – without par value; 5,000,000 shares authorized; no shares issued			—				—
Common stock — $.33 1/3 par value
Class A, 96,000,000 shares authorized; 75,688,335 and 75,695,084 shares issued and outstanding, respectively			25,230				25,232
Class B, convertible, 36,000,000 shares authorized; 25,986,960 and 26,149,070 shares issued and outstanding, respectively; 6,257,961 shares issuable			8,662				8,716
			33,892				33,948
Additional paid-in capital			252,095				251,991
Unearned compensation			—				(4,151	)
Retained earnings			659,496				612,371
			945,483				894,159
Accumulated other comprehensive income			457				223
Total Shareholders’ Equity			945,940				894,382
Total Liabilities and Shareholders’ Equity		$	7,838,450			$	7,990,341

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		Three Months Ended April 30,
		2006				2005
		(in thousands, except per share data)
Revenues from real estate operations		$	289,354			$	294,580
Expenses
Operating expenses			167,516				165,461
Depreciation and amortization			43,617				41,975
Provision for decline in real estate			—				1,500
			211,133				208,936
Interest expense			(70,417	)			(66,187	)
Amortization of mortgage procurement costs			(3,019	)			(3,058	)
Loss on early extinguishment of debt			(803	)			(1,610	)
Interest and other income			14,962				6,902
Equity in earnings of unconsolidated entities			379				20,036
Gain on disposition of other investments			—				606
Earnings before income taxes			19,323				42,333
Income tax expense (benefit)
Current			(423	)			7,560
Deferred			7,573				8,591
			7,150				16,151
Earnings before minority interest and discontinued operations			12,173				26,182
Minority interest			(4,257	)			(2,832	)
Earnings from continuing operations			7,916				23,350
Discontinued operations, net of tax and minority interest
Operating loss from rental properties			(861	)			(1,134	)
Gain on disposition of rental properties			46,203				—
			45,342				(1,134	)
Net earnings		$	53,258			$	22,216
Basic earnings per common share (1)
Earnings from continuing operations		$	0.08			$	0.23
Earnings from discontinued operations, net of tax and minority interest			0.44				(0.01	)
Net earnings		$	0.52			$	0.22
Diluted earnings per common share (1)
Earnings from continuing operations		$	0.08			$	0.23
Earnings from discontinued operations, net of tax and minority interest			0.44				(0.01	)
Net earnings		$	0.52			$	0.22

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		Three Months Ended April 30,
		2006				2005
		(in thousands)
Net earnings		$	53,258			$	22,216
Other comprehensive income, net of tax and minority interest:
Unrealized net losses on investment securities			(33	)			(166	)
Change in unrealized net gains on interest rate derivative contracts			267				1,326
Other comprehensive income, net of tax and minority interest			234				1,160
Comprehensive income		$	53,492			$	23,376

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

																																						Accumulated
		Common Stock																Additional																				Other
		Class A								Class B								Paid-In				Unearned				Retained				Treasury Stock								Comprehensive
		Shares				Amount				Shares				Amount				Capital				Compensation				Earnings				Shares				Amount				(Loss) Income				Total
																						(in thousands)
Three Months Ended April 30, 2006
Balances at January 31, 2006			75,695			$	25,232				26,149			$	8,716			$	251,991			$	(4,151	)		$	612,371				—			$	—			$	223			$	894,382
Reclassifications related to the adoption of SFAS No. 123(R)			(259	)			(86	)											(4,065	)			4,151																				—
Net earnings																											53,258																53,258
Other comprehensive income, net of tax and minority interest																																							234				234
Dividends $.06 per share																											(6,133	)															(6,133	)
Purchase of treasury stock																															18				(826	)							(826	)
Conversion of Class B to Class A shares			162				54				(162	)			(54	)																											—
Exercise of stock options			34				11												(55	)											(18	)			826								782
Restricted stock vested			56				19												(19	)																							—
Stock-based compensation																			3,044																								3,044
Excess income tax benefit from stock option exercises																			536																								536
Excess income tax benefit from restricted stock vesting																			663																								663
Balances at April 30, 2006			75,688			$	25,230				25,987			$	8,662			$	252,095			$	—			$	659,496				—			$	—			$	457			$	945,940
Three Months Ended April 30, 2005
Balances at January 31, 2005			74,206			$	24,736				26,497			$	8,832			$	230,188			$	(3,087	)		$	552,106				—			$	—			$	(8,250	)		$	804,525
Net earnings																											22,216																22,216
Other comprehensive income, net of tax and minority interest																																							1,160				1,160
Dividends $.05 per share																											(5,033	)															(5,033	)
Purchase of treasury stock																															62				(1,945	)							(1,945	)
Exercise of stock options			134				44												1,668																								1,712
Restricted stock granted			90				30												2,827				(2,857	)																			—
Amortization of unearned compensation																							573																				573
Excess income tax benefit from stock option exercises																			814																								814
Excess income tax benefit from restricted stock vesting																			723																								723
Balances at April 30, 2005			74,430			$	24,810				26,497			$	8,832			$	236,220			$	(5,371	)		$	569,289				62			$	(1,945	)		$	(7,090	)		$	824,745

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

		Three Months Ended April 30,
		2006				2005
		(in thousands)
Net Earnings		$	53,258			$	22,216
Depreciation and amortization			43,617				41,975
Provision for decline in real estate			—				1,500
Amortization of mortgage procurement costs			3,019				3,058
Loss on early extinguishment of debt			803				1,610
Equity in earnings of unconsolidated entities			(379	)			(20,036	)
Gain on disposition of other investments			—				(606	)
Deferred income taxes			7,573				6,803
Minority interest			4,257				2,832
Excess tax benefit from stock-based compensation			(1,199	)			—
Stock-based compensation			2,526				573
Cash distributions from operations of unconsolidated entities			11,983				11,412
Non-cash operating expenses:
Write-off of abandoned development projects			669				1,209
Discontinued operations:
Depreciation and amortization			115				1,999
Amortization of mortgage procurement costs			40				208
Minority interest			60,880				38
Gain on disposition of operating properties			(136,384	)			—
Deferred income taxes			29,190				568
Cost of sales of land included in projects under development and completed rental properties			11,355				13,090
(Increase) decrease in land held for development or sale			(12,342	)			7,173
Decrease in notes and accounts receivable			22,955				11,114
Decrease (increase) in other assets			3,489				(10,390	)
Increase in restricted cash used for operating purposes			(6,309	)			(11,657	)
(Decrease) increase in accounts payable and accrued expenses			(42,484	)			10,178
Net cash provided by operating activities		$	56,632			$	94,867

