UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
.......................................................
OR
/ / TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from..................to.....................
Commission file number 1-13375
........................................
TOWER REALTY TRUST, INC.
......................................................................
(Exact name of registrant as specified in its charter)
Maryland 13-3938558
................................ ..................................
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
292 Madison Ave, 3rd Floor, New York, New York 10017
.............................................. ............................
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 448-1864
..............................
<TABLE>
<CAPTION>
Securities registered pursuant to Section 12(b) of the Act:
<S> <C>
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 per share New York Stock Exchange
...................................... .........................................
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
.........................................................
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosures of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
<PAGE>
The aggregate market value of the voting shares held by non-affiliates
of the registrant, as of March 18, 1999 was approximately $260,154,823.
The number of common shares, $.01 par value, outstanding was 16,958,255
as of March 18, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, which involve
certain risks and uncertainties. The Company's actual results in future periods
may be materially different from any future performance anticipated herein. Each
forward-looking statement that the Company believes is material is accompanied
by a cautionary statement or statements identifying important factors that could
cause actual results to differ materially from those described in the
forward-looking statement. In the context of forward-looking information
provided in this Annual Report on Form 10-K and in other reports, please refer
to the discussion of risk factors detailed in, as well as the other information
contained in, the Company's filings with the Securities and Exchange Commission
during the past 12 months.
<PAGE>
PART I
Item 1. Business.
Business and Growth Strategies
Tower Realty Trust, Inc. (collectively, with its subsidiaries, the
"Company") operates from its midtown Manhattan headquarters and its two
full-service regional offices in Orlando and Phoenix. The Company is a fully
integrated real estate company with in-house expertise in acquisition,
development, construction, property management and leasing. As of December 31,
1998, the 25 office buildings that comprise the Company's portfolio of
properties (the "Properties") contain approximately 4.6 million square feet and
had a weighted average occupancy rate of approximately 94.6%. Substantially all
of the Properties are located either in Manhattan, Orlando or Phoenix. The
Company operates as a fully integrated, self-administered, and self-managed real
estate company and operates in a manner with the expectation of qualifying as a
real estate investment trust ("REIT") for federal income tax purposes.
Subject to the completion of the Company's proposed merger with a
subsidiary of Reckson Associates Realty Corp., the Company will continue its
turnaround strategy of acquiring office properties at a significant discount to
replacement costs that are attractively priced due to physical, leasing and/or
operational deficiencies. Consistent with this strategy, the Company seeks to
acquire office properties that present an attractive opportunity to create value
and enhance cash flow through the Company's hands-on approach to property
repositioning, including the implementation of property specific renovation
programs for under-performing assets.
The Company has initially focused its turnaround strategy in
Manhattan because the Company believes that the current supply/demand
fundamentals in that office market provide an attractive environment for owning
office properties. Consistent with this strategy, the Company's first completed
acquisition following the Offering (as defined below) was the purchase of the
office property located at 810 Seventh Avenue in midtown Manhattan ("810
Seventh"). Following that acquisition, the Company acquired an additional two
office properties located in Phoenix and an additional office property in
downtown Manhattan. As a result of increasing demand for office space in
Manhattan and limited new supply, vacancy rates have declined during the last
five years and rental rates for office properties have increased.
The Company has also pursued the strategic acquisition of office
properties located in the Phoenix and Orlando markets that are consistent with
its turnaround strategy, as well as the development of four parcels of land
which can support 2.2 million rentable square feet of development (the
"Development Parcels") in those markets. The Company believes that these office
markets generally have significant growth potential due to employment growth,
declining vacancies and limited new construction activity.
Background and Formation Transactions
The Company was organized in March 1997 and was formed to continue
and expand the commercial real estate business of Tower Equities & Realty Corp.
(collectively, with its predecessor entities and affiliates, "Tower Equities").
Through its controlling interest in Tower Realty Operating
Partnership, L.P., a Delaware limited partnership (the "Operating Partnership"),
the Company is engaged in developing, acquiring, owning,
<PAGE>
renovating, managing and leasing office properties in the Manhattan, Phoenix/
Tucson and Orlando markets.
On October 16, 1997, the Company consummated an initial public
offering (the "Offering") of 13,817,250 shares of common stock, par value $0.01
per share (the "Common Stock") (including the exercise of the underwriters'
over-allotment option of 1,802,250 shares) at a price of $26.00 per share (the
"Offering Price") and effected concurrent private placements (the "Concurrent
Private Placements") of 1,153,845 shares of Common Stock and 1,949,360 shares of
Common Stock in connection with the purchase of certain Properties at a price of
$26.00 per share and realized net proceeds from the Offering and the Concurrent
Private Placements of $353.35 million. Such net proceeds were contributed to the
Operating Partnership in exchange, in part, for the Company's approximate 91.4%
interest therein (which includes a 90.4% limited partner interest and a 1%
general partner interest). The Operating Partnership used the proceeds received
from the Company, the $107.0 million net cash proceeds from the Company's term
loan facility (the "Term Loan") borrowed concurrent with and subsequent to the
Offering and approximately $12.3 million of proceeds received from Morgan
Stanley Dean Witter Investment Management Inc. (formerly known as Morgan Stanley
Asset Management Inc.) ("MSAM"), from the conversion of convertible notes of the
Company held by certain private investment funds and separate accounts advised
by MSAM ("the MSAM Notes") into Common Stock, as follows: (i) approximately
$281.0 million for repayment of certain indebtedness (including associated
prepayment penalties) relating to the Properties and the partnerships that own
the Properties (the "Property Partnerships"); (ii) approximately $137.0 million
to acquire certain equity, debt and fee interests in the 21 Properties acquired
in connection with the Offering and the formation of the Company (the "Initial
Properties"); (iii) approximately $3.1 million to pay for commitment fees and
expenses relating to the Term Loan and the Company's unsecured line of credit
with Fleet National Bank (the "Line of Credit"); (iv) approximately $3.0 million
to pay transfer taxes and other expenses associated with the acquisitions of the
Properties; and (v) the remaining approximately $48.6 million for working
capital.
Formation Transactions
The principal transactions made in connection with the formation of
the Company and the acquisition of the Properties (the "Formation Transactions")
included the following:
o The Company acquired, directly or indirectly, a 100% interest in
each of the Initial Properties (other than the 2800 North
Central Property) and the ground lease encumbering the Maitland
Forum Property for an aggregate of 1,128,160 shares of
restricted Common Stock, 1,583,640 units of limited partnership
interest in the Operating Partnership (the "OP Units"),
approximately $118.7 million in cash and the assumption of
approximately $244.6 million in mortgage indebtedness and
approximately $13 million of non-interest-bearing deferred tax
liabilities payable over 10 years (which have been discounted as
of the date of the Offering to approximately $9.8 million, as
described in the financial statements included as part of this
Annual Report on Form 10-K) as follows:
o The Operating Partnership acquired directly or indirectly
from Lawrence H. Feldman (the former Chairman of the
Board, Chief Executive Officer and President of the
Company), Robert L. Cox (the Acting Chief Executive
Officer and President of the Company), Joseph D. Kasman
(the former Senior Vice President and Chief Financial
Officer of the Company), Clifford L. Stein (Managing
Director of the
2
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Company's Southeast Region), Robert M. Adams (a director
of the Company), Richard M. Wisely (a director of the
Company), Eric S. Reimer (Vice President-Leasing of the
Company), Reuben Friedberg (Vice President-Finance of the
Company), and Reid Berman (a regional director of Leasing
for the Company) (collectively, the "Primary
Contributors") interests in each of the Initial
Properties (including an interest in the Maitland Forum
ground lease), two Development Parcels which can support
370,000 square feet of development, and substantially all
the assets of the Tower Equities and Properties Atlantic
management companies in exchange for 1,509,490 OP Units;
and
o The Company acquired from persons other than the Primary
Contributors, directly or indirectly, debt, equity and
fee interests in the Initial Properties, including an
interest in the Maitland Forum ground lease, in exchange
for 1,128,160 shares of restricted Common Stock (valued
at approximately $29.3 million based on the Offering
Price), 74,150 OP Units and $118.7 million in cash.
o The Operating Partnership entered into the $107 million
seven-year Term Loan with Merrill Lynch Credit Corporation and
borrowed approximately $54 million under such facility at the
closing of the Offering. Subsequent to the Offering, the Company
additionally borrowed approximately $53.0 million under the Term
Loan in order to repay certain indebtedness encumbering the
Initial Properties and for working capital purposes.
o The Operating Partnership utilized $246.5 million of the net
proceeds of the Offering, the Concurrent Private Placements and
the $54.0 million initial draw on the Term Loan to repay
mortgage indebtedness (including $1.9 million of prepayment
penalties) encumbering the Initial Properties and the Property
Partnerships concurrent with the closing of the Offering.
o The Tower Equities and Properties Atlantic management and
leasing companies (that were owned entirely by the Primary
Contributors) contributed substantially all of the assets of
such companies to the Operating Partnership and the Operating
Partnership has, in turn, recontributed such assets to Tower
Equities Management, Inc., a Delaware corporation (the
"Management Company") in exchange for 100% of the non-voting
common stock and 5% of the voting common stock in the Management
Company (which collectively is entitled to receive approximately
95% of the dividends). This structure is designed to assist the
Company in maintaining its status as a REIT.
o The Company issued 886,200 shares of restricted Common Stock in
exchange for the cancellation of indebtedness outstanding under
the MSAM Notes.
o The Management Company and certain Primary Contributors that
hold interests in retail properties controlled directly or
indirectly by Tower Equities (the "Excluded Properties") entered
into management agreements with respect to each of the Excluded
Properties. Four of the Excluded Properties are controlled by
certain Primary Contributors and have non- cancellable
management contracts (except upon a sale of such property). The
remaining three properties are under management contracts which
may be terminated upon payment of
3
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two years of management fees or upon a sale of the applicable
property. In consideration for the services to be provided under
the management agreements, the Management Company is entitled to
receive market rate property and construction management fees,
as well as applicable leasing commissions.
o The Operating Partnership acquired, at no cost, an option held
by certain Primary Contributors that provided the Operating
Partnership with the right to acquire from an unaffiliated third
party for approximately $10.3 million the Phoenix Land Parcel
which contains approximately 43 acres of undeveloped land in
Phoenix that can support 1.0 million square feet of office
development. This option was exercised by the Company in
November, 1997. In addition, the Operating Partnership acquired
from certain Primary Contributors for no additional
consideration an option to acquire for approximately $3.8
million (approximately $4.75 per buildable square foot)
approximately 3.6 acres of land adjacent to the Company's One
Orlando Center Property that can support approximately 800,000
square feet of development. As of May 9, 1997, such parcel was
appraised at approximately $5.1 million.
o The Company established the three-year $200 million Line of
Credit which has been and will continue to be used primarily to
finance the acquisition of, and investment in, office properties
and other costs and expenses related to such acquisitions, to
refinance existing indebtedness, and for general working capital
needs. The Line of Credit has subsequently been modified by the
Company and currently has a maximum principal amount of $165.0
million.
o The Company has paid to an affiliate of The Carlyle Group, a
Washington, D.C. based merchant banking firm ("Carlyle")
$925,000 in consideration of obtaining such affiliate's consent
to the transfer of an interest in the 2800 North Central Avenue
Property to the Company.
o As part of the Formation Transactions, the Company acquired
certain interests in the Property Partnerships from the Primary
Contributors and certain third parties. Certain of the interests
in three of the Property Partnerships were acquired from Edward
Feldman pursuant to a bankruptcy proceeding under Chapter 7 of
United States Bankruptcy Code. In conjunction with the transfer
of those interests to the Company, the Company entered into a
court-approved settlement agreement whereby the Company has
obtained a release of all potential claims of the bankruptcy
trustee and any creditor of the bankruptcy estate relating
directly or indirectly to the Company in exchange for a cash
payment of $2.0 million. Accordingly, the Company believes that
this bankruptcy proceeding will have no impact on Company
operations. Edward Feldman, the father of Lawrence H. Feldman,
the former Chairman of the Board, Chief Executive Officer and
President of the Company, served as President of Tower Equities
until December 1990, at which time he retired at age 70. Edward
Feldman served as a consultant to Tower Equities from the date
of his retirement until March 1997.
4
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Recent Developments
On January 13, 1998, the Company acquired two two-story office
properties located at 2444 Las Palmeritas Drive in Phoenix, bringing the total
number of properties in the Company's portfolio to twenty-four (24). The two
buildings combined contain approximately 126,000 square feet and, as of the date
of acquisition, were 100% leased to Blue Cross/Blue Shield of Arizona, Inc. The
properties were acquired for approximately $16.9 million in cash.
On March 30, 1998, Russell C. Platt, then a managing director of
MSAM and Francis X. Tansey, the President of DRA Advisors, Inc. ("DRA"), each
such entity being a significant stockholder of the Company, were named to the
Company's board of directors (the "Board"). On January 11, 1999, Mr. Platt
resigned from the Board and on March 2, 1999, the Board named John Timothy
Morris, a principal of Morgan Stanley & Co., to replace Mr. Platt.
On April 17, 1998, following the resignation of Joseph D. Kasman,
the Company's Senior Vice President and Chief Financial Officer, the Board
appointed Lester S. Garfinkel, an independent Board member, as Executive Vice
President--Administration and Finance and Chief Financial Officer.
On May 6, 1998, the Company purchased the office property located at
90 Broad Street in New York City, a 25-story building containing approximately
335,000 square feet, for approximately $34.3 million in cash, bringing the total
number of properties in the Company's portfolio to twenty-five (25).
On August 3, 1998, Lawrence H. Feldman resigned from his positions
as Chairman of the Board, Chief Executive Officer, President and Director of the
Company. Robert L. Cox was appointed by the Board to serve as Acting Chief
Executive Officer and President of the Company until closing of the Merger (as
defined below) and Francis X. Tansey was appointed as Chairman of the Board. On
March 17, 1999, the Company paid Mr. Feldman a severance payment of
approximately $1.0 million in full satisfaction of all obligations under his
employment agreement with the Company and Mr. Feldman executed a release of
claims against the Company. This severance amount, equal to 2.99 times the "base
amount," as described in Mr. Feldman's employment agreement with the Company and
as defined in Section 280G of the Internal Revenue Code of 1986, was charged to
operations by the Company during the third quarter of 1998.
On December 7, 1998, the Company's Board approved a merger (the
"Merger") in which the Company will be acquired by Metropolitan Partners LLC
("Metropolitan"), a subsidiary of Reckson Associates Realty Corp. ("Reckson")
and on December 8, 1998, the Company, Metropolitan, Reckson and Reckson
Operating Partnership, L.P., a subsidiary of Reckson ("Reckson OP"), entered
into a definitive agreement with respect to the Merger (the "Merger Agreement").
Consummation of the Merger requires the approval of the Company's stockholders.
Although the approval of Reckson common stockholders is not required for
consummation of the Merger, the form of a portion of the merger consideration
payable to the Company's stockholders and unitholders will vary depending upon
the results of a separate vote of Reckson common stockholders. If Reckson common
stockholders approve the issuance of only shares of Reckson class B exchangeable
common stock as the non-cash portion of the merger consideration, common
stockholders of the Company and holders of OP Units will receive for each of
their Company shares or OP Units, at their election and subject to proration,
either (i) $23.00 in cash or (ii) .8364 of a share of Reckson class B
exchangeable common stock. If Reckson common stockholders do not approve the
5
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issuance of only shares of Reckson class B exchangeable common stock as the
non-cash portion of the merger consideration, Reckson will still be obligated to
consummate the Merger, subject to the conditions of the Merger Agreement. In
this case, however, the Company's stockholders and unitholders will receive for
each of their shares or units, at their election and subject to proration,
either (i) $23.00 in cash or (ii) .5725 of a share of Reckson class B
exchangeable common stock and $7.2565 principal amount of 7% senior unsecured
notes due 2009 of Reckson OP. In the Merger, only 25% of the Company's Common
Stock and OP Units will be exchanged for $23.00 in cash.
On December 7, 1998, the Company entered into a mortgage extension
agreement with Credit Suisse First Boston in connection with the Company's
refinancing of 810 Seventh. Under the mortgage extension agreement, the $100
million mortgage's due date was extended from December 31, 1998 to April 30,
1999. In connection with such extension, the Company paid a 1% fee to Credit
Suisse First Boston. In addition, the Company incurred third party broker fees
and other related costs of approximately $600,000. On December 31, 1998, the
Company paid down $40 million of the $100 million mortgage to Credit Suisse
First Boston. Costs associated with the transaction include a payment of a 1%
prepayment fee equal to $400,000. On March 1, 1999, the Company entered into a
modification agreement with respect to its Line of Credit for the purpose of
making 810 Seventh an unencumbered asset and adding to the Company's
unencumbered borrowing base. In that regard, the Company drew down $60 million
from its Line of Credit and fully repaid the mortgage on 810 Seventh with Credit
Suisse First Boston. The Company's mortgage with Credit Suisse First Boston was
then assigned to Fleet National Bank and the Company's Line of Credit was
reduced from $200 million to $165 million. Costs associated with such
transactions were approximately $1.2 million.
On December 8, 1998, Metropolitan purchased 2,169,197 shares of the
Company's newly issued Series A preferred stock, par value $0.01 per share (the
"Preferred Stock") for an aggregate purchase price of $40 million. In connection
with this sale of the Preferred Stock, the Company entered into a registration
rights agreement with Metropolitan that provides for certain registration rights
with respect to the Preferred Stock. The Preferred Stock initially has a
dividend equal to the dividend on the Company's Common Stock (currently, $1.69
per share annually), resulting in a yield of 9.16%. Holders of the Preferred
Stock will not have rights to convert such shares into shares of Common Stock
unless the Merger is terminated. If the Merger is terminated, the Preferred
Stock will be convertible into Common Stock, initially, on a one-for-one basis
by the holders thereof, subject to customary adjustments. In addition, under the
terms of its investment, if Reckson fails to complete the Merger when it is
obligated to do so under the Merger Agreement or fails to use its best efforts
to (i) seek Reckson stockholder approval of the issuance of only Reckson class B
common stock in the Merger or (ii) register such Reckson securities, Reckson
will forfeit 75% of the Preferred Stock purchased for Metropolitan's $40 million
investment. Furthermore, if the Company fails to complete the Merger when it is
obligated to do so under the Merger Agreement, or fails to use its best efforts
to seek the approval of the Company's stockholders of the Merger, the Company
must pay Metropolitan $30 million in cash.
On January 14, 1999, the Company drew down $8.0 million from the
Line of Credit to replenish working capital for capital improvements and leasing
costs including tenant improvements and brokerage commissions previously funded
from operations, enabling the Company to make its fourth quarter 1998
distribution.
6
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Competition
The Company competes with other owners and developers that have
greater resources and more experience than the Company. Additionally, the number
of competitive properties in any particular market in which the Company's
Properties are located could have a material adverse effect on both the
Company's ability to lease space at the Properties or any newly acquired
property and on the rents charged at the Properties. The Company believes its
major competitors are local real estate companies in its markets that specialize
in the redevelopment and development of office buildings and its major REIT
competitors are as follows: (i) in the New York City office market; SL Green
Realty Corp.; (ii) in the Metropolitan Orlando office market; Highwoods
Properties, Inc.; and (iii) in the Metropolitan Phoenix office market; Prentiss
Properties Trust and CarrAmerica Realty Corporation.
Possible Environmental Liabilities
Under various federal, state, and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, the presence of
hazardous or toxic substances, or the failure to remediate such property
properly, may adversely affect the owner's ability to borrow using such real
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of hazardous substances at the disposal or treatment facility,
whether or not such facility is or ever was owned or operated by such person. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or treatment
of hazardous or toxic substances and, therefore, potentially liable for removal
or remediation costs, as well as certain other related costs, including
governmental fines and injuries to persons and property. Certain environmental
laws and common law principles could be used to impose liability for release of
and exposure to hazardous substances, including asbestos containing materials
("ACMs") into the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage associated
with exposure to released hazardous substances, including ACMs. As the owner of
the Properties, the Company may be potentially liable for any such costs.
The Company engaged an independent consulting firm to perform Phase
I Environmental Site Assessments, or updates on Environmental Site Assessments
performed within the last 18 months, on all of the Properties. The purpose of
Phase I Environmental Site Assessments is to identify potential sources of
contamination for which the Company may be responsible and to assess the status
of environmental regulatory compliance. For a number of the Properties, the
Phase I Environmental Site Assessments reference prior Phase II Environmental
Site Assessments obtained on such Properties. Phase II Environmental Site
Assessments generally involve more invasive procedures than Phase I
Environmental Site Assessments, such as soil sampling and testing or the
installation and monitoring of groundwater wells. The Environmental Site
Assessments have not revealed any environmental condition, liability or
compliance concern that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations nor is the
Company aware of any such condition, liability or concern.
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Insurance
The Operating Partnership carries comprehensive liability, fire,
extended coverage and rental loss insurance covering all of the Properties, with
policy specifications and insured limits which the Company believes are adequate
and appropriate under the circumstances. There are, however, certain types of
losses that are not generally insured because they are either uninsurable or not
economically feasible to insure. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in the
Property, as well as the anticipated future revenues from the Property and, in
the case of debt which is with recourse to the Company, would remain obligated
for any mortgage debt or other financial obligations related to the Property.
Any such loss would adversely affect the Company. Moreover, the Company will
generally be liable for any unsatisfied obligations other than non-recourse
obligations. Company management believes that the Properties are adequately
insured. No assurance can be given that material losses in excess of insurance
proceeds will not occur in the future.
Employees
As of December 31, 1998, the Company had 96 full-time employees.
Foreign Operations
The Company does not engage in any foreign operations or derive
revenues from Foreign sources.
Financial Information About Industry Segments
The Company is involved in only one industry, namely commercial
office real estate. Therefore, all of the financial statements contained herein
relate to this industry segment. See note 18 to the consolidated financial
statements included as part of this Annual Report on Form 10-K.
Item 2. Properties.
As of December 31, 1998, the Company owns or has interests in 25
office properties comprising approximately 4.6 million net rentable square feet.
The Properties are wholly-owned by the Company (through its subsidiaries),
except the 2800 North Central Property ("2800 North Central"), which is owned by
a joint venture company in which the Company owns a 10% interest (comprised of a
1.01% general partner interest and an 8.99% limited partnership), subject to
economic interest increases of up to 27.5% if certain performance criteria are
achieved. The Company also owns or has an option to acquire the Development
Parcels, which can support 2.2 million of rentable square feet of development.
The following sets forth certain data relating to the Properties as of December
31, 1998:
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<TABLE>
<CAPTION>
Annualized
Net
Annualized Effective
Year Rent Percent of Rent per
Built/ Rentable per Leased Portfolio Leased
Percent Renovated Square Percent Annualized Square Annualized Square
Market/Property Owned (1) Feet Leased Rent (2) Foot Rent Foot (3)
- - ------------------------ -------- --------- -------- -------- ---------- ----------- ----------- ---------
New York City Area
Manhattan Market
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tower 45........................ 100% 1989 443,114 98.40% $ 20,898,877 $ 47.93 19.01% 42.83
286 Madison Avenue.............. 100% 1918(4) 111,999 98.80 2,814,351 25.43 2.56% 25.87
290 Madison Avenue.............. 100% 1950(4) 38,512 86.20 1,001,922 30.18 0.91% 31.99
292 Madison Avenue.............. 100% 1920/86 186,901 97.00 5,395,823 29.76 4.91% 30.04
100 Wall Street................. 100% 1969/94 458,848 96.20 12,943,910 29.32 11.77% 31.45
810 Seventh Avenue.............. 100% 1970/90 692,023 92.50 20,879,041 32.62 18.99% 36.92
90 Broad Street 100% 1930/98 335,904 78.80 5,892,180 22.26 5.36% 24.36
Long Island Market
120 Mineola Boulevard............ 100% 1984/92 100,810 88.10 2,608,996 29.38 2.37% 26.83
--------- ----- ---------- ----- ------ -----
Market Subtotal/
Weighted Average................. 2,368,111 92.00% 72,435,100 $ 34.96 65.88% 34.97
--------- ----- ---------- ----- ------ -----
Metropolitan Arizona Area
Metropolitan Phoenix Market
Corporate Center Building
10010-30........................ 100% 1976/86 188,614 100.00% $ 2,908,426 15.42 2.65% 15.41
Corporate Center Building 10040. 100% 1976/86 23,155 100.00 387,155 16.72 0.35% 16.91
Corporate Center Building 10050. 100% 1976/86 42,398 100.00 713,792 16.84 0.65% 17.02
Corporate Center Building 10210.... 100% 1976/86 45,100 100.00 685,034 15.19 0.62% 15.32
Corporate Center Building 10220.... 100% 1976/86 24,128 100.00 424,380 17.59 0.39% 18.13
Corporate Center Building 9630(5).. 100% 1976/86 130,164 100.00 2,359,720 18.13 2.15% 18.33
2800 North Central (6)............. 10% 1987 357,923 92.00 6,214,185 18.87 5.65% 17.11
Century Plaza...................... 100% 1974/90 219,769 89.50 2,863,198 14.56 2.60% 14.09
Blue Cross/Blue Shield Building.... 100% 1982 126,084 100.00 1,898,732 15.06 1.73% 16.11
Metropolitan Tucson Market
5151 E. Broadway................... 100% 1975/89/96 246,486 96.30% 3,870,542 16.31 3.52% 17.15
------- ----- ----------- ------- ------ ------
Market Subtotal/Weighted Average... 1,403,821 97.78% $22,325,164 $ 15.50 20.31% 16.51
--------- ------ ----------- ------- ------ ------
Metropolitan Orlando Market
One Orlando Center................. 100% 1989 357,184 99.50% 8,578,446 24.14 7.80% 25.68
5750 Major Boulevard............... 100% 1973/97 82,815 94.00 1,363,158 17.51 1.24% 14.58
Maitland Forum (7)................. 100% 1985/96 266,060 99.90 4,384,382 16.50 3.99% 15.33
Maitland West (8).................. 100% 1982 59,610 82.70 860,781 17.46 0.78% 14.87
--------- -------- ------------ ------- ------- ------
Market Subtotal/Weighted Average... 765,669 94.02% $15,186,767 $ 20.96 13.81% 21.52
--------- -------- ------------ -------- ------- -----
Consolidated Portfolio Total/ 4,537,601 94.60% $109,947,031 $ 25.61 100.00% 24.33
========= ======== ============ ======== ======= =======
</TABLE>
Weighted Average
- - ---------------------------------------------
(1) Data in this column does not include years in which tenant improvements
were made to the Properties.
