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, 1995
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 1-8971
ROCKEFELLER CENTER PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3280472
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1270 AVENUE OF THE AMERICAS 10020
NEW YORK, N.Y. (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212-698-1440
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common stock, $.01 Par Value, all of one class New York
(38,260,704 shares outstanding as of March 14, 1996)* Stock Exchange
------------------------------
Securities registered pursuant to Section 12(g) of the Act: None
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 disclosure 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]
- ------------------------------
* The aggregate market value of Registrant's voting stock held by
non-affiliates as of March 14, 1996, based on the closing price on the New
York Stock Exchange composite tape on that date, was approximately
$301,303,000.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12 and 13 in Part III will be
incorporated by reference from the Company's Proxy Statement for its 1996 Annual
Meeting of Stockholders or, if no such Proxy Statement is filed within 120 days
after the end of the Company's last fiscal year, will be included in an
amendment to this Form 10-K.
<PAGE>
ROCKEFELLER CENTER PROPERTIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I Page
- ------ ----
<S> <C> <C>
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of
Security Holders 12
Part II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 13
Part III
Item 10. Directors and Executive Officers
of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain
Beneficial Owners and Management 14
Item 13. Certain Relationships and Related
Transactions 14
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 15
Signatures 20
</TABLE>
(i)
<PAGE>
ROCKEFELLER CENTER PROPERTIES, INC.
PART I
ITEM 1. BUSINESS.
Rockefeller Center Properties, Inc. (the "Company") was
incorporated in Delaware on July 17, 1985. Its principal executive offices are
located at 1270 Avenue of the Americas, New York, New York 10020, and its
telephone number is (212) 698-1440. The Company qualifies and has elected to be
treated, for Federal income tax purposes, as a real estate investment trust (a
"REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). On
September 19, 1985, the Company issued 37,510,000 shares of common stock (the
"Common Stock") in an initial public offering registered under the Securities
Act of 1933 (the "Act"). Simultaneously with the offering of the Common Stock,
the Company issued Current Coupon Convertible Debentures due 2000 and Zero
Coupon Convertible Debentures due 2000 (collectively, the "Convertible
Debentures"). In December of 1993, 750,704 warrants issued in connection with
the settlement of litigation were exercised and a like number of shares of
Common Stock were issued. In December 1994, the Company issued $150 million of
Floating Rate Notes ("Floating Rate Notes") due December 31, 2000 to Goldman
Sachs Mortgage Company, and $75 million of 14% Debentures, ("14% Debentures")
due December 31, 2007 to Whitehall Street Real Estate Limited Partnership V
("Whitehall"). In conjunction with the issuance of the 14% Debentures, the
Company also issued 4,155,927 Warrants ("Warrants") to acquire newly issued
common stock exercisable at $5 per share and 5,349,541 Stock Appreciation Rights
("SARs") convertible into 14% Debentures or, under certain circumstances,
Warrants.
The net proceeds of the initial Common Stock offering and the
offerings of Convertible Debentures were used by the Company to make a
convertible, participating mortgage loan (the "Loan") to two partnerships
(collectively, the "Borrower") which together own most of the land and buildings
known as Rockefeller Center. The partners of the Borrower are Rockefeller Group,
Inc. ("RGI") and a wholly-owned subsidiary of RGI. The real property interests
owned by the Borrower and subject to the Company's mortgage referred to herein
(the "Property") are described below.
STATUS OF THE BORROWER
On May 11, 1995, the two partnerships comprising the Borrower
filed for protection under Chapter 11 of the Federal Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New York. The
Company's only significant source of income is interest received on the Loan
from the Borrower. As a result of these filings and until such time as
these Chapter 11 cases (the "Chapter 11 Cases") have been brought
to a conclusion, the Company does not expect to receive interest payments from
the Borrower and the Company's ability to enforce its rights under the Loan
has been and will be stayed unless and until the Court issues an order
permitting the Company to take steps to enforce such rights. The Borrower and
its managing general partner, RGI filed a Chapter 11 reorganization plan
(the "Chapter 11 Plan") for the Borrower that contemplates that ownership
of the Property will be turned over to the Company or its designee upon
consummation of the Chapter 11 Plan. Pursuant to the order of the
Bankruptcy Court having jurisdiction over the Borrower's Chapter 11
Cases, a disclosure statement in respect of the Chapter 11 Plan has been
approved and March 27, 1996 has been set as the date for the hearing to
consider confirmation of the Chapter 11 Plan. The Company currently anticipates
that, if the Chapter 11 Plan is confirmed on or shortly after March 27, 1996,
the transactions contemplated by the Merger Agreement (as defined below) could
be consummated prior to April 30, 1996, as required by the Merger Agreement.
There is no assurance that the conditions to confirmation and/or consummation
of the Chapter 11 Plan will be met, that the conditions to the Merger Agreement
will be met, or that the transactions contemplated by the Chapter 11 Plan and
the Merger Agreement will occur or will take place within the periods
described above.
MERGER AGREEMENT AND RELATED AGREEMENTS
On November 7, 1995, the Company executed and delivered an
Agreement and Plan of Merger dated as of November 7, 1995 (as amended by
Amendment No. 1 thereto, dated as of February 12, 1996, the "Merger Agreement"),
with a group of investors (the "Investor Group") including Exor Group S.A.,
David Rockefeller, Rockprop L.L.C., Troutlet Investments Corporation and
Whitehall, pursuant to which, subject to satisfaction of the conditions
specified in the Merger Agreement, a corporation formed by the Investor Group
would merge into the Company, the surviving company would be wholly owned by the
Investor Group, and the stockholders of the Company would receive $8.00 in cash
for each of their shares of the Company's Common Stock other than Excluded
Shares (as defined in the Merger Agreement). The Company plans to hold a special
meeting (the "Special Meeting") for stockholders to vote on the Merger Agreement
on March 25, 1996.
Under the Merger Agreement, Goldman Sachs Mortgage Company
("GSMC"), which is a party to the Merger Agreement for this purpose, has agreed
to make available to the Company up to $47.5 million of
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<PAGE>
credit ("GSMC Loan") during the period between November 7, 1995 and the earlier
of (1) the consummation of the merger contemplated by the Merger Agreement or
(2) any termination of the Merger Agreement. Such credit would be secured on the
same basis as the Floating Rate Notes and the 14% Debentures, but would accrue
interest at the rate of 10% per annum (compounded quarterly) and be prepayable
at any time without penalty. If borrowings under this facility have not been
repaid by the earlier of April 30, 1996, the consummation of the merger
contemplated by the Merger Agreement or any termination of the Merger Agreement
in specified circumstances, including any exercise by the Company of its
"fiduciary out," such borrowings would be subject to the same terms and
conditions as those applicable to the Floating Rate Notes. The Company had
borrowed $10.2 million from GSMC under this facility as of December 31, 1995 and
$45 million as of February 29, 1996. The Company expects to borrow the total
amount available under the GSMC Loan prior to April 30, 1996. The credit
facility extended by GSMC to the Company under the Merger Agreement is expected
to provide sufficient liquidity for the Company until the earlier of the
consummation of the merger contemplated by the Merger Agreement or April 30,
1996.
Also on November 7, 1995, the Company entered into a rights
offering agreement (the "Rights Offering Agreement") with Whitehall and Goldman,
Sachs & Co. ("Goldman Sachs"), an affiliate of Whitehall, pursuant to which the
parties have agreed that, if the Company's stockholders do not approve the
Merger Agreement at the Special Meeting, the Company will have the right to
elect, within 30 days after the date of the Special Meeting, to make a $200
million publicly registered rights offering (the "Rights Offering") at a price
set by the Company's Board of Directors, but not less than $6.00 per share of
Common Stock. The purpose of the Rights Offering Agreement is to provide the
Company with a pre-negotiated potential means to raise the funds it would
require to be able to acquire the Property and to service its obligations if the
Company's stockholders do not approve the Merger Agreement. No decision has been
made by the Company's Board of Directors as to whether this option would be
exercised if the Company's stockholders do not approve the Merger Agreement;
such a decision will be made in the light of the circumstances prevailing at the
time of any such failure to approve the Merger Agreement, including any
alternatives that may then be available to the Company. Any election by the
Company to proceed with the Rights Offering would not require prior approval of
the Company's stockholders.
Management and the Board of Directors believe that, if the
Company's stockholders do not approve the Merger Agreement or if the
transactions contemplated by the Merger Agreement are not consummated, the
Company would be subject to substantial uncertainties. The Company expects that,
in the absence of additional financing, its cash resources will be exhausted by
the end of April 1996. There can be no assurance as to the availability to the
Company of any alternatives to proceeding with the Rights Offering and there can
be no assurance that, if the Board of Directors elects to proceed with the
Rights Offering, Goldman Sachs or PaineWebber, Incorporated will agree to
underwrite the Rights Offering or that the Rights Offering can be successfully
concluded or, if concluded, as to the timing of such conclusion. Approval of the
Merger Agreement by the Company's stockholders is, in any event, a condition to
the effectiveness of the proposed Chapter 11 Plan and, accordingly, in the event
of a rejection of the Merger Agreement, a new reorganization plan will have to
be negotiated; there can be no assurance as to the results that such
negotiations would reach or even that such negotiations would be successful.
While the Rights Offering is designed to produce proceeds to the Company of $200
million (before expenses), most of these proceeds would be used to retire the
Floating Rate Notes. Thus, the Board of Directors believes that, even if the
Rights Offering were successful, the Company would require additional funds in
order to be able to demonstrate in the Chapter 11 Cases that the Company could
successfully operate the Property. While Whitehall and Goldman Sachs agreed in
the Rights Offering Agreement to make certain changes in the terms of the 14%
Debentures to facilitate additional borrowings by the Company, there can be no
assurance that the Company could obtain the required additional financing on
terms satisfactory to it, if at all.
Due to the factors described above, Management believes that
there is substantial doubt about the Company's ability to continue as a going
concern if the Company's stockholders do not approve the Merger Agreement or if
the transactions contemplated by the Merger Agreement are not consummated. The
financial statements do not include any adjustment to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of these uncertainties.
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<PAGE>
THE LOAN AND THE EQUITY OPTION.
The Loan, in the face amount of $1.3 billion, was made pursuant
to a loan agreement between the Company and the Borrower, dated
September 19, 1985 (as amended, the "Loan Agreement"), and is evidenced by two
notes (collectively, as amended, the "Note"). The Note matures on
December 31, 2007 and provides for both base interest ("Base Interest") and
additional interest ("Additional Interest") through December 31, 2000 and for
floating interest rates thereafter.
At the Company's option (the "Equity Option"), the Loan is
convertible on December 31, 2000 (the "Equity Conversion Date") or, if an event
of default under the Loan Agreement has occurred and is continuing, any earlier
date specified by the Company into a 71.5% (subject to reduction in the event of
certain prepayments) general partnership interest in the partnership (the
"Partnership") which will then own the Property. RGI or a permitted successor
will be the managing partner of the Partnership and will generally have the
power to make business decisions for the Partnership without the consent of the
other partners. The Partnership will terminate on September 30, 2169 unless
previously dissolved pursuant to the terms of the agreement under which the
Partnership will be formed (the "Partnership Agreement").
Base Interest is payable quarterly at stated annual interest
rates ranging from 7.215% (for 1985 and 1986) to 8.43% (for the year 2000). For
each year beginning with 1988 through 2000 in which Gross Revenues (as defined
in the Note) of the Property exceed $312.5 million, Additional Interest would
accrue in an amount equal to the sum of (i) 31.5% of such excess plus (ii)
$42.95 million. If Additional Interest is earned by the Company, but cash is
unavailable to the Borrower to pay it, then such Additional Interest would be
deferred (without interest) until the Equity Conversion Date or such earlier
time as cash became available. No Additional Interest was earned by the Company
through December 31, 1995 and, based on present conditions in the Midtown
Manhattan rental market, the Company does not currently expect that it will earn
Additional Interest even if the Borrower's reorganization proceedings are
terminated.
While the Loan is outstanding, the Company may transfer
participations in the Loan (but not in the Equity Option), pledge interests in
the Loan (subject to the Borrower's reasonable consent if interests representing
more than 20% of the Loan are pledged during any 12-month period), and in
certain limited circumstances transfer the Loan itself (including the right to
exercise the Equity Option) subject to a right of first refusal in favor of the
Borrower. The Company has, with the consent of the Borrower, pledged the Note
and certain other collateral as security for the repayment of the Floating Rate
Notes and the 14% Debentures, together with the Convertible Debentures. So long
as the Floating Rate Notes or the 14% Debentures are outstanding, the terms
thereof prohibit the Company from encumbering, with certain exceptions, its
property or assets or selling or otherwise disposing of its property or assets.
THE MORTGAGE.
The Loan is secured by fee and leasehold mortgages in the
aggregate amount of approximately $44.8 million which were assigned to the
Company, consolidated, spread and recorded as a first mortgage lien against the
Property. Through September 6, 1994, the Loan also was secured by an unrecorded
mortgage in the amount of approximately $1,255.2 million. On September 6, 1994
the Company recorded this mortgage.
THE CREDIT SUPPORT FACILITIES.
In accordance with the provisions of the Loan Agreement, the
Borrower was required to maintain for the benefit of the Company credit support
facilities ("Credit Support Facilities") to secure payment of (i) the Base
Interest (as defined) and (ii) the unexpended portion of the cost of making
certain required capital improvements to the Property. On January 1, 1995, the
required level of this support was $70 million and on April 1, 1995 decreased to
$50 million. Following the Borrower's failure to make the interest payment due
on May 31, 1995, the Company drew down the full amount available under the $50
million of letters of credit which supported payment of the Base Interest on the
Loan.
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<PAGE>
THE PROPERTY.
Rockefeller Center is among the best-known commercial real
estate complexes in the world, offering an architecturally renowned combination
of office, retail and public space. Occupying most of the three blocks
(approximately 12 acres) between 48th and 51st Streets and Fifth Avenue and
Avenue of the Americas in midtown Manhattan, the Property includes 12 buildings,
all but one of which were completed between 1932 and 1940, having approximately
6.2 million square feet of rentable office, retail, storage and studio space as
measured in accordance with the measurement standards promulgated by the Real
Estate Board of New York in 1968. The Borrower owns the fee interest in the
entire Property, excepting the land (which is owned by an unrelated party and
leased to the Borrower through the year 2000 at an annual rent of $650,000)
underlying a portion of the building at 600 Fifth Avenue. This lease (the
"Church Lease") provides for three renewal periods of 21 years each at annual
rents of 6%, 7% and 8%, respectively, of the value of the land (exclusive of
improvements and unencumbered by the Church Lease) appraised for its highest and
best use, determined at the beginning of each such renewal term. The Borrower's
leasehold interest under the Church Lease is subordinate to any mortgage placed
on the land, the principal amount of which does not exceed $750,000 and the
aggregate payment of principal and interest on which does not exceed the fixed
rent payable under the Church Lease. The Church Lease, however, contains a
non-disturbance provision which provides that any foreclosure of a superior
mortgage will not result in termination of the Church Lease so long as the
tenant is not in default thereunder. If the opportunity to purchase the land
underlying the Church Lease arises, RGI has agreed to allow the Company to
participate with the Borrower in such purchase (if such opportunity arises
during the term of the Loan) and to allow such opportunity to the Partnership
(if such opportunity arises thereafter).
Also included in the Property is Radio City Music Hall (the
"Music Hall"), which has been leased by the Borrower to Radio City Music Hall
Productions, Inc. ("RCMHP") at a nominal rent through December 31, 2000. RCMHP
is a wholly-owned subsidiary of RGI. RCMHP is obligated under the lease to pay
for the expenses of maintaining the interior of the Music Hall and the property
taxes assessed against the portion of the building housing the Music Hall. The
Borrower is responsible for the expenses of exterior maintenance. Following the
initial term, RCMHP will have rights to renew the Music Hall lease for ten
successive 15-year periods at fair market rents established at the beginning of
each such period.
The following table provides summary information furnished by
the Borrower regarding the buildings included in the Property.
<TABLE>
<CAPTION>
At December 31, 1995
--------------------------------
Year Number of Rentable area Occupancy
Building opened stories (sq.ft.)(1) percentage
- -------- -------- ------- ------------- ----------
<S> <C> <C> <C> <C>
GE 1933 69 1,876,438 94.6%
NBC Studio 1933 10 384,592 100.0
GE West 1933 16 151,687 100.0
1270 Avenue of the Americas (2) 1932 32 389,102 69.6
Associated Press 1938 16 400,536 70.3
International 1935 40 1,029,911 82.9
British Empire 1933 9 102,699 100.0
La Maison Francaise 1933 9 104,791 97.3
One Rockefeller Plaza 1937 35 468,985 68.7
Ten Rockefeller Plaza 1939 17 291,497 69.5
Simon & Schuster 1940
and Addition 1955 21 600,482 92.1
600 Fifth Avenue 1952 29 355,312 85.8
Additional Property (3) ---- -- 28,421 100.0
--------- -----
Total ................... 6,184,453 86.3%
========= =====
</TABLE>
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(1) Measured in accordance with the standard for measurement promulgated by the
New York Real Estate Board in 1968. Includes office, retail and storage
space.
(2) Radio City Music Hall is included as part of this building but excluded from
the rentable area and occupancy percentage data.
(3) Includes the underground concourse and lower plaza and includes the
Television City and Hurley's restaurant buildings.
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<PAGE>
Rockefeller Center is one of the world's largest privately-owned
business and entertainment complexes. In addition to the buildings described
above, the Property contains a wide range of amenities including the Channel
Gardens landscaped promenade, the lower plaza used as an ice skating rink during
colder weather and otherwise for outdoor dining, a six-story 725-car parking
garage and extensive off-street truck delivery areas, an underground retail and
pedestrian concourse connecting all buildings and providing access to an on-site
subway station, roof gardens and the Music Hall. Retail space within the
Property includes approximately 200 shops and 35 restaurants. The murals and
statuary which are an integral part of the Property include over one hundred
major works by more than thirty artists, including the renowned sculpture
"Prometheus". A private street, Rockefeller Plaza, parallels Fifth Avenue and
the Avenue of the Americas and bisects the Property.