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

		Three Months Ended April 30,
		2006				2005
		(in thousands)
Cash Flows from Investing Activities
Capital expenditures		$	(208,601	)		$	(222,522	)
Proceeds from disposition of rental properties and other investments			121,205				187
Change in restricted cash to be used for capital expenditures			(95,945	)			(9,220	)
Change in investments in and advances to affiliates			(44,432	)			7,387
Net cash used in investing activities			(227,773	)			(224,168	)
Cash Flows from Financing Activities
Payments on bank revolving credit facility			(82,500	)			—
Proceeds from nonrecourse mortgage debt			247,080				143,011
Principal payments on nonrecourse mortgage debt			(122,368	)			(83,825	)
Proceeds from notes payable			266				273
Payments on notes payable			(19,261	)			(10,695	)
Change in restricted cash and book overdrafts			56,766				49,475
Payment of deferred financing costs			(9,518	)			(11,170	)
Excess tax benefit from stock-based compensation			1,199				—
Purchase of treasury stock			(826	)			(1,945	)
Exercise of stock options			782				1,712
Dividends paid to shareholders			(6,111	)			(5,036	)
Decrease in minority interest			(7,592	)			(17,933	)
Net cash provided by financing activities			57,917				63,867
Net decrease in cash and equivalents			(113,224	)			(65,434	)
Cash and equivalents at beginning of period			254,734				276,492
Cash and equivalents at end of period		$	141,510			$	211,058

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Unaudited)

Supplemental Non-Cash Disclosures:

The table below represents the effect of the following non-cash transactions for the three months ended April 30, 2006 and 2005:

		Three Months Ended April 30,
		2006				2005
		(in thousands)
Operating Activities
Decrease in notes and accounts receivable		$	531			$	—
Increase in land held for development or sale			(4,701	)			—
Decrease in other assets			365				—
Decrease in accounts payable and accrued expenses			(9,934	)			—
Total effect on operating activities		$	(13,739	)		$	—
Investing Activities
Decrease in projects under development		$	18,642				—
Increase in completed rental properties			(518	)			—
Non-cash proceeds from disposition of properties			109,302				—
Total effect on investing activities		$	127,426			$	—
Financing Activities
Increase in notes payable		$	4,701			$	—
Decrease in nonrecourse mortgage debt			(242,200	)			—
Decrease in restricted cash			150,418				—
Decrease in minority interest			(27,102	)			—
Increase in additional paid-in capital			518				—
Dividends declared but not yet paid			(22	)			—
Total effect on financing activities		$	(113,687	)		$	—

2006

	•		Assumption of nonrecourse mortgage debt and direct payment to partner by the buyer upon sale of Hilton Times Square Hotel and G Street properties in the Commercial Group.
	•		Change to equity method of accounting from full consolidation due to admission of a 50% partner in Uptown Apartments, a residential development project in Oakland, California.
	•		Change to full consolidation method of accounting from equity method due to acquisition of partners’ interest in Rockport Square in the Land Development Group.
	•		Capitalization of stock-based compensation.

The accompanying notes are an integral part of these consolidated financial statements.

Forest City Enterprises, Inc. and Subsidiaries

(Unaudited)

A. Accounting Policies

Basis of Presentation

The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended January 31, 2006, including the Report of Independent Registered Public Accounting Firm. The results of interim periods are not necessarily indicative of results for the full year or any subsequent period. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of financial position, results of operations and cash flows at the dates and for the periods presented have been included.

New Accounting Standards

In March 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets — an Amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 requires separate recognition of a servicing asset and a servicing liability each time an entity undertakes an obligation to service a financial asset by entering into a servicing contract. This statement also requires that all separately recognized servicing assets and liabilities be initially measured at fair value and subsequently measured at fair value at the end of each reporting period. This statement is effective in fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156 is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an Amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”). SFAS No. 155 (i) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and (v) amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS No. 140”), to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R) requires the recognition of compensation costs related to the estimated fair value of employee stock options and similar stock awards. The Company adopted SFAS No. 123(R) on February 1, 2006. See Note B – Stock-Based Compensation for details regarding the implementation of SFAS No. 123(R).

Variable Interest Entities

As of April 30, 2006, the Company determined that it is the primary beneficiary of 30 Variable Interest Entities ("VIE") representing 18 properties (19 VIEs representing 8 properties in Residential Group, 10 VIEs representing 9 properties in Commercial Group, and 1 VIE/property in Land Development Group). As of April 30, 2006, the Company held variable interests in 43 VIEs for which it is not the primary beneficiary. The maximum exposure to loss as a result of the Company’s involvement with these unconsolidated VIEs is limited to its recorded investments in those VIEs totaling approximately $101,000,000 at April 30, 2006, which is recorded as investments in and advances to affiliates. In addition, the Company has various VIEs that were previously consolidated that remain consolidated under FASB Interpretation (“FIN”) No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN No. 46 (R)”). These VIEs consist of joint ventures that are engaged, directly or indirectly, in the ownership, development and management of office buildings, regional malls, specialty retail centers, apartment communities, military housing, supported-living communities and land development.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

The total assets, nonrecourse mortgage debt, total liabilities and minority interest of VIEs consolidated due to the implementation of FIN No. 46 (R) for which the Company is the primary beneficiary are as follows as of April 30 and January 31, 2006:

		April 30, 2006				January 31, 2006
		(in thousands)
Total assets		$	926,000			$	940,000
Nonrecourse mortgage debt			837,000				839,000
Total liabilities (including nonrecourse mortgage debt)			890,000				900,000
Minority interest			36,000				40,000

In addition to the VIEs described above, the Company has also determined that it is the primary beneficiary of a VIE which holds collateralized borrowings of $29,000,000 (Note E – Senior and Subordinated Debt) as of April 30, 2006.

Restricted Cash

Restricted cash represents legally restricted deposits with financial institutions for taxes and insurance, security deposits, capital replacement, improvement and operating reserves, bond funds, development escrows, construction escrows and collateral on total rate of return swaps, as well as certain internally restricted deposits with qualified intermediaries related to like-kind exchanges.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related notes. Some of the critical estimates made by the Company include, but are not limited to, estimates of useful lives for long-lived assets, reserves for collection on accounts and notes receivable and other investments, provisions for decline in real estate and the computation of expected losses on VIEs. As a result of the nature of estimates made by the Company, actual results could differ.