(2) Annualized Rent represents the annualized monthly Base Rent in effect plus
estimated annualized monthly tenant pass-through of increases in operating
and other expenses (but excluding electricity costs paid by tenants) under
each lease executed as of December 31, 1998, or, if such monthly rent has
been reduced by a rent concession, the monthly rent that would have been
in effect at such date in the absence of such concession. Base Rent
represents the fixed base rental amount paid by a tenant under the terms
of the related lease Agreement, which amount generally does not include
payments on account of real estate
9
<PAGE>
taxes, operating expense escalations and utility charges. Annualized Rent
represents actual payments attributable to leases executed.
(3) Annualized Net Effective Rent per Leased Square Foot represents the Base
Rent for the month of December 1998 under each lease executed as of
December 31, 1998, presented on a straight-line basis in accordance with
GAAP, taking into account the amortization of tenant improvement costs and
leasing commissions, if any, paid or payable by the Company during such
period, annualized.
(4) In 1996 the Company completed certain mechanical upgrades with respect to
this Property.
(5) Includes two free-standing restaurants adjacent to the Property which
account for, in the aggregate, 17,000 rentable square feet (100% of which
is leased).
(6) Data are presented without proration on account of the Company's partial
ownership interest. The Company's interest in the cash flow from this
Property increases to up to 27.5% if certain performance criteria are
achieved.
(7) Maitland Forum consists of two buildings.
(8) Consists of three properties at Maitland Center Parkway.
Item 3. Legal Proceedings.
As a result of the acquisition of the Properties, the Company has
become a successor party-in-interest to certain legal proceedings arising in the
ordinary course of the business of Tower Equities and the other third-party
predecessor entities.
On or about January 21, 1999, an action captioned DBD International
Limited, Inc. v. Tower Realty Trust, Inc., Index No. 99 CV 9 (Cir. Ct. Dunn Co.)
was commenced in the Circuit Court of the State of Wisconsin. The plaintiff
alleges that the Company purportedly breached a contract regarding the
plaintiff's provision of image management services to the Company. The plaintiff
seeks, among other things, compensatory damages in the amount of $798,788,
prejudgment interest and attorneys' fees.
In July 1998, David Miller, a purported stockholder of the Company,
commenced a putative class action against the Company and certain of its then
directors and officers in the Supreme Court of New York, New York County
captioned Miller v. Adams, et al., Index No. 98/113363 (Sup. Ct. N.Y. Co.). This
action challenged, among other things, the process employed by the Company and
its directors in reviewing, approving and assessing the fairness of the Prior
Merger Agreement (as defined below). Following Tower's press release on November
2, 1998, which indicated that the Prior Merger Agreement was terminated, this
action was discontinued without prejudice. On or about December 18, 1998, David
Miller commenced a putative class action in the Supreme Court of New York, New
York County captioned Miller v. Adams, et al., Index No. 98/606208 (Sup. Ct.
N.Y. Co.) challenging the process employed by the Company and its directors in
reviewing, approving and assessing the fairness of the Merger Agreement. Miller
is seeking, among other things, equitable and declaratory relief and unspecified
compensatory damages.
The Company intends to contest these claims vigorously. As with any
litigation, however, it is not possible to predict the resolution of these
pending actions and the Company therefore bears certain risks associated with
these actions. However, although management believes that the ultimate
resolution of these matters will not have a material effect on the financial
position of the Company, the ultimate resolution may have a material adverse
effect on the results of operations of any one period.
On November 2, 1998, the Company commenced an action in New York
Supreme Court against Reckson, Crescent Real Estate Equities Corp. ("Crescent")
and Metropolitan alleging breach of a merger agreement between the Company and
these parties dated July 9, 1998 (the "Prior Merger Agreement"). The Company
sought $75 million in compensatory damages, declaratory and other relief. The
Company's
10
<PAGE>
press release on November 2, 1998 stated that this action was filed because the
Company had been informed by Crescent, Reckson and Metropolitan Partners that
they would not proceed with the transactions contemplated by the Prior Merger
Agreement. On December 22, 1998, the action was discontinued. As discussed in
the Merger Agreement, under certain limited circumstances this action can be
recommenced following the Merger by the Company against Crescent for the benefit
of the Company's stockholders.
On or about September 29, 1998, a complaint entitled Stephen Mikolas
v. Lawrence Feldman, Feldman Equities, Tower 45 Asset Management Corporation,
286 Madison LP, 290 Madison LP, 292 Madison LP, Tower Equities and Tower Realty
Trust, Inc. (Index No. 98 Civ. 6079 S.D.N.Y.), was filed in the U.S. District
court for the Southern District of New York in which the plaintiff alleges
unlawful retaliation in violation of federal, state, and city statutes. On or
about March 19, 1999, the parties entered into a "Stipulation of
Discontinuance," which provided that the action be discontinued, without
prejudice, and subject to reinstatement in the event a formal settlement
agreement is not executed by the parties within thirty days. The resolution
contemplated by the parties, which would include a dismissal of the action with
prejudice, is not expected to have a material adverse effect on the financial
position or results of operations of the Company.
On or about July 10, 1998, a complaint entitled Karen Schwartz v.
Lawrence Feldman, Feldman Equities, Tower 45 Asset Management Corporation, 286
Madison LP, 290 Madison LP, 292 Madison LP, Tower Equities and Tower Realty
Trust, Inc. (Index No. 98 Civ. 4918 (S.D.N.Y.) was filed in the U.S. District
Court for the Southern District of New York in which the Plaintiff alleges she
was discriminated against in the terms and conditions of her employment on the
basis of her religion in violation of federal, state and city statutes. On or
about March 19, 1999, the parties entered into a "Stipulation of
Discontinuance," which provided that the action be discontinued, without
prejudice, and subject to reinstatement in the event a formal settlement
agreement is not executed by the parties within thirty days. The resolution
contemplated by the parties, which would include a dismissal of the action with
prejudice, is not expected to have a material adverse effect on the financial
position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter ended December 31, 1998.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
The Company's Common Stock commenced trading on The New York Stock
Exchange ("NYSE") on October 16, 1997 under the symbol "TOW." The following
table sets forth the high and low sale prices for the Common Stock as traded
from October 10, 1997 through December 31, 1997 and January 1, 1998 through
December 31, 1998 (quarterly).
11
<PAGE>
High Low
-------- -------
October 16, 1997 through December 31, 1997 28.50 22.563
Quarter ended March 31, 1998 26.438 22.563
Quarter ended June 30, 1998 22.250 20.750
Quarter ended September 30, 1998 23.938 19.333
Quarter ended December 31, 1998 20.813 16.938
Stockholder Information
As of March 18, 1999, the Company had approximately 63 holders of
record and approximately 5,311 beneficial owners of its Common Stock. In
addition, the OP Units (which are redeemable for Common Stock subject to certain
limitations) were held by 24 entities or persons, beneficially or otherwise.
Dividend Information
The Company has adopted a policy of paying regular quarterly
distributions on its Common and Preferred Stock and OP Units and cash
distributions have been paid on the Common Stock and OP Units with respect to
the period since its inception. The following table sets forth information
regarding the declaration and payment of distributions by the Company since its
commencement of operations on October 16, 1997.
<TABLE>
<CAPTION>
Distribution Distribution Per Share
Period Which Distribution Relates Record Date Payment Date Distribution Amount
- - --------------------------------- ----------- ------------ -------------------
<S> <C> <C> <C>
October 16, 1997 - December 31, 1997 12/31/97 1/15/98 $ .3536(1)
January 1, 1998 - March 31, 1998 03/31/98 4/15/98 $ .4225
April 1, 1998 - June 30, 1998 06/30/98 7/15/98 $ .4225
July 1, 1998 - September 30, 1998 09/30/98 10/15/98 $ .4225
October 1, 1998 - December 31, 1998 12/31/98 1/15/99 $ .4225(2)
</TABLE>
(1) Represents the pro rata portion (for the period from October 16, 1997
(date of offering) through December 31, 1997) of a quarterly
distribution of $.4225 per share.
(2) Preferred Stock dividends, in amounts equal to the common stock
dividend, were prorated from the date of issuance, December 9, 1998,
through December 31, 1998, or $.1056 per preferred share.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its shareholders of at least 95% of its taxable income
(which does not include net capital gains). See the above table for
distributions declared and distributions paid with respect to 1998 and 1997.
Under certain circumstances the Company may be required to make distributions in
excess of cash available for distribution in order to meet such REIT
distribution requirements. In such event, the Company presently would expect to
borrow funds, or to sell assets for cash, to the extent necessary to obtain cash
sufficient to make the distributions required to retain its qualification as a
REIT for federal income tax purposes.
12
<PAGE>
The Company currently anticipates that it will maintain at least the
current distribution rate for the immediate future, unless actual results of
operations, economic conditions or other factors differ from its current
expectations. Future distributions, if any, paid by the Company will be at the
discretion of the Board and will depend on the actual cash flow of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code and such
other factors as the Board deems relevant.
Recent Sales of Unregistered Securities
Concurrently with the consummation of the Offering and pursuant to
the Formation Transactions, the Company issued (i) 1,153,845 shares of Common
Stock in the concurrent private placements, (ii) 886,200 shares of Common Stock
in connection with the cancellation of the MSAM Notes, and (iii) 1,128,160
shares of Common Stock in connection with the acquisition of certain interests
in the Initial Properties. In addition, the Operating Partnership issued
1,583,640 OP Units to certain "accredited" investors (including certain officers
and directors) in consideration for their contribution to the Operating
Partnership of ownership interests in the 21 Initial Properties. Subsequent to
December 31, 1997, the Operating Partnership issued 129,032 OP Units as partial
consideration in the acquisition of a certain management contract in connection
with the acquisition of 810 Seventh.
Concurrently with the execution of the Merger Agreement, the Company
sold 2,169,197 shares of Preferred Stock (liquidation preference $18.44 per
share) to Metropolitan for an aggregate purchase price of $40 million. The
Company's Preferred Stock currently has a per share distribution equal to the
per share distribution on the Company's Common Stock (currently $1.69 annually),
resulting in a yield of 9.16%. Prior to a termination of the Merger Agreement,
the Company's Preferred Stock is not redeemable or convertible and has no voting
rights.
The issuance of the Company's Common Stock, Preferred Stock and OP
Units pursuant to the Formation Transactions, the Merger Agreement and the
acquisition of 810 Seventh constitutes private placements of securities which
are exempt from the registration requirements of the Securities Act of 1933, as
amended, pursuant to Section 4(2) and Rule 506 of Regulation D promulgated
thereunder.
Item 6. Selected Financial Data.
The historical selected financial data of the Company and Tower
Predecessor (as defined below) as of and for the periods ended December 31, 1998
and 1997, for the period from January 1, 1997 to October 15, 1997, as of and for
the years ended December 31, 1996, 1995 and for the year ended 1994 have been
derived from the respective audited financial statements. The selected financial
data for the year ended December 31, 1994 are derived from the respective
unaudited financial statements and, in the opinion of management, reflect all
adjustments consisting of normal recurring adjustments, necessary for a fair
presentation of such data. The following historical data should be read in
conjunction with the consolidated and combined historical financial statements
of the Company and Tower Predecessor and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report on Form 10-K.
The historical operating results of the Company and Tower
Predecessor may not be indicative of future operating results. In addition, the
Company believes that the recorded value of the Company's
13
<PAGE>
Properties, which reflects the historical cost of such real estate, less
accumulated depreciation, is not indicative of the fair value of the Company's
Properties.
<TABLE>
<CAPTION>
The Company (Consolidated)
-----------------------------------------------------------------
Twelve March 27, January 1,
Months Ended 1997- 1997-
December 31, December 31, October 15,
1998 1997 1997
------------ ------------ -----------
(In Thousands, Except per Share Data and Number of Properties)
Statements of Operations Data:
<S> <C> <C> <C>
Rental income........ .................................. $ 110,137 $ 16,409 $ 21,908
Management fees(1)...................................... -- 1,090 318
Construction, leasing and other income.................. 857 861 576
-------------- --------------- ------------
Total revenues.......................................... 110,994 18,360 22,802
-------------- -------------- ------------
Property operating and maintenance
expenses(1)......................................... 25,849 3,941 4,538
Real estate taxes....................................... 14,838 2,266 3,792
General and administrative.............................. 10,140 2,844 2,189
Interest expense........................................ 20,770 2,369 11,725
Depreciation and amortization........................... 17,773 2,813 5,541
Ground rent/air rights expense.......................... 683 126 473
Costs related to sale of the Company.................... 5,019 -- --
Severance and other compensation costs.................. 2,471 -- --
-------------- --------------- ------------
Total expenses.......................................... 97,543 14,359 28,258
-------------- -------------- ------------
Equity in unconsolidated entities(1).................... 297 353 134
Income (loss) before minority interest
and extraordinary gain on early
extinguishment of debt.............................. 13,748 4,354 (5,322)
Minority interest(2).................................... (1,234) (373) --
Income (loss) before extraordinary gain
(loss) on early extinguishment of debt.............. $ 12,514 $ 3,981 $ (5,322)
Income before loss on early
extinguishment of debt applicable to
common shareholders................................. $ 12,285 $ 3,981
=============== ===============
Income before loss on early extinguishment
of debt per common share (basic and
dilutive)........................................... $ 0.72 $ 0.24
=============== ===============
Weighted average number of shares
outstanding (basic and dilutive).................... 16,946 16,920
=============== ==============
Balance Sheet Data (end of period):
Real estate, net of accumulated depreciation............ $ 673,442 $ 618,113 -
Total assets............................................ 719,747 656,096 -
Total debt.............................................. 260,293 228,990 -
Total liabilities....................................... 299,394 259,759 -
Minority interest in operating partnership.............. 34,371 33,920 -
Stockholders' equity/owners' deficit.................... 385,982 382,417 -
Other Data:
Cash dividends declared per common
share............................................... $ 1.69 $ 0.35 -
Funds from operations available to
common shares(3).................................... 36,740 6,581 219
Tower Predecessor (Combined)
------------------------------------------------
Year Ended December 31,
1996 1995 1994
--------------------------------------------------------------
(In Thousands, Except per Share Data and Number of Properties)
Statements of Operations Data:
Rental income........ .................................. $ 26,138 $ 25,202 $ 25,994
Management fees(1)...................................... 1,261 961 82
Construction, leasing and other income.................. 1,335 1,041 320
----------- ----------- ----------
Total revenues.......................................... 28,734 27,204 26,396
----------- ----------- ----------
Property operating and maintenance
expenses(1)......................................... 5,481 5,332 5,278
Real estate taxes....................................... 4,722 4,571 3,971
General and administrative.............................. 3,494 3,497 2,512
Interest expense........................................ 15,511 15,150 12,751
Depreciation and amortization........................... 6,853 6,897 7,415
Ground rent/air rights expense.......................... 599 599 599
Costs related to sale of the Company.................... -- -- --
Severance and other compensation costs.................. -- -- --
------------ ------------- -------------
Total expenses.......................................... 36,660 36,046 32,526
------------ ------------- -------------
Equity in unconsolidated entities(1).................... 461 193 1
Income (loss) before minority interest
and extraordinary gain on early
extinguishment of debt.............................. (7,465) (8,649) (6,129)
Minority interest(2).................................... -- -- --
Income (loss) before extraordinary gain
(loss) on early extinguishment of debt.............. $ (7,465) $ (8,649) $ (6,129)
========== ============= =============
Income before loss on early
extinguishment of debt applicable to
common shareholders.................................
Income before loss on early extinguishment
of debt per common share (basic and
dilutive)...........................................
Weighted average number of shares
outstanding (basic and dilutive)....................
Balance Sheet Data (end of period):
Real estate, net of accumulated depreciation............ $ 129,064 $ 128,138 $ 132,904
Total assets............................................ 172,967 173,889 184,174
Total debt.............................................. 202,892 199,962 202,454
Total liabilities....................................... 234,857 230,977 235,343
Minority interest in operating partnership.............. -- -- --
Stockholders' equity/owners' deficit.................... (61,870) (57,088) (51,169)
Other Data:
Cash dividends declared per common
share............................................... -- -- --
Funds from operations available to
common shares(3).................................... 129 (1,449) 1,292
</TABLE>
14
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Cash flow from operating activities................... 38,515 6,526 5,290 951 1,762 4,118
Cash flow from investing activities...................(73,388) 540,188) (3,771) (6,787) (3,440) (3,137)
Cash flow from financing activities................... 39,803 535,008 (1,785) 5,613 238 30
Property Data (end of period):
Number of Properties.................................. 25 22 -- 7 6 6
- - --------------------------
</TABLE>
(1) The operations transferred to the Management Company, are combined with
the property operations in the historical financial statements of the
Company and the Tower Predecessor prior to October 15, 1997, and are
accounted for under the equity method in the Company's historical
financial statements subsequent to that date.
Equity in unconsolidated entities includes the Company's 10% interest
(subject to an increase to up to 27.5% if certain performance goals are
achieved) in the partnership owning 2800 North Central and, prior to
October 16, 1997, Tower Predecessor's 18% interest in the partnerships
(the "DRA Joint Venture Companies") that owned, prior to the Offering, the
following properties: 286 Madison Avenue, New York, New York; 290 Madison
Avenue, New York, New York; 292 Madison Avenue, New York, New York; the
six Corporate Center Properties, Phoenix, Arizona; 5151 East Broadway,
Tucson, Arizona; and One Orlando Center, Orlando, Florida (such
properties, the "DRA Joint Venture Properties").
Subsequent to the Offering, the Company owns 10% of 2800 North Central and
95% of the economic interest in the Management Company. Tower Predecessor
owned, on December 31, 1996, 3.8% of 2800 North Central and approximately
18% of the DRA Joint Venture Companies (which represents Lawrence H.
Feldman's effective ownership interest).
(2) Represents an approximate 9.0% and 8.6% historical interest at December
31, 1998 and December 31, 1997, respectively, in the Operating
Partnership.
(3) The Company generally considers funds from operations an appropriate
measure of liquidity of an equity REIT because industry analysts have
accepted it as a performance measure of equity REITs. "Funds from
Operations," as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), means net income (loss), computed in
accordance with GAAP, excluding gains or losses from debt restructuring
and sales of property, plus depreciation and amortization on real estate
assets, after adjustments for unconsolidated entities. The Company also
adds back to net income costs related to the sale of the Company and
severance and certain compensation charges. The Company's determination of
funds from operations may not be comparable to funds from operations
reported by other REITs. The Company believes that in order to facilitate
a clear understanding of the combined historical operating results of
Tower Predecessor and the Company, funds from operations should be
considered in conjunction with net income (loss) as presented in the
consolidated and combined financial statements and notes thereto of the
Company and Tower Predecessor included elsewhere in this Annual Report on
Form 10-K. Funds from operations should not be considered as an
alternative to net income, determined in accordance with GAAP, as an
indication of the Company's performance
15
<PAGE>
or to cash flows from operating activities, determined in accordance with
GAAP, or as a measure of liquidity or the ability to make distributions.
The Company's and Tower Predecessor's historical funds from operations for
the respective periods is calculated as follows:
<TABLE>
<CAPTION>
The Company Tower Predecessor
------------------------------ --------------------------------------------------------------
Year Ended December 31,
---------------------------------------------
Historical
Twelve March 27, January 1,
Months Ended 1997- 1997-
December 31, December 31, October 15,
1998 1997 1997 1996 1995 1994
------------- ------------ ------------ --------- ------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Funds From Operations:
Net income (loss) $11,907 $3,981 $1,153 $(7,465) $(8,649) $(6,129)
Real estate depreciation and 17,773 2,813 5,541 6,853 6,897 7,415
amortization
Real estate depreciation and 134 33 -- 741 303 6
amortization of
unconsolidated entities
Minority interest 1,174 373 -- -- -- --
Severance and other compensation 2,471 -- -- -- -- --
costs
Costs related to sale of Company 5,019 -- -- -- -- --
Preferred stock dividend (229)
requirements
Other nonrecurring costs 1,449 -- -- -- -- --
Gain (loss) on extinguishment
of debt 667 -- (6,475) -- -- --
--------- --------- ------ ----- ------- -------
Funds from operations $40,365 $7,200 $219 $129 $(1,449) $1,292
========== ========= ====== ===== ======== =======
Funds from operations applicable to
common shareholders $36,740 $6,581 -- -- -- --
========== =========
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The following discussion should be read in conjunction with the
"Selected Financial Data" and the historical consolidated and combined financial
statements and related notes thereto for the Company and Tower Predecessor,
respectively, appearing elsewhere in this Annual Report on Form 10-K. The
following discussion is based primarily on the consolidated financial statements
of the Company for the period subsequent to the Offering and on the combined
financial statements of Tower Predecessor for the periods prior to the Offering.
The combined financial statements include the assets, liabilities and operations
of the Properties and predecessor management companies acquired by the Company
in the Formation Transactions from entities controlled and managed by Tower
Equities as follows (collectively, known as "Tower Predecessor"). In addition,
Tower Predecessor includes interests in 2800 North Central and the Properties
then held by the DRA Joint Venture Companies, on the equity basis of accounting.
Historical results set forth in the "Selected Financial Data," the
combined financial statements of Tower Predecessor, and the consolidated
financial statements of the Company should not be taken as an indication of
future operations of the Company.
16
<PAGE>
Overview
The Company was incorporated in the State of Maryland on March 27,
1997. The Company operates so as to qualify as a REIT for federal income tax
purposes. On March 31, 1997 interests in certain partnerships, properties and
limited liability companies were contributed to the Operating Partnership in
exchange for OP Units. Certain of these interests were owned by the Operating
Partnership after consummation of the Offering. Simultaneously with such
contribution of interests and through the date of the Offering, the Company
issued $12.3 million of notes to certain investors advised by MSAM. The notes
were collateralized by certain of the Properties. Upon completion of the
Offering, all notes were converted into shares of Common Stock of the Company.
As of October 16, 1997, the Company completed the Offering of 13,817,250 shares
of common stock (including the exercise of the underwriters' over-allotment
option of 1,802,250 shares) and effected the concurrent private placements of
1,153,845 shares of common stock at a price of $26.00 per share and realized net
proceeds therefrom of approximately $353.35 million. In addition, in connection
with the Formation Transactions relating to the Offering and the Concurrent
Private Placements, including the acquisition of certain property interests and
the cancellation of certain indebtedness, the Company issued 1,949,360 shares of
Common Stock. Upon consummation of the Offering and the Concurrent Private
Placements, the Company acquired a sole 1% general partner interest in the
Operating Partnership and a 90.4% limited partnership interest in the Operating
Partnership. At December 31, 1998, the Company had a 1% general partner interest
and a 89.9% limited partnership interest in the Operating Partnership.
The Company was formed to continue and expand the commercial real
estate business of Tower Equities, including developing, acquiring, owning,
renovating, managing, and leasing office properties in the Manhattan, Phoenix,
Tucson, and Orlando markets. Upon completion of the Offering, the Concurrent
Private Placements and the Formation Transactions, the Operating Partnership
owned or had interests in the 21 Initial Properties. On December 31, 1997 the
Company purchased the approximately 700,000 square foot office building located
at 810 Seventh in midtown Manhattan for approximately $150 million, including
closing costs, on January 16,1998, the Company purchased the approximately
126,000 square foot Blue Cross/Blue Shield office complex located in Phoenix,
Arizona for approximately $16.9 million and on May 6, 1998, the Company
purchased the office property located at 90 Broad Street in New York City, a
25-story building containing approximately 335,000 square feet, for
approximately $34.3 million in cash. The Company also owns or has an option to
acquire the Development Parcels, which can support 2.2 million rentable square
feet of development. In November 1997, the Company exercised its option to
purchase one of the optioned Development Parcels located in Phoenix, Arizona for
approximately $10.3 million. This parcel is currently under development.
Results of Operations
The Company's consolidated results of operations comprise the
Management Company's operations from March 27, 1997 (using the equity method
after October 15, 1997) and the consolidated results of the Operating
Partnership and the operating entities comprising the Tower Predecessor and the
DRA Joint Venture Companies after October 16, 1997. Tower Predecessor's combined
results of operations includes the predecessor management companies' operations
and the operations of the Tower Predecessor properties for all periods
presented. The consolidated and combined results of operations of the Company
and the Tower Predecessor are not directly comparable between periods as a
result of the effects of valuation of assets and liabilities recorded in
accordance with Accounting Principles Board
17
<PAGE>
Opinion No. 16. Consequently, the comparison of the results of operations
between the periods provides only limited information regarding the operations
of the Company as currently constituted. The following table sets forth selected
statement of operations data for the Company and Tower Predecessor for the
periods indicated:
<TABLE>
<CAPTION>
Tower
The Company Predecessor Tower
March 27, January 1, Combined Year Predecessor
The Company 1997- 1997- Ended Year Ended
December 31, December 31, October 15, December 31, December-31,
1998 1997 1997 1997 1996
-------------- ------------- --------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Rental Income.................................... $ 110,137 $ 16,409 $ 21,908 $ 38,317 $ 26,138
Management Fees.................................. - 1,090 318 1,408 1,261
Construction, leasing and other fees............. 857 861 576 1,437 1,335
-------------- ------------- ------------ ------------ --------
Total revenue.................................... 110,994 18,360 22,802 41,162 28,734
============== ============= ============ ============ ========
Expenses:
Property operating and maintenance............... 25,549 3,941 4,538 8,479 5,481
Real estate taxes................................ 14,838 2,266 3,792 6,058 4,722
General and administrative....................... 10,140 2,844 2,189 5,033 3,494
Interest expense................................. 20,770 2,369 11,725 14,094 15,511
Depreciation and amortization.................... 17,773 2,813 5,541 8,354 6,853
Ground rent/air rights expense................... 683 126 473 599 599
Costs related to sale of Tower................... 5,019 -- -- -- --
Severance and other compensated costs............ 2,471 -- -- -- --
-------------- ------------- ------------ ------------ --------
Total expenses................................... 97,543 14,359 28,258 42,617 36,660
-------------- ------------- ------------ ------------ --------
Equity in unconsolidated entities................ 297 353 134 487 461
Net income (loss) before extraordinary gain on
early extinguishment of debt and minority
interest..................................... 13,748 4,354 (5,322) (968) (7,465)
Minority interests............................... (1,234) (373) (373) --
--------------- ------------- ------------ ----------- ---------
Net income (loss) before gain (loss) on early
extinguishment of debt....................... 12,514 3,981 (5,322) (1,341) (7,465)
-------------- ------------- ------------ ----------- ----------
Extraordinary gain (loss) on early extinguishment
of debt, net of minority interest............ (607) -- 6,475 6,475 --
-------------- ------------ ------------ ----------- ----------
Net income (loss)................................ $ 11,907 $ 3,981 $ 1,153 $ 5,134 $ (7,465)
============== ============ ============ =========== ==========
</TABLE>
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997
(Combined).
