-----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, Nz3n20d1fkK1XYsxEv1G1cqG1bY3XJOF/QzUiIjDVh9fMks1WGH5Ga+aiJPMWMEz rZHKhZ+HFJE6jHJ2vuRHZg== 0001005150-02-001235.txt : 20021112 0001005150-02-001235.hdr.sgml : 20021111 20021112172356 ACCESSION NUMBER: 0001005150-02-001235 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021112 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: 02817980 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, 2002 COMMISSION FILE NUMBER: 1-13762 RECKSON ASSOCIATES REALTY CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 11-3233650 - -------- ---------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) 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 . --- --- INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES X NO . --- --- ---------------------------------------------- THE COMPANY HAS TWO CLASSES OF COMMON STOCK, PAR VALUE $.01 PAR VALUE PER SHARE, WITH 49,812,033 AND 9,915,313 SHARES OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK OUTSTANDING, RESPECTIVELY AS OF NOVEMBER 8, 2002 =============================================================================== RECKSON ASSOCIATES REALTY CORP. QUARTERLY REPORT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 TABLE OF CONTENTS
INDEX PAGE - ------------------------------------------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION - ------------------------------------------------------------------------------------------------------------------- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001......... 2 Consolidated Statements of Income for the three and nine months ended September 30, 2002 and 2001 (unaudited)......................................................... 3 Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 (unaudited)......................................................... 4 Notes to the Consolidated Financial Statements (unaudited)...................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 16 Item 3. Quantitative and Qualitative Disclosures about Market Risk ..................................... 29 Item 4. Controls and Procedures......................................................................... 30 - ------------------------------------------------------------------------------------------------------------------- PART II. OTHER INFORMATION - ------------------------------------------------------------------------------------------------------------------- Item 1. Legal Proceedings.............................................................................. 34 Item 2. Changes in Securities and Use of Proceeds...................................................... 34 Item 3. Defaults Upon Senior Securities................................................................ 34 Item 4. Submission of Matters to a Vote of Securities Holders.......................................... 34 Item 5. Other Information.............................................................................. 34 Item 6. Exhibits and Reports on Form 8-K............................................................... 34 - ------------------------------------------------------------------------------------------------------------------- SIGNATURES 35 - -------------------------------------------------------------------------------------------------------------------
1 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, 2002 2001 ------------- ----------- (Unaudited) ASSETS: Commercial real estate properties, at cost: Land ..................................................................................... $ 417,351 $ 408,837 Building and improvements ................................................................ 2,400,577 2,328,374 Developments in progress: Land ..................................................................................... 91,396 69,365 Development costs ........................................................................ 26,371 74,303 Furniture, fixtures and equipment ............................................................ 7,811 7,725 ----------- ----------- 2,943,506 2,888,604 Less accumulated depreciation ................................................................ (428,150) (361,960) ----------- ----------- 2,515,356 2,526,644 Investments in real estate joint ventures .................................................... 5,680 5,744 Investments in mortgage notes and notes receivable ........................................... 55,695 56,234 Investments in service companies and affiliate loans and joint ventures ...................... 80,130 79,184 Cash and cash equivalents .................................................................... 32,631 121,975 Tenant receivables ........................................................................... 9,321 9,633 Deferred rents receivable .................................................................... 100,755 81,089 Prepaid expenses and other assets ............................................................ 30,964 45,495 Contract and land deposits and pre-acquisition costs ......................................... 121 3,782 Deferred leasing and loan costs .............................................................. 68,295 64,438 ----------- ----------- TOTAL ASSETS ................................................................................. $ 2,898,948 $ 2,994,218 =========== =========== LIABILITIES: Mortgage notes payable ....................................................................... $ 743,148 $ 751,077 Unsecured credit facility .................................................................... 224,000 271,600 Senior unsecured notes ....................................................................... 499,272 449,463 Accrued expenses and other liabilities ....................................................... 80,181 87,683 Dividends and distributions payable .......................................................... 32,234 32,988 ----------- ----------- TOTAL LIABILITIES ............................................................................ 1,578,835 1,592,811 ----------- ----------- Minority partners' interests in consolidated partnerships .................................... 242,720 242,698 Preferred unit interest in the operating partnership ......................................... 19,662 30,965 Limited partners' minority interest in the operating partnership ............................. 74,288 81,887 ----------- ----------- 336,670 355,550 ----------- ----------- Commitments and contingencies ................................................................ -- -- STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value, 25,000,000 shares authorized Series A preferred stock, 9,192,000 shares issued and outstanding......................... 92 92 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, 49,152,033 and 49,982,377 shares issued and outstanding, respectively.................................................... 492 500 Class B common stock, 9,915,313 and 10,283,513 shares issued and outstanding, respectively........................................................................... 99 103 Treasury stock - Class A common, 1,856,200 and 0, respectively and Class B common, 368,200 and 0, respectively............................................................. (49,227) -- Additional paid in capital................................................................... 1,031,967 1,045,142 ----------- ----------- Total Stockholders' Equity ................................................................... 983,443 1,045,857 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................................... $ 2,898,948 $ 2,994,218 =========== ===========
(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, ---------------------------- --------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ REVENUES: Base rents ............................................................ $ 111,175 $ 110,594 $ 326,424 $ 327,697 Tenant escalations and reimbursements ................................. 15,272 15,273 44,656 45,198 Equity in earnings of real estate joint ventures and service companies 104 505 598 1,704 Interest income on mortgage notes and notes receivable ................ 1,589 1,584 4,710 4,651 Gain on sales of real estate .......................................... -- 972 537 972 Investment and other income ........................................... 642 3,244 1,459 13,463 ------------ ------------ ------------ ------------ TOTAL REVENUES .................................................... 128,782 132,172 378,384 393,685 ============ ============ ============ ============ EXPENSES: Property operating expenses ........................................... 46,135 43,844 129,461 125,047 Marketing, general and administrative ................................. 7,965 7,629 22,710 23,438 Interest .............................................................. 22,653 23,510 65,772 70,701 Depreciation and amortization ......................................... 29,147 26,318 82,913 76,601 ------------ ------------ ------------ ------------ TOTAL EXPENSES ................................................... 105,900 101,301 300,856 295,787 ============ ============ ============ ============ Income from continuing operations before minority interests, preferred dividends and distributions, valuation reserves on investments in affiliate loans and joint ventures, discontinued operations and extraordinary loss .............................................. 22,882 30,871 77,528 97,898 Minority partners' interests in consolidated partnerships ............. (4,446) (3,065) (14,379) (12,885) Distributions to preferred unit holders ............................... (273) (509) (1,014) (1,630) Valuation reserves on investments in affiliate loans and joint ventures -- (163,000) -- (163,000) Limited partners' minority interest in the operating partnership ...... (1,249) 14,684 (4,796) 9,437 ------------ ------------ ------------ ------------ Income (loss) before discontinued operations, extraordinary loss and preferred dividends ............................................ 16,914 (121,019) 57,339 (70,180) Discontinued operations (net of limited partners' minority interest) Income from discontinued operations ............................... 439 181 776 681 Gain on sales of real estate ...................................... 4,268 -- 4,267 -- ------------ ------------ ------------ ------------ Income (loss) before extraordinary loss and preferred dividends ....... 21,621 (120,838) 62,382 (69,499) Extraordinary loss on extinguishment of debt, net of limited partners' minority interest ................................................. -- (2,595) -- (2,595) ------------ ------------ ------------ ------------ Net income (loss) ..................................................... 21,621 (123,433) 62,382 (72,094) Dividends to preferred shareholders ................................... (5,487) (5,487) (16,461) (16,379) ------------ ------------ ------------ ------------ Net income (loss) allocable to common shareholders .................... $ 16,134 $ (128,920) $ 45,921 $ (88,473) ============ ============ ============ ============ Net income (loss) allocable to: Class A common .................................................... $ 12,334 $ (97,944) $ 35,041 $ (67,526) Class B common .................................................... 3,800 (30,976) 10,880 (20,947) ------------ ------------ ------------ ------------ Total ................................................................. $ 16,134 $ (128,920) $ 45,921 $ (88,473) ============ ============ ============ ============ Basic net income (loss) per weighted average common share before extraordinary loss: Class A common .................................................... $ .25 $ (1.93) $ .70 $ (1.38) Extraordinary loss per Class A common share ....................... -- (.04) -- (.04) ------------ ------------- ------------- ----------- Basic net income (loss) per weighted average Class A common share . $ .25 $ (1.97) $ .70 $ (1.42) ============ ============= ============= =========== Class B common .................................................... $ .38 $ (2.95) $ 1.07 $ (1.98) Extraordinary loss per Class B common share ....................... -- (.06) -- (.06) ------------ ------------- ------------- ----------- Basic net income (loss) per weighted average Class B common share . $ .38 $ (3.01) $ 1.07 $ (2.04) ============ ============= ============= =========== Basic weighted average common shares outstanding: Class A common .................................................... 49,525,372 49,715,423 50,102,817 47,489,129 Class B common .................................................... 10,010,423 10,283,513 10,191,483 10,283,513 Diluted net income (loss) per weighted average common share before extraordinary loss: Class A common .................................................... $ .25 $ (1.97) $ .69 $ (1.42) ============ ============= ============= =========== Class B common .................................................... $ .26 $ (3.01) $ .75 $ (2.04) ============ ============= ============= =========== Diluted weighted average common shares outstanding: Class A common .................................................... 49,825,400 49,715,423 50,445,005 47,489,129 Class B common .................................................... 10,010,423 10,283,513 10,191,483 10,283,513
(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, --------------------------------------- 2002 2001 ------------------ ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS)................................................................ $ 62,382 $ (72,094) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.............................................. 82,913 77,221 Gain on sales of real estate............................................... (4,804) (972) Valuation reserves on investments in affiliate loans and joint ventures.... -- 163,000 Minority partners' interests in consolidated partnerships.................. 14,379 12,885 Extraordinary loss on extinguishment of debts.............................. -- 2,595 Limited partners' minority interest in the operating partnership........... 4,796 (9,326) Equity in earnings of real estate joint ventures and service companies..... (598) (1,704) Changes in operating assets and liabilities: Tenant receivables......................................................... 312 1,446 Real estate tax escrows ................................................... (2,774) (2,037) Prepaid expenses and other assets.......................................... 14,053 13,028 Deferred rents receivable.................................................. (19,666) (28,843) Accrued expenses and other liabilities..................................... (5,218) (18,009) ------------------ ----------------- Net cash provided by operating activities.................................. 145,775 137,190 ------------------ ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Increase in contract deposits and pre-acquisition costs.................... (37,304) (2,897) Additions to developments in progress..................................... -- (3,606) Proceeds from mortgage note receivable repayments.......................... 12 2,949 Investments in affiliate joint ventures.................................... -- (25,056) Additions to commercial real estate properties............................. (31,029) (121,703) Additions to furniture, fixtures and equipment............................. (71) (324) Payment of leasing costs................................................... (12,789) (6,264) Proceeds from sales of real estate and marketable securities............... 22,385 109,250 ------------------ ----------------- Net cash used in investing activities...................................... (58,796) (47,651) ------------------ ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock net of issuance costs............... 6,310 1,790 Purchases of common stock.................................................. (49,227) -- Principal payments on secured borrowings................................... (7,930) (291,445) Payment of loan and equity issuance costs.................................. (1,538) (5,944) Increase in investments in affiliate loans and service companies........... -- (12,382) Proceeds from issuance of senior unsecured notes........................... 49,432 -- Proceeds from secured borrowings........................................... -- 325,000 Proceeds from unsecured credit facility.................................... 115,000 128,000 Repayment of unsecured credit facility..................................... (162,600) (98,000) Distributions to minority partners in consolidated partnerships............ (14,572) (13,390) Distributions to limited partners in the operating partnership............. (9,451) (9,181) Distributions to preferred unit holders.................................... (1,047) (1,749) Dividends to common shareholders........................................... (84,239) (75,278) Dividends to preferred shareholders........................................ (16,461) (16,337) ------------------ ----------------- Net cash used in financing activities...................................... (176,323) (68,916) ------------------ ----------------- Net (decrease) increase in cash and cash equivalents....................... (89,344) 20,623 Cash and cash equivalents at beginning of period........................... 121,975 17,843 ------------------ ----------------- Cash and cash equivalents at end of period................................. $ 32,631 $ 38,466 ================== =================
(see accompanying notes to financial statements) 4 RECKSON ASSOCIATES REALTY CORP. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2002 (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 June 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. At September 30, 2002, the Company's ownership percentage in the Operating Partnership was approximately 89.7%. 2. BASIS OF PRESENTATION The accompanying consolidated financial statements include the consolidated financial position of the Company and the Operating Partnership at September 30, 2002 and December 31, 2001 and the results of their operations for the three and nine months ended September 30, 2002 and 2001, respectively, and, their cash flows for the nine months ended September 30, 2002 and 2001, respectively. The Operating Partnership's investments in majority owned and/or controlled real estate joint ventures are reflected in the accompanying financial statements on a consolidated basis with a reduction for the minority partners' interest. The Operating Partnership also invests in real estate joint ventures where it may own less than a controlling interest. Such investments are reflected in the accompanying financial statements on the equity method of accounting. The operating results of Reckson Management Group, Inc., RANY Management Group, Inc., Reckson Construction Group New York, Inc. and Reckson Construction Group, Inc. (the "Service Companies"), in which the Operating Partnership owns a 97% non-controlling interest are reflected in the accompanying financial statements on the equity method of accounting. On October 1, 2002, the Operating Partnership acquired the remaining 3% interests in the Service Companies for an aggregate purchase price of approximately $122,000. As a result, commencing on October 1, 2002, the Operating Partnership will consolidate the operations of the Service Companies. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Minority partners' interests in consolidated partnerships represent a 49% non-affiliated interest in RT Tri-State LLC, owner of an nine property suburban office portfolio, a 40% non-affiliated interest in Omni Partners, L.P., owner of a 575,000 square foot suburban office property and beginning December 21, 2001, a 49% non-affiliated interest in Metropolitan 919 Third Avenue, LLC, owner of the property located at 919 Third Avenue, New York, NY. Limited partners' minority interest in the Operating Partnership was approximately 10.3% and 11.1% at September 30, 2002 and 2001, respectively. 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, 2002 and for the three and nine month periods ended September 30, 2002 and 2001 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, 2002. 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, 2001. 5 The Company intends to qualify as a REIT under Sections 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. In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Statement No. 144 provides accounting guidance for financial accounting and reporting for the impairment or disposal of long-lived assets. Statement No. 144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. It also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions related to the disposal of a segment of a business. The Company adopted Statement No. 144 on January 1, 2002. The adoption of this statement did not have a material effect on the results of operations or the financial position of the Company. The adoption of Statement No. 144 does not have an impact on net income (loss) allocable to common shareholders. Statement No. 144 only impacts the presentation of the results of operations and gain (loss) on sales of real estate for those properties sold during the period within the consolidated statements of operations (see Note 6). Effective January 1, 2002 the Company has elected to follow FASB Statement No. 123, "Accounting for Stock Based Compensation". Statement No.123 requires the use of option valuation models which determine the fair value of the option on the date of the grant. All future employee stock option grants will be expensed over the options' vesting periods based on the fair value at the date of the grant in accordance with Statement No. 123. The Company expects minimal financial impact in the current year from the adoption of Statement No. 123. To determine the fair value of the stock options granted, the Company uses a Black-Scholes option pricing model. Historically, the Company had applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans and reported pro forma disclosures in its Form 10-K filings by estimating the fair value of options issued and the related expense in accordance with Statement No. 123. Accordingly, no compensation cost had been recognized for its stock option plans in the past. In April 2002, the FASB issued Statement No. 145, which rescinded Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt". Statement No. 145 is effective for fiscal years beginning after May 15, 2002. The Company will adopt Statement No. 145 on January 1, 2003. Certain prior period amounts have been reclassified to conform to the current period presentation. 6 3. MORTGAGE NOTES PAYABLE As of September 30, 2002, the Company had approximately $743.1 million of fixed rate mortgage notes which mature at various times between 2004 and 2027. The notes are secured by 21 properties with a net carrying value of approximately $1.5 billion and have a weighted average interest rate of approximately 7.26%. The following table sets forth the Company's mortgage notes payable as of September 30, 2002, by scheduled maturity date (dollars in thousands):