Interest and Other Income

In connection with a redevelopment project in Cumberland, Rhode Island, the Company applied and qualified for a Rhode Island Historic Tax Preservation Credit (“Credit”). The Credit, which is equal to 30% of Qualified Rehabilitation Expenditures as defined by the Rhode Island state tax code, is fully assignable irrespective of whether the assignee has an ownership interest in the underlying real estate. The purpose of the Credit is to create economic incentives for the purpose of stimulating the redevelopment and reuse of Rhode Island’s historic structures. Included in interest and other income for the three months ended April 30, 2006 is approximately $8.8 million related to proceeds received from third parties resulting from the sale of the Credits that were realized by the Company in connection with the completion of the redevelopment project. The Company has no significant rights or obligations following the sale of these Credits.

Accounting for Derivative Instruments and Hedging Activities

For the three months ended April 30, 2006 and 2005, the amount of hedge ineffectiveness relating to hedges designated and qualifying as cash flow and fair value hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” was not material. The amount of derivative losses reclassified into earnings from other comprehensive income (“OCI”) as a result of forecasted transactions that did not occur by the end of the originally specified time period or within an additional two-month period of time thereafter for the three months ended April 30, 2006 and 2005 was $32,000 and $-0-, respectively. As of April 30, 2006, the Company expects that within the next twelve months it will reclassify amounts recorded in accumulated OCI into earnings as a reduction of interest expense of approximately $1,669,000, net of tax.

From time to time, certain of the Company’s joint ventures (the “Joint Ventures”) enter into total rate of return swaps (“TRS”) on various tax-exempt fixed-rate borrowings generally held within the Joint Ventures. The TRS convert these borrowings from a fixed rate to a variable rate and provide an efficient financing product to lower the cost of capital. In exchange for a fixed rate, the TRS require that the Joint Ventures pay a variable rate, generally equivalent to the Bond Market Association (“BMA”) rate. Additionally, the Joint Ventures have guaranteed the principal balance of the underlying borrowing. Any fluctuation in the value of the guarantee would be offset by the fluctuation in the value of the underlying borrowing, resulting in no financial impact to the Joint Ventures or

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

A. Accounting Policies (continued)

the Company. At April 30, 2006, the aggregate notional amount of TRS in which the Joint Ventures have an interest is approximately $319,790,000. The fair value of such contracts is immaterial at April 30, 2006. The Company believes the economic return and related risk associated with a TRS is generally comparable to that of nonrecourse variable-rate mortgage debt.

The Company estimates the fair value of its hedging instruments based on interest rate market pricing models. At April 30 and January 31, 2006, interest rate caps were reported at fair value of approximately $3,034,000 and $2,454,000, respectively, in other assets in the Consolidated Balance Sheets. At April 30 and January 31, 2006, interest rate swap agreements had a positive fair value recorded as an unrealized gain of $9,942,000 and $7,887,000, respectively, and are included in other assets in the Consolidated Balance Sheets.

Other Comprehensive Income

Net unrealized gains or losses on securities are included in OCI and represent the difference between the market value of investments in unaffiliated companies that are available-for-sale at the balance sheet date and the Company’s cost. Also included in OCI is the Company’s portion of the unrealized gains and losses on the effective portions of derivative instruments designated and qualified as cash flow hedges. The amount of income tax expense related to accumulated OCI was $287,000 and $141,000 as of April 30, 2006 and January 31, 2006, respectively.

The following table summarizes the components of accumulated OCI included within the Company’s Consolidated Balance Sheets, net of tax and minority interest.

		April 30,				January 31,
		2006				2006
		(in thousands)
Unrealized gains on securities		$	237			$	270
Unrealized gains (losses) on interest rate contracts			220				(47	)
Accumulated Other Comprehensive Income		$	457			$	223

Reclassification

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year’s presentation. Effective July 31, 2005 the Company changed from the direct method of cash flow presentation to the indirect method to be consistent with the disclosure common throughout the real estate industry. The prior period cash flow has been revised to conform to the indirect method. The direct method reports major classes of gross cash receipts and gross cash payments versus the indirect method which reconciles net earnings to net cash used in or provided by operating activities.

B. Stock-Based Compensation

The Company’s 1994 Stock Plan, as amended, (the “Plan”) permits the award of Class A stock options (incentive and nonqualified), restricted shares, restricted stock units and stock appreciation rights to key employees and non-employee directors of the Company. The aggregate maximum number of shares that may be issued during the term of the Plan is 500,000 for restricted shares or units granted after June 21, 2005 and 11,750,000 for all types of awards. As of April 30, 2006, the total number of shares available for granting of all types of awards was 3,985,560, of which 309,000 may be restricted shares or units. The maximum annual award to an individual is 400,000 stock options or rights and 225,000 restricted shares or units. Stock options have a maximum term of 10 years and are awarded with an exercise price at least equal to the market value of the stock on the date of grant. Class A common stock issued upon the exercise of stock options may be issued out of unissued shares or treasury stock. The Plan, which is administered by the Compensation Committee of the Board of Directors, does not allow the exercise price to be lowered for outstanding options or to cancel and replace stock options at lower exercise price. The Company has not amended the terms of any previously issued options. All outstanding stock options have an exercise price equal to the fair market value of the underlying stock at the date of grant, a 10-year term, and graded vesting over four years. All outstanding restricted shares have graded vesting over four years.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

B. Stock-Based Compensation (continued)

In December 2004, the FASB issued SFAS No. 123 (Revised), “Share-Based Payment” (“SFAS No. 123(R)”). This statement requires the recognition of compensation costs related to the estimated fair value of employee stock options and similar stock awards. Among other changes, SFAS No. 123(R) provides for certain changes to the method of valuing share-based payments. On April 14, 2005, the U.S. Securities and Exchange Commission (“SEC”) adopted a new rule amending the compliance dates for SFAS No. 123(R), which extended the implementation date for the Company to February 1, 2006. The Company adopted the modified prospective application method which requires the provisions of SFAS No. 123(R) to be applied to unvested awards outstanding at the date of adoption and all new awards. The Company recognizes compensation costs for its stock option and restricted stock awards over the requisite service period using the straight-line attribution method. The current Plan, as amended, which covers awards granted in 2006, permits the acceleration of vesting upon the retirement of a grantee who retires on or after reaching the prescribed retirement age, as defined in the Plan. The cost of an award subject to this retirement provision is recognized immediately for grantees that are retirement eligible at the date of grant or on a straight-line basis over the period ending with the first anniversary from the date of grant which the individual reaches retirement age. This retirement provision does not apply to awards granted prior to 2006. The Company recognized approximately $1,170,000 of compensation expense related to stock-based compensation awards that were granted during 2006 to retirement eligible grantees.