Total revenues increased by $69.8 million, or 169.4%, to $111.0
million in 1998 as compared to $41.2 million in 1997. Rental income increased by
$71.8 million, or 187.5%, to $110.1 million in 1998 as compared to $38.3 million
in 1997 primarily as a result of the properties acquired concurrent with and
subsequent to the Offering. Rental income for the year ended December 31, 1998
included $31.6 million of rental income from the DRA Joint Venture Properties
and rental revenue of $42.2 million from 100 Wall Street, Century Plaza, 810
Seventh and the Blue Cross/Blue Shield office complex; the 1997 results include
rental revenues of $9.5 million related to such properties. The remaining
increase in rental income can be attributed to an increase in base rent,
primarily resulting from (i) an increase in leasing activity from
18
<PAGE>
the date of the Offering and (ii) additional unbilled rent resulting from the
effect of re-straight-lining the lease payments over the remaining lease terms
from the date of the Offering.
Management fee income decreased in 1998 to $0 as compared to $1.4
million in 1997. These fees relate to services provided during 1997 by
consolidated or combined management companies to certain properties (which have
been eliminated since the Company became self-administered following the
consummation of its Offering), as well as services to third-party owned
properties by consolidated or combined management companies. These operations
are reflected in the results of operations of the Management Company subsequent
to the consummation of the Offering. The Management Company's results of
operations are reflected by the Company on the equity method of accounting.
Total expenses in 1998 increased by $54.9 million, or 128.9%, to
$97.5 million as compared to $42.6 million in 1997 primarily as a result of the
acquisition of the properties previously owned by the DRA Joint Venture
Companies and other properties purchased concurrent with and subsequent to the
Company's Offering and costs associated with the Merger, severance and other
compensation and the refinancing of 810 Seventh. Expenses, excluding interest,
depreciation and amortization, as a percentage of total revenue increased to
52.9% from 49.0%. The components of expenses, excluding interest and
depreciation and amortization, as a percentage of total revenue are as follows:
1998 1997
---------- -------------
Property operating and maintenance.............. 23.1% 20.6%
Real estate taxes............................... 13.4 14.7
General and administrative...................... 9.1 12.2
Ground rent and air rights...................... 0.6 1.5
Other costs..................................... 6.7 --
------ ----
Total................................... 52.9% 49.0%
====== =====
Property operating and maintenance increased as a percentage of
revenue due to the inclusion of the properties located in Arizona, where utility
costs are typically higher. The decrease in real estate taxes as a percentage of
revenue is primarily due to the inclusion of 100 Wall Street and 90 Broad Street
as part of the Company's portfolio, which have lower real estate tax assessment
as compared to the Company's other New York properties. General and
administrative costs decreased as a result of improved leverage of the Company's
cost base over a larger revenue base. Other costs represent costs that were not
present in 1997.
Interest expense increased by $6.7 million to $20.8 million in 1998
as compared to $14.1 million in 1997 due to increased borrowings in connection
with the acquisition of properties subsequent to the Offering, offset in part by
the effect of the repayment of Tower Predecessor's debt from the proceeds of the
Offering.
Depreciation and amortization increased $9.4 million or 111.9% to
$17.8 million in 1998 as compared to $8.4 million in 1997 as a result of
reflecting a full year of depreciation of the properties acquired from the DRA
Joint Venture Companies and the acquisition of additional properties.
19
<PAGE>
Equity in unconsolidated entities decreased by approximately $0.2
million primarily reflecting lower results of the Management Company, which is
accounted for on the equity method for the full year in 1998.
Minority interest pertains to interests in certain partnerships and
properties, and that were contributed to the Operating Partnership in exchange
for OP Units concurrent with and subsequent to the Offering. The increase is
consistent with the Company's results of operations for the year.
The extraordinary loss in 1998 resulted from the partial prepayment
of the debt incurred to purchase 810 Seventh. The 1997 extraordinary gain
resulted from the prepayment of debt by Tower Predecessor.
Net income increased by $6.8 million to $11.9 million in 1998 as
compared to $5.1 million in 1997, as a result of the acquisition of properties
and other factors described above.
Comparison of Year Ended December 31, 1997 Combined to Year Ended December 31,
1996.
Total revenues increased by $12.4 million, or 43.3%, to $41.2
million in 1997 as compared to $28.7 million in 1996. Rental income increased by
$12.2 million, or 46.6%, to $38.3 million in 1997 as compared to $26.1 million
in 1996 primarily due to (i) $6.3 million of rental income from the Properties
held by the DRA Joint Venture Companies from October 16, 1997 through December
31, 1997 and (ii) the purchase of 100 Wall Street and Century Plaza at the time
of the Offering, which contributed rental revenues of $3.2 million from October
16, 1997 to December 31, 1997. The remaining increase in rental income can be
attributed to an increase in base rent, primarily resulting from the effect of
re-straight-lining the lease payments over the remaining lease terms, as of
October 16, 1997, of approximately $2 million, and other increases from
properties which were owned by the Tower Predecessor.
Management fee income increased $0.1 million, or 11.7%, to $1.4
million in 1997 as compared to $1.3 million in 1996. These fees are reflected in
results of operations of the Management Company after October 15, 1997 results
of operations. Construction, leasing, and other fees, relating to seven retail
properties as well as the DRA Joint Venture Companies and 2800 North Central,
also increased by $0.1 million, or 7.6%, to $1.4 million in 1997 as compared to
$1.3 million in 1996. After October 15, 1997, these construction, leasing and
other fees are reflected in the results of operations of the Management Company.
Total expenses in 1997 increased by $6.0 million, or 16.3%, to $42.6
million as compared to $36.6 million in 1996. Expenses excluding interest and
depreciation and amortization increased from $14.3 million in 1996 to $20.2
million in 1997 due to an inclusion of the DRA Joint Venture Companies
subsequent to the Offering and the purchase of 100 Wall Street and Century
Plaza. Expenses excluding interest and depreciation and amortization as a
percentage of total revenue decreased slightly from 49.8% in 1996 to 48.9% in
1997, reflecting economies realized through spreading fixed costs over larger
total revenue base. The components of expenses, excluding interest and
depreciation and amortization decreased as a percentage of total revenue as
follows:
1997 1996
----------- --------
Property operating and maintenance............... 20.6% 19.1%
20
<PAGE>
Real estate taxes................................ 14.7 16.4
General and administrative....................... 12.2 12.2
Ground rent and air rights....................... 1.5 2.1
----- -----
Total.................................... 49.0% 49.8%
===== =====
The increase in property operating and maintenance expenses as a
percentage of revenue has been offset by a decrease in real estate taxes and
ground rent and air rights. The increase in property operating and maintenance
as a percentage of revenue is primarily attributed to the inclusion, subsequent
to the Offering, of certain DRA Joint Venture Properties located in Arizona,
which have higher operating costs. The decrease in real estate taxes as a
percentage of revenue is primarily due to the inclusion of 100 Wall Street,
which has a lower real estate tax assessment as compared to the Company's other
New York properties. The decrease in ground rent and air rights, which are fixed
costs, as a percentage of revenue, is due to the increase in the Company's
revenue base.
Interest expense decreased by $1.4 million to $14.1 million in 1997
as compared to $15.5 million in 1996 due to the repayment of debt with the
proceeds of the Offering.
Depreciation and amortization expense increased $1.5 million or
22.0% to $8.3 million in 1997 as compared to $6.8 million in 1996 due to
depreciation of additional properties in 1997 as compared to 1996 (primarily
subsequent to the Offering).
Equity in unconsolidated entities remained relatively constant from
year to year.
Minority interest pertains to interests in certain partnerships,
properties, and Properties Atlantic which were contributed to the Operating
Partnership in exchange for OP Units. The percentage of minority interest for
the period subsequent to the Offering through December 31, 1997 is approximately
8.6%.
Net income increased by $12.6 million to $5.1 million in 1997 as
compared to net loss of $7.5 million in 1996, reflecting the reasons previously
discussed and a $6.5 million extraordinary gain on the extinguishment of debt by
Tower Predecessor.
Liquidity and Capital Resources
Cash and cash equivalents were $6.3 million and $1.3 million at
December 31, 1998 and December 31, 1997, respectively. Cash and cash equivalents
include cash on hand and short term, highly liquid investments with original
maturities of three months or less. These financial investments, which
potentially subject the Company to concentrations of credit risk, are invested
primarily through short-term obligations issued or guaranteed by the U.S.
government or its agencies. The Company believes that this mitigates their risk.
Included in cash and cash equivalents at December 31, 1998 and 1997 are
segregated security deposits amounting to approximately $5.9 million. In 1997
the cash and cash equivalent balance was comprised primarily of segregated
security deposits. The increase in cash and cash equivalents is a result of the
net increase in amounts outstanding under the Line of Credit of $70.4 million
and cash flows from
21
<PAGE>
operations of $38.5 million, net of approximately $73.4 million for additions to
real estate and deferred charges primarily as a result of the $16.9 million
purchase of the Blue Cross/Blue Shield office complex, the $34.3 million
purchase of the 90 Broad Street property and capital expenditures on
thoseproperties, as well as Tower's other Properties and $30.1 million relating
to distributions to stockholders and holders of OP Units.
The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements, and deferred
real estate taxes. The Company's properties require periodic investment of
capital for tenant-related capital expenditures and for general capital
improvements. In addition, the Company has adopted a policy of paying regular
quarterly distributions on its Common Stock, Preferred Stock and OP Units. Based
upon its cash and cash equivalents as of December 31, 1998, its expected cash
flows from operations and the funds available under the Line of Credit, the
Company expects to meet its cash requirements for the foreseeable future.
As a general policy, the Company intends to maintain a debt policy
limiting the Company's total consolidated indebtedness plus its pro rata share
of joint venture company debt to 50% of the Company's total market
capitalization. However, the Company may from time to time modify its debt
policy in light of current economic conditions, relative costs of debt and
equity capital, market values of its properties, general conditions in the
market for debt and equity securities, fluctuations in the market price for its
common stock, growth and acquisition opportunities and other factors.
Accordingly, there can be no assurance that the Company may not increase its
debt to total market capitalization ratio beyond the limit described above.
At December 31, 1998 and 1997, the Company had total outstanding
indebtedness of approximately $260.3 and $228.9 million, exclusive of the
Company's ten percent portion of the debt on 2800 North Central of $2.8 million
and $2.7 million, respectively. This total outstanding indebtedness was
collateralized by nine of the Company's properties and represents 44% and 36% of
the Company's total market capitalization based on the $20.125 and $24.625
closing price of the shares of Common Stock at December 31, 1998 and 1997.
Line of Credit
The Line of Credit has a three-year term and bears interest at the
rate of approximately 150 basis points over LIBOR (London Interbank Offered
Rate). As of December 31, 1998, $70.4 million was outstanding under the Line of
Credit. The Line of Credit matures in October 2000 but will become due upon
consummation of the Merger.
In conjunction with its Line of Credit the Company must maintain the
following financial ratios:
i. Total outstanding indebtedness must not exceed 55% of
"total value," as defined in the Line of Credit, during
the first year of the facility and must not exceed 50%
thereafter.
ii. Collateral indebtedness must not exceed 40% of total
value during the first year of the facility and 35%
thereafter.
iii. Recourse indebtedness cannot exceed five percent of
total value.
22
<PAGE>
iv. The total outstanding unsecured indebtedness must not
exceed 60% of total unencumbered assets value (as
defined in the Line of Credit) during the first year of
the facility and 55% thereafter.
Other financial covenants that must be met by the Company include
interest expense and fixed charges to debt ratios, among others.
As of December 31, 1998, the Company has complied with the financial
debt covenants.
In connection with the Merger Agreement, the Company issued $40
million of preferred stock which shares in the dividends pro rata with the
Company's common stockholders and OP unitholders. The proceeds from the issuance
were utilized to partially prepay the 810 Seventh loan.
In 1999, the Company borrowed $60 million under the Line of Credit
and used the proceeds to repay the remaining debt outstanding on 810 Seventh. In
connection with this borrowing, the total amount available to borrow under the
Line of Credit was reduced from $200 million to $165 million.
Mortgage Debt
<TABLE>
<CAPTION>
Principal Interest
Description Amount Rate Maturity
- - ------------------------------------- ---------------------- ------------------- -----------------------
(dollars in thousands)
<S> <C> <C> <C>
Term loan........................................ $107,000 6.82% October 16, 2027
Corporate Center................................. 21,000 7.55% January 1, 2006
Corporate Center................................. 974 8.37% January 1, 2006
810 Seventh Avenue............................... 60,000 * % April 30, 1999
2800 North Central............................... 2,696 9.41% May 31, 1999
Construction Loan................................ 1,212 7.75% **
</TABLE>
- - ------------
* LIBOR plus 400 basis points.
** Term of the construction loan is concurrent with the period of
construction.
In connection with the acquisition of 810 Seventh, the Company
incurred a $100 million mortgage loan from Credit Suisse First Boston Mortgage
Capital LLC that was to mature on December 31, 1998. On December 8, 1998, this
mortgage was extended through April 30, 1999 with an option to further extend
the loan through June 30, 1999 for a 1% payment to the bank ($1.0 million), a
broker fee of .5% ($.5 million) and an additional 1% fee to be paid upon
maturity. This mortgage was repaid in 1999 from the borrowings under the Line of
Credit.
Interest Rate Risk
The Company's financial instruments that are sensitive to changes in
interest rates are its debt obligations, all of which are denominated in U.S.
dollars. The interest rate on real estate debt other than the 810 Seventh debt
is fixed and therefore not affected by changes in interest rates. The 810
Seventh debt and borrowings under the revolving credit agreement bear interest
at variable rates. The Company does not enter in derivative instruments to
mitigate the impact of interest rate movements. Accordingly, increases in market
rates will adversely impact the Company.
23
<PAGE>
Cash Flows
The Company's 1998 cash flows from operating activities were $38.5
million. This is an increase of $26.7 million over operating cash flows of $11.8
million for the year ended December 31, 1997. This increase is primarily
attributed to an increase in net income resulting from the full year of
operations of the DRA Joint Venture Properties and other property acquisitions.
Cash flows used in investing activities for the Company's 1998
operations were $73.4 million. The primary uses of cash in 1998 included the
acquisition of the Blue Cross/Blue Shield property and 90 Broad Street property
and other capital expenditures on the Properties. Cash flows used in investing
activities for the Company's 1997 operations increased by $537.4 million from
$6.8 million for the year ended December 31, 1996 to $544.2 million. The primary
uses of cash in 1997 included the acquisition of real estate, joint venture and
deferred charges of $534.4 million in connection with the Formation
Transactions.
Cash flows from financing activities were $39.8 million reflecting
the sale of $40 million of Preferred Stock and the related pay-down of the 810
Seventh mortgage debt, borrowings under the Line of Credit and related
repayments, net of distributions of common stockholders and OP unitholders. Cash
flows from financing activities for the year ended December 31, 1997 increased
$527.6 million from $5.6 million at December 31, 1996 to $533.2 million at
December 31, 1997. The most significant inflows of cash relate to the net
proceeds from the Offering of $353.3 million, proceeds from real estate debt of
$217.9 million, which includes $100.0 million for a mortgage note on 810
Seventh, approximately $107.0 million from the term loan and amounts borrowed
from MSAM, which were repaid with stock in conjunction with the Offering. In
addition, the Company has declared a $.3536 per share or $6.5 million
distribution payable as of December 31, 1997. This amount was paid on January
15, 1998.
Funds from Operations
The Company generally considers funds from operations an appropriate
measure of liquidity of an equity REIT because industry analysts have accepted
it as a performance measure of equity REITs. "Funds from Operations," as defined
by the NAREIT, means net income (computed in accordance with GAAP), excluding
gains (or losses) from debt restructuring and sales (loss) of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. The Company also adds back costs
related to the sale of the company and severance and other compensation charges.
Accordingly, funds from operations as defined by the Company may not be
comparable to definitions used by other REITs. The Company believes that in
order to facilitate a clear understanding of the combined historical operating
results of Tower Predecessor and the Company, funds from operations should be
considered in conjunction with net income (loss), determined in accordance with
GAAP, as presented in the audited consolidated and combined financial statements
of the Company and Tower Predecessor, respectively, and notes thereto included
elsewhere in this Annual Report on Form 10- K. Funds from operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income, determined in
accordance with GAAP, as an indication of the Company's performance or to cash
flows from operating activities, determined in accordance with GAAP, as a
measure of liquidity or ability to make distributions.
The Company's calculation of Funds from Operations is as follows:
24
<TABLE>
<CAPTION>
The Company Tower Predecessor
--------------------------------------- -------------------------------------------
March 27, January 1, Combined
1997- 1997- Year Ended Year Ended
December 31, October 15, December 31, December 31,
1998 1997 1997 1997 1996
---------- ------------- -------------- ------------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net Income (loss).............................. $ 11,907 $ 3,981 $ 1,153 $ 5,134 $ (7,465)
Real estate depreciation and amortization...... 17,773 2,813 5,541 8,354 6,853
Real estate depreciation and amortization of
unconsolidated joint venture................... 134 33 33 741
Minority interest.............................. 1,174 373 373
Costs related to the sale of the Company....... 5,019
Severance and other compensation costs......... 2,471
Preferred stock dividend requirement........... (229) - - - -
Other nonrecurring costs....................... 1,449 - - - -
Gain (loss) on extinguishment of debt.......... 667 - (6,475) (6,475)
--------- --------- ----------- ------------ -----------
Funds from operations.......................... $ 38,916 $ 7,200 $ 219 $ 7,419 $ 129
========= ========= =========== ============ ============
</TABLE>
On a combined basis, funds from operations increased by $33.2
million for the year ended December 31, 1998 from the year ended December 31,
1997, and increased by $7.3 million for the year ended December 31, 1997 from
the year ended December 31, 1996 as a result of the factors discussed in the
analysis of operating results.
Inflation
The Company's leases with the majority of its tenants require the
tenants to pay most operating expenses, including insurance and real estate
taxes, and increases in common area maintenance expenditures which partially
offsets the Company's exposure to increases in costs and operating expenses
resulting from inflation.
Year 2000
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000 issue.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. The Company believes that the cost of remediation associated
with its computer systems will be minimal and the remediation is anticipated to
be completed in the first quarter of 1999.
The Company's Year 2000 compliance program focuses on addressing
Year 2000 readiness in the following areas:
i. The Company's information technology and software;
ii. other material technology systems; and
iii. Year 2000 compliance of third parties with which the Company
has a material relationship.
25
<PAGE>
In this regard, the Company has retained consultants to assist in its efforts.
The Company has completed an initial assessment and remediation of
its key information technology systems including its operating systems and
critical financial and nonfinancial applications. Remediation efforts as of the
date hereof include addressing critical financial applications. Based on this
initial assessment and remediation efforts, the Company believes that these key
information technology systems will be "Year 2000 compliant" by the first
quarter of 1999. However, there can be no assurance that coding errors or other
defects will not be discovered in the future. The Company is currently
evaluating the remaining non-critical information technology systems for Year
2000 compliance.
As of December 31, 1998, the Company owned and operated a portfolio
of 25 office properties. The Company is continually evaluating whether the
material noninformation technology systems such as security control equipment,
fire suppression equipment and other physical plant and equipment at such
properties are Year 2000 compliant, and has been advised by most of its vendors
that such systems and equipment are or will be compliant. All of the Properties,
as a part of general operating policy, are developing contingency plans that
will be deployed in the event key operational systems, such as security control
equipment, fail (e.g., when a power failure occurs).
The Company depends upon the proper functioning of third-party
computer and noninformation technology systems. These third parties include
tenants, commercial banks and other lenders, construction contractors, and
vendors. The Company has initiated communications with third parties with whom
it has important financial or operational relationships to determine the extent
to which they are vulnerable to the Year 2000 issue. The Company has not yet
received sufficient information from all parties about their remediation plans
to predict the outcome of their efforts.
If third parties with whom the Company or one of its affiliates
interacts have Year 2000 problems that are not remedied, the following problems
could result:
a. In the case of construction contractors and other
vendors, the delayed construction or redevelopment of
properties;
b. In the case of vendors, disruption of important services
upon which the Company or its affiliates depend, such as
professional services, including accounting and legal
services, telecommunications and electrical power; and
c. In the case of banks and other lenders, the disruption
of capital flows potentially resulting in liquidity
stress.
Due to the nature of the Company's tenants' businesses, the Company
does not believe the Year 2000 issue will materially impact the tenants' ability
to pay rent. However, financial difficulties of significant tenants as a result
of the Year 2000 issues could have a material adverse effect on the Company's
results of operations or financial position. Though the Company does not expect
the Year 2000 issue to have a material adverse effect on its result of
operations or financial position there can be no assurances of that position.
26
<PAGE>
Environmental Matters
The Company is not aware of any environmental issues at any of the
Properties. The Company believes it has sufficient insurance coverage at each of
the Properties.
Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 specifies the
presentation and disclosure requirements for reporting comprehensive income,
which includes items which had been formerly reported as a component of
stockholders' equity. SFAS 130 did not have a material impact on the Company's
financial statements.
During 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), which are effective for fiscal years beginning after
December 15, 1997. SFAS 131 establishes the disclosure requirements for
reporting segment information. The adoption of SFAS 131 required the Company to
report information regarding the Company's segments, and such information is
provided in Note 18 to the financial statements filed as part of this Annual
Report on Form 10-K.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. This statement addresses the accounting for
derivative instruments including certain derivative instruments embedded in
other contracts and for activities. The Company does not expect that adoption of
this Statement will have a material impact on its financial statements.
During 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") and
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which are effective for
the fiscal years beginning after December 15, 1998. SOP 98-1 provides guidance
on whether the costs of computer software developed or obtained for internal use
should be capitalized or expensed. Management believes that, when adopted, SOP
98-5 and SOP 98-1 will not have a significant impact on the Company's financial
statements. In addition, the Emerging Issues Task Force of the Financial
Accounting Standards Board released EITF 97-11. EIT 97-11 was adopted by the
Company during the first quarter of fiscal 1998 and resulted in the Company
having to expense internal property acquisition costs they would have otherwise
capitalized.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The financial statements filed as part of this Annual Report on Form
10-K are provided under Item 14 below.
27
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no disagreements on accounting and financial
disclosure matters.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Company's Board is composed of eight directors (the
"Directors"), each of whom will serve until their respective successors are
elected and qualified.
The name, age and offices held by the Directors and executive
officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Offices and Positions
- - ----------- --------- ---------------------
<S> <C> <C>
Robert L. Cox 38 Acting Chief Executive Officer and
President of the Company. From
December 1995 until the Offering in
October 1997, Mr. Cox served as Senior
Vice President-Construction of Tower
Equities and prior to that he served
as its Vice President-Construction
from 1989 to November 1995 where his
main responsibilities included
supervising all of Tower Equities'
construction projects. Before joining
Tower Equities, Mr. Cox was Chairman
of Cox Building Concepts, a national
construction management company
specializing in the construction of
high-rise office buildings. He is
currently a member of Building Owners
and Management Association and the
National Contractor's Register. Mr.
Cox graduated from Florida State
University in 1983 with a B.A. in
Architecture.
Lester S. Garfinkel 45 Executive Vice President-Finance and
Administration, Chief Financial
Officer and Director of the Company.
From October 1996 to April 1998, Mr.
Garfinkel was a partner in the public
accounting firm of Reminick, Aarons &
Company LLP, where he was in charge of
the firm's quality control and
professional standards. Prior to
joining Reminick, Aarons & Company
LLP, he managed his family's
investment portfolio from March 1996
to September 1996. Prior to that, Mr.
Garfinkel was a principal at Feldman
Radin & Company (no affiliation with
Tower Equities or Lawrence H. Feldman
personally), a public accounting firm,
from April 1995 to March 1996. Prior
to joining Feldman Radin & Company, he
was a partner at Weber, Lipshie & Co.,
an international public accounting
firm, from January 1980 to June 1994,
where his clients, among others, were
residential, commercial and shopping
center developers and owner operators.
He is a Certified Public Accountant in
the States of New York and Connecticut
and he is a member of the American
Institute of Certified Public
Accountants, the New York State
Society of Certified Public
Accountants where he has served on
technical and public relations
committees and the Connecticut State
Society of Certified Public
Accountants. Mr. Garfinkel graduated
from Long Island University
Professional School of Accountancy,
C.W. Post Center in 1975 with a B.S.
in Accounting.
28
<PAGE>
Francis X. Tansey 54 Chairman of the Board of the Company.
From July 1994 to the present, Mr.
Tansey has served as the President and
Chief Executive Officer of DRA
Advisors, Inc. and serves as its Chief
Investment Officer. From May 1986
through July 1994, Mr. Tansey was the
President and Chief Executive Officer
of Dreyfus Realty, where Mr. Tansey
provided investment advisory services
relating to real estate assets valued
in excess of $1 billion. From 1984 to
1986, Mr. Tansey was a Trustee and
Manager Investment Financing--of the
General Electric Pension Trust
("GEPT"). In that capacity, Mr. Tansey
was responsible for the management of
assets valued in excess of $20
billion, including GEPT's investment
portfolios of affiliated mutual funds,
foundations and insurance companies.
From 1981 to 1984, he was the
Manager--Fixed Income of GEPT,
responsible for the management of real
estate, taxable and tax-exempt bonds
and cash. From 1970 to 1981, Mr.
Tansey was both Investment Manager and
Manager-Real Estate of GEPT,
responsible for the management of its
real estate portfolio. Mr. Tansey
graduated in 1966 from Rutgers
University with a B.S. in Economics.
Robert M. Adams 57 Director of the Company. From May 1996
to August 1998, Mr. Adams served as
Director, New Business Development at
Keefe, Bruyette & Woods, Inc., an
investment banking firm and served as
President of Adams Financial Services,
Inc. from June 1995 to April 1996.
Prior to that, Mr. Adams was a
co-founder and Managing Director of
Adams Cohen & Associates, Inc. and
Adams Cohen Securities Inc. from 1984
to May 1995. Prior to that, he was a
Senior Vice President of E.F. Hutton &
Co. in the Corporate Finance
Department, was a General Partner of
Loeb Rhoades & Co. and was a Second
Vice President at Chase Manhattan
Bank, N.A. Mr. Adams graduated from
Brown University in 1963 with a B.A in
Economics degree and the Wharton
School of Finance and Commerce,
University of Pennsylvania in 1967
with a Masters in Business
Administration degree with a
concentration in Finance.