Under the existing zoning regulations, there is allocable to the
Property the right to develop up to approximately 2.0 million square feet of
floor area in excess of the floor area presently constructed thereon. These
excess development rights may be transferred to other properties or, with the
approval of the New York City Landmarks Preservation Commission (the "Landmarks
Commission"), used to construct additional floor area within the Property. The
Borrower has reserved the right to transfer these rights. In 1993, as part of
the settlement of a lawsuit, 100,000 square feet of these rights were added to
the Mortgage. The Borrower has also reserved the right to transfer all of the
Borrower's rights to the air space above the Music Hall, together with easements
for support, operations and access.
In April 1985, the Landmarks Commission granted landmark status
to the exterior of all of the buildings in the Property. The Landmarks
Commission has also designated as landmarks portions of the interiors of the GE
and International Buildings and the interior of the Music Hall. As a result of
these designations, alteration, demolition and reconstruction of the Property
will under most circumstances be subject to approval of the Landmarks
Commission.
APPRAISAL VALUE. The property was appraised as of December 31,
1994 by Douglas Elliman Appraisal and Consulting Division ("Douglas Elliman") an
independent appraisal firm. In a report dated January 11, 1995, Douglas Elliman
concluded that, as of December 31, 1994, the fair market value of the Property
was $1.25 billion, an increase of $100 million from the value assigned in an
appraisal conducted by that same firm as of December 31, 1993. The Weitzman
Group, Inc. ("The Weitzman Group"), an independent real estate consulting firm,
reviewed the Douglas Elliman appraisal and issued a review and concurrence
report dated February 15, 1995 stating that, based upon the review described in
such report, The Weitzman Group concurred with the Douglas Elliman appraisal
and that, in the opinion of The Weitzman Group, the market value estimated by
Douglas Elliman did not vary by more that 5 percent from the market value The
Weitzman Group would have estimated in a full and complete appraisal of the
same interests. Copies of the 1994 appraisal and concurrence report were filed
as exhibits to the Company's Current Report on Form 8-K filed on February 22,
1995 and a copy of the 1993 appraisal was filed as an exhibit to the Company's
Current Report on Form 8-K filed on February 22, 1994.
Appraisals are only estimates of value and should not be relied
upon as measures of realizable value because the current market value of a
property is not indicative of the value such property may have at any time in
the future. Future value of an appraised property will depend on a variety of
factors, including the economic success of the property, the impact of inflation
on property values, local competitive conditions, prevailing interest rates and
general economic circumstances.
CAPITAL IMPROVEMENT PROGRAM. In connection with the making of
the Loan, independent consulting firms conducted structural, mechanical, systems
and engineering analyses of the Property. Their reports (collectively, the
"Engineering Reports") indicated that the Property was in generally good
condition and recommended a program of capital improvements over the term of the
Loan. The Borrower agreed to make all of the improvements recommended in the
Engineering Reports, as well as other major capital improvements to the
Property. At the time of the Company's initial public offerings, the Borrower
projected for its capital improvement program an aggregate expenditure (after
adjusting for inflation) of approximately $260 million for the period from 1985
through the year 2000, which amount substantially exceeds the cost of the
capital improvements recommended in the Engineering Reports ($197.6 million). On
a cumulative basis since the inception of the Loan and through December 31,
1995, the Borrower has spent $223.5 million in connection with the capital
improvements required in the Engineering Reports and an additional $108.2
million for other capital improvements.
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<PAGE>
In 1995, 1994 and 1993, the Borrower incurred approximately $13
million, $14 million and $27 million, respectively, under its capital
improvement program. Progress continued on elevator replacements and upgrades,
roof repairs and fire safety systems.
NBC TENANCY. National Broadcasting Company, Inc. ("NBC")
currently leases approximately 1.3 million square feet of space in four
Rockefeller Center buildings (the GE Building, the Studio Building, and the
GE West Building, which buildings are interconnected, and 10 Rockefeller Plaza).
In December 1988, the Borrower and NBC signed lease agreements
extending NBC's primary lease at Rockefeller Center through 2022. NBC has
options to extend its lease for two renewal periods through 2042. Through
1997 NBC will continue to pay rents on the basis of its prior lease. After
1997, the lease agreements call for NBC to pay rent on a "net" basis, that is,
without including amounts normally payable with regard to real estate taxes and
certain operating expenses, which NBC would pay directly. See Management's
Discussion and Analysis of Financial Condition and Results of Operations.
LEASING. The average annual office rent (base rent plus
escalations) at the Property at December 31, 1995 was $32.62 per square foot,
while 1995 leases for office space in the Property have been signed and have
taken effect at average net effective rents of $31.64 per square foot and with
lease terms which generally range from 5 to 15 years. These rents are comparable
with current midtown Manhattan asking market rents for office buildings. See
"Competitive Market".
Recent leases for space in the Property typically provide for
proportionate pass-throughs of 100% to 110% of increases in certain operating
expenses and 100% of increases in real estate taxes and electricity recoveries
at the wholesale rate plus a 9% administrative charge.
For lease expiration information for the Property, see Results
of Operations - The Property.
At December 31, 1995, the occupancy rate for the Property was
approximately 86.3%. The following table shows the historical occupancy rates,
average annual rent per square foot (base rent plus escalations) and average net
effective new and renewal rates for all leases (office, retail and storage) at
the Property for the past fifteen years. While the average net effective rental
rates for new and renewal space were generally consistent with those prevailing
in the midtown Manhattan market during this period, the Property's occupancy
rates (except for 1995) were higher.
<TABLE>
<CAPTION>
Average net effective
Occupancy Average annual rent rent per sq.ft. for
Year percentage per sq.ft. for all leases new and renewal leases
---- ---------- ------------------------- ----------------------
<S> <C> <C> <C>
1981 99.5% $16.84 $32.44
1982 99.4 20.28 17.19*
1983 98.6 21.36 37.12
1984 98.3 23.37 41.98
1985 98.0 27.05 43.42
1986 98.3 28.53 40.65
1987 98.2 29.34 42.70
1988 98.4 30.98 42.04
1989 96.2 31.99 45.82
1990 95.7 33.98 43.43
1991 95.9 34.57 41.34
1992 94.0 33.47 33.76
1993 94.6 32.97 35.93
1994 90.2 31.99 31.98
1995 86.3 31.48 33.63
</TABLE>
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*Includes a substantial amount of space leased to NBC and RCA at below
market rates on exercise of renewal options.
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COMPETITIVE MARKET. The information set forth in this section is
based upon data supplied by Cushman & Wakefield, Inc. ("C&W") and publicly
available sources. The statements with respect to real estate markets and market
trends made in this section and elsewhere in this Report are based upon the
conclusions of C&W as experts. C&W is an affiliate of RGI.
New York City is the largest office real estate market in the
United States. Its central business district has two primary concentrations,
midtown and downtown Manhattan. The Property is located in Manhattan's midtown
office market. The midtown market comprises approximately 221 million square
feet of rentable office space, of which 168 million square feet of existing
space is considered prime. The market principally serves corporate headquarters
and financial, legal, communications, advertising and other service firms, as
well as foreign businesses and governments, for which prestige, central location
and amenities are factors justifying the higher rental rates charged for prime
office space.
The midtown Manhattan office space market has historically been
cyclical. Following a low point in 1975, the market rebounded sharply at the end
of the decade because of the low level of new construction and improvement in
the local and national economies. During the period 1975-1979, vacancies
decreased sharply from approximately 15% to approximately 2% and average asking
rents doubled to approximately $20.50 per square foot at the start of 1980. By
1985, rents had reached $38 per square foot, and vacancies had risen to over 9%.
An unprecedented amount of new construction accounted for approximately 22
million square feet added to the market from 1986 to 1992. The level of new
construction activity has since decreased, with 380,616 square feet added
between 1993 and 1995. For prime space, vacancy levels reached 17.2% and average
asking rents topped $40 per square foot in 1990; by December 1995, the vacancy
rate had decreased to 12.1%, while asking rents averaged $34.97 per square foot.
The Property competes with a large number of existing prime office
properties in the midtown Manhattan market, including other buildings in which
RGI has an interest. RGI and its affiliates have ownership interests in and
manage (or, in the case of two buildings, manage without having an ownership
interest) the four other buildings which are a part of the entire Rockefeller
Center complex but are not included in the Property. One of these four
buildings, Time & Life Building, is primarily occupied under a long-term lease
and in recent years has had little or no vacant space; the McGraw-Hill Building,
1251 Avenue of the Americas and 1211 Avenue of the Americas Buildings had
vacancy levels which ranged from 4.5% to .9% at December 31, 1995. Rockefeller
Center Management Corporation ("RCMC"), a wholly-owned subsidiary of RGI,
performs services for these buildings and C&W performs services for other office
buildings. Depending on the nature of their interests in these other properties,
RGI and its affiliates might have an incentive to favor them. In addition, RGI
owns property adjacent to the 1251 Avenue of the Americas Building, on which it
may construct a building (which would be an addition to the Rockefeller Center
complex, but which would not be included in the Property) of up to 1.5 million
rentable square feet. RGI and the Borrower have agreed, however, that RCMC, and
any successor or replacement management company which is an affiliate of the
Borrower, will not favor the leasing of other buildings over the Property. The
Borrower makes periodic reports to the Company regarding space leased in
buildings other than those included in the Property in which RGI and its
affiliates have ownership interests.
The Property will be subject to competition in the future from
continuing new office construction in midtown Manhattan. As of December 31,
1995, there were no additional buildings under construction in the midtown
market. RGI might in the future (including by use of the development rights and
air rights excluded from the Property) build, acquire or expand, and RCMC or C&W
might perform leasing and management services for other properties in the
midtown market.
Within the midtown market, certain high quality office buildings
have historically achieved above-average rents and rent rate stability due to
various factors including their location, amenities and name recognition.
Changes in local, national and international economic conditions will continue
to affect the midtown Manhattan office space market, so it is anticipated that
there will be fluctuations of both occupancy levels and rental rates.
REAL ESTATE TAXES. The targeted and actual assessed valuation of
the Property and the real estate taxes payable by the Property are set forth in
the following schedule for the fiscal year periods encompassing the years ended
December 31, 1992, 1993, 1994 and 1995. The schedule reflects the final
settlement negotiated with the Tax Commission of the City of New York during
1995. This settlement reduced the targeted assessed valuation of the Property.
Increases in targeted assessed valuation are required to be phased-in over a
five-year period commencing with the fiscal year for which it is first
increased.
-7-
<PAGE>
<TABLE>
<CAPTION>
($ in millions)
FISCAL YEAR TARGETED ASSESSED ACTUAL ASSESSED REAL ESTATE
JULY 1-JUNE 30 VALUATION(1) (2) VALUATION(1) (2) TAXES PAYABLE(1) (2)
- -------------- ---------------- ---------------- --------------------
<S> <C> <C> <C>
1992/93 $373.4 $373.4 $39.9
1993/94 $359.7 $359.7 $39.6
1994/95 $320.8 $320.8 $34.0
1995/96 $318.2 $318.2 $33.1
</TABLE>
- --------------------
(1) Excludes amounts applicable to Radio City Music Hall. Real estate taxes
assessed against the Music Hall portions of the Property are not charged
to the Property.
(2) Excludes amounts applicable to the NBC space, see Note 5 of the Notes to
Combined Financial Statements of Rockefeller Center Properties and RCP
Associates.
PROPERTY MANAGEMENT. The Borrower entered into a Management and
Rental Agreement, dated as of September 1, 1985 (the "Property Management
Agreement"), engaging RCMC to manage the Property and appointing RCMC as the
Borrower's exclusive rental agent for the Property. RCMC was organized by RGI in
1973 to manage Rockefeller Center. RCMC's duties include, among other things,
the management of the Property and the supervision of its maintenance, repair,
alteration and operation and the preparation of operating and capital and
capital improvement budgets. As exclusive rental agent, RCMC is required to use
reasonable efforts to keep the Property at all times fully rented. RCMC has
agreed not to favor the leasing of other buildings managed by RCMC over the
Property. The Property Management Agreement will expire on the Equity Conversion
Date, unless terminated prior to such date, and thereafter may be renewed by
agreement of the Borrower and RCMC for successive three-year periods. During the
term of the Property Management Agreement, RCMC will be reimbursed for Property
operating costs and will be paid a fee at the initial rate of approximately $1.8
million (or $.30 per square foot of rentable area) escalating as of each
December 1st thereafter (commencing December 1, 1986) with the Consumer Price
Index. RCMC's annual fee for the period commencing December 1, 1994 was
established at approximately $2.7 million. RCMC also receives leasing
commissions for rental services payable at rates and in accordance with terms
set forth in the Property Management Agreement. For the year ended December 31,
1995, RCMC earned such leasing commissions in the approximate amount of $4.9
million.
By amendment effective October 1, 1995, the Property Management Agreement was
modified in several respects. First, the term of the Property Management
Agreement was amended to expire on December 31, 1996, subject to the right of
either RCMC or the Borrower to terminate on not less than 60 days' notice given
on or subsequent to the date of consummation of the Chapter 11 Plan (the "Plan
Consummation Date"). Second, RCMC's annual management fee was increased from
approximately $2.7 million to approximately $2.8 million and the Borrower agreed
to pay RCMC the following additional fees for the additional services indicated:
(i) a fee of $102,500 per month for human resource services; (ii) a fee of
$63,833 per month until the Plan Consummation Date for certain lease preparation
and related services; and (iii) until terminated by either party on not less
than 30 days' notice given on or subsequent to the Plan Consummation Date, a fee
of $222,084 per month for certain marketing, rental and corporate communication
services. Third, the parties agreed that RCMC would no longer receive leasing
commissions for rental services. Finally, the Property Management Agreement was
amended to provide that RCMC may not enter into, modify or cancel significant
leases at the Property without first obtaining the approval of the Borrower and
the Company.
If the transactions contemplated by the Merger Agreement are consummated,
the Property will be managed by Tishman Speyer Properties, L.P., ("Tishman
Speyer"), an affiliate of Rockprop L.L.C., one of the members of the Investor
Group, on terms to be negotiated between Tishman Speyer and the Investor Group.
REPURCHASE OF CONVERTIBLE DEBENTURES.
Between 1987 and 1992, the Company repurchased and retired a
portion of its Convertible Debentures and financed these repurchases with
unsecured short term nonconvertible borrowings subsequently replaced with
Floating Rate Notes and 14% Debentures in December 1994. The Company under the
terms of the 14% Debentures and Floating Rate Notes is not permitted to
repurchase any of its currently outstanding Convertible Debentures.
-8-
<PAGE>
At December 31, 1995, Current Coupon and Zero Coupon Convertible
Debentures with face values of $121,830,000 and $366,065,000, respectively, had
been cumulatively repurchased at an aggregate cost of $217,295,000. At December
31, 1995, the Company had $116,296,000 of Floating Rate Notes, $75,000,000 of
14% Debentures and a $10,200,000 GSMC loan outstanding. The Company has in place
interest rate swap agreements that establish fixed rates of interest payable on
a portion of the Floating Rate Notes.
INCOME TAX MATTERS.
The Company qualifies and has elected to be treated as a REIT
under the Code, commencing with its taxable year ended December 31, 1985.
The election to be a REIT continues unless terminated or
revoked. In brief, if the Code requirements for qualification as a REIT continue
to be met, the Company (which would otherwise be subject to taxation as a
corporation) is, with limited exceptions, not taxed at the corporate level on
taxable income that is currently distributed to its stockholders. In any taxable
year for which the Company would not qualify as a REIT, the Company would be
subject to Federal income tax as an ordinary corporation without any deduction
for distributions to stockholders, and generally would not be eligible again to
elect REIT status for four years following the year in which such qualification
is lost. To the extent that the Company would as a consequence be subject to
significant tax liability for any such year, the amount of cash available for
satisfaction of its liabilities and distributions to its stockholders would be
reduced or eliminated, and the Company could be required to borrow to pay such
liabilities and make such distributions.
The Company must meet and maintain certain requirements in order
to qualify as a REIT. These requirements relate principally to the Company's
organizational structure, the nature of its assets, the sources of its income,
and the distribution of its income to its stockholders.
The statutory provisions relating to REIT qualification are
highly technical and complex. While management of the Company believes that the
Company will continue to remain qualified as a REIT, no assurance of continuing
qualification can be given.
POLICIES.
BUSINESS ACTIVITY. The Company's Certificate of Incorporation
precludes it from engaging in any business other than as lender under the Loan
Agreement and holding the Equity Option and activities related thereto. The
provision to this effect in the Certificate of Incorporation may be amended only
by the holders of at least 80% of the Common Stock entitled to vote thereon.
DISTRIBUTIONS FROM OPERATIONS. Prior to May 11, 1995, the date
the Borrower filed for protection under Chapter 11 of the Federal Bankruptcy
Code, the Company's intentions were to make four distributions annually to its
stockholders during the months of April, July, October and December. Due to the
significant uncertainties created by the Borrower's Chapter 11 filings, the
Company has not made any distributions since the April 1995 dividend. In
addition, under the terms of the Merger Agreement, the Company is prohibited
from making distributions unless required to do so to maintain REIT status. To
the extent that distributions made by the Company exceed annual net income as
computed for tax purposes, the excess is treated as a return of capital.
The Company also has made and intends to continue to make
sufficient distributions to meet the requirements for being treated as a REIT
for federal income tax purposes. Since the applicable distribution requirements
are calculated after inclusion of certain non-cash income and deduction of
certain non-cash charges, including amortization of original issue discount in
connection with the Convertible Debentures, Floating Rate Notes and 14%
Debentures, distributions by the Company may exceed such distribution
requirements.
INVESTMENTS. The Company may make investments which will not
result in the Company's being disqualified as a REIT. The Company invests in
short-term (maturing in less than three months) instruments with only the
highest credit ratings.
-9-
<PAGE>
DILUTION. Other than issuances of shares of Common Stock on
conversion of Convertible Debentures or exercise of Warrants, and except in
connection with any exercise of its rights under the Rights Offering Agreement,
the Company does not intend to issue any additional capital stock, other than
Warrants issuable in exchange for SARs, or any rights, warrants or options to
purchase any additional Common Stock.
BORROWINGS. The Company may borrow, on an unsecured basis or on
a secured basis, to participate in the development of certain improvements at
the Property, refinance debt, make any distributions to stockholders (including
distributions to stockholders in order to maintain its qualification as a REIT),
obtain working capital, and pay any taxes which might become due if the Company
failed to qualify as a REIT. The terms of the Floating Rate Notes and the 14%
Debentures restrict the Company's ability to incur additional indebtedness.