Prior to February 1, 2006, the Company followed the provisions of APB No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations. As such, stock-based compensation was measured using the intrinsic value method, that is, the excess, if any, of the quoted market price of the Company’s stock on the date of grant over the amount the employee is required to pay for the stock. None of the stock option awards were expensed under APB No. 25 because their intrinsic value was zero at the date of grant. The restricted stock awards were expensed under APB No. 25 because their intrinsic value was equal to the fair market value of the stock at the date of grant. In accordance with SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, pro forma disclosures were provided illustrating the effect on net earnings and earnings per share as if the fair value based method had been applied.

As a result of adopting SFAS No. 123(R) on February 1, 2006, the Company’s earnings before income taxes, earnings from continuing operations and net earnings for the three months ended April 30, 2006 are lower by $1,725,000, $1,195,000 and $1,195,000, respectively, than if the Company had continued to account for stock-based compensation under APB No. 25. Basic and diluted earnings per share for the three months ended April 30, 2006 would have both been $0.53 if the Company had not adopted SFAS No. 123(R), compared to the reported basic and diluted earnings per share of $0.52. The unearned compensation costs of $4,151,000 relating to 258,750 shares of unvested restricted stock at January 31, 2006, which was reflected as a reduction of shareholders’ equity at January 31, 2006 under APB No. 25, was eliminated against common stock and additional paid-in capital on February 1, 2006 upon the adoption of SFAS No. 123(R).

Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from exercises of stock options and vesting of restricted stock as operating cash flows in the Consolidated Statements of Cash Flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for those options or shares (excess tax benefits) to be classified as financing cash flows. The $1,199,000 excess tax benefit classified as a financing cash inflow would have been classified as an operating cash inflow if the Company had not adopted SFAS No. 123(R).

During the three months ended April 30, 2006, the Company recognized stock-based compensation costs of $3,044,000. The composition of the stock-based compensation costs, the amount charged to operating expenses and the amount capitalized into the basis of qualifying real estate projects under development are as follows:

														Deferred
														Income Tax
		Operating												Benefit
		Expense				Capitalized				Total				Recognized
						(in thousands)
Stock option costs		$	1,725			$	518			$	2,243			$	530
Restricted stock costs			801				—				801				310
		$	2,526			$	518			$	3,044			$	840

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

B. Stock-Based Compensation (continued)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for options granted during the three months ended April 30, 2006:

Risk-free interest rate			4.89	%
Expected volatility			20.00	%
Expected dividend yield			0.70	%
Expected term (in years)			6.60
Weighted-average grant-date fair value		$	14.32

The risk-free interest rate was based on published yields of U.S. Treasury Strips having a maturity date approximating the expected term of the options. Expected volatility was based on the historical volatility of the Company’s stock using the daily closing prices of the Company’s Class A common stock over a period of time equivalent to the expected term of the options. The expected dividend yield was based on the Company’s recent annual dividend divided by the average price of the Company’s stock during that period. The Company used the simplified method for plain vanilla options, as provided in the SEC Staff Accounting Bulletin No. 107 to compute the expected term of the options granted in 2006.

The following table provides a summary of stock option activity for the three months ended April 30, 2006:

										Weighted
										Average
						Weighted				Remaining
						Average				Contractual				Intrinsic
						Exercise				Term				Value
Stock Options		Shares				Price				(in years)				(in thousands)
Outstanding at January 31, 2006			3,054,148			$	18.42
Granted			960,100			$	46.37
Exercised			(51,450	)		$	15.05							$	1,597
Forfeited			(26,600	)		$	21.85
Outstanding at April 30, 2006			3,936,198			$	25.26				7.3			$	78,263
Options exercisable (fully vested) at April 30, 2006			1,565,348			$	13.09				4.9			$	50,166

At April 30, 2006, there was $19,466,000 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a weighted-average period of 3.4 years.

The following table provides a summary of restricted stock activity for the three months ended April 30, 2006:

						Weighted-Average
						Grant-Date
Restricted Stock		Shares				Fair Value
Unvested shares at January 31, 2006			258,750			$	21.15
Granted			191,000			$	46.37
Vested			(56,250	)		$	15.50
Forfeited			—			$	—
Unvested shares at April 30, 2006			393,500			$	34.20

Restricted stock represents a grant of Class A common stock to key employees subject to restrictions on disposition, transferability and risk of forfeiture, while having the rights to vote the shares and receive dividends. The restrictions generally lapse on the second, third and fourth anniversary of the date of grant. Restricted shares subject to the restrictions mentioned above are considered to be nonvested shares under SFAS No. 123(R) and are not reflected as issued and outstanding shares until the restrictions lapse. At that time, the shares are released to the employee and the Company records the issuance of the shares.

At April 30, 2006, there was $12,207,000 of unrecognized compensation cost related to unvested restricted stock that is expected to be recognized over a weighted-average period of 3.4 years. The total fair value of shares vested during the three months ended April 30, 2006 was $872,000.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

B. Stock-Based Compensation (continued)

In connection with the vesting of restricted stock during the three months ended April 30, 2006 and 2005, the Company repurchased into treasury 17,970 shares and 61,584 shares, respectively, of Class A common stock to satisfy the employees’ related minimum statutory tax withholding requirements. These shares were placed in treasury with an aggregate cost basis of $826,000 and $1,945,000, respectively.

For the three months ended April 30, 2005, the Company expensed $573,000 related to compensation costs for restricted shares. For periods prior to February 1, 2006, the Company will continue to provide pro forma disclosures related to the impact of compensation costs for stock options as illustrated in the following table:

		Three Months Ended
		April 30, 2005
Net earnings (in thousands)
As reported		$	22,216
Deduct stock-based employee compensation expense for stock options determined under the fair value based method, net of tax			(661	)(1)
Pro forma		$	21,555
Basic earnings per share
As reported		$	.22
Pro forma		$	.21
Diluted earnings per share
As reported		$	.22
Pro forma		$	.21

C. Discontinued Operations, Gain on Disposition of Rental Properties and Provision for Decline in Real Estate

Discontinued Operations

Pursuant to the definition of a component of an entity in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) all earnings of discontinued operations sold or held for sale, assuming no significant continuing involvement, have been reclassified in the Consolidated Statements of Earnings for the three months ended April 30, 2006 and 2005. The Company considers assets held for sale when the transaction has been approved and there are no significant contingencies related to the sale that may prevent the transaction from closing.