Esko I. Korhonen 43 Director of the Company. Since
December, 1998, Mr. Korhonen has
served as a Senior Partner of Federal
Capital Partners, a private real
estate equity fund. Prior to that, Mr.
Korhonen was a principal of Carlyle
Realty, L.P., an affiliate of Carlyle,
a Washington, D.C. based merchant
banking firm, and since April, 1995,
was a part of a group that is
responsible for coordinating the
firm's real estate acquisitions. From
1991 to April, 1995, Mr. Korhonen was
Vice President of ING Real Estate, a
subsidiary of the Netherlands-based
ING Groep N.V., a financial services
company ("ING"), where he directed
acquisition and asset management
activities for ING's North American
real estate portfolio. From 1988 to
1991, Mr. Korhonen was a partner and
regional manager at Richard Ellis
Inc., an investment advisory firm,
where he acted as a principal-side
advisor to foreign and domestic
institutional investors for the
acquisition and asset management of
North American real estate. Mr.
Korhonen began his real estate career
in 1983 as a developer with the
Trammell Crow Company in Houston,
Texas. Mr. Korhonen graduated in 1977
with a B.A. from Colgate University
and an M.B.A. in 1983 from The J.L.
Kellog Graduate School of Business at
Northwestern University.
29
<PAGE>
John Timothy Morris 32 Director of the Company. Mr. Morris
has served as a Principal of Morgan
Stanley Dean Witter Investment
Management since December, 1998. He is
responsible for the firm's real estate
direct investment activities. Prior to
his current position, Mr. Morris was
in charge of Morgan Stanley Dean
Witter's Non-Japan Asia real estate
activities and worked for ten years
for Morgan Stanley & Co. in connection
with both agency and direct real
estate investment activities. Mr.
Morris received a B.S. in Finance from
Indiana University.
Stephen B. Siegel 54 Director of the Company. Mr. Siegel
serves as President and Chief
Executive Officer of Insignia
Commercial Group, Inc. He was named to
this position following the
acquisition of Edward S. Gordon
Company by Insignia Financial Group in
1996. Mr. Siegel continues as
President of Insignia/Edward S. Gordon
Co., a post he has held since 1992.
From 1988 to 1992, Mr. Siegel was
President of Chubb Realty, a real
estate development subsidiary of The
Chubb Corporation. Prior to that, he
was employed by Cushman & Wakefield,
Inc. for 27 years, rising to the
position of Chief Executive Officer.
Mr. Siegel serves on the advisory
board of Wharton School's Real Estate
Center and New York University's Real
Estate Council and is a director of
Liberty Property Trust.
Richard M. Wisely 53 Director of the Company. Mr. Wisely
serves as Chairman of the Board and
Chief Executive Officer of LungCheck
Inc., a highly specialized diagnostic
laboratory and lung cancer research
facility that he co-founded in 1996.
From 1990 until August 1995, Mr.
Wisely served as Senior Vice President
and Chief Operating Officer of Rexall
Sundown, Inc., a publicly-traded
vitamin and over-the-counter
pharmaceutical manufacturer. Prior to
joining Rexall Sundown as the Senior
Vice President of Operations in 1985,
Mr. Wisely had spent 17 years with
Dart Industries, principally with the
former Rexall Drug Company of St.
Louis; his last position there was
Vice President of Operations.
Peggy D. Rawitt 41 Executive Vice President, General
Counsel and Secretary of the Company.
From April 1991 until joining the
Company in March 1998, Ms. Rawitt was
Senior Vice President and Deputy
General Counsel of Enhance Financial
Services Group Inc., a publically
traded specialty insurance and
financial services company. In
addition to other corporate duties,
she handled all legal aspects of the
company's portfolio of commercial
mortgage-backed credit enhanced bond
financings and was responsible for all
corporate owned and leased real
estate. Ms. Rawitt graduated from
State University of New York at Stony
Brook in 1977 with a B.A. degree and
graduated from New York Law School in
1980. Eric S. Reimer 41 Vice
President-Leasing of the Company,
since October 1997. From 1987 until
October 1997, Mr. Reimer was employed
at Tower Equities where his
responsibilities included overseeing
all leasing activity in the Tower
Equities' portfolio throughout the
United States. Prior to joining Tower
Equities, he was the Vice President of
Leasing for Rostenberg-Doern in New
York's Westchester County and
Connecticut's Fairfield County where
he specialized in tenant
representation. He is a member of
Building Owners and Management
Association and Industrial Office Real
Estate Brokers Association. Mr. Reimer
graduated from the University of
Vermont in 1981 with a B.A. degree.
Eric S. Reimer 41 Vice President-Leasing of the Company,
since October 1997. From 1987 until
October 1997, Mr. Reimer was employed
at Tower Equities where his
responsibilities included overseeing
all leasing activity in the Tower
Equities' portfolio throughout the
United States. Prior to joining Tower
Equities, he was the Vice President of
Leasing for Rostenberg-Doern in New
York's Westchester County and
Connecticut's Fairfield County where
he specialized in tenant
representation. He is a member of
Building Owners and Management
Association and Industrial Office Real
Estate Brokers Association. Mr. Reimer
graduated from the University of
Vermont in 1981 with a B.A. degree.
30
<PAGE>
Reuben Friedberg 72 Vice-President-Finance of the Company
since October 1997. From 1992 until
October 1997, Mr. Friedberg served as
Vice President-Finance of Tower
Equities. Prior to joining Tower
Equities, Mr. Friedberg was the
controller of other firms in the real
estate and construction industry. Mr.
Friedberg graduated from Baric College
in 1948 with a Bachelor of Business
Administration degree and has been a
Certified Public Accountant in the
State of New York since 1957.
</TABLE>
Item 11. Executive Compensation.
The following table sets forth information, for the fiscal years
ended December 31, 1998 and 1997, regarding the compensation of the Company's
Acting Chief Executive Officer other current and former executive officers of
the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Compensation
-----------------------
Annual Compensation Awards Payouts
------------------------------------------------ ----------------------- --------------
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Position Year(1) Salary($) Bonus($) Compensation($) Award$/(2) Options/(#)(2) Payouts($) Compensation($)
------------------ ------- ---------- -------- --------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lawrence H. Feldman;
Chairmanof the Board,
Chief Executive Officer 1998 107,692 None None None None None 1,015,066
and President (3) 1997 30,961 None None None 201,000 None None
Joseph D. Kasman; Senior
President Vice and Chief 1998 54,807 None None None None None 510,099
Financial Officer (4) 1997 26,538 None None None 110,000 None None
Robert L. Cox;
Acting Chief Executive 1998 162,126 150,000 None None None None None
Officer and President (5) 1997 26,536 None None None 201,000 None None
Lester S. Garfinkel;
Executive Vice President--Finance
and Administration and Chief
Operating Officer 1998 136,500 146,250 None None 300,000 None None
Peggy D. Rawitt;
Executive Vice President,
General Counsel and
Secretary 1998 127,884 131,250 None 10,000 50,000 None None
Eric S. Reimer; Vice 1998 150,000 150,000 None None 100,000 None None
President--Leasing 1997 26,538 None None None 68,000 None None
Reuben Friedberg; 1998 107,000 107,000 None None None None None
Vice President--Finance 1997 18,930 None None None 31,000 None None
</TABLE>
- - ----------------
(1) None of the executive officers listed above earned more than $100,000 in
1997, the Company's first year of operations. Amounts for 1997 are based on
the period from October 16, 1997 through December 31, 1997.
(2) In connection with their respective employment agreements, Mr. Garfinkel was
granted 300,000 options to purchase Common Stock, Ms. Rawitt was granted
50,000 options to purchase Common Stock and Mr. Reimer was granted 100,000
options to purchase Common Stock. In the case of Messrs. Garfinkel and
Reimer, the options vest in three equal annual installments commencing on
the first anniversary of the date of grant. In the case of Ms. Rawitt, the
options vest in four installments commencing on the date of grant, with
subsequent installments vesting on each of the first, second and third
anniversaries of the date of grant. In addition, pursuant her employment
agreement, Ms. Rawitt was granted 10,000 shares of restricted Common Stock.
See "Officer Employment Agreements" and "Restricted Stock Award" below.
31
<PAGE>
(3) Mr. Feldman resigned from the Company on August 3, 1998.
(4) Mr. Kasman resigned from the Company as of April 18, 1998. Because Mr.
Kasman resigned at a time when none of his options had vested, such options
are not exercisable pursuant to their terms.
(5) Mr. Cox served as Executive Vice President and Chief Operating Officer of
the Company in 1997 and in 1998 until the resignation of Mr. Feldman.
The following table sets forth information regarding grants of stock
options to the Company's executive officers during the 1998 fiscal year. The
options were granted pursuant to the Company's 1997 Incentive Plan.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants Potential Realizable Value
--------------------------------------------------------------------------- at Assumed Annual Rates of
Common Share Price
Number of % of Total Exercise Price Appreciation for
Securities Options Per Option Term
Underlying Granted to Common -----------------------------
Options Employees in Share Expiration
Name Granted(#) Fiscal Year ($/Share) Date 5%($) 10%($)
---- ---------- ----------- --------- ---- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lester S. Garfinkel 300,000 54.9% $26.00 4/20/08 $ 3,780,000 $ 9,798,000
Peggy D. Rawitt 50,000 9.1% $26.00 4/3/08 $ 595,000 $ 1,581,500
Eric S. Reimer 100,000 18.3% $26.00 6/18/08 $ 900,000 $ 2,720,000
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of
Securities
Underlying
Unexercised
Options at
December 31, 1998(#)
Name Exercisable/Unexercisable(1)
- - ------------ ----------------------------------
<S> <C>
Lawrence H. Feldman 66,330/201,000
Joseph D. Kasman 0/110/000
Robert L. Cox 66,330/201,000
Eric S. Reimer 22,440/168,000
Reuben Friedberg 10,230/31,000
Lester S. Garfinkel 0/300,000
Peggy D. Rawitt 12,500/50,000
- - --------------
(1) No options were exercised or wre in-the-money during 1998.
</TABLE>
The options granted to Messrs. Cox and Friedberg were granted as of
October 9, 1997 at an exercise price equal to $26.00 per share. Mr. Reimer was
granted 68,000 options as of October 9, 1997 and an additional 100,000 options
as of June 18, 1998. The options granted Mr. Garfinkel were granted as of April
20, 1998 and the options granted Ms. Rawitt were granted as of April 3, 1998,
each at an exercise price equal to $26.00 per share. In the case of Messrs. Cox,
Friedberg, Reimer and Garfinkel, the options vest in three equal annual
installments commencing on the first anniversary of the date of grant. In the
case of Ms. Rawitt, the options vest in four annual installments of twenty-five
(25%) each, commencing on the date of grant with subsequent installments vesting
on each of the first, second and third anniversaries of the date of grant. See
"Option Awards" below for a discussion of the effect of the Merger Agreement on
the above listed options.
32
<PAGE>
Officer Employment Agreements
In October 1997, the Company entered into an employment agreement
with Robert L. Cox (the Acting Chief Executive Officer and President of the
Company), in April 1998, the Company entered into employment agreements with
Lester S. Garfinkel (the Executive Vice President-Finance and Administration and
Chief Financial Officer of the Company) and Peggy D. Rawitt (Executive Vice
President, General Counsel and Secretary of the Company) and in June 1998, the
Company entered into employment agreements with Clifford L. Stein, Reid Berman,
Scott Jensen and Mr. Reimer, each of whom is an officer of the Company. The term
of each of these employment agreements is three years, subject, in the case of
Messrs. Garfinkel and Cox and Ms. Rawitt, to automatic one-year extensions. The
base salary for 1998 under these agreements were as follows: for Mr. Cox,
$150,000; Ms. Rawitt, $175,000; Mr. Garfinkel, $195,000 ($225,000 for 1999); Mr.
Reimer, $150,000; Mr. Stein, $135,000; Mr. Jensen, $135,000; and Mr. Berman,
$75,000.
Pursuant to the terms of the these employment agreements, except with
respect to Ms. Rawitt, in the event an officer's employment is terminated by the
Company without Cause, as defined in each employment agreement, or is terminated
by such officer for "Good Reason," as defined in each employment agreement
(which includes a "Change in Control" of the Company, as defined in each
employment agreement, in the case of Messrs. Garfinkel, Berman, Reimer, Stein
and Jensen), each officer will be entitled to receive a severance payment equal
to either 2.99 times the "base amount," as defined in the Internal Revenue Code,
or 2.99 times the officer's then current "base salary," payable in monthly
installments over a 12-month period, as determined under each respective
employment agreement. In the event Ms. Rawitt's employment is terminated by the
Company within six months following a Change in Control of the Company, or is
terminated by Ms. Rawitt for Good Reason, Ms. Rawitt will be entitled to receive
a severance payment in an amount equal to one (1) year's then current base
salary plus the bonus paid to Ms. Rawitt during the preceding year of her
employment.
If the employment of any of the following officers of the Company is
terminated following a Change in Control of the Company under circumstances
entitling him or her to severance payments and benefits under the applicable
employment agreement, the appropriate amount of the cash severance payment would
be as follows:
Company Officers Severance Amount
---------------- ----------------
Robert L. Cox $ 687,000
Lester S. Garfinkel $1,116,882
Peggy D. Rawitt $ 332,500
Eric S. Reimer $ 515,775
Clifford L. Stein $ 464,198
Reid Berman $ 257,888
Scott Jensen $ 464,198
The above amounts will be paid to each Company officer only in the
event that the conditions to such payment contained in the applicable employment
agreement are satisfied, entitling such officer to his or her severance payment.
Stay Bonuses for Messrs. Garfinkel, Cox and Stein
In addition to the severance payments above, the Company must pay
the "stay bonuses" set forth below, provided that the officer remains an
employee of the Company in good standing through the consummation of a Change in
Control and regardless of whether the officer is terminated following a Change
in Control. The Merger will constitute a Change in Control.
33
<PAGE>
Company Officers Stay Bonus Amount
---------------- -----------------
Lester S. Garfinkel $900,000
Clifford L. Stein $135,000
Robert L. Cox $ 75,000
There are no other stay bonuses payable to any other Company officer following
the Merger other than those to Messrs. Garfinkel, Stein and Cox.
Restricted Stock Award
Pursuant to Ms. Rawitt's employment agreement, she was granted
10,000 shares of restricted Common Stock, which restrictions lapse and which
shares become non-forfeitable (a) in five equal annual installments commencing
on January 1, 1999, (b) in the event Ms. Rawitt's employment is terminated by
the Company without Cause (as defined in her employment agreement) or is
terminated by Ms. Rawitt for Good Reason (as defined in her employment
agreement) or (c) upon a Change in Control (as defined in her employment
agreement). As a result, Ms. Rawitt's restricted Common Stock shall vest and
become free of all restrictions immediately prior to the Merger and shall be
converted into the consideration to be paid pursuant to the Merger Agreement.
Option Awards
Pursuant to the Merger Agreement, each outstanding stock option to
acquire shares of Common Stock shall, effective as of the Merger, become fully
vested and exercisable and shall, subject to obtaining the required consent of
each holder of Company stock options, be canceled. The officers of the Company
will not receive any payment for their Company stock options.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Shown below is certain information as of March 15, 1999 (except as
where indicated in the footnotes to the table) with respect to beneficial
ownership of shares of Common Stock by each Director, each of the five most
highly compensated executive officers, all directors and Tower executive
officers as a group and each person the Company believes beneficially holds more
than 5% of the outstanding Common Stock. Unless otherwise indicated, the named
person or members of the group possess sole voting and investment power with
respect to the shares.
<TABLE>
<CAPTION>
Number of Shares Percent of
of Common Stock All Shares Percent of All Shares
Name of Beneficial Owner(1) and OP Units of Common of Common Stock
- - --------------------------- Beneficially Owned Stock(2) and OP Units(3)
------------------------------------------------------------
<S> <C> <C> <C>
Lawrence H. Feldman(4)........................ 904,254 5.33% 4.85%
Robert L. Cox................................. 173,723 * *
Eric S. Reimer................................ 101,389 * *
34
<PAGE>
Reuben Friedberg................................... 40,452 * *
Lester S. Garfinkel(5)............................. 101,000 * *
Peggy D. Rawitt(6)................................. 35,000 * *
Robert M. Adams(7)................................. 73,993 * *
Esko I. Korhonen(8)(18-21)......................... 20,000 --- ---
Stephen B. Siegel(9)............................... 20,000 --- ---
Richard M. Wisely (10)............................. 58,000 * *
Francis X. Tansey(11)(12).......................... 944,800 5.45 4.96
John Timothy Morris (13)(14).......................1,800,630 10.61 9.65
DRA Opportunity Funds(5)........................... 465,400 2.74 2.49
Office Invest Sub LLC (16)......................... 459,400 2.71 2.46
Morgan Stanley Dean Witter & Co.(17)...............1,780,630 10.61 9.65
Carlyle Realty Partners, L.P.(18).................. 123,150 * *
Carlyle Realty Qualified Partners, L.P.(19)........ 130,506 * *
Carlyle Realty Partners Sunrise, L.P.(20).......... 79,489 * *
Carlyle Realty Coinvestment, L.P.(21).............. 51,470 * *
Heitman/PRA Securities Advisors LLC (22)...........1,732,822 10.22 9.29
OZ Management, L.L.C (23).......................... 956,200 5.63 5.12
European Investors Inc. (24)....................... 927,960 5.47 4.97
All executive officers and directors as a group
(11 persons).......................................3,348,987 19.75% 17.96%
</TABLE>
- - -------------
* Represents less than 1.0% of the class.
(1) Unless otherwise indicated, the business address of each person listed
is c/o Tower Realty Trust, Inc., 292 Madison Avenue, 3rd Floor, New
York, New York 10017.
(2) Assumes that all OP Units held by the person are exchanged for shares
of Common Stock on a one-for-one basis. The total number of shares of
Common Stock outstanding used in calculating this percentage assumes
that none of the OP Units held by other persons are exchanged for
shares of Common Stock.
(3) Assumes that all OP Units held by the person are exchanged for shares
of Common Stock. The total number of shares of Common Stock outstanding
used in calculating this percentage assumes that all of the OP Units
held by other persons are exchanged for shares of Common Stock.
(4) Based on Schedule 13G filed with the Securities and Exchange Commission
on February 16, 1999. Mr. Feldman individually owns 887,946 OP Units
and beneficially owns 16,308 OP Units through his indirect control of
Maitland Property Investors, Ltd., the record holder of such OP Units.
Mr. Feldman is the former Chairman of the Board, Chief Executive
Officer and President of the Company. The business address of Mr.
Feldman is Feldman Equities, 269 Grand Central Parkway, Penthouse A,
Floral Park, New York 11005.
(5) Includes 1,000 shares of Common Stock held jointly by Mr. Garfinkel and
his spouse.
(6) Includes 8,000 shares of restricted Common Stock that shall vest and
become free of all restrictions immediately prior to the closing of the
Merger and 2,000 shares of unrestricted Common Stock.
(7) The business address of Mr. Adams is Adams Financial Services, Inc., 13
South Bayles Avenue, Port Washington, New York 11050.
(8) The business address of Mr. Korhonen is Federal Capital Partners, 1626
East Jefferson Street, Rockville, Maryland 20852.
(9) The business address of Mr. Siegel is Insignia/Edward S. Gordon Co.,
200 Park Avenue, 19th Floor, New York, New York 10166.
(10) The business address of Mr. Wisely is LungCheck, Inc., 8255 East
Raintree Drive, Scottsdale, Arizona, 85260-2515.
35
<PAGE>
(11) The business address of Mr. Tansey is DRA Advisors, Inc., 1180 Avenue
of the Americas, New York, New York 10036.
(12) Includes 465,400 shares of Common Stock held by DRA Opportunity Fund
("DRA Fund") and 459,400 shares of Common Stock held by Office Invest
Sub LLC ("OIS"), which may be deemed to be beneficially owned by Mr.
Tansey in his capacity as President of DRA Advisors, Inc., an affiliate
of DRA Fund and OIS.
(13) The business address of Mr. Morris is Morgan Stanley, Dean Witter,
Discover & Co., 1585 Broadway, New York, New York 10036. On January 11,
1999, soon after his resignation from Morgan Stanley Dean Witter
Investment Inc., Russell C. Platt resigned from the Company's Board. On
March 2, 1999, the Company's Board elected Mr. Morris as Director to
replace Mr. Platt.
(14) Includes 1,655,430 shares of Common Stock held by certain private
investment funds and separate accounts advised by Morgan Stanley Dean
Witter Investment Management Inc. (the "Morgan Stanley Investors"),
which formerly were deemed to be beneficially owned by Mr. Platt as a
Managing Director of Morgan Stanley Dean Witter Investment Management
Inc. and currently are deemed to be beneficially owned by Mr. Morris,
in his capacity as a Principal of Morgan Stanley & Co. Mr. Morris and
Mr. Platt each disclaim beneficial ownership of such shares of Common
Stock.
(15) The business address of DRA Fund is c/o DRA Advisors, Inc., 1180 Avenue
of the Americas, New York, New York 10036. Francis X. Tansey is the
President of DRA Advisors, Inc., an affiliate of DRA Fund.
(16) The business address of Office Invest Sub LLC is c/o DRA Advisors,
Inc., 1180 Avenue of the Americas, New York, New York 10036. Francis X.
Tansey is the President of DRA Advisors, Inc., an affiliate of OIS.
(17) Morgan Stanley Dean Witter Investment Management Inc., as investment
adviser to the Morgan Stanley Investors, and Morgan Stanley, Dean
Witter, Discover & Co., as the owner of all the Company Common Stock
owned by Morgan Stanley Dean Witter Investment Management Inc., are
deemed beneficially to own the shares of Company Common Stock
beneficially owned by the Morgan Stanley Investors. See Notes 13 and 14
above. Morgan Stanley Dean Witter Investment Management Inc. maintains
its principal office at 1221 Avenue of the Americas, New York, New York
10020 and Morgan Stanley, Dean Witter, Discover & Co. maintains its
principal office at 1585 Broadway, New York, New York 10036. Morgan
Stanley Dean Witter Investment Management Inc. disclaims beneficial
ownership of such shares of Common Stock.
(18) Carlyle Realty Partners, L.P. is an affiliate of The Carlyle Group, the
business address of which is 1001 Pennsylvania Avenue, N.W., Suite 220
South, Washington, D.C. 20004-2505. Esko I. Korhonen, a director of the
Company, was until December, 1998 a principal of Carlyle.
(19) Carlyle Realty Qualified Partners, L.P. is an affiliate of Carlyle.
Esko I. Korhonen, a director of the Company, was until December, 1998 a
principal of Carlyle.
(20) Carlyle Realty Partners Sunrise, L.P. is an affiliate of Carlyle. Esko
I. Korhonen, a director of the Company, was until December, 1998 a
principal of Carlyle.
(21) Carlyle Realty Coinvestment, L.P. is an affiliate of Carlyle. Esko I.
Korhonen, a director of the Company, was until December, 1998 a
principal of Carlyle.
(22) Based on a Schedule 13G filed with the Securities and Exchange
Commission on February 10, 1999. Heitman/PRA Securities Advisors LLC
(the "Heitman LLC") serves as investment advisor to the Heitman Real
Estate Portfolio, that, along with 60 separate account clients, have
given to the Heitman LLC the right to receive or the power to direct
the dividends from, or proceeds from the sale of 1,712,422 shares, or
10.10%, of the Common Stock. One separate account of Heitman Real
Estate Portfolio has the right to receive or the power to direct the
dividends from, or proceeds from the sale of 20,400 shares, or 0.12%,
of the Common Stock. The business address of Heitman LLC is 180 North
LaSalle Street, Suite 3600, Chicago, Illinois 60601.
(23) Based on a Schedule 13G filed with the Securities and Exchange
Commission on March 2, 1999. OZ Management, L.L.C. (the "OZ LLC")
serves as principal investment manager, and has been granted investment
discretion over, 780,600 and 175,600 shares of Common Stock held,
respectively, for the account
36
<PAGE>
of OZ Master Fund, Ltd. and Och-Ziff Capital Management, L.P. The
business address of OZ LLC is 153 East 53rd Street, 44th Floor, New
York, New York 10022.
(24) Based on a Schedule 13G filed with the Securities and Exchange
Commission on February 13, 1998. Of the 927,960 shares of Common Stock
beneficially owned by European Investors Inc. ("EI"), 207,360 shares of
Common Stock are beneficially owned by EII Realty Securities Inc., a
wholly owned subsidiary of EI. The business address of EI is 667
Madison Avenue, New York, New York 10021.
Item 13. Certain Relationships and Related Transactions.
Acquisition of Interests in Certain of the Initial Properties
Robert L. Cox (the Acting Chief Executive Officer and President of
the Company), Eric S. Reimer (the Vice President--Leasing of the Company),
Reuben Freidberg (the Vice President--Finance of the Company), Robert M. Adams
(a Director) and Richard M. Wisely (a Director) owned equity interests or
contract rights relating to certain of the Initial Properties that the Company
acquired at the time of the Offering. Such persons received an aggregate of
307,557 OP Units in exchange for such interests in these properties. Upon
exercise of their rights to exchange such OP Units (which rights are not
exercisable until October 1999), such persons and entities may receive cash or,
at the Company's option, an aggregate of 307,557 shares of Common Stock.
Certain affiliates of Mr. Francis X. Tansey (the Chairman of the
Board of the Company) owned equity interests in 10 of the Initial Properties.
Such affiliates of Mr. Tansey received $23.1 million in cash and 924,800 shares
of restricted Common Stock in connection with the acquisition of these
properties at the time of the Offering. Pursuant to this transaction, DRA
Advisors, Inc., an affiliate of Mr. Tansey, received $560,000 in cash in
connection with the cancellation of an asset management fee agreement.
The Management Agreements
The Management Company manages six retail properties for certain
limited partnerships in which Messrs. Cox, Reimer and Friedberg have an
interest. Pursuant to those management agreements, the Management Company is
entitled to receive a management fee equal to approximately 4% of gross revenues
($365,754 in the aggregate during 1998).