OTHER ACTIVITIES AND INVESTMENTS. It is the policy of the
Company not to (i) invest in the securities of other issuers for the purpose of
exercising control, (ii) underwrite securities of other issuers, or (iii) offer
securities in exchange for property.
INVESTMENT BY MITSUBISHI ESTATE COMPANY, LIMITED IN RGI.
In 1990, Mitsubishi Estate Company, Ltd. ("Mitsubishi Estate")
acquired a controlling interest in the outstanding stock of RGI. RGI, through
affiliate partnerships, is the equity owner of the Property. RCPI has no
interest in RGI and this change in the ownership of RGI had no effect on RCPI's
rights under its mortgage on the Property.
ITEM 2. PROPERTIES.
None. The principal assets of the Company are the mortgage loan
receivable secured by the Property and the Equity Option described in
Item 1. Business above.
ITEM 3. LEGAL PROCEEDINGS.
On January 23, 1995, Bear, Stearns & Co., Inc. and Donaldson
Lufkin & Jenrette Securities Corporation commenced an action against the Company
in the Supreme Court of New York, County of New York. The plaintiffs allege that
the Company breached a contract relating to the plaintiffs' provision of
investment banking services to the Company in connection with a proposed 1994
transaction. The plaintiffs seek $5,062,500, plus costs, attorneys' fees and
interest. The Supreme Court of New York denied the Company's motion to dismiss
the complaint on September 21, 1995. On October 10, 1995, the Company filed an
answer to the complaint which denied the plaintiffs' allegations and asserted
numerous affirmative defenses. The Company intends to vigorously contest the
plaintiffs' claims.
On May 11, 1995, the two partnerships comprising the Borrower
filed for protection under Chapter 11 of the Federal Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New York as
described in Note 1.
On May 24, 1995, Jerry Krim commenced an action encaptioned Krim
v. Rockefeller Center Properties, Inc. and Peter D. Linneman. On June 7, 1995,
Kathy Knight and Moishe Malamud commenced an action encaptioned Knight, et al.
v. Rockefeller Center Properties, Inc. and Peter D. Linneman. Both actions were
filed in the United States District Court for the Southern District of New York
and purport to be brought on behalf of a class of plaintiffs comprised of all
persons who purchased the Company's common stock between March 20, 1995 and May
10, 1995. The complaints allege that the Company and Dr. Linneman violated the
federal securities laws by their purported failure to disclose, prior to May 11,
1995, that the Borrower would file for bankruptcy protection. The cases have
been consolidated. On July 28, 1995, the Company and Dr. Linneman filed answers
to the complaints denying plaintiffs' substantive allegations and asserting
numerous affirmative defenses. On September 22, 1995, plaintiffs served an
Amended Class Action Complaint adding the Company's remaining directors and its
president as defendants. In addition to the foregoing claims, the Amended
Complaint also asserts a cause of action for breach by the Company's directors
and its president of their fiduciary duties by approving the Combination
Agreement. The plaintiffs are seeking damages in such amount as may be proved at
trial. Plaintiffs are also seeking injunctive relief, plus costs, attorneys'
fees and interest. The Company intends to vigorously contest these actions.
-10-
<PAGE>
On July 6, 1995, Charal Investment Company, Inc. commenced a
derivative action against certain of the Company's present and former directors
in the Court of Chancery of the State of Delaware in and for New Castle County
("Delaware Court of Chancery"). The Company was named as a nominal defendant.
The plaintiff alleged that the directors breached their fiduciary duties by: (1)
using commercial paper proceeds to repurchase Convertible Debentures in
1987-1992; (2) entering into interest rate swaps; and (3) making capital
distributions to stockholders during the years 1990 through 1994. On February
21, 1995, prior to the commencement of the action, the Company's Board of
Directors appointed a special committee of the Board to review the plaintiff's
February 3, 1995 pre-suit demand that the Company's Board of Directors institute
litigation on the Company's behalf with respect to such claims and recommend a
course of action to the full Board. Plaintiff nevertheless commenced the action,
asserting that circumstances did not permit further delay. On November 7, 1995,
the Delaware Court of Chancery dismissed this action without prejudice due to
plaintiff's failure to comply with the requirements of the Delaware Court of
Chancery Rule 23.1.
On November 14, 1995, the plaintiff moved to amend and
supplement its complaint and/or to amend or alter the Delaware Court's judgment
so as to permit the filing of additional derivative allegations, as well as
class allegations that the Company's Board of Directors had approved the
proposed Merger without considering the value to the Company of the matters set
forth in the plaintiff's pre-suit demand. The Delaware Court of Chancery denied
the plaintiff's motion on February 12, 1996.
On November 28, 1995, the special committee of the Board
reviewed the report of its counsel and, after deliberation, determined to
recommend to the Company's Board of Directors that the plaintiff's pre-suit
demand be rejected because it would not be in the best interest of the Company
to pursue the matters set forth in such demand. On December 5, 1995, after
considering the recommendation of the special committee and the report of the
special committee's counsel, the Company's Board of Directors voted to reject
the plaintiff's pre-suit demand.
On February 29, 1996, Charal Investment Company, Inc. filed a
new action in the Delaware Court of Chancery purporting to assert both
derivative and class counts. The derivative count alleges claims substantially
identical to those set forth in Charal's July 6, 1996 complaint, which claims
were the subject of the Board's rejection of plaintiff's pre-suit demand. The
class count alleges that the directors failed to consider the value of the
derivative claims in connection with the Board's evaluation of the fairness of
the proposed Merger. The Company is named only as a nominal defendant in this
action. To the extent that any relief is sought against the Company, the Company
intends to vigorously contest the action.
On July 31, 1995, L.L. Capital Partners, L.P. commenced an
action against the Company in the United States District Court in the Southern
District of New York. The plaintiff alleges that, in a Company prospectus dated
November 3, 1993, the Company failed to disclose its purported belief that the
Rockefeller Interests and Mitsubishi Estate would cease to fund the Borrower's
cash flow shortfalls. The plaintiff seeks recovery under Section 12(2) of the
Securities Act of 1933, Section 10(b) of, and Rule 10b-5 under the Exchange Act
and the common law. The Company intends to vigorously contest this action. In
September 1995, counsel for the Company filed a motion to dismiss this action
for failure to state a claim. That motion has been fully submitted and argued
and the parties are awaiting a decision by the Court.
On September 13 and 14, 1995, five class action complaints,
captioned Faegheh Moezinia v. Peter D. Linneman, Benjamin D. Holloway, Peter G.
Peterson, William F. Murdoch, Jr. and Rockefeller Center Properties, Inc.;
Martin Zacharias v. B.D. Holloway, P.G. Peterson, W.F. Murdoch, P.D. Linneman
and Rockefeller Center Properties, Inc.; James Cosentino v. Peter D. Linneman,
Benjamin D. Holloway, Peter G. Peterson, William F. Murdoch, Jr. and Rockefeller
Center Properties, Inc.; Mary Millstein v. Peter D. Linneman, Peter G. Peterson,
Benjamin D. Holloway, William F. Murdoch, Jr. and Rockefeller Center Properties,
Inc.; and Robert Markewich v. Peter D. Linneman and Daniel M. Neidich, et al.
were filed in the Delaware Court of Chancery. On October 11, 1995, an additional
complaint captioned Hunter Hogan v. Rockefeller Center Properties, Inc., et al.
was filed in the Delaware Court of Chancery. Each of the complaints purports to
be brought on behalf of a class of plaintiffs comprised of stockholders of the
Company who have been or will be adversely affected by the Combination
Agreement. All of the complaints allege that the Company's Directors breached
their fiduciary duties by approving the Combination Agreement. The complaints
seek damages in such amount as may be proved at trial. Plaintiffs also seek
injunctive relief, plus costs and attorneys fees. On November 8, 1995, the
Delaware Court of Chancery entered an order consolidating these actions. The
Company intends to contest these actions vigorously.
On February 28, 1996, Zell/Merrill Lynch Real Estate Opportunity
Partners Limited Partnership III ("ZML") filed a complaint and a motion for a
preliminary injunction against the Company. The action is
-11-
<PAGE>
captioned Zell/Merrill Lynch Real Estate Opportunity Partners Limited
Partnership III v. Rockefeller Center Properties, Inc., 96 Civ. 1445, and is
pending in the United States Federal District Court for the Southern District of
New York. The complaint alleges that the Company breached the ZML Investment
Agreement, dated August 18, 1995, between the Company and ZML (the "ZML
Investment Agreement") by failing to sell to ZML 1,788,908 shares of Common
Stock and by failing to appoint a person designated by ZML to the Company's
Board of Directors. ZML seeks specific performance of the ZML Investment
Agreement. ZML's motion for a preliminary injunction seeks to enjoin the
March 25, 1996 Special Meeting pending resolution of ZML's claim
for specific performance. The Company intends to vigorously contest both the
motion for a preliminary injunction and the underlying action and the Company
does not believe that ZML is entitled to the relief requested. A hearing on the
motion for a preliminary injunction is scheduled for March 19, 1996.
The Company does not expect the outcome of the above litigations
to have a material effect on the financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
-12-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal market for the Company's Common Stock is the New
York Stock Exchange. For quarterly price information with respect to the
Company's Common Stock for the two years ended December 31, 1995, see "Quarterly
Stock Information" at page F-47 herein, which information is incorporated herein
by reference.
As of March 5, 1996, there were 9,762 stockholders of record.
For information on the frequency and amount of dividends paid
with respect to the Company's Common Stock during the two years ended December
31, 1995, see Note 7 "Income Taxes and Distributions" at page F-19 herein, which
information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
Selected financial information of the Company for the five years
ended December 31, 1995 is set forth on pages F-25 through F-28 herein and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information set forth under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages F-29 through F-46 herein is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data of the Company
and the report of independent auditors thereon are set forth at pages F-2
through F-24 herein and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
-13-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item will be incorporated by
reference from the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders or, if no such Proxy Statement is filed within 120 days after the
end of the Company's last fiscal year, will be included in an amendment to this
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be incorporated by
reference from the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders or, if no such Proxy Statement is filed within 120 days after the
end of the Company's last fiscal year, will be included in an amendment to this
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be incorporated by
reference from the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders or, if no such Proxy Statement is filed within 120 days after the
end of the Company's last fiscal year, will be included in an amendment to this
Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be incorporated by
reference from the Company's Proxy Statement for its 1996 Annual Meeting of
Stockholders or, if no such Proxy Statement is filed within 120 days after the
end of the Company's last fiscal year, will be included in an amendment to this
Form 10-K.
-14-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THE REPORT.
1. Financial Statements and Report of Independent Auditors.
A. Registrant-See Item 8.
B. Rockefeller Center Properties and RCP Associates.
(1) Report of Independent Auditors.
(2) Combined Balance Sheets at December 31, 1995 and 1994.
(3) Combined Statements of Operations and
Partners' Capital Deficiency for the
years ended December 31, 1995, 1994 and
1993.
(4) Combined Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993.
(5) Notes to Combined Financial Statements.
2. Financial Statement Schedule.
A. No schedules have been included since the required
information is not present or is not present in
amounts sufficient to require submission of the
schedules, or because the information required is
included in the financial statements and notes
thereto.
3. Exhibits.
Documents Incorporated by Reference:
(3.1) Restated Certificate of Incorporation of the
Registrant, as amended June 15, 1988, is
incorporated by reference to Exhibit 3.4 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988.
(3.2) By-laws of the Registrant, as amended February 22,
1995, is incorporated by reference to Exhibit 3.2
to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
(4.1) Debenture Purchase Agreement dated as of December
18, 1994 between Registrant and Whitehall Real
Estate Limited Partnership V ("Whitehall") is
incorporated by reference to Exhibit 4.9 to the
Registrant's Current Report on Form 8-K dated
December 30, 1994.
(4.2) Warrant Agreement dated as of December 18, 1994
between the Registrant and Chemical Bank, agent,
relating to the issuance and sale to Whitehall of
warrants to purchase shares of the Registrant's
common stock is incorporated by reference to
Exhibit 4.6 to the Registrant's Current Report on
Form 8-K dated December 22, 1994.
(4.3) Stock Appreciation Rights Agreement dated as of
December 18, 1994 between the Registrant and
Chemical Bank, agent, relating to the issuance and
sale to Whitehall of stock appreciation rights
exchangeable for warrants of the Registrant and
exercisable for the Registrant's 14% Debentures
due 2007 is incorporated by reference to Exhibit
4.7 to the Registrant's Current Report on Form 8-K
dated December 22, 1994.
-15-
<PAGE>
(4.4) Letter Agreement dated December 18, 1994 among the
Registrant, Whitehall and Goldman, Sachs & Co.
relating to board representation and other matters
is incorporated by reference to Exhibit 4.8 to the
Registrant's Current Report on Form 8-K dated
December 22, 1994.
(4.5) Collateral Trust Agreement dated as of December
29, 1994 among the Registrant, Bankers Trust
Company and Gary R. Vaughan, Trustees, is
incorporated by reference to Exhibit 4.10 to the
Registrant's Current Report on Form 8-K dated
December 30, 1994.
(4.6) Registration Rights Agreement dated as of December
29, 1994 among the Registrant, Goldman Sachs
Mortgage Company ("GSMC") and Whitehall is
incorporated by reference to Exhibit 4.11 to the
Registrant's Current Report on Form 8-K dated
December 30, 1994.
(4.7) Letter amendment dated as of December 29, 1994
between the Registrant and Chemical Bank, warrant
agent, amending the Warrant Agreement dated as of
December 18, 1994 between the Registrant and
Chemical Bank, warrant agent, is incorporated by
reference to Exhibit 4.12 to the Registrant's
Current Report on Form 8-K dated December 30,
1994.
(4.8) Letter amendment dated as of December 29, 1994
between the Registrant and Chemical Bank, SAR
agent, amending the SAR Agreement dated as of
December 18, 1994 between the Registrant and
Chemical Bank, SAR agent, is incorporated by
reference to Exhibit 4.13 to the Registrant's
Current Report on Form 8-K dated December 30,
1994.
(4.9) Indenture dated as of September 15, 1985 between
the Registrant and Manufacturers Hanover Trust
Company, as Trustee (the "Trustee"), including the
forms of Current Coupon Convertible Debenture,
Zero Coupon Convertible Debenture and Floating
Rate Note, is incorporated by reference to Exhibit
4 to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1985.
(4.10) First Supplemental Indenture dated as of December
15, 1985 between the Registrant and the Trustee,
is incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1985.
(4.11) Form of definitive share certificate for Common
Stock, is incorporated by reference to
Exhibit 4.3 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1985.
(4.12) Instrument of Resignation, Appointment and
Acceptance dated as of December 1, 1993 among the
Registrant, Chemical Bank, successor by merger to
Manufacturers Hanover Trust Company, and United
States Trust Company of New York is incorporated
by reference to Exhibit 4.21 to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1993.
(10.1) Loan Agreement dated as of December 18, 1994 among
the Registrant, the lenders parties thereto and
GSMC, as agent, is incorporated by reference to
Exhibit 10.35 to the Registrant's Current Report
on Form 8-K dated December 30, 1994.
(10.2) Loan Agreement dated as of September 19, 1985
among the Registrant, RCP Associates
("Associates") and Rockefeller Center Properties
("RCP"), is incorporated by reference to Exhibit
19.1 to the Registrant's Quarterly Report on Form
10-Q for the period ended September 30, 1985.
(10.3) Consolidated Mortgage Note of Associates and RCP
dated September 19, 1985, is incorporated by
reference to Exhibit 19.4 to the Registrant's
Quarterly Report on Form 10-Q for the period ended
September 30, 1985.
-16-
<PAGE>
(10.4) Mortgage Note of Associates and RCP dated
September 19, 1985, is incorporated by reference
to Exhibit 19.5 to the Registrant's Quarterly
Report on Form 10-Q for the period ended September
30, 1985.
(10.5) Letter Agreement dated September 12, 1985 among
Rockefeller Group, Inc. ("RGI"), Radio City Music
Hall Productions, Inc. ("RCMHP"), the Registrant,
Goldman, Sachs & Co. and Shearson Lehman Brothers
Inc., as representatives of the several
Underwriters with respect to the Registrant's
Common Stock, and Goldman Sachs International
Corp. and certain other Representatives, as
representatives of the several Underwriters with
respect to the Registrant's Convertible
Debentures, is incorporated by reference to
Exhibit 19.8 to the Registrant's Quarterly
Report on Form 10-Q for the period ended
September 30, 1985.
(10.6) Management and Rental Agreement dated as of
September 1, 1985 among RCP, Associates and
Rockefeller Center Management Corporation, is
incorporated by reference to Exhibit 19.9 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1985.
(10.7) Administrative Services Agreement dated September
11, 1985 between the Registrant and Cushman &
Wakefield Realty Advisors, Inc., is incorporated
by reference to Exhibit 19.10 to the Registrant's
Quarterly Report on Form 10-Q for the period ended
September 30, 1985.
(10.8) Form of Amended and Restated Partnership Agreement
of RCP among RGI, RCMHP and the Registrant, is
incorporated by reference to Exhibit 19.11 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1985.
(10.9) Form of Amended and Restated Agreement of Limited
Partnership of Associates among RGI, RCMHP and the
Registrant, is incorporated by reference to
Exhibit 19.12 to the Registrant's Quarterly Report
on Form 10-Q for the period ended September 30,
1985.
(10.10) Dividend Reinvestment Plan of the Registrant, is
incorporated by reference to Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1985.
(10.11) Amended and Restated Consolidated Mortgage and
Security Agreement, dated as of December 1, 1988
among Associates, RCP and the Registrant, is
incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988.
(10.12) Amended and Restated Mortgage and Security
Agreement, dated as of December 1, 1988 among
Associates, RCP and the Registrant, is
incorporated by reference to Exhibit 10.16 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988.
(10.13) Amended and Restated Assignment of Rents, dated as
of December 1, 1988 among Associates, RCP and the
Registrant, is incorporated by reference to
Exhibit 10.17 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.
(10.14) Amended and Restated Purchase Option, dated as of
December 1, 1988 among Associates, RCP and the
Registrant, is incorporated by reference to
Exhibit 10.18 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1988.
(10.15) Consent and Agreement, dated as of December 1,
1988 among Associates, RCP and the Registrant, is
incorporated by reference to Exhibit 10.19 to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988.