Summarized financial information for assets, liabilities and minority interest that were held for sale as of April 30, 2006 (Providence at Palm Harbor) and January 31, 2006 (Hilton Times Square Hotel) were as follows:

		April 30,				January 31,
		2006				2006
		(in thousands)
Assets
Real estate		$	8,984			$	101,374
Cash and equivalents			403				2,854
Restricted cash			416				2,808
Notes and accounts receivable, net			10				3,154
Other assets			315				3,030
Total Assets		$	10,128			$	113,220
Liabilities
Mortgage debt, nonrecourse		$	9,754			$	81,133
Notes payable			—				15,000
Accounts payable and accrued expenses			256				14,421
Total Liabilities			10,010				110,554
Minority interest			1				3,843
Total Liabilities and Minority Interest		$	10,011			$	114,397

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

C. Discontinued Operations, Gain on Disposition of Rental Properties and Provision for Decline in Real Estate (continued)

The following table lists the formerly consolidated rental properties included in discontinued operations:

Three Months

Three Months

Square Feet/

Quarter/ Year

Ended

Ended

Property

Location

Number of Units

Disposed

4/30/2006

4/30/2005

Commercial Group:

G Street

Philadelphia, Pennsylvania

13,000 square feet

Q1-2006

Yes

Yes

Hilton Times Square

Manhattan, New York

444 rooms

Q1-2006

Yes

Yes

Residential Group:

Providence at Palm Harbor

Tampa, Florida

236 units

Q2-2006

Yes

Yes

Enclave

San Jose, California

637 units

Q4-2005

—

Yes

Cherrywood Village

Denver, Colorado

360 units

Q3-2005

—

Yes

Ranchstone

Denver, Colorado

368 units

Q3-2005

—

Yes

The operating results related to discontinued operations were as follows:

		Three Months Ended April 30,
		2006				2005
		(in thousands)
Revenues		$	5,660			$	14,723
Expenses
Operating expenses			7,164				10,961
Depreciation and amortization			115				1,999
			7,279				12,960
Interest expense			(557	)			(3,432	)
Amortization of mortgage procurement costs			(40	)			(208	)
Interest and other income			608				67
Gain on disposition of rental properties			136,384				—
Earnings (loss) before income taxes			134,776				(1,810	)
Income tax expense (benefit)
Current			(636	)			(1,282	)
Deferred			29,190				568
			28,554				(714	)
Earnings (loss) before minority interest			106,222				(1,096	)
Minority interest			60,880				38
Net earnings (loss) from discontinued operations		$	45,342			$	(1,134	)

Gain on Disposition of Rental Properties

The following table summarizes the gain on disposition of properties, pre-tax and minority interest, for the three months ended April 30, 2006 and 2005:

						Three Months Ended April 30,
						2006				2005
						(in thousands)
Discontinued Operations:
Hilton Times Square		Manhattan, New York				$	135,945			$	—
G Street		Philadelphia, Pennsylvania					439				—
Total						$	136,384			$	—

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

C. Discontinued Operations, Gain on Disposition of Rental Properties and Provision for Decline in Real Estate (continued)

Investments accounted for on the equity method are not subject to the provisions of SFAS No. 144, and therefore the gains or losses on the sales of equity method properties are reported in continuing operations when sold. Any changes in fair value that are other than temporary are recognized in the period such decrease has occurred. The following table summarizes the Company’s proportionate share of gains on equity method investments disposed of during the three months ended April 30, 2006 and 2005, which are included in equity in earnings of unconsolidated entities in the Consolidated Statements of Earnings:

						Three Months Ended April 30,
						2006				2005
						(in thousands)
Showcase (Specialty Retail Center)		Las Vegas, Nevada				$	—			$	13,145
Colony Place (Apartments)		Fort Myers, Florida					—				5,352
Total						$	—			$	18,497

Provision for Decline in Real Estate

The Company reviews its investment portfolio to determine if its carrying costs will be recovered from future undiscounted cash flows whenever events or changes indicate that recoverability of long-lived assets may not be assured. In cases where the Company does not expect to recover its carrying costs, an impairment loss is recorded as a provision for decline in real estate for assets in its real estate portfolio pursuant to the guidance established in SFAS No. 144.

There was no provision for decline in real estate recorded for the three months ended April 30, 2006.

For the three months ended April 30, 2005, the Company recorded a provision for decline in real estate of $1,500,000 related to the Ritz Carlton, a 206-room Commercial hotel located in Cleveland, Ohio. This provision represents a write down to the estimated fair value, less cost to sell, due to a change in events (unexpected offer to purchase) related to the estimated future cash flows.

D. Bank Revolving Credit Facility

On April 7, 2005, the Company amended its bank revolving credit facility. The amendment to the credit facility extended the maturity by one year to March 2008, lowered the borrowing rate to 1.95% over the London Interbank Offered Rate (“LIBOR”), eliminated the higher rate tier on the last $50,000,000 of borrowings and contains an accordion provision that allows the Company to increase the availability under the revolving line of credit by $100,000,000 to $550,000,000 during the 24 months following the amendment. The amendment also lowered the Company’s unused commitment fee from 37.5 basis points on any unused portion to 25 basis points if the revolver usage is less than 50% and 15 basis points if the revolver usage is greater than 50%. The amendment also increased the combined availability of letters of credit or surety bonds by $10,000,000 to $60,000,000 and added a swing line availability of $40,000,000 for up to three business days.

On January 20, 2006, the Company further amended the bank revolving credit facility to increase the combined availability of letters of credit or surety bonds by $40,000,000 to $100,000,000. There were $65,971,000 in letters of credit and $-0- in surety bonds outstanding at April 30, 2006.

The amended credit facility provides, among other things, for 1) at the Company’s election, interest rates of 1.95% over LIBOR or ¹/2% over the prime rate; 2) maintenance of debt service coverage ratios and specified levels of net worth and cash flows (as defined in the credit facility); and 3) restrictions on dividend payments and stock repurchases.

The outstanding balance of the revolving credit facility was $-0- and $82,500,000 at April 30, 2006 and January 31, 2006, respectively.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

E. Senior and Subordinated Debt

Senior Notes

Along with its wholly-owned subsidiaries, Forest City Enterprises Capital Trust I (“Trust I”) and Forest City Enterprises Capital Trust II (“Trust II”), the Company filed an amended shelf registration statement with the SEC on May 24, 2002. This shelf registration statement amended the registration statement previously filed with the SEC in December 1997. This registration statement is intended to provide the Company flexibility to raise funds from the offering of Class A common stock, preferred stock, depositary shares and a variety of debt securities, warrants and other securities. Trust I and Trust II have not issued securities to date and, if issued, would represent the sole net assets of the trusts. The Company has $292,180,000 available under its shelf registration at April 30, 2006.