- ----------------------------------------------------------------------------------------------------------------------- Principal Interest Maturity Amortization Property Outstanding Rate Date Term (Years) - ----------------------------------------------------------------------------------------------------------------------- 80 Orville Dr, Islip, NY 2,616 10.10% February, 2004 Interest only - ----------------------------------------------------------------------------------------------------------------------- 395 North Service Road, Melville, NY 19,811 6.45% October, 2005 $34 per month - ----------------------------------------------------------------------------------------------------------------------- 200 Summit Lake Drive, Valhalla, NY 19,476 9.25% January, 2006 25 - ----------------------------------------------------------------------------------------------------------------------- 1350 Avenue of the Americas, NY, NY 74,824 6.52% June, 2006 30 - ----------------------------------------------------------------------------------------------------------------------- Landmark Square, Stamford, CT (a) 45,342 8.02% October, 2006 25 - ----------------------------------------------------------------------------------------------------------------------- 100 Summit Lake Drive, Valhalla, NY 19,429 8.50% April, 2007 15 - ----------------------------------------------------------------------------------------------------------------------- 333 Earle Ovington Blvd, Mitchel Field, NY (b) 54,104 7.72% August, 2007 25 - ----------------------------------------------------------------------------------------------------------------------- 810 Seventh Avenue, NY, NY 83,223 7.73% August, 2009 25 - ----------------------------------------------------------------------------------------------------------------------- 100 Wall Street, NY, NY 36,063 7.73% August, 2009 25 - ----------------------------------------------------------------------------------------------------------------------- 6900 Jericho Turnpike, Syosset, NY 7,376 8.07% July, 2010 25 - ----------------------------------------------------------------------------------------------------------------------- 6800 Jericho Turnpike, Syosset, NY 13,976 8.07% July, 2010 25 - ----------------------------------------------------------------------------------------------------------------------- 580 White Plains Road, Tarrytown, NY 12,735 7.86% September, 2010 25 - ----------------------------------------------------------------------------------------------------------------------- 919 Third Ave, NY, NY (c) 247,464 6.867% August, 2011 30 - ----------------------------------------------------------------------------------------------------------------------- 110 Bi-County Blvd., Farmingdale, NY 3,690 9.125% November, 2012 20 - ----------------------------------------------------------------------------------------------------------------------- One Orlando Center, Orlando, FL (d) 38,512 6.82% November, 2027 28 - ----------------------------------------------------------------------------------------------------------------------- 120 West 45th Street, NY, NY (d) 64,507 6.82% November, 2027 28 - ----------------------------------------------------------------------------------------------------------------------- Total/Weighted Average $ 743,148 7.26% - ----------------------------------------------------------------------------------------------------------------------- (a) Encompasses six Class A office properties. - ----------------------------------------------------------------------------------------------------------------------- (b) The Company has a 60% general partnership interest in this property and its proportionate share of the aggregate principal amount is approximately $32.5 million - ----------------------------------------------------------------------------------------------------------------------- (c) The Company has a 51% membership interest in this property and its proportionate share of the aggregate principal amount is approximately $126.2 million - ----------------------------------------------------------------------------------------------------------------------- (d) Subject to interest rate adjustment on November 1, 2004 - ----------------------------------------------------------------------------------------------------------------------- In addition, the Company has a 60% interest in an unconsolidated joint venture property. The Company's pro rata share of the mortgage debt at September 30, 2002is approximately $7.6 million. - -----------------------------------------------------------------------------------------------------------------------
4. SENIOR UNSECURED NOTES As of September 30, 2002, the Operating Partnership had outstanding approximately $499.3 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 by scheduled maturity date (dollars in thousands):
FACE ISSUANCE AMOUNT COUPON RATE TERM MATURITY ----------------- --------------- ------------------ ----------- ------------------------- March 26, 1999 $ 100,000 7.40% 5 years March 15, 2004 June 17, 2002 $ 50,000 6.00% 5 years June 15, 2007 August 27, 1997 $ 150,000 7.20% 10 years August 28, 2007 March 26, 1999 $ 200,000 7.75% 10 years March 15, 2009
Interest on the Senior Unsecured Notes is payable semi-annually with principal and unpaid interest due on the scheduled maturity dates. In addition, the Senior Unsecured Notes issued on March 26, 1999 and June 17, 2002 were issued at aggregate discounts of $738,000 and $267,500, respectively. Such discounts are being amortized over the term of the Senior Unsecured Notes to which they relate. On June 17, 2002, the Operating Partnership issued $50 million of 6.00% (6.125% effective rate) senior unsecured notes. Net proceeds of approximately $49.4 million received from this issuance were used to repay outstanding borrowings under the Company's unsecured credit facility. 7 5. UNSECURED CREDIT FACILITY As of September 30, 2002, the Company had a three year $575 million unsecured revolving credit facility (the "Credit Facility") from JPMorgan Chase Bank, as administrative agent, UBS Warburg LLC as syndication agent and Deutsche Bank as documentation agent. The outstanding borrowings under the Credit Facility was $224 million at September 30, 2002. 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, 2002, the Company had availability under the Credit Facility to borrow approximately an additional $351 million, subject to compliance with certain financial covenants. 6. COMMERCIAL REAL ESTATE INVESTMENTS As of September 30, 2002, the Company owned and operated 75 office properties (inclusive of eleven office properties owned through joint ventures) comprising approximately 13.6 million square feet, 101 industrial properties comprising approximately 6.7 million square feet and two retail properties comprising approximately 20,000 square feet located in the Tri-State Area. The Company also owns approximately 338 acres of land in 14 separate parcels of which the Company can develop approximately 3.2 million square feet of office space and approximately 470,000 square feet of industrial space. The Company is currently evaluating alternative land uses for certain of the land holdings to realize the highest economic value. These alternatives may include rezoning certain land parcels from commercial to residential for potential disposition. As of September 30, 2002, the Company had invested approximately $117 million in these development projects. Management has made subjective assessments as to the value and recoverability of these investments based on current and proposed development plans, market comparable land values and alternative use values. The Company has capitalized approximately $8.1 million for the nine months ended September 30, 2002 related to real estate taxes, interest and other carrying costs related to these development projects. The Company holds a $17.0 million interest 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, NY and three other notes receivable aggregating $36.5 million which bear interest at rates ranging from 10.5% to 12% per annum and are secured by a minority partner's preferred unit interest in the Operating Partnership and certain real property. As of September 30, 2002, management has made subjective assessments as to the underlying security value on the Company's note receivable investments. These assessments indicated an excess of market value over carrying value related to the Company's note receivable investments. The Company also owns a 357,000 square foot office building in Orlando, Florida. This non-core real estate holding was acquired in May 1999 in connection with the Company's initial New York City portfolio acquisition. This property is cross collateralized under a $103 million mortgage note along with one of the Company's New York City buildings. The Company also owns a 60% non-controlling interest in a 172,000 square foot office building located at 520 White Plains Road in White Plains, New York (the "520JV") which it manages. The remaining 40% interest is owned by JAH Realties L.P. Jon Halpern, the CEO and a director of HQ Global Workplaces is a partner in JAH Realties, L.P.. As of September 30, 2002, the 520JV had total assets of $21.3 million, a mortgage note payable of $12.7 million and other liabilities of $1.0 million. The Company's allocable share of the 520JV mortgage note payable is approximately $7.6 million. In addition, the 520JV had total revenues of $2.6 million and total expenses of $2.5 million for the nine months ended September 30, 2002. The Company accounts for the 520JV under the equity method of accounting. The 520JV contributed approximately $133,000 and $316,000 to the Company's equity in earnings of real estate joint ventures for the nine months ended September 30, 2002 and 2001, respectively. On December 21, 2001, the Company formed a joint venture with the New York State Teachers' Retirement System ("NYSTRS") whereby NYSTRS acquired a 49% indirect interest in the property located at 919 Third Avenue, New York, NY for $220.5 million which included $122.1 million of its proportionate share of secured mortgage debt and approximately $98.4 million of cash which was then distributed to the Company. On January 4, 2002, net proceeds from this transaction were used primarily to repay borrowings under the Credit Facility and for working capital purposes. On August 7, 2002, the Company sold an industrial property on Long Island aggregating approximately 32,000 square feet for approximately $1.8 million. This property was sold to the sole tenant of the property through an option contained in the tenant's lease. On August 8, 2002, the Company sold two Class A office properties located in Westchester County, NY aggregating approximately 157,000 square feet for approximately $18.5 million. Net proceeds from these sales were used to repay borrowings under the Credit Facility and for general corporate purposes. The Company recorded an aggregate net gain of approximately $4.9 million as a result of these sales. In addition, in accordance with FASB Statement No. 144, the operating results of these properties and the resulting gain on sales of real estate have been reflected as discontinued operations for all periods presented on the accompanying statements of operations. 8 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 August 2002, 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 7, 2002 October 18, 2002 September 30, 2002 $1.6984 Class B common stock $ .6471 October 15, 2002 October 31, 2002 October 31, 2002 $2.5884 Series A preferred stock $.476563 October 15, 2002 October 31, 2002 October 31, 2002 $1.9063 Series B preferred stock $.553125 October 15, 2002 October 31, 2002 October 31, 2002 $2.2125
On May 22, 2002, approximately $1.4 million of loans made to certain executive officers to purchase the Company's common stock matured. The loans were secured by 61,668 shares of the Company's Class A common stock. The loans were satisfied by the executive officers with the 61,668 shares of Class A common stock. The market value of these shares on May 22, 2002 was sufficient to fully satisfy these loans and as such there was no financial impact to the Company. The Company has subsequently retired these shares. On September 30, 2002, the Company had issued and outstanding 9,915,313 shares of Class B Exchangeable Common Stock, par value $.01 per share (the "Class B common stock"). The dividend on the shares of Class B common stock is subject to adjustment annually based on a formula which measures increases or decreases in the Company's Funds From Operations, as defined, over a base year. The Class B common stock currently receives an annual dividend of $2.5884 per share. 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, 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 a five million shares of the Company's Class A common stock and/or its Class B common stock. Transactions conducted on the New York Stock Exchange 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. During the three months ended September 30, 2002, under this buy-back program, the Company purchased 368,200 shares of Class B common stock at an average price of $22.90 per Class B share and 1,856,200 shares of Class A common stock at an average price of $21.98 per Class A share for an aggregate purchase price for both the Class A and Class B common stock of approximately $49.2 million. In addition, subsequent to September 30, 2002, the Company purchased 842,200 shares of Class A common stock at $20.77 per share. As a result of these purchases, annual common stock dividends will decrease by approximately $5.5 million. Previously, under the Company's prior stock buy-back program, 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 61,704 shares of Class A common stock at an average price of $23.03 per Class A share for an aggregate purchase price for both the Class A and Class B common stock of approximately $31.7 million. The Board of Directors of the Company has formed a pricing committee to consider purchases of up to $75 million of the Company's outstanding preferred securities. On September 30, 2002, the Company had issued and outstanding 9,192,000 shares of 7.625% Series A Convertible Cumulative Preferred Stock (the "Series A preferred stock"). The Series A preferred stock is redeemable by the Company on or after April 13, 2003 at a price of approximately $25.95 per share with such price decreasing, at annual intervals, to $25.00 per share over a five year period. In addition, the Series A preferred stock, at the option of the holder, is convertible at any time into the Company's Class A common stock at a price of $28.51 per share. On October 14, 2002, the Company purchased and retired 357,500 shares of the Series A Preferred stock at $22.29 per share for approximately $8.0 million. As a result of this purchase, annual preferred dividends will decrease by approximately $682,000. 9 The Company currently has issued and outstanding two million shares of Series B Convertible Cumulative Preferred Stock (the "Series B preferred stock"). The Series B preferred stock is redeemable by the Company as follows: (i) on or after March 2, 2002 to and including June 2, 2003, at an amount which provides an annual rate of return with respect to such shares of 15%, (ii) on or after June 3, 2003 to and including June 2, 2004, $25.50 per share and (iii) on or after June 3, 2004 and thereafter, $25.00 per share. In addition, the Series B preferred stock, at the option of the holder, is convertible at any time into the Company's Class A common stock at a price of $26.05 per share. The Series B preferred stock currently accumulates dividends at a rate of 8.85% per annum. 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 49,525,372 and 49,715,423 for the three months ended September 30, 2002 and 2001, respectively and 50,102,817 and 47,489,129 for the nine months ended September 30, 2002 and 2001, 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 10,010,423 and 10,283,513 for the three months ended September 30, 2002 and 2001, respectively and 10,191,483 and 10,283,513 for the nine months ended September 30, 2002 and 2001, respectively. The following table sets forth the Company's reconciliation of numerators and denominators of the basic and diluted net income (loss) per weighted average common share and the computation of basic and diluted net income (loss) 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 September 30, September 30, ------------------------------- ---------------------------- 2002 2001 2002 2001 --------------- --------------- ------------- -------------- Numerator: Income (loss) before discontinued operations, dividends to preferred shareholders, extraordinary loss and (income) loss allocated to Class B shareholders....................................... $ 16,914 $ (121,019) $ 57,339 $ (70,180) Discontinued operations (net of share applicable to limited partners and Class B shareholders)...... 3,598 137 3,848 520 Dividends to preferred shareholders................... (5,487) (5,487) (16,461) (16,379) Extraordinary loss (net of share applicable to limited partners and Class B shareholders)................. -- (1,971) -- (1,971) (Income) loss allocated to Class B common shareholders....................................... (2,691) 30,396 (9,685) 20,484 --------------- --------------- ------------- -------------- Numerator for basic and diluted earnings per Class A common share........................... $ 12,334 $ (97,944) $ 35,041 $ (67,526) =============== =============== ============= ============== Denominator: Denominator for basic earnings per share - weighted average Class A common shares............. 49,525 49,715 50,103 47,489 Effect of dilutive securities: Common stock equivalents........................ 300 -- 342 -- -------------- -------------- ------------- -------------- Denominator for diluted earnings per Class A common share - adjusted weighted average shares and assumed conversions............................. 49,825 49,715 50,445 47,489 =============== =============== ============= ============== Basic earnings per Class A common share: Income (loss) before extraordinary loss............... $ .25 $ (1.93) $ .70 $ (1.38) Extraordinary loss.................................... -- (.04) -- (.04) --------------- --------------- ------------- -------------- Net income (loss) per Class A common share............ $ .25 $ (1.97) $ .70 $ (1.42) =============== =============== ============= ============== Diluted earnings per Class A common share: Income (loss) before extraordinary loss............... $ .25 $ (1.93) $ .69 $ (1.38) Extraordinary loss.................................... -- (.04) -- (.04) --------------- --------------- ------------- -------------- Diluted net income (loss) per Class A common share.... $ .25 $ (1.97) $ .69 $ (1.42) =============== =============== ============= ==============
10 The following table sets forth the Company's reconciliation of numerators and denominators of the basic and diluted net income (loss) per weighted average common share and the computation of basic and diluted net income (loss) 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, ------------------------------- ---------------------------- 2002 2001 2002 2001 --------------- --------------- ------------- -------------- Numerator: Income (loss) before discontinued operations, dividends to preferred shareholders, extraordinary loss and (income) loss allocated to Class A shareholders..... $ 16,914 $ (121,019) $ 57,339 $ (70,180) Discontinued operations (net of share applicable to limited partners and Class A shareholders).......... 1,109 43 1,195 161 Dividends to preferred shareholders..................... (5,487) (5,487) (16,461) (16,379) Extraordinary loss (net of share applicable to limited partners and Class A shareholders).................. -- (624) -- (624) (Income) loss allocated to Class A common shareholders.. (8,736) 96,111 (31,193) 66,075 ------------- --------------- ------------- -------------- Numerator for basic earnings per Class B common share..... 3,800 (30,976) 10,880 (20,947) Add back: Income allocated to Class A common shareholders......... 12,334 -- 35,041 -- Limited partner's minority interest in the operating partnership......................................... 1,249 -- 4,796 -- ------------- --------------- ------------- -------------- Numerator for diluted earnings per Class B common share... $ 17,383 $ (30,976) $ 50,717 $ (20,947) ============= =============== ============= ============== Denominator: Denominator for basic earnings per share-weighted average Class B common shares....................... 10,010 10,284 10,191 10,284 Effect of dilutive securities: Weighted average Class A common shares outstanding... 49,525 -- 50,103 -- Weighted average OP Units outstanding................ 7,276 -- 7,427 -- Common stock equivalents............................. 300 -- 342 -- ------------- --------------- ------------- -------------- Denominator for diluted earnings per Class B common share - adjusted weighted average shares and assumed conversions.................................. 67,111 10,284 68,063 10,284 ============= =============== ============= ============== Basic earnings per Class B common share: Income (loss) before extraordinary loss............... $ .38 $ (2.95) $ 1.07 $ (1.98) Extraordinary loss.................................... -- (.06) -- (.06) ------------- --------------- ------------- -------------- Net income (loss) per Class B common share............ $ .38 $ (3.01) $ 1.07 $ (2.04) ============= =============== ============= ============== Diluted earnings per Class B common share: Income (loss) before extraordinary loss............... $ .26 $ (2.95) $ .75 $ (1.98) Extraordinary loss.................................... -- (.06) -- (.06) ------------- --------------- ------------- -------------- Diluted net income (loss) per Class B common share.... $ .26 $ (3.01) $ .75 $ (2.04) ============= =============== ============= ==============
