-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DDLuo6WJjSTbAEUVK4495967Kez/H9FFz6/eS+rwlmNoQsNp0SjnvZRgq/7DNuqp ZKZipkbcLiEvslL1engRRw== 0001005150-01-500830.txt : 20020410 0001005150-01-500830.hdr.sgml : 20020410 ACCESSION NUMBER: 0001005150-01-500830 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RECKSON ASSOCIATES REALTY CORP CENTRAL INDEX KEY: 0000930548 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 113233650 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13762 FILM NUMBER: 1781410 BUSINESS ADDRESS: STREET 1: 225 BROADHOLLOW RD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 6316946900 MAIL ADDRESS: STREET 1: 225 BROADHOLLOW RD CITY: MELVILLE STATE: NY ZIP: 11747 10-Q 1 form10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 COMMISSION FILE NUMBER: 1-13762 RECKSON ASSOCIATES REALTY CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 11-3233650 - -------- ---------- (STATE OTHER JURISDICTION OF INCORPORATION OF ORGANIZATION) (IRS. EMPLOYER IDENTIFICATION NUMBER) 225 BROADHOLLOW ROAD, MELVILLE, NY 11747 - ---------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(631) 694-6900 (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) --------------------------------------------------- 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) YES X NO__, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO . --------------------------------------------------- THE COMPANY HAS TWO CLASSES OF COMMON STOCK, ISSUED AT $.01 PAR VALUE PER SHARE WITH 49,876,552 AND 10,283,513 SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK OUTSTANDING, RESPECTIVELY AS OF NOVEMBER 9, 2001 --------------------------------------------------- RECKSON ASSOCIATES REALTY CORP. QUARTERLY REPORT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 TABLE OF CONTENTS INDEX PAGE - ---------------------------------------------------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION - ---------------------------------------------------------------------------------------------------------------------------- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000..... 2 Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000 (unaudited).................................................... 3 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 (unaudited).................................................... 4 Notes to the Consolidated Financial Statements (unaudited)................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 14 Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................ 22 - ---------------------------------------------------------------------------------------------------------------------------- PART II. OTHER INFORMATION - ---------------------------------------------------------------------------------------------------------------------------- Item 1. Legal Proceedings.......................................................................... 28 Item 2. Changes in Securities and Use of Proceeds.................................................. 28 Item 3. Defaults Upon Senior Securities............................................................ 28 Item 4. Submission of Matters to a Vote of Securities Holders...................................... 28 Item 5. Other Information.......................................................................... 28 Item 6. Exhibits and Reports on Form 8-K........................................................... 28 - ---------------------------------------------------------------------------------------------------------------------------- SIGNATURES 28 - ----------------------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS RECKSON ASSOCIATES REALTY CORP. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS) SEPTEMBER 30, DECEMBER 31, 2001 2000 ----------- ----------- (Unaudited) ASSETS: Commercial real estate properties, at cost: Land ..................................................................................... $ 389,186 $ 396,482 Building and improvements ................................................................ 2,281,906 2,219,448 Developments in progress: Land ..................................................................................... 68,734 60,918 Development costs ........................................................................ 74,198 93,759 Furniture, fixtures and equipment ............................................................ 7,418 7,138 ----------- ----------- 2,821,442 2,777,745 Less accumulated depreciation ................................................................ (346,315) (288,479) ----------- ----------- 2,475,127 2,489,266 Investments in real estate joint ventures .................................................... 5,663 5,348 Investments in mortgage notes and notes receivable ........................................... 55,721 58,220 Investments in service companies and affiliate loans and joint ventures ...................... 80,569 215,660 Cash and cash equivalents .................................................................... 38,466 17,843 Tenant receivables ........................................................................... 10,065 11,511 Deferred rents receivable .................................................................... 96,773 67,930 Prepaid expenses and other assets ............................................................ 32,164 68,895 Contract and land deposits and pre-acquisition costs ......................................... 3,481 1,676 Deferred leasing and loan costs .............................................................. 63,622 61,681 ----------- ----------- TOTAL ASSETS ................................................................................. $ 2,861,651 $ 2,998,030 =========== =========== LIABILITIES: Mortgage notes payable ....................................................................... $ 762,526 $ 728,971 Unsecured credit facility .................................................................... 246,600 216,600 Senior unsecured notes ....................................................................... 449,443 449,385 Accrued expenses and other liabilities ....................................................... 74,491 95,393 Dividends and distributions payable .......................................................... 32,952 28,801 ----------- ----------- TOTAL LIABILITIES ............................................................................ 1,566,012 1,519,150 ----------- ----------- Minority partners' interests in consolidated partnerships .................................... 140,845 226,350 Preferred unit interest in the operating partnership ......................................... 30,965 42,518 Limited partners' minority interest in the operating partnership ............................. 83,140 97,353 ----------- ----------- 254,950 366,221 ----------- ----------- Commitments and other comments ............................................................... -- -- STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value, 25,000,000 shares authorized ................................ 92 92 Series A preferred stock, 9,192,000 shares issued and outstanding Series B preferred stock, 2,000,000 shares issued and outstanding ........................ 20 20 Common Stock, $.01 par value, 100,000,000 shares authorized Class A common stock, 49,806,885 and 45,352,286 shares issued and outstanding, respectively .......................................................................... 498 454 Class B common stock, 10,283,513 shares issued and outstanding ........................... 103 103 Additional paid in capital ................................................................... 1,039,976 1,111,990 ----------- ----------- Total Stockholders' Equity ................................................................... 1,040,689 1,112,659 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................... $ 2,861,651 $ 2,998,030 =========== ===========
(SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS) 2 RECKSON ASSOCIATES REALTY CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- ------------------------- 2001 2000 2001 2000 ---------- ----------- ----------- ---------- REVENUES: Base rents ............................................................... $ 111,394 $ 100,854 $ 330,072 $ 291,353 Tenant escalations and reimbursements .................................... 15,328 14,900 45,438 40,730 Equity in earnings of real estate joint ventures and service companies.... 505 706 1,704 3,893 Interest income on mortgage notes and notes receivable ................... 1,584 1,901 4,651 6,377 Gain on sales of real estate ............................................. 972 15,206 972 21,868 Investment and other income .............................................. 3,244 6,735 13,463 19,194 ---------- ----------- ----------- ---------- Total Revenues ....................................................... 133,027 140,302 396,300 383,415 ---------- ----------- ----------- ---------- EXPENSES: Property operating expenses .............................................. 44,231 41,255 126,099 115,778 Marketing, general and administrative .................................... 7,679 6,930 23,587 20,151 Interest ................................................................. 23,510 24,651 70,703 72,667 Depreciation and amortization ............................................ 26,528 24,083 77,221 67,520 ---------- ----------- ----------- ---------- Total Expenses ...................................................... 101,948 96,919 297,610 276,116 ---------- ----------- ----------- ---------- Income before minority interests, preferred dividends and distributions, valuation reserves on investments in affiliate loans and joint ventures and extraordinary loss................................................ 31,079 43,383 98,690 107,299 Minority partners' interests in consolidated partnerships ................ (3,065) (1,874) (12,885) (5,773) Distributions to preferred unit holders .................................. (509) (660) (1,630) (1,981) Valuation reserves on investments in affiliate loans and joint ventures .. (163,000) -- (163,000) -- Limited partners' minority interest in the operating partnership ......... 14,657 (4,050) 9,326 (9,411) ---------- ----------- ----------- ---------- Income (loss) before dividends to preferred shareholders and extraordinary loss ................................................................. (120,838) 36,799 (69,499) 90,134 Extraordinary loss on extinguishment of debt, net of limited partners' minority interest share of $303, $175, $303 and $175, respectively ......................................................... (2,595) (1,396) (2,595) (1,396) ---------- ----------- ----------- ---------- Net Income (loss) ........................................................ (123,433) 35,403 (72,094) 88,738 Dividends to preferred shareholders ...................................... (5,487) (5,425) (16,379) (19,946) ---------- ----------- ----------- ---------- Net income (loss) available to common shareholders ....................... $ (128,920) $ 29,978 $ (88,473) $ 68,792 ========== =========== =========== ========== Net Income (loss) available to: Class A common ....................................................... $ (97,944) $ 22,143 $ (67,526) $ 50,244 Class B common ....................................................... (30,976) 7,835 (20,947) 18,548 ---------- ----------- ----------- ---------- Total .................................................................... $ (128,920) $ 29,978 $ (88,473) $ 68,792 ========== =========== =========== ========== Basic net income (loss) per weighted average common share before extraordinary loss: Class A common shareholders .......................................... $ (1.93) $ .51 $ (1.38) $ 1.21 Extraordinary loss per Class A common share .......................... (.04) (.02) (.04) (.02) ----------- ----------- ----------- ---------- Basic net income (loss) per weighted average Class A common share .... $ (1.97) $ .49 $ (1.42) $ 1.19 =========== =========== =========== ========== Class B common shareholders .......................................... $ (2.95) $ .80 $ (1.98) $ 1.84 Extraordinary loss per Class B common share .......................... (.06) (.04) (.06) (.04) ----------- ----------- ------------ ---------- Basic net income (loss) per weighted average Class B common share .... $ (3.01) $ .76 $ (2.04) $ 1.80 =========== =========== ============ ========== Basic weighted average common shares outstanding: Class A common ....................................................... 49,715,423 45,178,451 47,489,129 42,311,751 Class B common ....................................................... 10,283,513 10,283,513 10,283,513 10,283,541 Diluted net income (loss) per weighted average common share: Class A common ....................................................... $ (1.97) $ .48 $ (1.42) $ 1.18 =========== =========== ============ ========== Class B common ....................................................... $ (3.01) $ .53 $ (2.04) $ 1.28 =========== =========== ============ ========== Diluted weighted average common shares outstanding: Class A common ....................................................... 49,715,423 49,818,354 47,489,129 42,735,828 Class B common ....................................................... 10,283,513 10,283,513 10,283,513 10,283,541
(SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS) 3 RECKSON ASSOCIATES REALTY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) ................................................................................ $ (72,094) $ 88,738 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization .............................................................. 77,221 67,520 Gain on sales of real estate ............................................................... (972) (21,868) Valuation reserves on investments in affiliate loans and joint ventures .................... 163,000 -- Minority partners' interests in consolidated partnerships .................................. 12,885 5,773 Extraordinary loss on extinguishment of debts .............................................. 2,595 1,396 Limited partners' minority interest in the operating partnership ........................... (9,326) 9,411 Equity in earnings of real estate joint ventures and service companies ..................... (1,704) (3,893) Changes in operating assets and liabilities: Tenant receivables ......................................................................... 1,446 438 Real estate tax escrows .................................................................... (2,037) 2,112 Prepaid expenses and other assets .......................................................... 13,028 (7,592) Deferred rents receivable .................................................................. (28,843) (21,778) Accrued expenses and other liabilities ..................................................... (18,009) 615 --------- --------- Net cash provided by operating activities .................................................. 137,190 120,872 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in contract deposits and pre-acquisition costs .................................... (2,897) (11,893) Additions to developments in progress ...................................................... (3,606) (11,668) Purchases of commercial real estate properties ............................................. -- (184,613) Proceeds from mortgage note receivable repayments .......................................... 2,949 5,213 Investments in affiliate joint ventures .................................................... (25,056) (7,450) Distribution from a real estate joint venture .............................................. -- 312 Additions to commercial real estate properties ............................................. (121,703) (32,772) Additions to furniture, fixtures and equipment ............................................. (324) (707) Payment of leasing costs ................................................................... (6,264) (15,465) Proceeds from sales of real estate and mortgage redemption ................................. 73,550 42,594 --------- --------- Net cash used in investing activities ...................................................... (83,351) (216,449) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock net of issuance costs ............................... 1,790 3,999 Proceeds from redemption of KTR preferred securities ....................................... 35,700 19,903 Principal payments on secured borrowings ................................................... (291,445) (25,518) Payment of loan and equity issuance costs .................................................. (5,944) (7,643) Increase in investments in affiliate loans and service companies ........................... (12,382) (4,161) Proceeds from secured borrowings ........................................................... 325,000 97,163 Proceeds from unsecured credit facility .................................................... 128,000 659,600 Repayment of unsecured credit facility and term loan ....................................... (98,000) (669,600) Contributions by minority partners in consolidated partnerships ............................ -- 135,975 Distributions to minority partners in consolidated partnerships ............................ (13,390) (6,893) Distributions to limited partners in the operating partnership ............................. (9,181) (8,684) Distributions to preferred unit holders .................................................... (1,749) (1,981) Dividends to common shareholders ........................................................... (75,278) (63,785) Dividends to preferred shareholders ........................................................ (16,337) (21,212) --------- --------- Net cash provided by (used in) financing activities ........................................ (33,216) 107,163 --------- --------- Net increase in cash and cash equivalents .................................................. 20,623 11,586 Cash and cash equivalents at beginning of period ........................................... 17,843 21,368 --------- --------- Cash and cash equivalents at end of period ................................................. $ 38,466 $ 32,954 ========= =========
(SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS) 4 RECKSON ASSOCIATES REALTY CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001 (UNAUDITED) 1. ORGANIZATION AND FORMATION OF THE COMPANY Reckson Associates Realty Corp. (the "Company") is a self-administered and self managed real estate investment trust ("REIT") engaged in the ownership, management, operation, leasing and development of commercial real estate properties, principally office and industrial buildings and also owns land for future development (collectively, the "Properties") located in the New York tri-state area (the "Tri-State Area"). The Company was incorporated in Maryland in September 1994. In September 1995, the Company completed an Initial Public Offering (the "IPO") and commenced operations. The Company became the sole general partner of Reckson Operating Partnership, L.P. (the "Operating Partnership") by contributing substantially all of the net proceeds of the IPO, in exchange for an approximate 73% interest in the Operating Partnership. All Properties acquired by the Company are held by or through the Operating Partnership. In conjunction with the IPO, the Operating Partnership executed various option and purchase agreements whereby it issued common units of limited partnership interest in the Operating Partnership ("OP Units") to certain continuing investors in exchange for (i) interests in certain property partnerships, (ii) fee simple and leasehold interests in properties and development land, (iii) certain other business assets and (iv) 100% of the non-voting preferred stock of the management and construction companies. During July 1998, the Company formed Metropolitan Partners, LLC ("Metropolitan") for the purpose of acquiring Tower Realty Trust, Inc. ("Tower"). On May 24, 1999 the Company completed the merger with Tower and acquired three Class A office properties located in New York City totaling approximately 1.6 million square feet and one Class A office property located on Long Island totaling approximately 101,000 square feet. In addition, pursuant to the merger, the Company also acquired certain office properties, a property under development and land located outside the Tri-State Area. All of the assets acquired in the merger located outside the Tri-State Area, other than a 357,000 square foot office property located in Orlando, Florida, have been sold. 2. BASIS OF PRESENTATION The accompanying consolidated financial statements include the consolidated financial position of the Company and the Operating Partnership at September 30, 2001 and December 31, 2000 and the results of their operations for the three and nine months ended September 30, 2001 and 2000, respectively, and, their cash flows for nine months ended September 30, 2001 and 2000, respectively. The Operating Partnership's investments in Omni Partners, L. P. ("Omni"), the Tri-State JV and certain joint venture properties are reflected in the accompanying financial statements on a consolidated basis with a reduction for the minority partners' interest. The operating results of the service companies currently conducted by Reckson Management Group, Inc., RANY Management Group, Inc. and Reckson Construction Group, Inc. are reflected in the accompanying financial statements on the equity method of accounting. The Operating Partnership also invests in real estate joint ventures where it may own less than a controlling interest. Such investments are also reflected in the accompanying financial statements on the equity method of accounting. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The minority interests at September 30, 2001 represent an approximate 11.3% limited partnership interest in the Operating Partnership, a 49% interest in the Tri-State JV and a 40% interest in Omni. The accompanying interim unaudited financial statements have been prepared by the Company's management pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The unaudited financial statements as of September 30, 2001 and for the three and nine month periods ended September 30, 2001 and 2000 include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth herein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These financial statements should be read in conjunction with the Company's audited financial statements and the notes thereto included in the Company's Form 10-K for the year ended December 31, 2000. The Company intends to qualify as a REIT under Section 856 through 869 of the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company will not generally be subject to corporate Federal income taxes as long as it satisfies certain technical requirements of the Code relating to composition of its income and assets and requirements relating to distributions of taxable income to shareholders. 