On January 25, 2005, the Company issued $150,000,000 of 6.50% senior notes due February 1, 2017 in a public offering under its shelf registration statement. The proceeds from this offering (net of approximately $4,300,000 of offering costs) were used to repay the outstanding balance under the Company’s bank revolving credit facility (see Note D – Bank Revolving Credit Facility) and for general working capital purposes. Accrued interest is payable semi-annually on February 1 and August 1, commencing on August 1, 2005. These senior notes may be redeemed by the Company, at any time on or after February 1, 2010 at a redemption price of 103.250% beginning February 1, 2010 and systematically reduced to 100% in the years thereafter. However, if the Company completes one or more public equity offerings prior to February 1, 2008, up to 35% of the original principal amount of the notes may be redeemed using all or a portion of the net proceeds within 75 days of the completion of the public equity offering at 106.50% of the principal amount of the notes.

On February 10, 2004, the Company issued $100,000,000 of 7.375% senior notes due February 1, 2034 in a public offering under its shelf registration statement. The proceeds from this offering (net of $3,808,000 of offering costs) were used to repay the outstanding term loan balance of $56,250,000 under the previous credit facility and for general working capital purposes. Accrued interest is payable quarterly on February 1, May 1, August 1, and November 1. These senior notes may be redeemed by the Company, in whole or in part, at any time on or after February 10, 2009 at a redemption price equal to 100% of their principal amount plus accrued interest.

On May 19, 2003, the Company issued $300,000,000 of 7.625% senior notes due June 1, 2015 in a public offering under its shelf registration statement. The proceeds from this offering (net of $8,151,000 of offering costs) were used to redeem all of the outstanding 8.5% senior notes originally due in 2008 at a redemption price equal to 104.25%, or $208,500,000. The remaining proceeds were used to repay the balance outstanding under the Company’s previous credit facility and for general working capital purposes. Accrued interest is payable semi-annually on December 1 and June 1. These senior notes may be redeemed by the Company, at any time on or after June 1, 2008 at a redemption price of 103.813% beginning June 1, 2008 and systematically reduced to 100% in years thereafter. However, if the Company completes one or more public equity offerings prior to June 1, 2006, up to 35% of the original principal amount of the notes may be redeemed using all or a portion of the net proceeds within 75 days of the completion of the public equity offering at 107.625% of the principal amount of the notes.

The Company’s senior notes are unsecured senior obligations and rank equally with all existing and future unsecured indebtedness; however, they are effectively subordinated to all existing and future secured indebtedness and other liabilities of the Company’s subsidiaries to the extent of the value of the collateral securing such other debt, including the bank revolving credit facility. The indenture governing the senior notes contains covenants providing, among other things, limitations on incurring additional debt and payment of dividends.

Subordinated Debt

In May 2003, the Company purchased $29,000,000 of subordinate tax revenue bonds that were contemporaneously transferred to a custodian, which in turn issued custodial receipts that represent ownership in the bonds to unrelated third parties. The Company evaluated the transfer pursuant to the provisions of SFAS No. 140 and has determined that the transfer does not qualify for sale accounting treatment principally because the Company has guaranteed the payment of principal and interest in the unlikely event that there is insufficient tax revenue to support the bonds when the custodial receipts are subject to mandatory tender on December 1, 2013. As such, the Company is the primary beneficiary of this VIE (see the Variable Interest Entities Section of Note A) and the book value (which approximates amortized costs) of the bonds was recorded as a collateralized borrowing reported as senior and subordinated debt and as held-to-maturity securities reported as other assets in the Consolidated Balance Sheets.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

E. Senior and Subordinated Debt (continued)

In November 2000, the Company issued $20,400,000 of redevelopment bonds in a private placement. The bonds bear a fixed interest rate of 8.25% and are due September 15, 2010. The Company has entered into a TRS for the benefit of these bonds that expires on September 15, 2008. Under this TRS, the Company receives a rate of 8.25% and pays BMA plus a spread (1.15% through September 2006 and 0.90% thereafter). Interest is payable semi-annually on March 15 and September 15. This debt is unsecured and subordinated to the senior notes and the bank revolving credit facility.

F. Financing Arrangements

Collateralized Borrowings

In 2001, Stapleton Land, LLC purchased $75,000,000 in Tax Increment Financing (“TIF”) bonds and $70,000,000 in revenue bonds (for an aggregate of $145,000,000, collectively the “Bonds”) from the Park Creek Metropolitan District (the “District”). The Bonds were immediately sold to Lehman Brothers, Inc. (“Lehman”) and were subsequently acquired by a qualified special purpose entity (the “Trust”), which in turn issued trust certificates to third parties. The District had a call option on the revenue bonds that began in August 2003 and had a call option on the TIF bonds that began in August 2004. In the event the Bonds were not removed from the Trust, Stapleton Land, LLC had the obligation to repurchase the Bonds from the Trust. Upon removal of the Bonds from the Trust, Stapleton Land, LLC was entitled to the difference between the interest paid on the Bonds and the cumulative interest paid to the certificate holders less trustee fees, remarketing fees and credit enhancement fees (the “Retained Interest”).

The Company assessed its transfer of the Bonds to Lehman at inception and determined that it qualified for sale accounting treatment pursuant to the provisions of SFAS No. 140 because the Company did not maintain control over the Trust and the Bonds were legally isolated from the Company’s creditors. At inception, the Retained Interest had no determinable fair value as the cash flows were not practical to estimate because of the uncertain nature of the tax base still under development. In accordance with SFAS No. 140, no gain or loss was recognized on the sale of the Bonds to Lehman. As a result, the Retained Interest was recorded at zero with all future income to be recorded under the cost recovery method. The Company separately assessed the obligation to redeem the Bonds from the Trust pursuant to the provisions of SFAS No. 140 and concluded the liability was not material. The original principal outstanding under the securitization structure described above was $145,000,000, which was not recorded on the Consolidated Balance Sheets.