11 8. SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION (IN THOUSANDs)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------------------- 2002 2001 -------------- -------------- Cash paid during the period for interest....................... $ 79,456 $ 87,932 ============== ============== Interest capitalized during the period ........................ $ 6,354 $ 7,764 ============== ==============
9. SEGMENT DISCLOSURE The Company owns all of the interests in its real estate properties directly or indirectly 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 due to their final authority over resource allocation, decisions and performance assessment. The Company does not consider (i) interest incurred on its Credit Facility and Senior Unsecured Notes (ii) the operating performance of the office property located in Orlando, Florida and (iii) the operating performance of those properties reflected as discontinued operations in the Company's consolidated statements of operations as part of its Core Portfolio's property operating performance for purposes of its component disclosure set forth below. The following table sets forth the components of the Company's revenues and expenses and other related disclosures for the three and nine months ended September 30, 2002 and 2001 (in thousands):
Three months ended --------------------------------------------- September 30, 2002 --------------------------------------------- Core Other CONSOLIDATED Portfolio TOTALS -------------- -------------- -------------- REVENUES: Base rents, tenant escalations and reimbursements..................... $ 124,289 $ 2,158 $ 126,447 Equity in earnings of real estate joint ventures and service companies..... -- 104 104 Other income (loss).................... 331 1,900 2,231 -------------- -------------- -------------- Total Revenues......................... 124,620 4,162 128,782 -------------- -------------- -------------- EXPENSES: Property operating expenses............ 45,011 1,124 46,135 Marketing, general and administrative.. 4,807 3,158 7,965 Interest............................... 13,003 9,650 22,653 Depreciation and amortization.......... 26,730 2,417 29,147 -------------- -------------- -------------- Total Expenses......................... 89,551 16,349 105,900 -------------- -------------- -------------- Income (loss) from continuing operations before minority interests, preferred dividends and distributions, valuation reserves, discontinued operations and extraordinary loss... $ 35,069 $ (12,187) $ 22,882 ============== ============== ============== Total Assets............................ $ 2,679,679 $ 219,269 $ 2,898,948 ============== ============== ============== Three months ended ---------------------------------------------- September 30, 2001 ---------------------------------------------- Core Other CONSOLIDATED Portfolio TOTALS --------------- ------------- -------------- REVENUES: Base rents, tenant escalations and reimbursements..................... $ 123,689 $ 2,178 $ 125,867 Equity in earnings of real estate joint ventures and service companies..... -- 505 505 Other income (loss).................... 6,714 (914) 5,800 --------------- ------------- -------------- Total Revenues......................... 130,403 1,769 132,172 --------------- ------------- -------------- EXPENSES: Property operating expenses............ 42,933 911 43,844 Marketing, general and administrative.. 5,533 2,096 7,629 Interest............................... 13,033 10,477 23,510 Depreciation and amortization.......... 24,183 2,135 26,318 --------------- ------------- -------------- Total Expenses......................... 85,682 15,619 101,301 --------------- ------------- -------------- Income (loss) from continuing operations before minority interests, preferred dividends and distributions, valuation reserves, discontinued operations and extraordinary loss... $ 44,721 $ (13,850) $ 30,871 =============== ============= ============== Total Assets............................ $ 2,631,077 $ 230,574 $ 2,861,651 =============== ============= ==============
12
Nine months ended --------------------------------------------- September 30, 2002 --------------------------------------------- Core Other CONSOLIDATED Portfolio TOTALS -------------- ------------- --------------- REVENUES: Base rents, tenant escalations and reimbursements...................... $ 364,505 $ 6,575 $ 371,080 Equity in earnings of real estate joint ventures and service companies................... -- 598 598 Other income............................ 1,383 5,323 6,706 -------------- ------------- --------------- Total Revenues.......................... 365,888 12,496 378,384 ============== ============= =============== EXPENSES: Property operating expenses............. 125,996 3,465 129,461 Marketing, general and administrative... 13,994 8,716 22,710 Interest................................ 38,956 26,816 65,772 Depreciation and amortization........... 76,757 6,156 82,913 -------------- ------------- --------------- Total Expenses.......................... 255,703 45,153 300,856 ============== ============= =============== Income (loss) from continuing operations before minority interests, preferred dividends and distributions, valuation reserves, discontinued operations and extraordinary loss... $ 110,185 $ (32,657) $ 77,528 ============== ============= =============== Nine months ended ---------------------------------------------- September 30, 2001 ---------------------------------------------- Core Other CONSOLIDATED Portfolio TOTALS -------------- -------------- --------------- REVENUES: Base rents, tenant escalations and reimbursements...................... $ 365,681 $ 7,214 $ 372,895 Equity in earnings of real estate joint ventures and service companies................... -- 1,704 1,704 Other income............................ 9,192 9,894 19,086 -------------- -------------- --------------- Total Revenues.......................... 374,873 18,812 393,685 -------------- -------------- --------------- EXPENSES: Property operating expenses............. 122,702 2,345 125,047 Marketing, general and administrative... 15,504 7,934 23,438 Interest................................ 38,086 32,615 70,701 Depreciation and amortization........... 70,404 6,197 76,601 -------------- -------------- --------------- Total Expenses.......................... 246,696 49,091 295,787 -------------- -------------- --------------- Income (loss) from continuing operations before minority interests, preferred dividends and distributions, valuation reserves, discontinued operations and extraordinary loss... $ 128,177 $ (30,279) $ 97,898 ============== ============== ===============
10. RELATED PARTY TRANSACTIONS As part of the Company's REIT structure it is provided management, leasing and construction related services through taxable REIT subsidiaries as defined by the Code. These services are currently provided by the Service Companies in which, as of September 30, 2002, the Operating Partnership owns a 97% non-controlling interest. An entity which is substantially owned by certain Rechler family members who are also executive officers of the Company own a 3% controlling interest in the Service Companies. In order to minimize the potential for corporate conflicts of interests, the Independent Directors of the Company approved the purchase by the Operating Partnership of the remaining 3% interest in the Service Companies. On October 1, 2002, the Operating Partnership acquired such 3% interests in the Service Companies for an aggregate purchase price of approximately $122,000. Such amount was less than the total amount of capital contributed by the Rechler family members. As a result, commencing on October 1, 2002, the Operating Partnership will consolidate the operations of the Service Companies. During the nine months ended September 30, 2002, Reckson Construction Group, Inc. billed approximately $134,000 of market rate services and Reckson Management Group, Inc. billed approximately $232,000 of market rate management fees to certain properties in which certain Rechler family members who are also executive officers maintain an equity interest. These properties consist of five properties in which these officers had acquired their interests prior to the initial public offering, but were not contributed to the Company as part of the initial public offering (the "Option Properties"). At the initial public offering the Operating Partnership was granted ten year options to acquire these interests at a price based upon an agreed upon formula. Such options provide the Company the right to acquire fee interest in two of the Option Properties and the Rechler's minority interests in the remaining properties. The Independent Directors are currently reviewing whether the Company should exercise one or more of these options. In addition, for the nine months ended September 30, 2002, Reckson Construction Group, Inc. performed market rate services, aggregating approximately $299,000 for a property in which certain executive officers maintain an equity interest. The Company leases 43,713 square feet of office and storage space at an Option Property for its corporate offices located in Melville, New York at an annual base rent of approximately $1.1 million. The Company also leases 10,722 square feet of warehouse space used for equipment, materials and inventory storage at an Option Property located in Deer Park, New York at an annual base rent of approximately $72,000. A company affiliated with an Independent Director of the Company, leases 15,566 square feet in a property owned by the Company at an annual base rent of approximately $431,500. Reckson Strategic Venture Partners, LLC ("RSVP") leases 5,144 square feet in one of the Company's joint venture properties at an annual base rent of approximately $176,000. 13 During 1997, the Company formed FrontLine Capital Group, formerly Reckson Service Industries, Inc., ("FrontLine") and RSVP. RSVP is a real estate venture capital fund which invests primarily in real estate and real estate operating companies outside 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. The Company has 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"), hrough 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, 2002, 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, 2002, interest accrued (net of reserves) under the FrontLine Facility and the RSVP Facility was approximately $19.6 million. RSVP retained the services of two managing directors to manage RSVP's day to day operations. Prior to the spin off of Frontline, the Company guaranteed certain salary provisions of their employment agreements with RSVP Holdings, LLC, RSVP's common member. The term of these employment agreements is seven years commencing March 5, 1998 provided however, the term may be earlier terminated after five years upon certain circumstances. The salary for each managing director is $1 million in the first five years and $1.6 million in years six and seven. 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. During the third quarter of 2001, the Company noted a significant deterioration in FrontLine's operations and financial condition and, based on its assessment of value and recoverability and considering the findings and recommendations of the committee and its financial advisor, the Company recorded a $163 million valuation reserve charge, inclusive of anticipated costs, in its consolidated statements of operations relating to its investments in the FrontLine Loans and joint ventures with RSVP. The Company has discontinued the accrual of interest income with respect to the FrontLine Loans. The Company has also reserved against its share of GAAP equity in earnings from the RSVP controlled joint ventures funded through the RSVP Commitment until such income is realized through cash distributions. At December 31, 2001, the Company, pursuant to Section 166 of the Code, for tax purposes charged off $70 million of the aforementioned reserve directly related to the FrontLine Facility, including accrued interest. On February 14, 2002, the Company for tax purposes charged off an additional $38 million of the reserve directly related to the FrontLine Facility, including accrued interest and $47 million of the reserve directly related to the RSVP Facility, including accrued interest. FrontLine is in default under the FrontLine Loans from the Operating Partnership and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. 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 previously accrued GAAP equity in earnings on those investments, is approximately $65 million which was reassessed with no change by management as of September 30, 2002. Such amount has been reflected in investments in service companies and affiliate loans and joint ventures on the Company's consolidated balance sheet. The common and preferred members of RSVP are currently in dispute over certain provisions of the RSVP operating agreement. The members are currently negotiating to restructure the RSVP operating agreement to settle the dispute. There can be no assurances that the members will successfully negotiate a settlement. Both the FrontLine Facility and the RSVP Facility have terms of five years, are unsecured and advances thereunder are recourse obligations of FrontLine. Notwithstanding the valuation reserve, under the terms of the credit facilities, interest accrued 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 were 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. As a result of FrontLine's default under the FrontLine Loans, interest on borrowings thereunder accrue at default rates ranging between 13% and 14.5% per annum. Scott H. Rechler, who serves as Co-Chief Executive Officer and a director of the Company, serves as CEO and Chairman of the Board of Directors of FrontLine. As of December 31, 2001, the Company's directors and officers owned approximately 15.9% of FrontLine's outstanding common stock. 14 In November 1999, the Company received 176,186 shares of the common stock of FrontLine as fees in connection with the FrontLine Loans. As a result of certain tax rule provisions included in the REIT Modernization Act, it was determined that the Company could no longer maintain any equity position in FrontLine. As part of a compensation program, the Company distributed these shares to certain non-executive employees, subject to recourse loans. The loans were scheduled to be forgiven over time based on continued employment with the Company. Based on the current value of FrontLine's common stock, the Company has established a valuation reserve charge relating to the outstanding balance of these loans in the amount of $2.4 million. 11. COMMITMENTS AND CONTINGENCIES HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible officing solutions in the world and which is controlled by FrontLine, currently operates nine (formerly eleven) executive office centers in the Company's properties, three of which are held through joint ventures. The leases under which these office centers operate expire between 2008 and 2011, encompass approximately 202,000 square feet and have current contractual annual base rents of approximately $6.1 million. On March 13, 2002, as a result of experiencing financial difficulties, HQ voluntarily filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. As of June 30, 2002, HQ's leases with the Company were in default. Further, effective March 13, 2002, the Bankruptcy Court granted HQ's petition to reject two of its leases with the Company. The two rejected leases aggregated approximately 23,900 square feet and provided for contractual base rents of approximately $548,000 for the 2002 calendar year. Commencing April 1, 2002 and pursuant to the bankruptcy filing, HQ has been paying current rental charges under its leases with the Company, other than under the two rejected leases. The Company is in negotiation to restructure three of the leases and leave the terms of the remaining six leases unchanged. All negotiations with HQ are conducted by a committee designated by the Board and chaired by an independent director. There can be no assurance as to whether any deal will be consummated with HQ or if HQ will affirm or reject any or all of its remaining leases with the Company. As a result of the foregoing, the Company has reserved approximately $550,000 (net of minority partners' interests and including the Company's share of unconsolidated joint venture interest), or 74%, of the amounts due from HQ as of September 30, 2002. Scott H. Rechler serves as the non-Executive Chairman of the Board and Jon Halpern is the Chief Executive Officer and a director of HQ. WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company, which leases as of September 30, 2002 approximately 527,000 square feet in thirteen of the Company's properties located throughout the Tri-State Area voluntarily filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code on July 21, 2002. The total annualized base rental revenue from these leases amounts to approximately $12.0 million, or 2.9% of the Company's total 2002 annualized rental revenue, making it the Company's second largest tenant based on base rental revenue earned on a consolidated basis. All of WorldCom's leases are current on base rental charges through November 30, 2002 and the Company currently holds approximately $300,000 in security deposits relating to these leases. There can be no assurance as to whether WorldCom will affirm or reject any or all of its leases with the Company. As a result of the foregoing, the Company has increased its reserve against the deferred rent receivable on its balance sheet in an amount equal to $1.1 million representing approximately 51% of the outstanding deferred rent receivable attributable to WorldCom. MetroMedia Fiber Network Services, Inc. ("MetroMedia"), which leased approximately 112,000 square feet in one property from the Company, voluntarily filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in May 2002. MetroMedia's lease with the Company provided for contractual base rent of approximately $25 per square foot amounting to $2.8 million per calendar year and expired in May 2010. In July 2002, the Bankruptcy Court granted MetroMedia's petition to restructure and reduce space under its existing lease. As a result, the lease was amended to reduce MetroMedia's space by 80,357 square feet to 31,718 square feet. Annual base rent on the 31,718 square feet MetroMedia will continue to lease is $25 per square foot amounting to approximately $793,000 per annum. Further, pursuant to the Bankruptcy Court order MetroMedia is required to pay to the Company a surrender fee of approximately $1.8 million. As a result of the foregoing, the Company has written off approximately $388,000 of deferred rent receivable relating to this lease and recognized the aforementioned surrender fee. Arthur Andersen, LLP ("AA") leased approximately 38,000 square feet in one of the Company's New York City buildings. AA's lease with the Company provided for base rent of approximately $2 million on an annualized basis and expired in April 2004. AA has experienced significant financial difficulties with its business and as a result has entered into a lease termination agreement with the Company effective November 30, 2002. In October 2002, AA paid the Company for all base rental and other charges through November 30, 2002 and a lease termination fee of approximately $144,000. As of September 30, 2002, the Company has reserved 100% of the deferred rent receivable related to this lease which is approximately $130,000. 15 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; credit of our tenants, changes in operating costs, including utility, security and insurance 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. CRITICAL ACCOUNTING POLICIES The consolidated financial statements of the Company include accounts of the Company and all majority-owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the Company's consolidated financial statements and related notes. In preparing these financial statements, management has utilized information available including its past history, industry standards and the current economic environment among other factors in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements may not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of the Company's results of operations to those of companies in similar businesses. Revenue Recognition and Accounts Receivable Rental revenue is recognized on a straight line basis, which averages minimum rents over the terms of the leases. The excess of rents recognized over amounts contractually due are included in deferred rents receivable on the Company's balance sheets. The leases also typically provide for tenant reimbursements of common area maintenance and other operating expenses and real estate taxes. Ancillary and other property related income is recognized in the period earned. The Company makes estimates of the collectibility of its tenant accounts receivables related to base rents, tenant escalations and reimbursements and other revenue or income. The Company specifically analyzes tenant receivables and analyzes historical bad debts, customer credit worthiness, current economic trends, changes in customer payment terms, publicly available information and to the extent available, guidance provided by the tenant when evaluating the adequacy of its allowance for doubtful accounts. In addition, when tenants are in bankruptcy the Company makes estimates of the expected recovery of pre-petition administrative and damage claims. In some cases, the ultimate resolution of those claims can exceed a year. These estimates have a direct impact on the Company's net income because a higher bad debt reserve results in less net income. During the nine months ended September 30, 2002, the Company incurred approximately $4.6 million of bad debt expense related to tenant receivables and deferred rents receivable which accordingly reduced total revenues and reported net income during the period. 