5 Financial Accounting Standards Board's ("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") which became effective January 1, 2001 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in accumulated other comprehensive income ("OCI") until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. As of January 1, 2001, the carrying value of the Company's derivatives equaled their fair value and as a result no cumulative effect changes were recorded. Additionally, as of June 30, 2001, the fair value of the Company's derivatives equaled approximately $3.7 million and was reflected in other assets and OCI on the Company's balance sheet. On July 18, 2001, the mortgage note payable to which these derivatives relate to was funded (see Note 3) and their fair value at that time was approximately $676,000 less than their carrying value. This amount is being amortized to interest expense over the term of the mortgage note to which it relates. Certain prior period amounts have been reclassified to conform to the current period presentation. 3. MORTGAGE NOTES PAYABLE As of September 30, 2001, the Company had approximately $762.5 million of fixed rate mortgage notes which mature at various times between 2002 and 2027. The notes are secured by 23 properties and have a weighted average interest rate of approximately 7.3%. On June 1, 2001, the Company refinanced a $70 million variable rate mortgage note, which secured the property located at 1350 Avenue of the Americas, with a five year, $75 million fixed rate mortgage note which bears interest at 6.52% per annum. Net proceeds of approximately $3.4 million were used for working capital purposes. On July 18, 2001, the Company refinanced a $200 million variable rate mortgage note, which secured the property located at 919 Third Avenue, with a ten year, $250 million fixed rate mortgage note which bears interest at 6.867% per annum. As a result, certain deferred loan costs incurred in connection with the existing mortgage note were written off. Such amount is reflected as an extraordinary loss in the accompanying consolidated statements of operations. Net proceeds of approximately $47 million were used primarily to repay maturing fixed rate debt and the Company's unsecured credit facility. On July 24, 2001, the Company repaid a mortgage note in the amount of approximately $15.5 million which was secured by the property located at 50 Charles Lindbergh Blvd., Mitchel Field, NY. On October 30, 2001, the Company repaid a mortgage note in the amount of approximately $6.4 million which was secured by the property located at 200 Broadhollow Road, Melville, NY. 4. SENIOR UNSECURED NOTES As of September 30, 2001, the Operating Partnership had outstanding approximately $449.4 million (net of issuance discounts) of senior unsecured notes (the "Senior Unsecured Notes"). The following table sets forth the Operating Partnership's Senior Unsecured Notes and other related disclosures (dollars in thousands): FACE ISSUANCE AMOUNT COUPON RATE TERM MATURITY --------------- ----------- ----------- -------- --------------- August 27, 1997 $ 150,000 7.20% 10 years August 28, 2007 March 26, 1999 $ 100,000 7.40% 5 years March 15, 2004 March 26, 1999 $ 200,000 7.75% 10 years March 15, 2009
Interest on the Senior Unsecured Notes is payable semiannually with principal and unpaid interest due on the scheduled maturity dates. In addition, the Senior Unsecured Notes issued on March 26, 1999 were issued at an aggregate discount of $738,000. Such discount is being amortized over the term of the Senior Unsecured Notes to which they relate. 6 5. UNSECURED CREDIT FACILITY As of September 30, 2001, the Company had a three year $575 million unsecured revolving credit facility (the "Credit Facility") from The Chase Manhattan Bank, as administrative agent, UBS Warburg LLC as syndication agent and Deutsche Bank as documentation agent. The Credit Facility matures in September 2003 and borrowings under the Credit Facility are currently priced off LIBOR plus 105 basis points. The Company utilizes the Credit Facility primarily to finance real estate investments, fund its real estate development activities and for working capital purposes. At September 30, 2001, the Company had availability under the Credit Facility to borrow an additional $328.4 million (of which, approximately $38.8 million has been allocated for outstanding undrawn letters of credit). 6. COMMERCIAL REAL ESTATE INVESTMENTS As of September 30, 2001, the Company owned and operated 78 office properties (inclusive of ten office properties owned through joint ventures) comprising approximately 13.9 million square feet, 103 industrial properties comprising approximately 6.8 million square feet and two retail properties comprising approximately 20,000 square feet located in the Tri-State Area. The Company also owns a 357,000 square foot office building located in Orlando, Florida and approximately 271 acres of land in 12 separate parcels of which the Company can develop approximately 2.4 million square feet of office space and approximately 224,000 square feet of industrial space. The Company also has invested approximately $17.0 million in a note receivable secured by a partnership interest in Omni Partners, L.P., owner of the Omni, a 575,000 square foot Class A office property located in Uniondale, New York and $36.5 million under three notes which are secured by a minority partners' preferred interest in the Operating Partnership. On September 28, 2000, the Company formed the Tri-State JV with TIAA and contributed eight Class A suburban office properties aggregating approximately 1.5 million square feet to the Tri-State JV in exchange for approximately $136 million and a 51% majority ownership interest in the Tri-State JV. During the three months ended September 30, 2001, the Company sold four office properties aggregating approximately 580,000 square feet and one 26,000 square foot industrial property for approximately $73.6 million. In addition, the Company sold its preferred interest in Keystone Property Trust for $35.7 million. As a result of these sales, the Company realized a net gain of approximately $972,000. Net proceeds from the sales were used primarily to repay borrowings under the Credit Facility. 7. STOCKHOLDERS' EQUITY An OP Unit and a share of Class A common stock have essentially the same economic characteristics as they effectively share equally in the net income or loss and distributions of the Operating Partnership. Subject to certain holding periods OP Units may either be redeemed for cash or, at the election of the Company, exchanged for shares of Class A common stock on a one-for-one basis. During the nine months ended September 30, 2001, approximately 11,553 preferred units of the Operating Partnership, with a liquidation preference value of approximately $11.6 million, were exchanged for 456,351 OP Units at an average price of $25.32 per OP Unit. In addition, 509,545 OP Units were exchanged for an equal number of shares of the Company's Class A common stock. Metropolitan is 100% owned by the Company; a minority partner owned an $85 million preferred equity investment in Metropolitan which accrued distributions at a rate of 7.5% per annum for a two-year period (May 24, 1999 through May 30, 2001). On May 31, 2001, the minority partner, at its election, converted its preferred equity investment into 3,453,881 shares of the Company's Class A common stock based on a conversion price of $24.61 per share. The Company currently has issued and outstanding 10,283,513 shares of Class B Exchangeable Common Stock, par value $.01 per share (the "Class B common stock"). The shares of Class B common stock currently receive an annual dividend of $2.5968 per share, which is subject to adjustment annually. 7 The shares of Class B common stock are exchangeable at any time, at the option of the holder, into an equal number of shares of Class A common stock, par value $.01 per share, of the Company subject to customary antidilution adjustments. The Company, at its option, may redeem any or all of the Class B common stock in exchange for an equal number of shares of the Company's Class A common stock at any time following November 23, 2003. During September 2001, the Board of Directors of the Company declared the following dividends on the Company's securities: ANNUALIZED DIVIDEND / RECORD PAYMENT THREE MONTHS DIVIDEND / SECURITY DISTRIBUTION DATE DATE ENDED DISTRIBUTION -------- ------------ ---- ---- ----- ------------ Class A common stock $.4246 October 5. 2001 October 17, 2001 September 30, 2001 $1.6984 Class B common stock $.6492 October 12, 2001 October 31, 2001 October 31, 2001 $2.5968 Series A preferred stock $.4766 October 12, 2001 October 31, 2001 October 31, 2001 $1.9063 Series B preferred stock $.553125 October 12, 2001 October 31, 2001 October 31, 2001 $2.2125
The Board of Directors of the Company has authorized the purchase of up to three million shares of the Company's Class B common stock. In addition, the Board of Directors has also authorized the purchase of up to an additional three million shares of the Company's Class B common stock and/or its Class A common stock. The buy-back program will be effected in accordance with the safe harbor provisions of the Securities Exchange Act of 1934 and may be terminated by the Company at any time. As of September 30, 2001, the Company had purchased and retired 1,410,804 shares of Class B common stock at an average price of $21.48 per Class B share and 16,704 shares of Class A common stock at an average price of $22.01 per Class A share for an aggregate purchase price of approximately $30.7 million. Basic net income (loss) per share on the Company's Class A common stock was calculated using the weighted average number of shares outstanding of 49,715,423 and 45,178,451 for the three months ended September 30, 2001 and 2000, respectively, and 47,489,129 and 42,311,751 for the nine months ended September 30, 2001 and 2000, respectively. Basic net income (loss) per share on the Company's Class B common stock was calculated using the weighted average number of shares outstanding of 10,283,513 for the three months ended September 30, 2001 and 2000 and 10,283,513 and 10,283,541 for the nine months ended September 30, 2001 and 2000, respectively. 8 The following table sets forth the Company's reconciliation of numerators and denominators of the basic and diluted earnings per weighted average common share and the computation of basic and diluted earnings per weighted average share for the Company's Class A common stock (in thousands except for earnings per share data): THREE MONTHS ENDED NINE MONTHS ENDED Numerator: SEPTEMBER 30, SEPTEMBER 30, -------------------- -------------------- 2001 2000 2001 2000 --------- -------- --------- -------- Income (loss) before dividends to preferred shareholders, extraordinary loss and (income) loss allocated to Class B shareholders ................... $(120,838) $ 36,799 $ (69,499) $ 90,134 Dividends to preferred shareholders ............................................ (5,487) (5,425) (16,379) (19,946) Extraordinary loss (net of share applicable to limited partners and Class B shareholders) ............................................................ (1,971) (1,031) (1,971) (1,031) (Income) loss allocated to Class B common shareholders ........................ 30,352 (8,200) 20,323 (18,913) --------- -------- --------- -------- Numerator for basic earnings per Class A common share ............................... (97,944) 22,143 (67,526) 50,244 Add back: Minority partner's preferred interest in a consolidated partnership ............ -- 1,594 -- -- Preferred units of limited partnership interest ................................ -- 272 -- -- --------- -------- --------- -------- Numerator for diluted earnings per Class A common share ............................. $ (97,944) $ 24,009 $ (67,526) $ 50,244 ========= ======== ========= ======== Denominator: Denominator for basic earnings per share- weighted average Class A common shares .............................................................. 49,715 45,178 47,489 42,312 Effect of dilutive securities: Common stock equivalents.................................................. -- 588 -- 424 Minority partner's preferred interest in a consolidated Partnership ........................................................... -- 3,454 -- -- Preferred units of limited partnership interest ............................ -- 598 -- -- --------- -------- --------- -------- Denominator for diluted earnings per Class A common share - adjusted weighted average shares and assumed conversions ................................ 49,715 49,818 47,489 42,736 ========= ======== ========= ======== Basic earnings per Class A common share: Income (loss) before extraordinary loss ........................................ $ (1.93) $ .51 $ (1.38) $ 1.21 Extraordinary loss ............................................................. (.04) (.02) (.04) (.02) --------- -------- --------- -------- Net income (loss) per Class A common share ..................................... $ (1.97) $ .49 $ (1.42) $ 1.19 ========= ======== ========= ======== Diluted earnings per Class A common share: Income (loss) before extraordinary loss ........................................ $ (1.93) $ .50 $ (1.38) $ 1.20 Extraordinary loss ............................................................. (.04) (.02) (.04) (.02) --------- -------- --------- -------- Diluted net income (loss) per Class A common share ............................. $ (1.97) $ .48 $ (1.42) $ 1.18 ========= ======== ========= ========
9 The following table sets forth the Company's reconciliation of numerators and denominators of the basic and diluted earnings per weighted average common share and the computation of basic and diluted earnings per weighted average share for the Company's Class B common stock (in thousands except for earnings per share data): THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Numerator: Income (loss) before dividends to preferred shareholders, extraordinary loss and (income) loss allocated to Class A shareholders .................................................. $(120,838) $ 36,799 $ (69,499) $ 90,134 Dividends to preferred shareholders ..................................... (5,487) (5,425) (16,379) (19,946) Extraordinary loss (net of share applicable to limited partners and Class A common shareholders) .......................................... (624) (365) (624) (365) (Income) loss allocated to Class A common shareholders .................. 95,973 (23,174) 65,555 (51,275) --------- --------- --------- --------- Numerator for basic earnings per Class B common share ........................ (30,976) 7,835 (20,947) 18,548 Add back: Income allocated to Class A common shareholders ......................... -- 22,143 -- 50,244 Limited partner's minority interest in the operating partnership......... -- 4,050 -- 9,411 Minority partner's preferred interest in a consolidated partnership -- 1,594 -- -- Preferred units of limited partnership interest ......................... -- 272 -- -- --------- --------- --------- --------- Numerator for diluted earnings per Class B common share ...................... $ (30,976) $ 35,894 $ (20,947) $ 78,203 ========= ========= ========= ========= Denominator: Denominator for basic earnings per share- weighted average Class B common shares ....................................................... 10,284 10,284 10,284 10,284 Effect of dilutive securities: Weighted average Class A common shares outstanding .................... -- 45,178 -- 42,312 Weighted average OP Units outstanding ................................. -- 7,695 -- 7,697 Minority partner's preferred interest in a consolidated partnership ... -- 3,454 -- -- Preferred units of limited partnership interest ....................... -- 598 -- -- Common stock equivalents............................................... -- 588 -- 424 --------- --------- --------- --------- Denominator for diluted earnings per Class B common share-adjusted weighted average shares and assumed conversions ....................... 10,284 67,797 10,284 60,717 ========= ========= ========= ========= Basic earnings per Class B common share: Income (loss) before extraordinary loss ................................ $ (2.95) $ .80 $ (1.98) $ 1.84 Extraordinary loss ...................................................... (.06) (.04) (.06) (.04) --------- --------- --------- --------- Net income (loss) per Class B common share .............................. $ (3.01) $ .76 $ (2.04) $ 1.80 ========= ========= ========= ========= Diluted earnings per Class B common share: Income (loss) before extraordinary loss ................................. $ (2.95) $ .55 $ (1.98) $ 1.31 Extraordinary loss ...................................................... (.06) (.02) (.06) (.03) --------- --------- --------- --------- Diluted net income (loss) per Class B common share ...................... $ (3.01) $ .53 $ (2.04) $ 1.28 ========= ========= ========= =========
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 2001 2000 --------- ---------- Cash paid during the period for interest.......................................... $ 87,932 $ 88,290 ========= ========== Interest capitalized during the period ........................................... $ 7,764 $ 8,447 ========= ==========
10 9. SEGMENT DISCLOSURE The Company owns all of the interests in its real estate properties by or through the Operating Partnership. The Company's portfolio consists of Class A office properties located within the New York City metropolitan area and Class A suburban office and industrial properties located and operated within the Tri-State Area (the "Core Portfolio"). The Company's portfolio also includes one office property located in Orlando, Florida. The Company has managing directors who report directly to the Co-Presidents and Chief Financial Officer who have been identified as the Chief Operating Decision Makers because of their final authority over resource allocation, decisions and performance assessment. In addition, the Company does not consider (i) interest incurred on its Credit Facility and Senior Unsecured Notes and (ii) the operating performance of the office property located in Orlando, Florida as part of its Core Portfolio's property operating performance. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The following table sets forth the components of the Company's revenues and expenses and other related disclosures for the three months ended September 30, 2001 and 2000 (in thousands): Three months ended --------------------------------------------------------------------------------------- September 30, 2001 September 30, 2000 ---------------------------------------- ------------------------------------------- Core Portfolio Other CONSOLIDATED Core Portfolio Other CONSOLIDATED TOTALS TOTALS -------------- ---------- ------------ -------------- ---------- ------------- REVENUES: Base rents, tenant escalations and reimbursements ... $ 124,544 $ 2,178 $ 126,722 $ 113,546 $ 2,208 $ 115,754 Equity in earnings of real estate joint ventures and service companies .................. -- 505 505 -- 706 706 Other income (loss) .................... 6,714 (914) 5,800 191 23,651 23,842 ---------- ---------- ---------- ---------- ---------- ---------- Total Revenues ......................... 131,258 1,769 133,027 113,737 26,565 140,302 ---------- ---------- ---------- ---------- ---------- ---------- EXPENSES: Property operating expenses ............ 43,320 911 44,231 40,666 589 41,255 Marketing, general and administrative .. 5,583 2,096 7,679 5,405 1,525 6,930 Interest ............................... 13,033 10,477 23,510 9,623 15,028 24,651 Depreciation and amortization .......... 24,393 2,135 26,528 21,282 2,801 24,083 ---------- ---------- ---------- ---------- ---------- ---------- Total Expenses ......................... 86,329 15,619 101,948 76,976 19,943 96,919 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before minority interests, preferred dividends and distributions, valuation reserves and extraordinary loss ................................... $ 44,929 $ (13,850) $ 31,079 $ 36,761 $ 6,622 $ 43,383 ========== ========== ========== ========== ========== ========== Total assets ........................... $2,631,077 $ 230,574 $2,861,651 $2,547,701 $ 396,419 $2,944,120 ========== ========== ========== ========== ========== ==========
11 9. SEGMENT DISCLOSURE (CONTINUED) The following table sets forth the components of the Company's revenues and expenses and other related disclosures for the nine months ended September 30, 2001 and 2000 (in thousands): Nine months ended --------------------------------------------------------------------------------------- September 30, 2001 September 30, 2000 ---------------------------------------- ------------------------------------------- Core Portfolio Other CONSOLIDATED Core Portfolio Other CONSOLIDATED TOTALS TOTALS -------------- ---------- ------------ -------------- ---------- ------------- REVENUES: Base rents, tenant escalations and Reimbursements ...................... $368,296 $ 7,214 $375,510 $325,218 $ 6,865 $332,083 Equity in earnings of real estate joint ventures and service companies ................... -- 1,704 1,704 -- 3,893 3,893 Other income ............................ 9,192 9,894 19,086 855 46,584 47,439 -------- -------- -------- -------- -------- -------- Total Revenues .......................... 377,488 18,812 396,300 326,073 57,342 383,415 -------- -------- -------- -------- -------- -------- EXPENSES: Property operating expenses ............. 123,754 2,345 126,099 113,963 1,815 115,778 Marketing, general and administrative ... 15,653 7,934 23,587 15,434 4,717 20,151 Interest ................................ 38,088 32,615 70,703 28,218 44,449 72,667 Depreciation and amortization ........................ 71,024 6,197 77,221 60,670 6,850 67,520 -------- -------- -------- -------- -------- -------- Total Expenses .......................... 248,519 49,091 297,610 218,285 57,831 276,116 -------- -------- -------- -------- -------- -------- Income (loss) before minority interests, preferred dividends and distributions, valuation reserves and extraordinary loss ................................ $128,969 $(30,279) $ 98,690 $107,788 $ (489) $107,299 ======== ======== ======== ======== ======== ========