Interests of Certain Executive Officers in the Merger
Messrs. Cox, Garfinkel, Reimer and Freidberg (solely because he is an
owner of OP Units) and Ms. Rawitt each have benefit arrangements with the
Company that are triggered upon the consummation of the Merger. See Item 11
above for a description of these arrangements with respect to Messrs. Cox,
Garfinkel and Reimer and Ms. Rawitt.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
The Consolidated and Combined Financial Statements of
the Company and Tower Predecessor as of December 31,
1998 (and for each of the three years in the period
ended December 31, 1998). See pages F-1 through F-33,
which are included herein.
(a)(2) Financial Statement Schedules
37
<PAGE>
All schedules are omitted because they are
inapplicable, not required or the information is
included in the consolidated and combined financial
statements or the notes thereto.
(a)(3) Exhibits
The exhibits listed below are filed as part of this
report or incorporated by reference to the Company's
Registration Statement on Form S-11, as amended (File
No. 333-33011) or the Company's filings pursuant to the
Securities Exchange Act of 1934, as amended.
Exhibit No. Description
2.1+ Sale-Purchase Agreement, dated December 31, 1997,
between 810 Partners LLC and BHONE Corp., as sellers,
and 810 7th Avenue, L.P., as purchaser
2.2+ Loan Agreement, dated December 31, 1997, by and between
Credit Suisse First Boston Mortgage Capital LLC, as
lender, and 810 7th Avenue, L.P., as borrower
2.3+ Consolidated, Amended and Restated Mortgage Note, dated
December 31, 1997, between Credit Suisse First Boston
Mortgage Capital LLC and 810 7th Avenue, L.P.
2.4+ Agreement of Principal, dated December 31, 1997, by
Tower Realty Operating Partnership, L.P. to Credit
Suisse First Boston Mortgage Capital LLC
3.1** Form of Amended and Restated Articles of Incorporation
of the Company
3.2** Form of Amended and Restated By-Laws of the Company
4.1** Form of Common Stock Certificate for the Company
4.2++ Articles Supplementary of the Company, dated as of
December 8, 1998
10.1* Form of Amendment and Restatement of Agreement of
Limited Partnership of Tower Realty Operating
Partnership, L.P., by and among Tower Realty Trust,
Inc., as general partner, Lawrence H. Feldman, as
initial Limited Partner, and the Persons set forth in
Exhibit A thereto
10.2* Form of Exchange Rights Agreement
10.3* Form of Registration Rights Amendment
10.4* Form of Lock-up Agreement
10.5** Form of Tower Realty Trust, Inc. 1997 Incentive Plan
10.6** Form of Tower Realty Trust, Inc. Non-Employee
Directors' Incentive Plan
10.7*** Form of Employment Agreement between the Company and
Lawrence H. Feldman
10.8*** Form of Employment Agreement between the Company and
Robert L. Cox
10.9*** Form of Employment Agreement between the Company and
Joseph D. Kasman
10.10** Form of Indemnification Agreement between the Company
and its executive officers and directors
38
<PAGE>
Exhibit No. Description
10.11** Purchase Agreement, dated as of March 31, 1997, among
Tower Realty Trust, Inc., Tower Realty Operating
Partnership, L.P. and each of the investors signatory
thereto, as amended by the Purchase Agreement
Supplement dated as of May 15, 1997, Purchase Agreement
Supplement No. 2, dated as of May 29, 1997, Purchase
Agreement Supplement No. 3, dated as of May 29, 1997,
Purchase Agreement Supplement No. 4, dated as of July
9, 1997, Purchase Agreement Supplement No. 5, dated as
of July 31, 1997
10.12** Contribution Agreement (OP Units-CXX Magnolia Limited
Partnership) by and among Tower Realty Operating
Partnership, L.P. and Jeffrey Feldman
10.13** Amendment to Contribution Agreement by and among Tower
Realty Operating Partnership, L.P. and Jeffrey Feldman
10.14** Second Amendment to Contribution Agreement by and
between Tower Realty Operating Partnership, L.P. and
Jeffrey Feldman
10.15** Contribution Agreement (Cash-Stellar Associates) by and
among Tower Realty Operating Partnership, L.P. and
Laurie Jacoby
10.16** First Amendment to Contribution Agreement by and
between Tower Realty Operating Partnership, L.P. and
Laurie Jacoby
10.17** Contribution Agreement (OP Units) by and among Tower
Realty Operating Partnership, L.P. and Bama Equities,
Inc.
10.18** Amendment to Contribution Agreement by and among Tower
Realty Operating Partnership, L.P. and Bama Equities,
Inc.
10.19** Second Amendment to Contribution Agreement by and
between Tower Realty Operating Partnership, L.P. and
Bama Equities, Inc.
10.20** Contribution Agreement (Cash-Stellar Associates) by and
among Tower Realty Operating Partnership, L.P. and
Valerie Herts Kalnitzky
10.21** First Amendment to Contribution Agreement by and
between Tower Realty Operating Partnership, L.P. and
Valerie Hertz Kalnitzky
10.22** Assignment Agreement by Charles M. Kotick, as nominee
(CXX)
10.23** Contribution Agreement by and between Tower Realty
Operating Partnership, L.P. and Allan B. Mendelsohn, as
Chapter 7 Trustee of Edward Feldman
10.24** Option Agreement, dated as of July 28, 1997, by and
between Tower Realty Operating Partnership, L.P. and
Dana II Associates Limited Partnership
10.25** Option Agreement, dated July 28, 1997, by and between
Tower Realty Operating Partnership, L.P. and Tower 45
Ventures Limited Partnership
10.26** Option Agreement, dated July 31, 1997, by and between
Tower Realty Operating Partnership, L.P. and Feldman
Tower 45, Inc.
39
<PAGE>
Exhibit No. Description
10.27** Contribution Agreement between Maitland Property
Investors, Limited and Tower Realty Operating
Partnership, L.P., dated as of August 4, 1997
10.28** Non-Competition Agreement, dated as of August 4, 1997
among Tower Realty Operating Partnership L.P.,
Properties Atlantic, Inc., Clifford Stein and Reid
Berman
10.29** Assets Contribution Agreement, dated as of August 4,
1996, between Tower Realty Operating Partnership, L.P.,
and Properties Atlantic, Inc., Clifford Stein, and Reid
Berman
10.30** Option Agreement, dated as of July 28, 1997, by and
between Tower Realty Operating Partnership, L.P. and
Stellar Associates
10.31** Option Agreement, dated as of July 28, 1997, by and
between Tower Realty Operating Partnership, L.P. and
Carlyle Industries, Inc.
10.32** Option Agreement, dated as of July 31, 1997, by and
between Tower Realty Operating Partnership, L.P. and
120 West 45th Street Associates
10.33** Option Agreement, dated as of July 29, 1997, by and
between Tower Realty Operating Partnership, L.P. and
Richard Cooke, Craig Cooke and Brian Cooke
10.34** Option Agreement, dated as of July 28, 1997, by and
between Tower Realty Operating Partnership, L.P. and
Charles B. Hickcox
10.35** Option Agreement, dated as of July 31, 1997, by and
between Tower Realty Operating Partnership, L.P. and
Hazama T-45
10.36** Option Agreement, dated as of July 25, 1997, by and
between Tower Realty Operating Partnership, L.P. and
Leo V. Berger
10.37** Omnibus Option Agreement, dated as of July 31, 1997, by
and between Tower Realty Operating Partnership, L.P.
and Shoen U.S.A. Inc.
10.38** Option Agreement, dated as of July 28, 1997, by and
among Tower Realty Operating Partnership, L.P., Tower
Equities Management, Inc. and Tower Equities and Realty
Corp., CXX Magnolia Management Corp., Forum Management
and Realty Corp., Madison 40/41 Management Corp., Tower
45 Asset Management Corp. and SJP Realty Corp.
10.39** Contribution Agreement by and between Reid Berman and
Tower Realty Operating Partnership, L.P. dated as of
July 31, 1997
10.40** Purchase Agreement by and among Tower Realty Operating
Partnership, L.P. and Anthony DiLeonardo dated as of
July 31, 1997, as amended by Amendment No. 1 to Anthony
DiLeonardo Purchase Agreement, dated as of September
18, 1997
10.41** Purchase Agreement by and among Tower Realty Operating
Partnership, L.P. and Carmela Carrano dated as of July
31, 1997, as amended by Amendment No. 1 to Carmela
Carrano Purchase Agreement, dated as of September 18,
1997
10.42** Contribution Agreement by and between Richard Wisely
and Tower Realty Operating Partnership, L.P. dated as
of July 31, 1997
40
<PAGE>
Exhibit No. Description
10.43** Contribution Agreement by and between Lawrence Stein
and Tower Realty Operating Partnership, L.P. dated as
of July 31, 1997
10.44** Contribution Agreement by and between Lawrence H.
Feldman and Tower Realty Operating Partnership, L.P.
dated as of July 31, 1997
10.45** Contribution Agreement by and between Clifford L. Stein
and Tower Realty Operating Partnership, L.P. dated as
of July 31, 1997
10.46** Contribution Agreement by and between Robert Adams and
Tower Realty Operating Partnership, L.P. dated as of
July 31, 1997
10.47** Contribution Agreement by and between Eric Reimer and
Tower Realty Operating Partnership, L.P. dated as of
July 31, 1997
10.48** Contribution Agreement by and between Reuben Friedberg
and Tower Realty Operating Partnership, L.P. dated as
of July 31, 1997
10.49** Contribution Agreement by and between Joseph Kasman and
Tower Realty Operating Partnership, L.P. dated as of
July 31, 1997
10.50** Contribution Agreement by and between Robert Cox and
Tower Realty Operating Partnership, L.P. dated as of
July 31, 1997
10.51** Contribution Agreement, dated as of July 31, 1997, by
and among Tower Realty Operating Partnership, L.P. and
Joseph Kasman
10.52** Option Agreement, dated as of May 8, 1997, by and among
Tower Realty Operating Partnership, L.P. and Stanley B.
Grey
10.53** Option Agreement, dated as of May 8, 1997, by and among
Tower Realty Operating Partnership, L.P. and Michael C.
Zerner
10.54** Letter Agreement, dated as of July 28, 1997, between
Tower Realty Trust, Inc., Tower Realty Operating
Partnership, L.P., General Electric Capital
Corporation, General Electric Real Estate Equities,
Inc., GENEL Company, Inc. and GEBAM, Inc.
10.55** Contribution Agreement by and among Tower Realty Trust,
Inc., Tower Realty Operating Partnership, L.P. and DRA
Opportunity Fund
10.56** Contribution Agreement by and among Tower Realty Trust,
Inc., Tower Realty Operating Partnership, L.P. and
Office Invest Sub LLC
10.57** Supplement and Amendment, dated as of September 11,
1997, to the Contribution Agreement by and among Tower
Realty Trust, Inc., Tower Realty Operating Partnership,
L.P. and Office Invest Sub LLC, as parties to the
original Contribution Agreement, and Feldman MOT
Portfolio Corp., Feldman FSA Corp., FSA Associates,
L.P. and Lawrence H. Feldman
10.58** Purchase and Sale Agreement, dated as of March 31,
1997, by and between Tower Equities and Realty Corp.
and Tower Realty Operating Partnership, L.P.
41
<PAGE>
Exhibit No. Description
10.59** Purchase and Sale Agreement, dated as of September 11,
1997, by and between 100 Wall LLC and Tower Realty
Operating Partnership, L.P.
10.60*** Mortgage Loan Commitment, dated as of October 4, 1997,
by and between Merrill Lynch Credit Corporation and one
or more subsidiaries of Tower Realty Operating
Partnership, L.P.
10.61*** Form of Financial Advisory Fee Agreement by and between
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Tower Realty Trust, Inc. and Tower Realty Operating
Partnership, L.P.
10.62*** Form of Supplemental Representations, Warranties and
Indemnity Agreement by and among Lawrence H. Feldman,
Robert L. Cox, Joseph D. Kasman, Eric S. Reimer, Reuben
Friedberg and Tower Realty Operating Partnership, L.P.
and Tower Realty Trust, Inc.
10.63*** Line of Credit Commitment, dated as of October 4, 1997,
by and between Merrill Lynch Capital Corporation and
Tower Realty Operating Partnership, L.P. and Tower
Realty Trust, Inc.
10.64** Purchase and Sale Agreement, dated as of July 25, 1997,
by and between RSH Associates, Joel Wiener, and
Lawrence H. Feldman
10.65** Option Agreement, dated as of July 31, 1997, by and
between Tower Realty Operating Partnership, L.P. and
Carmela Carrano, as amended by Amendment No. 1 to
Option Agreement, dated as of September 18, 1997
10.66** Option Agreement, dated as of July 31, 1997, by and
between Tower Realty Operating Partnership, L.P. and
Anthony DiLeonardo, as amended by Amendment No. 1 to
Option Agreement, dated as of September 18, 1997
10.67*** Option Agreement, dated as of September 27, 1997, by
and between Orlando Option Holding, L.L.C. and Tower
Realty Operating Partnership. L.P.
10.68*** Assignment of Real Estate Agreement, dated as of
September 24, 1997, by and between Tower Equities and
Realty Corp. and Tower Realty Operating Partnership,
L.P.
10.69*** Third Amendment to Escrow Instructions and Addendum
thereto and Option Agreement, dated as of July 23,
1997, by and between Beardsley and I-17, L.L.C and Deer
Valley Towne Center L.L.C and Crystal, Inc.
10.70*** Phoenix Land Parcel Option Contract, dated as of
September 12, 1997, by and between Crystal, Inc. and
Tower Realty Operating Partnership, L.P.
10.71*** Form of Acquisition Advisory Fee Agreement
10.72**** Stock Purchase Agreement, dated as of September 19,
1997, by and among Tower Realty Trust, Inc. and Carlyle
Realty Partners, L.P. Carlyle Realty Qualified
Partners, L.P., Carlyle Realty Partners Sunrise, L.P.
and Carlyle Realty Coinvestment, L.P.
10.73++ Agreement and Plan of Merger, dated as of December 8,
1998, by and among Tower Realty Trust, Inc., Reckson
Associates Realty Corp., Reckson Operating Partnership,
L.P. and Metropolitan Partners LLC (including exhibits)
42
<PAGE>
Exhibit No. Description
10.74++ Release from Reckson Associates Realty Corp. to Tower
Realty Trust, Inc. dated as of December 8, 1998
10.75++ Release from Tower Realty Trust, Inc. to Reckson
Associates Realty Corp. dated as of December 8, 1998
10.76++ Release from Crescent Real Estate Equities Company to
Tower Realty Trust, Inc. dated as of December 8, 1998
10.77++ Release from Tower Realty Trust, Inc. to Crescent Real
Estate Equities Company dated as of December 8, 1998
10.78++ Release from Metropolitan Partners LLC to Tower Realty
Trust, Inc. dated as of December 8, 1998
10.79++ Release from Tower Realty Trust, Inc. to Metropolitan
Partners LLC dated as of December 8, 1998
10.80++ Stock Purchase Agreement, dated as of December 8, 1998,
by and between Tower Realty Trust, Inc. and
Metropolitan Partners LLC
10.81++ Registration Rights Agreement, dated as of December 8,
1998, by and between Tower Realty Trust, Inc. and
Metropolitan Partners LLC
10.82+++ Second Amendment and Restatement of Agreement of
Limited Partnership of Tower Realty Operating
Partnership, L.P., dated March 6, 1998
21.1 Subsidiaries of the Company, as amended
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
- - -----------------------
+ Incorporated by reference to the Company's Current Report on Form
8-K, dated December 31, 1997.
++ Incorporated by reference to the Company's Current Report on Form
8-K, dated December 7, 1998.
+++ Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the three months ended March 31, 1998, dated May 15, 1998.
* Incorporated by reference to the Company's Registration Statement on
Form S-11, dated August 6, 1997.
** Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-11, dated September 23, 1997.
*** Incorporated by reference to Amendment No. 2 to the Company's
Registration Statement on Form S-11, dated October 6, 1997.
**** Incorporated by reference to Amendment No. 4 to the Company's
Registration Statement on Form S-11, dated October 9, 1997.
(b) Current Reports on Form 8-K and/or Form 8-K/A
(1) A current report on Form 8-K, dated November 2, 1998 and filed
with the Securities and Exchange Commission on November 9,
1998, was filed by the Company with respect to the litigation
commenced by the Company against Crescent and Reckson alleging
breach of the Prior Merger Agreement.
43
<PAGE>
(2) A current report on Form 8-K, dated December 7, 1998 and filed
with the Securities and Exchange Commission on December 18,
1998, was filed by the Company with respect execution by the
Company, Reckson and Metropolitan of the Merger Agreement.
44
<PAGE>
TOWER REALTY TRUST, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.......................................................................... F-2
Consolidated Balance Sheets of Tower Realty Trust Inc. (the "Company") as of December
31, 1998 and 1997.................................................................................... F-3
Consolidated Statement of Income of the Company for the year ended December 31, 1998
and the period from March 27, 1997 (inception of the Company) to December 31, 1997
and Combined Statements of Income of the Tower Predecessor for the period January 1,
1997 to October 15, 1997, and the year ended December 31, 1996....................................... F-4
Consolidated Statement of Changes in Shareholders' Equity of the Company for the year
ended December 31, 1998 and the period from March 27, 1997 (inception of the
Company) to December 31, 1997 and Combined Statements of Changes in Owners'
Deficit of the Tower Predecessor for the Period January 1, 1997 to October 15, 1997 and
the year ended December 31, 1996..................................................................... F-5
Consolidated Statement of Cash Flows of the Company for the year ended December 31,
1998 and the period March 27, 1997 (inception of the Company) to December 31, 1997
and Combined Statements of Cash Flows of the Tower Predecessor for the period
January 1, 1997 to October 15, 1997, and the year ended December 31, 1996.............................. F-6
Notes to Consolidated and Combined Financial Statements................................................. F-7-F-30
Schedule III--Real Estate and Accumulated Depreciation.................................................. F-31-F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Tower Realty Trust, Inc.
We have audited the accompanying consolidated and combined financial
statements and the financial statement schedule of Tower Realty Trust, Inc. and
its subsidiaries (the "Company") and the Tower Predecessor, listed on page F-1
of this Annual Report on Form 10-K. These consolidated and combined financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Tower Realty Trust, Inc. as of December 31, 1998 and 1997 the
consolidated results of operations and cash flows of Tower Realty Trust, Inc.
for the year ended December 31, 1998 and for the period from March 27, 1997
(inception of the Company) to December 31, 1997, and the combined results of
operations and cash flows of the Tower Predecessor for the period from January
1, 1997 to October 15, 1997, and the year ended December 31, 1996, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PRICEWATERHOUSECOOPERS LLP
1177 Avenue of the Americas
New York, New York
March 17, 1999
F-2
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- ------------------
ASSETS
Assets:
<S> <C> <C>
Real estate............................................................................... $691,560 $620,557
Less: accumulated depreciation................................................ (18,118) (2,444)
--------- ----------
673,442 618,113
Deferred charges.......................................................................... 13,692 11,495
Receivables............................................................................... 11,288 3,820
Cash and cash equivalents................................................................. 6,277 1,347
Escrowed cash............................................................................. 3,378 6,373
Other assets.............................................................................. 8,962 12,537
Investments in unconsolidated entities.................................................... 2,708 2,411
--------- ----------
Total assets...................................................... $719,747 $656,096
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debt on real estate........................................................... $189,893 $228,990
Borrowings under revolving line of credit..................................... 70,400 --
Accounts payable and other liabilities........................................ 11,524 7,494
Distributions payable......................................................... 8,106 6,543
Deferred real estate taxes.................................................... 9,155 9,758
Other liabilities............................................................. 10,316 6,974
--------- -----------
Total liabilities................................................. 299,394 259,759
--------- ---------
Minority interest in Operating Partnership................................................ 34,371 33,920
Commitments and Contingencies (See Note 14)
Shareholders' equity (owners' deficit):
Preferred shares 50,000,000 shares authorized, 2,197,167 shares issued and
outstanding....................................................... 40,000 --
Common shares $.01 par value, 150,000,000 shares authorized, 16,958,355
and 16,920,455 shares issued and outstanding as of December 31,
1998 and 1997..................................................... 169 169
Additional paid-in-capital.................................................... 364,833 364,250
Distributions in excess of accumulated earnings............................... (19,020) (2,002)
--------- ----------
Total shareholders' equity.................................................... 385,982 362,417
--------- ---------
Total liabilities and shareholders' equity.................................... $719,747 $656,096
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
CONSOLIDATED (COMBINED) STATEMENTS OF INCOME
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
The Company Tower Predecessor
(Consolidated) Combined)
---------------------------- ------------------------
March 27, January 1,
Year Ended 1997 through 1997 through Year Ended
December 31, December 31, October 15, December 31,
1998 1997 1997 1996
---------- ------------- ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Rental income .............................................. $110,137 $16,409 $21,908 $26,138
Management fees ............................................ -- 1,090 318 1,261
Construction, leasing and other fees ....................... 857 861 576 1,335
--------- ------- ------- ------
Total revenues ........................................................ 110,994 18,360 22,802 28,734
--------- ------- ------- ------
Expenses:
Property operating and maintenance ......................... 25,849 3,941 4,538 5,481
Real estate taxes .......................................... 14,838 2,266 3,792 4,722
General and administrative ................................. 10,140 2,844 2,189 3,494
Interest expense ........................................... 20,770 2,369 11,725 15,511
Depreciation and amortization .............................. 17,773 2,813 5,541 6,853
Ground rent/air rights expense ............................. 683 126 473 599
Costs related to the sale of Company ....................... 5,019 -- -- --
Severance and other compensation costs ..................... 2,471 -- -- --
--------- ------- ------- ------
Total expenses ........................................................ 97,543 14,359 28,258 36,660
--------- ------- ------- ------
Equity in unconsolidated entities ..................................... 297 353 134 461
Income (loss) before minority interest and extraordinary .............. 13,748 4,354 (5,322) (7,465)
gain (loss) on early extinguishment of debt
Minority interest ..................................................... (1,234) (373)
--------- ------- ------- ------
Net income (loss) before extraordinary gain (loss) on ................. 12,514 3,981 (5,322) (7,465)
early extinguishment of debt
Extraordinary gain (loss) on early extinguishment of
debt, net of minority interest ........................................ (607) -- 6,475 --
--------- ------- ------- ------
Net income (loss) ..................................................... 11,907 3,981 $1,153 $(7,465)
========= ======= ====== =======
Less: Preferred stock dividend requirements ........................... (229) --
Net income applicable to common shareholders .......................... $11,678 $3,981
========= =======
Per Share Data--basic and diluted:
Net income before extraordinary gain (loss) on early .................. $0.72 $0.24
extinguishment of debt per common share
Extraordinary (loss) on early extinguishment of debt,
net of minority interest per common share ................. (.03) --
--------- -------
Net income per common share ................................ $0.69 $0.24
======== ==========
Weighted average number of common shares outstanding--basic
and diluted ........................................................... 16,946 16,920
======== =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
CONSOLIDATED (COMBINED) STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY AND OWNERS' DEFICIT
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
The Company--Shareholders' Equity Tower
(Consolidated) Predecessor
Additional Dist. in Excess Owners'
Preferred Common Paid-in- Accumulated Deficit
Total Shares Shares Capital Earnings (Combined)
----- ------ ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ............. -- -- -- -- -- $(57,088)
Net loss and comprehensive loss .......... -- -- -- -- -- (7,465)
Contributions, net ....................... -- -- -- -- -- 2,683
-------- ------- ------ --------- ------- --------
Balance at December 31, 1996 ............. -- -- -- -- -- (61,870)
Net income and comprehensive
income 1/1/97-10/15/97.................. -- -- -- -- -- 1,153
March 27, 1997, opening equity of the
Company................................. 1 -- -- 1 -- --
-------- ------- ------ --------- ------- --------
Balance at October 16, 1997 .............. 1 -- -- 1 -- $(60,717)
Acquisition of Tower Predecessor's
Interest (including the issuance of
1,949,455 common shares)........ ....... $ 11,073 -- -- $ 11,073 -- 60,717
Net proceeds from issuance of common
shares (14,971,000 common shares)..... 353,345 -- $169 353,176 -- --
Distributions declared (.3536 per common
share).................................. (5,983) -- -- -- $ (5,983) --
Net income and comprehensive income ...... 3,981 -- -- -- 3,981 --
-------- ------- ------ --------- ------- --------
Balance at December 31, 1997 ............. 362,417 -- 169 364,250 (2,002) --
-------- ------- ------ --------- ------- --------
Net proceeds from issuance of preferred
shares.................................. 40,000 $40,000 -- -- --
Reclassification of amounts due for shares
and OP Units issued..................... (981) -- -- (981) --
Distributions declared ($1.69 per common
share and $.105 per preferred share).. . (28,925) -- -- -- (28,925)
Net income and comprehensive income ...... 11,907 -- -- -- 11,907
Other capital transactions ............... 1,564 -- -- 1,564 --
-------- ------- ------ --------- ------- --------
Balance at December 31, 1998 ............. $ 385,982 $40,000 $169 $ 364,833 $(19,020)
========= ======= ==== ========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Tower
The Company Predecessor
(Consolidated) (Combined)
----------------------------- -----------------------------
March 27, January 1,
Year Ended 1997 through 1997 through Year Ended
December 31, December 31, October 15, December 31,
1998 1997 1997 (1996)
------------- ------------ ----------- --------------
Cash Flows from Operating Activities:
<S> <C> <C> <C> <C>
Net income (loss)............................................... $11,907 $3,981 $1,153 $(7,465)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization................................... 17,785 2,813 4,590 6,853
Amortization of deferred financing costs........................ 2,053 84 906 504
Unbilled rental income.......................................... (6,712) (936) 1,012 1,205
Equity income in unconsolidated entities........................ (297) (353) -- (461)
Gain on disposal of assets...................................... -- (39)
Non-cash compensation expense................................... 682 -- -- --
Extraordinary gain of early extinguishment of debt.............. -- (6,475) --
Changes in assets and liabilities:
Receivables............................................ (756) (2,529) (1,593) (867)
Escrowed cash.......................................... 2,995 (5,765) (352) 345
Other assets........................................... 1,538 (5,610) 907 (116)
Deferred real estate taxes............................. (603) -- 566 42
Accounts payable and other liabilities................. 4,030 14,096 -- 1,267
Minority interest...................................... 1,234 373 -- --
Other liabilities and amounts due to/from affiliates... 4,659 372 4,576 (317)
------ -------- -------- ------
Net cash provided by operating activities............................ 38,515 6,526 5,290 951
------ -------- -------- -------
Cash Flows from Investing Activities:
Additions to real estate........................................... (1,103) (3,362) (2,659)
Acquisition of real estate, joint venture and deferred charges..... (73,388) (534,393) (409) (3,850)
Contribution to Management Company................................. (400) -- (317)
Deposits on future acquisitions.................................... (3,937) -- --
Due from affiliated Company........................................ (355) -- --
Proceeds from disposal of assets................................... -- -- 39
------ -------- -------- -------
Net cash used in investing activities................................. (73,388) (540,188) (3,771) (6,787)
------ -------- -------- -------
Cash Flows from Financing Activities:
Partner's contributions, net....................................... -- (6) 2,683
Net proceeds from issuance of common shares........................ 353,345 -- --
Net proceeds from issuance of preferred shares........................ 40,000
Mortgage fees paid.................................................... (1,549)
Escrow for Mortgage Interest....................................... (608) -- --
Loan Origination Fees.............................................. (1,052) -- --
Proceeds from Lawrence H. Feldman in lieu of OP Units.............. 200
Distributions to OP Unitholders.................................... (2,706)
Distributions to Common Stockholders............................... (27,463)
Proceeds from debt................................................. 129,122 219,300 15,581 7,039
Repayments of debt on real estate.................................. (97,801) (35,977) 17,360) (4,109)
------ -------- -------- -------
Net cash provided by (used in) financing activities................... 39,803 535,008 (1,785) 5,613
------ -------- -------- -------
Net increase (decrease) in cash and cash equivalents.................. 4,930 1,346 (266) (223)
Cash and cash equivalents, beginning of periods....................... 1,347 1 4,985 5,208
------ -------- -------- -------
Cash and cash equivalents, end of periods............................. $ 6,277 $ 1,347 4,719 $ 4,985
======= ======= ===== =========
Supplemental Cash Flow Information:
Cash paid for interest, net of amounts capitalized................. $20,086 $ 1,621 9,753 $ 15,007
======= ======= ===== =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(1) Organization and Basis of Presentation:
Tower Realty Trust, Inc.