16 The Company records interest income on investments in mortgage notes and notes receivable on an accrual basis of accounting. The Company does not accrue interest on impaired loans where, in the judgment of management, collection of interest according to the contractual terms is considered doubtful. Among the factors the Company considers in making an evaluation of the collectibility of interest are: (i) the status of the loan, (ii) the value of the underlying collateral, (iii) the financial condition of the borrower and (iv) anticipated future events. Gain on sales of real estate are recorded when title is conveyed to the buyer, subject to the buyer's financial commitment being sufficient to provide economic substance to the sale. Real Estate Land, buildings and improvements, furniture, fixtures and equipment are recorded at cost. Tenant improvements, which are included in buildings and improvements, are also stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Renovations and/or replacements, which improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives. Depreciation is computed utilizing the straight-line method over the estimated useful lives of ten to thirty years for buildings and improvements and five to ten years for furniture, fixtures and equipment. Tenant improvements are amortized on a straight-line basis over the term of the related leases. The Company is required to make subjective assessments as to the useful lives of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company's net income. Should the Company lengthen the expected useful life of a particular asset, it would be depreciated over more years and result in less depreciation expense and higher annual net income. Assessment by the Company of certain other lease related costs must be made when the Company has a reason to believe that the tenant will not be able to execute under the term of the lease as originally expected. Long Lived Assets On a periodic basis, management assesses whether there are any indicators that the value of the real estate properties may be impaired. A property's value is impaired only if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property. Such cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property. The Company is required to make subjective assessments as to whether there are impairments in the value of its real estate properties and other investments. These assessments have a direct impact on the Company's net income because recognizing an impairment results in an immediate negative adjustment to net income. In determining impairment, if any, the Company has adopted Financial Accounting Standards Board Statement No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets." 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"). As of September 30, 2002, the Company owned and operated 75 office properties (inclusive of eleven office properties owned through joint ventures) comprising approximately 13.6 million square feet, 101 industrial properties comprising approximately 6.7 million square feet and two retail properties comprising approximately 20,000 square feet located in the Tri-State Area. 17 The Company also owns approximately 338 acres of land in 14 separate parcels of which the Company can develop approximately 3.2 million square feet of office space and approximately 470,000 square feet of industrial space. The Company is currently evaluating alternative land uses for certain of the land holdings to realize the highest economic value. These alternatives may include rezoning certain land parcels from commercial to residential for potential disposition. As of September 30, 2002, the Company had invested approximately $117 million in these development projects. Management has made subjective assessments as to the value and recoverability of these investments based on current and proposed development plans, market comparable land values and alternative use values. The Company has capitalized approximately $8.1 million for the nine months ended September 30, 2002 related to real estate taxes, interest and other carrying costs related to these development projects. The Company holds a $17.0 million interest 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, NY and three other notes receivable aggregating $36.5 million which bear interest at rates ranging from 10.5% to 12% per annum and are secured by a minority partner's preferred unit interest in the Operating Partnership and certain real property. As of September 30, 2002, management has made subjective assessments as to the underlying security value on the Company's note receivable investments. These assessments indicated an excess of market value over carrying value related to the Company's note receivable investments. The Company also owns a 357,000 square foot office building in Orlando, Florida. This non-core real estate holding was acquired in May 1999 in connection with the Company's initial New York City portfolio acquisition. This property is cross collateralized under a $103 million mortgage note along with one of the Company's New York City buildings. The Company also owns a 60% non-controlling interest in a 172,000 square foot office building located at 520 White Plains Road in White Plains, New York (the "520JV") which it manages. The remaining 40% interest is owned by JAH Realties L.P. Jon Halpern, the CEO and a director of HQ Global Workplaces is a partner in JAH Realties, L.P. . As of September 30, 2002, the 520JV had total assets of $21.3 million, a mortgage note payable of $12.7 million and other liabilities of $1.0 million. The Company's allocable share of the 520JV mortgage note payable is approximately $7.6 million. In addition, the 520JV had total revenues of $2.6 million and total expenses of $2.5 million for the nine months ended September 30, 2002. The Company accounts for the 520JV under the equity method of accounting. The 520JV contributed approximately $133,000 and $316,000 to the Company's equity in earnings of real estate joint ventures for the nine months ended September 30, 2002 and 2001, respectively. As part of the Company's REIT structure it is provided management, leasing and construction related services through taxable REIT subsidiaries as defined by the Code. These services are currently provided by Reckson Management Group, Inc., RANY Management Group, Inc., Reckson Construction Group New York, Inc., and Reckson Construction Group, Inc. (collectively, the "Service Companies") in which the Operating Partnership, as of September 30, 2002, owned a 97% non-controlling interest. An entity which is substantially owned by certain Rechler family members who are also executive officers of the Company owned a 3% controlling interest in the Service Companies. In order to minimize the potential for corporate conflicts of interests, the Independent Directors of the Company approved the purchase by the Operating Partnership of the remaining 3% interest in the Service Companies. On October 1, 2002, the Operating Partnership acquired such 3% interests in the Service Companies for an aggregate purchase price of approximately $122,000. Such amount was less than the total amount of capital contributed by the Rechler family members. As a result, commencing on October 1, 2002, the Operating Partnership will consolidate the operations of the Service Companies. During the nine months ended September 30, 2002, Reckson Construction Group, Inc. billed approximately $134,000 of market rate services and Reckson Management Group, Inc. billed approximately $232,000 of market rate management fees to certain properties in which certain Rechler family members who are also executive officers maintain an equity interest. These properties consist of five properties in which these officers had acquired their interests prior to the initial public offering, but were not contributed to the Company as part of the initial public offering (the "Option Properties"). At the initial public offering the Operating Partnership was granted ten year options to acquire these interests at a price based upon an agreed upon formula. Such options provide the Company the right to acquire fee interest in two of the Option Properties and the Rechler's minority interests in the remaining properties. The Independent Directors are currently reviewing whether the Company should exercise one or more of these options. In addition, for the nine months ended September 30, 2002, Reckson Construction Group, Inc. performed market rate services, aggregating approximately $299,000 for a property in which certain executive officers maintain an equity interest. The Company leases 43,713 square feet of office and storage space at an Option Property for its corporate offices located in Melville, New York at an annual base rent of approximately $1.1 million. The Company also leases 10,722 square feet of warehouse space used for equipment, materials and inventory storage at an Option Property located in Deer Park, New York at an annual base rent of approximately $72,000. A company affiliated with an Independent Director of the Company, leases 15,566 square feet in a property owned by the Company at an annual base rent of approximately $431,500. Reckson Strategic Venture Partners, LLC ("RSVP") leases 5,144 square feet in one of the Company's joint venture properties at an annual base rent of approximately $176,000. During July 1998, the Company formed Metropolitan Partners, LLC ("Metropolitan") for the purpose of acquiring Class A office properties in New York City. Currently the Company owns, through Metropolitan, five Class A office properties aggregating approximately 3.5 million square feet. 18 During September 2000, the Company formed a joint venture (the "Tri-State JV") with Teachers Insurance and Annuity Association ("TIAA") and contributed eight Class A suburban office properties aggregating approximately 1.5 million square feet to the Tri-State JV for a 51% majority ownership interest. TIAA contributed approximately $136 million for a 49% interest in the Tri-State JV which was then distributed to the Company. For purposes of its financial statements the Company consolidates this joint venture. On December 21, 2001, the Company formed a joint venture with the New York State Teachers' Retirement System ("NYSTRS") whereby NYSTRS acquired a 49% indirect interest in the property located at 919 Third Avenue, New York, NY for $220.5 million which included $122.1 million of its proportionate share of secured mortgage debt and approximately $98.4 million of cash which was then distributed to the Company. On January 4, 2002, net proceeds from this sale were used primarily to repay borrowings under the Credit Facility and for working capital purposes. For purposes of its financial statements the Company consolidates this joint venture. The total market capitalization of the Company at September 30, 2002 was approximately $3.2 billion. The Company's total 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 $22.77 per share/unit (based on the closing price of the Company's Class A common stock on September 30, 2002), (ii) the market value of the Company's Class B common stock of $23.75 per share (based on the closing price of the Company's Class B common stock on September 30, 2002), (iii) the liquidation preference value of the Company's Series A preferred stock 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 $1.3 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, 2002. As a result, the Company's total debt to total market capitalization ratio at September 30, 2002 equaled approximately 42.2%. During 1997, the Company formed FrontLine Capital Group, formerly Reckson Service Industries, Inc., ("FrontLine") and RSVP. RSVP is a real estate venture capital fund which invests primarily in real estate and real estate operating companies outside 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. The Company has 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, 2002, 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, 2002, interest accrued (net of reserves) under the FrontLine Facility and the RSVP Facility was approximately $19.6 million. RSVP retained the services of two managing directors to manage RSVP's day to day operations. Prior to the spin off of Frontline, the Company guaranteed certain salary provisions of their employment agreements with RSVP Holdings, LLC, RSVP's common member. The term of these employment agreements is seven years commencing March 5, 1998 provided however, the term may be earlier terminated after five years upon certain circumstances. The salary for each managing director is $1 million in the first five years and $1.6 million in years six and seven. 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. During the third quarter of 2001, the Company noted a significant deterioration in FrontLine's operations and financial condition and, based on its assessment of value and recoverability and considering the findings and recommendations of the committee and its financial advisor, the Company recorded a $163 million valuation reserve charge, inclusive of anticipated costs, in its consolidated statements of operations relating to its investments in the FrontLine Loans and joint ventures with RSVP. The Company has discontinued the accrual of interest income with respect to the FrontLine Loans. The Company has also reserved against its share of GAAP equity in earnings from the RSVP controlled joint ventures funded through the RSVP Commitment until such income is realized through cash distributions. At December 31, 2001, the Company, pursuant to Section 166 of the Internal Revenue Code of 1986 charged off for tax purposes $70 million of the aforementioned reserve directly related to the FrontLine Facility, including accrued interest. On February 14, 2002, the Company charged off for tax purposes an additional $38 million of the reserve directly related to the FrontLine Facility, including accrued interest and $47 million of the reserve directly related to the RSVP Facility, including accrued interest. Scott H. Rechler, who serves as Co-Chief Executive Officer and a director of the Company, serves as CEO and Chairman of the Board of Directors of FrontLine. As of December 31, 2001, the Company's directors and officers owned approximately 15.9% of FrontLine's outstanding common stock. 19 FrontLine is in default under the FrontLine Loans from the Operating Partnership and on June 12, 2002, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. 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 previously accrued GAAP equity in earnings on those investments, is approximately $65 million which was reassessed with no change by management as of September 30, 2002. Such amount has been reflected in investments in service companies and affiliate loans and joint ventures on the Company's consolidated balance sheet. The common and preferred members of RSVP are currently in dispute over certain provisions of the RSVP operating agreement. The members are currently negotiating to restructure the RSVP operating agreement to settle the dispute. There can be no assurances that the members will successfully negotiate a settlement. Both the FrontLine Facility and the RSVP Facility have terms of five years, are unsecured and advances thereunder are recourse obligations of FrontLine. Notwithstanding the valuation reserve, under the terms of the credit facilities, interest accrued 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 were 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. As a result of FrontLine's default under the FrontLine Loans, interest on borrowings thereunder accrue at default rates ranging between 13% and 14.5% per annum. In November 1999, the Company received 176,186 shares of the common stock of FrontLine as fees in connection with the FrontLine Loans. As a result of certain tax rule provisions included in the REIT Modernization Act, it was determined that the Company could no longer maintain any equity position in FrontLine. As part of a compensation program, the Company distributed these shares to certain non-executive employees, subject to recourse loans. The loans were scheduled to be forgiven over time based on continued employment with the Company. Based on the current value of FrontLine's common stock, the Company has established a valuation reserve charge relating to the outstanding balance of these loans in the amount of $2.4 million. 20 RESULTS OF OPERATIONS Three months ended September 30, 2002 as compared to the three months ended September 30, 2001. The Company's total revenues decreased by $3.4 million or 2.6% for the three months ended September 30, 2002 as compared to the 2001 period. Property operating revenues from continuing operations, which include base rents and tenant escalations and reimbursements ("Property Operating Revenues") increased by approximately $.6 million for the three months ended September 30, 2002 as compared to the 2001 period. The change in Property Operating Revenues is attributable to increases in rental rates in our "same store" properties amounting to $.5 million. In addition, Property Operating Revenues increased by $2.9 million attributable to lease up of newly developed and redeveloped properties. These increases in Property Operating Revenues were offset by $1.9 million of Property Operating Revenues attributable to six properties that were sold in 2001 and a decrease of $.9 million in lease termination fees. Other revenues from continuing operations (excluding Property Operating Revenues) decreased by $4.0 million or 63% for the three months ended September 30, 2002 as compared to the 2001 period. This decrease is primarily attributable to decreases in dividends received on marketable securities, real estate tax refunds and gain on sales of real estate. Property operating expenses, real estate taxes and ground rents ("Property Expenses") increased by $2.3 million or 5.2% for the three months ended September 30, 2002 as compared to the 2001 period. This increase includes a $2.0 million increase in property operating expenses and a $1.1 million increase in real estate taxes related to our "same-store" properties. Included in the $2.0 million of property operating expense increase is $500,000 and $1.1 million attributable to increases in security and insurance costs respectively. These increases result primarily from implications of the events which occurred on September 11, 2001 and security cost increases primarily relate to our New York City properties. These increases in Property Expenses were offset by approximately $800,000 of Property Expenses attributable to six properties that were sold in 2001. 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, 2002 and 2001 were 63.5% and 65.2%, respectively. The decrease in Gross Operating Margins is primarily attributable to decreases in average occupancy of the portfolio and also as a result of increased Property Expenses specifically relating to security, insurance costs and real estate taxes. Marketing, general and administrative expenses increased by approximately $336,000 or 4.4% for the three months ended September 30, 2002 as compared to the 2001 period. The increase in marketing, general and administrative expenses is primarily due to legal and professional fees incurred during the 2002 period in connection with certain cancelled acquisition transactions, increased directors and officers insurance costs and costs associated with the expensing of the fair value of stock options. Marketing, general and administrative expenses, as a percentage of total revenues from continuing operations, were 6.2% for the three months ended September 30, 2002 as compared to 5.8% for the 2001 period. The Company capitalized approximately $1.1 million of marketing, general and administrative expenses for the three months ended September 30, 2002 as compared to $1.2 million for the 2001 period. These costs relate to leasing, construction and development activities, which are performed by the Company. Interest expense decreased by approximately $857,000 for the three months ended September 30, 2002 as compared to the 2001 period. The decrease was primarily attributable to a decrease in interest expense on the Company's variable rate debt due to lower interest rates and a lower average balance outstanding on the Company's unsecured credit facility. The weighted average balance outstanding was $216.0 million for the three months ended September 30, 2002 as compared to $296.3 million for the three months ended September 30, 2001. This decrease was offset by $750,000 of interest expense on the senior unsecured notes issued in June 2002. Income (loss) before extraordinary loss and preferred dividends increased by approximately $142.5 million for the three months ended September 30, 2002 as compared to the 2001 period. This increase is primarily attributable to the $163 million valuation reserve (see Overview and Background) on investments in affiliate loans and joint ventures recorded in the 2001 period with no such comparable reserve recorded in the 2002 period. In addition, included in the net increase, is a $4.5 million increase in discontinued operations relating to the sale of three properties during the 2002 period. 