12 10. INVESTMENTS IN AFFILIATE LOANS AND JOINT VENTURES During 1997, the Company formed FrontLine Capital Group, formerly Reckson Service Industries, Inc., ("FrontLine") and Reckson Strategic Venture Partners, LLC ("RSVP"). RSVP is a real estate venture capital fund which invests primarily in real estate and real estate operating companies generally outside of the Company's core office and industrial focus and whose common equity is held indirectly by FrontLine. In connection with the formation and spin-off of FrontLine, the Operating Partnership established an unsecured credit facility with FrontLine (the "FrontLine Facility") in the amount of $100 million for FrontLine to use in its investment activities, operations and other general corporate purposes. As of September 30, 2001, the Company had advanced approximately $93.4 million under the FrontLine Facility. The Operating Partnership also approved the funding of investments of up to $100 million relating to RSVP (the "RSVP Commitment"), through RSVP-controlled joint ventures (for REIT-qualified investments) or advances made to FrontLine under an unsecured loan facility (the "RSVP Facility") having terms similar to the FrontLine Facility (advances made under the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine Loans"). During March 2001, the Company increased the RSVP Commitment to $110 million and as of September 30, 2001, approximately $109.1 million had been funded through the RSVP Commitment, of which $59.8 million represents investments by the Company in RSVP-controlled (REIT-qualified) joint ventures and $49.3 million represents loans made to FrontLine under the RSVP Facility. As of September 30, 2001, interest accrued (net of reserves) under the FrontLine Facility and RSVP Facility was approximately $ 19.6 million. At June 30, 2001, the Company assessed the recoverability of the FrontLine Loans and reserved approximately $3.5 million of the interest accrued during the three month period then ended. In addition, the Company formed a committee of its Board of Directors, comprised solely of independent directors, to consider any actions to be taken by the Company in connection with the FrontLine Loans and its investments in joint ventures with RSVP. At September 30, 2001, the Company noted a significant deterioration in FrontLine's operations and financial condition. Based on the Company's assessment of value and recoverability and considering the findings and recommendations of the committee and its financial advisor, the Company has included in its consolidated statements of operations for the three and nine months ended September 30, 2001, a $163 million valuation reserve charge, inclusive of costs, relating to its investments in the FrontLine Loans and joint ventures with RSVP. The Company has also discontinued the accrual of interest income with respect to the FrontLine Loans. As a result of the foregoing, the net carrying value of the Company's investments in the FrontLine Loans and joint venture investments with RSVP, inclusive of the Company's share of GAAP equity in earnings on those investments, is approximately $65.0 million. Such amount has been reflected in investments in service companies and affiliate loans and joint ventures on the accompanying balance sheet. Both the FrontLine Facility and the RSVP Facility have a term of five years, are unsecured and advances under each are recourse obligations of FrontLine. Notwithstanding the valuation reserve, under the terms of the credit facilities, interest accrues on the FrontLine Loans at a rate equal to the greater of (a) the prime rate plus two percent and (b) 12% per annum, with the rate on amounts that are outstanding for more than one year increasing annually at a rate of four percent of the prior year's rate. In March 2001, the credit facilities were amended to provide that (i) interest is payable only at maturity and (ii) the Company may transfer all or any portion of its rights or obligations under the credit facilities to its affiliates. The Company requested these changes as a result of changes in REIT tax laws. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the accompanying Consolidated Financial Statements of Reckson Associates Realty Corp. (the "Company") and related notes thereto. The Company considers certain statements set forth herein to be 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, with respect to the Company's expectations for future periods. Certain forward-looking statements, including, without limitation, statements relating to the timing and success of acquisitions and the completion of development or redevelopment of properties, the financing of the Company's operations, the ability to lease vacant space and the ability to renew or relet space under expiring leases, involve risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, the actual results may differ materially from those set forth in the forward-looking statements and the Company can give no assurance that its expectation will be achieved. Among those risks, trends and uncertainties are: the general economic climate, including the conditions affecting industries in which our principal tenants compete; changes in the supply of and demand for office and industrial properties in the New York Tri-State area; changes in interest rate levels; downturns in rental rate levels in our markets and our ability to lease or release space in a timely manner at current or anticipated rental rate levels; the availability of financing to us or our tenants; changes in operating costs, including utility costs; repayment of debt owed to the Company by third parties (including FrontLine Capital Group); risks associated with joint ventures; and other risks associated with the development and acquisition of properties, including risks that development may not be completed on schedule, that the tenants will not take occupancy or pay rent, or that development or operating costs may be greater than anticipated. Consequently, such forward-looking statements should be regarded solely as reflections of the Company's current operating and development plans and estimates. These plans and estimates are subject to revisions from time to time as additional information becomes available, and actual results may differ from those indicated in the referenced statements. OVERVIEW AND BACKGROUND The Company is a self-administered and self-managed real estate investment trust ("REIT") specializing in the acquisition, leasing, financing, management and development of office and industrial properties. The Company's growth strategy is focused on the real estate markets in and around the New York tri-state area (the "Tri-State Area"). The Company owns all of the interests in its real properties through Reckson Operating Partnership, L.P. (the "Operating Partnership"). As of September 30, 2001, the Company owned and operated 78 office properties (inclusive of ten office properties which are owned through joint ventures) comprising approximately 13.9 million square feet, 103 industrial properties comprising approximately 6.8 million square feet and two retail properties comprising approximately 20,000 square feet located in the Tri-State Area. The Company also owns a 357,000 square foot office building located in Orlando, Florida and approximately 271 acres of land in 12 separate parcels of which the Company can develop approximately 2.4 million square feet of office space and approximately 224,000 square feet of industrial space. The Company also has invested approximately $17.0 million in a note receivable secured by a partnership interest in Omni Partners, L.P., owner of the Omni, a 575,000 square foot Class A office property located in Uniondale, New York and $36.5 million under three notes which are secured by a minority partners' preferred interest in the Operating Partnership. During July 1998, the Company formed Metropolitan Partners, LLC ("Metropolitan") for the purpose of acquiring Tower Realty Trust, Inc. ("Tower"). On May 24, 1999 the Company completed the merger with Tower and acquired three Class A office properties located in New York City totaling approximately 1.6 million square feet and one Class A office property located on Long Island totaling approximately 101,000 square feet. In addition, pursuant to the merger, the Company also acquired certain office properties, a property under development and land located outside the Tri-State Area. All of the assets acquired in the merger located outside the Tri-State Area, other than a 357,000 square foot office property located in Orlando, Florida, have been sold. On September 28, 2000, the Company formed a joint venture (the "Tri-State JV") with Teachers Insurance and Annuity Association and contributed eight Class A suburban office properties aggregating approximately 1.5 million square feet to the Tri-State JV in exchange for approximately $136 million and a 51% majority ownership interest in the Tri-State JV. 14 During 1997, the Company formed FrontLine Capital Group, formerly Reckson Service Industries, Inc., ("FrontLine") and Reckson Strategic Venture Partners, LLC ("RSVP"). RSVP is a real estate venture capital fund which invests primarily in real estate and real estate operating companies generally outside of the Company's core office and industrial focus and whose common equity is held indirectly by FrontLine. In connection with the formation and spin-off of FrontLine, the Operating Partnership established an unsecured credit facility with FrontLine (the "FrontLine Facility") in the amount of $100 million for FrontLine to use in its investment activities, operations and other general corporate purposes. As of September 30, 2001, the Company had advanced approximately $93.4 million under the FrontLine Facility. The Operating Partnership also approved the funding of investments of up to $100 million relating to RSVP (the "RSVP Commitment"), through RSVP-controlled joint ventures (for REIT-qualified investments) or advances made to FrontLine under an unsecured loan facility (the "RSVP Facility") having terms similar to the FrontLine Facility (advances made under the RSVP Facility and the FrontLine Facility hereafter, the "FrontLine Loans"). During March 2001, the Company increased the RSVP Commitment to $110 million and as of September 30, 2001, approximately $109.1 million had been funded through the RSVP Commitment, of which $59.8 million represents investments by the Company in RSVP-controlled (REIT-qualified) joint ventures and $49.3 million represents loans made to FrontLine under the RSVP Facility. As of September 30, 2001, interest accrued (net of reserves) under the FrontLine Facility and RSVP Facility was approximately $ 19.6 million. At June 30, 2001, the Company assessed the recoverability of the FrontLine Loans and reserved approximately $3.5 million of the interest accrued during the three month period then ended. In addition, the Company formed a committee of its Board of Directors, comprised solely of independent directors, to consider any actions to be taken by the Company in connection with the FrontLine Loans and its investments in joint ventures with RSVP. At September 30, 2001, the Company noted a significant deterioration in FrontLine's operations and financial condition. Based on the Company's assessment of value and recoverability and considering the findings and recommendations of the committee and its financial advisor, the Company has included in its consolidated statements of operations for the three and nine months ended September 30, 2001, a $163 million valuation reserve charge, inclusive of costs, relating to its investments in the FrontLine Loans and joint ventures with RSVP. The Company has also discontinued the accrual of interest income with respect to the FrontLine Loans. As a result of the foregoing, the net carrying value of the Company's investments in the FrontLine Loans and joint venture investments with RSVP, inclusive of the Company's share of GAAP equity in earnings on those investments, is approximately $65.0 million. Such amount has been reflected in investments in service companies and affiliate loans and joint ventures on the accompanying balance sheet. Both the FrontLine Facility and the RSVP Facility have a term of five years, are unsecured and advances under each are recourse obligations of FrontLine. Notwithstanding the valuation reserve, under the terms of the credit facilities, interest accrues on the FrontLine Loans at a rate equal to the greater of (a) the prime rate plus two percent and (b) 12% per annum, with the rate on amounts that are outstanding for more than one year increasing annually at a rate of four percent of the prior year's rate. In March 2001, the credit facilities were amended to provide that (i) interest is payable only at maturity and (ii) the Company may transfer all or any portion of its rights or obligations under the credit facilities to its affiliates. The Company requested these changes as a result of changes in REIT tax laws. The market capitalization of the Company at September 30, 2001 was approximately $3.4 billion. The Company's market capitalization is based on the sum of (i) the market value of the Company's Class A common stock and common units of limited partnership interest in the Operating Partnership ("OP Units") (assuming conversion) of $24.15 per share/unit (based on the closing price of the Company's Class A common stock on September 28, 2001), (ii) the market value of the Company's Class B common stock of $25.51 per share (based on the closing price of the Company's Class B common stock on September 28, 2001), (iii) the liquidation preference value of the Company's Series A preferred and Series B preferred stock of $25 per share, (iv) the liquidation preference value of the Operating Partnership's preferred units of $1,000 per unit and (v) the approximately $1.4 billion (including its share of joint venture debt and net of minority partners' interests share of joint venture debt) of debt outstanding at September 30, 2001. As a result, the Company's total debt to total market capitalization ratio at September 30, 2001 equaled approximately 42.4%. 15 RESULTS OF OPERATIONS Three months ended September 30, 2001 as compared to the three months ended September 30, 2000. The Company's total revenues decreased by $7.3 million or 5.2% for the three months ended September 30, 2001 as compared to the 2000 period. Property operating revenues, which include base rents and tenant escalations and reimbursements ("Property Operating Revenues") increased by $11.0 million or 9.5% for the three months ended September 30, 2001 as compared to the 2000 period. The increase in Property Operating Revenues is primarily attributable to increases in rental rates in our "same store" properties amounting to $7.9 million. In addition, $3.9 million of the increase was generated by lease up of newly developed and redeveloped properties. These increases in Property Operating Revenues was offset by $1.9 million of revenues from properties that were sold during the three months ended September 30, 2001. The Company's base rent reflects the positive impact of the straight-line rent adjustment of $9.7 million for the three months ended September 30, 2001 as compared to $12.2 million for the 2000 period. Included in the $9.7 million straight-line rent adjustment is $5.9 million attributable to 919 Third Avenue as compared to $8.2 million for the 2000 period. This amount is primarily attributable to the free rent period, which is effective through February 28, 2002, contained in the lease of the largest tenant in the building. Other revenues (excluding Property Operating Revenues) decreased by $18.2 million or 74.3% for the three months ended September 30, 2001 as compared to the 2000 period. This decrease is primarily attributable to $15.2 million in gain on sales of real estate recognized in the 2000 period as compared to $972,000 recognized in the 2001 period. In addition, this decrease includes $4.5 million of interest income accrued during the 2000 period relating to the FrontLine Loans with no such comparable accrual for the 2001 period. Property operating expenses, real estate taxes and ground rents ("Property Expenses") increased by $3.0 million or 7.2% for the three months ended September 30, 2001 as compared to the 2000 period. This increase is primarily due to an increase of $1.8 million in our "same-store" properties of which $1.2 million is attributable to an increase in real estate taxes. Additionally, there were increased expenses of $950,000 due to higher occupancy levels at our developed and redeveloped properties. Gross Operating Margins (defined as Property Operating Revenues less Property Expenses, taken as a percentage of Property Operating Revenues) for the three months ended September 30, 2001 and 2000 were 65.1% and 64.4%, respectively. The increase in Gross Operating Margins is primarily attributable to an increase in rental rates. Marketing, general and administrative expenses increased by approximately $749,000 for the three months ended September 30, 2001 as compared to the 2000 period. The increase was primarily attributable to increased costs relating to marketing the Company in its Tri-State Area markets and amortization of deferred compensation costs. Marketing, general and administrative expenses, as a percentage of total revenues, excluding gain on sales of real estate, were 5.8% for the three months ended September 30, 2001 as compared to 5.5% for the 2000 period. Interest expense decreased by approximately $1.1 million for the three months ended September 30, 2001 as compared to the 2000 period. The decrease was primarily attributable to a decrease in interest expense on the Company's variable rate debt due to lower interest rates. Income (loss) before dividends to preferred shareholders and extraordinary loss decreased by approximately $158 million for the three months ended September 30, 2001 as compared to the 2000 period. The decrease is primarily attributable to the $163 million valuation reserve on investment in affiliate loans and joint ventures as further described in Overview and Background. Nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000. The Company's total revenues increased by $12.9 million or 3.4% for the nine months ended September 30, 2001 as compared to the 2000 period. Property Operating Revenues increased by $43.4 million or 13.1% for the nine months ended September 30, 2001 as compared to the 2000 period. The increase in Property Operating Revenues is primarily attributable to increases in rental rates in our "same store" properties amounting to $20.1 million. In addition, $10.1 million of the increase was generated by lease up of newly developed and redeveloped properties. The Company's base rent reflects the positive impact of the straight-line rent adjustment of $31.7 million for the nine months ended September 30, 2001 as compared to $25.0 million for the 2000 period. Included in the $31.7 million straight-line rent adjustment is $20.3 million attributable to 919 Third Avenue, as compared to $13.6 million for the 2000 period. This amount is primarily attributable to the free rent period, which is effective through February 28, 2002 contained in the lease of the largest tenant in the building. Other revenues (excluding Property Operating Revenues) decreased by $30.5 million or 59.5% for the nine months ended September 30, 2001 as compared to the 2000 period. This decrease is primarily attributable to $21.9 million in gain on sales of real estate recognized in the 2000 period as compared to $972,000 recognized in the 2001 period. In addition, this decrease includes $13.0 million of interest income accrued during the 2000 period relating to the FrontLine Loans as compared to $6.1 million for the 2001 period. 16 Property Expenses increased by $10.3 million or 8.9% for the nine months ended September 30, 2001 as compared to the 2000 period. This increase is primarily due to an increase of $6.0 million in our "same store" properties which consists of a $3.2 million increase in property operating expenses and a $2.8 million increase in real estate taxes. Additionally, there were increased expenses of $2.4 million due to higher occupancy levels at our developed and redeveloped properties. Gross Operating Margins for the nine months ended September 30, 2001 and 2000 were 66.4% and 65.1%, respectively. The increase in Gross Operating Margins is primarily attributable to an increase in rental rates. Marketing general and administrative expenses increased by $3.4 million for the nine months ended September 30, 2001 as compared to the 2000 period. The increase was primarily attributable to legal and professional fees incurred in connection with certain cancelled acquisition transactions, increases in certain tenant and community relation costs and amortization of deferred compensation costs. Marketing general and administrative expenses, as a percentage of total revenues, excluding gain on sales of real estate, were 6.0% for the nine months ended September 30, 2001 as compared to 5.6% for the 2000 period. Interest expense decreased by approximately $2.0 million for the nine months ended September 30, 2001 as compared to the 2000 period. The decrease was primarily attributable to a decrease in interest expense on the Company's variable rate debt due to lower interest rates. Income (loss) before dividends to preferred shareholders and extraordinary loss decreased by approximately $160 million for the nine months ended September 30, 2001 as compared to the 2000 period. The decrease is primarily attributable to the $163 million valuation reserve on investment in affiliate loans and joint ventures as further described in Overview and Background. 