-17-
<PAGE>
(10.16) Second Amendment dated April 6, 1993 to the Loan
Agreement is incorporated by reference to Exhibit
10.22 to the Registrant's Current Report on Form
8-K dated April 23, 1993.
(10.17) Third Amendment dated April 6, 1993 to the Loan
Agreement is incorporated by reference to Exhibit
10.23 to the Registrant's Current Report on Form
8-K dated April 23, 1993.
(10.18) Amendment to Amended and Restated Consolidated
Mortgage dated as of April 6, 1993 by the
Borrowers to the Registrant is incorporated by
reference to Exhibit 10.24 to the Registrant's
Current Report on Form 8-K dated April 23, 1993.
(10.19) Amendment to Amended and Restated Mortgage dated
as of April 6, 1993 by the Borrowers to the
Registrant is incorporated by reference to Exhibit
10.25 to the Registrant's Current Report on Form
8-K dated April 23, 1993.
(10.20) Amendment to Amended and Restated Purchase Option
dated as of April 6, 1993 by the Borrowers to the
Registrant is incorporated by reference to Exhibit
10.26 to the Registrant's Current Report on Form
8-K dated April 23, 1993.
(10.21) Amendment to Amended and Restated Assignment of
Rents dated as of April 6, 1993 by the Borrowers
to the Registrant is incorporated by reference to
Exhibit 10.27 to the Registrant's Current Report
on Form 8-K dated April 23, 1993.
(10.22) Letter of Credit dated April 8, 1993 from The
Mitsubishi Bank, Limited to the Registrant is
incorporated by reference to Exhibit 10.28 to the
Registrant's Current Report on Form 8-K dated
April 23, 1993.
(10.23) Letter of Credit dated April 8, 1993 from The
Mitsubishi Trust and Banking Corporation, New York
Branch, to the Registrant, as beneficiary is
incorporated by reference to Exhibit 10.29 to the
Registrant's Current Report on Form 8-K dated
April 23, 1993.
(10.24) Letter Agreement dated February 17, 1994 between
the Registrant and RGI concerning temporary
relinquishment by RGI of its right to nominate 40%
of the Registrant's Board of Directors is
incorporated by reference to Exhibit 10.33 to the
Registrant's Current Report on Form 8-K dated
February 22, 1994.
(10.25) Fourth Amendment dated February 22, 1994 to the
Loan Agreement is incorporated by reference to
Exhibit 10.33 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993.
(10.26) Agreement and Plan of Merger dated as of November
7, 1995 among the Registrant, RCPI Holdings Inc.,
RCPI Merger Inc., Whitehall Street Real Estate
Limited Partnership V, Rockprop, L.L.C., David
Rockefeller, Exor Group S.A. and Troutlet
Investments Corporation is incorporated by
reference to Exhibit 10.28 to the Registrant's
Current Report on Form 8-K dated November 13,
1995.
(10.27) Supplemental Agreement dated as of November 7,
1995 between the Registrant and Goldman Sachs
Mortgage Company is incorporated by reference to
Exhibit 10.29 to the Registrant's Current Report
on Form 8-K dated November 13, 1995.
(10.28) Letter Agreement among the Registrant, Goldman,
Sachs & Co. and Whitehall Street Real Estate
Limited Partnership V is incorporated by reference
to Exhibit 10.30 to the Registrant's Current
Report on Form 8-K dated November 13, 1995.
-18-
<PAGE>
(10.29) Amendment No. 1 dated as of February 12, 1996 to
the Agreement and Plan of Merger dated as of
November 7, 1995 among the Registrant, RCPI
Holdings Inc., RCPI Merger Inc., Whitehall Street
Real Estate Limited Partnership V, Rockprop,
L.L.C., David Rockefeller, Exor Group S.A. and
Troutlet Investments Corporation is incorporated
by reference to Exhibit 10.31 to the Registrant's
Current Report on Form 8-K dated February 22,
1996.
(10.30) Amendment No. 1 dated as of February 13, 1996 to
the Supplemental Agreement dated as of November 7,
1995 between the Registrant and Goldman Sachs
Mortgage Company is incorporated by reference to
Exhibit 10.32 to the Registrant's Current Report
on Form 8-K dated February 22, 1996.
(27.1) Registrant's Financial Data Schedule.
(99.1) Appraisal of Real Property as of December 31, 1994
prepared by Douglas Elliman Appraisal and
Consulting Division dated January 11, 1995 is
incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K dated
February 22, 1995.
(99.2) Review and Concurrence Report prepared by the
Weitzman Group, Inc. dated February 15, 1995 is
incorporated by reference to Exhibit 99.2 to the
Registrant's Current Report on Form 8-K dated
February 22, 1995.
(B) REPORTS ON FORM 8-K.
A report on Form 8-K was filed on November 13,
1995 reporting events under Item 1 of Form 8-K.
A report on Form 8-K was filed on December 14,
1995 reporting events under Item 5 of Form 8-K. A
copy of the Combined Financial Statements of
Rockefeller Center Properties and RCP Associates
for the year ended December 31, 1994, together
with the new report thereon of Ernst & Young LLP,
independent auditors, was filed with the December
14, 1995 Form 8-K.
-19-
<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.
ROCKEFELLER CENTER PROPERTIES, INC.
/s/ RICHARD M. SCARLATA
-----------------------
Richard M. Scarlata
President and Chief Executive Officer
(Principal Financial Officer)
Date: March 18, 1996
Pursuant to the requirements 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.
/s/ RICHARD M. SCARLATA
-----------------------
Richard M. Scarlata
President and Chief Executive Officer
(Principal Financial Officer)
/s/ PETER D. LINNEMAN
------------------------
Peter D. Linneman
Director and Chairman of the Board
/s/ BENJAMIN D. HOLLOWAY
------------------------
Benjamin D. Holloway
Director
/s/ WILLIAM F. MURDOCH, JR.
-------------------------
William F. Murdoch, Jr.
Director
/s/ PETER G. PETERSON
-------------------------
Peter G. Peterson
Director
Date: March 18, 1996
-20-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
ROCKEFELLER CENTER PROPERTIES, INC. ("THE COMPANY")
- ---------------------------------------------------
Financial Statements ................................................... F-2
Report of Independent Auditors ......................................... F-2
Balance Sheets ......................................................... F-3
Statements of Operations ............................................... F-4
Statements of Changes in Stockholders' Equity .......................... F-5
Statements of Cash Flows ............................................... F-6
Notes to Financial Statements .......................................... F-8
Report of Management ................................................... F-24
Selected Financial Information ......................................... F-25
Management's Discussion and Analysis ................................... F-29
Liquidity and Capital Resources - The Company .......................... F-29
Results of Operations - The Company .................................... F-34
Financial Condition and Outlook - The Property ......................... F-38
Results of Operations - The Property ................................... F-41
Cash Flow - The Property ............................................... F-44
Quarterly Stock Information ............................................ F-47
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES ("THE BORROWER")
- -----------------------------------------------------------------
Financial Statements ................................................... F-48
Report of Independent Auditors ......................................... F-48
Combined Balance Sheets ................................................ F-49
Combined Statements of Operations and Partners' Capital Deficiency ..... F-50
Combined Statements of Cash Flows ...................................... F-51
Notes to Combined Financial Statements ................................. F-52
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Rockefeller Center Properties, Inc.
We have audited the accompanying balance sheets of Rockefeller Center
Properties, Inc. (the "Company") as of December 31, 1995 and 1994, and the
related statements of operations, changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial position of Rockefeller Center Properties,
Inc. at December 31, 1995 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern as more fully described in Note 1 to the
Company's financial statements. The borrowers (collectively, the "Borrower")
under the mortgage loan, the Company's principal asset, filed for protection
under Chapter 11 of the Federal Bankruptcy Code on May 11, 1995. As a result of
these filings and until such time as the Chapter 11 cases have been brought to a
conclusion, the Company does not expect to receive interest payments from the
Borrower, and the Company's ability to enforce its rights under the mortgage
loan has been and will be stayed unless and until the Bankruptcy Court issues an
order permitting the Company to take steps to enforce such rights. The Company
cannot predict either the time it will take to conclude these proceedings or
their ultimate outcome. On November 7, 1995, the Company executed and delivered
an Agreement and Plan of Merger (as amended as of February 12, 1996, the "Merger
Agreement") with an investor group. If the transactions contemplated by the
Merger Agreement are consummated, the stockholders will receive $8.00 in cash
for each of their shares of the Company's Common Stock. Also on November 7,
1995, the Company entered into an agreement that would allow the Company to make
a $200 million publicly registered rights offering should the stockholders not
approve the Merger Agreement. The uncertainties created by the bankruptcy of the
Borrower raise substantial doubt about the Company's ability to continue as a
going concern if the Merger Agreement is not approved by the Company's
stockholders or if the transactions contemplated by the Merger Agreement are not
consummated. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/s/ERNST & YOUNG LLP
New York, New York
February 29, 1996
F-2
<PAGE>
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
----------- ------------
<S> <C> <C>
ASSETS
Loan receivable and interest receivable,
net of valuation reserve of $74,000 and $0 (Notes 2 and 3)
net of unamortized discount of $34,906 and $36,101 ............ $ 1,176,220 $ 1,300,220
Deferred debt issuance costs, net (Note 2) ....................... 12,421 16,709
Cash and cash equivalents ........................................ 1,298 2,897
Other assets ..................................................... 837 169
----------- -----------
$ 1,190,776 $ 1,319,995
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current coupon convertible debentures due 2000 (Notes 2 and 5) $ 213,170 $ 213,170
Zero coupon convertible debentures due 2000, net of
unamortized discount of $225,902 and $259,322 (Notes 2 and 5) 360,283 326,863
Floating rate notes due 2000 (Notes 2 and 5) .................. 116,296 150,000
14% debentures due 2007, net of unamortized discount
of $4,282 and $4,639 (Notes 2 and 5) ........................ 70,718 70,361
GSMC loan (Notes 2 and 5) ..................................... 10,200
Accrued interest payable (Notes 2 and 5) ...................... 61,914 37,338
Stock appreciation rights (Note 5) ............................ 13,406 2,611
Accounts payable and accrued expenses ......................... 3,027 2,185
Accrued transaction costs and expenses (Note 1) ............... 25,163
----------- -----------
874,177 802,528
----------- -----------
Contingencies (Note 9)
Stockholders' equity:
Common stock, $.01 par value:
150,000,000 shares authorized;
38,260,704 shares issued and outstanding (Notes 1 and 7) .... 383 383
Additional paid-in capital (Note 5) ........................... 707,545 707,545
Distributions to stockholders in excess of net income (Note 7) (391,329) (190,461)
----------- -----------
Total stockholders' equity ................................ 316,599 517,467
----------- -----------
$ 1,190,776 $ 1,319,995
=========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
--------- ----------- ---------
<S> <C> <C> <C>
Revenues
Loan interest income (Notes 2 and 3) .................... $ 20,339(1) $ 108,732 $ 108,363
Other income (Notes 2, 4 and 5) ......................... 1,131 553 5,197
--------- --------- ---------
21,470 109,285 113,560
--------- --------- ---------
Expenses
Interest expense:
Current coupon convertible debentures (Notes 2 and 5) ... 22,979 22,478 22,020
Zero coupon convertible debentures (Notes 2 and 5) ...... 33,420 30,320 27,507
14% debentures (Notes 2 and 5) .......................... 10,973 87
Floating rate notes (Notes 2 and 5) ..................... 17,858 166
Commercial paper and other (Notes 2 and 5) .............. 333 24,450 28,816
--------- --------- ---------
85,563 77,501 78,343
General and administrative ................................. 11,267 4,170 3,728
Amortization of financing costs (Note 2) ................... 9,258 705 705
Increase in liability for stock appreciation rights (Note 5) 10,795
Effects of the execution and delivery of the
merger agreement (Note 1) ............................... 99,163
Expenses related to the March 25, 1996
special meeting of stockholders ......................... 553
Cost of swap terminations and modifications related to
debt extinguishment (Note 5) ............................ 9,855 3,451
Cost of evaluating alternative financings (Note 8) ......... 1,942
--------- --------- ---------
216,599 94,173 86,227
--------- --------- ---------
(Loss) income before non-recurring income .................. (195,129) 15,112 27,333
Non-recurring income (gain on sales of portfolio
securities) (Note 4) .................................... 31 8,593
--------- --------- ---------
Net (loss) income (Note 7) ................................. ($195,129) $ 15,143 $ 35,926
========= ========= =========
Net (loss) income per share (Note 2) ....................... ($ 5.10) $ 0.40 $ 0.96
========= ========= =========
</TABLE>
(1) Loan interest income for the year ended December 31, 1995 is presented on
the cash basis of accounting, see Note 1.
See notes to financial statements.
F-4
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Distributions
Additional to stockholders Total
Common Stock paid-in in excess of stockholders'
Shares Amount capital net income equity
-------- -------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 ................................... 37,510,000 $ 375 $ 700,439 ($ 178,964) $ 521,850
Issuance of Common Stock .............................. 750,704 8 5,078 5,086
Net Income ............................................ 35,926 35,926
Distributions to
stockholders
($1.00 per share) ..................................... (37,697) (37,697)
----------- ----------- ----------- ----------- ----------
Balance at
December 31, 1993 ................................... 38,260,704 383 705,517 (180,735) 525,165
Issuance of warrants .................................. 2,028 2,028
Net income ............................................ 15,143 15,143
Distributions to
stockholders
($0.65 per share) ..................................... (24,869) (24,869)
----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1994 ................................... 38,260,704 383 707,545 (190,461) 517,467
Net loss .............................................. (195,129) (195,129)
Distributions to
stockholders
($0.15 per share) ..................................... (5,739) (5,739)
----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1995 ................................... 38,260,704 $ 383 $ 707,545 ($ 391,329) $ 316,599
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Cash flow from operating activities:
Loan interest received .................................. $ 20,339 $ 105,495 $ 103,545
Other interest income received .......................... 1,131 998 6,553
Interest paid on floating rate notes .................... (17,114)
Interest paid on 14% debentures ......................... (9,917)
Interest paid on commercial paper and other ............. (198) (27,020) (31,016)
Interest paid on current coupon convertible debentures .. (17,053) (17,053)
Payments for accounts payable, accrued expenses
and other assets ..................................... (11,947) (5,222) (3,798)
--------- --------- ---------
Net cash (used in) provided by operating activities (17,706) 57,198 58,231
--------- --------- ---------
Cash flows from investing activities:
Draw downs on letter of credit support .................. 50,000
Portfolio sales, maturities and redemptions ............. 14,331 126,668
--------- --------- ---------
Net cash provided by investing activities ............ 50,000 14,331 126,668
--------- --------- ---------
Cash flows from financing activities:
Dividends paid .......................................... (5,739) (24,869) (37,697)
Floating rate note principal repayment .................. (33,704)
Interim financing cost .................................. (4,650)
Net proceeds from GSMC loan ............................. 10,200
Proceeds from issuance of floating rate notes, 14%
debentures, warrants and SARs net of issuance costs .. 212,522
Maturities of commercial paper, net ..................... (246,682) (128,717)
Repayment of bank loans payable, net .................... (20,000)
Proceeds from issuance of common stock .................. 5,086
Payments to terminate (1994) and reduce
duration (1993) of interest rate swaps ............... (9,855) (3,451)
--------- --------- ---------
Net cash used in financing activities ............. (33,893) (68,884) (184,779)
--------- --------- ---------
Net (decrease) increase in cash ............................. (1,599) 2,645 120
Cash and cash equivalents at the beginning of the year ...... 2,897 252 132
========= ========= =========
Cash and cash equivalents at the end of the year ............ $ 1,298 $ 2,897 $ 252
========= ========= =========
</TABLE>
(Continued on F-7)
See notes to financial statements.
F-6
<PAGE>
STATEMENTS OF CASH FLOWS (cont'd)
(Dollars in thousands)
RECONCILIATION OF NET (LOSS) INCOME TO NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Net (loss) income ......................................... ($195,129) $ 15,143 $ 35,926
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Effects of the execution and delivery of the
merger agreement ................................ 99,163
Gain on sale of portfolio securities ............... (31) (8,593)
Cost of swap terminations and modifications
related to debt extinguishment .................. 9,855 3,451
Amortization of discount:
Zero coupon convertible debentures .............. 33,420 30,320 27,507
14% debentures .................................. 357
Portfolio securities ............................ (383)
Decrease in deferred debt issuance costs
and other costs, net ............................ 8,270 1,130 415
Increase in interest receivable and
amortization of loan receivable discount, net (1) (2,793) (3,287)
Increase in accrued interest payable and amortized
unpaid discount on commercial paper ............. 24,576 3,135 3,517
Increase in stock appreciation rights liability .... 10,795
Increase (decrease) in accounts payable and
accrued expenses ................................ 842 439 (322)
--------- --------- ---------
Net cash (used in) provided by operating activities ....... ($ 17,706) $ 57,198 $ 58,231
========= ========= =========
</TABLE>
(1) Loan interest income for the year ended December 31, 1995 is presented on
the cash basis of accounting, see Note 1.
See notes to financial
statements.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND PURPOSE
Rockefeller Center Properties, Inc. (the "Company") was incorporated in Delaware
on July 17, 1985. The Company qualifies and has elected to be treated, for
Federal income tax purposes, as a real estate investment trust (a "REIT") under
the Internal Revenue Code of 1986, as amended (the "Code"). The Company was
formed to permit public investment in two convertible, participating mortgages
(collectively the "Mortgage") on the 12 original landmarked buildings in
Rockefeller Center (the "Property"). From the proceeds of its offering of Common
Stock and the offerings of its Current Coupon Convertible Debentures due 2000
and Zero Coupon Convertible Debentures due 2000 (collectively, the "Convertible
Debentures"), the Company made a convertible, participating mortgage loan (the
"Loan") to two partnerships, Rockefeller Center Properties and RCP Associates
(collectively, the "Borrower"). The Borrower owns the Property. The Loan, which
is secured by the Mortgage, is in the face amount of $1.3 billion, matures on
December 31, 2007 and provides for payments of both base interest ("Base
Interest") at stated rates (See Note 3) and additional interest ("Additional
Interest") based on Gross Revenues (as defined) of the Property through December
31, 2000, and floating interest rates thereafter. The Loan is convertible at the
Company's option on December 31, 2000 (the "Equity Conversion Date") or, if an
event of default under the Loan Agreement has occurred and is continuing, any
earlier date specified by the Company, into a 71.5% (subject to reduction in the
event of certain prepayments) general partnership interest in the partnership
which will own the Property (the "Partnership") on that date. In December 1994,
the Company issued floating rate notes ("Floating Rate Notes") due December 31,
2000 and 14% debentures ("14% Debentures") due December 31, 2007 and warrants
("Warrants") and stock appreciation rights ("SARs") expiring December 31, 2007,
the proceeds from which were used to retire all of its commercial paper
borrowings and certain of its interest rate swap agreements.