21 Nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001. The Company's total revenues decreased by $15.3 million or 3.9% for the nine months ended September 30, 2002 as compared to the 2001 period. Property Operating Revenues decreased by $1.8 million for the nine months ended September 30, 2002 as compared to the 2001 period. The change in Property Operating Revenues is attributable to net increases in rental rates and lease termination fees in our "same store" properties amounting to $.8 million. In addition, Property Operating Revenues increased by $8.2 million attributable to lease up of newly developed and redeveloped properties. These increases in Property Operating Revenues were offset by $10.8 million of revenue attributable to six properties that were sold in 2001. Other revenues (excluding Property Operating Revenues) decreased by $13.5 million or 64.9% for the nine months ended September 30, 2002 as compared to the 2001 period. This decrease is primarily attributable to $6.1 million of interest income accrued on the FrontLine Loans and $2.6 million of dividends from marketable securities during the 2001 period with no such comparable income for the 2002 period. To a lesser extent this decrease is attributable to a decrease in real estate tax refunds, operating interest income and gain on sales of real estate. Property Expenses increased by $4.4 million or 3.5% for the nine months ended September 30, 2002 as compared to the 2001 period. This increase is primarily due to a $3.9 million increase in property operating expenses and a $3.0 million increase in real estate taxes related to our "same store" properties. Included in the $3.9 million increase in property operating expenses is $1.4 million and $1.6 million attributable to increases in security and insurance costs, respectively. The increases result primarily from implications of the events which occured on September 11, 2001 and security cost increases primarily relate to our New York City properties. In addition, Property Expenses increased by $1.6 million attributable to the lease up of newly developed and redeveloped properties. These increases in Property Expenses were offset by $4.1 million of expenses attributable to six properties that were sold in 2001. Gross Operating Margins for the nine months ended September 30, 2002 and 2001 were 65.1% and 66.5%, respectively. The decrease in Gross Operating Margins is primarily attributable to decreases in average occupancy of the portfolio and also as a result of increased Property Expenses specifically related to security, insurance costs and real estate taxes. Marketing, general and administrative expenses decreased by approximately $728,000 million or 3.1% for the nine months ended September 30, 2002 as compared to the 2001 period. The decrease in marketing, general and administrative expenses is primarily due to staff reduction, cost containment and reduction in legal and professional fess incurred during the 2001 period in connection with certain cancelled acquisition transactions. Marketing, general and administrative expenses, as a percentage of total revenues from continuing operations, were 6.0% for the nine month periods ended September 30, 2002 and September 30, 2001. The Company capitalized approximately $3.6 million of marketing, general and administrative expenses for the nine month periods ended September 30, 2002 and September 30, 2001. These costs relate to leasing, construction and development activities, which are performed by the Company. Interest expense decreased by approximately $4.9 million for the nine months ended September 30, 2002 as compared to the 2001 period. The decrease was primarily attributable to a decrease in interest expense on the Company's variable rate debt due to lower interest rates and a lower average balance outstanding on the Company's unsecured credit facility. The weighted average balance outstanding was $213.2 million for the nine months ended September 30, 2002 as compared to $291.5 million for the nine months ended September 30, 2001. This decrease was offset by approximately $875,000 of interest expense on the senior unsecured notes issued in June 2002. Income (loss) before extraordinary loss and preferred dividends increased by approximately $134.5 million for the nine months ended September 30, 2002 as compared to the 2001 period. This increase is primarily attributable to the $163 million valuation reserve (see Overview and Background) on investments in affiliate loans and joint ventures recorded in the 2001 period with no such comparable reserve recorded in the 2002 period. In addition, included in the net increase, is a $4.4 million increase in discontinued operations relating to the sale of three properties during the 2002 period. 22 LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2002, the Company had a three year $575 million unsecured revolving credit facility (the "Credit Facility") from JPMorgan Chase Bank, as administrative agent, UBS Warburg LLC as syndication agent and Deutsche Bank as documentation agent. The outstanding borrowings under the Credit Facility were $224 million at September 20, 2002. 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, 2002, the Company had availability under the Credit Facility to borrow approximately an additional $351 million, subject to compliance with certain financial covenants. On June 17, 2002, the Operating Partnership issued $50 million of 6.00% (6.125% effective rate) senior unsecured notes due June 15, 2007. Net proceeds of approximately $49.4 million were used to repay outstanding borrowings under the Credit Facility. On August 7, 2002, the Company sold an industrial property on Long Island aggregating approximately 32,000 square feet for approximately $1.8 million. This property was sold to the sole tenant of the property through an option contained in the tenant's lease. On August 8, 2002, the Company sold two Class A office properties located in Westchester County, NY aggregating approximately 157,000 square feet for approximately $18.5 million. Net proceeds from these sales were used to repay borrowings under the Credit Facility and for general corporate purposes. The Company recorded an aggregate net gain of approximately $4.9 million as a result of these sales. Such gain has been included in discontinued operations for all periods presented on the Company's consolidated statements of operations. The Company continues to seek opportunities to acquire real estate assets in its markets. The Company has historically sought to acquire properties where it could use its real estate expertise to create additional value subsequent to acquisition. As a result of increased market values for the Company's commercial real estate assets the Company has sold certain non-core assets or interests in assets where significant value has been created. During 2000, 2001 and 2002, the Company has sold assets or interests in assets with aggregate sales prices of approximately $499.8 million. The Company has used the proceeds from these sales primarily to pay down borrowings under the Credit Facility, repurchase its outstanding stock and for general corporate purposes. The following table sets forth the Company's invested capital (before valuation reserves) in RSVP controlled (REIT-qualified) joint ventures and amounts which were advanced under the RSVP Commitment to FrontLine, for its investment in RSVP controlled investments (in thousands):
RSVP controlled Amounts joint ventures advanced Total ------------------- -------------------- -------------------- Privatization $ 21,480 $ 3,520 $ 25,000 Student Housing 18,086 3,935 22,021 Medical Offices 20,185 -- 20,185 Parking -- 9,091 9,091 Resorts -- 8,057 8,057 Net leased retail -- 3,180 3,180 Other assets and overhead -- 21,598 21,598 ------------------- -------------------- -------------------- $ 59,751 $ 49,381 $ 109,132 =================== ==================== ====================
Included in these investments is approximately $16.5 million of cash that has been contributed to the respective RSVP controlled joint ventures or advanced under the RSVP Commitment to FrontLine and is being held, along with cash from the preferred investors. On September 30, 2002, the Company had issued and outstanding 9,915,313 shares of Class B Exchangeable Common Stock, par value $.01 per share (the "Class B common stock"). The dividend on the shares of Class B common stock is subject to adjustment annually based on a formula which measures increases or decreases in the Company's Funds From Operations, as defined, over a base year. The Class B common stock currently receives an annual dividend of $2.5884 per share. 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, 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. 23 The Board of Directors of the Company has authorized the purchase of up to a five million shares of the Company's Class A common stock and/or its Class B common stock. Transactions conducted on the New York Stock Exchange 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. During the three months ended September 30, 2002, under this buy-back program, the Company purchased 368,200 shares of Class B common stock at an average price of $22.90 per Class B share and 1,856,200 shares of Class A common stock at an average price of $21.98 per Class A share for an aggregate purchase price for both the Class A and Class B common stock of approximately $49.2 million. In addition, subsequent to September 30, 2002, the Company purchased 842,200 shares of Class A common stock at $20.77 per share. As a result of these purchases, annual common sock dividends will decrease by approximately $5.5 million. Previously, under the Company's prior stock buy-back program, 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 61,704 shares of Class A common stock at an average price of $23.03 per Class A share for an aggregate purchase price for both the Class A and Class B common stock of approximately $31.7 million. The Board of Directors of the Company has formed a pricing committee to consider purchases of up to $75 million of the Company's outstanding preferred securities. On September 30, 2002, the Company had issued and outstanding 9,192,000 shares of 7.625% Series A Convertible Cumulative Preferred Stock (the "Series A preferred stock"). The Series A preferred stock is redeemable by the Company on or after April 13, 2003 at a price of approximately $25.95 per share with such price decreasing, at annual intervals, to $25.00 per share over a five year period. In addition, the Series A preferred stock, at the option of the holder, is convertible at any time into the Company's Class A common stock at a price of $28.51 per share. On October 14, 2002, the Company purchased and retired 357,500 shares of the Series A Preferred stock at $22.29 per share for approximately $8.0 million. As a result of this purchase, annual preferred dividends will decrease by approximately $682,000. The Company currently has issued and outstanding two million shares of Series B Convertible Cumulative Preferred Stock (the "Series B preferred stock"). The Series B preferred stock is redeemable by the Company as follows: (i) on or after March 2, 2002 to and including June 2, 2003, at an amount which provides an annual rate of return with respect to such shares of 15%, (ii) on or after June 3, 2003 to and including June 2, 2004, $25.50 per share and (iii) on or after June 3, 2004 and thereafter, $25.00 per share. In addition, the Series B preferred stock, at the option of the holder, is convertible at any time into the Company's Class A common stock at a price of $26.05 per share. The Series B preferred stock currently accumulates dividends at a rate of 8.85% per annum. On May 22, 2002, approximately $1.4 million of loans made to certain executive officers to purchase the Company's common stock matured. The loans were secured by 61,668 shares of the Company's Class A common stock. The loans were satisfied by the executive officers with the 61,668 shares of Class A common stock. The market value of these shares on May 22, 2002 was sufficient to fully satisfy these loans and as such there was no financial impact to the Company. The Company has subsequently retired these shares. Effective January 1, 2002 the Company has elected to follow FASB Statement No. 123, "Accounting for Stock Based Compensation". Statement No.123 requires the use of option valuation models which determine the fair value of the option on the date of the grant. All future employee stock option grants will be expensed over the options' vesting periods based on the fair value at the date of the grant in accordance with Statement No. 123. The Company expects minimal financial impact in the current year from the adoption of Statement No. 123. To determine the fair value of the stock options granted, the Company uses a Black-Scholes option pricing model. Historically, the Company had applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans and reported pro forma disclosures in its Form 10-K filings by estimating the fair value of options issued and the related expense in accordance with Statement No. 123. Accordingly, no compensation cost had been recognized for its stock option plans in the past. As of September 30, 2002, the Company recorded approximately $47,000 of expense related to the fair value of stock options issued. Such amounts have been included in marketing, general and administrative expenses in the Company's consolidated statements of operations. The Company's indebtedness at September 30, 2002 totaled approximately $1.3 billion (including its share of joint venture debt and net of minority partners' interests share of joint venture debt) and was comprised of $224 million outstanding under the Credit Facility, approximately $499.3 million of senior unsecured notes and approximately $607.9 million of mortgage indebtedness. Based on the Company's total market capitalization of approximately $3.2 billion at September 30, 2002 (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 $1.3 billion of debt), the Company's debt represented approximately 42.2% of its total market capitalization. 24 HQ Global Workplaces, Inc. ("HQ"), one of the largest providers of flexible officing solutions in the world and which is controlled by FrontLine, currently operates nine (formerly eleven) executive office centers in the Company's properties, three of which are held through joint ventures. The leases under which these office centers operate expire between 2008 and 2011, encompass approximately 202,000 square feet and have current contractual annual base rents of approximately $6.1 million. On March 13, 2002, as a result of experiencing financial difficulties, HQ voluntarily filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code. As of June 30, 2002, HQ's leases with the Company were in default. Further, effective March 13, 2002, the Bankruptcy Court granted HQ's petition to reject two of its leases with the Company. The two rejected leases aggregated approximately 23,900 square feet and provided for contractual base rents of approximately $548,000 for the 2002 calendar year. The Company has since re-leased the rejected spaces for approximately $519.000 per year in contractual base rents. Commencing April 1, 2002 and pursuant to the bankruptcy filing, HQ has been paying current rental charges under its leases with the Company, other than under the two rejected leases. The Company is in negotiation to restructure three of the leases and leave the terms of the remaining six leases unchanged. All negotiations with HQ are conducted by a committee designated by the Board and chaired by an independent director. There can be no assurance as to whether any deal will be consummated with HQ or if HQ will affirm or reject any or all of its remaining leases with the Company. As a result of the foregoing, the Company has reserved approximately $550,000 (net of minority partners' interests and including the Company's share of unconsolidated joint venture interest), or 74%, of the amounts due from HQ as of September 30, 2002. Scott H. Rechler serves as the non-Executive Chairman of the Board and Jon Halpern is the Chief Executive Officer and a director of HQ. WorldCom/MCI and its affiliates ("WorldCom"), a telecommunications company, which leases as of September 30, 2002 approximately 527,000 square feet in thirteen of the Company's properties located throughout the Tri-State Area voluntarily filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code on July 21, 2002. The total annualized base rental revenue from these leases amounts to approximately $12.0 million, or 2.9% of the Company's total 2002 annualized rental revenue, making it the Company's second largest tenant based on base rental revenue earned on a consolidated basis. All of WorldCom's leases are current on base rental charges through November 30, 2002 and the Company currently holds approximately $300,000 in security deposits relating to these leases. There can be no assurance as to whether WorldCom will affirm or reject any or all of its leases with the Company. As a result of the foregoing, the Company has increased its reserve against the deferred rent receivable on its balance sheet in an amount equal to $1.1 million representing approximately 51% of the outstanding deferred rent receivable attributable to WorldCom. MetroMedia Fiber Network Services, Inc. ("MetroMedia"), which leased approximately 112,000 square feet in one property from the Company, voluntarily filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code in May 2002. MetroMedia's lease with the Company provided for contractual base rent of approximately $25 per square foot amounting to $2.8 million per calendar year and expired in May 2010. In July 2002, the Bankruptcy Court granted MetroMedia's petition to restructure and reduce space under its existing lease. As a result, the lease was amended to reduce MetroMedia's space by 80,357 square feet to 31,718 square feet. Annual base rent on the 31,718 square feet MetroMedia will continue to lease is $25 per square foot amounting to approximately $793,000 per annum. Further, pursuant to the Bankruptcy Court order MetroMedia is required to pay to the Company a surrender fee of approximately $1.8 million. As a result of the foregoing, the Company has written off approximately $388,000 of deferred rent receivable relating to this lease and recognized the aforementioned surrender fee. The Company has re-leased approximately 49,000 square feet of the 80,357 square feet MetroMedia terminated to Skadden, Arps, Slate, Meagher & Flom LLP, a New York City based law firm. Arthur Andersen, LLP ("AA") leased approximately 38,000 square feet in one of the Company's New York City buildings. AA's lease with the Company provided for base rent of approximately $2 million on an annualized basis and expired in April 2004. AA has experienced significant financial difficulties with its business and as a result has entered into a lease termination agreement with the Company effective November 30, 2002. In October 2002, AA paid the Company for all base rental and other charges through November 30, 2002 and a lease termination fee of approximately $144,000. As of September 30, 2002, the Company has reserved 100% of the deferred rent receivable related to this lease which is approximately $130,000. 25 CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table sets forth the Company's significant debt obligations by scheduled principal cash flow payments and maturity date and its commercial commitments by scheduled maturity at September 30, 2002 (in thousands):
MATURITY DATE --------------------------------------------------------------------------- 2002 2003 2004 2005 2006 THEREAFTER TOTAL --------- ---------- ---------- ---------- ---------- ----------- ----------- Mortgage notes payable(1) $ 3,132 $ 12,300 $ 13,169 $ 14,167 $ 13,785 $ 128,698 $ 185,251 Mortgage notes payable(2) -- -- 2,616 18,553 129,920 406,808 557,897 Senior unsecured notes -- -- 100,000 -- -- 400,000 500,000 Unsecured credit facility -- 224,000 -- -- -- -- 224,000 Land lease obligations 652 2,687 2,811 2,814 2,795 49,921 61,680 Air rights lease obligations 91 369 379 379 379 4,659 6,256 --------- ---------- ---------- ---------- ---------- ----------- ----------- $ 3,875 $ 239,356 $ 118,975 $ 35,913 $ 146,879 $ 990,086 $1,535,084 ========= ========== ========== ========== ========== =========== ===========