17 LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2001, the Company had a three year $575 million unsecured revolving credit facility (the "Credit Facility") from The Chase Manhattan Bank, as administrative agent, UBS Warburg LLC as syndication agent and Deutsche Bank as documentation agent. The Credit Facility matures in September 2003 and borrowings under the Credit Facility are currently priced off LIBOR plus 105 basis points. The Company utilizes the Credit Facility primarily to finance real estate investments, fund its real estate development activities and for working capital purposes. At September 30, 2001, the Company had availability under the Credit Facility to borrow an additional $328.4 million (of which, approximately $38.8 million has been allocated for outstanding undrawn letters of credit). On June 1, 2001, the Company refinanced a $70 million short term variable rate mortgage note with a five year $75 million fixed rate mortgage note, which bears interest at 6.52% per annum. In addition, on July 18, 2001, the Company refinanced a $200 million short term variable rate mortgage note with a ten year $250 million fixed rate mortgage note, which bears interest at 6.867% per annum. The net proceeds of approximately $50.4 million received by the Company as a result of these refinancings was used to repay maturing fixed rate debt, the Credit Facility and for working capital purposes. On July 24, 2001, the Company repaid a mortgage note in the amount of approximately $15.5 million from a portion of the proceeds received from the secured debt financing of 919 Third Avenue. In addition, on October 30, 2001, the Company repaid a mortgage note in the amount of approximately $6.4 million through a draw under the Company's Credit Facility. During the nine months ended September 30, 2001, approximately 11,553 preferred units of limited partnership interest in the Operating Partnership, with a liquidation preference value of approximately $11.6 million, were exchanged for 456,351 OP Units at an average price of $25.32 per OP Unit. In addition, 509,545 OP Units were exchanged for an equal number of shares of the Company's Class A common stock. During the three months ended September 30, 2001, the Company sold four office properties aggregating approximately 580,000 square feet and one 26,000 square foot industrial property for approximately $73.6 million. In addition, the Company sold its preferred interest in Keystone Property Trust for $35.7 million. As a result of these sales, the Company realized a net gain of approximately $972,000. Net proceeds from the sales were used primarily to repay borrowings under the Credit Facility. Metropolitan is 100% owned by the Company; a minority partner owned an $85 million preferred equity investment in Metropolitan which accrued distributions at a rate of 7.5% per annum for a two-year period (May 24, 1999 through May 30, 2001). On May 31, 2001, the minority partner, at its election, converted its preferred equity investment into 3,453,881 shares of the Company's Class A common stock based on a conversion price of $24.61 per share. The Company currently has issued and outstanding 10,283,513 shares of Class B Exchangeable Common Stock, par value $.01 per share (the "Class B common stock"). The shares of Class B common stock currently receive an annual dividend of $2.5968 per share, which is subject to adjustment annually. The shares of Class B common stock are exchangeable at any time, at the option of the holder, into an equal number of shares of Class A common stock, par value $.01 per share, of the Company subject to customary antidilution adjustments. The Company, at its option, may redeem any or all of the Class B common stock in exchange for an equal number of shares of the Company's Class A common stock at any time following November 23, 2003. The Board of Directors of the Company has authorized the purchase of up to three million shares of the Company's Class B common stock. In addition, the Board of Directors has also authorized the purchase of up to an additional three million shares of the Company's Class B common stock and/or its Class A common stock. The buy-back program will be effected in accordance with the safe harbor provisions of the Securities Exchange Act of 1934 and may be terminated by the Company at any time. As of September 30, 2001, the Company had purchased and retired 1,410,804 shares of Class B common stock at an average price of $21.48 per Class B share and 16,704 shares of Class A common stock at an average price of $22.01 per Class A share for an aggregate purchase price of approximately $30.7 million. The Company's indebtedness at September 30, 2001 totaled approximately $1.4 billion (including its share of joint venture debt and net of minority partners' interests share of joint venture debt) and was comprised of $246.6 million outstanding under the Credit Facility, approximately $449.4 million of senior unsecured notes and approximately $748.4 million of mortgage indebtedness. Based on the Company's total market capitalization of approximately $3.4 billion at September 30, 2001 (calculated based on the sum of (i) the market value of the Company's Class A common stock and OP Units, assuming conversion, (ii) the market value of the Company's Class B common stock, (iii) the liquidation preference value of the Company's preferred stock, (iv) the liquidation preference value of the Operating Partnership's preferred units and (v) the $1.4 billion of debt), the Company's debt represented approximately 42.4% of its total market capitalization. 18 Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service and capital expenditures, excluding non-recurring capital expenditures of the Company. The Company expects to meet its short-term liquidity requirements generally through its net cash provided by operating activities along with the Credit Facility previously discussed. The Company expects to meet certain of its financing requirements through long-term secured and unsecured borrowings and the issuance of debt and equity securities of the Company. In addition, the Company also believes that it will, from time to time, generate funds from the disposition of certain of its real estate properties or interests therein. The Company will refinance existing mortgage indebtedness or indebtedness under the Credit Facility at maturity or retire such debt through the issuance of additional debt securities or additional equity securities. The Company anticipates that the current balance of cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and equity offerings, will be adequate to meet the capital and liquidity requirements of the Company in both the short and long-term. In order to qualify as a REIT for federal income tax purposes, the Company is required to make distributions to its stockholders of at least 90% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to stockholders and for payment of recurring, non-incremental revenue-generating expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments. INFLATION The office leases generally provide for fixed base rent increases or indexed escalations. In addition, the office leases provide for separate escalations of real estate taxes, operating expenses and electric costs over a base amount. The industrial leases generally provide for fixed base rent increases, direct pass through of certain operating expenses and separate real estate tax escalations over a base amount. The Company believes that inflationary increases in expenses will be offset by contractual rent increases and expense escalations described above. The Credit Facility bears interest at a variable rate, which will be influenced by changes in short-term interest rates, and is sensitive to inflation. FUNDS FROM OPERATIONS Management believes that funds from operations ("FFO") is an appropriate measure of performance of an equity REIT. FFO is defined by the National Association of Real Estate Investment Trusts ("NAREIT") as net income or loss, excluding gains or losses from debt restructuring and sales of properties plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States ("GAAP") and is not indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. FFO for the three and nine months ended September 30, 2001 excludes $163 million of valuation reserves on investments in affiliate loans and joint ventures. Since all companies and analysts do not calculate FFO in a similar fashion, the Company's calculation of FFO presented herein may not be comparable to similarly titled measures as reported by other companies. 19 The following table presents the Company's FFO calculation (unaudited and in thousands, except per share/unit data): Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Net income (loss) available to common shareholders ............................. $(128,920) $ 29,978 $ (88,473) $ 68,792 Adjustments for basic funds from operations: Add: Limited partners' minority interest in the operating partnership ......... -- 4,050 -- 9,411 Real estate depreciation and amortization ................................ 26,340 23,632 76,055 66,184 Minority partners' interests in consolidated partnerships ................ 3,065 1,874 12,885 5,773 Valuation reserves on investments in affiliate loans and joint ventures .. 163,000 -- 163,000 -- Extraordinary loss (net of limited partners' minority interest) .......... 2,595 1,396 2,595 1,396 Less: Limited partners' minority interest in the operating partnership ......... 14,657 -- 9,326 -- Gain on sales of real estate ............................................. 972 15,206 972 21,868 Amounts distributable to minority partners in consolidated partnerships .. 4,206 2,247 15,010 6,764 --------- --------- --------- --------- Basic Funds From Operations ("FFO") ............................................ 46,245 43,477 140,754 122,924 Add: Dividends and distributions on dilutive shares and units .............. 5,996 7,679 20,633 26,708 --------- --------- --------- --------- Diluted FFO ............................................................... $ 52,241 $ 51,156 $ 161,387 $ 149,632 ========= ========= ========= ========= Basic FFO calculations: Weighted average common shares outstanding ................................ 59,999 55,462 57,773 52,595 Weighted average units of limited partnership interest outstanding ........ 7,652 7,695 7,703 7,697 --------- --------- --------- --------- Basic weighted average common shares and units outstanding ................ 67,651 63,157 65,476 60,292 ========= ========= ========= ========= Basic FFO per weighted average common share or unit ....................... $ .68 $ .69 $ 2.15 $ 2.04 Basic weighted average dividends or distributions per share or unit ....... $ .46 $ .42 $ 1.34 $ 1.25 Basic FFO payout ratio .................................................... 67.1% 61.2% 62.2% 61.2% Diluted FFO calculations: Basic weighted average common shares and units outstanding ................ 67,651 63,157 65,476 60,292 Adjustments for dilutive FFO weighted average shares and units outstanding: Add: Weighted average common stock equivalents ............................. 441 588 429 424 Weighted average shares of Series A Preferred Stock ................... 8,060 8,060 8,060 8,060 Weighted average shares of Series B Preferred Stock ................... 1,919 1,919 1,919 4,315 Weighted average shares of minority partners preferred interest ....... -- 3,454 1,898 3,454 Weighted average units of preferred limited partnership interest ...... 1,056 1,367 1,182 1,367 --------- --------- --------- --------- Dilutive FFO weighted average shares and units outstanding ................ 79,127 78,545 78,964 77,912 ========= ========= ========= ========= Diluted FFO per weighted average share or unit ............................ $ .66 $ .65 $ 2.04 $ 1.92 Diluted weighted average dividends or distributions per share or unit ..... $ .45 $ .41 $ 1.32 $ 1.22 Diluted FFO payout ratio .................................................. 68.7% 63.7% 64.6% 63.7%
20 The following table presents the Company's CAD calculation (unaudited and in thousands, except per share/unit data): Three Months Ended Nine Months Ended September 30, September 30, -------------------------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Basic Funds From Operations ........................................................ $ 46,245 $ 43,477 $140,754 $122,924 Adjustments for basic cash available for distribution: Less: Straight line rents (Note a) ................................................. 9,730 12,153 31,743 24,991 Non-incremental capitalized tenant improvements and leasing commissions ...... 3,105 4,239 9,849 8,982 Non-incremental capitalized improvements ..................................... 1,996 1,075 4,260 3,773 -------- -------- -------- -------- Basic Cash Available for Distribution ("CAD") ...................................... 31,414 26,010 94,902 85,178 Add: Dividends and distributions on dilutive shares and units .................. 260 -- 4,254 5,597 -------- -------- -------- -------- Diluted CAD ................................................................... $ 31,674 $ 26,010 $ 99,156 $ 90,775 ======== ======== ======== ======== Basic CAD calculations: Weighted average common shares outstanding .................................... 59,999 55,462 57,773 52,595 Weighted average units of limited partnership interest outstanding ............ 7,652 7,695 7,703 7,697 -------- -------- -------- -------- Basic weighted average common shares and units outstanding .................... 67,651 63,157 65,476 60,292 ======== ======== ======== ======== Basic CAD per weighted average common share or unit ........................... $ .46 $ .41 $ 1.45 $ 1.41 Basic weighted average dividends or distributions per share or unit ........... $ .46 $ .42 $ 1.34 $ 1.25 Basic CAD payout ratio ........................................................ 98.8% 102.4% 92.2% 88.3% Diluted CAD calculations: Basic weighted average common shares and units outstanding .................... 67,651 63,157 65,476 60,292 Adjustments for dilutive CAD weighted average shares and units outstanding: Add: Weighted average common stock equivalents ................................. 441 588 429 424 Weighted average shares of Series A Preferred Stock ....................... -- -- -- -- Weighted average shares of Series B Preferred Stock ....................... -- -- -- -- Weighted average shares of minority partners'preferred interest ........... -- -- 1,898 3,454 Weighted average units of preferred limited partnership interest .......... 566 -- 1,182 598 -------- -------- -------- -------- Dilutive CAD weighted average shares and units outstanding .................... 68,658 63,745 68,985 64,768 ======== ======== ======== ======== Diluted CAD per weighted average share or unit ................................ $ .46 $ .41 $ 1.44 $ 1.40 Diluted weighted average dividends or distributions per share or unit ......... $ .46 $ .42 $ 1.33 $ 1.24 Diluted CAD payout ratio ...................................................... 99.3% 103.2% 92.6% 88.5%
- ----------- Notes: (a) Includes straight-line rental income attributable to the property located at 919 Third Avenue, New York, N. Y. of $5,939, $8,175, $20,323 and $13,560, respectively. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The primary market risk facing the Company is interest rate risk on its long term debt, mortgage notes and notes receivable. The Company will, when advantageous, hedge its interest rate risk using financial instruments. The Company is not subject to foreign currency risk. The Company manages its exposure to interest rate risk on its variable rate indebtedness by borrowing on a short-term basis under its Credit Facility until such time as it is able to retire the short-term variable rate debt with either a long-term fixed rate debt offering, long term mortgage debt, equity offerings or through sales or partial sales of assets. The Company will recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges will be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The fair market value ("FMV") of the Company's long term debt, mortgage notes and notes receivable is estimated based on discounting future cash flows at interest rates that management believes reflects the risks associated with long term debt, mortgage notes and notes receivable of similar risk and duration. The following table sets forth the Company's long term debt obligations by scheduled principal cash flow payments and maturity date, weighted average interest rates and estimated FMV at September 30, 2001 (dollars in thousands): For the Year Ended December 31, --------------------------------------------------------------- 2001 2002 2003 2004 2005 Thereafter Total(1) FMV ------------------------------------------------------------------------------------------------------ Long term debt: Fixed rate ......... $ 2,629 $ 20,047 $ 12,550 $116,099 $ 33,004 $1,028,197 $1,212,526 $1,231,866 Weighted average Interest rate .... 7.55% 7.65% 7.50% 7.47% 6.92% 7.35% 7.35% Variable rate ...... $ -- $ -- $246,600 $ -- $ -- $ -- $ 246,600 $ 246,600 Weighted average Interest rate .... -- -- 4.56% -- -- -- 4.56%
(1) Includes unamortized issuance discounts of $557,000 on the 5 and 10-year senior unsecured notes issued on March 26, 1999 which are due at maturity. In addition, the Company has assessed the market risk for its variable rate debt, which is based upon LIBOR, and believes that a one percent increase in the LIBOR rate would have an approximate $2.5 million annual increase in interest expense based on approximately $246.6 million of variable rate debt outstanding at September 30, 2001. The following table sets forth the Company's mortgage notes and note receivables by scheduled maturity date, weighted average interest rates and estimated FMV at September 30, 2001 (dollars in thousands): For the Year Ended December 31, ------------------------------------------------------------- 2001 2002 2003 2004 2005 Thereafter Total (2) FMV -------------------------------------------------------------------------------------------------- Mortgage notes and notes receivable: Fixed rate............ $ 4 $ 1,165 $ -- $ 36,500 $ -- $ 16,990 $ 54,659 $ 55,974 Weighted average Interest rate........ 9.00% 9.00% -- 10.23% -- 11.87% 10.71%
(2) Excludes interest receivables aggregating approximately $1,062,000. 22 - ------------------------------------------------------------------------------- NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES, TENANT IMPROVEMENT COSTS AND LEASING COMMISSIONS The following table summarizes the expenditures incurred for capital expenditures for the entire portfolio and tenant improvements and leasing commissions for space leased at the Company's office and industrial properties for the nine month period ended September 30, 2001 and the historical average of such capital expenditures, tenant improvements and leasing commissions for the years 1997 through 2000.
- ---------------------------------------------------------------------------------------------------------------------------------- NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES - ---------------------------------------------------------------------------------------------------------------------------------- 1997-2000 Nine months ended 1997 1998 1999 2000 average September 30, 2001 ------------- ------------- ----------- ----------- --------------- ------------------ Suburban Office Properties Total $1,108,675 $2,004,976 $2,298,899 $3,289,116 $2,175,417 $2,623,584 Per Square Foot 0.22 0.23 0.23 0.33 0.25 0.26 CBD Office Properties Total N/A N/A N/A $946,718 $946,718 $1,209,481 Per Square Foot N/A N/A N/A 0.38 0.38 0.34 Industrial Properties Total $733,233 $1,205,266 $1,048,688 $813,431 $950,155 $500,698 Per Square Foot 0.15 0.12 0.11 0.11 0.12 0.08
- ------------------------------------------------------------------------------------------------------------------------------------ NON-INCREMENTAL REVENUE GENERATING TENANT IMPROVEMENTS AND LEASING COMMISSIONS - ------------------------------------------------------------------------------------------------------------------------------------ 1997-2000 1997 1998 1999 2000 average --------------- -------------------- ---------------- ----------------- ----------------------- Long Island Office Properties Tenant Improvements $ 784,044 $1,140,251 $1,009,357 $2,853,706 $1,466,840 Per Square Foot Improved 7.00 3.98 4.73 6.99 5.68 Leasing Commissions $ 415,822 $ 418,191 $ 551,762 $2,208,604 $ 898,595 Per Square Foot Leased 4.83 1.46 2.59 4.96 3.46 --------------- -------------------- ---------------- ----------------- ------------------------ Total Per Square Foot $ 11.83 $ 5.44 $ 7.32 $ 11.95 $ 9.14 =============== ==================== ================ ================= ======================== Westchester Office Properties Tenant Improvements $1,211,665 $ 711,160 $1,316,611 $1,860,027 $1,274,866 Per Square Foot Improved 8.90 4.45 5.62 5.72 6.17 Leasing Commissions $ 366,257 $ 286,150 $ 457,730 $ 412,226 $ 380,591 Per Square Foot Leased 2.69 1.79 1.96 3.00 2.36 --------------- -------------------- ---------------- ----------------- ------------------------ Total Per Square Foot $ 11.59 $ 6.24 $ 7.58 $ 8.72 $ 8.53 =============== ==================== ================ ================= ======================== Connecticut Office Properties Tenant Improvements $1,022,421 $ 202,880 $ 179,043 $ 385,531 $ 447,469 Per Square Foot Improved 13.39 5.92 4.88 4.19 7.10 Leasing Commissions $ 256,615 $ 151,063 $ 110,252 $ 453,435 $ 242,841 Per Square Foot Leased 3.36 4.41 3.00 4.92 3.92 --------------- -------------------- ---------------- ----------------- ------------------------ Total Per Square Foot $ 16.75 $ 10.33 $ 7.88 $ 9.11 $ 11.02 =============== ==================== ================ ================= ======================== New Jersey Office Properties Tenant Improvements N/A $ 654,877 $ 454,054 $1,580,323 $ 896,418 Per Square Foot Improved N/A 3.78 2.29 6.71 4.26 Leasing Commissions N/A $ 396,127 $ 787,065 $1,031,950 $ 738,381 Per Square Foot Leased N/A 2.08 3.96 4.44 3.49 --------------- -------------------- ---------------- ----------------- ------------------------ Total Per Square Foot N/A $ 5.86 $ 6.25 $ 11.15 $ 7.75 =============== ==================== ================ ================= ======================== New York City Office Properties Tenant Improvements N/A N/A N/A $ 65,267 $ 65,267 Per Square Foot Improved N/A N/A N/A 1.79 1.79 Leasing Commissions N/A N/A N/A $ 418,185 $ 418,185 Per Square Foot Leased N/A N/A N/A 11.50 11.50 --------------- -------------------- ---------------- ----------------- ------------------------ Total Per Square Foot N/A N/A N/A $ 13.29 $ 13.29 =============== ==================== ================ ================= ======================== Industrial Properties Tenant Improvements $ 230,466 $ 283,842 $ 375,646 $ 650,216 $ 385,043 Per Square Foot Improved 0.55 0.76 0.25 0.95 0.63 Leasing Commissions $ 81,013 $ 200,154 $ 835,108 $ 436,506 $ 388,195 Per Square Foot Leased 0.19 0.44 0.56 0.64 0.46 --------------- -------------------- ---------------- ----------------- ------------------------ Total Per Square Foot $ 0.75 $ 1.20 $ 0.81 $ 1.59 $ 1.09 =============== ==================== ================ ================= ======================== 23 Nine months ended September 30, 2001 ------------------ Long Island Office Properties Tenant Improvements $ 702,596 Per Square Foot Improved 3.87 Leasing Commissions $ 699,507 Per Square Foot Leased 3.86 ------------------ Total Per Square Foot $ 7.73 ================== Westchester Office Properties Tenant Improvements $1,683,578 Per Square Foot Improved 7.50 Leasing Commissions $ 39,295 Per Square Foot Leased 0.14 ------------------ Total Per Square Foot $ 7.64 ================== Connecticut Office Properties Tenant Improvements $ 213,909 Per Square Foot Improved 2.38 Leasing Commissions $ 182,516 Per Square Foot Leased 2.03 ------------------ Total Per Square Foot $ 4.41 ================== New Jersey Office Properties Tenant Improvements $1,140,108 Per Square Foot Improved 2.93 Leasing Commissions $1,591,484 Per Square Foot Leased 4.09 ------------------ Total Per Square Foot $ 7.02 ================== New York City Office Properties Tenant Improvements $ 738,800 Per Square Foot Improved 16.87 Leasing Commissions $1,026,398 Per Square Foot Leased 23.44 ------------------ Total Per Square Foot 40.31 ================== Industrial Properties Tenant Improvements $ 34,650 Per Square Foot Improved 0.08 Leasing Commissions $ 50,055 Per Square Foot Leased 0.11 ------------------ Total Per Square Foot 0.19 ==================