Status of the Borrower
On May 11, 1995, the two partnerships comprising the Borrower filed for
protection under Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York. The Company's only
significant source of income is interest received on the Loan from the Borrower.
As a result of these filings and until such time as these Chapter 11 cases (the
"Chapter 11 Cases") have been brought to a conclusion, the Company does not
expect to receive interest payments from the Borrower and the Company's ability
to enforce its rights under the Loan has been and will be stayed unless and
until the Court issues an order permitting the Company to take steps to enforce
such rights. The Borrower and its managing general partner, Rockefeller Group,
Inc., filed a Chapter 11 reorganization plan (the "Chapter 11 Plan") for the
Borrower that contemplates that ownership of the Property will be turned over to
the Company or its designee upon consummation of the Chapter 11 Plan. Pursuant
to the order of the Bankruptcy Court having jurisdiction over the Borrower's
Chapter 11 Cases, a disclosure statement in respect of the Chapter 11 Plan has
been approved and March 27, 1996 has been set as the date for the hearing to
consider confirmation of the Chapter 11 Plan. The Company currently anticipates
that, if the Chapter 11 Plan is confirmed on or shortly after March 27, 1996,
the transactions contemplated by the Merger Agreement (as defined below) could
be consummated prior to April 30, 1996, as required by the Merger Agreement.
There is no assurance that the conditions to confirmation and/or consummation
of the Chapter 11 Plan will be met, that the conditions to the Merger Agreement
will be met, or that the transactions contemplated by the Chapter 11 Plan and
the Merger Agreement will occur or will take place within the periods described
above.
Due to the significant uncertainties created by the Borrower's Chapter 11
filings, (i) the Company has limited recognition of income on the Loan for the
year ended December 31, 1995 to the cash actually received from the Borrower
during this period and (ii) the Company intends, solely for accounting purposes,
to apply future cash receipts, if any, from the Borrower to reduce the carrying
value of the Loan. When the Company drew down the $50 million of additional
collateral under letters of credit posted by the Borrower's parent in the second
quarter of 1995, these cash receipts were applied to reduce the carrying value
of the Loan to $1.25 billion.
F-8
<PAGE>
On November 7, 1995, the Company executed and delivered an Agreement and Plan of
Merger dated as of November 7, 1995 (as amended by Amendment No. 1 thereto,
dated as of February 12, 1996, the "Merger Agreement"), with a group of
investors (the "Investor Group") including Exor Group S.A., David Rockefeller,
Rockprop L.L.C., Troutlet Investments Corporation and Whitehall Street Real
Estate Limited Partnership V ("Whitehall"), pursuant to which, subject to
satisfaction of the conditions specified in the Merger Agreement, a corporation
formed by the Investor Group would merge into the Company, the surviving company
would be wholly owned by the Investor Group, and the stockholders of the Company
would receive $8.00 in cash for each of their shares of the Company's Common
Stock other than Excluded Shares (as defined in the Merger Agreement). The
Company plans to hold a special meeting (the "Special Meeting") for stockholders
to vote on the Merger Agreement on March 25, 1996.
Under the Merger Agreement, Goldman Sachs Mortgage Company ("GSMC"), which is a
party to the Merger Agreement for this purpose, has agreed to make available to
the Company up to $47.5 million of credit ("GSMC Loan") during the period
between November 7, 1995 and the earlier of (1) the consummation of the merger
contemplated by the Merger Agreement or (2) any termination of the Merger
Agreement. Such credit would be secured on the same basis as the Floating Rate
Notes and the 14% Debentures, but would accrue interest at the rate of 10% per
annum (compounded quarterly) and be prepayable at any time without penalty. If
borrowings under this facility have not been repaid by the earlier of April 30,
1996, the consummation of the merger contemplated by the Merger Agreement or any
termination of the Merger Agreement in specified circumstances, including any
exercise by the Company of its "fiduciary out," such borrowings would be subject
to the same terms and conditions as those applicable to the Floating Rate Notes.
The Company had borrowed $10.2 million from GSMC under this facility as of
December 31, 1995 and $45 million as of February 29, 1996. The Company expects
to borrow the total amount available under the GSMC Loan prior to April 30,
1996. The credit facility extended by GSMC to the Company under the Merger
Agreement is expected to provide sufficient liquidity for the Company until the
earlier of the consummation of the merger contemplated by the Merger Agreement
or April 30, 1996.
Consummation of the transactions contemplated by the Merger Agreement would
resolve many of the significant uncertainties created by the Borrower's Chapter
11 filings. Subsequent to the Borrower's Chapter 11 filings and prior to the
execution and delivery of the Merger Agreement, the Company had based the value
assigned to the Property and hence to the Loan on an independent appraisal as of
December 31, 1994, which was supported by a concurring review. The appraisal, at
that time, gave the clearest indication as to the value of the Property.
However, the terms of the Merger Agreement could be considered to indicate that
the market value of the Property now may be less than the carrying value of the
Loan as reported in the June 30, 1995 interim financial statements. Accordingly,
as reported in the Company's September 30, 1995 interim financial statements,
the Company reflected a valuation reserve, totaling $74 million, to reduce the
carrying value of the Loan to reflect the economics of the transactions
contemplated by the Merger Agreement. In addition, the Company recorded certain
transaction costs and expenses aggregating $25.2 million, which reflected the
breakup fee related to the termination of a combination agreement (see Note 9),
professional fees, and certain liquidation expenses and other liabilities
specifically provided for in the Merger Agreement. Finally, the Company has
recognized as amortization of financing cost certain deferred debt issuance and
letter of intent costs totaling $4.6 million related to the terminated
combination agreement.
Also on November 7, 1995, the Company entered into a rights offering agreement
(the "Rights Offering Agreement") with Whitehall and Goldman, Sachs & Co.
("Goldman Sachs"), an affiliate of Whitehall, pursuant to which the parties have
agreed that, if the Company's stockholders do not approve the Merger Agreement
at the Special Meeting, the Company will have the right to elect, within 30 days
after the date of the Special Meeting, to make a $200 million publicly
registered rights offering (the "Rights Offering") at a price set by the
Company's Board of Directors, but not less than $6.00 per share of Common Stock.
The purpose of the Rights
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Offering Agreement is to provide the Company with a pre-negotiated potential
means to raise the funds it would require to be able to acquire the Property and
to service its obligations if the Company's stockholders do not approve the
Merger Agreement. No decision has been made by the Company's Board of Directors
as to whether this option would be exercised if the Company's stockholders do
not approve the Merger Agreement; such a decision will be made in the light of
the circumstances prevailing at the time of any such failure to approve the
Merger Agreement, including any alternatives that may then be available to the
Company. Any election by the Company to proceed with the Rights Offering would
not require prior approval of the Company's stockholders.
Management and the Board of Directors believe that, if the Company's
stockholders do not approve the Merger Agreement or if the transactions
contemplated by the Merger Agreement are not consummated, the Company would be
subject to substantial uncertainties. The Company expects that, in the absence
of additional financing, its cash resources will be exhausted by the end of
April 1996. There can be no assurance as to the availability to the Company of
any alternatives to proceeding with the Rights Offering and there can be no
assurance that, if the Board of Directors elects to proceed with the Rights
Offering, Goldman Sachs or PaineWebber, Incorporated will agree to underwrite
the Rights Offering or that the Rights Offering can be successfully concluded
or, if concluded, as to the timing of such conclusion. Approval of the Merger
Agreement by the Company's stockholders is, in any event, a condition to the
effectiveness of the proposed Chapter 11 Plan and, accordingly, in the event of
a rejection of the Merger Agreement, a new reorganization plan will have to be
negotiated; there can be no assurance as to the results that such negotiations
would reach or even that such negotiations would be successful. While the Rights
Offering is designed to produce proceeds to the Company of $200 million (before
expenses), most of these proceeds would be used to retire the Floating Rate
Notes. Thus, the Board of Directors believes that, even if the Rights Offering
were successful, the Company would require additional funds in order to be able
to demonstrate in the Chapter 11 Cases that the Company could successfully
operate the Property. While Whitehall and Goldman Sachs agreed in the Rights
Offering Agreement to make certain changes in the terms of the 14% Debentures to
facilitate additional borrowings by the Company, there can be no assurance that
the Company could obtain the required additional financing on terms satisfactory
to it, if at all.
Due to the factors described above, Management believes that there is
substantial doubt about the Company's ability to continue as a going concern if
the Company's stockholders do not approve the Merger Agreement or if the
transactions contemplated by the Merger Agreement are not consummated. The
financial statements do not include any adjustment to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fair Values of Financial Instruments (Notes 3, 4 and 5):
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value and other techniques. Such
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Derived fair value estimates
cannot be substantiated by comparison to independent markets and may not reflect
the values that could be realized in any immediate settlement of the instrument
or otherwise. Statement 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts may not necessarily represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and cash
equivalents approximate their fair value.
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Loan receivable: As the Loan receivable is the Company's principal
asset, fair value has been estimated based on the economics of the transactions
contemplated by the Merger Agreement. Accordingly, the Company had reflected at
September 30, 1995 a valuation reserve, totaling $74,000,000, to reduce the
carrying value of its Loan.
Debt: The carrying amounts of the Company's 14% Debentures and Floating
Rate Notes approximate their fair value. The fair values of the Company's
Current Coupon Convertible Debentures and Zero Coupon Convertible Debentures are
estimated using quoted market prices.
Off-balance-sheet financial instruments: Fair values for the Company's
off-balance-sheet financial instruments (interest rate swaps) are based on
market quotes. The Company uses interest rate swaps to manage interest rate risk
on a portion of its floating rate debt.
The following are the Company's significant accounting policies:
Loan Interest Income (Note 3):
Due to the significant uncertainties created by the Borrower's Chapter 11
filings, (i) the Company has limited recognition of income on the Loan for the
year ended December 31, 1995 to the cash actually received from the Borrower
during this period and (ii) the Company intends, solely for accounting purposes,
to apply future cash receipts, if any, from the Borrower to reduce the carrying
value of the Loan.
Debt Issuance Costs:
Issuance costs of $10,690,000, pertaining to the outstanding Convertible
Debentures, at December 31, 1995 and 1994 have been deferred and are being
amortized on a straight-line basis over the period from issuance through
December 31, 2000, the maturity date of the Convertible Debentures. The
unamortized balance at December 31, 1995 was $3,526,000. Issuance costs of
$9,252,000 and $3,377,000 relating to the Floating Rate Notes and 14%
Debentures, respectively, at December 31, 1995 have been deferred and are being
amortized using the effective interest method and straight-line method,
respectively, over the originally expected life of the Floating Rate Notes and
14% Debentures. The unamortized balance of the issuance cost of the Floating
Rate Notes and 14% Debentures at December 31, 1995 was $5,778,000 and
$3,117,000, respectively.
Interest Expense (Note 5):
Interest expense recognized on the Convertible Debentures is based on the
average yields from the date of issuance through the maturity date, December 31,
2000. The average yields are computed (using the effective interest method) by
(1) combining the differing coupon rates on the Current Coupon Convertible
Debentures and (2) amortizing the original issue discount related to the Zero
Coupon Convertible Debentures. The resultant effective annual interest rates are
9.23% and 10.23% for the Current Coupon and Zero Coupon Convertible Debentures,
respectively. Interest expense including the amortization of the related
original issue discount on the 14% Debentures, arising from the allocation of a
portion of the proceeds to the Warrants and SARs, is computed using the
straight-line method through the maturity date, December 31, 2007. Interest
expense on the Floating Rate Notes is based on the three-month London Interbank
Offered Rate (LIBOR) reset two days prior to each interest payment date plus 4%.
The interest rate at December 31, 1995 was 9.875%. The average interest rate for
the year ended December 31, 1995 was 10.12%. Interest expense on the GSMC Loan
accrues at the rate of 10% per annum (compounded quarterly) and is classified as
interest on commercial paper and other.
Interest Rate Swap Agreements (Note 5):
The fair value of interest rate swaps, which are used for hedging purposes, is
not reflected in the balance sheets. The incremental revenue or expense
associated with an interest rate swap is recognized over the term of the swap
arrangement and, through March 31, 1993 had been presented in the statements of
operations as a component of the interest revenue of the related asset or the
interest expense of the related liability. In connection with the reduction of
commercial paper outstanding in April 1993 and the sale of a substantial portion
of its portfolio of investment securities in order to fund that reduction,
beginning in the second quarter of 1993 and through the retirement of commercial
paper borrowings in December 1994, the Company
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presented interest rate swaps on a net basis as a component of interest expense
on commercial paper and other. Prior periods have not been restated. Since the
retirement of the Company's commercial paper, the Company presents interest rate
swaps on a net basis as a component of interest expense on Floating Rate Notes.
Net (Loss) Income Per Share:
Net (loss) income per share is based upon 38,260,704, 38,260,704, and 37,567,746
average shares of Common Stock outstanding during 1995, 1994 and 1993,
respectively. For such periods of operations, fully diluted net (loss) income
per share is not presented since the effect of the assumed conversion of the
Convertible Debentures and Warrants and SARs would be anti-dilutive.
Cash Equivalents:
Cash equivalents are highly liquid investments with the highest credit rating
which mature within three months or less.
3. LOAN RECEIVABLE AND INTEREST INCOME
The Loan, which is in the face amount of $1.3 billion, was made pursuant to a
Loan Agreement between the Company and the Borrower dated September 19, 1985 (as
amended, the "Loan Agreement"), and is evidenced by two notes (collectively, as
amended, the "Note"). Following the Borrower's failure to make the interest
payment due on May 31, 1995, the Company drew down the full amount available
under the $50 million of letters of credit which supported, among other things,
payment of Base Interest (as defined) on the Loan.
Due to the significant uncertainties caused by the Borrower's Chapter 11 filings
and solely for accounting purposes, this $50 million has been applied to reduce
the carrying value of the Loan to $1.25 billion. The Company has further reduced
the carrying value of the Loan by $74 million to reflect the economics of the
transactions contemplated by the Merger Agreement. The fair value of the
Company's loan receivable at December 31, 1995, approximates $1.18 billion. The
Loan and interest receivable on the Loan are combined on the balance sheet as of
December 31, 1995 and a reclassification has been made to the previously
reported December 31, 1994 balance sheet to combine these items.
See Note 1 for a discussion of the status of the Borrower.
The Loan is secured by leasehold mortgages in the aggregate amount of
approximately $44.8 million, which were assigned to the Company, consolidated,
spread and recorded as a first mortgage lien against the entire Property.
Through September 6, 1994, the Loan also was secured by an unrecorded mortgage
in the amount of approximately $1,255.2 million. On September 6, 1994, the
Company recorded this mortgage. The Loan is further secured by a recorded
assignment of rents pursuant to which the Borrower has assigned to the Company,
as security for repayment of the Loan, the Borrower's rights to collect certain
rents with respect to the Property.
The Loan also provides for Additional Interest (as defined) to be earned by the
Company under certain circumstances. No Additional Interest has been earned by
the Company to date. Based on present conditions in the Midtown Manhattan rental
market, the Company does not currently expect that it would earn Additional
Interest even if the Borrower's reorganization proceedings were terminated.
Loan interest income for the year ended December 31, 1995 is presented on the
cash basis of accounting. Loan interest income of the Company for the years
ended December 31, 1994 and 1993, has been calculated on the basis of the
average yield on the Note through December 31, 2000 (the "Equity Conversion
Date" and the date at which the Loan would, if not converted, begin to bear
floating rates of interest). Based on the scheduled principal and interest
payments, the average yield is 8.51% per annum and combines (using the interest
method) differing coupon rates of base interest with the amortization of
original issue discount applicable to the Loan.
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<PAGE>
4. PORTFOLIO SECURITIES
The Company liquidated its portfolio securities during the years ended December
31, 1994 and 1993, which resulted in non-recurring gains of $31,000 and
$8,593,000, respectively. Proceeds from the sales of portfolio securities were
used to fund scheduled reductions in commercial paper outstanding.
5. DEBT
Convertible Debentures:
The Convertible Debentures were issued pursuant to an Indenture, dated as of
September 15, 1985 (as amended, the "Indenture"), between the Company and
Manufacturers Hanover Trust Company (now Chemical Bank), as Trustee. As of
December 31, 1993, United States Trust Company replaced Chemical Bank as
Trustee. Since December 29, 1994, the Convertible Debentures, together with the
Floating Rate Notes and the 14% Debentures have been secured by a pledge of the
Note and certain other collateral pursuant to a Collateral Trust Agreement,
dated as of December 29, 1994 (the "Collateral Trust Agreement"), among the
Company and Bankers Trust Company and Gary R. Vaughan (collectively, the
"Collateral Trustee"). Prior to December 29, 1994, the Convertible Debentures
were general unsecured obligations of the Company. The Convertible Debentures
mature, and are convertible into shares of Common Stock of the Company, on the
Equity Conversion Date.
Any Convertible Debentures not converted at maturity will be exchanged for
nonconvertible floating rate notes. The nonconvertible floating rate notes would
mature on December 31, 2007, would be prepayable at the Company's option at any
time at par, and would bear interest at the three-month LIBOR plus 1/4% or such
greater spread (not in excess of 1%) as would, in the opinion of a major
international investment bank selected by the Company, cause such notes to trade
at par.
The Current Coupon Convertible Debentures bore interest from the date of
issuance until December 31, 1994 at the rate of 8% per annum, and from January
1, 1995 until December 31, 2000 bear interest at the rate of 13% per annum,
payable annually on December 31 of each year. Under the terms of the Indenture,
if December 31 is not a business day, the interest will be paid on the next
succeeding business day. Therefore, the interest due on December 31, 1995 was
paid on January 2, 1996.