The Company reassessed the fair value and adjusted the amount of the Retained Interest through OCI on a quarterly basis. The Company measured its Retained Interest in the Trust at its estimated fair value based on the present value of the expected future cash flows, which were determined based on the expected future cash flows from the underlying Bonds and from expected changes in the rates paid to the certificate holders discounted at market yield, which considered the related risk. The difference between the amortized cost of the Retained Interest (approximately zero) and the fair value was recorded, net of the related tax and minority interest, in shareholders’ equity as a change in accumulated OCI. The quarterly fair value calculations were determined based on the application of key assumptions determined at the time of transfer including an estimated weighted average life of two years and a 6.50% residual cash flows discount rate.

In August 2004, the $75,000,000 TIF bonds were defeased and removed from the Trust with the proceeds of a new $75,000,000 bond issue by the Denver Urban Renewal Authority (“DURA”), and the $70,000,000 revenue bonds, which bear interest at a rate of 8.5%, were removed from the Trust through a third party purchase. Upon removal of the $70,000,000 revenue bonds from the Trust, the third party deposited the bonds into a special-purpose entity (the “Entity”).

As the TIF and revenue bonds were successfully removed from the Trust, the amounts previously recorded in OCI were recognized by Stapleton Land, LLC as interest income during the year ended January 31, 2005. Stapleton Land, LLC is not obligated to pay, nor is entitled to, any further amounts related to this Retained Interest.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

F. Financing Arrangements (continued)

Also in August 2004, the Entity issued two types of securities, 1) Puttable Floating Option Tax-Exempt Receipts (“P-FLOATs”), which bear interest at a short-term floating rate as determined by the remarketing agent and 2) Residual Interest Tax-Exempt Securities Receipts (“RITES”), which receive the residual interest from the revenue bonds after the P-FLOAT interest and various program fees have been paid. The P-FLOATs were sold to third parties. Stapleton Land II, LLC, a consolidated affiliate of Stapleton Land, LLC, acquired the RITES for a nominal amount and provided credit enhancement to the trustor of the Entity including an initial collateral contribution of $10,000,000. During the year ended January 31, 2005, the Company contributed additional net collateral of $2,094,000. The Company consolidated the collateralized borrowing given its obligation to absorb the majority of the expected losses. The book value (which approximates amortized cost) of the P-FLOATs was reported as nonrecourse mortgage debt until terminated in July 2005. As the bonds were redeemed in July 2005, there are no balances reported for the revenue bonds or collateral at April 30, 2006 and January 31, 2006 in the Consolidated Balance Sheets, and there was $-0- of interest income and interest expense recorded for the three months ended April 30, 2006 in the Consolidated Statements of Earnings related to this collateralized borrowing. For the three months ended April 30, 2005, the Company recorded approximately $1,475,000 and $659,000 of interest income and interest expense, respectively, related to this collateralized borrowing in the Consolidated Statements of Earnings. Of the interest income amount, approximately $1,471,000 is interest income on the RITES and $4,000 is interest income on the collateral.

On July 13, 2005, the District issued $63,000,000 Senior Limited Property Tax Supported Revenue Refunding Bonds (“Senior Limited Bonds”), Series 2005 and $65,000,000 Senior Subordinate Limited Property Tax Supported Revenue Refunding and Improvement Bonds (“Senior Subordinate Bonds”), Series 2005 (collectively, the “2005 Bonds”). Proceeds from the issuance of the 2005 Bonds were used to redeem the $70,000,000 revenue bonds held by the Entity, which were then removed from the Company’s Consolidated Balance Sheets. The Entity, in turn, redeemed the outstanding P-FLOATs. As holder of the RITES, Stapleton Land II, LLC was entitled to the remaining capital balances of the Entity after payment of P-FLOAT interest and other program fees. The District used additional proceeds of $30,271,000 to repay developer advances and accrued interest to Stapleton Land, LLC. Stapleton Land II, LLC was refunded $12,060,000 of collateral provided as credit enhancement under this borrowing.

On July 13, 2005, Stapleton Land II, LLC entered into an agreement whereby it will receive a 1% fee on the $65,000,000 Senior Subordinate Bonds described above and in exchange for providing certain credit enhancement. In connection with this transaction, Stapleton Land II, LLC provided collateral of approximately $10,000,000 which is recorded as restricted cash in the Consolidated Balance Sheets. For the three months ended April 30, 2006, the Company recorded approximately $237,000 of interest income related to this arrangement in the Consolidated Statements of Earnings. Of the interest income amount, approximately $158,000 is fee interest income and $79,000 is interest income on the collateral. The counterparty to the credit enhancement arrangement also owns the underlying Senior Subordinate Bonds and can exercise its rights requiring payment from Stapleton Land II, LLC upon an event of default of the Senior Subordinate Bonds, a refunding of the Senior Subordinate Bonds, or failure of Stapleton Land II, LLC to post required collateral. The agreement is scheduled to expire on July 1, 2009. The maximum potential amount of payments Stapleton Land II, LLC could be required to make under the agreement is the par value of the bonds. The Company does not have any rights or obligations to acquire the $65,000,000 Senior Subordinate Bonds under this agreement. At April 30, 2006, the fair value of this agreement, which is deemed to be a derivative financial instrument, was immaterial. Subsequent changes in fair value, if any, will be marked to market through earnings.

On August 16, 2005, the District issued $58,000,000 Junior Subordinated Limited Property Tax Supported Revenue Bonds, Series 2005 (the “Junior Subordinated Bonds”). The Junior Subordinated Bonds initially pay a variable rate of interest. Upon issuance, the Junior Subordinated Bonds were purchased by a third party and the sales proceeds were deposited with a trustee pursuant to the terms of the Series 2005 Investment Agreement. Under the terms of the Series 2005 Investment Agreement, after March 1, 2006, the District may elect to withdraw funds from the trustee for reimbursement for certain qualified infrastructure and interest expenditures (“Qualifying Expenditures”). In the event that funds from the trustee are used for Qualifying Expenditures, a corresponding amount of the Junior Subordinated Bonds converts to an 8.5% fixed rate and matures in December 2037 (“Converted Bonds”). On August 16, 2005, Stapleton Land, LLC entered into a forward delivery placement agreement whereby Stapleton Land, LLC is entitled to and obligated to purchase the converted fixed rate Junior Subordinated Bonds through June 2, 2008. Prior to the incurrence of Qualifying Expenditures and the resulting Converted Bonds, Stapleton Land, LLC has no rights or obligations relating to the Junior Subordinated Bonds. In the event the District does not incur Qualifying Expenditures, the Junior Subordinated Bonds will mature on June 2, 2008. As of April 30, 2006 no draws have been made by the District.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

F. Financing Arrangements (continued)

Other Financing Arrangements

In May 2004, a third party purchased $200,000,000 in tax increment revenue bonds issued by DURA, with a fixed-rate coupon of 8.0% and maturity date of October 1, 2024, which were used to fund the infrastructure costs associated with phase II of the Stapleton development project. The DURA bonds were transferred to a trust that issued floating rate trust certificates. Stapleton Land, LLC entered into an agreement with the third party to purchase the DURA bonds from the trust if they are not repurchased or remarketed between June 1, 2007 and June 1, 2009. Stapleton Land, LLC will receive a fee upon removal of the DURA bonds from the trust equal to the 8.0% coupon rate, less the BMA index (fixed at 2.85% through June 1, 2007), plus 40 basis points, less all fees and expenses due to the third party (collectively, the “Fee”).