24 LEASE EXPIRATIONS The following table sets forth scheduled lease expirations for executed leases as of September 30, 2001: LONG ISLAND OFFICE PROPERTIES (EXCLUDING OMNI): Year of Total Rentable % of Total Per Per Lease Number Square Feet Rentable Square Square Foot Square Foot Expiration of Leases Expiring Feet Expiring S/L Rent (1) Rent (2) ---------- --------- -------- ------------- ------------ -------- 2001 10 58,954 1.9% $ 22.39 $ 23.58 2002 30 137,384 4.5% $ 22.63 $ 25.13 2003 48 324,908 10.7% $ 23.69 $ 26.03 2004 40 249,801 8.2% $ 23.47 $ 25.29 2005 48 411,949 13.5% $ 24.07 $ 26.35 2006 31 142,090 4.7% $ 26.29 $ 29.72 2007 and thereafter 83 1,723,657 56.5% -- -- --- --------- ----- Total 290 3,048,743 100.0% === ========= =====
OMNI: Year of Total Rentable % of Total Per Per Lease Number Square Feet Rentable Square Square Foot Square Foot Expiration of Leases Expiring Feet Expiring S/L Rent (1) Rent (2) ---------- --------- -------- ------------- ------------ -------- 2001 1 5,290 0.9% $ 30.83 $ 34.82 2002 4 53,127 9.3% $ 34.55 $ 37.91 2003 4 58,018 10.1% $ 30.22 $ 34.97 2004 4 112,414 19.6% $ 26.14 $ 34.15 2005 6 59,115 10.3% $ 27.91 $ 35.18 2006 1 9,749 1.7% $ 35.21 $ 38.02 2007 and thereafter 10 276,259 48.1% -- -- --- --------- ----- Total 30 573,972 100.0% === ========= =====
INDUSTRIAL PROPERTIES: Year of Total Rentable % of Total Per Per Lease Number Square Feet Rentable Square Square Foot Square Foot Expiration of Leases Expiring Feet Expiring S/L Rent (1) Rent (2) ---------- --------- -------- ------------- ------------ -------- 2001 7 74,427 1.5% $ 5.75 $ 6.17 2002 26 252,635 4.9% $ 6.49 $ 7.30 2003 28 733,434 14.4% $ 5.35 $ 6.26 2004 32 620,553 12.2% $ 6.24 $ 7.31 2005 22 427,994 8.4% $ 5.93 $ 7.97 2006 37 933,793 18.3% $ 6.42 $ 7.91 2007 and thereafter 44 2,056,442 40.3% -- -- --- --------- ----- Total 196 5,099,278 100.0% === ========= =====
25 LEASE EXPIRATIONS RESEARCH AND DEVELOPMENT PROPERTIES: Year of Total Rentable % of Total Per Per Lease Number Square Feet Rentable Square Square Foot Square Foot Expiration of Leases Expiring Feet Expiring S/L Rent (1) Rent (2) ---------- --------- -------- ------------- ------------ -------- 2001 5 262,946 21.1% $ 5.59 $ 6.78 2002 3 118,620 9.5% $ 10.19 $ 11.82 2003 4 37,938 3.0% $ 9.20 $ 10.15 2004 9 99,218 8.0% $ 13.86 $ 15.01 2005 4 357,440 28.7% $ 8.70 $ 10.78 2006 5 80,261 6.5% $ 18.06 $ 20.83 2007 and thereafter 13 288,400 23.2% -- -- --- --------- ----- Total 43 1,244,823 100.0% === ========= =====
WESTCHESTER OFFICE PROPERTIES: Year of Total Rentable % of Total Per Per Lease Number Square Feet Rentable Square Square Foot Square Foot Expiration of Leases Expiring Feet Expiring S/L Rent (1) Rent (2) ---------- --------- -------- ------------- ------------ -------- 2001 4 14,463 0.4% $ 22.07 $ 22.37 2002 48 430,153 14.3% $ 21.34 $ 21.92 2003 49 240,857 8.0% $ 22.68 $ 23.81 2004 32 169,158 5.6% $ 21.37 $ 22.40 2005 45 387,247 12.9% $ 25.00 $ 25.40 2006 36 719,583 23.9% $ 22.79 $ 24.60 2007 and thereafter 44 1,049,933 34.9% -- -- --- --------- ----- Total 258 3,011,394 100.0% === ========= =====
STAMFORD OFFICE PROPERTIES: Year of Total Rentable % of Total Per Per Lease Number Square Feet Rentable Square Square Foot Square Foot Expiration of Leases Expiring Feet Expiring S/L Rent (1) Rent (2) ---------- --------- -------- ------------- ------------ -------- 2001 9 18,656 1.8% $ 27.67 $ 21.62 2002 18 88,704 8.5% $ 27.44 $ 28.72 2003 17 120,969 11.6% $ 31.00 $ 31.64 2004 21 228,220 21.9% $ 21.81 $ 22.67 2005 19 121,885 11.7% $ 26.66 $ 28.47 2006 21 281,437 26.9% $ 25.65 $ 25.31 2007 and thereafter 16 183,932 17.6% -- -- --- --------- ----- Total 121 1,043,803 100.0% === ========= =====
26 LEASE EXPIRATIONS NEW JERSEY OFFICE PROPERTIES: Year of Total Rentable % of Total Per Per Lease Number Square Feet Rentable Square Square Foot Square Foot Expiration of Leases Expiring Feet Expiring S/L Rent (1) Rent (2) ---------- --------- -------- ------------- ------------ -------- 2001 7 38,621 2.1% $ 16.76 $ 17.14 2002 20 160,092 8.8% $ 20.02 $ 20.93 2003 17 317,607 17.6% $ 28.05 $ 27.56 2004 28 200,726 11.1% $ 22.96 $ 23.78 2005 24 272,316 15.1% $ 23.66 $ 23.63 2006 16 194,327 10.7% $ 24.23 $ 25.54 2007 and thereafter 17 625,055 34.6% -- -- --- --------- ----- Total 129 1,808,744 100.0% === ========= =====
NEW YORK CITY OFFICE Year of Total Rentable % of Total Per Per Lease Number Square Feet Rentable Square Square Foot Square Foot Expiration of Leases Expiring Feet Expiring S/L Rent (1) Rent (2) ---------- --------- -------- ------------- ------------ -------- 2001 5 17,703 0.5% $ 28.48 $ 28.64 2002 22 193,034 5.7% $ 32.47 $ 33.40 2003 7 114,987 3.4% $ 32.10 $ 32.89 2004 19 218,239 6.5% $ 36.46 $ 39.35 2005 34 446,606 13.3% $ 36.05 $ 37.53 2006 49 343,986 10.2% $ 29.92 $ 30.69 2007 and thereafter 77 2,034,112 60.4% -- -- --- --------- ----- Total 213 3,368,667 100.0% === ========= =====
(1) Per square foot rental rate represents annualized straight line rent as of the lease expiration date. (2) Per square foot rental rate represents annualized base rent as of the lease expiration date plus non-recoverable operating expense pass-throughs. 27 PART II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and use of proceeds During the three months ended September 30, 2001, the Registrant issued 156,667 shares of its Class A common stock, par value $0.01 per share, in exchange for an equal number of units of limited partnership interest of the Operating Partnership. This transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Securities Holders - None Item 5. Other information - None Item 6. Exhibits and Reports on Form 8-K a) Exhibits 10.1 Amended and restated 1995 stock option plan of the Registrant 10.2 Amended and restated 1997 stock option plan of the Registrant b) During the three months ended September 30, 2001, the Registrant filed the following reports on Form 8-K: On August 8, 2001, the Registrant submitted a report on Form 8-K under Item 9 thereof in order to submit its second quarter presentation in satisfaction of the requirements of Regulation FD. On August 9, 2001, the Registrant submitted a report on Form 8-K under Item 9 thereof in order to submit supplemental operating and financial data for the quarter ended June 30, 2001 in satisfaction of the requirements of Regulation FD. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. RECKSON ASSOCIATES REALTY CORP. By: /s/ Scott H. Rechler /s/ Michael Maturo ----------------------------------------- ----------------------------------------- Scott H. Rechler, Co-Chief Executive Officer Michael Maturo, Executive Vice President, Treasurer and Chief Financial Officer
Date: November 12, 2001 28 EX-10.1 3 ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 RECKSON ASSOCIATES REALTY CORP. AMENDED AND RESTATED 1995 STOCK OPTION PLAN AS AMENDED THROUGH MARCH 5, 2001 ARTICLE 1. GENERAL 1.1. Purpose. The purpose of the Reckson Associates Realty Corp. 1995 Stock Option Plan (the "Plan") is to provide for certain officers, directors and key employees, as defined in Section 1.3, of Reckson Associates Realty Corp. (the "Company") and certain of its Affiliates (as defined below) an equity-based incentive to maintain and enhance the performance and profitability of the Company. It is the further purpose of this Plan to permit the granting of awards that will constitute performance based compensation for certain executive officers, as described in Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations promulgated thereunder. 1.2. Administration. (a) The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"), which Committee shall consist of two or more directors, or by the Board. It is intended that the directors appointed to serve on the Committee shall be "non-employee directors" (within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Act")) and "outside directors" (within the meaning of Code Section 162(m)); however, the mere fact that a Committee member shall fail to qualify under either of these requirements shall not invalidate any award made by the Committee which award is otherwise validly made under the Plan. The members of the Committee shall be appointed by, and may be changed at any time and from time to time in the discretion of, the Board. (b) The Committee shall have the authority (i) to exercise all of the powers granted to it under the Plan, (ii) to construe, interpret and implement the Plan and any Plan Agreements (as defined below) executed pursuant to the Plan, (iii) to prescribe, amend and rescind rules relating to the Plan, (iv) to make any determination necessary or advisable in administering the Plan, (v) to correct any defect, supply any omission and reconcile any inconsistency in the Plan and (vi) to delegate to Donald J. Rechler and Scott H. Rechler (the "Proper Officers") its authority to grant awards under the Plan to key employees, excluding those employees who are executive officers ("Non-Executive Officers"), provided that (a) the aggregate number of shares of Common Stock granted to any Non-Executive Officer during any calendar year shall not exceed 100,000 shares and (b) the Proper Officers shall report quarterly to the Committee regarding the material terms of awards granted to any Non-Executive Officers. The Committee shall have no authority to interpret or administer Article 5 of the Plan or to take any action with respect to any awards thereunder. (c) The determination of the Committee on all matters relating to the Plan or any Plan Agreement shall be conclusive. (d) No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any award hereunder. (e) Notwithstanding anything to the contrary contained herein, the Board may, in its sole discretion, at any time and from time to time, resolve to administer the Plan, in which case, the term Committee as used herein shall be deemed to mean the Board. 1.3. Persons Eligible for Awards. Awards under the Plan may be made to such officers, directors and key employees ("key personnel") of the Company or its Affiliates as the Committee shall from time to time in its sole discretion select. No member of the Board who is not an officer or employee of the Company or an Affiliate (an "Independent Director") shall be eligible to receive any Awards under the Plan, except for non-qualified stock options granted automatically under the provisions of Article 5 of the Plan. 1.4. Types of Awards Under Plan. (a) Awards may be made under the Plan in the form of (i) stock options ("options"), (ii) restricted stock awards and (iii) unrestricted stock awards, in lieu of cash compensation, all as more fully set forth in Articles 2 and 3. (b) Options granted under the Plan may be either (i) "nonqualified" stock options ("NQSOs") or (ii) options intended to qualify for incentive stock option treatment described in Code Section 422 ("ISOs"). Grants of options made under the Plan may also be made in lieu of cash fees otherwise payable to Directors of the Company or cash bonuses payable to employees of the Company or any Affiliate. (c) All options when granted are intended to be NQSOs, unless the applicable Plan Agreement explicitly states that the option is intended to be an ISO. If an option is intended to be an ISO, and if for any reason such option (or any portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification, such option (or portion) shall be regarded as a NQSO appropriately granted under the Plan provided that such option (or portion) otherwise meets the Plan's requirements relating to NQSOs. 1.5. Shares Available for Awards. (a) Subject to Section 4.5 (relating to adjustments upon changes in capitalization), as of any date the total number of shares of Common Stock with respect to which awards may be granted under the Plan, shall equal the excess (if any) of 750,000 shares of Common Stock, over (i) the number of shares of Common Stock subject to outstanding awards, (ii) the number of shares in respect of which options have been exercised, or grants of restricted or unrestricted Common Stock have been made pursuant to the Plan, and (iii) the number of shares issued subject to forfeiture restrictions which have lapsed. In accordance with (and without limitation upon) the preceding sentence, awards may be granted in respect of the following shares of Common Stock: shares covered by previously-granted awards that have expired, terminated or been cancelled for any reason whatsoever (other than by reason of exercise or vesting). 2 (b) In any year, a person eligible for awards under the Plan may not be granted options under the Plan covering a total of more than 75,000 shares of Common Stock. (c) Shares of Common Stock that shall be subject to issuance pursuant to the Plan shall be authorized and unissued or treasury shares of Common Stock, or shares of Common Stock purchased on the open market or from shareholders of the Company for such purpose. (d) Without limiting the generality of the foregoing, the Committee may, with the grantee's consent, cancel any award under the Plan and issue a new award in substitution therefor upon such terms as the Committee may in its sole discretion determine, provided that the substituted award shall satisfy all applicable Plan requirements as of the date such new award is made. 1.6. Definitions of Certain Terms. (a) The term "Affiliate" as used herein means Reckson Operating Partnership, L.P., Reckson FS Limited Partnership, RANY Management Group, Inc., Reckson Finance, Inc., Reckson Management Group, Inc. and Reckson Construction Group, Inc., and any person or entity as subsequently approved by the Board which, at the time of reference, directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company. (b) The term "Cause" shall mean a finding by the Committee that the recipient of an award under the Plan has (i) acted with gross negligence or willful misconduct in connection with the performance of his material duties to the Company or its Affiliates; (ii) defaulted in the performance of his material duties to the Company or its Affiliates and has not corrected such action within 15 days of receipt of written notice thereof; (iii) willfully acted against the best interests of the Company or its Affiliates, which act has had a material and adverse impact on the financial affairs of the Company or its Affiliates; or (iv) been convicted of a felony or committed a material act of common law fraud against the Company, its Affiliates or their employees and such act or conviction has, or the Committee reasonably determines will have, a material adverse effect on the interests of the Company or its Affiliates. (c) The term "Common Stock" as used herein means the shares of Class A common stock of the Company as constituted on the effective date of the Plan, and any other shares into which such common stock shall thereafter be changed by reason of a recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like. (d) The "fair market value" (or "FMV") as of any date and in respect of any share of Common Stock shall be: (i) if the Common Stock is listed for trading on the New York Stock Exchange, the closing price, regular way, of the Common Stock as reported on the New York Stock Exchange Composite Tape, or if no such reported sale of the Common Stock shall have occurred on such date, on the next preceding date on which there was such a reported sale; or 3 (ii) the Common Stock is not so listed but is listed on another national securities exchange or authorized for quotation on the National Association of Securities Dealers Inc.'s NASDAQ National Market System ("NASDAQ/NMS"), the closing price, regular way, of the Common Stock on such exchange or NASDAQ/NMS, as the case may be, on which the largest number of shares of Common Stock have been traded in the aggregate on the preceding twenty trading days, or if no such reported sale of the Stock shall have occurred on such date on such exchange or NASDAQ/NMS, as the case may be, on the preceding date on which there was such a reported sale on such exchange or NASDAQ/NMS, as the case may be; or (iii) if the Stock is not listed for trading on a national securities exchange or authorized for quotation on NASDAQ/NMS, the average of the closing bid and asked prices as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or, if no such prices shall have been so reported for such date, on the next preceding date for which such prices were so reported. 1.7. Agreements Evidencing Awards. (a) Options and restricted stock awards granted under the Plan shall be evidenced by written agreements. Any such written agreements shall (i) contain such provisions not inconsistent with the terms of the Plan as the Committee may in its sole discretion deem necessary or desirable and (ii) be referred to herein as "Plan Agreements." (b) Each Plan Agreement shall set forth the number of shares of Common Stock subject to the award granted thereby. (c) Each Plan Agreement with respect to the granting of an option shall set forth the amount (the "option exercise price") payable by the grantee to the Company in connection with the exercise of the option evidenced thereby. The option exercise price per share shall not be less than 100% of the fair market value of a share of Common Stock on the date the option is granted. ARTICLE 2. STOCK OPTIONS 2.1. Option Awards. (a) Grant of Stock Options. The Committee may grant options to purchase shares of Common Stock in such amounts and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine, subject to the terms of the Plan. (b) Dividend Equivalent Rights. To the extent expressly provided by the Committee at the time of the grant, each NQSO granted under this Section 2.1 shall also generate Dividend Equivalent Rights ("DERs"), which shall entitle the grantee to receive an additional share of Common Stock for each DER received upon the exercise of the NQSO, at no additional cost, based on the formula set forth herein. As of the last business day of each calendar quarter, the amount of dividends paid by the Company on each share of Common Stock with respect to 4 that quarter shall be divided by the FMV per share to determine the actual number of DERs accruing on each share subject to the NQSO. Such amount of DERs shall be multiplied by the number of shares covered by the NQSO to determine the number of DERs which accrued during such quarter. The provisions of this Section 2.1(b) shall not be amended more than once every six months other than to comport with changes in applicable law. For example. Assume that a grantee holds a NQSO to purchase 600 shares of Common Stock. Further assume that the dividend per share for the first quarter was $0.10, and that the FMV per share on the last business day of the quarter was $20. Therefore, .005 DER would accrue per share for that quarter and such grantee would receive three DERs for that quarter (600 X .005). For purposes of determining how many DERs would accrue during the second quarter, the NQSO would be considered to be for 603 shares of Common Stock. 2.2. Exercisability of Options. Subject to the other provisions of the Plan: (a) Exercisability Determined by Plan Agreement. Each Plan Agreement shall set forth the period during which and the conditions subject to which the option shall be exercisable (including, but not limited to vesting of such options), as determined by the Committee in its discretion. (b) Partial Exercise Permitted. Unless the applicable Plan Agreement otherwise provides, an option granted under the Plan may be exercised from time to time as to all or part of the full number of shares for which such option is then exercisable, in which event the DERs relating to the portion of the option being exercised shall also be exercised. (c) Notice of Exercise; Exercise Date. (i) An option shall be exercisable by the filing of a written notice of exercise with the Company, on such form and in such manner as the Committee shall in its sole discretion prescribe, and by payment in accordance with Section 2.4. (ii) Unless the applicable Plan Agreement otherwise provides, or the Committee in its sole discretion otherwise determines, the date of exercise of an option shall be the date the Company receives such written notice of exercise and payment. 2.3. Limitation on Exercise. Notwithstanding any other provision of the Plan, no Plan Agreement shall permit an ISO to be exercisable more than 10 years after the date of grant. 2.4. Payment of Option Price. (a) Tender Due Upon Notice of Exercise. Unless the applicable Plan Agreement otherwise provides or the Committee in its sole discretion otherwise determines, any written notice of exercise of an option shall be accompanied by payment of the full purchase price for the shares being purchased. (b) Manner of Payment. Payment of the option exercise price shall be made in any combination of the following: 5 (i) by certified or official bank check payable to the Company (or the equivalent thereof acceptable to the Committee); (ii) by personal check (subject to collection), which may in the Committee's discretion be deemed conditional; (iii) with the consent of the Committee in its sole discretion, by delivery of previously acquired shares of Common Stock owned by the grantee for at least six months having a fair market value (determined as of the option exercise date) equal to the portion of the option exercise price being paid thereby, provided that the Committee may require the grantee to furnish an opinion of counsel acceptable to the Committee to the effect that such delivery would not result in the grantee incurring any liability under Section 16(b) of the Act and does not require any Consent (as defined in Section 4.2); and (iv) with the consent of the Committee in its sole discretion, by the full recourse promissory note and agreement of the grantee providing for payment with interest on the unpaid balance accruing at a rate not less than that needed to avoid the imputation of income under Code Section 7872 and upon such terms and conditions (including the security, if any, therefor) as the Committee may determine; and (v) by withholding shares of Common Stock from the shares otherwise issuable pursuant to the exercise. (c) Cashless Exercise. Payment in accordance with Section 2.4(b) may be deemed to be satisfied, if and to the extent provided in the applicable Plan Agreement, by delivery to the Company of an assignment of a sufficient amount of the proceeds from the sale of Common Stock acquired upon exercise to pay for all of the Common Stock acquired upon exercise and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be made at the grantee's direction at the time of exercise, provided that the Committee may require the grantee to furnish an opinion of counsel acceptable to the Committee to the effect that such delivery would not result in the grantee incurring any liability under Section 16 of the Act and does not require any Consent (as defined in Section 4.2). (d) Issuance of Shares. As soon as practicable after receipt of full payment, the Company shall, subject to the provisions of Section 4.2, deliver to the grantee one or more certificates for the shares of Common Stock so purchased, which certificates may bear such legends as the Company may deem appropriate concerning restrictions on the disposition of the shares in accordance with applicable securities laws, rules and regulations or otherwise. 