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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
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
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
225 BROADHOLLOW ROAD, MELVILLE, NY 11747
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(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 .
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THE COMPANY HAS TWO CLASSES OF COMMON STOCK, PAR VALUE $.01 PAR VALUE
PER SHARE, WITH 49,182,033 AND 9,915,313 SHARES OF CLASS A COMMON
STOCK AND CLASS B COMMON STOCK OUTSTANDING, RESPECTIVELY
AS OF NOVEMBER 8, 2002
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Explanatory Note
----------------
Reckson Associates Realty Corp. (the "Registrant") is amending its Form
10-Q for the quarterly period ended September 30, 2002 in order to correct a
formatting error in which the line item captioned "Increase in contract deposits
and pre-acquisition costs" for the nine months ended September 30, 2002 under
the heading "Cash Flows From Investing Activities" on the Consolidated
Statements of Cash Flows should have reflected no amount, and the amount
reflected in that line item should have been reflected in the line item
appearing immediately below it captioned "Additions to developments in progress"
which reflected no amount. The correction of this formatting error results in no
change to the "Net cash used in investing activities" line item on the
Consolidated Statements of Cash Flows.
The following indicates the corrected amounts of the line items for the
nine months ended September 30, 2002 on the Consolidated Statements of Cash
Flows under the heading "Cash Flows From Investing Activities":
--------------------------------------------------------------------------------
As per As Amended
Initial in this
Filing Filing
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Increase in contract deposits and
pre-acquisition costs ....................... (37,304) --
Additions to developments in progress ......... -- (37,304)
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In accordance with the requirements of the Securities Exchange Act of
1934, this Form 10-Q/A sets forth in its entirety "Part I, Item 1. Financial
Statements." The correction of the formatting error noted above is the only
change from the "Part I, Item 1. Financial Statements" contained in the
Registrant's Form 10-Q for the quarterly period ended September 30, 2002 as
filed with the Securities and Exchange Commission on November 12, 2002.
In addition, "Part II, Item 6. Exhibits and Reports on Form 8-K" is
included in this Form 10-Q/A to reflect the filing as exhibits to this Form
10-Q/A of certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350 which is required for a filing of a form 10-Q/A
which contains financial statements.
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
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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.................... -- (2,897)
Additions to developments in progress..................................... (37,304) (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
PART II - OTHER INFORMATION
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
-----------------
*Previously filed as an Exhibit to the Form 10-Q filed on November 12, 2002.
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.
16
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: December 16, 2002
17
CERTIFICATION
I, Donald J. Rechler, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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: December 16, 2002
/s/ Donald J. Rechler
-------------------------------
Donald J. Rechler
Co-Chief Executive Officer
18
CERTIFICATION
I, Scott H. Rechler, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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: December 16, 2002
/s/ Scott H. Rechler
------------------------------
Scott H. Rechler
Co-Chief Executive Officer
19
CERTIFICATION
I, Michael Maturo, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A 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: December 16, 2002
/s/ Michael Maturo
----------------------------------
Michael Maturo
Executive Vice President, Treasurer
and Chief Financial Officer
20