The Company has concluded that the trust described above is considered a qualified special purpose entity pursuant to the provisions of SFAS No. 140 and thus is excluded from the scope of FIN No. 46 (R). As a result, the DURA bonds and the activity of the trust have not been recorded in the consolidated financial statements. The purchase obligation and the Fee have been accounted for as a derivative with changes in fair value recorded through earnings.

The fair market value of the purchase obligation and the Fee is determined based on the present value of the estimated amount of future cash flows considering possible variations in the amount and/or timing. The fair value of approximately $8,378,000 at April 30, 2006 and $7,244,000 at January 31, 2006 is recorded in other assets in the Consolidated Balance Sheets. For the three months ended April 30, 2006 and 2005, the Company has reported interest income of approximately $1,134,000 and $480,000, respectively, related to the Fee in the Consolidated Statements of Earnings.

Also in May 2004, Stapleton Land, LLC entered into a TRS and an interest rate swap both with notional amounts of $75,000,000. Stapleton Land, LLC receives a rate of 6.3% and pays BMA plus 60 basis points on the TRS (Stapleton Land, LLC paid BMA plus 160 basis points for the first 6 months under this agreement). On the interest rate swap, Stapleton Land, LLC pays a rate of 2.85% and receives BMA. Stapleton Land, LLC does not hold the underlying borrowings on the TRS. (See the Accounting for Derivative Instruments and Hedging Activities section in Note A). The change in the fair value of the TRS is marked to market through earnings. The fair value of the TRS was $899,473 and $1,100,098 at April 30 and January 31, 2006, respectively.

Stapleton Land, LLC has committed to fund $24,500,000 to the Park Creek Metropolitan District to be used for certain infrastructure projects. The first $4,500,000 is due in August 2007. The remaining balance is due no later than May 2009.

G. Stock Split

On June 21, 2005, the Board of Directors declared a two-for-one stock split of the Company’s outstanding Class A and Class B common stock effective July 11, 2005 to shareholders of record on June 27, 2005. The stock split is given retroactive effect to the beginning of the earliest period presented in the accompanying Consolidated Balance Sheets and Consolidated Statements of Shareholders’ Equity. All share and per share data included in this quarterly report for 2005 have been restated to reflect the stock split.

H. Dividends

The Company pays quarterly cash dividends on shares of Class A and Class B common stock. The first quarterly dividend of $.06 per share on both Class A and Class B common stock was declared on March 23, 2006 and will be paid on June 15, 2006 to shareholders of record at the close of business on June 1, 2006.

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

I. Earnings per Share

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

		Earnings from				Weighted Average
		Continuing Operations				Common Shares
		(Numerator)				Outstanding				Per Common
		(in thousands)				(Denominator)				Share
Three Months Ended April 30,
2006
Basic earnings per share		$	7,916				101,622,302			$	0.08
Effect of dilutive securities			—				1,374,700				—
Diluted earnings per share		$	7,916				102,997,002			$	0.08
2005
Basic earnings per share		$	23,350				100,763,462			$	0.23
Effect of dilutive securities			—				1,533,216				—
Diluted earnings per share		$	23,350				102,296,678			$	0.23

Options to purchase 960,100 shares of common stock, which were granted in April 2006, were not included in the computation of diluted earnings per share because they were anti-dilutive.

J. Investments in and Advances to Affiliates

Included in investments in and advances to affiliates are unconsolidated investments in entities which the Company does not control and/or is not deemed to be the primary beneficiary, and which are accounted for under the equity method of accounting, as well as advances to partners and other affiliates.

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

		April 30,				January 31,
		2006				2006
		(in thousands)
Members’ and partners’ equity as below		$	699,287			$	564,280
Equity of other members and partners			511,675				409,035
Company’s investment in partnerships			187,612				155,245
Advances to and on behalf of other affiliates (1)			216,187				206,697
Total Investments in and Advances to Affiliates		$	403,799			$	361,942

Forest City Enterprises, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

J. Investments in and Advances to Affiliates (continued)

Summarized financial information for the equity method investments is as follows:

		(Combined 100%)
		April 30,				January 31,
		2006				2006
		(in thousands)
Balance Sheet:
Completed rental properties		$	2,066,690			$	1,946,922
Projects under development			1,000,402				854,316
Land held for development or sale			193,459				181,315
Accumulated depreciation			(539,303	)			(529,501	)
Restricted cash			600,366				317,850
Other assets			458,298				469,676
Total Assets		$	3,779,912			$	3,240,578
Mortgage debt, nonrecourse		$	2,521,361			$	2,145,146
Other liabilities			559,264				531,152
Members’ and partners’ equity			699,287				564,280
Total Liabilities and Members’/Partners’ Equity		$	3,779,912			$	3,240,578
		(Combined 100%)
		Three Months Ended April 30,
		2006				2005
		(in thousands)
Operations:
Revenues		$	167,688			$	171,490
Operating expenses			(123,424	)			(106,593	)
Interest expense including early extinguishment of debt			(32,505	)			(26,324	)
Provision for decline in real estate			—				(704	)
Depreciation and amortization			(37,475	)			(39,864	)
Interest income			3,048				2,487
Gain on disposition of rental properties (2)			—				81,708
Net (Loss) Earnings (pre-tax) (3)		$	(22,668	)		$	82,200
Company’s portion of net earnings (pre-tax)		$	379			$	20,036

						Three Months Ended April 30,
						2006				2005
Showcase (Specialty Retail Center)		(Las Vegas, Nevada)				$	—			$	71,005
Colony Place (Apartments)		(Fort Myers, Florida)					—				10,703
Total gain on disposition of equity method rental properties						$	—			$	81,708
Company’s portion of gain on disposition of equity method rental properties						$	—			$	18,497