2.5. Default Rules Concerning Termination of Employment. Subject to the other provisions of the Plan and unless the applicable Plan Agreement otherwise provides: 6 (a) General Rule. All options granted to a grantee shall terminate upon the grantee's termination of employment for any reason except to the extent post-employment exercise of the option is permitted in accordance with this Section 2.5. (b) Termination for Cause. All unexercised or unvested options granted to a grantee shall terminate and expire on the day a grantee's employment is terminated for Cause. (c) Regular Termination; Leave of Absence. If the grantee's employment terminates for any reason other than as provided in subsection (b), (d) or (f) of this Section 2.5, any awards granted to such grantee which were exercisable immediately prior to such termination of employment may be exercised, and any awards subject to vesting may continue to vest, until the earlier of either: (i) 90 days after the grantee's termination of employment and (ii) the date on which such options terminate or expire in accordance with the provisions of the Plan (other than this Section 2.5) and the Plan Agreement; provided that the Committee may, in its sole discretion, determine such other period for exercise in the case of a grantee whose employment terminates solely because the grantee's employer ceases to be an Affiliate or the grantee transfers employment with the Company's consent to a purchaser of a business disposed of by the Company. The Committee may, in its sole discretion, determine (i) whether any leave of absence (including short-term or long-term disability or medical leave) shall constitute a termination of employment for purposes of the Plan and (ii) the effect, if any, of any such leave on outstanding awards under the Plan. (d) Retirement. If a grantee's employment terminates by reason of retirement (i.e., the voluntary termination of employee by a grantee after attaining the age of 55), the options exercisable by the grantee immediately prior to the grantee's retirement shall be exercisable by the grantee until the earlier of (i) 36 months after the grantee's retirement and (ii) the date on which such options terminate or expire in accordance with the provisions of the Plan (other than this Section 2.5) and the Plan Agreement. (e) Death After Termination. If a grantee's employment terminates in the manner described in subsections (c) or (d) of this Section 2.5 and the grantee dies within the period for exercise provided for therein, the options exercisable by the grantee immediately prior to the grantee's death shall be exercisable by the personal representative of the grantee's estate or by the person to whom such options pass under the grantee's will (or, if applicable, pursuant to the laws of descent and distribution) until the earlier of (i) 12 months after the grantee's death and (ii) the date on which such options terminate or expire in accordance with the provisions of subsections (c) or (d) of this Section 2.5. (f) Death Before Termination. If a grantee dies while employed by the Company or any Affiliate, all options granted to the grantee but not exercised before the death of the grantee, whether or not exercisable by the grantee before the grantee's death, shall immediately become and be exercisable by the personal representative of the grantee's estate or by the person to whom such options pass under the grantee's will (or, if applicable, pursuant to the laws of descent and distribution) until the earlier of (i) 12 months after the grantee's death and (ii) the date on which such options terminate or expire in accordance with the provisions of the Plan (other than this Section 2.5) and the Plan Agreement. 7 2.6. Special ISO Requirements. In order for a grantee to receive special tax treatment with respect to stock acquired under an option intended to be an ISO, the grantee of such option must be, at all times during the period beginning on the date of grant and ending on the day three months before the date of exercise of such option, an employee of the Company or any of the Company's parent or subsidiary corporations (within the meaning of Code Section 424), or of a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which Code Section 424(a) applies. If an option granted under the Plan is intended to be an ISO, and if the grantee, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the grantee's employer corporation or of its parent or subsidiary corporation, then (i) the option exercise price per share shall in no event be less than 110% of the fair market value of the Common Stock on the date of such grant and (ii) such option shall not be exercisable after the expiration of five years after the date such option is granted. ARTICLE 3. RESTRICTED STOCK AND UNRESTRICTED STOCK AWARDS 3.1. Restricted Stock Awards. (a) Grant of Awards. The Committee may grant restricted stock awards, alone or in tandem with other awards, under the Plan in such amounts and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine; provided, however, that the grant of any such restricted stock awards may be made in lieu of, or in tandem with other, cash compensation and bonuses. The vesting of a restricted stock award granted under the Plan may be conditioned upon the completion of a specified period of employment with the Company or any Affiliate, upon the attainment of specified performance goals, and/or upon such other criteria as the Committee may determine in its sole discretion. (b) Payment. Each Plan Agreement with respect to a restricted stock award shall set forth the amount (if any) to be paid by the grantee with respect to such award. If a grantee makes any payment for a restricted stock award which does not vest, appropriate payment may be made to the grantee following the forfeiture of such award on such terms and conditions as the Committee may determine. The Committee shall have the authority to make or authorize loans to finance, or to otherwise accommodate the financing of, the acquisition or exercise of a restricted stock award. (c) Forfeiture upon Termination of Employment. Unless the applicable Plan Agreement otherwise provides or the Committee otherwise determines, (i) if a grantee's employment terminates for any reason (including death) before all of his restricted stock awards have vested, such awards shall terminate and expire upon such termination of employment, and (ii) in the event any condition to the vesting of restricted stock awards is not satisfied within the period of time permitted therefor, such unvested shares shall be returned to the Company. (d) Issuance of Shares. The Committee may provide that one or more certificates representing restricted stock awards shall be registered in the grantee's name and bear an appropriate legend specifying that such shares are not transferable and are subject to the terms and conditions of the Plan and the applicable Plan Agreement, or that such certificate or certificates shall be held in escrow by the Company on behalf of the grantee until such shares 8 vest or are forfeited, all on such terms and conditions as the Committee may determine. Unless the applicable Plan Agreement otherwise provides, no share of restricted stock may be assigned, transferred, otherwise encumbered or disposed of by the grantee until such share has vested in accordance with the terms of such award. Subject to the provisions of Section 4.2, as soon as practicable after any restricted stock award shall vest, the Company shall issue or reissue to the grantee (or to the grantee's designated beneficiary in the event of the grantee's death) one or more certificates for the Common Stock represented by such restricted stock award. (e) Grantees' Rights Regarding Restricted Stock. Unless the applicable Plan Agreement otherwise provides: (i) a grantee may vote and receive dividends on restricted stock awarded under the Plan; and (ii) any stock received as a distribution with respect to a restricted stock award shall be subject to the same restrictions as such restricted stock. 3.2. Unrestricted Stock. The Committee may issue unrestricted stock under the Plan, alone or in tandem with other awards, in such amounts and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine; provided, however, that the grant of any such unrestricted stock awards may be made in lieu of, or in tandem with other, cash compensation and bonuses. The Committee shall have the authority to make or authorize loans to finance, or to otherwise accommodate the financing of, the acquisition or exercise of an unrestricted stock award. ARTICLE 4. MISCELLANEOUS 4.1. Amendment of the Plan; Modification of Awards. (a) Plan Amendments. The Board may, without stockholder approval, at any time and from time to time suspend, discontinue or amend the Plan in any respect whatsoever, except that no such amendment shall impair any rights under any award theretofore made under the Plan without the consent of the grantee of such award. Furthermore, except as and to the extent otherwise permitted by Section 4.5 or 4.11, no such amendment shall, without stockholder approval: (i) materially increase the benefits accruing to grantees under the Plan; (ii) increase the maximum number of shares which may be made subject to awards to an individual as options in any year; (iii) materially increase, beyond the amounts set forth in Section 1.5, the number of shares of Common Stock in respect of which awards may be issued under the Plan; (iv) materially modify the designation in Section 1.3 of the class of persons eligible to receive awards under the Plan; (v) provide for the grant of stock options having an option exercise price per share of Common Stock less than 100% of the fair market value of a share of Common Stock on the date of grant; or 9 (vi) extend the term of the Plan beyond the period set forth in Section 4.13. (b) Award Modifications. Subject to the terms and conditions of the Plan (including Section 4.1(a)), the Committee may amend outstanding Plan Agreements with such grantee, including, without limitation, any amendment which would (i) accelerate the time or times at which an award may vest or become exercisable and/or (ii) extend the scheduled termination or expiration date of the award, provided, however, that no modification having a material adverse effect upon the interest of a grantee in an award shall be made without the consent of such grantee. 4.2. Restrictions. (a) Consent Requirements. If the Committee shall at any time determine that any Consent (as hereinafter defined) is necessary or desirable as a condition of, or in connection with, the granting of any award under the Plan, the acquisition, issuance or purchase of shares or other rights hereunder or the taking of any other action hereunder (each such action being hereinafter referred to as a "Plan Action"), then such Plan Action shall not be taken, in whole or in part, unless and until such Consent shall have been effected or obtained to the full satisfaction of the Committee. Without limiting the generality of the foregoing, the Committee shall be entitled to determine not to make any payment whatsoever until Consent has been given if (i) the Committee may make any payment under the Plan in cash, Common Stock or both, and (ii) the Committee determines that Consent is necessary or desirable as a condition of, or in connection with, payment in any one or more of such forms. (b) Consent Defined. The term "Consent" as used herein with respect to any Plan Action means (i) any and all listings, registrations or qualifications in respect thereof upon any securities exchange or other self-regulatory organization or under any federal, state or local law, rule or regulation, (ii) the expiration, elimination or satisfaction of any prohibitions, restrictions or limitations under any federal, state or local law, rule or regulation or the rules of any securities exchange or other self-regulatory organization, (iii) any and all written agreements and representations by the grantee with respect to the disposition of shares, or with respect to any other matter, which the Committee shall deem necessary or desirable to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made, and (iv) any and all consents, clearances and approvals in respect of a Plan Action by any governmental or other regulatory bodies or any parties to any loan agreements or other contractual obligations of the Company or any Affiliate. 4.3. Nontransferability. No award granted to any grantee under the Plan or under any Plan Agreement shall be assignable or transferable by the grantee other than by will or by the laws of descent and distribution. During the lifetime of the grantee, all rights with respect to any award granted to the grantee under the Plan or under any Plan Agreement shall be exercisable only by the grantee. 4.4. Withholding Taxes. (a) Whenever under the Plan shares of Common Stock are to be delivered pursuant to an award, the Committee may require as a condition of delivery that the grantee remit an amount 10 sufficient to satisfy all federal, state and other governmental withholding tax requirements related thereto. Whenever cash is to be paid under the Plan, the Company may, as a condition of its payment, deduct therefrom, or from any salary or other payments due to the grantee, an amount sufficient to satisfy all federal, state and other governmental withholding tax requirements related thereto or to the delivery of any shares of Common Stock under the Plan. (b) Without limiting the generality of the foregoing, (i) a grantee may elect to satisfy all or part of the foregoing withholding requirements by delivery of unrestricted shares of Common Stock owned by the grantee for at least six months (or such other period as the Committee may determine) having a fair market value (determined as of the date of such delivery by the grantee) equal to all or part of the amount to be so withheld, provided that the Committee may require, as a condition of accepting any such delivery, the grantee to furnish an opinion of counsel acceptable to the Committee to the effect that such delivery would not result in the grantee incurring any liability under Section 16(b) of the Act and (ii) the Committee may permit any such delivery to be made by withholding shares of Common Stock from the shares otherwise issuable pursuant to the award giving rise to the tax withholding obligation (in which event the date of delivery shall be deemed the date such award was exercised). 4.5. Adjustments Upon Changes in Capitalization. If and to the extent specified by the Committee, the number of shares of Common Stock which may be issued pursuant to awards under the Plan, the maximum number of options which may be granted to any one person in any year, the number of shares of Common Stock subject to awards, the option exercise price of options theretofore granted under the Plan, and the amount payable by a grantee in respect of an award, shall be appropriately adjusted (as the Committee may determine) for any change in the number of issued shares of Common Stock resulting from the subdivision or combination of shares of Common Stock or other capital adjustments, or the payment of a stock dividend after the effective date of the Plan, or other change in such shares of Common Stock effected without receipt of consideration by the Company; provided that any awards covering fractional shares of Common Stock resulting from any such adjustment shall be eliminated and provided further, that each ISO granted under the Plan shall not be adjusted in a manner that causes such option to fail to continue to qualify as an ISO within the meaning of Code Section 422. Adjustments under this Section shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 4.6. Right of Discharge Reserved. Nothing in the Plan or in any Plan Agreement shall confer upon any person the right to continue in the employment of the Company or an Affiliate or affect any right which the Company or an Affiliate may have to terminate the employment of such person. 4.7. No Rights as a Stockholder. No grantee or other person shall have any of the rights of a stockholder of the Company with respect to shares subject to an award until the issuance of a stock certificate to him for such shares. Except as otherwise provided in Section 4.5, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities or other property) for which the record date is prior to the date such stock certificate is issued. In the case of a grantee of an award which has not yet vested, the grantee shall have the rights of a stockholder of the Company if and only to the extent provided in the applicable Plan Agreement. 11 4.8. Nature of Payments. (a) Any and all awards or payments hereunder shall be granted, issued, delivered or paid, as the case may be, in consideration of services performed for the Company or for its Affiliates by the grantee. (b) No such awards and payments shall be considered special incentive payments to the grantee or, unless otherwise determined by the Committee, be taken into account in computing the grantee's salary or compensation for the purposes of determining any benefits under (i) any pension, retirement, life insurance or other benefit plan of the Company or any Affiliate or (ii) any agreement between the Company or any Affiliate and the grantee. (c) By accepting an award under the Plan, the grantee shall thereby waive any claim to continued exercisability or vesting of an award or to damages or severance entitlement related to non-continuation of the award beyond the period provided herein or in the applicable Plan Agreement, notwithstanding any contrary provision in any written employment contract with the grantee, whether any such contract is executed before or after the grant date of the award. 4.9. Non-Uniform Determinations. The Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Committee shall be entitled, among other things, to make non-uniform and selective determinations, and to enter into non-uniform and selective Plan Agreements, as to (a) the persons to receive awards under the Plan, (b) the terms and provisions of awards under the Plan, and (c) the treatment of leaves of absence pursuant to Section 2.7(c). 4.10. Other Payments or Awards. Nothing contained in the Plan shall be deemed in any way to limit or restrict the Company, any Affiliate or the Committee from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect. 4.11. Reorganization. (a) In the event that the Company is merged or consolidated with another corporation and, whether or not the Company shall be the surviving corporation, there shall be any change in the shares of Common Stock by reason of such merger or consolidation, or in the event that all or substantially all of the assets of the Company are acquired by another person, or in the event of a reorganization or liquidation of the Company (each such event being hereinafter referred to as a "Reorganization Event") or in the event that the Board shall propose that the Company enter into a Reorganization Event, then the Committee may in its discretion, by written notice to a grantee, provide that his options will be terminated unless exercised within 30 days (or such longer period as the Committee shall determine in its sole discretion) after the date of such notice; provided that if, and to the extent that, the Committee takes such action with respect to the grantee's options not yet exercisable, the Committee shall also accelerate the dates upon which such options shall be exercisable. The Committee also may in its discretion by written notice to a grantee provide that all or some of the restrictions on any of the grantee's awards may lapse in 12 the event of a Reorganization Event upon such terms and conditions as the Committee may determine. (b) Whenever deemed appropriate by the Committee, the actions referred to in Section 4.11(a) may be made conditional upon the consummation of the applicable Reorganization Event. 4.12. Section Headings. The section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of said sections. 4.13. Effective Date and Term of Plan. (a) The Plan shall be deemed adopted and become effective upon the approval thereof by the shareholders of the Company. (b) The Plan shall terminate 10 years after the earlier of the date on which it becomes effective or is approved by shareholders, and no awards shall thereafter be made under the Plan. Notwithstanding the foregoing, all awards made under the Plan prior to such termination date shall remain in effect until such awards have been satisfied or terminated in accordance with the terms and provisions of the Plan and the applicable Plan Agreement. 4.14. Governing Law. The Plan shall be governed by the laws of the State of New York applicable to agreements made and to be performed entirely within such state. ARTICLE 5. STOCK OPTIONS GRANTED TO INDEPENDENT DIRECTORS 5.1. Automatic Grant of Options. Each Independent Director appointed or elected for the first time shall automatically be granted (under this Plan or another Company stock option plan) a NQSO to purchase 7,500 shares of Common Stock on his date of appointment or election. Each Independent Director who is serving as Director of the Company on the fifth business day after each annual meeting of shareholders shall, on such day, automatically be granted (under this Plan or another Company stock option plan) NQSOs to acquire 6,250 shares of Common Stock; provided, however, that an Independent Director who is appointed or elected for the first time shall not be eligible to receive NQSOs pursuant to this sentence for the year of his initial appointment or election. The exercise price per share for the Common Stock covered by a NQSO granted pursuant to this Section 5.1 shall be equal to the FMV of the Common Stock on the date the NQSO is granted. 