Tower Realty Trust, Inc. (collectively with its subsidiaries, the
"Company") was organized in the state of Maryland on March 27, 1997. The Company
operates so as to qualify as a real estate investment trust ("REIT") for federal
income tax purposes. As of October 16, 1997, the Company consummated an initial
public offering (the "Offering") of 13,817,250 shares of common stock, par value
$.01 per share (the "Common Stock") (including the exercise of the underwriters'
over-allotment option of 1,802,250 shares), and effected concurrent private
placements (the "Concurrent Private Placements"), of 1,153,845 shares of Common
Stock at a price of $26.00 per share and realized net proceeds therefrom of
approximately $353.35 million. In addition, in connection with the formation
transactions (the "Formation Transactions") related to the Offering, which
included the acquisition of certain property interests and the cancellation of
certain indebtedness, the Company issued 1,949,360 shares of Common Stock and
other assets. Upon consummation of the Offering, the Company acquired a sole 1%
general partner interest in Tower Realty Operating Partnership, L.P., a Delaware
limited partnership (the "Operating Partnership"), and a 90.4% limited partner
interest in the Operating Partnership. At December 31, 1998, the Company had a
.1% general partnership interest and a 89.9% limited partner interest in the
Operating Partnership.
The Company was formed to continue and expand the commercial real
estate business of Tower Equities & Real Estate Corp. and its affiliates
(collectively with its predecessor entities and affiliates, "Tower Equities"),
including developing, acquiring, owning, renovating, managing, and leasing
office properties in the Manhattan, Phoenix, Tucson, and Orlando markets. Upon
consummation of the Offering and the Formation Transactions, the Operating
Partnership owned or had interests in 21 office properties (the "Initial
Properties"). On December 31, 1997, the Company purchased the approximately
700,000 square foot office tower located at 810 Seventh Avenue in midtown
Manhattan ("810 Seventh Avenue") for approximately $150.0 million, including
closing costs; on January 16, 1998, the Company purchased the approximately
126,000 square foot Blue Cross/Blue Shield office complex located in Phoenix,
Arizona ("Blue Cross/Blue Shield") for $16.9 million. On May 6, 1998, the
Company purchased the approximately 335,000 square foot, 25-story downtown New
York City office building located on 90 Broad Street (the "90 Broad Property")
for approximately $34.3 million. The Initial Properties, together with 810
Seventh Avenue, Blue Cross/Blue Shield and the 90 Broad Property, are
collectively referred to herein as the "Properties." In November 1997, the
Company exercised an option to purchase a parcel of land located in Phoenix,
Arizona for approximately $10.3 million and is in the process of developing
Phase I of this parcel which will consist of an approximately 160,000 square
foot office building and parking facilities. At December 31, 1998 the Phase I
construction costs were 65% completed and of the $9.5 million estimated cost of
completion, the Company has expended $6.2 million. The Company also owns or has
an option to acquire three parcels of land adjacent to the Properties (the
"Development Parcels"), which can support 2.0 million of rentable square feet of
development.
F-7
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
On March 31, 1997 interests in certain partnerships, properties and
limited liability companies were contributed to the Operating Partnership in
exchange for units of limited partnership interest in the Operating Partnership
("OP Units"). Simultaneously with such contribution of interests, the Company
issued $12.3 million of notes (the "MSAM Notes") to certain investors advised by
Morgan Stanley Dean Witter Investment Management Inc. (formerly known as Morgan
Stanley Asset Management, Inc.) ("MSAM"). The MSAM Notes were collateralized by
certain interests in the Properties. Upon completion of the Offering, all MSAM
Notes were converted into Common Stock of the Company.
The net proceeds from the Offering were contributed to the Operating
Partnership in exchange, in part, for the Company's 91.4% interest therein. The
Operating Partnership used the proceeds received from the Company, the $107.0
million net cash proceeds from the Company's term loan facility (the "Term
Loan"), borrowed concurrent with and subsequent to the Offering and
approximately $12.3 million of proceeds received from MSAM, as follows: (i)
approximately $281.0 million for repayment of certain indebtedness (including
associated prepayment penalties) relating to the Initial Properties (the
"Property Partnerships"); (ii) approximately $137.0 million to acquire certain
equity, debt and fee interests in the Initial Properties; (iii) approximately
$3.1 million to pay for commitment fees and expenses relating to the Term Loan
and the Company's $200.0 million unsecured line of credit (the "Line of
Credit"); (iv) approximately $3.0 million to pay transfer taxes and other
expenses associated with the acquisitions of the Initial Properties; and (v) the
remaining approximately $48.6 million for working capital.
The Tower Equities management and leasing companies and Properties
Atlantic, Inc. management and leasing company (which, prior to the Offering, was
controlled and operated by Clifford Stein, Managing Director, Southeast Region
of the Company) (collectively the "Predecessor Management Companies")
contributed an undivided 95% interest in the assets of such companies to the
Operating Partnership which, in turn, recontributed such assets to Tower
Equities Management, Inc. (the "Management Company") in exchange for 100% of the
non-voting stock and 5% of the voting stock in the Management Company (which
entitles the Company to receive 95% of the dividends of the Management Company).
The Management Company and investors that hold interests in certain
properties, which continued to be controlled by Tower Equities after the
consummation of the Offering, entered into management agreements with respect to
each of the Properties. In consideration for the services to be provided under
the management agreements, the Management Company will receive a property
management fee and applicable construction fees and leasing commissions which
will be determined by reference to existing market rates for similar
transactions. As the result of a lender foreclosing on three third-party owned
retail properties in the fourth quarter of 1998, at December 31, 1998, the
Management Company held management agreements with only three retail properties.
Tower Predecessor
Lawrence H. Feldman, the former Chairman of the Board, Chief
Executive Officer and President of the Company, owned a majority general partner
interest in the partnerships owning the following properties and controlled
Tower Equities which managed the properties. Accordingly, the Tower Predecessor
financial statements reflect, on a combined basis, 100% of the assets,
liabilities and operations of these properties. The following entities comprise
the Tower Predecessor:
F-8
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Lawrence H. Feldman's
Ownership Interest Location
--------------------- ----------------
<S> <C> <C>
Tower 45...................................... 6% New York City
120 Mineola Boulevard......................... 5% Long Island, NY
Maitland Forum................................ 15% Maitland, FL
Maitland Center Parkway (3 properties)........ 90% Maitland, FL
5750 Major Boulevard (purchased in
October 1996)......................... 6% Orlando, FL
Management Companies.......................... 90% New York City and
Maitland, FL
</TABLE>
Lawrence H. Feldman also held a non-controlling interest in the
partnerships that own the following properties listed in the following table.
Lawrence H. Feldman was a general partner in these partnerships and DRA
Advisors, Inc. ("DRA") which was the managing general partner. These
partnerships are collectively known as the "DRA Joint Ventures." The Tower
Predecessor financial statements reflect the investments in the DRA Joint
Ventures using the equity method of accounting. Upon consummation of the
Offering, the Company purchased all of the partnership interests in the DRA
Joint Ventures.
<TABLE>
<CAPTION>
Lawrence H. Feldman's
Ownership Interest Location
--------------------- ---------------
<S> <C> <C>
286 Madison.............................................. 3% New York City
290 Madison.............................................. 3% New York City
292 Madison.............................................. 3% New York City
Corporate Center Building (6 properties)................. 20% Phoenix, AZ
5151 East Broadway....................................... 3% Tucson, AZ
One Orlando Center....................................... 3% Orlando, FL
</TABLE>
Lawrence H. Feldman also held a 3.8% non-controlling interest in a
partnership controlling the 2800 North Central Avenue Property ("2800 North
Central"). The Tower Predecessor financial statements reflect this investment
using the equity method of accounting. The Company, upon consummation of the
Offering, acquired this interest and the interests of Tower Equities (10%
aggregate interest).
In connection with the acquisition of certain property and
partnership interests, the Company also acquired certain assets and liabilities,
the economic and obligations benefits of which were retained by the respective
partners. The net remaining liability of such partners was reflected in the
accompanying financial statements as due to affiliates and aggregate $370
thousand as of December 31, 1997. No balance remained as of December 31, 1998.
Also in connection with these transactions the Company issued shares of Common
Stock and OP Units, the proceeds of which are not fully received. The aggregate
amount due of approximately $981,000 has been shown as a reduction of additional
paid-in-capital in the accompanying statement of shareholders equity. These
amounts have been recorded consistent with the Company's understanding of the
related formation transactions. However, the balances reflected in the financial
statements may be subject to dispute with predecessor entities and their owners.
In the opinion of the Company's management, the ultimate resolution of these
potential disputes will not have a material adverse effect on the accompanying
financial statements.
F-9
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
(2) Sale of the Company:
On December 8, 1998, the Company entered into an agreement (the
"Merger Agreement") relating to the merger of the Company with Metropolitan
Partners LLC, a subsidiary of Reckson Associates Realty Corp. ("Reckson"). The
Merger Agreement and the transactions contemplated thereunder (collectively, the
"Merger") were approved by the Company's Board of Directors on December 8, 1998.
Pursuant to the Merger Agreement and the transactions contemplated
thereby, each share of Common Stock of the Company will, at the election of
holders thereof and subject to proration, either (x) be converted into the right
to receive $23.00 in cash payable to the holder thereof, without interest, or
(y) be converted into either (1) .5725 of a share of class B exchangeable common
stock, par value $.01 per share, of Reckson (the "Reckson Class B Common Stock")
and $7.2565 principal amount of 7% senior unsecured notes due 2009 (the "Reckson
OP 7% Notes") of Reckson Operating Partnership ("Reckson OP"), guaranteed by
Reckson, if the Share Issuance Approval (as defined below) is not obtained, or
(2) .8364 of a share of Reckson Class B Common Stock if the Share Issuance
Approval is obtained. If the Reckson board of directors withdraws or amends or
materially modifies or withdraws its approval or recommendation of the Share
Issuance (as defined below) and if the Share Issuance Approval has not been
obtained, in addition to the consideration set forth in clause (x) or (y)(1)
above, each share of Common Stock will be converted into an additional $.8046
principal amount of Reckson OP 7% Notes. As used herein, the "Share Issuance
Approval" is defined as the approval, by a majority of votes cast at the special
meeting of the common stockholders of Reckson, of the issuance of only Reckson
Class B Common Stock as the non-cash portion of the merger consideration (the
"Share Issuance"); provided that the total votes cast on the Share Issuance
represent over 50% in interest of all shares of common stock of Reckson entitled
to vote on the Share Issuance.
In connection with the Merger and other strategic initiatives
explored by the Company (the "Initiatives"), the Company entered into an
agreement with Merrill Lynch & Co. ("Merrill Lynch") on April 16, 1998 whereby
Merrill Lynch acts as the exclusive financial advisor to the Company in
connection with the Initiatives. Pursuant to the terms of this agreement,
Merrill Lynch is entitled to .6% of the aggregate purchase price paid to the
Company for its sale upon closing of the applicable sale agreement. If the
Merger does not occur as anticipated, the Company will be responsible for
payments in the amount of approximately $1.0 million to Merrill Lynch. As of
December 31, 1998, the Company has charged $1.0 million to operations,
representing the retainer and the delivered fairness opinion under the
agreement, which is included in the costs related to sale of the Company item on
the condensed consolidated statements of operations.
Other costs incurred in connection with the Initiatives which have
been included in the costs of Sale of the Company in the accompanying statement
of income for the year ended December 31, 1998 include legal, accounting and
consulting fees. The Company anticipates that significant additional costs will
be incurred in connection with the Merger. These amounts have been recorded
consistent with the Company's understanding of the related formation
transactions. However, the balances reflected in the financial statements may be
subject to dispute with predecessor entities and their owners. In the opinion of
the Company's management, the ultimate resolution of these potential disputes
will not have a material adverse effect on the accompanying financial
statements.
F-10
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
(3) Summary of Significant Accounting Policies:
Principles of Consolidation and Combination
The accompanying consolidated financial statements of the Company
reflect the accounts of the Company, of the Operating Partnership and their
wholly-owned subsidiaries and majority owned partnerships and, from their date
of acquisition, the entities comprising the Tower Predecessor and the DRA Joint
Ventures. All significant inter-company balances and transactions have been
eliminated in consolidation.
The accompanying combined financial statements of Tower Predecessor
have been presented on a combined historical cost basis because of common
ownership and management, and because the assets, liabilities and operations of
Tower Predecessor were acquired by the Company and the Operating Partnership in
a business combination. All significant inter-company transactions have been
eliminated in the combined financial statements.
The Company and Tower Predecessor's investments in unconsolidated
entities and the Company's investment in the Management Company are reflected
using the equity method of accounting.
Real Estate
Real estate and leasehold improvements are stated at cost less
accumulated depreciation. Whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable, the Company's and
Tower Predecessor's policy is to assess any impairment in value by making a
comparison of the current and projected cash flows of each property over its
remaining useful life (undiscounted and without interest charges) to the
carrying amount of each property. In cases where the Company and Tower
Predecessor do not expect to recover their carrying amounts, the Company and
Tower Predecessor recognize an impairment loss to reflect the property at its
estimated fair value. No such impairment losses have been recognized in these
financial statements.
Depreciation on buildings and improvements is provided under the
straight-line method over an estimated useful life of 40 years. Depreciation on
tenant improvements is provided over the lesser of the useful life or the terms
of the related leases. Depreciation on furniture and fixtures is provided under
the straight-line method over an estimated useful life of five to seven years.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. When assets are sold or retired, their
costs and related accumulated depreciation are removed from the accounts with
the resulting gains or losses reflected in net income (loss).
F-11
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
Deferred Charges
Deferred financing costs are recorded at cost and are being
amortized using the interest method over the life of the related debt. Leasing
commissions are deferred and amortized over the lesser of the useful life or the
terms of the related leases.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and short-term,
highly liquid investments that have original maturities of three months or less
when purchased. At December 31, 1998 and 1997, the Company had on deposit with a
major financial institution substantially all of its cash and cash equivalents,
which balances at times exceeded insurable limits.
Escrowed Cash
Escrowed cash as of December 31, 1998 and 1997 are comprised of
funds held for the payment of real estate taxes, mortgage interest and other. Of
the total funds held in escrow, approximately $0.2 million and $2.3 million are
restricted by agreement at December 31, 1998 and 1997, respectively. Included in
cash and equivalents at December 31, 1998 are segregated security deposits
amounting to approximately $5.9 million. In 1997, the cash and cash equivalent
balance was comprised primarily of segregated security deposits.
Deferred Real Estate Taxes
Deferred real estate taxes represent real estate taxes, attributable
to the New York City Industrial and Commercial Incentive Program ("ICIP"),
accrued from 1988 through 1995 for the Tower 45 property which are payable to
the taxing authority commencing on July 1, 1998 in payments of approximately
$1.3 million per year. This liability has been reflected in the Company's
balance sheet at its present value using a discount rate of 6.24%.
Revenue Recognition
The Company and Tower Predecessor, each as lessor, have retained
substantially all of the risks and benefits of the rental properties and account
for the leases as operating leases.
Rental income is recognized ratably over the terms of the leases.
Unbilled rental revenue (unbilled receivables) represents the excess rental
income recognized on a straight-line basis over minimum rent payments received
pursuant to the terms of individual lease agreements. The unbilled receivable
related to base rental income amounted to $6.8 million and $0.9 million at
December 31, 1998 and 1997, respectively, and is included in tenant receivables.
Prior to October 15, 1997 the Company and the Tower Predecessor
earned management fees, construction fees and leasing fees. After such date the
operations that generated these fees to the extent they related to third parties
and unconsolidated entities were transferred to the Management Company
F-12
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
whose results are reflected on the equity method of accounting. Prior to October
15, 1997 the Company and the Tower Predecessor recognized management fees as
earned under the terms of the related agreements. Construction fees were
recognized ratably over each project's construction period and leasing fees are
generally recognized upon tenant occupancy of the leased premises unless such
fees were irrevocably due and payable upon lease execution, in which case
recognition occurred on the lease execution date.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its short taxable year ended December 31, 1997. As a REIT, the
Company generally will not be subject to federal corporate income tax on its
taxable income that is distributed to its shareholders. A REIT is subject to a
number of organizational and operational requirements, including a requirement
that it currently distribute at least 95% of its annual taxable income.
The Company operates so as to qualify as a REIT for federal income
tax purposes. The federal income tax provisions governing treatment of a REIT
are highly technical, complex and subject to interpretation. Accordingly, there
is no assurance that the Internal Revenue Service, upon examination, would not
interpret provisions in a manner that differs from the Company's interpretation
of these provisions.
No provision for income taxes is included in the combined financial
statements of the Tower Predecessor since the Tower Predecessor's statements
combine the operations and balances of partnerships, which are not directly
subject to income tax. The tax effect of its activities accrues to the
individual partners and/or principals of the respective entity. The Management
Company is a legal entity subject to federal income tax on its taxable income at
regular corporate rates.
Net Income Per Common Share--Basic and Diluted
The Company has adopted the provisions of Statement of Financial
Accounting Standard No. 128 ("SFAS 128") "Earnings Per Share." Net income per
common share has been computed by dividing net income applicable to common
stockholders by the weighted average number of Common Shares outstanding
(16,946,286 and 16,920,455) for the years ended December 31, 1998 and the period
March 27, 1997 to December 31, 1997, respectively. The effect of the outstanding
options, which were issued at $26 per share, has been excluded from the
calculation of net income per common share as these options had an antidilutive
effect at December 31, 1998 and 1997.
Distributions
The Company expects to make regular quarterly distributions.
Earnings and profits, which will determine the taxability of distributions to
shareholders, differ from income reported for financial reporting purposes due
to the differences for federal tax purposes primarily in the estimated useful
lives used to compute depreciation.
F-13
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
On December 31, 1997, the Company declared a distribution, payable
in January 1998, equal to $.3536 per common share and OP Units outstanding at
December 31, 1997. The common shares and OP Units outstanding at December 31,
1997 totaled 16,920,455 and 1,583,640, respectively.
During 1998, the Company declared distributions payable of $.4225
per common share and OP unit and outstanding at March 31, June 30, September 30
and December 31, 1998. In addition, preferred stock dividends, in amounts equal
to the common stock dividend, were prorated from the date of issuance, December
9, 1998, through December 31, 1998, or $.1056 per preferred share. At December
31, 1998, preferred shares outstanding totaled 2,197,167. Distributions of
approximately $8.1 million were paid on January 15, 1999.
Minority Interest
Minority interest in the Operating Partnership represents the
limited partners' proportionate share of the equity in the Operating
Partnership. Income is allocated to minority partners based on the weighted
average percentage ownership of OP Units throughout the year.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates and assumptions are related to
the recoverability and depreciable lives of real estate and the recoverability
of billed and unbilled tenant receivables. Actual results could differ from
those estimates.
Recently Issued Accounting Standards
Effective January 1, 1998, the Company adopted the Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 specifies the
presentation and disclosure requirements for reporting comprehensive income,
which includes items which had been formerly reported as a component of
stockholders' equity. SFAS 130 did not have a material impact on the Company's
financial statements.
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"), which are effective for
fiscal years beginning after December 15, 1997. SFAS 131 establishes the
disclosure requirements for reporting segment information. The adoption of SFAS
131 required the Company to report information regarding the Company's segments,
and such information is provided in Note 18.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. This statement
addresses
F-14
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
the accounting for derivative instruments including certain derivative
instruments embedded in other contracts and for activities. The Company does not
expect that adoption of this Statement will have a material impact on its
financial statements.
During 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") and
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which are effective for
the fiscal years beginning after December 15, 1998. SOP 98-1 provides guidance
on whether the costs of computer software developed or obtained for internal use
should be capitalized or expensed. Management believes that, when adopted, SOP
98-5 and SOP 98-1 will not have a significant impact on the Company's financial
statements. In addition, the Emerging Issues Task Force of the Financial
Accounting Standards Board released EITF 97-11. ETIF 91-11 was adopted by the
Company during the first quarter of fiscal 1998 and resulted in the Company
having to expense internal property acquisition costs they would otherwise have
capitalized.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
1998 financial statement presentation.
(4) Real Estate:
Real estate consisted of the following at December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land................................................. $149,690 $140,030
Building and improvements............................ 521,544 462,842
Tenant improvements.................................. 20,210 17,658
Furniture, fixtures, and equipment................... 116 27
-------- --------
Total.................................... 691,560 620,557
Less: Accumulated depreciation.......................
(18,118) (2,444)
---------- ---------
$673,442 $618,113
======== ========
(5) Deferred Charges and Other Assets:
Deferred charges and Other Assets consisted of the following at
December 31, 1998 and 1997 (in thousands):
1998 1997
------ -----
Deferred leasing and tenant charges................... $ 2,805 $ 2,939
Deferred financing costs.............................. 6,528 4,301
Leasing commissions................................... 7,371 4,499
Other deferred costs.................................. 1,496 --
Less: Accumulated amortization........................ (4,508) (244)
-------- ---------
$13,692 $11,495
======= =======
</TABLE>
F-15
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
Other assets consisted of the following at December 31, 1998 and
1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deposits on future acquisitions...................... $ -- $ 3,937
Goodwill, net........................................ 2,366 2,990
Prepaid real estate tax and other prepaid expenses... 6,446 5,610
Receivable from related party........................ 150 --
-------- ---------
$ 8,962 $ 12,537
======= ========
</TABLE>
Deposits on future acquisitions at December 31, 1997 consisted of
amounts related to the acquisition of the Blue Cross Building in Arizona and 90
Broad Street, which properties were acquired during 1998. Upon consummation of
the acquisitions, these costs were recorded as part of the costs of the
properties.
Goodwill relates to the Company's purchase of Properties Atlantic,
Inc., a brokerage and leasing company, as part of the Formation Transactions and
is being amortized over 5 years. The Company has assessed the recoverability of
this goodwill based on the estimated undiscounted cash flows, and has determined
that no impairment write-down is necessary.
(6) Receivables:
Receivables consisted of the following at December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- ----
<S> <C> <C>
Due from tenants..................................... 3,463 $ 2,080
Unbilled rent receivable............................. 7,648 936
Other miscellaneous receivables...................... 177 804
-------- -------
Total.................................... 11,288 $ 3,820
========
</TABLE>
(7) Investment in Unconsolidated Entities:
Included in Investments in joint venture and unconsolidated entities
at December 31, 1998 are the Company's investments in 2800 North Central and the
Management Company. Also, the Company accounts for its 95% investment in the
Management Company and its 10% investment in 2800 North Central using the equity
method of accounting, and thus reports its share of income and losses based on
its ownership interest in the respective entities.
F-16
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
At December 31, 1998 and 1997 these investments have the following
carrying amounts (in thousands):
1998 1997
---- ----
Investment in Management Company.....................$ 571 $ 400
Investment in 2800 North Central..................... 2,137 2,011
---- ----- -----
Total....................................$ 2,708 $ 2,411
======= ========
(8) Debt:
Debt on real estate consisted of the following at December 31, 1998
and 1997 (in thousands):
1998 1997
------ -----
Term loan.................................. $ 107,000 $ 107,000
Corporate Center........................... 20,707 21,000
Corporate Center........................... 974 990
810 Seventh Avenue......................... 60,000 100,000
Construction loan.......................... 1,212 --
--------- ----------
Total Mortgage Debt Payable.... $ 189,893 $ 228,990
========= ==========
Line of Credit............................. $ 70,400 --
=========== ==========
During 1997 the Operating Partnership entered into a $107.0 million
seven-year Term Loan with Merrill Lynch Credit Corporation and borrowed
approximately $54.0 million under such facility at the closing of the Offering
and an additional $53.0 million subsequent to the Offering but prior to December
31, 1997. Interest on the Term Loan was fixed at a rate equal to .9% in excess
of seven-year United States Treasury Notes at the closing of the Offering and
was 6.82% as of December 31, 1998 and 1997, respectively. Interest is due
monthly. This debt is collateralized by the One Orlando and Tower 45 properties.
The mortgage debt on Corporate Center is collateralized by the
properties. At December 31, 1998 and 1997, the interest rate on the Corporate
Center debt is 7.55% and 8.37%, related to the $20.7 million and $.974 million,
respectively. Interest is due monthly and principal is due on January 1, 2006.