(1) Scheduled principal amortization payments (2) Principal payments due at maturity Certain of the mortgage notes payable are guaranteed by certain limited partners in the Operating Partnership and/or the Company. In addition, consistent with customary practices in non-recourse lending, certain non-recourse mortgages may be recourse to the Company under certain limited circumstances including environmental issues and breaches of material representations. In addition, at September 30, 2002, the Company had approximately $1.0 million in outstanding undrawn standby letters of credit issued under the Credit Facility which expire in 2003. Thirteen of the Company's office properties and two of the Company's industrial properties which were acquired by the issuance of OP Units are subject to agreements limiting the Company's ability to transfer them prior to agreed upon dates without the consent of the limited partner who transferred the respective property to the Company. In the event the Company transfers any of these properties prior to the expiration of these limitations, the Company may be required to make a payment relating to taxes incurred by the limited partner. The limitations on nine of the properties expire prior to June 30, 2003. The limitations on the remaining properties expire between 2007 and 2013. Eleven of the Company's office properties are held in joint ventures which contain certain limitations on transfer. These limitations include requiring the consent of the joint venture partner to transfer a property prior to various specified dates ranging from 2003 to 2005, rights of first offer, and buy/sell provisions. 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 Credit Facility contains several financial covenants with which the Company must be in compliance in order to borrow funds thereunder. During certain quarterly periods, the Company may incur significant leasing costs as a result of increased market demands from tenants and high levels of leasing transactions. As a result, during these periods the Company's cash flow from operating activities may not be sufficient to pay 100% of the quarterly dividends due on its common stock. To meet the short term funding requirements relating to these leasing costs, the Company may use proceeds of property sales or borrowings under its Credit Facility. 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. There can be no assurance that there will be adequate demand for the Company's equity at the time or at the price in which the Company desires to raise capital through the sale of additional equity. 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. The Company is subject to federal, state and local laws and regulations relating to the protection of the environment, which may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at a property. An owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in the property. These laws often impose such liability without regard to whether the owner knew of, or caused, the presence of the contaminants. Clean-up costs and the owner's liability generally are not limited under the enactments and could exceed the value of the property and/or the aggregate assets of the owner. A number of the Company's properties are subject to certain environmental investigations or remediation including asbestos related abatement, soil sampling and ground water monitoring. Environmental conditions are included in the Company's original acquisition underwriting of properties. Management does not anticipate any of the known environmental conditions to have a material impact on the Company's results of operations or financial conditions. There are no assurances that management's estimates are correct and actual results may differ materially. The presence of, or the failure to properly remediate, the substances may adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. 26 As a result of current economic conditions, certain tenants have either not renewed their leases upon expiration or have paid the Company to terminate their leases. In addition, a number of U.S. companies have filed for protection under federal bankruptcy laws. Certain of these companies are tenants of the Company. The Company is subject to the risk that other companies that are tenants of the Company may file for bankruptcy protection. This may have an adverse impact on the financial results and condition of the Company. In addition, vacancy rates in our markets have been trending higher and in some instances our asking rents in our markets have been trending lower and landlords are being required to grant greater concessions such as free rent and tenant improvements. Additionally, the Company carries comprehensive liability, fire, extended coverage and rental loss insurance on all of its properties. Five of the Company's properties are located in New York City. As a result of the events of September 11, 2001, insurance companies are limiting and/or excluding coverage for acts of terrorism in all risk policies. The Company's current insurance coverage provides for full replacement cost of its properties, except that the coverage for acts of terrorism on its properties covers losses in an amount up to $100 million per occurrence (except for one property which has an additional aggregate $150 million of coverage). As a result, the Company may suffer losses from acts of terrorism that are not covered by insurance. In addition, the mortgage loans which are secured by certain of the Company's properties contain customary covenants, including covenants that require the Company to maintain property insurance in an amount equal to replacement cost of the properties. There can be no assurance that the lenders under these mortgage loans will not take the position that exclusions from the Company's coverage for losses due to terrorist acts is a breach of a covenant which, if uncured, could allow the lenders to declare an event of default and accelerate repayment of the mortgage loans. Other outstanding debt instruments contain standard cross default provisions that would be triggered in the event of an acceleration of the mortgage loans. This matter could adversely affect the Company's financial results, its ability to finance and/or refinance its properties or to buy or sell properties. 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. As a result of the impact of the events of September 11, 2001, the Company has realized increased insurance costs, particularly relating to property and terrorism insurance, and security costs. The Company has included these costs as part of its escalatable expenses. The Company has billed these escalatable expense items to its tenants consistent with the terms of the underlying leases and believes they are collectible. To the extent the Company's properties contain vacant space, the Company will bear such inflationary increases in expenses. 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. 27 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 real estate 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 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. 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. The following table presents the Company's FFO calculation (unaudited and in thousands, except per share/unit data):
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2002 2001 --------------- ------------ Net income (loss) allocable to common shareholders........... $ 16,134 $ (128,920) Adjustments for basic funds from operations: Add: Limited partners' minority interest in the operating partnership.............................. 1,941 -- Real estate depreciation and amortization............ 28,208 26,340 Minority partners' interests in consolidated partnerships....................................... 4,446 3,065 Valuation reserves on investments in affiliate loans and joint Ventures................................. -- 163,000 Extraordinary loss (net of limited partners' minority interest).......................................... -- 2,595 Less: Limited partners' minority interest in the operating partnership.............................. -- 14,657 Gain on sales of real estate ........................ 4,896 972 Amounts distributable to minority partners in consolidated Partnerships.......................... 6,050 4,206 --------------- ------------ Basic Funds From Operations ("FFO")......................... 39,783 46,245 Add: Dividends and distributions on dilutive shares and units......................................... 5,761 5,996 --------------- ------------ Diluted FFO.............................................. $ 45,544 $ 52,241 =============== ============ Weighted average common shares outstanding............... 59,536 59,999 Weighted average units of limited partnership interest outstanding............................................ 7,276 7,652 --------------- ------------ Basic weighted average common shares and units outstanding............................................ 66,812 67,651 Adjustments for dilutive FFO weighted average shares and units outstanding: Add: Weighted average common stock equivalents............. 300 441 Weighted average shares of Series A Preferred Stock... 8,060 8,060 Weighted average shares of Series B Preferred Stock... 1,919 1,919 Weighted average shares of minority partners preferred interest.................................. -- -- Weighted average shares of preferred limited 1,056 partnership interest................................ 661 --------------- ------------ Dilutive FFO weighted average shares and units outstanding............................................ 77,752 79,127 =============== ============ NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2002 2001 -------------- -------------- Net income (loss) allocable to common shareholders........... $ 45,921 $ (88,473) Adjustments for basic funds from operations: Add: Limited partners' minority interest in the operating partnership.............................. 5,538 -- Real estate depreciation and amortization............ 80,570 76,055 Minority partners' interests in consolidated partnerships....................................... 14,379 12,885 Valuation reserves on investments in affiliate loans and joint Ventures................................. -- 163,000 Extraordinary loss (net of limited partners' minority interest).......................................... -- 2,595 Less: Limited partners' minority interest in the operating partnership.............................. -- 9,326 Gain on sales of real estate ........................ 5,433 972 Amounts distributable to minority partners in consolidated Partnerships.......................... 18,943 15,010 -------------- -------------- Basic Funds From Operations ("FFO")......................... 122,032 140,754 Add: Dividends and distributions on dilutive shares and units......................................... 17,476 20,633 -------------- -------------- Diluted FFO.............................................. $ 139,508 $ 161,387 ============== ============== Weighted average common shares outstanding............... 60,294 57,773 Weighted average units of limited partnership interest outstanding............................................ 7,427 7,703 -------------- -------------- Basic weighted average common shares and units outstanding............................................ 67,721 65,476 Adjustments for dilutive FFO weighted average shares and units outstanding: Add: Weighted average common stock equivalents............. 342 429 Weighted average shares of Series A Preferred Stock... 8,060 8,060 Weighted average shares of Series B Preferred Stock... 1,919 1,919 Weighted average shares of minority partners preferred interest.................................. -- 1,898 Weighted average shares of preferred limited 770 partnership interest................................ 1,182 -------------- -------------- Dilutive FFO weighted average shares and units outstanding............................................ 78,812 78,964 ============== ==============
28 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. As of September 30, 2002, the Company had no derivatives outstanding. 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 reflect 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, 2002 (dollars in thousands):
For the Year Ended December 31, --------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter Total(1) FMV ----------------------------------------------------------------------------------------------- Long term debt: Fixed rate....... $ 3,132 $ 12,300 $ 115,785 $ 32,720 $ 143,705 $ 935,506 $ 1,243,148 $ 1,263,046 Weighted average interest rate.. 7.47% 7.51% 7.47% 6.92% 7.38% 7.27% 7.29% Variable rate.... $ -- $ 224,000 $ -- $ -- $ -- $ -- $ 224,000 $ 224,000 Weighted average interest rate.. -- 2.85% -- -- -- -- 2.85%
(1) Includes aggregate unamortized issuance discounts of approximately $728 on the senior unsecured notes issued during March 1999 and June 2002, which are due at maturity. In addition, a one percent increase in the LIBOR rate would have an approximate $2.2 million annual increase in interest expense based on $224 million of variable rate debt outstanding at September 30, 2002. 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, 2002 (dollars in thousands):
For the Year Ended December 31, --------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter Total(1) FMV ----------------------------------------------------------------------------------------------- Mortgage notes and notes receivable: Fixed rate........... $ 1,153 $ -- $ 36,500 $ -- $ -- $ 16,990 $ 54,643 $ 55,829 Weighted average interest rate...... 9.0% -- 10.23% -- -- 11.95% 10.74%
(1) Excludes interest receivables aggregating approximately one million dollars. 29 ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures within 90 days prior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 30 The following table sets forth the Company's schedule of its top 25 tenants based on base rental revenue as of September 30, 2002:
- --------------------------------------------------------------------------------------------------------------- PERCENT OF PRO-RATA PERCENT OF CONSOLIDATED TOTAL SHARE OF ANNUALIZED ANNUALIZED BASE TENANT NAME (1) TENANT TYPE SQUARE FEET BASE RENTAL REVENUE RENTAL REVENUE - --------------------------------------------------------------------------------------------------------------- * DEBEVOISE & PLIMPTON Office 465,420 3.3% 5.6% * WORLDCOM/MCI Office 527,214 3.2% 2.9% * AMERICAN EXPRESS Office 240,142 2.0% 1.8% BELL ATLANTIC Office 210,426 1.5% 1.3% * SCHULTE ROTH & ZABEL Office 238,052 1.4% 2.3% * HQ GLOBAL Office/Industrial 201,900 1.2% 1.5% UNITED DISTILLERS Office 137,918 1.1% 1.0% WATERHOUSE SECURITIES Office 127,143 1.1% 0.9% * BANQUE NATIONALE DE PARIS Office 145,834 0.9% 1.5% * KRAMER LEVIN NESSEN KAMIN Office 158,144 0.9% 1.4% VYTRA HEALTHCARE Office 105,613 0.8% 0.7% D.E.SHAW Office 89,526 0.7% 0.6% P.R.NEWSWIRE ASSOCIATES Office 67,000 0.7% 0.6% HOFFMANN-LA ROCHE INC. Office 120,736 0.7% 0.6% EMI ENTERTAINMENT WORLD Office 65,844 0.7% 0.6% * STATE FARM Office/Industrial 162,651 0.7% 1.0% HELLER EHRMAN WHITE Office 51,167 0.7% 0.6% LABORATORY CORP OF AMERICA Office 108,000 0.7% 0.6% ESTEE LAUDER Industrial 374,578 0.7% 0.6% * DRAFT WORLDWIDE INC. Office 124,008 0.7% 1.1% PRACTICING LAW INSTITUTE Office 62,000 0.7% 0.6% LOCKHEED MARTIN CORP. Office 123,554 0.7% 0.6% RADIANZ U.S. NO.2 Office 130,009 0.6% 0.5% TOWERS PERRIN FOSTER Office 88,233 0.6% 0.5% * MERRILL LYNCH Office 102,973 0.6% 0.7% - ----------------------------------------------------------------------------------------------------------------
(1) Ranked by pro-rata share of annualized based rental revenue * Part or all of space occupied by tenant is in a 51% or more owned joint venture building. 31
- -------------------------------------------------------------------------------------------------------------------- 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 years 1998 through 2001 and the nine months ended September 30, 2002. - -------------------------------------------------------------------------------------------------------------------- NON-INCREMENTAL REVENUE GENERATING CAPITAL EXPENDITURES - -------------------------------------------------------------------------------------------------------------------- Average 1998 1999 2000 2001 1998-2001 2002 ----------- ----------- ------------ ----------- ------------ ----------- Suburban Office Properties Total $2,004,976 $2,298,899 $3,289,116 $4,606,069 $3,049,765 $3,629,532 Per Square Foot 0.23 0.23 0.33 0.45 0.31 $0.36 NYC Office Properties Total N/A N/A $946,718 $1,584,501 $1,265,610 $1,406,967 Per Square Foot N/A N/A 0.38 0.45 0.42 $0.40 Industrial Properties Total $1,205,266 $1,048,688 $813,431 $711,666 $944,763 $1,379,875 Per Square Foot 0.12 0.11 0.11 0.11 0.11 $0.21
- -------------------------------------------------------------------------------------------------------------------- NON-INCREMENTAL REVENUE GENERATING TENANT IMPROVEMENTS AND LEASING COMMISSIONS (3) - -------------------------------------------------------------------------------------------------------------------- 1998 1999 2000 2001 --------------- ------------- -------------- -------------- Long Island Office Properties Tenant Improvements $1,140,251 $1,009,357 $2,853,706 $2,722,457 Per Square Foot Improved 3.98 4.73 6.99 8.47 Leasing Commissions $418,191 $551,762 $2,208,604 $1,444,412 Per Square Foot Leased 1.46 2.59 4.96 4.49 --------------- ------------- -------------- -------------- Total Per Square Foot $5.44 $7.32 $11.95 $12.96 =============== ============= ============== ============== Westchester Office Properties Tenant Improvements $711,160 $1,316,611 $1,860,027 $2,584,728 Per Square Foot Improved 4.45 5.62 5.72 5.91 Leasing Commissions $286,150 $457,730 $412,226 $1,263,012 Per Square Foot Leased 1.79 1.96 3.00 2.89 --------------- ------------- -------------- -------------- Total Per Square Foot $6.24 $7.58 $8.72 $8.80 =============== ============= ============== ============== Connecticut Office Properties Tenant Improvements $202,880 $179,043 $385,531 $213,909 Per Square Foot Improved 5.92 4.88 4.19 1.46 Leasing Commissions $151,063 $110,252 $453,435 $209,322 Per Square Foot Leased 4.41 3.00 4.92 1.43 --------------- ------------- -------------- -------------- Total Per Square Foot $10.33 $7.88 $9.11 $2.89 =============== ============= ============== ============== New Jersey Office Properties Tenant Improvements $654,877 $454,054 $1,580,323 $1,146,385 Per Square Foot Improved 3.78 2.29 6.71 2.92 Leasing Commissions $396,127 $787,065 $1,031,950 $1,602,962 Per Square Foot Leased 2.08 3.96 4.44 4.08 --------------- ------------- -------------- -------------- Total Per Square Foot $5.86 $6.25 $11.15 $7.00 =============== ============= ============== ============== New York City Office Properties Tenant Improvements N/A N/A $65,267 $788,930 Per Square Foot Improved N/A N/A 1.79 15.69 Leasing Commissions N/A N/A $418,185 $1,098,829 Per Square Foot Leased N/A N/A 11.50 21.86 --------------- ------------- -------------- -------------- Total Per Square Foot N/A N/A $13.29 $37.55 =============== ============= ============== ============== Industrial Properties Tenant Improvements $283,842 $375,646 $650,216 $1,366,488 Per Square Foot Improved 0.76 0.25 0.95 1.65 Leasing Commissions $200,154 $835,108 $436,506 $354,572 Per Square Foot Leased 0.44 0.56 0.64 0.43 --------------- ------------- -------------- -------------- Total Per Square Foot $1.20 $0.81 $1.59 $2.08 =============== ============= ============== ============== Average YTD 1998-2001 2002 New Renewal -------------- -------------- -------------- --------------- Long Island Office Properties Tenant Improvements $1,931,443 $1,240,929 $675,704 $565,225 Per Square Foot Improved 6.04 6.37 9.70 4.52 Leasing Commissions $1,155,742 $773,699 $317,398 $456,301 Per Square Foot Leased 3.38 3.97 4.55 3.65 -------------- -------------- -------------- --------------- Total Per Square Foot $9.42 10.33 $14.25 $8.16 ============== ============== ============== =============== Westchester Office Properties Tenant Improvements $1,618,132 $5,973,514 (2) $3,907,006 $2,066,508 Per Square Foot Improved 5.43 15.63 18.46 12.12 Leasing Commissions $604,780 $1,777,227 $1,434,359 $342,868 Per Square Foot Leased 2.41 4.91 6.36 2.51 -------------- -------------- -------------- --------------- Total Per Square Foot $7.84 $20.54 $24.83 $14.63 ============== ============== ============== =============== Connecticut Office Properties Tenant Improvements $245,341 $397,308 $395,588 $1,720 Per Square Foot Improved 4.11 7.92 8.52 0.46 Leasing Commissions $231,018 $122,612 $122,612 $0 Per Square Foot Leased 3.44 2.45 2.64 -- -------------- -------------- -------------- --------------- Total Per Square Foot $7.55 $10.37 $11.16 0.46 ============== ============== ============== =============== New Jersey Office Properties Tenant Improvements $958,910 $1,306,938 $998,613 $308,325 Per Square Foot Improved 3.93 9.39 17.47 3.76 Leasing Commissions $954,526 $359,276 $131,731 $227,545 Per Square Foot Leased 3.64 2.52 2.18 2.77 -------------- -------------- -------------- --------------- Total Per Square Foot $7.57 $11.91 $19.65 $6.53 ============== ============== ============== =============== New York City Office Properties Tenant Improvements $427,099 $3,868,236 $3,104,358 $763,878 Per Square Foot Improved 8.74 21.14 21.77 18.91 Leasing Commissions $758,507 $1,665,978 $1,218,308 $447,670 Per Square Foot Leased 16.68 9.10 8.54 11.08 -------------- -------------- -------------- --------------- Total Per Square Foot $25.42 $30.24 $30.32 $29.99 ============== ============== ============== =============== Industrial Properties Tenant Improvements $669,048 $872,114 $694,363 $177,751 Per Square Foot Improved 0.90 1.43 3.31 -- Leasing Commissions $456,585 $366,653 $320,996 $45,657 Per Square Foot Leased 0.52 0.60 1.52 0.11 -------------- -------------- -------------- --------------- Total Per Square Foot $1.42 $2.02 $4.84 $0.11 ============== ============== ============== ===============
- ------------------------------------------------------------------------------- NOTES: (1) Excludes non-incremental capital expenditures, tenant improvements and leasing commissions for One Orlando Center in Orlando, Florida. (2) Excludes tenant improvements and leasing commissions related to a 163,880 square foot leasing transaction with Fuji Photo Film U.S.A. Leasing commissions on this transaction amounted to $5.33 per square foot and tenant improvement allowance amounted to $40.88 per square foot. (3) All amounts represent tenant improvements and leasing costs committed on leases signed during the period. - ------------------------------------------------------------------------------- 32
- ---------------------------------------------------------------------------------------------------------------------------- LEASE EXPIRATION SCHEDULE As of September 30, 2002 TOTAL PORTFOLIO - ---------------------------------------------------------------------------------------------------------------------------- Number of Square % of Total Cumulative Year of Leases Feet Portfolio % of Total Expiration Expiring Expiring Sq Ft Portfolio Sq Ft - ---------------------------------------------------------------------------------------------------------------------------- 2002 40 222,550 1.1% 1.1% 2003 159 1,742,219 8.6% 9.7% 2004 201 1,820,933 9.0% 18.6% 2005 244 2,445,977 12.0% 30.6% 2006 221 2,592,815 12.8% 43.4% 2007 126 1,535,558 7.6% 50.9% 2008 and thereafter 327 8,787,070 43.3% 94.2% - ---------------------------------------------------------------------------------------------------------------------------- Total/Weighted Average 1,318 19,147,122 94.2% -- - ---------------------------------------------------------------------------------------------------------------------------- Total Portfolio Square Feet 20,334,559
OFFICE PORTFOLIO - ---------------------------------------------------------------------------------------------------------------------------- Number of Square % of Total Cumulative Year of Leases Feet Portfolio % of Total Expiration Expiring Expiring Sq Ft Portfolio Sq Ft - ---------------------------------------------------------------------------------------------------------------------------- 2002 36 197,457 1.5% 1.5% 2003 136 1,154,426 8.5% 9.9% 2004 157 1,159,480 8.5% 18.4% 2005 210 1,764,124 13.0% 31.4% 2006 170 1,622,691 11.9% 43.3% 2007 98 1,197,898 8.8% 51.1% 2008 and thereafter 260 5,844,193 42.9% 95.1% - ---------------------------------------------------------------------------------------------------------------------------- Total/Weighted Average 1,067 12,940,269 95.1% -- - ---------------------------------------------------------------------------------------------------------------------------- Total Portfolio Square Feet 13,614,217