Between 1987 and 1992, the Company repurchased and retired a portion of its
Convertible Debentures. The cost of such repurchases, the face values
repurchased and retired and the gain or loss resulting from such repurchases on
a cumulative basis are as follows:
- --------------------------------------------------------------------------------
(In thousands)
Cumulative
- --------------------------------------------------------------------------------
Cost of debenture repurchases $217,295
Face value repurchased and retired:
Current Coupon Convertible Debentures $121,830
Zero Coupon Convertible Debentures $366,065
Gain resulting from extinguishment of debt $11,085
- --------------------------------------------------------------------------------
At December 31, 1995, the Company had repurchased and retired 36.4% of the
original principal amount of the Current Coupon Convertible Debentures and 38.4%
of the face amount of the Zero Coupon Convertible Debentures. At December 31,
1995 and 1994, $213,170,000 of the Current Coupon Convertible Debentures were
outstanding and $586,185,000 face amount of the Zero Coupon Convertible
Debentures were outstanding. The Company's repurchase of its Convertible
Debentures was initially funded through floating rate short-term unsecured bank
loans. In 1990, in order to lengthen the maturity of its short-term debt, the
Company initiated a commercial paper program and fully repaid its outstanding
short-term bank loans. Commercial paper borrowings were repaid in 1993 and 1994
with proceeds from sales of the Company's investment portfolio,
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operating cash flow and the issuance of 14% Debentures and Floating Rate Notes
(see below) in December 1994. Under the terms of the 14% Debentures and Floating
Rate Notes, the Company is not permitted to repurchase any of its currently
outstanding Convertible Debentures.
The Current Coupon Convertible Debentures are convertible at maturity at the
rate of 84.59 shares of Common Stock per $1,000 principal amount (subject to
anti-dilution adjustments). If the Current Coupon Convertible Debentures
outstanding as of December 31, 1995 were converted at maturity, 18,032,050
shares of Common Stock of the Company would be issued. Based on quoted market
prices at December 31, 1995, the fair market value of the Company's outstanding
Current Coupon Convertible Debentures was approximately $235,000,000. The Zero
Coupon Convertible Debentures are convertible at maturity at the rate of 46.06
shares of Common Stock per $1,000 principal amount (subject to anti-dilution
adjustments). If the Zero Coupon Convertible Debentures outstanding as of
December 31, 1995 were converted at maturity, 26,999,681 shares of Common Stock
of the Company would be issued. Based on quoted market prices at December 31,
1995, the fair value of the Company's outstanding Zero Coupon Convertible
Debentures was approximately $333,000,000. Upon the occurrence of an Event of
Default (as defined), the Trustee may declare the unpaid principal of the
Convertible Debentures and any accrued interest thereon immediately due and
payable. In addition, the Convertible Debentures would become convertible at
special conversion rates (subject to anti-dilution adjustments) in the event
that they were called for redemption or became redeemable at the option of the
holder, or at any time that an Event of Default were to occur and be continuing.
The Convertible Debentures may be redeemed by the Company at par plus accrued
interest in the event of the imposition of certain withholding taxes or certain
certification requirements, in the event of an acceleration of the Loan or an
exercise of the option to convert the Loan, or out of the proceeds from a sale
or pledge by the Company of an interest in the Loan or from a substantial
casualty or condemnation in respect to the Property.
The Indenture provides that, with certain exceptions, the Company will not pay
dividends on or purchase shares of its Common Stock if funds used for all such
dividends or purchases would exceed cumulative aggregate Distributable Cash
(cash receipts from operations less operating expenses and interest) to that
date. The Indenture also imposes certain restrictions on the Company's ability
to consent to amendments of or grant waivers under the Loan Agreement or the
Mortgage. Under the terms of the Merger Agreement, the Company is prohibited
from paying dividends unless required to do so to maintain its REIT status.
Floating Rate Notes:
Pursuant to a Loan Agreement between the Company and Goldman Sachs Mortgage
Company, as Agent and as Lender, dated December 18, 1994, the Company issued
Floating Rate Notes totaling $150,000,000. On September 1, 1995, due to the draw
down on the letters of credit supporting the payment of Base Interest on the
Loan, the Company made a mandatory principal payment on the Floating Rate Notes
of $33,704,000 which reduced the principal balance to $116,296,000. The Floating
Rate Notes mature on December 31, 2000 and, together with the Convertible
Debentures and the 14% Debentures, are secured by a pledge of the Note and
certain other collateral. Debt issuance costs of $9,252,000 are being deferred
and amortized using the effective interest method over the originally expected
life of the Floating Rate Notes. Interest is based on 90-day LIBOR plus 4% reset
two business days prior to each interest payment date. At December 31, 1995, the
interest rate in effect was 9.875%. Interest payment dates ("Interest Payment
Dates") are March 1, June 1, September 1 and December 1 of each year. Required
principal payments are to be made on each Interest Payment Date beginning on
June 1, 1995. Mandatory principal payments are required to be made of net cash
flow ("Net Cash Flow") (calculated as of the most recent fiscal quarter) which
is defined as all gross receipts minus actual operating expenses incurred;
interest paid or accrued (on a straight-line basis) on the Floating Rate Notes,
14% Debentures, Current Coupon Convertible Debentures and other indebtedness (as
defined) permitted under the agreement governing the Floating Rate Notes;
dividends paid or accrued; and distributions paid or accrued on the Warrants and
SARs. Under the terms of the GSMC Loan, any amounts received from such loan are
not
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considered in the calculation of Net Cash Flow. However, the minimum principal
repayments required for each year are as follows:
Year Principal Repayment
---- -------------------
1995 $3,000,000
1996 9,000,000
1997 10,000,000
1998 12,000,000
1999 15,000,000
----------
$49,000,000
===========
The Company may prepay the Floating Rate Notes in whole or in part on any
Interest Payment Date; however, any prepayment made during the first and second
years the Floating Rate Notes are outstanding (except mandatory prepayments)
would be subject to a 3% and 1.5% penalty, respectively, of the principal amount
prepaid. Upon the occurrence of an Event of Default (as defined), the Agent may
declare the unpaid principal of the Floating Rate Notes and any accrued interest
thereon immediately due and payable.
14% Debentures:
The 14% Debentures were issued pursuant to a Debenture Purchase Agreement dated
as of December 18, 1994 between the Company and Whitehall. The 14% Debentures
mature on December 31, 2007 and, together with the Convertible Debentures and
the Floating Rate Notes, are secured by a pledge of the Note and certain other
collateral. Debt issuance costs of $3,377,000 are being deferred and amortized
using the straight-line method through December 31, 2007.
The 14% Debentures bear interest from the date of issuance until December 31,
2007 at a rate of 14% per annum, payable semi-annually on June 2 and December 2
of each year. Interest expense on the 14% Debentures also includes the
straight-line amortization of the original issue discount related to the
Warrants and SARs through the expiration date of December 31, 2007. Under the
terms of the 14% Debentures, to the extent that Net Cash Flow is insufficient to
pay interest on the due date, the Company will not be obligated to pay interest
on the 14% Debentures on such date and such interest will accrue. If an Event of
Default (as defined) were to occur and be continuing, the 14% Debentures would
bear interest at 18% per annum. Upon the occurrence of an Event of Default the
holders of the 14% Debentures may declare the unpaid principal thereof and
accrued interest thereon due and payable. The 14% Debentures are redeemable in
whole or in part at any time after December 30, 2000 provided the Floating Rate
Notes have been paid in full. The penalties for early redemption are as follows:
Penalty
Redemption period (% of principal amount redeemed)
--------------------- ---------------------------------
December 30, 2000 to December 31, 2001 5%
January 1, 2002 to December 31, 2002 3%
January 1, 2003 to December 31, 2003 1.5%
January 1, 2004 to December 31, 2007 0%
Pursuant to a Warrant Agreement dated December 18, 1994 between the Company and
Chemical Bank, as Warrant Agent, as amended, and in connection with the issuance
of the 14% Debentures, the Company issued Warrants to acquire 4,155,927 shares
of newly issued Common Stock. Since the Warrants are separate from the 14%
Debentures, at issuance the Company was required to assign a value to the
Warrants and reflect that value in stockholders' equity. The value assigned to
the Warrants of $2,028,000 has been recorded as a debt
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<PAGE>
discount and corresponding increase in stockholders' equity. Such discount is
being amortized using the straight-line method through the expiration date of
the Warrants, December 31, 2007. Each warrant is exercisable at $5.00 per share.
Beginning on January 15, 1996, each warrant is entitled to an annual
distribution payable on January 15 for the prior calendar year in an amount
equal to any positive difference between the total amount of dividends paid per
share of Common Stock in the preceding year and $0.60. No such distribution was
due on the Warrants for 1995. Beginning on January 1, 2001, the annual
distribution will be in an amount equal to any positive difference between the
total amount of dividends paid per share of Common Stock in the preceding year
and the exercise price multiplied by 90-day LIBOR in effect on the preceding
December 31 plus 1%.
Also in connection with the issuance of the 14% Debentures, the Company issued
5,349,541 SARs, which remain outstanding at December 31, 1995, pursuant to a SAR
Agreement dated December 18, 1994 between the Company and Chemical Bank, as SAR
Agent, as amended. Since the SARs are separate from the 14% Debentures, the
Company assigned a value to the SARs at issuance of $2,611,000, which has been
recorded as a debt discount and corresponding liability. Such discount is being
amortized using the straight-line method through the expiration date of the
SARs, December 31, 2007. Beginning on January 15, 1996, each SAR is entitled to
an annual distribution payable on January 15 for the prior calendar year in an
amount equal to any positive difference between the total amount of dividends
paid per share of Common Stock in the preceding year and $0.60. No such
distribution was due on the SARs for 1995. Beginning on January 1, 2001, the
annual distribution will be in an amount equal to any positive difference
between the total amount of dividends paid per share of Common Stock in the
preceding year and the exercise price multiplied by 90-day LIBOR in effect on
the preceding December 31 plus 1%. The SARs are exchangeable for 14% Debentures,
or under certain circumstances, for Warrants on a one-for-one basis. Each SAR is
exchangeable for a principal amount of 14% Debentures equal to the product of
the average daily market prices of the Common Stock for the 30 consecutive
trading days immediately preceding the date of exchange ($7.506 at December 31,
1995) minus the exercise price per share of the Warrants into which the SARs are
exchangeable ($5.00 per Warrant) times the number of Warrants (5,349,541 in
aggregate) into which the SARs are exchangeable. However, 14% Debentures will
not be issued for amounts less than $1,000, but cash will be paid in lieu of
such amounts. Under their current terms, the SARs would be automatically
exchanged for Warrants on a one-for-one basis following adoption and filing of
an amendment to the Company's Certificate of Incorporation which would permit
the holders of the SARs to own in excess of 9.8% of the outstanding shares of
the Company's Common Stock and adoption of any necessary Board resolutions. Upon
any such exchange, the SARs liability would be reclassified to paid-in capital,
requiring no further adjustments to future earnings.
Due to the increase in the market price of the Company's Common Stock during the
year ended December 31, 1995, the Company was required to increase its SARs
liability and record a current noncash charge to earnings of $10,795,000. The
Company is required to make adjustments to earnings for the difference between
the aggregate principal amount of 14% Debentures issuable upon exchange of the
SARs (SARs liability) and the value at which the SARs liability is carried by
the Company.
Under the terms of the Merger Agreement, Whitehall has agreed not to exercise
its SARs prior to the termination of the Merger Agreement unless the Company has
taken action and as a result of such action the failure to exercise the SARs
would adversely affect the rights of the holders of the SARs, the value of the
SARs or the position of the holders of the SARs in the Company.
Additional Warrants and SARs are issuable under certain circumstances to prevent
dilution to the holders thereof.
Security
Subject to the terms of the Collateral Trust Agreement, upon notice to the
Collateral Trustee of non-payment at
F-16
<PAGE>
maturity, or the acceleration of the maturity, of the Convertible Debentures,
the Floating Rate Notes or the 14% Debentures, the holders of not less than 50%
of the then outstanding aggregate principal amount of any of the Convertible
Debentures, the Floating Rate Notes or the 14% Debentures have the right to
direct the Collateral Trustee to initiate the exercise of remedies under the
Collateral Trust Agreement with respect to the Note and the other collateral
granted under the Collateral Trust Agreement.
GSMC Loan
The Merger Agreement provides that GSMC will make available to the Company up to
$47.5 million of credit during the period between November 7, 1995 and the
earlier of (1) the consummation of the merger contemplated by the Merger
Agreement or (2) any termination of the Merger Agreement. Such credit would be
secured on the same basis as the Floating Rate Notes and the 14% Debentures, but
would accrue interest at the rate of 10% per annum (compounded quarterly) and be
prepayable at any time without penalty. If borrowings under this facility have
not been repaid by the earlier of April 30, 1996, the consummation of the merger
contemplated by the Merger Agreement or any termination of the Merger Agreement
in specified circumstances, including any exercise by the Company of its
"fiduciary out," such borrowings would be subject to the same terms and
conditions as those applicable to the Floating Rate Notes. The Company had
borrowed $10.2 million from GSMC under this facility as of December 31, 1995 and
$45 million as of February 29, 1996. The Company expects to borrow the total
amount available under the GSMC Loan prior to April 30, 1996. The credit
facility extended by GSMC to the Company under the Merger Agreement is expected
to provide sufficient liquidity for the Company until the earlier of the
consummation of the merger contemplated by the Merger Agreement or April 30,
1996.
Interest Rate Swap Agreements:
In connection with its short term floating rate debt and its portfolio of
investment securities, which was liquidated in 1993 and 1994, the Company
entered into interest rate swap agreements with financial institutions that were
intended either to fix a portion of the Company's interest rate risk on floating
rate debt ("Liability Swaps"), or to fix the yield on its floating rate
portfolio securities ("Asset Swaps"). The Company does not use interest rate
swaps for trading purposes. Under the Liability Swaps, the Company pays a fixed
rate of interest semi-annually and receives a variable rate of interest
semi-annually based on 180-day LIBOR. Under the Asset Swaps, the Company
received a fixed rate of interest semi-annually and paid a variable rate of
interest quarterly based on 90-day LIBOR. In connection with the issuance of the
Floating Rate Notes and 14% Debentures in December 1994, the Company retired all
of its Asset Swaps (notional principal $35,000,000) and certain of its Liability
Swaps (notional principal $180,000,000). The Company would be exposed to
credit-related losses in the event of non-performance by the counterparties to
the swap agreements; however, it does not expect any counterparties to fail to
meet their obligations given their current high credit ratings. The Company's
credit-related risk and market-related risk would be that the Floating Rate
Notes would no longer be partially hedged, and therefore the Company would not
receive the benefit of fixing the interest rate on a portion of its floating
rate debt. The amount to be paid or received from interest rate swap agreements
is accrued as floating interest rates are reset semi-annually and, through the
December 1994 retirement date of the commercial paper borrowings, is included as
a component of interest expense on commercial paper and other. Since the
retirement of the Company's commercial paper, the Company presents the financial
effect of interest rate swaps as a component of interest expense on Floating
Rate Notes. The net amount payable to or receivable from the counterparties is
recorded as a component of accrued interest payable. Approximately 90% of the
Company's exposure to interest rate fluctuations on its Floating Rate Notes was
hedged by interest rate swaps at December 31, 1995.
F-17
<PAGE>
The notional amounts, fixed and variable interest rates and expiration dates
relating to such contracts are summarized below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(In thousands) at December 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted
Notional Average
Type Expiring during the Year Amount Interest Rates
---- ----------------------- ------------ --------------
Liability Swaps (3 contracts) 1998 $105,000
---------------
Pay fixed rates 9.64%
Receive variable rates 5.89%
- --------------------------------------------------------------------------------------------------------------------
(In thousands) at December 31, 1994
- -------------------------------------------------------------------------------------------------------------------
Weighted
Notional Average
Type Expiring during the Year Amount Interest Rates
---- ------------------------ ------------ --------------
Liability Swaps (3 contracts) 1998 $105,000
------------------
Pay fixed rates 9.64%
Receive variable rates 5.56%
</TABLE>
The notional principal, weighted average interest rate of swaps outstanding and
annualized net payment relating to interest rate swap contracts, as of December
31, are as follows:
<TABLE>
<CAPTION> 1995 1994
--------------------- ---------------------
<S> <C> <C>
Notional principal $105,000,000 $105,000,000
=================== ===================
Weighted average interest rate
of swaps outstanding 3.75% 4.08%
=================== ===================
Annualized net payment $3,938,000 $4,284,000
=================== ===================
</TABLE>
The current settlement values of all swaps outstanding (the fair value of the
Company's off-balance sheet financial instruments), based on market quotes, was
a liability of approximately $10.6 million and $5.6 million at December 31, 1995
and 1994, respectively.
In connection with the Company's retirement of commercial paper borrowings in
1993 and 1994, the Company exchanged payments with certain counterparties to
retire all of the Asset Swaps and certain of the Liability Swaps in 1994 and
made payments to certain counterparties to reduce the duration of certain
Liability Swaps in 1993, which thereby reduced the Company's net swap liability.
As a result of these transactions, the Company recorded, as a cost of swap
terminations and modifications related to debt extinguishment, $9,855,000 and
$3,451,000 for the years ended December 31, 1994 and 1993, respectively. The
1993 payments were made pursuant to agreements between the Company and certain
of its lenders whereby the Company had agreed to apply a portion of the proceeds
from the issuance of Common Stock for this purpose. As of December 30, 1994,
these agreements with certain of the Company's lenders were terminated.
Commercial Paper Outstanding:
The proceeds from the issuance of the Floating Rate Notes and 14% Debentures
were used to retire all remaining commercial paper outstanding as of December
30, 1994.
F-18
<PAGE>
6. STOCKHOLDERS' EQUITY
In December of 1994, the Company issued Warrants and SARs in connection with the
issuance of its 14% Debentures. As of December 31, 1995, no Warrants or SARs had
been converted to Common Stock (Note 5). In 1993, 750,704 warrants issued in
connection with the settlement of litigation were exercised and a like number of
shares of Common Stock were issued. The proceeds of this issuance totaled
$5,086,000.