The mortgage debt on 810 Seventh Avenue is collateralized by the
property. On December 7, 1998, the Company entered into a mortgage extension
agreement with the lender extending the mortgage's original maturity date of
December 31, 1998 to April 30, 1999 with the further ability to extend to June
30, 1999. Costs associated with the mortgage modification agreement include a 1%
fee paid to the bank in addition to other expenses paid by the Company on
December 7, 1998. During the term of the mortgage extension agreement, the
interest rate is LIBOR plus 400 basis points. On December 31, 1998, the Company
prepaid $40.0 million of the $100.0 million mortgage from the proceeds of a
preferred stock issuance, plus a 1% prepayment penalty. The related loss on
early extinguishment of debt of $607,000
F-17
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
is shown as an extraordinary item net of minority interest of $60 thousand in
the Company's consolidated statement of income for the year ended December 31,
1998.
Principal repayments at December 31, 1998 are due approximately as
follows (in thousands):
Years ending December 31:
1999..................................... $ 60,319(1)
2000..................................... 70,742
2001..................................... 366
2002..................................... 391
2003..................................... 447
Thereafter............................... 128,028
-------
$260,293
- - --------------------
(1) Of the total amounts due in 1999, $60 million has been paid off with
funds drawn on the Line of Credit facility in February of 1999.
The Company has a revolving credit agreement with a group of
lenders. The revolving credit agreement may be used, among other things, to
finance its acquisition of additional office properties and other costs and
expenses attendant with such acquisitions, to refinance existing indebtedness
and for general working capital requirements. At December 31, 1998, $70.4
million was outstanding under the revolving credit agreement. No amounts were
outstanding under the revolving credit agreement at December 31, 1997.
Commitment fees to obtain such line amounted to approximately $1.1 million at
December 31, 1997, which are being amortized on a straight-line basis over the
three-year term of the credit facility. The Company pays monthly commitment fees
equal to 25 basis points on the undrawn revolving line of credit commitment. In
1999 in connection with the refinancing of 810 Seventh Avenue, the Company
modified its revolving credit agreement by adding 810 Seventh Avenue to the
unencumbered borrowing base. In addition, the Line of Credit was reduced from
$200.0 million to $165.0 million and the Company utilized $60 million of the
Line of Credit to pay off the remaining $60 million secured mortgage. The Line
of Credit has a three-year term and bears interest at the rate of approximately
150 basis points over LIBOR (London Interbank Offered Rate). The Company paid
approximately $400 thousand to the lenders and approximately $200 thousand to
third parties in connection with the modification.
The Line of Credit expires in October 2000 but borrowings will
become due upon consummation of the merger. In conjunction with the line of
credit, the Company must maintain certain financial ratios:
i. Total outstanding indebtedness must not exceed 55% of
Total Value (as defined in the Line of Credit Agreement)
during the first year of the facility and must not
exceed 50% thereafter.
F-18
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
ii. Collateral indebtedness must not exceed 40% of Total
Value (as defined) during the first year of the facility
and 35% thereafter.
iii. Recourse Indebtedness cannot exceed 5% of Total Value
(as defined).
iv. Total outstanding unsecured indebtedness must not exceed
60% of total unencumbered asset value (as defined)
during the first year of the facility and must not
exceed 55% thereafter.
v. Other financial covenants that must be met by the
Company include interest expense to debt and fixed
charges to debt ratios, amongst others.
As of December 31, 1998 and 1997, the Company has complied with
the financial debt covenants.
As a general policy, the Company intends to maintain a debt
policy limiting the Company's total consolidated indebtedness plus its pro rata
share of joint venture debt to 50% of the Company's total market capitalization.
As of December 31, 1998 and 1997 the debt to total market capitalization,
including the Company's 10% interest in the debt of 2800 North Central, was 44%
and 36%.
Interest capitalized during 1998 was approximately $1.7 million.
No interest was capitalized during 1997.
(9) Accounts Payable and Other Liabilities:
Accounts payable and other liabilities consisted of the
following at December 31, 1998 and 1997 (in thousands):
1998 1997
----------- ------------
Accrued interest................ $ 203 $ 748
Accounts payable................ 5,282 4,498
Advanced rent and deposits...... 2,663 836
Deferred income................. 3,376 1,412
----------- ------------
$ 11,524 $ 7,494
----------- ------------
Included within accounts payable at December 31, 1997 is $.37
million due to an affiliated Company.
F-19
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
(10) Leasing Activities and Concentration of Credit and Market Risk:
The future minimum lease payments to be received by the Company
as of December 31, 1998, under non-cancellable operating leases, which expire on
various dates through 2011, are as follows:
Years ending December 31 (in thousands):
- - --------------------------------------
1999........................................... $87,549
2000........................................... 83,925
2001........................................... 76,798
2002........................................... 65,493
2003........................................... 47,734
Thereafter..................................... 158,826
-------
$520,325
========
The geographic concentration of the future minimum lease
payments to be received is detailed as follows (in thousands):
Location Amount
- - --------
New York, New York............................ $397,808
Phoenix/Tucson, Arizona....................... 50,844
Orlando, Florida.............................. 71,673
-------
$520,325
========
Of the Company's total future minimum lease payments as of
December 31, 1998, approximately 76% are derived from New York properties.
Approximately 61% of the Company's rental income for the period October 16, 1997
through December 31, 1997 was generated from the New York Properties. No one
tenant represents more than 5% of the Company's future minimum rentals.
F-20
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
(11) Supplemental Disclosure of Non-cash Investing and Financing Activities:
The Company entered into the following non-cash investing and
financing activities for the year ended December 31, 1998 and the period March
27, 1997 to December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
(in thousands)
<S> <C> <C>
Mortgage debt assumed......................................... $ -- $ 56,624
OP units and restricted stock issued for
acquisitions of the Tower Predecessor properties
and the DRA Joint Venture properties....................... $ -- $ 40,954
OP units issued for the purchase of Properties
Atlantic, Inc.............................................. $ -- $ 3,120
OP units issued for a portion of the Company's
10% interest in 2800 North Central......................... $ -- $ 1,173
Assumption of deferred real estate tax liability
related to Tower 45........................................ $ -- $ 9,758
Conversion of MSAM debt to restricted stock................... $ -- $ 12,299
OP units issued in connection with the purchase of
810 Seventh Avenue......................................... $ 3,000 $ --
Exchange of OP units for shares of common stock............... $ 677 $ --
</TABLE>
During the second quarter of 1998, Lawrence H. Feldman
transferred 28,900 OP units and $200,000 of cash to the Company, and in turn,
the Company issued 28,900 shares of Common Stock and paid $200,000 of cash to
four current and former employees for their efforts during the time of the
Offering. The transaction has been accounted for as a contribution of capital
with corresponding charge to compensation expense in the accompanying financial
statements.
The Company declared a dividend of approximately $8.1 million on
Preferred and Common Stock and OP units for holders of record on December 31,
1998 which was paid on January 15, 1999. The Company declared a dividend of
approximately $6.5 million on December 31, 1997 which was paid on January 15,
1998.
(12) Related Party Transactions:
Under the terms of various management agreements, prior to
October 15, 1997, the Company and the Tower Predecessor received cost
reimbursements and property management, leasing and tenant service fees from
certain affiliates in which Tower Equities has ownership interests. Cost
reimbursements are comprised primarily of salary and employee benefit recoveries
and reimbursements of certain administrative costs. For the period from March
27, 1997 to December 31, 1997, the period from January 1, 1997 to October 15,
1997 and the year ended December 31, 1996, fees and cost reimbursements derived
from these agreements totaled approximately $1.1 million, $0.2 million and $2.2
million, respectively.
F-21
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
(13) Shareholders' Equity:
Preferred Stock
The Board of Directors is authorized to provide for the issuance
of 50,000,000 preferred shares in one or more series, to establish the number of
shares in each series and to fix the designation, powers, preferences, and
rights of each such series and the qualifications, limitations or restrictions
thereof.
On December 8, 1998, in connection with the Merger Agreement, the
Company issued 2,169,197 shares Preferred Stock to Metropolitan Partners LLC for
an aggregate price of $40.0 million. In connection with this issuance, the
Company entered into a registration rights agreement providing for certain
registration rights with respect to such Preferred Stock. The Preferred Stock
will initially have a dividend equal to the dividend on the Company's Common
Stock. Holders of Preferred Stock will not have conversion rights to common
stock unless the Merger is terminated. If the Merger is terminated, conversion
into the Company's Common Stock will be on a one-for-one basis. If Metropolitan
Partners LLC breaches its obligation to close the Merger, it is required to
return to the Company for no consideration 75% of the Company's Preferred Stock
it purchased, equivalent to $30.0 million based on the purchase price.
Partnership Operating Units
The outstanding OP Units are redeemable at the option of the
holder for a like number of common shares, or at the option of the Company, the
cash equivalent thereof. Total OP Units outstanding at December 31, 1998 and
1997 were 1,683,774 and 1,583,640, respectively.
Earnings per share
Preferred stockholders share in the dividends on a pro rata basis
with the common stockholders and the OP unitholders. In 1998 the preferred
stockholder dividends were approximately $229,000, which dividends were deducted
from net income to determine net income applicable to common stockholders.
OP unitholders also share in the dividends on the same basis as
common shareholders. Weighted average OP units outstanding were 1,671,179 and
1,583,640 for the year ended December 31, 1998 and the period ended December 31,
1997, respectively.
Share-Based Compensation Plans
The Company has two fixed option plans which reserve shares of
Common Stock for issuance to executives, key employees, and directors.
During 1997 the Company adopted the disclosure-only provision of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation cost has been
recognized for the options described above because the exercise price of the
F-22
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
options equaled the fair market value on the date of the grant. Had the
compensation cost for these options been determined based on the fair value at
the grant date consistent with the provisions of SFAS No. 123, the Company's net
income and net income per common share for 1998 and 1997 would have been reduced
to the following pro forma amounts:
<TABLE>
<CAPTION>
Net Income Applicable Net Income per
to Common Stockholders -- Common Share
-------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998................................... $ 10,965 $ 0.65
Period from March 27, 1997 through December 31, 1997........... $ 3,796 $ 0.22
</TABLE>
The fair value of each share option granted is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: for 1998 the dividend yield of 8.40; risk-free
interest rate of 5.62%; and volatility of 25.0%, and for 1997 the dividend yield
of 6.4%; risk-free interest rate of 5.94%; and volatility of 15.0%. All options
have an expected life of four years.
The effects of applying SFAS 123 in this pro forma disclosure
are not indicative of future amounts.
A summary of the status of the Company's share options as of
December 31, 1998 and 1997, and the changes during the year ended December 31,
1998 and the period ended on December 31, 1997, is presented below:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
# Shares of Weighted # Shares of Weighted
Underlying Average Underlying Average
Options Exercise Price Options Exercise Price
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year............ 975,000 $26 975,000 $26
Granted......................................... 486,800 $26 -- --
Exercised....................................... -- -- -- --
Forfeited....................................... (343,213) -- -- --
Expired......................................... -- -- -- --
------------ ------------- ----------- -------------
Outstanding at end of year...................... 1,118,587 $26 975,000 $26
------------ ------------- ----------- -------------
Weighted-average fair value of
options granted during the year................. 2.43 2.27
------------ ------------
</TABLE>
1997 Plan
The 1997 plan provides for the granting of stock options,
restricted stock and performance shares and incentive awards from time to time
with respect to up to a number of shares of Common Stock equal to 9.5% of the
total number of issued and outstanding shares of Common Stock (on a fully
diluted basis the exchange of all OP Units for shares of Common Stock) to
executive or other key employees of the Company. Stock options may be granted in
the form of "incentive stock options" or non-statutory stock options, and are
exercisable for up to 10 years following the date of the grant. The exercise
price of each option must be equal to or greater than the fair value of the
Common Stock on the grant date. These options vest in three annual installments
beginning on the first anniversary of the date of grant.
F-23
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
Directors' Plan
A maximum of 200,000 shares of Common Stock will be issuable
under the Directors' Plan to non-employee directors. The Directors' Plan will
provide for the grant of options to purchase Common Stock.
The Directors' Plan provides that each eligible director who is
a member of the Board of Directors as of the date that the registration
statement relating to the Offering is declared effective by the Securities and
Exchange Commission (the "Commission") will be awarded non-qualified options to
purchase 20,000 shares of Common Stock on the closing date of the Offering (each
such director, a "Founding Director"). Each eligible director who is not a
Founding Director (a "Non-Founding Director") will receive non-qualified options
to purchase 20,000 shares of Common Stock on the date of the commencement of the
term of office of such Non-Founding Director. The options granted Founding
Directors upon effectiveness of the registration statement relating to the
Offering will have an exercise price equal to the Offering price and will vest
in three annual installments beginning on the first anniversary of the date of
grant, subject to the Director's continuous service through such vesting date.
The exercise price of options under future grants will be 100% of the fair
market value of the Common Stock on the date of grant. Upon termination of
service as a director, options which have not vested will be forfeited and
vested options may be exercised until they expire.
As of December 31, 1998 and 1997, there were 1,118,587 and
975,000 options outstanding with a weighted-average remaining contractual life
of 9.0 and 9.7 years and a weighted-average exercise price of $26 in each year.
223,095 of these options were exercisable at December 31, 1998 and none at
December 31, 1997.
(14) Commitments and contingencies:
Legal Matters
As a result of the acquisition of the Properties, the Company
has become a successor party-in-interest to certain legal proceedings arising in
the ordinary course of the business of Tower Equities and the other third-party
predecessor entities.
On or about January 21, 1999, an action captioned DBD
International Limited, Inc. v. Tower Realty Trust, Inc., Case No. 99 CV 9 (Cir.
Ct. Dunn Co.) was commenced in the Circuit Court of the State of Wisconsin. The
plaintiff alleges that the Company purportedly breached a contract regarding the
plaintiff's provision of image management services to the Company. The plaintiff
seeks, among other things, compensatory damages in the amount of $798,788,
prejudgment interest and attorneys' fees.
In July 1998, David Miller, a purported stockholder of the
Company, commenced a putative class action against the Company and certain of
its then directors and officers in the Supreme Court of New York, New York
County captioned Miller v. Adams, et al., Index No. 98/113363 (Sup. Ct. N.Y.
Co.). This action challenges, among other things, the process employed by the
Company and its directors in reviewing, approving and assessing the fairness of
the Prior Merger Agreement. Following Tower's press
F-24
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
release on November 2, 1998, this action was discontinued without prejudice. On
or about December 18, 1998, David Miller commenced a putative class action in
the Supreme Court of New York, New York County captioned Miller v. Adams, et
al., Index No. 98/606208 (Sup. Ct. N.Y. Co.) challenging, among other things,
the process employed by the Company and its directors in reviewing, approving
and assessing the fairness of the Merger Agreement. Miller is seeking, among
other things, equitable and declaratory relief and unspecified compensatory
damages.
The Company intends to contest these claims vigorously. As with
any litigation, however, it is not possible to predict the resolution of these
pending actions and the Company therefore bears certain risks associated with
these actions. However, although management believes that the ultimate
resolution of these matters will not have a material adverse effect on the
financial position of the Company, the ultimate resolution may have a material
adverse effect on the results of operations of any one period.
On November 2, 1998, the Company commenced an action in New York
Supreme Court against Reckson, Crescent Real Estate Equities Corp. ("Crescent")
and Metropolitan alleging breach of the merger agreement between the Company and
these parties dated July 9, 1998 (the "Prior Merger Agreement"). The Company
sought $75 million in compensatory damages, declaratory and other relief. The
Company's press release on November 2, 1998 stated that this action was filed
because the Company had been informed by Crescent, Reckson and Metropolitan
Partners that they would not proceed with the transactions contemplated by the
Prior Merger Agreement. On December 22, 1998, the action was discontinued. As
discussed in the Merger Agreement, under certain limited circumstances this
action can be recommenced following the merger by the Company against Crescent
for the benefit of the Company's stockholders.
On or about September 29, 1998, a complaint entitled Stephen
Mikolas v. Lawrence Feldman, Feldman Equities, Tower 45 Asset Management
Corporation, 286 Madison LP, 290 Madison LP, 292 Madison LP, Tower Equities and
Tower Realty Trust, Inc. (Index No. 98 Civ. 6079 S.D.N.Y.), was filed in the
U.S. District court for the Southern District of New York in which the plaintiff
alleges unlawful retaliation in violation of federal, state, and city statutes.
On or about March 19, 1999, the parties entered into a "Stipulation of
Discontinuance," which provided that the action be discontinued, without
prejudice, and subject to reinstatement in the event a formal settlement
agreement is not executed by the parties within thirty days. The resolution
contemplated by the parties, which would include a dismissal of the action with
prejudice, is not expected to have a material adverse effect on the financial
position or results of operations of the Company.
On or about July 10, 1998, a complaint entitled Karen Schwartz
v. Lawrence Feldman, Feldman Equities, Tower 45 Asset Management Corporation,
286 Madison LP, 290 Madison LP, 292 Madison LP, Tower Equities and Tower Realty
Trust, Inc.(Index No. 98 Civ. 4918 (S.D.N.Y.) was filed in the U.S. District
Court for the Southern District of New York in which the Plaintiff alleges she
was discriminated against in the terms and conditions of her employment on the
basis of her religion in violation of federal, state and city statutes. On or
about March 19, 1999, the parties entered into a "Stipulation of
Discontinuance," which provided that the action be discontinued, without
prejudice, and subject to reinstatement in the event a formal settlement
agreement is not executed by the parties within thirty days. The resolution
contemplated by the parties, which would include a dismissal of the action with
prejudice,
F-25
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
is not expected to have a material adverse effect on the financial position or
results of operations of the Company.
Severance and Other Compensation Costs
The Company has written agreements with several key members of
management providing for, among other things, severance and stay bonuses.
Payment of such amounts described will be triggered upon the occurrence of
certain events, including a change in control, as defined in the agreements. The
aggregate amounts due upon a change of control amount to approximately $4.9
million.
On April 18, 1998, Joseph D. Kasman resigned as Senior Vice
President and Chief Financial Officer of the Company. Pursuant to, and under the
terms and conditions of, his employment agreement with the Company, severance
payments will be payable over the course of a 12-month period in monthly
installments of approximately $46,000. A severance provision of approximately
$556,000 has been charged to operations during the second quarter of 1998.
During the second quarter of 1998, Lawrence H. Feldman
transferred approximately 28,900 OP units and $200,000 of cash to the Company,
and in turn, the Company issued 28,900 shares of Common Stock and paid $200,000
of cash to four current and former employees for their efforts during the time
of the Offering. In connection with this event, the Company recorded $887,000 of
compensation expense during the second quarter of 1998.
On August 3, 1998, Lawrence H. Feldman resigned from his
positions as Chairman of the Board, Chief Executive Officer and President of the
Company. In connection with his resignation, the Company expects to pay Mr.
Feldman a severance payment equal to 2.99 times his "base amount" as described
in his employment agreement and the Company recorded approximately $1.0 million
of severance expense to operations.
Air Rights and Ground Leases
On November 30, 1980 Tower Predecessor entered into an air
rights lease agreement with the Village of Mineola which expires in May 2012,
subject to the Company's right to extend the term pursuant to two 30-year
renewal options. The lease provides for a current annual lease payment of
$33,000, increasing to $46,500 in 2001.
On November 30, 1986, Tower Predecessor entered into an
agreement to lease for 250 years the air and corresponding development rights
adjacent to one of the properties. The Operating Partnership has an option that
is exercisable through October 31, 2001 to acquire the lessor's site for a
price, as of July 31, 1997, of $11 million. This price increases through the
expiration of the option on October 31, 2001, at a rate of 50% of the percentage
increase in the consumer price index as defined in the lease (approximately $13
million as of July 31, 1997). Upon the Company's exercise of this option, its
obligation to pay rent under the air rights lease would automatically be
eliminated.
F-26
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
The Company is not aware of any environmental issues at any of
its properties. The Company believes it has sufficient insurance coverage at
each of its properties.
Other
The Company is obligated, in accordance with its lease
provisions, to provide certain tenants with tenant improvements.
(15) Savings Plan:
Effective January 1, 1994, Tower Predecessor adopted a 401(k)
Savings Plan (the "Plan") for its employees. Under the Plan, as amended,
employees, age 21 and older, are eligible to participate in the Plan immediately
upon employment. Base salary and wages are eligible for contribution to the
Plan. Participants may make salary deferral contributions from 1% to 15% per
payroll period. The Plan provides that matching employer contributions are to be
determined at the discretion of Tower Predecessor. Pursuant to the Offering, the
Plan was transferred to the Company. There were no discretionary matching
contributions for the years ended December 31, 1998, 1997 and 1996. Participants
are immediately vested in their pre-tax contributions, and are vested in the
Company's and Tower Predecessor's discretionary matching contributions after two
years of service.
(16) Fair Value of Financial Instruments:
The Company is required to disclose the fair value of financial
instruments for which it is practicable to estimate that value. The Company
determines the fair value based on the discounted future cash flows at a
discount rate that approximates the Company's effective current borrowing rate.
Except for the items noted below, the fair value of the Company's financial
instruments (comprising receivables, cash and cash equivalents, escrowed cash
and accounts payable and other liabilities) is not significantly different than
their carrying values at December 31, 1998 and 1997 since they are of a
relatively short-term nature.
December 31, 1998 December 31,1998
Fair Value Carrying Value
----------------- -----------------
(in thousands)
Term loan............ $107,977 $107,000
(17) Pro Forma Financial Information (Unaudited):
Due to the impact of the Offering, related formation
transactions and the 25 properties acquired in conjunction with and subsequent
to the Offering, the historical results of operations are not indicative of
future results of operations. The following Pro Forma Condensed Statements of
Income for the years ended December 31, 1998 and 1997 are presented as if the
Offering and related formation transactions and property acquisitions had
occurred at January 1, 1998 and January 1, 1997. The following pro forma
information is based upon historical information and does not purport to present
what actual results would
F-27
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
have been had such transactions, in fact, occurred at January 1, 1998 and
January 1, 1997, or to project results for any future periods.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997
-------------- -----------
(in thousands, except for per
share data)
<S> <C> <C>
Total revenues..................................... $ 113,547 $ 103,306
Net income before early extinguishment of debt..... $ 17,015 $ 20,540
Net income per common share-basic and dilutive..... $ 0.79 $ 1.00
</TABLE>
(18) Segment Reporting:
The Company operates in one business segment: real estate. The
Company provides leasing, management, acquisition, development and construction
for its portfolio. The Company does not have any foreign operations. The
accounting policies of the segment are the same as those described in the
summary of significant accounting policies, except that the Company excludes
straight-line rent adjustments and depreciation and amortization.
The Company evaluates performance based upon net operating
income from the combined properties in the segment (which excludes straight-line
rent adjustments and depreciation and amortization).
<TABLE>
<CAPTION>
Total Corporate & Total
Segment Other(g) Company
--------- ----------- --------
<S> <C> <C> <C>
Total revenues(a):
The Company(b):
1998.............................. $103,404 $ 990 $104,394
1997.............................. 15,511 2,266 17,777
Tower Predecessor(c):
1997.............................. $ 22,933 $885 $ 23,818
1996.............................. 27,227 3,024 30,251
Total operating and interest expenses(d):
The Company(b):
1998.............................. $45,423 $ 26,857 $ 72,280
1997.............................. 6,945 4,601 11,546
Tower Predecessor(c):
1997.............................. $ 9,964 $12,753 $ 22,717
1996.............................. 12,599 17,208 29,807
Net operating income (loss)(e):
The Company(b):
1998.............................. $ 57,981 $(25,867) $ 32,114
1997.............................. 8,566 (2,335) 6,231
Tower Predecessor(c):
1997.............................. $ 12,969 $(11,868) $ 1,101
1996.............................. 14,628 (14,184) 444
Total assets (The Company):
1998.......................................... $712,517 $ 7,230 $719,747
1997.......................................... 631,643 24,453 656,096
Total long-lived assets (The Company)(f):
1998.......................................... $681,131 $ 2,708 $683,839
1997.......................................... 619,049 2,411 621,460
</TABLE>
- - -----------
(a) Total revenues represent all revenues during the period (including
the Company and Tower Predecessor's equity in earnings of
unconsolidated entities), excluding adjustments for straight-lining
of rents and the Company and Tower Predecessor's share of
straight-line rent adjustments from unconsolidated joint ventures.
All interest income is excluded from the segment amounts and is
classified in Corporate and Other for all periods.
(b) Segment information has been presented for the Company for the year
ended December 31, 1998 and for the period from March 27, 1997
through December 31, 1997.
(c) Segment information has been presented for Tower Predecessor for the
period from January 1, 1997 through October 15, 1997 and for the year
ended December 31, 1996.
(d) Total operating and interest expenses represents the sum of real
estate taxes, utilities, general and administrative, ground rents/air
rights and interest expense. All interest expense (including
property-level mortgages) is excluded from the segment amounts and is
classified in corporate and other for all periods. Total segment
information of the Company includes $3,108 and $512 of management fee
expenses charged from the Management Company for 1998 and 1997. Total
segment information of Tower Predecessor for 1997 and 1996 include
management fee expense charged from the predecessor management
companies of $761 and $1,672. Amounts presented exclude depreciation
and amortization of $17,773 and $2,812 for the Company in 1998 and
1997, respectively, non-recurring merger-related charges of $5,019
and severance and other compensation costs of $2,471 in 1998. Amounts
presented for Tower Predecessor exclude depreciation and amortization
of $5,541 and $6,853 in 1997 and 1996, respectively.
(e) Net operating income represents total revenues, as defined in Note
(a) less total operating and interest expenses, as defined in Note
(d) for the period.
(f) Long-lived assets is comprised of total rental property, unbilled
rents receivable and investments in unconsolidated entities.
(g) Corporate and other represents all corporate-level items (including
interest income, interest expense and non-property general and
administrative expense) as well as intercompany eliminations
necessary to reconcile to consolidated the Company and Tower
Predecessor totals.
F-29
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
(21) Quarterly Financial Results (Unaudited):
Quarterly financial results for the year ended December 31, 1998 and
1997 are as follows (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Total revenue........................................... $ 25,944 $ 28,640 $ 28,644 $ 27,766
Net income before extraordinary loss on
early extinguishment of debt......................... $ 5,181 $ 3,536 $ 1,783 $ 2,014
Extraordinary loss on early extinguishment
of debt, net of minority interest.................... -- -- -- (607)
---------- --------- ---------- ------------
Net income.............................................. $ 5,181 $ 3,536 $ 1,783 $ 1,407
---------- --------- ---------- -------------
Preferred stock dividend................................ -- -- -- (229)
Net income applicable to common
shareholders......................................... $ 5,181 $ 3,536 $ 1,783 $ 1,178
======== ========= ========== ==========
Net income before extraordinary loss on
early extinguishment of debt per share,
basic and diluted.................................... .31 .21 .11 .09
Extraordinary loss on early extinguishment
of debt per share, basic and
diluted.............................................. -- -- -- (.03)
---------- --------- ---------- -------------
Net income per share, basic and
diluted.............................................. $.31 $.21 $.11 $.06
========== ========= ========== =============
Weighted average shares
outstanding.......................................... 16,920 16,945 16,958 16,958
========== ========= ========== ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
December 31, 1997
-------------------------
<S> <C>
Total Revenue............................................................................................ $17,180
Net income............................................................................................... $ 4,375
Net income per share, basic and diluted.................................................................. $ 0.26
========
Weighted average shares outstanding...................................................................... 16,920(1)
=========
(1) Weighted average shares outstanding from October 16, 1997 (the date of the Offering) through
December 31, 1997.