INDUSTRIAL/R&D PORTFOLIO - ---------------------------------------------------------------------------------------------------------------------------- Number of Square % of Total Cumulative Year of Leases Feet Portfolio % of Total Expiration Expiring Expiring Sq Ft Portfolio Sq Ft - ---------------------------------------------------------------------------------------------------------------------------- 2002 4 25,093 0.4% 0.4% 2003 23 587,793 8.7% 9.1% 2004 44 661,452 9.8% 19.0% 2005 34 681,853 10.1% 29.0% 2006 51 970,124 14.4% 43.5% 2007 28 337,660 5.0% 48.6% 2008 and thereafter 67 2,942,877 43.8% 92.4% - ---------------------------------------------------------------------------------------------------------------------------- Total/Weighted Average 251 6,206,853 92.4% -- - ---------------------------------------------------------------------------------------------------------------------------- Total Portfolio Square Feet 6,720,342
33 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not presently subject to any material litigation nor, to the Company's knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations or business or financial condition of the Company. Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Securities Holders - None Item 5. Other information The Company has received approval of the Audit Committee of the Board permitting Ernst & Young, LLP, the Company's auditors to perform the following non-audit related services: (i) the preparation and review of tax filings; (ii) analysis related to compliance with law including, but not limited to the REIT qualification; (iii) review of Company disclosure related issues; and (iv) analysis relating to alternative structures of potential joint ventures, acquisitions and financings. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 3(ii) Amended and Restated ByLaws of the Registrant 10.1 Each member of the Registrant's Board of Directors and each Executive Officer of the Registrant has entered into an Indemnification Agreement with the Registrant. These Indemnification Agreements are identical in all material respects. The schedule below sets forth the terms of each Indemnification Agreement not filed which differ from the copy of the example Indemnification Agreement (between the Registrant and Donald J. Rechler, dated as of May 23, 2002), which is filed as Exhibit 10.1 hereto: Name Dated As Of ---- ----------- Scott H. Rechler May 23, 2002 Mitchell D. Rechler May 23, 2002 Gregg M. Rechler May 23, 2002 Michael Maturo May 23, 2002 Roger M. Rechler May 23, 2002 Jason Barnett May 23, 2002 Herve A. Kevenides May 23, 2002 John V. N. Klein May 23, 2002 Ronald H. Menaker May 1, 2002 Peter Quick May 1, 2002 Lewis S. Ranieri May 23, 2002 Conrad D. Stephenson May 23, 2002 99.1 Certification of Donald J. Rechler, Co-Chief Executive Officer of the Registrant pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 99.2 Certification of Scott H. Rechler, Co-Chief Executive Officer of the Registrant pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code 99.3 Certification of Michael Maturo, Executive Vice President, Treasurer and Chief Financial Officer of the Registrant pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code b) During the three months ended September 30, 2002, the Registrant filed the following reports on Form 8-K: On August 8, 2002, 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 8, 2002, 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, 2002 in satisfaction of the requirements of Regulation FD. 34 PART II - OTHER INFORMATION (CONTINUED) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. RECKSON ASSOCIATES REALTY CORP. By: /s/ Scott H. Rechler By: /s/ Michael Maturo ------------------------------------------ --------------------------------------- Scott H. Rechler, Co-Chief Executive Officer Michael Maturo, Executive Vice President, Treasurer and Chief Financial Officer By /s/ Donald J. Rechler ------------------------------------------- Donald J. Rechler, Co-Chief Executive Officer
DATE: November 12, 2002 35 CERTIFICATION I, Donald J. Rechler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Reckson Associates Realty Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Donald J. Rechler ------------------------------- Donald J. Rechler Co-Chief Executive Officer 36 CERTIFICATION I, Scott H. Rechler, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Reckson Associates Realty Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Scott H. Rechler ------------------------------ Scott H. Rechler Co-Chief Executive Officer 37 CERTIFICATION I, Michael Maturo, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Reckson Associates Realty Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Michael Maturo ---------------------------------- Michael Maturo Executive Vice President, Treasurer and Chief Financial Officer 38 EX-3 3 ex3.txt EXHIBIT 3 EXHIBIT 3(ii) RECKSON ASSOCIATES REALTY CORP. AMENDED AND RESTATED BYLAWS (AMENDED AS OF AUGUST 2002) ARTICLE I OFFICES Section 1. PRINCIPAL OFFICE. The principal office of the Corporation shall be located at such place or places as the Board of Directors may designate. Section 2. ADDITIONAL OFFICES. The Corporation may have additional offices at such places as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. PLACE. All meetings of stockholders shall be held at the principal office of the Corporation or at such other place within the United States as shall be stated in the notice of the meeting. Section 2. ANNUAL MEETING. An annual meeting of the stockholders for the election of directors and the transaction of any business within the powers of the Corporation shall be held on a date and at the time set by the Board of Directors during the month of May in each year. Section 3. SPECIAL MEETINGS. The president, chief executive officer or Board of Directors may call special meetings of the stockholders. Special meetings of stockholders shall also be called by the secretary of the Corporation upon the written request of the holders of shares entitled to cast not less than a majority of all the votes entitled to be cast at such meeting. Such request shall state the purpose of such meeting and the matters proposed to be acted on at such meeting. The secretary shall inform such stockholders of the reasonably estimated cost of preparing and mailing notice of the meeting and, upon payment to the Corporation by such stockholders of such costs, the secretary shall give notice to each stockholder entitled to notice of the meeting. Unless requested by the stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any special meeting of the stockholders held during the preceding twelve months. Section 4. NOTICE. Not less than ten nor more than 90 days before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Corporation, with postage thereon prepaid. Section 5. SCOPE OF NOTICE. Any business of the Corporation may be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice. Section 6. ORGANIZATION. At every meeting of stockholders, the Chairman of the Board, if there be one, shall conduct the meeting or, in the case of vacancy in office or absence of the Chairman of the Board, one of the following officers present shall conduct the meeting in the order stated: the Vice Chairman of the Board, if there be one, the President, the Vice Presidents in their order of rank and seniority, or a Chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as Chairman, and the Secretary, or, in his absence, an assistant secretary, or in the absence of both the Secretary and assistant secretaries, a person appointed by the Chairman shall act as Secretary. Section 7. QUORUM. At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum; but this section shall not affect any requirement under any statute or the charter of the Corporation for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the stockholders, the stockholders entitled to vote at such meeting, present in person or by proxy, shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 8. VOTING. A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the charter of the Corporation. Unless otherwise provided in the charter, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. 2 Section 9. PROXIES. A stockholder may vote the stock owned of record by him, either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the Corporation registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or other fiduciary may vote stock registered in his name as such fiduciary, either in person or by proxy. Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes the certification. Notwithstanding any other provision of the charter of the Corporation or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition. Section 11. INSPECTORS. At any meeting of stockholders, the chairman of the meeting may, or upon the request of any stockholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, 3 count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. Section 12. NOMINATIONS AND STOCKHOLDER BUSINESS (a) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders (except for stockholder proposals included in the proxy materials pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section 12(a), who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(a). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 12, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Corporation not less than 120 days nor more than 180 days prior to the first anniversary of the preceding year's annual meeting or special meeting in lieu thereof; provided, however, that in the event that the date of the annual meeting is advanced by more than seven calendar days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 180th day prior to such annual meeting and not later than the close of business on the later of the 120th day prior to such annual meeting or the twentieth day following the earlier of the day on which public announcement of the date of such meeting is first made or notice of the meeting is mailed to stockholders. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the number of shares of each class of stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. 4 (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this Section 12 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 85 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 12(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 12(b), who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(b). In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Corporation's notice of meeting, if the stockholder's notice containing the information required by paragraph (a)(2) of this Section 12 shall be delivered to the secretary at the principal executive offices of the Corporation not earlier than the 180th day prior to such special meeting and not later than the close of business on the later of the 75th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 12 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 12. The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 12 and, if any proposed nomination or business is not in compliance with this Section 12, to declare that such defective nomination or proposal be disregarded. (2) For purposes of this Section 12, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 12, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 5 12. Nothing in this Section 12 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 13. VOTING BY BALLOT. Voting on any question or in any election may be viva voce unless the presiding officer shall order or any stockholder shall demand that voting be by ballot. ARTICLE III DIRECTORS Section 1. GENERAL POWERS; QUALIFICATIONS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the Maryland General Corporation Law, nor more than 15, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors. Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this Bylaw being necessary. The Board of Directors may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Board of Directors without other notice than such resolution. Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the chairman of the board (or any co-chairman of the board if more than one), president or by a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Board of Directors called by them. Section 5. NOTICE. Notice of any special meeting of the Board of Directors shall be delivered personally or by telephone, facsimile transmission, United States mail or courier to each director at his business or residence address. Notice by personal delivery, by telephone or a facsimile transmission shall be given at least two days prior to the meeting. Notice by mail shall be given at least five days prior to the meeting and shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Telephone notice shall be deemed to be given when the director is personally given such notice in a telephone call to which he is a party. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws. 6 Section 6. QUORUM. A majority of the directors shall constitute a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a majority of such directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to the charter of the Corporation or these Bylaws, the vote of a majority of a particular group of directors is required for action, a quorum must also include a majority of such group. The Board of Directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. Section 7. VOTING. The action of the majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable statute. Section 8. TELEPHONE MEETINGS. Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each director and such written consent is filed with the minutes of proceedings of the Board of Directors. Section 10. VACANCIES. If for any reason any or all the directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder (even if fewer than three directors remain). Any vacancy on the Board of Directors for any cause other than an increase in the number of directors shall be filled by a majority of the remaining directors, although such majority is less than a quorum. Any vacancy in the number of directors created by an increase in the number of directors may be filled by a majority vote of the entire Board of Directors. Any individual so elected as director shall hold office for the unexpired term of the director he is replacing. Section 11. COMPENSATION. Directors shall not receive any stated salary for their services as directors but, by resolution of the Board of Directors, may receive fixed sums per year and/or per meeting and/or per visit to real property owned or to be acquired by the Corporation and for any service or activity they performed or engaged in as directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they performed or engaged in as directors; but nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor. Section 12. LOSS OF DEPOSITS. No director shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or stock have been deposited. 7 Section 13. SURETY BONDS. Unless required by law, no director shall be obligated to give any bond or surety or other security for the performance of any of his duties. Section 14. RELIANCE. Each director, officer, employee and agent of the Corporation shall, in the performance of his duties with respect to the Corporation, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Corporation, upon an opinion of counsel or upon reports made to the Corporation by any of its officers or employees or by the adviser, accountants, appraisers or other experts or consultants selected by the Board of Directors or officers of the Corporation, regardless of whether such counsel or expert may also be a director. Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The directors shall have no responsibility to devote their full time to the affairs of the Corporation. Any director or officer, employee or agent of the Corporation, in his personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to or in addition to or in competition with those of or relating to the Corporation. Section. 16. MATTERS TO BE TAKEN INTO CONSIDERATION BY DIRECTORS. In considering any potential acquisition of control of the Corporation, the directors may consider the effect of the potential acquisition of control on (i) stockholders of the Corporation and unitholders of Reckson Operating Partnership, L.P. and employees, suppliers, customers and creditors of the Corporation or any of its subsidiaries; and (ii) communities in which offices or other establishments of the Corporation are located. ARTICLE IV COMMITTEES Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may appoint from among its members an Executive Committee, an Audit Committee, a Compensation Committee and other committees, composed of two or more directors, to serve at the pleasure of the Board of Directors. Section 2. POWERS. The Board of Directors may delegate to committees appointed under Section 1 of this Article any of the powers of the Board of Directors, except as prohibited by law. Section 3. MEETINGS. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. The act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or any two members of any committee may fix the time and place of its meeting unless the Board shall otherwise provide. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may 8 appoint another director to act in the place of such absent member. Each committee shall keep minutes of its proceedings. Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each member of the committee and such written consent is filed with the minutes of proceedings of such committee. Section 6. VACANCIES. Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve any such committee. ARTICLE V OFFICERS Section 1. GENERAL PROVISIONS. The officers of the Corporation shall include a chief executive officer, a president, a secretary and a treasurer and may include a chairman of the board (or one or more co-chairmen of the board), a vice chairman of the board, one or more executive vice presidents, one or more senior vice presidents, one or more vice presidents, a chief operating officer, a chief financial officer, a treasurer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of stockholders, except that the chief executive officer may appoint one or more vice presidents, assistant secretaries and assistant treasurers. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his successor is elected and qualifies or until his death, resignation or removal in the manner hereinafter provided. Any two or more offices except president and vice president may be held by the same person. In its discretion, the Board of Directors may leave unfilled any office except that of president, treasurer and secretary. Election of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent. Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the Corporation may be removed by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by giving written notice of his resignation to the Board of Directors, the chairman of the board (or any co-chairman of the board if more than one), the president or the secretary. Any 9 resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Corporation. Section 3. VACANCIES. A vacancy in any office may be filled by the Board of Directors for the balance of the term. Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate a chief executive officer. In the absence of such designation, the chairman of the board (or, if more than one, the co-chairmen of the board in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall be the chief executive officer of the Corporation. The chief executive officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. Section 5. CHIEF OPERATING OFFICER. The Board of Directors may designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer. Section 7. CHAIRMAN OF THE BOARD. The Board of Directors shall designate a chairman of the board (or one or more co-chairmen of the board). The chairman of the board shall preside over the meetings of the Board of Directors and of the stockholders at which he shall be present. If there be more than one, the co-chairmen designated by the Board of Directors will perform such duties. The chairman of the board shall perform such other duties as may be assigned to him or them by the Board of Directors. Section 8. CHAIRMAN OF THE BOARD EMERITUS. The directors may elect by a majority vote, from time to time, a chairman of the board emeritus (or one or more co-chairmen of the board emeritus). The chairman of the board emeritus shall be an honorary position and shall have no vote on any matter considered by the directors. The chairman of the board emeritus shall serve for such term as determined by the Board of Directors and may be removed by a majority vote of directors with or without cause. Section 9. PRESIDENT. The president or chief executive officer, as the case may be, shall in general supervise and control all of the business and affairs of the Corporation. In the absence of a designation of a chief operating officer by the Board of Directors, the president shall be the chief operating officer. He may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to 10 the office of president and such other duties as may be prescribed by the Board of Directors from time to time. Section 10. VICE PRESIDENTS. In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to him by the president or by the Board of Directors. The Board of Directors may designate one or more vice presidents as executive vice president or as vice president for particular areas of responsibility. Section 11. SECRETARY. The secretary shall (a) keep the minutes of the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (e) have general charge of the share transfer books of the Corporation; and (f) in general perform such other duties as from time to time may be assigned to him by the chief executive officer, the president or by the Board of Directors. Section 12. TREASURER. The treasurer shall have the custody of the funds and securities of the Corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. In the absence of a designation of a chief financial officer by the Board of Directors, the treasurer shall be the chief financial officer of the Corporation. The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and Board of Directors, at the regular meetings of the Board of Directors or whenever it may so require, an account of all his transactions as treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, moneys and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be assigned to them by the secretary or treasurer, respectively, or by the president or the Board of Directors. The assistant treasurers shall, if required by the Board of Directors, give bonds for the 11 faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Board of Directors. Section 14. SALARIES. The salaries and other compensation of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a director. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. CONTRACTS. The Board of Directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the directors or by an authorized person shall be valid and binding upon the Board of Directors and upon the Corporation when authorized or ratified by action of the Board of Directors. Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from time to time be determined by the Board of Directors. Section 3. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may designate. ARTICLE VII STOCK Section 1. CERTIFICATES. Each stockholder shall be entitled to a certificate or certificates which shall represent and certify the number of shares of each class of stock held by him in the Corporation. Each certificate shall be signed by the chief executive officer, the president or a vice president and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Corporation. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Corporation shall, from time to time, issue several classes of stock, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing shares which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. If the Corporation has authority to issue stock of more than one class, the certificate shall contain on the face or back a full statement or summary of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, 12 qualifications and terms and conditions of redemption of each class of stock and, if the Corporation is authorized to issue any preferred or special class in series, the differences in the relative rights and preferences between the shares of each series to the extent they have been set and the authority of the Board of Directors to set the relative rights and preferences of subsequent series. In lieu of such statement or summary, the certificate may state that the Corporation will furnish a full statement of such information to any stockholder upon request and without charge. If any class of stock is restricted by the Corporation as to transferability, the certificate shall contain a full statement of the restriction or state that the Corporation will furnish information about the restrictions to the stockholder on request and without charge. Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer agent of the Corporation of a stock certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in all respects to the charter of the Corporation and all of the terms and conditions contained therein. Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board of Directors may direct a new certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, an officer designated by the Board of Directors may, in his discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner's legal representative to advertise the same in such manner as he shall require and/or to give bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate. Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken. 13 In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days before the date of such meeting. If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the directors, declaring the dividend or allotment of rights, is adopted. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein. Section 5. STOCK LEDGER. The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder. Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors may issue fractional stock or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit. ARTICLE VIII ACCOUNTING YEAR The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by a duly adopted resolution. 14 ARTICLE IX DISTRIBUTIONS Section 1. AUTHORIZATION. Dividends and other distributions upon the stock of the Corporation may be authorized and declared by the Board of Directors, subject to the provisions of law and the charter of the Corporation. Dividends and other distributions may be paid in cash, property or stock of the Corporation, subject to the provisions of law and the charter. Section 2. CONTINGENCIES. Before payment of any dividends or other distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends or other distributions, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine to be in the best interest of the Corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X INVESTMENT POLICY Subject to the provisions of the charter of the Corporation, the Board of Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion. ARTICLE XI SEAL Section 1. SEAL. The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words "Corporate Seal Maryland." The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation. ARTICLE XII INDEMNIFICATION AND INSURANCE (A) Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative or investigative (hereinafter, a "proceeding"), by reason of the fact that he or she or a person of 15 whom he or she is the legal representative is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the Corporation, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Maryland General Corporation Law as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in paragraph (C) of this Bylaw, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. The right to indemnification conferred in this Bylaw shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition, such advances to be paid by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the claimant requesting such advance or advances from time to time; provided, however, that if the Maryland General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Bylaw or otherwise. (B) To obtain indemnification under this Bylaw, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Upon written request by a claimant for indemnification pursuant to the first sentence of this paragraph (B), a determination, if required by applicable law, with respect to the claimant's entitlement thereto shall be made as follows: (1) if requested by the claimant, by Independent Counsel (as hereinafter defined), or (2) if no request is made by the claimant for a determination by Independent Counsel, (i) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or, if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable, by a majority vote of a committee of the Board consisting solely of two or more Disinterested Directors designated by a majority vote of the full Board of Directors in which all Directors may participate, or (ii) if a quorum of the Board of Directors consisting of Disinterested Directors or the committee described in (i) above is not obtainable or, even if obtainable, if such quorum of Disinterested Directors or such committee so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be 16 delivered to the claimant. In the event the determination of entitlement to indemnification is to be made by Independent Counsel, whether by the request of the claimant or otherwise, the Independent Counsel shall be selected by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors, or, if such quorum is not obtainable, by a majority vote of the committee described in (i) above, or, if the requisite quorum cannot be obtained therefor and such committee cannot be established, by a majority vote of the full Board of Directors in which all Directors may participate. If it is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within 10 days after such determination. (C) If a claim under paragraph (A) of this Bylaw is not paid in full by the Corporation within thirty days after a written claim pursuant to paragraph (B) of this Bylaw has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standard of conduct which makes it permissible under the Maryland General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, Independent Counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Maryland General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, Independent Counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (D) If a determination shall have been made pursuant to paragraph (B) of this Bylaw that the claimant is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to paragraph (C) of this Bylaw. (E) The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to paragraph (C) of this Bylaw that the procedures and presumptions of this Bylaw are not valid, binding and enforceable and shall stipulate in such proceeding that the Corporation is bound by all the provisions of this Bylaw. (F) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Bylaw shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or Disinterested Directors or otherwise. No repeal or modification of this Bylaw shall in any way diminish or adversely affect the rights of any director, officer, employee or agent of the Corporation hereunder in respect of any occurrence or matter arising prior to any such repeal or modification. 17 (G) The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Maryland General Corporation Law. To the extent that the Corporation maintains any policy or policies providing such insurance, each such director or officer, and each such agent or employee to which rights to indemnification have been granted as provided in paragraph (H) of this Bylaw, shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such director, officer, employee or agent. (H) The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Corporation the expenses incurred in defending any proceeding in advance of its final disposition, to any employee or agent of the Corporation to the fullest extent of the provisions of this Bylaw with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. (I) If any provision or provisions of this Bylaw shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (1) the validity, legality and enforceability of the remaining provisions of this Bylaw (including, without limitation, each portion of any paragraph of this Bylaw containing any such provision held to be invalid, illegal or unenforceable, that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (2) to the fullest extent possible, the provisions of this Bylaw (including, without limitation, each such portion of any paragraph of this Bylaw containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. (J) For purposes of this Bylaw: (1) "Disinterested Director" means a director of the Corporation who is not and was not a party to the proceeding in respect of which indemnification is sought by the claimant. (2) "Independent Counsel" means a law firm, or a member of a law firm, or an independent practitioner, that is reasonably acceptable to the respective claimant hereunder and that is experienced in matters of relevant corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Corporation or the claimant in any matter material to either such party (other than with respect to matters concerning the claimant under this Bylaw, or of other claimants under this Bylaw), or (ii) any other party to the proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or the claimant in an action to determine the claimant's rights under this Bylaw. (K) Any notice, request or other communication required or permitted to be given to the Corporation under this Bylaw shall be in writing and either delivered in person or 18 sent by telecopy, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation and shall be effective only upon receipt by the Secretary. ARTICLE XIII WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the charter of the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE XIV AMENDMENT OF BYLAWS The Board of Directors shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws. 19 EX-10.1 4 ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 RECKSON ASSOCIATES REALTY CORP. EXHIBIT 10.1 INDEMNIFICATION AGREEMENT ------------------------- This Agreement, made and entered into as of the 23rd day of May, 2002 (the "Agreement"), by and between Reckson Associates Realty Corp., a Maryland corporation (the "Company"), and Donald J. Rechler ("Indemnitee"). WHEREAS, at the request of the Company, Indemnitee currently serves as a director and executive officer of the Company and may, therefore, be subjected to claims, suits or proceedings arising as a result of his service; and WHEREAS, Section 2-418 of the Maryland General Corporation Law (the "MGCL") sets forth the terms of permitted and required indemnification of, and advancement of expenses to, directors and officers of a Maryland corporation; WHEREAS, as an inducement to Indemnitee to continue to serve as such director and executive officer, the Company has agreed to indemnify Indemnitee against expenses and costs incurred by Indemnitee in connection with any such claims, suits or proceedings, to the fullest extent that is lawful; and WHEREAS, the parties by this Agreement desire to set forth their agreement regarding indemnification; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows: 1. Acts or Omissions Covered by This Agreement. ------------------------------------------- This Agreement shall cover any act or omission by Indemnitee after the date of his commencement of service as a director and executive officer, regardless of whether said act or omission occurred prior to the date of this Agreement, which (i) occurs or is alleged to have occurred by reason of his being or having been a director and/or executive officer (ii) occurs or is alleged to have occurred, during or after the time when Indemnitee served as a director and/or executive officer and (iii) gives rise to, or is the direct or indirect subject of a claim in any threatened, pending or completed action, suit or proceeding at any time or times whether during or after his service as a director and/or executive officer. 2. Indemnity. --------- (a) The Company shall indemnify the Indemnitee to the fullest lawful extent permitted by Maryland law (including, without limitation, indemnification permitted under Section 2-418(g) of the MGCL), as amended from time to time, in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director and/or executive officer of the Company or is or was serving at the request of the Company as a director, trustee, officer, partner, employee or agent of another corporation, partnership, joint venture, trust or other enterprise and whether or not such action is by or in the right of the Company or that other corporation, partnership, joint venture, trust or other enterprise with respect to which the Indemnitee serves or has served. (b) Notwithstanding anything to the contrary in subsection (a), the Company shall indemnify Indemnitee in a Proceeding initiated by Indemnitee only if Indemnitee acted with the authorization of the Company in initiating that proceeding. However, any proceeding brought by the Indemnitee to enforce his rights under this Agreement shall not be subject to this subsection (b). (c) An indemnification under this Agreement shall be made upon Indemnitee's written request to the Board of Directors of the Company (the "Board of Directors"), setting forth the grounds and lawfulness of such indemnification. For purposes of this Agreement, references to "other enterprises" shall include, without limitation, employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a trustee, director, officer, employee or agent of any other partnership, trust or corporation which imposes duties on, or involves services by, Indemnitee which are requested in writing by the Board of Directors, or which involve services by such trustee, director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries. INDEMNIFICATION AGREEMENT 3. Burden of Proof. --------------- Indemnitee shall be presumed to be entitled to indemnification for any act or omission covered in Section 1 or 2 of this Agreement. The burden of proof of establishing that Indemnitee is not entitled to indemnification because of the failure to fulfill some requirement of Maryland law, the charter of the Company, or bylaws as in effect from time to time or this Agreement shall be on the Company. 4. Notice by Indemnitee. -------------------- Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification hereunder as soon as reasonably practicable following the receipt by Indemnitee of written threat thereof, provided that failure to so notify the Company shall not constitute a waiver by Indemnitee of his rights hereunder. 5. Advancement of Expenses. ----------------------- In the event of any Proceeding involving Indemnitee which may give rise to a right of indemnification from the Company pursuant to this Agreement, the Company shall advance to Indemnitee amounts to cover expenses (including fees and disbursements of counsel) incurred by Indemnitee in connection with any Proceeding in advance of final disposition within one business day after receipt by the Company of (i) an undertaking by or on behalf of the Indemnitee to repay the amount advanced in the event that it shall be ultimately determined in accordance with this Agreement that he is not entitled to indemnification by the Company, (ii) a written affirmation by the Indemnitee of his good faith belief that the standard of conduct necessary for indemnification by the Company has been met and (iii) satisfactory evidence as to the amount of such expenses. Indemnitee's written certification together with a copy of the statement paid or to be paid by Indemnitee shall constitute satisfactory evidence of the amount of such expenses. 6. Defense of Claim. ---------------- The Indemnitee shall have the absolute right to employ his own counsel in respect of any Proceeding; provided, that in the event that more than one director or executive officer is entitled to indemnification under this Agreement or a similar agreement arising out of the same Proceeding, all such directors and/or executive officers, including Indemnitee, shall, to the extent practicable, endeavor to use the same counsel; and further provided that the counsel selected by the Indemnitee would not be precluded as a matter of professional ethics from representing the Company or a person adverse to the Company. 7. Non-Exclusivity of Right of Indemnification. ------------------------------------------- The indemnification rights granted to Indemnitee under this Agreement shall not be deemed exclusive of, or in limitation of, any rights to which Indemnitee may be entitled under Maryland law, the charter of the Company, or bylaws, any other agreement, vote of stockholders or directors or otherwise. 8. Term of Agreement and Survival of Right of Indemnification. ---------------------------------------------------------- (a) Subject to subparagraph (b) of this section, the term of this Agreement shall continue for as long as the Indemnitee serves as a director and/or an executive officer of the Company. (b) The rights granted to Indemnitee hereunder shall continue after termination as provided in Section 1 and shall inure to the benefit of Indemnitee, his personal representative, heirs, executors, administrators and beneficiaries, and this Agreement shall be binding upon the Company, its successors and assigns. 9. Legal Fees and Expenses. ----------------------- The Company shall pay all legal fees and expenses which Indemnitee may incur to collect money due under this Agreement or as a result of the Company's contesting the validity or enforceability of this Agreement. 2 10. Governing Law. ------------- This Agreement shall be governed by the laws of the State of Maryland. 11. Severability. ------------ If any provision of this Agreement is determined to be invalid or unenforceable, the invalidity or unenforceability shall not affect the validity or enforceability of any other provision of this Agreement, and this Agreement shall be interpreted as though the invalid or unenforceable provision was not a part of this Agreement. 12. Changes in Law. -------------- This Agreement is intended to provide to Indemnitee, to the fullest lawful extent permitted by Maryland law as in effect from time to time, indemnification and advancement of expenses in connection with a Proceeding as described in Sections 2 and 5 hereof; provided, however, that no change in Maryland law shall have the effect of reducing the benefits available to Indemnitee hereunder based on Maryland law as in effect on the date hereof. The parties have executed this Agreement as of the day and year first above stated. RECKSON ASSOCIATES REALTY CORP. By /s/ Scott H. Rechler --------------------------------- Name: Scott H. Rechler Title: Co-Chief Executive Officer INDEMNITEE By /s/ Donald J. Rechler --------------------------------- Name: Donald J. Rechler 3 EX-99.1 5 ex99-1.txt EXHIBIT 99.1 > EXHIBIT 99.1 RECKSON ASSOCIATES REALTY CORP. EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, Donald J. Rechler, Co-Chief Executive Officer of Reckson Associates Realty Corp. (the "Company"), certify pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 12, 2002 By /s/ Donald J. Rechler --------------------------------------------- Donald J. Rechler, Co-Chief Executive Officer EX-99.2 6 ex99-2.txt EXHIBIT 99.2 EXHIBIT 99.2 RECKSON ASSOCIATES REALTY CORP. EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, Scott H. Rechler, Co-Chief Executive Officer of Reckson Associates Realty Corp. (the "Company"), certify pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 12, 2002 By /s/ Scott H. Rechler -------------------------------------------- Scott H. Rechler, Co-Chief Executive Officer EX-99.3 7 ex99-3.txt EXHIBIT 99.3 EXHIBIT 99.3 RECKSON ASSOCIATES REALTY CORP. EXHIBIT 99.3 CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF THE UNITED STATES CODE I, Michael Maturo, Executive Vice President, Treasurer and Chief Financial Officer of Reckson Associates Realty Corp. (the "Company"), certify pursuant to section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 12, 2002 By /s/ Michael Maturo ----------------------------------------- Michael Maturo, Executive Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----