7. INCOME TAXES AND DISTRIBUTIONS
No provisions for current or deferred income taxes have been made by the Company
on the basis that it has qualified under the Code as a REIT and has distributed
at least 95% of its annual net income as computed for tax purposes to
stockholders. To the extent that such distributions exceed such income, the
excess will be treated as a return of capital. Net capital gains generated by
the Company are proportionately distributed to the stockholders as net capital
gains dividends. During the years ended December 31, 1995, 1994 and 1993, the
Company made per share distributions to stockholders of $0.15, $0.65 and $1.00,
respectively, of which approximately $0.15, $0.26 and $0.07, respectively,
represented returns of capital, and $0, $0.369 and $0.724, respectively,
represented ordinary income, and $0, $0.021 and $0.206, respectively,
represented a net capital gain dividend. Through December 31, 1995, the
cumulative return of capital paid was $5.25 per share. Of the December, 1994 and
1993 total distribution amounts of $5,739,106 and $9,564,430, respectively, the
Company has designated that $789,362 and $7,893,468, respectively, constitute a
net capital gain dividend, amounting to approximately $.021 and $.206 per share,
respectively, or approximately 13.75% and 82.53% of the fourth quarter dividends
for such years, respectively. During 1995, due to the uncertainties created by
the Borrower's Chapter 11 filings, the Company paid only one dividend, which was
paid in April. Under the terms of the Merger Agreement, the Company is
prohibited from paying additional dividends unless required to do so to maintain
REIT status. During 1994 and 1993, dividends were paid in April, July, October
and December.
As of December 31, 1995, the aggregate tax basis of the Company's net assets
exceeded the amounts reported on the financial statements by approximately $113
million. This difference relates primarily to amounts that will be recognized
for tax purposes when paid or realized. For the years ended December 31, 1994
and 1993, no significant difference existed between the aggregate tax basis of
the Company's net assets and the amounts reported on the financial statements.
Beginning on January 15, 1996, each Warrant and SAR is entitled to an annual
distribution payable on January 15 for the prior calendar year in an amount
equal to any positive difference between the total amount of dividends paid per
share of Common Stock in the preceding year and $0.60. No such distribution was
due on the Warrants and SARs for 1995. Beginning on January 1, 2001, the annual
distribution would be required to be in an amount equal to any positive
difference between the total amount of dividends paid per share of Common Stock
in the preceding year and the exercise price multiplied by 90-day LIBOR in
effect on the preceding December 31 plus 1%.
8. GENERAL AND ADMINISTRATIVE AND OTHER EXPENSES
General and administrative expense includes compensation and benefits for the
Company's employees, rent and related facility costs, directors' and officers'
liability insurance premiums, registrar and transfer agent fees, debenture
trustee fees, legal, audit and financial advisory fees and stockholder reporting
costs. The increase in general and administrative expenses from 1994 to 1995 is
principally due to increased legal fees, investor relations related expenses and
financial advisory fees principally due to actions taken as a result of the
Borrower's Chapter 11 filings.
During the year ended December 31, 1995, the Company incurred: $99,163,000 of
expenses related to the effects of the execution and delivery of the Merger
Agreement as discussed in Note 1; $10,795,000 of expenses related to the SARs
liability as discussed in Note 5; and $553,000 of expenses related to the
Special Meeting.
F-19
<PAGE>
During the year ended December 31, 1994, the Company incurred $1,942,000 of
expenses in connection with its evaluation of alternative financings.
9. AGREEMENTS WITH EOH AND ZML
In August 1995, the Company entered into a Letter of Intent (the "Letter of
Intent"), dated as of August 16, 1995, with Equity Office Holdings, L.L.C.
("EOH") with respect to a possible business combination between the Company and
a group of investors described therein (the "Zell Investor Group") and, in
connection therewith, paid to EOH a fee of $2.0 million. In the same month, the
Company entered into an Investment Agreement dated as of August 18, 1995 (the
"ZML Investment Agreement") with Zell/Merrill Lynch Real Estate Opportunity
Partners Limited Partnership III ("ZML"), pursuant to which ZML made a $10
million working capital loan to the Company and, in connection therewith, the
Company paid ZML a fee of $1.9 million. The Company also paid ZML a fee of $.4
million upon execution of the Letter of Intent. In addition, the Company paid
other financing fees associated with these transactions of $.3 million. In
September 1995, the Company entered into an Agreement and Plan of Combination
dated as of September 11, 1995 (the "Combination Agreement") with EOH.
On November 7, 1995, the Company terminated the Combination Agreement. The terms
of the Combination Agreement provide that, following termination of such
agreement, a fee of $9,575,000 plus up to $2,000,000 of expense reimbursements
would be payable to the Zell Investor Group upon closing of an Alternative
Transaction (as defined) within 30 months after the relevant trigger date. Such
fee and expenses were accrued and are included in expenses of effects of the
execution and delivery of the Merger Agreement. Any obligation to pay such fees
and expenses will be the responsibility of the surviving company in the merger
contemplated by the Merger Agreement. On November 8, 1995, the Company repaid
ZML the principal of $10 million plus interest on the working capital loan
which had been made pursuant to the ZML Investment Agreement.
10. LEGAL MATTERS
On January 23, 1995, Bear, Stearns & Co., Inc. and Donaldson Lufkin & Jenrette
Securities Corporation commenced an action against the Company in the Supreme
Court of New York, County of New York. The plaintiffs allege that the Company
breached a contract relating to the plaintiffs' provision of investment banking
services to the Company in connection with a proposed 1994 transaction. The
plaintiffs seek $5,062,500, plus costs, attorneys' fees and interest. The
Supreme Court of New York denied the Company's motion to dismiss the complaint
on September 21, 1995. On October 10, 1995, the Company filed an answer to the
complaint which denied the plaintiffs' allegations and asserted numerous
affirmative defenses. The Company intends to vigorously contest the plaintiffs'
claims.
On May 11, 1995, the two partnerships comprising the Borrower filed for
protection under Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York as described in Note 1.
On May 24, 1995, Jerry Krim commenced an action encaptioned Krim v. Rockefeller
Center Properties, Inc. and Peter D. Linneman. On June 7, 1995, Kathy Knight and
Moishe Malamud commenced an action encaptioned Knight, et al. v. Rockefeller
Center Properties, Inc. and Peter D. Linneman. Both actions were filed in the
United States District Court for the Southern District of New York and purport
to be brought on behalf of a class of plaintiffs comprised of all persons who
purchased the Company's common stock between March 20, 1995 and May 10, 1995.
The complaints allege that the Company and Dr. Linneman violated the federal
securities laws by their purported failure to disclose, prior to May 11, 1995,
that the Borrower would file for bankruptcy protection. The cases have been
consolidated. On July 28, 1995, the Company and Dr. Linneman filed answers to
the complaints denying plaintiffs' substantive allegations and asserting
numerous affirmative defenses. On September 22, 1995, plaintiffs served an
Amended Class Action Complaint adding the
F-20
<PAGE>
Company's remaining directors and its president as defendants. In addition to
the foregoing claims, the Amended Complaint also asserts a cause of action for
breach by the Company's directors and its president of their fiduciary duties by
approving the Combination Agreement. The plaintiffs are seeking damages in such
amount as may be proved at trial. Plaintiffs are also seeking injunctive relief,
plus costs, attorneys' fees and interest. The Company intends to vigorously
contest these actions.
On July 6, 1995, Charal Investment Company, Inc. commenced a derivative action
against certain of the Company's present and former directors in the Court of
Chancery of the State of Delaware in and for New Castle County ("Delaware Court
of Chancery"). The Company was named as a nominal defendant. The plaintiff
alleged that the directors breached their fiduciary duties by: (1) using
commercial paper proceeds to repurchase Convertible Debentures in 1987-1992; (2)
entering into interest rate swaps; and (3) making capital distributions to
stockholders during the years 1990 through 1994. On February 21, 1995, prior to
the commencement of the action, the Company's Board of Directors appointed a
special committee of the Board to review the plaintiff's February 3, 1995
pre-suit demand that the Company's Board of Directors institute litigation on
the Company's behalf with respect to such claims and recommend a course of
action to the full Board. Plaintiff nevertheless commenced the action, asserting
that circumstances did not permit further delay. On November 7, 1995, the
Delaware Court of Chancery dismissed this action without prejudice due to
plaintiff's failure to comply with the requirements of the Delaware Court of
Chancery Rule 23.1.
On November 14, 1995, the plaintiff moved to amend and supplement its complaint
and/or to amend or alter the Delaware Court's judgment so as to permit the
filing of additional derivative allegations, as well as class allegations that
the Company's Board of Directors had approved the proposed Merger without
considering the value to the Company of the matters set forth in the plaintiff's
pre-suit demand. The Delaware Court of Chancery denied the plaintiff's motion on
February 12, 1996.
On November 28, 1995, the special committee of the Board reviewed the report of
its counsel and, after deliberation, determined to recommend to the Company's
Board of Directors that the plaintiff's pre-suit demand be rejected because it
would not be in the best interest of the Company to pursue the matters set forth
in such demand. On December 5, 1995, after considering the recommendation of the
special committee and the report of the special committee's counsel, the
Company's Board of Directors voted to reject the plaintiff's pre-suit demand.
On February 29, 1996, Charal Investment Company, Inc. filed a
new action in the Delaware Court of Chancery purporting to assert both
derivative and class counts. The derivative count alleges claims substantially
identical to those set forth in Charal's July 6, 1996 complaint, which claims
were the subject of the Board's rejection of plaintiff's pre-suit demand. The
class count alleges that the directors failed to consider the value of the
derivative claims in connection with the Board's evaluation of the fairness of
the proposed Merger. The Company is named only as a nominal defendant in this
action. To the extent that any relief is sought against the Company, the Company
intends to vigorously contest the action.
On July 31, 1995, L.L. Capital Partners, L.P. commenced an action against the
Company in the United States District Court in the Southern District of New
York. The plaintiff alleges that, in a Company prospectus dated November 3,
1993, the Company failed to disclose its purported belief that the Rockefeller
Interests and Mitsubishi Estate would cease to fund the Borrower's cash flow
shortfalls. The plaintiff seeks recovery under Section 12(2) of the Securities
Act of 1933, Section 10(b) of, and Rule 10b-5 under the Exchange Act and the
common law. The Company intends to vigorously contest this action. In September
1995, counsel for the Company filed a motion to dismiss this action for failure
to state a claim. That motion has been fully submitted and argued and the
parties are awaiting a decision by the Court.
On September 13 and 14, 1995, five class action complaints, captioned Faegheh
Moezinia v. Peter D. Linneman, Benjamin D. Holloway, Peter G. Peterson, William
F. Murdoch, Jr. and Rockefeller Center Properties, Inc.; Martin Zacharias v.
B.D. Holloway, P.G. Peterson, W.F. Murdoch, P.D. Linneman and Rockefeller Center
Properties, Inc.; James Cosentino v. Peter D. Linneman, Benjamin D. Holloway,
Peter G. Peterson, William F. Murdoch, Jr. and Rockefeller Center Properties,
Inc.; Mary Millstein v. Peter D.
F-21
<PAGE>
Linneman, Peter G. Peterson, Benjamin D. Holloway, William F.
Murdoch, Jr. and Rockefeller Center Properties, Inc; and Robert Markewich v.
Peter D. Linneman and Daniel M. Neidich, et al. were filed in the Delaware
Court of Chancery. On October 11, 1995, an additional complaint captioned Hunter
Hogan v. Rockefeller Center Properties, Inc., et al. was filed in the Delaware
Court of Chancery. Each of the complaints purports to be brought on behalf of a
class of plaintiffs comprised of stockholders of the Company who have been or
will be adversely affected by the Combination Agreement. All of the complaints
allege that the Company's Directors breached their fiduciary duties by approving
the Combination Agreement. The complaints seek damages in such amount as may be
proved at trial. Plaintiffs also seek injunctive relief, plus costs and
attorneys fees. On November 8, 1995, the Delaware Court of Chancery entered an
order consolidating these actions. The Company intends to contest these actions
vigorously.
On February 28, 1996, ZML filed a complaint and a motion for a preliminary
injunction against the Company. The action is captioned Zell/Merrill Lynch Real
Estate Opportunity Partners Limited Partnership III v. Rockefeller Center
Properties, Inc., 96 Civ. 1445, and is pending in the United States Federal
District Court for the Southern District of New York. The complaint alleges that
the Company breached the ZML Investment Agreement by failing to sell to ZML
1,788,908 shares of Common Stock and by failing to appoint a person designated
by ZML to the Company's Board of Directors. ZML seeks specific performance of
the ZML Investment Agreement. ZML's motion for a preliminary injunction seeks to
enjoin the March 25, 1996 Special Meeting pending resolution of ZML's claim for
specific performance. The Company intends to vigorously contest both the motion
for a preliminary injunction and the underlying action and the Company does not
believe that ZML is entitled to the relief requested. A hearing on the motion
for a preliminary injunction is scheduled for March 19, 1996.
The Company does not expect the outcome of the above litigations to have a
material effect on the financial condition of the Company.
11. THE PROPERTY
Summarized financial information of the Property provided by the Borrower is as
follows:
<TABLE>
<CAPTION>
(In thousands) Years Ended December 31,
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Gross revenue $213,845 $220,851 $226,597
Less:
Operating expenses (151,218) (161,890) (165,456)
Interest expense, net (45,038) (117,328) (114,599)
Reorganization items (2,475)
--------------- -------------- ---------------
Net income (loss) $15,114 ($58,367) ($53,458)
=============== ============== ===============
</TABLE>
The Loan Agreement provides for the establishment of loans for the cumulative
portion of capital improvements made by the Borrower in excess of amounts
specified in the Loan Agreement. The cumulative amounts of excess capital
improvements totaled $126.7 million, $126.7 million and $123 million at December
31, 1995, 1994 and 1993, respectively. These excess capital improvement loans
are deemed to be made to the Borrower by its partners and bear interest at 80%
of the prime rate (as defined), compounded quarterly, which is added to the loan
principal at the end of each year. At December 31, 1995, 1994 and 1993, the
amount of such excess capital improvement loans (including accrued interest)
totaled $164.7 million, $160.7 million and $149.7 million, respectively. As a
result of the bankruptcy proceedings, interest has not been accrued since the
bankruptcy filings. The results of operations of the Property for 1995, 1994 and
1993 reflect non-cash interest charges of $3.9 million, $7.3 million and $6.3
million, respectively, relating to interest on these excess capital improvement
loans.
F-22
<PAGE>
12. INTERIM FINANCIAL INFORMATION (unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1995 1Q 2Q 3Q 4Q
- ------------------ ---------------- ----------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues $20,446 $339 $556 $129
Net loss ($7,478) ($17,818) ($141,078) ($28,755)
Net loss per share ($0.20) ($0.46) ($3.69) ($0.75)
- ------------------ ---------------- ----------------- -------------- -----------
1994 1Q 2Q 3Q 4Q
- ------------------ ---------------- ----------------- -------------- -----------
Revenues $27,270 $27,262 $27,417 $27,336
Net income (loss) $6,667 $6,551 $3,321 ($1,396)
Net income (loss)
per share $0.17 $0.17 $0.09 ($0.03)
</TABLE>
F-23
<PAGE>
REPORT OF MANAGEMENT
Board of Directors and Stockholders March 18, 1996
Rockefeller Center Properties, Inc.
The management of Rockefeller Center Properties, Inc. (the "Company") has the
responsibility for preparing the accompanying financial statements and for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles applied on a consistent basis and are
not misstated due to material fraud or error. The financial statements include
amounts that are based on management's best estimates and judgments. These
estimates and judgments are significantly affected by the Chapter 11 filings of
the Borrower, the execution and delivery of the Merger Agreement described in
these financial statements and the impending vote of the stockholders at a
special meeting to be held on March 25, 1996. The financial statements have been
prepared on a going concern basis; however, there are significant uncertainties
which raise substantial doubt about the ability of the Company to continue as a
going concern if the Merger Agreement is not approved or if the transactions
contemplated by the Merger Agreement are not consummated. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
financial statements.
The financial statements have been audited by Ernst & Young LLP. Management has
made available to Ernst & Young LLP all the Company's financial records and
related data. Furthermore, management believes that all representations made to
Ernst & Young LLP during its audit were valid and appropriate.
Management has established and maintains a system of internal accounting control
that provides reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition, and the prevention and detection of fraudulent financial reporting.
Management continually monitors the system of internal accounting control for
compliance. In addition, as part of its audit of the Company's financial
statements, Ernst & Young LLP evaluated selected internal accounting controls to
establish a basis for reliance thereon in determining the nature, timing, and
extent of audit tests to be applied. Management believes that, as of December
31, 1995, the system of internal accounting control is adequate to accomplish
the objectives discussed herein.
Management also recognizes its responsibility for fostering a strong ethical
climate so that the Company's affairs are conducted according to the highest
standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's code of business conduct. The code
addresses, among other things, potential conflicts of interest; business
conduct; political activities; and confidentiality of information. The Company
maintains a program to assess compliance with these policies.
The Audit Committee of the Board of Directors is directly responsible for
assuring that management fulfills its financial reporting responsibilities. The
Audit Committee met twice during 1995 with management and Ernst & Young LLP to
discuss audit activities, internal accounting controls, and financial reporting
matters. Ernst & Young LLP has unrestricted access to the Audit Committee.