</TABLE>
F-29
<PAGE>
Schedule III
TOWER REALTY TRUST, INC.
AND PREDECESSOR COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Initial Cost
-------------------------------
Costs
Capitalized
Building and Subsequent
Property Name Location Encumbrances Land Improvements to Acquisition
- - ------------------------- ------------------ ------------ ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
286 Madison Avenue....... New York, New York $ -- $ 2,226,307 $ 8,754,798 $ 1,030,864
290 Madison Avenue....... New York, New York -- 1,137,721 4,550,886 327,518
292 Madison Avenue....... New York, New York -- 5,089,907 20,359,628 824,497
Tower 45................. New York, New York 67,000,000 23,790,993 108,722,331 836,246
100 Wall Street.......... New York, New York -- 11,793,632 47,074,876 1,585,706
810 Seventh Avenue....... New York, New York 60,000,000 30,317,000 119,826,465 3,792,597
120 Mineola Blvd......... Mineola, New York -- 2,740,776 11,862,871 332,983
90 Broad................. New York, New York -- 6,961,619 27,453,600 3,617,803
5151 East Broadway....... Tucson, Arizona -- 6,965,623 16,253,125 (55,318)
Corporate Center......... Phoenix, Arizona 21,680,261 9,730,139 38,920,556 (16,098)
Century Plaza............ Phoenix, Arizona -- 2,279,974 9,119,896 704,629
Black Canyon Loop........ Phoenix, Arizona 1,212,106 10,742,974 -- 7,666,033
Blue Cross/Blue Shield... Phoenix, Arizona -- 3,391,398 13,565,593 4,469
One Orlando Center....... Orlando, Florida 40,000,000 23,849,316 55,648,405 (457,470)
57-50 Major Blvd......... Orlando, Florida -- 1,565,009 6,795,112 2,639,385
Maitland Forum........... Maitland, Florida -- 5,708,302 24,886,810 502,859
Maitland West............ Maitland, Florida -- 1,158,595 4,978,040 1,025
------------ ------------ ------------ ---------------
$189,892,367 $149,449,285 $518,772,992 $ 23,337,728
============ ============ ============= ===============
</TABLE>
<TABLE>
<CAPTION>
Gross Amount
Carried at Close of Period
-------------------------------------------------
Land and Building and
Property Name Improvements Improvements Total
- - ------------------------- ------------- ------------- ------------
<S> <C> <C> <C>
286 Madison Avenue....... $ 2,176,316 $ 9,835,653 $ 12,011,969
290 Madison Avenue....... 1,127,683 4,888,442 6,016,125
292 Madison Avenue....... 5,049,866 21,224,166 26,274,032
Tower 45................. 23,965,102 109,384,468 133,349,570
100 Wall Street.......... 11,769,251 48,684,963 60,454,214
810 Seventh Avenue....... 30,347,784 123,588,278 153,936,062
120 Mineola Blvd......... 2,740,776 12,195,854 14,936,630
90 Broad................. 7,007,619 31,025,403 38,033,022
5151 East Broadway....... 6,849,008 16,314,422 23,163,430
Corporate Center......... 10,023,559 38,611,038 48,634,597
Century Plaza............ 2,317,300 9,787,199 12,104,499
Black Canyon Loop........ 10,742,974 7,666,033 18,409,007
Blue Cross/Blue Shield... 3,391,398 13,570,062 16,961,460
One Orlando Center....... 23,709,162 55,331,089 79,040,251
57-50 Major Blvd......... 1,565,009 9,434,497 10,999,506
Maitland Forum........... 5,748,794 25,349,177 31,097,971
Maitland West............ 1,158,595 4,979,065 6,137,660
------------- ------------- ------------
$ 149,690,195 $ 541,869,810 $691,560,005
============= ============= ============
</TABLE>
F-30
<PAGE>
Schedule III
TOWER REALTY TRUST, INC.
AND PREDECESSOR COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
<TABLE>
<CAPTION>
Accumulated Date of Date Acquired
Property Name Location Depreciation Construction (Years) Depreciable
- - --------------------------- --------------------- ---------------- --------------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
286 Madison Avenue........ New York, New York $ 308,693 1929 October 16, 1997 S/L 40
290 Madison Avenue........ New York, New York 149,494 1929 October 16, 1997 S/L 40
292 Madison Avenue........ New York, New York 689,148 1955 October 16, 1997 S/L 40
Tower 45.................. New York, New York 5,347,013 1987 October 16, 1997 S/L 40
100 Wall Street........... New York, New York 1,509,584 1975 October 16, 1997 S/L 40
810 Seventh Avenue........ New York, New York 2,877,437 1970 December 31, 1997 S/L 40
120 Mineola Blvd.......... Mineola, New York 649,821 1983 October 16, 1997 S/L 40
90 Broad Street........... New York, New York 523,241 1930 May 6, 1998 S/L 40
5151 East Broadway........ Tucson, Arizona 546,891 1975 October 16, 1997 S/L 40
Corporate Center.......... Phoenix, Arizona 1,205,302 1975 October 16, 1997 S/L 40
Century Plaza............. Phoenix, Arizona 350,219 -- October 16, 1997 S/L 40
Black Canyon Loop......... Phoenix, Arizona -- N/A November 24,1997 N/A
Blue Cross/Blue Shield.... Phoenix, Arizona 325,116 1982 January 16, 1998 S/L 40
One Orlando Center........ Orlando, Florida 1,689,041 1988 October 16, 1997 S/L 40
57-50 Major Blvd.......... Orlando, Florida 437,491 1972 October 16, 1997 S/L 40
Maitland Forum............ Maitland, Florida 1,230,702 1986 October 16, 1997 S/L 40
Maitland West............. Maitland, Florida 278,371 1981 October 16, 1997 S/L 40
-----------
$18,117,564
===========
</TABLE>
F-31
<PAGE>
TOWER REALTY TRUST, INC. AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS--(Continued)
Real Estate and Accumulated Depreciation
(dollars in thousands)
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
March 27, January 1,
1997 - 1997 -
December October
1998 31, 1997 15, 1997 1996
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Real estate:
Balance at beginning of year...................... $ 620,557 $ -- $ 169,619 $163,879
Additions to and improvement of real estate....... 73,388 620,557 3,350 6,509
Disposition of real estate........................ (570) -- (769)
Transfers to other accounts, net.................. (1,815)
------------ ---------- --------- ---------
Balance at end of year...................... $ 691,560 $ 620,557 $172,969 $169,619
============ ========== ========= =========
Accumulated depreciation:
Balance at beginning of year................... 2,444 -- $ 40,555 $ 35,741
Depreciation expense........................... 16,244 2,444 4,590 5,583
Accumulated depreciation on real estate sold... (570) -- (769)
------------ ---------- --------- ---------
Balance at end of year...................... $ 18,118 $ 2,444 $ 45,145 $ 40,555
============ ========== ========= =========
</TABLE>
F-32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TOWER REALTY TRUST, INC.
(Registrant)
By: /s/ Lester S. Garfinkel
-----------------------------
Name: Lester S. Garfinkel
Title: Executive Vice President -- Finance and
Administration and Chief Financial Officer
Date: March 31, 1999
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Francis X. Tansey Chairman of the Board March 31, 1999
- - ----------------------------------------------------
Francis X. Tansey
/s/ Robert L. Cox Acting Chief Executive Officer March 31, 1998
- - ---------------------------------------------------- and President and Executive Vice
Robert L. Cox President and Chief Operating Officer
and Director
/s/ Lester S. Garfinkel Executive Vice President-- March 31, 1998
- - ---------------------------------------------------- Finance and Administration and
Lester S. Garfinkel Chief Financial Officer and
Director
/s/ Stephen B. Siegel Director March 31, 1998
- - ----------------------------------------------------
Stephen B. Siegel
/s/ Esko I. Korhonen Director March 31, 1998
- - ----------------------------------------------------
Esko I. Korhonen
/s/ Robert M. Adams Director March 31, 1998
- - ----------------------------------------------------
Robert M. Adams
/s/ Richard M. Wisely Director March 31, 1998
- - ----------------------------------------------------
Richard M. Wisely
/s/ John Timothy Morris Director March 31, 1998
- - ----------------------------------------------------
John Timothy Morris
</TABLE>
S-1
<PAGE>
Exhibit Index
The following exhibits are filed as part of this Annual Report on Form 10-K
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
2.1+ Sale-Purchase Agreement, dated December 31, 1997, between 810 Partners LLC and BHONE Corp., as sellers, and 810
7th Avenue, L.P., as purchaser
2.2+ Loan Agreement, dated December 31, 1997, by and between Credit Suisse First Boston Mortgage Capital LLC, as lender,
and 810 7th Avenue, L.P., as borrower
2.3+ Consolidated, Amended and Restated Mortgage Note, dated December 31, 1997, between Credit Suisse First Boston
Mortgage Capital LLC and 810 7th Avenue, L.P.
2.4+ Agreement of Principal, dated December 31, 1997, by Tower Realty Operating Partnership, L.P. to Credit Suisse First
Boston Mortgage Capital LLC
3.1** Form of Amended and Restated Articles of Incorporation of the Company
3.2** Form of Amended and Restated By-Laws of the Company
4.1** Form of Common Stock Certificate for the Company
4.2++ Articles Supplementary of the Company, dated as of December 8, 1998
10.1* Form of Amendment and Restatement of Agreement of Limited Partnership of Tower Realty Operating Partnership, L.P.,
by and among Tower Realty Trust, Inc., as general partner, Lawrence H. Feldman, as initial Limited Partner, and the
Persons set forth in Exhibit A thereto
10.2* Form of Exchange Rights Agreement
10.3* Form of Registration Rights Amendment
10.4* Form of Lock-up Agreement
10.5** Form of Tower Realty Trust, Inc. 1997 Incentive Plan
10.6** Form of Tower Realty Trust, Inc. Non-Employee Directors' Incentive Plan
10.7*** Form of Employment Agreement between the Company and Lawrence H. Feldman
10.8*** Form of Employment Agreement between the Company and Robert L. Cox
10.9*** Form of Employment Agreement between the Company and Joseph D. Kasman
10.10** Form of Indemnification Agreement between the Company and its executive officers and directors
10.11** Purchase Agreement, dated as of March 31, 1997, among Tower Realty Trust, Inc., Tower Realty Operating Partnership,
L.P. and each of the investors signatory thereto, as amended by the Purchase Agreement Supplement dated as of May 15,
1997, Purchase Agreement Supplement No. 2, dated as of May 29, 1997, Purchase Agreement Supplement No. 3, dated as of
May 29, 1997, Purchase Agreement Supplement No. 4, dated as of July 9, 1997, Purchase Agreement Supplement No. 5,
dated as of July 31, 1997
<PAGE>
Exhibit No. Description
10.12** Contribution Agreement (OP Units-CXX Magnolia Limited Partnership) by and among Tower
Realty Operating Partnership, L.P. and Jeffrey Feldman
10.13** Amendment to Contribution Agreement by and among Tower Realty Operating Partnership,
L.P. and Jeffrey Feldman
10.14** Second Amendment to Contribution Agreement by and between Tower Realty Operating
Partnership, L.P. and Jeffrey Feldman
10.15** Contribution Agreement (Cash-Stellar Associates) by and among Tower Realty Operating
Partnership, L.P. and Laurie Jacoby
10.16** First Amendment to Contribution Agreement by and between Tower Realty Operating
Partnership, L.P. and Laurie Jacoby
10.17** Contribution Agreement (OP Units) by and among Tower Realty Operating Partnership, L.P.
and Bama Equities, Inc.
10.18** Amendment to Contribution Agreement by and among Tower Realty Operating Partnership,
L.P. and Bama Equities, Inc.
10.19** Second Amendment to Contribution Agreement by and between Tower Realty Operating
Partnership, L.P. and Bama Equities, Inc.
10.20** Contribution Agreement (Cash-Stellar Associates) by and among Tower Realty Operating
Partnership, L.P. and Valerie Herts Kalnitzky
10.21** First Amendment to Contribution Agreement by and between Tower Realty Operating
Partnership, L.P. and Valerie Hertz Kalnitzky
10.22** Assignment Agreement by Charles M. Kotick, as nominee (CXX)
10.23** Contribution Agreement by and between Tower Realty Operating Partnership, L.P. and Allan
B. Mendelsohn, as Chapter 7 Trustee of Edward Feldman
10.24** Option Agreement, dated as of July 28, 1997, by and between Tower Realty Operating
Partnership, L.P. and Dana II Associates Limited Partnership
10.25** Option Agreement, dated July 28, 1997, by and between Tower Realty Operating Partnership,
L.P. and Tower 45 Ventures Limited Partnership
10.26** Option Agreement, dated July 31, 1997, by and between Tower Realty Operating Partnership,
L.P. and Feldman Tower 45, Inc.
10.27** Contribution Agreement between Maitland Property Investors, Limited and Tower Realty
Operating Partnership, L.P., dated as of August 4, 1997
10.28** Non-Competition Agreement, dated as of August 4, 1997 among Tower Realty Operating
Partnership L.P., Properties Atlantic, Inc., Clifford Stein and Reid Berman
10.29** Assets Contribution Agreement, dated as of August 4, 1996, between Tower Realty Operating
Partnership, L.P., and Properties Atlantic, Inc., Clifford Stein, and Reid Berman
10.30** Option Agreement, dated as of July 28, 1997, by and between Tower Realty Operating
Partnership, L.P. and Stellar Associates
<PAGE>
Exhibit No. Description
10.31** Option Agreement, dated as of July 28, 1997, by and between Tower Realty Operating
Partnership, L.P. and Carlyle Industries, Inc.
10.32** Option Agreement, dated as of July 31, 1997, by and between Tower Realty Operating
Partnership, L.P. and 120 West 45th Street Associates
10.33** Option Agreement, dated as of July 29, 1997, by and between Tower Realty Operating
Partnership, L.P. and Richard Cooke, Craig Cooke and Brian Cooke
10.34** Option Agreement, dated as of July 28, 1997, by and between Tower Realty Operating
Partnership, L.P. and Charles B. Hickcox
10.35** Option Agreement, dated as of July 31, 1997, by and between Tower Realty Operating
Partnership, L.P. and Hazama T-45
10.36** Option Agreement, dated as of July 25, 1997, by and between Tower Realty Operating
Partnership, L.P. and Leo V. Berger
10.37** Omnibus Option Agreement, dated as of July 31, 1997, by and between Tower Realty
Operating Partnership, L.P. and Shoen U.S.A. Inc.
10.38** Option Agreement, dated as of July 28, 1997, by and among Tower Realty Operating
Partnership, L.P., Tower Equities Management, Inc. and Tower Equities and Realty Corp.,
CXX Magnolia Management Corp., Forum Management and Realty Corp., Madison 40/41
Management Corp., Tower 45 Asset Management Corp. and SJP Realty Corp.
10.39** Contribution Agreement by and between Reid Berman and Tower Realty Operating Partnership,
L.P. dated as of July 31, 1997
10.40** Purchase Agreement by and among Tower Realty Operating Partnership, L.P. and Anthony
DiLeonardo dated as of July 31, 1997, as amended by Amendment No. 1 to Anthony
DiLeonardo Purchase Agreement, dated as of September 18, 1997
10.41** Purchase Agreement by and among Tower Realty Operating Partnership, L.P. and Carmela
Carrano dated as of July 31, 1997, as amended by Amendment No. 1 to Carmela Carrano
Purchase Agreement, dated as of September 18, 1997
10.42** Contribution Agreement by and between Richard Wisely and Tower Realty Operating
Partnership, L.P. dated as of July 31, 1997
10.43** Contribution Agreement by and between Lawrence Stein and Tower Realty Operating
Partnership, L.P. dated as of July 31, 1997
10.44** Contribution Agreement by and between Lawrence H. Feldman and Tower Realty Operating
Partnership, L.P. dated as of July 31, 1997
10.45** Contribution Agreement by and between Clifford L. Stein and Tower Realty Operating
Partnership, L.P. dated as of July 31, 1997
10.46** Contribution Agreement by and between Robert Adams and Tower Realty Operating
Partnership, L.P. dated as of July 31, 1997
10.47** Contribution Agreement by and between Eric Reimer and Tower Realty Operating Partnership,
L.P. dated as of July 31, 1997
<PAGE>
Exhibit No. Description
10.48** Contribution Agreement by and between Reuben Friedberg and Tower Realty Operating
Partnership, L.P. dated as of July 31, 1997
10.49** Contribution Agreement by and between Joseph Kasman and Tower Realty Operating
Partnership, L.P. dated as of July 31, 1997
10.50** Contribution Agreement by and between Robert Cox and Tower Realty Operating Partnership,
L.P. dated as of July 31, 1997
10.51** Contribution Agreement, dated as of July 31, 1997, by and among Tower Realty Operating
Partnership, L.P. and Joseph Kasman
10.52** Option Agreement, dated as of May 8, 1997, by and among Tower Realty Operating
Partnership, L.P. and Stanley B. Grey
10.53** Option Agreement, dated as of May 8, 1997, by and among Tower Realty Operating
Partnership, L.P. and Michael C. Zerner
10.54** Letter Agreement, dated as of July 28, 1997, between Tower Realty Trust, Inc., Tower Realty
Operating Partnership, L.P., General Electric Capital Corporation, General Electric Real Estate
Equities, Inc., GENEL Company, Inc. and GEBAM, Inc.
10.55** Contribution Agreement by and among Tower Realty Trust, Inc., Tower Realty Operating
Partnership, L.P. and DRA Opportunity Fund
10.56** Contribution Agreement by and among Tower Realty Trust, Inc., Tower Realty Operating
Partnership, L.P. and Office Invest Sub LLC
10.57** Supplement and Amendment, dated as of September 11, 1997, to the Contribution Agreement
by and among Tower Realty Trust, Inc., Tower Realty Operating Partnership, L.P. and Office
Invest Sub LLC, as parties to the original Contribution Agreement, and Feldman MOT Portfolio
Corp., Feldman FSA Corp., FSA Associates, L.P. and Lawrence H. Feldman
10.58** Purchase and Sale Agreement, dated as of March 31, 1997, by and between Tower Equities and
Realty Corp. and Tower Realty Operating Partnership, L.P.
10.59** Purchase and Sale Agreement, dated as of September 11, 1997, by and between 100 Wall LLC
and Tower Realty Operating Partnership, L.P.
10.60*** Mortgage Loan Commitment, dated as of October 4, 1997,
by and between Merrill Lynch Credit Corporation and one
or more subsidiaries of Tower Realty Operating
Partnership, L.P.
10.61*** Form of Financial Advisory Fee Agreement by and between Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Tower Realty Trust, Inc. and Tower Realty Operating Partnership, L.P.
10.62*** Form of Supplemental Representations, Warranties and Indemnity Agreement by and among
Lawrence H. Feldman, Robert L. Cox, Joseph D. Kasman, Eric S. Reimer, Reuben Friedberg
and Tower Realty Operating Partnership, L.P. and Tower Realty Trust, Inc.
10.63*** Line of Credit Commitment, dated as of October 4, 1997, by and between Merrill Lynch
Capital Corporation and Tower Realty Operating Partnership, L.P. and Tower Realty Trust,
Inc.
<PAGE>
Exhibit No. Description
10.64** Purchase and Sale Agreement, dated as of July 25, 1997, by and between RSH Associates, Joel
Wiener, and Lawrence H. Feldman
10.65** Option Agreement, dated as of July 31, 1997, by and between Tower Realty Operating
Partnership, L.P. and Carmela Carrano, as amended by Amendment No. 1 to Option
Agreement, dated as of September 18, 1997
10.66** Option Agreement, dated as of July 31, 1997, by and between Tower Realty Operating
Partnership, L.P. and Anthony DiLeonardo, as amended by Amendment No. 1 to Option
Agreement, dated as of September 18, 1997
10.67*** Option Agreement, dated as of September 27, 1997, by and between Orlando Option Holding,
L.L.C. and Tower Realty Operating Partnership. L.P.
10.68*** Assignment of Real Estate Agreement, dated as of September 24, 1997, by and between Tower
Equities and Realty Corp. and Tower Realty Operating Partnership, L.P.
10.69*** Third Amendment to Escrow Instructions and Addendum thereto and Option Agreement, dated
as of July 23, 1997, by and between Beardsley and I-17, L.L.C and Deer Valley Towne Center
L.L.C and Crystal, Inc.
10.70*** Phoenix Land Parcel Option Contract, dated as of September 12, 1997, by and between Crystal,
Inc. and Tower Realty Operating Partnership, L.P.
10.71*** Form of Acquisition Advisory Fee Agreement
10.72**** Stock Purchase Agreement, dated as of September 19, 1997, by and among Tower Realty
Trust, Inc. and Carlyle Realty Partners, L.P. Carlyle Realty Qualified Partners, L.P., Carlyle
Realty Partners Sunrise, L.P. and Carlyle Realty Coinvestment, L.P.
10.73++ Agreement and Plan of Merger, dated as of December 8, 1998, by and among Tower Realty
Trust, Inc., Reckson Associates Realty Corp., Reckson Operating Partnership, L.P. and
Metropolitan Partners LLC (including exhibits)
10.74++ Release from Reckson Associates Realty Corp. to Tower Realty Trust, Inc. dated as of
December 8, 1998
10.75++ Release from Tower Realty Trust, Inc. to Reckson Associates Realty Corp. dated as of
December 8, 1998
10.76++ Release from Crescent Real Estate Equities Company to Tower Realty Trust, Inc. dated as of
December 8, 1998
10.77++ Release from Tower Realty Trust, Inc. to Crescent Real Estate Equities Company dated as of
December 8, 1998.
10.78++ Release from Metropolitan Partners LLC to Tower Realty Trust, Inc. dated as of December
8, 1998.
10.79++ Release from Tower Realty Trust, Inc. to Metropolitan Partners LLC dated as of December
8, 1998.
10.80++ Stock Purchase Agreement, dated as of December 8, 1998, by and between Tower Realty
Trust, Inc. and Metropolitan Partners LLC
<PAGE>
Exhibit No. Description
10.81++ Registration Rights Agreement, dated as of December 8, 1998, by and between Tower Realty
Trust, Inc. and Metropolitan Partners LLC
10.82+++ Second Amendment and Restatement of Agreement of Limited
Partnership of Tower Realty Operating Partnership, L.P., dated
March 6, 1998
21.1 Subsidiaries of the Company, as amended
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
----------------
+ Incorporated by reference to the Company's Current Report on Form 8-K, dated December 31, 1997.
++ Incorporated by reference to the Company's Current Report on Form 8-K, dated December 7, 1998.
+++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1998, dated May 15, 1998.
* Incorporated by reference to the Company's Registration Statement on Form S-11,
dated August 6, 1997.
** Incorporated by reference to Amendment No. 1 to the Company's Registration Statement on Form S-11, dated
September 23, 1997.
*** Incorporated by reference to Amendment No. 2 to the Company's Registration Statement on Form S-11, dated
October 6, 1997.
**** Incorporated by reference to Amendment No. 4 to the Company's Registration Statement on Form S-11, dated
October 9, 1997.
</TABLE>
Exhibit 21.1
Subsidiaries of the Registrant
--------------------------------
<TABLE>
<CAPTION>
State of
Name of Subsidiary Incorporation or Organization
- - -------------------- -----------------------------
<S> <C>
Tower Realty Operating Partnership, L.P. Delaware
Tower Equities Management, Inc. Delaware
286 Madison, L.P. New York
290 Madison, L.P. New York
292 Madison, L.P. New York
810 7th Avenue GP LLC Delaware
810 7th Avenue L.P. New York
2800 Associates, L.P. Delaware
2800 GP LLC Delaware
2800 I LLC Delaware
5750 Associates, L.P. Delaware
Black Canyon Loop Company, L.L.C. Arizona
Corporate Center Associates, L.P. Delaware
Corporate Tower Center, GP LLC Delaware
East Broadway 5151, L.P. Delaware
Magnolia Associates, L.P. Florida
Maitland Associates, Ltd. Florida
Maitland West Associates Limited Partnership Florida
Mineola UPREIT, LLC Delaware
Tower Madison GP LLC Delaware
Tower Mineola, L.P. Delaware
Tower Orlando GP LLC Delaware
Tower QRS No. 1 Corp. Delaware
Tower QRS No. 3 Corp. Delaware
Tower QRS No. 4 Corp. Delaware
Tower QRS No. 5 Corp. Delaware
Tower 45 GP LLC Delaware
</TABLE>
We consent to the incorporation by reference in the registration statement of
Tower Realty Trust, Inc. (the "Company") on Form S-8 (File No. 333-50501) of our
report dated March 17, 1999, on our audits of the consolidated financial
statements and financial statements schedule of Tower Realty Trust, Inc. as of
December 31, 1998 and 1997 and for the period from March 27, 1997 to December
31, 1997 and the combined financial statements of Tower Predecessor for the
period from January 1, 1997 to October 15, 1997 and as of and for the year ended
December 31, 1996, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information
extracted for the financial statements of Tower Realty
Trust, Inc. for the year ended December 31, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,277
<SECURITIES> 0
<RECEIVABLES> 11,288
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 691,560
<DEPRECIATION> 18,118
<TOTAL-ASSETS> 719,747
<CURRENT-LIABILITIES> 0
<BONDS> 260,293
0
40,000
<COMMON> 169
<OTHER-SE> 345,813
<TOTAL-LIABILITY-AND-EQUITY> 719,747
<SALES> 0
<TOTAL-REVENUES> 110,994
<CGS> 0
<TOTAL-COSTS> 97,543
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,770
<INCOME-PRETAX> 12,514
<INCOME-TAX> 0
<INCOME-CONTINUING> 12,514
<DISCONTINUED> 0
<EXTRAORDINARY> (607)
<CHANGES> 0
<NET-INCOME> 11,907
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
</TABLE>