5.2. Exercise; Termination; Non-Transferability (a) All NQSOs granted under this Article 5 shall be immediately exercisable. No NQSO issued under this Article 5 shall be exercisable after the expiration of ten years from the date upon which such NQSO is granted. (b) The rights of an Independent Director in a NQSO granted under this Article 5 shall terminate twelve months after such Director ceases to be a Director of the Company or the specified expiration date, if earlier; provided, however, that such rights shall terminate immediately on the date on which an Independent Director ceases to be a Director by reason of 13 termination of his directorship on account of any act of (i) fraud or intentional misrepresentation or (ii) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Affiliate. (c) No NQSO granted under this Article 5 shall be transferable by the grantee otherwise than by will or by the laws of descent and distribution, and such grantee shall be exercisable during the grantee's lifetime only by the grantee. Any NQSO granted to an Independent Director and outstanding on the date of his death may be exercised by the legal representative or legatee of the grantee for the period of twelve months from the date of death or until the expiration of the stated term of the option, if earlier. (d) NQSOs granted under this Article 5 may be exercised only by written notice to the Company specifying the number of shares to be purchased. Payment of the full purchase price of the shares to be purchased may be made by certified or official bank check payable to the Company. A grantee shall have the rights of a stockholder only as to shares acquired upon the exercise of a NQSO and not as to unexercised NQSOs. 5.3. Adjustments Upon Changes in Capitalization. The number of shares of Common Stock subject to awards and the option exercise price of NQSOs theretofore granted under this Article 5, and the amount payable by a grantee in respect of an award, shall be appropriately adjusted for any change in the number of issued shares of Common Stock resulting from the subdivision or combination of shares of Common Stock or other capital adjustments, or the payment of a stock dividend after the effective date of the Plan, or other change in such shares of Common Stock effected without receipt of consideration by the Company; provided that any awards covering fractional shares of Common Stock resulting from any such adjustment shall be eliminated. 5.4 Limited to Independent Directors. The provisions of this Article 5 shall apply only to NQSOs granted or to be granted to Independent Directors, shall be interpreted as if this Article 5 constituted a separate plan of the Company and shall not be deemed to modify, limit or otherwise apply to any other provision of this Plan or to any NQSO issued under this Plan to a participant who is not an Independent Director of the Company. To the extent inconsistent with the provisions of any other Section of this Plan, the provisions of this Article 5 shall govern the rights and obligations of the Company and Independent Directors respecting NQSOs granted or to be granted to Independent Directors. The provisions of this Article 5 shall not be amended more than once every six months other than to comport with changes in applicable law. 14 EX-10.2 4 ex10-2.txt EXHIBIT 10.2 EXHIBIT 10.2 RECKSON ASSOCIATES REALTY CORP. AMENDED AND RESTATED 1997 STOCK OPTION PLAN As Amended Through March 5, 2001 ARTICLE 1. GENERAL 1.1. Purpose. The purpose of the Reckson Associates Realty Corp. 1997 Stock Option Plan (the "Plan") is to provide for certain officers, directors and key employees, as defined in Section 1.3, of Reckson Associates Realty Corp. (the "Company") and certain of its Affiliates (as defined below) an equity-based incentive to maintain and enhance the performance and profitability of the Company. It is the further purpose of this Plan to permit the granting of awards that will constitute performance based compensation for certain executive officers, as described in Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations promulgated thereunder. 1.2. Administration. (a) The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"), which Committee shall consist of two or more directors, or by the Board. It is intended that the directors appointed to serve on the Committee shall be "non-employee directors" (within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Act")) and "outside directors" (within the meaning of Code Section 162(m)); however, the mere fact that a Committee member shall fail to qualify under either of these requirements shall not invalidate any award made by the Committee which award is otherwise validly made under the Plan. The members of the Committee shall be appointed by, and may be changed at any time and from time to time in the discretion of, the Board. (b) The Committee shall have the authority (i) to exercise all of the powers granted to it under the Plan, (ii) to construe, interpret and implement the Plan and any Plan Agreements (as defined below) executed pursuant to the Plan, (iii) to prescribe, amend and rescind rules relating to the Plan, (iv) to make any determination necessary or advisable in administering the Plan, (v) to correct any defect, supply any omission and reconcile any inconsistency in the Plan and (vi) to delegate to Donald J. Rechler and Scott H. Rechler (the "Proper Officers") its authority to grant awards under the Plan to key employees, excluding those employees who are executive officers ("Non-Executive Officers"), provided that (a) the aggregate number of shares of Common Stock granted to any Non-Executive Officer during any calendar year shall not exceed 100,000 shares and (b) the Proper Officers shall report quarterly to the Committee regarding the material terms of awards granted to any Non-Executive Officers. The Committee shall have no authority to interpret or administer Article 5 of the Plan or to take any action with respect to any awards thereunder. (c) The determination of the Committee on all matters relating to the Plan or any Plan Agreement shall be conclusive. (d) No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any award hereunder. (e) Notwithstanding anything to the contrary contained herein, the Board may, in its sole discretion, at any time and from time to time, resolve to administer the Plan, in which case, the term Committee as used herein shall be deemed to mean the Board. 1.3. Persons Eligible for Awards. Awards under the Plan may be made to such officers, directors and key employees ("key personnel") of the Company or its Affiliates as the Committee shall from time to time in its sole discretion select. No member of the Board who is not an officer or employee of the Company or an Affiliate (an "Independent Director") shall be eligible to receive any Awards under the Plan, except for non-qualified stock options granted automatically under the provisions of Article 5 of the Plan. 1.4. Types of Awards Under Plan. (a) Awards may be made under the Plan in the form of (i) stock options ("options"), (ii) restricted stock awards and (iii) unrestricted stock awards, in lieu of cash compensation, all as more fully set forth in Articles 2 and 3. (b) Options granted under the Plan may be either (i) "nonqualified" stock options ("NQSOs") or (ii) options intended to qualify for incentive stock option treatment described in Code Section 422 ("ISOs"). Grants of options made under the Plan may also be made in lieu of cash fees otherwise payable to Directors of the Company or cash bonuses payable to employees of the Company or any Affiliate. (c) All options when granted are intended to be NQSOs, unless the applicable Plan Agreement explicitly states that the option is intended to be an ISO. If an option is intended to be an ISO, and if for any reason such option (or any portion thereof) shall not qualify as an ISO, then, to the extent of such nonqualification, such option (or portion) shall be regarded as a NQSO appropriately granted under the Plan provided that such option (or portion) otherwise meets the Plan's requirements relating to NQSOs. 1.5. Shares Available for Awards. (a) Subject to Section 4.5 (relating to adjustments upon changes in capitalization), as of any date the total number of shares of Common Stock with respect to which awards may be granted under the Plan, shall equal the excess (if any) of 3,000,000 shares of Common Stock, over (i) the number of shares of Common Stock subject to outstanding awards, (ii) the number of shares in respect of which options have been exercised, or grants of restricted or unrestricted Common Stock have been made pursuant to the Plan, and (iii) the number of shares issued subject to forfeiture restrictions which have lapsed. In accordance with (and without limitation upon) the preceding sentence, awards may be granted in respect of the following shares of Common Stock: shares covered by previously-granted awards that have expired, terminated or been cancelled for any reason whatsoever (other than by reason of exercise or vesting). 2 (b) In any year, a person eligible for awards under the Plan may not be granted options under the Plan covering a total of more than 150,000 shares of Common Stock. (c) Shares of Common Stock that shall be subject to issuance pursuant to the Plan shall be authorized and unissued or treasury shares of Common Stock, or shares of Common Stock purchased on the open market or from shareholders of the Company for such purpose. (d) Without limiting the generality of the foregoing, the Committee may, with the grantee's consent, cancel any award under the Plan and issue a new award in substitution therefor upon such terms as the Committee may in its sole discretion determine, provided that the substituted award shall satisfy all applicable Plan requirements as of the date such new award is made. 1.6. Definitions of Certain Terms. (a) The term "Affiliate" as used herein means Reckson Operating Partnership, L.P., Reckson FS Limited Partnership, RANY Management Group, Inc., Reckson Finance, Inc., Reckson Management Group, Inc., Reckson Construction Group, Inc., and any person or entity as subsequently approved by the Board which, at the time of reference, directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the Company. (b) The term "Cause" shall mean a finding by the Committee that the recipient of an award under the Plan has (i) acted with gross negligence or willful misconduct in connection with the performance of his material duties to the Company or its Affiliates; (ii) defaulted in the performance of his material duties to the Company or its Affiliates and has not corrected such action within 15 days of receipt of written notice thereof; (iii) willfully acted against the best interests of the Company or its Affiliates, which act has had a material and adverse impact on the financial affairs of the Company or its Affiliates; or (iv) been convicted of a felony or committed a material act of common law fraud against the Company, its Affiliates or their employees and such act or conviction has, or the Committee reasonably determines will have, a material adverse effect on the interests of the Company or its Affiliates. (c) The term "Common Stock" as used herein means the shares of Class A common stock of the Company as constituted on the effective date of the Plan, and any other shares into which such common stock shall thereafter be changed by reason of a recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like. (d) The "fair market value" (or "FMV") as of any date and in respect of any share of Common Stock shall be: (i) if the Common Stock is listed for trading on the New York Stock Exchange, the closing price, regular way, of the Common Stock as reported on the New York Stock Exchange Composite Tape, or if no such reported sale of the Common Stock shall have occurred on such date, on the next preceding date on which there was such a reported sale; or 3 (ii) the Common Stock is not so listed but is listed on another national securities exchange or authorized for quotation on the National Association of Securities Dealers Inc.'s NASDAQ National Market System ("NASDAQ/NMS"), the closing price, regular way, of the Common Stock on such exchange or NASDAQ/NMS, as the case may be, on which the largest number of shares of Common Stock have been traded in the aggregate on the preceding twenty trading days, or if no such reported sale of the Stock shall have occurred on such date on such exchange or NASDAQ/NMS, as the case may be, on the preceding date on which there was such a reported sale on such exchange or NASDAQ/NMS, as the case may be; or (iii) if the Stock is not listed for trading on a national securities exchange or authorized for quotation on NASDAQ/NMS, the average of the closing bid and asked prices as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or, if no such prices shall have been so reported for such date, on the next preceding date for which such prices were so reported. 1.7. Agreements Evidencing Awards. (a) Options and restricted stock awards granted under the Plan shall be evidenced by written agreements. Any such written agreements shall (i) contain such provisions not inconsistent with the terms of the Plan as the Committee may in its sole discretion deem necessary or desirable and (ii) be referred to herein as "Plan Agreements." (b) Each Plan Agreement shall set forth the number of shares of Common Stock subject to the award granted thereby. (c) Each Plan Agreement with respect to the granting of an option shall set forth the amount (the "option exercise price") payable by the grantee to the Company in connection with the exercise of the option evidenced thereby. The option exercise price per share shall not be less than 100% of the fair market value of a share of Common Stock on the date the option is granted. ARTICLE 2. STOCK OPTIONS 2.1. Option Awards. (a) Grant of Stock Options. The Committee may grant options to purchase shares of Common Stock in such amounts and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine, subject to the terms of the Plan. (b) Dividend Equivalent Rights. To the extent expressly provided by the Committee at the time of the grant, each NQSO granted under this Section 2.1 shall also generate Dividend Equivalent Rights ("DERs"), which shall entitle the grantee to receive an additional share of Common Stock for each DER received upon the exercise of the NQSO, at no additional cost, based on the formula set forth herein. As of the last business day of each calendar quarter, the amount of dividends paid by the Company on each share of Common Stock with respect to that 4 quarter shall be divided by the FMV per share to determine the actual number of DERs accruing on each share subject to the NQSO. Such amount of DERs shall be multiplied by the number of shares covered by the NQSO to determine the number of DERs which accrued during such quarter. The provisions of this Section 2.1(b) shall not be amended more than once every six months other than to comport with changes in applicable law. For example. Assume that a grantee holds a NQSO to purchase 600 shares of Common Stock. Further assume that the dividend per share for the first quarter was $0.10, and that the FMV per share on the last business day of the quarter was $20. Therefore, .005 DER would accrue per share for that quarter and such grantee would receive three DERs for that quarter (600 X .005). For purposes of determining how many DERs would accrue during the second quarter, the NQSO would be considered to be for 603 shares of Common Stock. 2.2. Exercisability of Options. Subject to the other provisions of the Plan: (a) Exercisability Determined by Plan Agreement. Each Plan Agreement shall set forth the period during which and the conditions subject to which the option shall be exercisable (including, but not limited to vesting of such options), as determined by the Committee in its discretion. (b) Partial Exercise Permitted. Unless the applicable Plan Agreement otherwise provides, an option granted under the Plan may be exercised from time to time as to all or part of the full number of shares for which such option is then exercisable, in which event the DERs relating to the portion of the option being exercised shall also be exercised. (c) Notice of Exercise; Exercise Date. (i) An option shall be exercisable by the filing of a written notice of exercise with the Company, on such form and in such manner as the Committee shall in its sole discretion prescribe, and by payment in accordance with Section 2.4. (ii) Unless the applicable Plan Agreement otherwise provides, or the Committee in its sole discretion otherwise determines, the date of exercise of an option shall be the date the Company receives such written notice of exercise and payment. 2.3. Limitation on Exercise. Notwithstanding any other provision of the Plan, no Plan Agreement shall permit an ISO to be exercisable more than 10 years after the date of grant. 2.4. Payment of Option Price. (a) Tender Due Upon Notice of Exercise. Unless the applicable Plan Agreement otherwise provides or the Committee in its sole discretion otherwise determines, any written notice of exercise of an option shall be accompanied by payment of the full purchase price for the shares being purchased. (b) Manner of Payment. Payment of the option exercise price shall be made in any combination of the following: 5 (i) by certified or official bank check payable to the Company (or the equivalent thereof acceptable to the Committee); (ii) by personal check (subject to collection), which may in the Committee's discretion be deemed conditional; (iii) with the consent of the Committee in its sole discretion, by delivery of previously acquired shares of Common Stock owned by the grantee for at least six months having a fair market value (determined as of the option exercise date) equal to the portion of the option exercise price being paid thereby, provided that the Committee may require the grantee to furnish an opinion of counsel acceptable to the Committee to the effect that such delivery would not result in the grantee incurring any liability under Section 16(b) of the Act and does not require any Consent (as defined in Section 4.2); and (iv) with the consent of the Committee in its sole discretion, by the full recourse promissory note and agreement of the grantee providing for payment with interest on the unpaid balance accruing at a rate not less than that needed to avoid the imputation of income under Code Section 7872 and upon such terms and conditions (including the security, if any, therefor) as the Committee may determine; and (v) by withholding shares of Common Stock from the shares otherwise issuable pursuant to the exercise. (c) Cashless Exercise. Payment in accordance with Section 2.4(b) may be deemed to be satisfied, if and to the extent provided in the applicable Plan Agreement, by delivery to the Company of an assignment of a sufficient amount of the proceeds from the sale of Common Stock acquired upon exercise to pay for all of the Common Stock acquired upon exercise and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be made at the grantee's direction at the time of exercise, provided that the Committee may require the grantee to furnish an opinion of counsel acceptable to the Committee to the effect that such delivery would not result in the grantee incurring any liability under Section 16 of the Act and does not require any Consent (as defined in Section 4.2). (d) Issuance of Shares. As soon as practicable after receipt of full payment, the Company shall, subject to the provisions of Section 4.2, deliver to the grantee one or more certificates for the shares of Common Stock so purchased, which certificates may bear such legends as the Company may deem appropriate concerning restrictions on the disposition of the shares in accordance with applicable securities laws, rules and regulations or otherwise. 2.5. Default Rules Concerning Termination of Employment. Subject to the other provisions of the Plan and unless the applicable Plan Agreement otherwise provides: 6 (a) General Rule. All options granted to a grantee shall terminate upon the grantee's termination of employment for any reason except to the extent post-employment exercise of the option is permitted in accordance with this Section 2.5. (b) Termination for Cause. All unexercised or unvested options granted to a grantee shall terminate and expire on the day a grantee's employment is terminated for Cause. (c) Regular Termination; Leave of Absence. If the grantee's employment terminates for any reason other than as provided in subsection (b), (d) or (f) of this Section 2.5, any awards granted to such grantee which were exercisable immediately prior to such termination of employment may be exercised, and any awards subject to vesting may continue to vest, until the earlier of either: (i) 90 days after the grantee's termination of employment and (ii) the date on which such options terminate or expire in accordance with the provisions of the Plan (other than this Section 2.5) and the Plan Agreement; provided that the Committee may, in its sole discretion, determine such other period for exercise in the case of a grantee whose employment terminates solely because the grantee's employer ceases to be an Affiliate or the grantee transfers employment with the Company's consent to a purchaser of a business disposed of by the Company. The Committee may, in its sole discretion, determine (i) whether any leave of absence (including short-term or long-term disability or medical leave) shall constitute a termination of employment for purposes of the Plan and (ii) the effect, if any, of any such leave on outstanding awards under the Plan. (d) Retirement. If a grantee's employment terminates by reason of retirement (i.e., the voluntary termination of employee by a grantee after attaining the age of 55), the options exercisable by the grantee immediately prior to the grantee's retirement shall be exercisable by the grantee until the earlier of (i) 36 months after the grantee's retirement and (ii) the date on which such options terminate or expire in accordance with the provisions of the Plan (other than this Section 2.5) and the Plan Agreement. (e) Death After Termination. If a grantee's employment terminates in the manner described in subsections (c) or (d) of this Section 2.5 and the grantee dies within the period for exercise provided for therein, the options exercisable by the grantee immediately prior to the grantee's death shall be exercisable by the personal representative of the grantee's estate or by the person to whom such options pass under the grantee's will (or, if applicable, pursuant to the laws of descent and distribution) until the earlier of (i) 12 months after the grantee's death and (ii) the date on which such options terminate or expire in accordance with the provisions of subsections (c) or (d) of this Section 2.5. (f) Death Before Termination. If a grantee dies while employed by the Company or any Affiliate, all options granted to the grantee but not exercised before the death of the grantee, whether or not exercisable by the grantee before the grantee's death, shall immediately become and be exercisable by the personal representative of the grantee's estate or by the person to whom such options pass under the grantee's will (or, if applicable, pursuant to the laws of descent and distribution) until the earlier of (i) 12 months after the grantee's death and (ii) the date on which such options terminate or expire in accordance with the provisions of the Plan (other than this Section 2.5) and the Plan Agreement. 7 2.6. Special ISO Requirements. In order for a grantee to receive special tax treatment with respect to stock acquired under an option intended to be an ISO, the grantee of such option must be, at all times during the period beginning on the date of grant and ending on the day three months before the date of exercise of such option, an employee of the Company or any of the Company's parent or subsidiary corporations (within the meaning of Code Section 424), or of a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which Code Section 424(a) applies. If an option granted under the Plan is intended to be an ISO, and if the grantee, at the time of grant, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the grantee's employer corporation or of its parent or subsidiary corporation, then (i) the option exercise price per share shall in no event be less than 110% of the fair market value of the Common Stock on the date of such grant and (ii) such option shall not be exercisable after the expiration of five years after the date such option is granted. ARTICLE 3. RESTRICTED STOCK AND UNRESTRICTED STOCK AWARDS 3.1. Restricted Stock Awards. (a) Grant of Awards. The Committee may grant restricted stock awards, alone or in tandem with other awards, under the Plan in such amounts and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine; provided, however, that the grant of any such restricted stock awards may be made in lieu of, or in tandem with other, cash compensation and bonuses. The vesting of a restricted stock award granted under the Plan may be conditioned upon the completion of a specified period of employment with the Company or any Affiliate, upon the attainment of specified performance goals, and/or upon such other criteria as the Committee may determine in its sole discretion. (b) Payment. Each Plan Agreement with respect to a restricted stock award shall set forth the amount (if any) to be paid by the grantee with respect to such award. If a grantee makes any payment for a restricted stock award which does not vest, appropriate payment may be made to the grantee following the forfeiture of such award on such terms and conditions as the Committee may determine. The Committee shall have the authority to make or authorize loans to finance, or to otherwise accommodate the financing of, the acquisition or exercise of a restricted stock award. (c) Forfeiture upon Termination of Employment. Unless the applicable Plan Agreement otherwise provides or the Committee otherwise determines, (i) if a grantee's employment terminates for any reason (including death) before all of his restricted stock awards have vested, such awards shall terminate and expire upon such termination of employment, and (ii) in the event any condition to the vesting of restricted stock awards is not satisfied within the period of time permitted therefor, such unvested shares shall be returned to the Company. (d) Issuance of Shares. The Committee may provide that one or more certificates representing restricted stock awards shall be registered in the grantee's name and bear an appropriate legend specifying that such shares are not transferable and are subject to the terms and conditions of the Plan and the applicable Plan Agreement, or that such certificate or certificates shall be held in escrow by the Company on behalf of the grantee until such shares 8 vest or are forfeited, all on such terms and conditions as the Committee may determine. Unless the applicable Plan Agreement otherwise provides, no share of restricted stock may be assigned, transferred, otherwise encumbered or disposed of by the grantee until such share has vested in accordance with the terms of such award. Subject to the provisions of Section 4.2, as soon as practicable after any restricted stock award shall vest, the Company shall issue or reissue to the grantee (or to the grantee's designated beneficiary in the event of the grantee's death) one or more certificates for the Common Stock represented by such restricted stock award. (e) Grantees' Rights Regarding Restricted Stock. Unless the applicable Plan Agreement otherwise provides: (i) a grantee may vote and receive dividends on restricted stock awarded under the Plan; and (ii) any stock received as a distribution with respect to a restricted stock award shall be subject to the same restrictions as such restricted stock. 3.2. Unrestricted Stock. The Committee may issue unrestricted stock under the Plan, alone or in tandem with other awards, in such amounts and subject to such terms and conditions as the Committee shall from time to time in its sole discretion determine; provided, however, that the grant of any such unrestricted stock awards may be made in lieu of, or in tandem with other, cash compensation and bonuses. The Committee shall have the authority to make or authorize loans to finance, or to otherwise accommodate the financing of, the acquisition or exercise of an unrestricted stock award. ARTICLE 4. MISCELLANEOUS 4.1. Amendment of the Plan; Modification of Awards. (a) Plan Amendments. The Board may, without stockholder approval, at any time and from time to time suspend, discontinue or amend the Plan in any respect whatsoever, except that no such amendment shall impair any rights under any award theretofore made under the Plan without the consent of the grantee of such award. Furthermore, except as and to the extent otherwise permitted by Section 4.5 or 4.11, no such amendment shall, without stockholder approval: (i) materially increase the benefits accruing to grantees under the Plan; (ii) increase the maximum number of shares which may be made subject to awards to an individual as options in any year; (iii) materially increase, beyond the amounts set forth in Section 1.5, the number of shares of Common Stock in respect of which awards may be issued under the Plan; (iv) materially modify the designation in Section 1.3 of the class of persons eligible to receive awards under the Plan; (v) provide for the grant of stock options having an option exercise price per share of Common Stock less than 100% of the fair market value of a share of Common Stock on the date of grant; or 9 (vi) extend the term of the Plan beyond the period set forth in Section 4.13. (b) Award Modifications. Subject to the terms and conditions of the Plan (including Section 4.1(a)), the Committee may amend outstanding Plan Agreements with such grantee, including, without limitation, any amendment which would (i) accelerate the time or times at which an award may vest or become exercisable and/or (ii) extend the scheduled termination or expiration date of the award, provided, however, that no modification having a material adverse effect upon the interest of a grantee in an award shall be made without the consent of such grantee. 4.2. Restrictions. (a) Consent Requirements. If the Committee shall at any time determine that any Consent (as hereinafter defined) is necessary or desirable as a condition of, or in connection with, the granting of any award under the Plan, the acquisition, issuance or purchase of shares or other rights hereunder or the taking of any other action hereunder (each such action being hereinafter referred to as a "Plan Action"), then such Plan Action shall not be taken, in whole or in part, unless and until such Consent shall have been effected or obtained to the full satisfaction of the Committee. Without limiting the generality of the foregoing, the Committee shall be entitled to determine not to make any payment whatsoever until Consent has been given if (i) the Committee may make any payment under the Plan in cash, Common Stock or both, and (ii) the Committee determines that Consent is necessary or desirable as a condition of, or in connection with, payment in any one or more of such forms. (b) Consent Defined. The term "Consent" as used herein with respect to any Plan Action means (i) any and all listings, registrations or qualifications in respect thereof upon any securities exchange or other self-regulatory organization or under any federal, state or local law, rule or regulation, (ii) the expiration, elimination or satisfaction of any prohibitions, restrictions or limitations under any federal, state or local law, rule or regulation or the rules of any securities exchange or other self-regulatory organization, (iii) any and all written agreements and representations by the grantee with respect to the disposition of shares, or with respect to any other matter, which the Committee shall deem necessary or desirable to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made, and (iv) any and all consents, clearances and approvals in respect of a Plan Action by any governmental or other regulatory bodies or any parties to any loan agreements or other contractual obligations of the Company or any Affiliate. 4.3. Nontransferability. No award granted to any grantee under the Plan or under any Plan Agreement shall be assignable or transferable by the grantee other than by will or by the laws of descent and distribution. During the lifetime of the grantee, all rights with respect to any award granted to the grantee under the Plan or under any Plan Agreement shall be exercisable only by the grantee. 4.4. Withholding Taxes. (a) Whenever under the Plan shares of Common Stock are to be delivered pursuant to an award, the Committee may require as a condition of delivery that the grantee remit an amount 10 sufficient to satisfy all federal, state and other governmental withholding tax requirements related thereto. Whenever cash is to be paid under the Plan, the Company may, as a condition of its payment, deduct therefrom, or from any salary or other payments due to the grantee, an amount sufficient to satisfy all federal, state and other governmental withholding tax requirements related thereto or to the delivery of any shares of Common Stock under the Plan. (b) Without limiting the generality of the foregoing, (i) a grantee may elect to satisfy all or part of the foregoing withholding requirements by delivery of unrestricted shares of Common Stock owned by the grantee for at least six months (or such other period as the Committee may determine) having a fair market value (determined as of the date of such delivery by the grantee) equal to all or part of the amount to be so withheld, provided that the Committee may require, as a condition of accepting any such delivery, the grantee to furnish an opinion of counsel acceptable to the Committee to the effect that such delivery would not result in the grantee incurring any liability under Section 16(b) of the Act and (ii) the Committee may permit any such delivery to be made by withholding shares of Common Stock from the shares otherwise issuable pursuant to the award giving rise to the tax withholding obligation (in which event the date of delivery shall be deemed the date such award was exercised). 4.5. Adjustments Upon Changes in Capitalization. If and to the extent specified by the Committee, the number of shares of Common Stock which may be issued pursuant to awards under the Plan, the maximum number of options which may be granted to any one person in any year, the number of shares of Common Stock subject to awards, the option exercise price of options theretofore granted under the Plan, and the amount payable by a grantee in respect of an award, shall be appropriately adjusted (as the Committee may determine) for any change in the number of issued shares of Common Stock resulting from the subdivision or combination of shares of Common Stock or other capital adjustments, or the payment of a stock dividend after the effective date of the Plan, or other change in such shares of Common Stock effected without receipt of consideration by the Company; provided that any awards covering fractional shares of Common Stock resulting from any such adjustment shall be eliminated and provided further, that each ISO granted under the Plan shall not be adjusted in a manner that causes such option to fail to continue to qualify as an ISO within the meaning of Code Section 422. Adjustments under this Section shall be made by the Committee, whose determination as to what adjustments shall be made, and the extent thereof, shall be final, binding and conclusive. 4.6. Right of Discharge Reserved. Nothing in the Plan or in any Plan Agreement shall confer upon any person the right to continue in the employment of the Company or an Affiliate or affect any right which the Company or an Affiliate may have to terminate the employment of such person. 4.7. No Rights as a Stockholder. No grantee or other person shall have any of the rights of a stockholder of the Company with respect to shares subject to an award until the issuance of a stock certificate to him for such shares. Except as otherwise provided in Section 4.5, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities or other property) for which the record date is prior to the date such stock certificate is issued. In the case of a grantee of an award which has not yet vested, the grantee shall have the rights of a stockholder of the Company if and only to the extent provided in the applicable Plan Agreement. 11 4.8. Nature of Payments. (a) Any and all awards or payments hereunder shall be granted, issued, delivered or paid, as the case may be, in consideration of services performed for the Company or for its Affiliates by the grantee. (b) No such awards and payments shall be considered special incentive payments to the grantee or, unless otherwise determined by the Committee, be taken into account in computing the grantee's salary or compensation for the purposes of determining any benefits under (i) any pension, retirement, life insurance or other benefit plan of the Company or any Affiliate or (ii) any agreement between the Company or any Affiliate and the grantee. (c) By accepting an award under the Plan, the grantee shall thereby waive any claim to continued exercisability or vesting of an award or to damages or severance entitlement related to non-continuation of the award beyond the period provided herein or in the applicable Plan Agreement, notwithstanding any contrary provision in any written employment contract with the grantee, whether any such contract is executed before or after the grant date of the award. 4.9. Non-Uniform Determinations. The Committee's determinations under the Plan need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Committee shall be entitled, among other things, to make non-uniform and selective determinations, and to enter into non-uniform and selective Plan Agreements, as to (a) the persons to receive awards under the Plan, (b) the terms and provisions of awards under the Plan, and (c) the treatment of leaves of absence pursuant to Section 2.7(c). 4.10. Other Payments or Awards. Nothing contained in the Plan shall be deemed in any way to limit or restrict the Company, any Affiliate or the Committee from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect. 4.11. Reorganization. (a) In the event that the Company is merged or consolidated with another corporation and, whether or not the Company shall be the surviving corporation, there shall be any change in the shares of Common Stock by reason of such merger or consolidation, or in the event that all or substantially all of the assets of the Company are acquired by another person, or in the event of a reorganization or liquidation of the Company (each such event being hereinafter referred to as a "Reorganization Event") or in the event that the Board shall propose that the Company enter into a Reorganization Event, then the Committee may in its discretion, by written notice to a grantee, provide that his options will be terminated unless exercised within 30 days (or such longer period as the Committee shall determine in its sole discretion) after the date of such notice; provided that if, and to the extent that, the Committee takes such action with respect to the grantee's options not yet exercisable, the Committee shall also accelerate the dates upon which such options shall be exercisable. The Committee also may in its discretion by written notice to a grantee provide that all or some of the restrictions on any of the grantee's awards may lapse in 12 the event of a Reorganization Event upon such terms and conditions as the Committee may determine. (b) Whenever deemed appropriate by the Committee, the actions referred to in Section 4.11(a) may be made conditional upon the consummation of the applicable Reorganization Event. 4.12. Section Headings. The section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of said sections. 4.13. Effective Date and Term of Plan. (a) The Plan shall be deemed adopted and become effective upon the approval thereof by the shareholders of the Company. (b) The Plan shall terminate 10 years after the earlier of the date on which it becomes effective or is approved by shareholders, and no awards shall thereafter be made under the Plan. Notwithstanding the foregoing, all awards made under the Plan prior to such termination date shall remain in effect until such awards have been satisfied or terminated in accordance with the terms and provisions of the Plan and the applicable Plan Agreement. 4.14. Governing Law. The Plan shall be governed by the laws of the State of New York applicable to agreements made and to be performed entirely within such state. ARTICLE 5. STOCK OPTIONS GRANTED TO INDEPENDENT DIRECTORS 5.1. Automatic Grant of Options. Each Independent Director appointed or elected for the first time shall automatically be granted (under this Plan or another Company stock option plan) a NQSO to purchase 7,500 shares of Common Stock on his date of appointment or election. Each Independent Director who is serving as Director of the Company on the fifth business day after each annual meeting of shareholders shall, on such day, automatically be granted (under this Plan or another Company stock option plan) NQSOs to acquire 6,250 shares of Common Stock; provided, however, that an Independent Director who is appointed or elected for the first time shall not be eligible to receive NQSOs pursuant to this sentence for the year of his initial appointment or election. The exercise price per share for the Common Stock covered by a NQSO granted pursuant to this Section 5.1 shall be equal to the FMV of the Common Stock on the date the NQSO is granted. 5.2. Exercise; Termination; Non-Transferability (a) All NQSOs granted under this Article 5 shall be immediately exercisable. No NQSO issued under this Article 5 shall be exercisable after the expiration of ten years from the date upon which such NQSO is granted. (b) The rights of an Independent Director in a NQSO granted under this Article 5 shall terminate twelve months after such Director ceases to be a Director of the Company or the specified expiration date, if earlier; provided, however, that such rights shall terminate immediately on the date on which an Independent Director ceases to be a Director by reason of 13 termination of his directorship on account of any act of (i) fraud or intentional misrepresentation or (ii) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Affiliate. (c) No NQSO granted under this Article 5 shall be transferable by the grantee otherwise than by will or by the laws of descent and distribution, and such grantee shall be exercisable during the grantee's lifetime only by the grantee. Any NQSO granted to an Independent Director and outstanding on the date of his death may be exercised by the legal representative or legatee of the grantee for the period of twelve months from the date of death or until the expiration of the stated term of the option, if earlier. (d) NQSOs granted under this Article 5 may be exercised only by written notice to the Company specifying the number of shares to be purchased. Payment of the full purchase price of the shares to be purchased may be made by certified or official bank check payable to the Company. A grantee shall have the rights of a stockholder only as to shares acquired upon the exercise of a NQSO and not as to unexercised NQSOs. 5.3. Adjustments Upon Changes in Capitalization. The number of shares of Common Stock subject to awards and the option exercise price of NQSOs theretofore granted under this Article 5, and the amount payable by a grantee in respect of an award, shall be appropriately adjusted for any change in the number of issued shares of Common Stock resulting from the subdivision or combination of shares of Common Stock or other capital adjustments, or the payment of a stock dividend after the effective date of the Plan, or other change in such shares of Common Stock effected without receipt of consideration by the Company; provided that any awards covering fractional shares of Common Stock resulting from any such adjustment shall be eliminated. 5.4 Limited to Independent Directors. The provisions of this Article 5 shall apply only to NQSOs granted or to be granted to Independent Directors, shall be interpreted as if this Article 5 constituted a separate plan of the Company and shall not be deemed to modify, limit or otherwise apply to any other provision of this Plan or to any NQSO issued under this Plan to a participant who is not an Independent Director of the Company. To the extent inconsistent with the provisions of any other Section of this Plan, the provisions of this Article 5 shall govern the rights and obligations of the Company and Independent Directors respecting NQSOs granted or to be granted to Independent Directors. The provisions of this Article 5 shall not be amended more than once every six months other than to comport with changes in applicable law. 14 -----END PRIVACY-ENHANCED MESSAGE-----