/s/RICHARD M. SCARLATA
Richard M. Scarlata
President & Chief Executive Officer
F-24
<PAGE>
SELECTED FINANCIAL INFORMATION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(FOR THE YEAR):
Revenues (1) .................... $ 21,470 $ 109,285 $ 113,560 $ 122,414 $ 123,182
--------- --------- --------- --------- ---------
Interest Expense ................ 85,563 77,501 78,343 80,799 80,784
General and Administrative ...... 11,267 4,170 3,728 4,299 3,349
Amortization of financing costs
(2) 9,258 705 705 705 760
Stock appreciation rights
liability (3) ................ 10,795 -- -- -- --
Effects of the execution and
delivery of the merger
agreement (2) ................ 99,163 -- -- -- --
Expenses related to the March 25,
1996 special meeting of the
stockholders ................. 553 -- -- -- --
Cost of swap terminations and
modifications related to debt
extinguishment ............... -- 9,855 3,451 -- --
Cost of evaluating alternative
financings ................... -- 1,942 -- -- --
--------- --------- --------- --------- ---------
216,599 94,173 86,227 85,803 84,893
--------- --------- --------- --------- ---------
(Loss) income before non-
recurring income and
extraordinary item ........... (195,129) 15,112 27,333 36,611 38,289
--------- --------- --------- --------- ---------
Non-recurring income (gain on
sales of portfolio securities) -- 31 8,593 -- --
--------- --------- --------- --------- ---------
Extraordinary gain on debt
extinguishment ............... -- -- -- 2,537 38
--------- --------- --------- --------- ---------
Net (loss) income ............... ($195,129) $ 15,143 $ 35,926 $ 39,148 $ 38,327
========= ========= ========= ========= =========
(Loss) income per share before
extraordinary item ........... ($ 5.10) $ 0.40 $ 0.96 $ 0.97 $ 1.02
========= ========= ========= ========= =========
Net (loss) income per share ..... ($ 5.10) $ 0.40 $ 0.96 $ 1.04 $ 1.02
========= ========= ========= ========= =========
</TABLE>
(footnotes on pages F-27 and F-28)
F-25
<PAGE>
SELECTED FINANCIAL INFORMATION (cont'd)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
--------- ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT END
OF PERIOD):
Total assets (1) (2) ................ $ 1,190,776 $ 1,319,995 $ 1,317,509 $ 1,432,210 $ 1,450,103
Total debt .......................... 770,667 760,394 756,936 879,284 876,959
Total liabilities ................... 874,177 802,528 792,344 910,360 904,009
Total stockholders' equity .......... 316,599 517,467 525,165 521,850 546,094
OTHER FINANCIAL DATA:
Ratio of earnings to fixed
charges (4) ...................... -- 1.19X 1.35X 1.45X 1.47X
Net cash (used in)
provided by operating
activities ....................... ($ 17,706) $ 57,198 $ 58,231 $ 62,735 $ 57,909
Net cash provided by
investing activities ............. 50,000 14,331 126,668 23,560 17,200
Net cash used in financing activities
Excluding dividends paid ......... 28,154 44,015 147,082 22,955 3,041
Dividends paid ................... 5,739 24,869 37,697 63,392 72,019
Dividends paid per share ............ 0.15 0.65 1.00 1.69 1.92
Portion of dividends
representing a return of
capital .......................... 100% 39.4% 7.4% 38.2% 46.8%
Book value per share ................ $ 8.27 $ 13.52 $ 13.73 $ 13.91 $ 14.56
Book value per share
assuming exercise of
Warrants and SARs ................ $ 7.90 $ 11.88 -- -- --
Market price per share
(at end of period) ............... $ 7.625 $ 5.00 $ 6.75 $ 7.625 $ 15.375
Repurchase of convertible
debentures (5) ................... -- -- -- $ 30,410 $ 10,000
</TABLE>
(footnotes on pages F-27 and F-28)
F-26
<PAGE>
----------------------
(1) On May 11, 1995, the Borrower filed for protection under Chapter
11 of the Bankruptcy Code. The Company's only significant source
of income is interest received on the Loan from the Borrower.
Due to the significant uncertainties created by the Borrower's
Chapter 11 filings, the Company has limited recognition of
income on the Loan for the year ended December 31, 1995 to the
cash actually received from the Borrower during this period.
When the Company drew down the $50 million under letters of
credit posted by the Borrower's parent in the second quarter of
1995, these cash receipts were applied to reduce the carrying
value of the Loan to $1,250,000,000. Management and the Board of
Directors believe that, if the Company's stockholders do not
approve the Merger Agreement or if the transactions contemplated
by the Merger Agreement are not consummated, the Company would
be subject to substantial uncertainties. The Company expects
that, in the absence of additional financing, its cash resources
will be exhausted by the end of April 1996. There can be no
assurance as to the availability to the Company of any
alternatives to proceeding with the Rights Offering and there
can be no assurance that, if the Board of Directors elects to
proceed with the Rights Offering, Goldman Sachs or PaineWebber,
Incorporated will agree to underwrite the Rights Offering or
that the Rights Offering can be successfully concluded or, if
concluded, as to the timing of such conclusion. Approval of the
Merger Agreement by the Company's stockholders is, in any event,
a condition to the effectiveness of the proposed Chapter 11 Plan
and, accordingly, in the event of a rejection of the Merger
Agreement, a new reorganization plan will have to be negotiated;
there can be no assurance as to the results that such
negotiations would reach or even that such negotiations would be
successful. While the Rights Offering is designed to produce
proceeds to the Company of $200 million (before expenses), most
of these proceeds would be used to retire the Floating Rate
Notes. Thus, the Board of Directors believes that, even if the
Rights Offering were successful, the Company would require
additional funds in order to be able to demonstrate in the
Chapter 11 Cases that the Company could successfully operate the
Property. While Whitehall and Goldman Sachs agreed in the Rights
Offering Agreement to make certain changes in the terms of the
14% Debentures to facilitate additional borrowings by the
Company, there can be no assurance that the Company could obtain
the required additional financing on terms satisfactory to it,
if at all.
Due to the factors described above, Management believes that
there is substantial doubt about the Company's ability to
continue as a going concern if the Company's stockholders do not
approve the Merger Agreement or if the transactions contemplated
by the Merger Agreement are not consummated. The financial
statements do not include any adjustment to reflect the possible
future effects on the recoverability of assets or the amounts of
liabilities that may result from the outcome of these
uncertainties.
(2) The Company reflected in its September 30, 1995 interim
financial statements a valuation reserve, totaling $74,000,000,
to reduce the carrying value of its Loan to reflect the
economics of the transactions contemplated by the Merger
Agreement. In addition, the Company recorded certain transaction
costs and expenses aggregating $25,200,000, and recognized as
amortization of financing cost certain deferred debt issuance
and letter of intent costs totaling $4,650,000.
(3) Due to the increase in the market price of the Company's Common
Stock during the year ended December 31, 1995, the Company was
required to increase its liability for the SARs issued in
December 1994 and record a current noncash charge to earnings of
$10,795,000.
F-27
<PAGE>
(4) For purposes of determining the ratio of earnings to fixed
charges, earnings are defined as net income plus fixed charges.
Fixed charges consist of interest expense and amortization of
financing costs. For the year ended December 31, 1995, earnings
were inadequate to cover fixed charges by $195,129,000 due to
the Company's net loss for the year. The loss was due primarily
to the Borrower's failure to pay interest on the Loan after the
Borrower's Chapter 11 filings (see (1) above).
(5) As of December 31, 1995, the aggregate face value of the
Convertible Debentures repurchased since 1987 was $487,895,000.
F-28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES - THE COMPANY
In September 1985, Rockefeller Center Properties, Inc. (the "Company") issued
37,500,000 shares of Common Stock at $20 per share in an initial public
offering. Simultaneously with the offering of the Common Stock, the Company
issued Current Coupon Convertible Debentures in the principal amount of
$335,000,000 and Zero Coupon Convertible Debentures in the face amount of
$952,250,000 (collectively, the "Convertible Debentures"). The Company received
net proceeds of $1,233,770,000 from such offerings. Such funds were used to make
a convertible, participating mortgage loan (the "Loan") in the face amount of
$1,300,000,000 to two partnerships (collectively, the "Borrower"). The partners
of the Borrower are Rockefeller Group, Inc. ("RGI") and a wholly-owned
subsidiary of RGI. The Loan, which is secured by the real property interests
owned by the Borrower comprising most of the land and buildings known as
Rockefeller Center (the "Property"), was made pursuant to a loan agreement
between the Company and the Borrower (as amended, the "Loan Agreement"). The
Loan is convertible at the Company's option on December 31, 2000 (the "Equity
Conversion Date") or, if an event of default under the Loan Agreement has
occurred and is continuing, any earlier date specified by the Company into a
71.5% (subject to reduction in the event of certain prepayments) general
partnership interest in the partnership which will own the Property (the
"Partnership") on that date.
During December 1993, the Company issued an additional 750,704 shares of Common
Stock for a cash consideration of $7.00 per share as the result of the exercise
of an equivalent number of warrants which were issued pursuant to a
court-ordered class action settlement. The Company received proceeds of
$5,086,000 from this Common Stock issuance. At December 31, 1995, 1994 and 1993,
the Company had 38,260,704 shares of Common Stock outstanding.
On December 29, 1994, the Company issued $150,000,000 of floating rate notes
("Floating Rate Notes") and $75,000,000 of 14% debentures ("14% Debentures") and
warrants ("Warrants") and stock appreciation rights ("SARs"). The net proceeds
from these issuances of approximately $212,522,000 were used to retire
commercial paper borrowings of $193,100,000, and to retire interest rate swaps
with a net notional principal of $145,000,000 at a cost of $9,855,000. The
balance of the proceeds from this transaction has been applied to general
corporate purposes.
On May 11, 1995, the two partnerships comprising the Borrower filed for
protection under Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Southern District of New York. The Company's only
significant source of income is interest received on the Loan from the Borrower.
As a result of these filings and until such time as these Chapter 11 cases (the
"Chapter 11 Cases") have been brought to a conclusion, the Company does not
expect to receive interest payments from the Borrower and the Company's ability
to enforce its rights under the Loan has been and will be stayed unless and
until the Court issues an order permitting the Company to take steps to enforce
such rights. The Borrower and its managing general partner, RGI, filed a Chapter
11 reorganization plan (the "Chapter 11 Plan") for the Borrower that
contemplates that ownership of the Property will be turned over to the Company
or its designee upon consummation of the Chapter 11 Plan. Pursuant to the order
of the Bankruptcy Court having jurisdiction over the Borrower's Chapter 11
Cases, a disclosure statement in respect of the Chapter 11 Plan has been
approved and March 27, 1996 has been set as the date (the "Plan Confirmation
Date") for the hearing to consider confirmation of the Chapter 11 Plan. The
Company currently anticipates that, if the Chapter 11 Plan is confirmed on or
shortly after March 27, 1996, the transactions contemplated by the Merger
Agreement (as defined below) could be consummated prior to April 30, 1996,
as required by the Merger Agreement. There is no assurance that the conditions
to confirmation and/or consummation of the Chapter 11 Plan will be met, that
the conditions to the Merger Agreement will be met, or
F-29
<PAGE>
that the transactions contemplated by the Chapter 11 Plan and the Merger
Agreement will occur or will take place within the periods described above.
On November 7, 1995, the Company executed and delivered an Agreement and Plan of
Merger, dated as of November 7, 1995 (as amended by Amendment No. 1 thereto,
dated as of February 12, 1996, the "Merger Agreement"), with a group of
investors (the "Investor Group") including Exor Group S.A., David Rockefeller,
Rockprop L.L.C., Troutlet Investments Corporation and Whitehall Street Real
Estate Limited Partnership V ("Whitehall"), pursuant to which, subject to
satisfaction of the conditions specified in the Merger Agreement, a corporation
formed by the Investor Group would merge into the Company, the surviving company
would be wholly owned by the Investor Group, and the stockholders of the Company
would receive $8.00 in cash for each of their shares of the Company's Common
Stock other than Excluded Shares (as defined in the Merger Agreement). The
Company plans to hold a special meeting (the "Special Meeting") for stockholders
to vote on the Merger Agreement on March 25, 1996.
Under the Merger Agreement, Goldman Sachs Mortgage Company ("GSMC"), which is a
party to the Merger Agreement for this purpose, has agreed to make available to
the Company up to $47.5 million of credit ("GSMC Loan") during the period
between November 7, 1995 and the earlier of (1) the consummation of the merger
contemplated by the Merger Agreement or (2) any termination of the Merger
Agreement. Such credit would be secured on the same basis as the Floating Rate
Notes and the 14% Debentures, but would accrue interest at the rate of 10% per
annum (compounded quarterly) and be prepayable at any time without penalty. If
borrowings under this facility have not been repaid by the earlier of April 30,
1996, the consummation of the merger contemplated by the Merger Agreement or any
termination of the Merger Agreement in specified circumstances, including any
exercise by the Company of its "fiduciary out," such borrowings would be subject
to the same terms and conditions as those applicable to the Floating Rate Notes.
The Company had borrowed $10.2 million from GSMC under this facility as of
December 31, 1995 and $45 million as of February 29, 1996. The Company expects
to borrow the total amount available under the GSMC Loan prior to April 30,
1996. The credit facility extended by GSMC to the Company under the Merger
Agreement is expected to provide sufficient liquidity for the Company until the
earlier of the consummation of the merger contemplated by the Merger Agreement
or April 30, 1996.
Also on November 7, 1995, the Company entered into a rights offering agreement
("the Rights Offering Agreement") with Whitehall and Goldman, Sachs & Co.
("Goldman Sachs"), an affiliate of Whitehall, pursuant to which the parties have
agreed that, if the Company's stockholders do not approve the Merger Agreement
at the Special Meeting, the Company will have the right to elect, within 30 days
after the date of the Special Meeting, to make a $200 million publicly
registered rights offering (the "Rights Offering") at a price set by the
Company's Board of Directors, but not less than $6.00 per share of Common Stock.
The purpose of the Rights Offering Agreement is to provide the Company with a
pre-negotiated potential means to raise the funds it would require to be able to
acquire the Property and to service its obligations if the Company's
stockholders do not approve the Merger Agreement. No decision has been made by
the Company's Board of Directors as to whether this option would be exercised if
the Company's stockholders do not approve the Merger Agreement; such a decision
will be made in the light of the circumstances prevailing at the time of any
such failure to approve the Merger Agreement, including any alternatives that
may then be available to the Company. Any election by the Company to proceed
with the Rights Offering would not require prior approval of the Company's
stockholders.
Management and the Board of Directors believe that, if the Company's
stockholders do not approve the Merger Agreement or if the transactions
contemplated by the Merger Agreement are not consummated, the Company would be
subject to substantial uncertainties. The Company expects that, in the absence
of additional financing, its cash resources will be exhausted by the end of
April 1996. There can be no assurance as to the
F-30
<PAGE>
availability to the Company of any alternatives to proceeding with the Rights
Offering and there can be no assurance that, if the Board of Directors elects to
proceed with the Rights Offering, Goldman Sachs or PaineWebber, Incorporated
will agree to underwrite the Rights Offering or that the Rights Offering can be
successfully concluded or, if concluded, as to the timing of such conclusion.
Approval of the Merger Agreement by the Company's stockholders is, in any event,
a condition to the effectiveness of the proposed Chapter 11 Plan and,
accordingly, in the event of a rejection of the Merger Agreement, a new
reorganization plan will have to be negotiated; there can be no assurance as to
the results that such negotiations would reach or even that such negotiations
would be successful. While the Rights Offering is designed to produce proceeds
to the Company of $200 million (before expenses), most of these proceeds would
be used to retire the Floating Rate Notes. Thus, the Board of Directors believes
that, even if the Rights Offering were successful, the Company would require
additional funds in order to be able to demonstrate in the Chapter 11 Cases that
the Company could successfully operate the Property. While Whitehall and Goldman
Sachs agreed in the Rights Offering Agreement to make certain changes in the
terms of the 14% Debentures to facilitate additional borrowings by the Company,
there can be no assurance that the Company could obtain the required additional
financing on terms satisfactory to it, if at all.
Due to the factors described above, Management believes that there is
substantial doubt about the Company's ability to continue as a going concern if
the Company's stockholders do not approve the Merger Agreement or if the
transactions contemplated by the Merger Agreement are not consummated. The
financial statements do not include any adjustment to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of these uncertainties.
The following table sets forth certain information regarding the Company's
outstanding debt as of December 31, 1995:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Principal Balance
Interest Rate as of
as of December 31, 1995
Description Maturing December 31, 1995 (000's)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Coupon Convertible Debentures 12/31/2000 (1) 13% (2) $213,170
Zero Coupon Convertible Debentures 12/31/2000 (1) 0% (3) 360,283 (4)
Floating Rate Notes 12/31/2000 (5) 9.875% (6) 116,296
14% Debentures 12/31/2007 14% 70,718 (7)
GSMC Loan 12/31/2000 (8) 10% 10,200
--------
$770,667
========
- -------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) If not converted into Common Stock on 12/31/2000, become floating rate notes
due 12/31/2007.
(2) Annual effective rate is 9.23% (see Note 2 to the Financial Statements).
(3) Annual effective rate is 10.23% (see Note 2 to the Financial Statements).
(4) Accreted value at 12/31/2000 - $586,185,000.
(5) See Note 5 to the Financial Statements for a description of mandatory
prepayments.
(6) Rate = 90-day LIBOR +4%, reset quarterly (exclusive of swap agreements,
see Note 5 to the Financial Statements).
(7) Accreted value at 12/31/2007 - $75,000,000.
(8) If not repaid by the earlier of April 30, 1996, the consummation of the
merger contemplated by the Merger Agreement or any termination of the
Merger Agreement in specified circumstances, borrowings become subject to
the same terms and conditions as the Floating Rate Notes.
Due to the significant uncertainties created by the Borrower's Chapter 11
filings, (i) the Company has limited recognition of income on the Loan for the
year ended December 31, 1995 to $20,339,000, which is equal to the cash actually
received from the Borrower during this period and (ii) the Company intends,
solely for accounting purposes, to apply future cash receipts, if any, from the
Borrower to reduce the carrying value of the
F-31
<PAGE>
Loan. When the Company drew down the $50 million under letters of credit posted
by the Borrower's parent in the second quarter of 1995, these cash receipts were
applied to reduce the carrying value of the Loan to $1.25 billion.
During the years ended December 31, 1995, 1994 and 1993, cash received from the
Borrower for the payment of interest on the Loan was $20,339,000, $105,495,000
and $103,545,000, respectively. The Loan Agreement, enforcement of which is
stayed during the pendency of the Borrower's Chapter 11 Cases until the Court
orders otherwise, provides for Base Interest (as defined) to be paid according
to a fixed schedule. The increase from 1993 to 1994 is attributable to the
scheduled increase in the annualized coupon rate on the Loan.
The Loan Agreement also provides for Additional Interest (as defined) to be
earned by the Company under certain circumstances. No Additional Interest has
been earned by the Company to date. Based on present conditions in the Midtown
Manhattan rental market, the Company does not currently expect that it would
earn Additional Interest even if the Borrower's reorganization proceedings
were terminated.
Other interest income received during 1995, 1994 and 1993 was $1,131,000,
$998,000 and $6,553,000, respectively. During the year ended December 31, 1995,
interest was received on invested funds. The Company's short term investments
are highly liquid and have the highest credit rating with a maturity of less
than three months. The decrease from 1993 to 1994 was due to portfolio sales and
maturities, the proceeds from which were used with operating cash to reduce the
Company's commercial paper during the years ended December 31, 1994 and 1993
(see Note 5 of the Notes to Financial Statements). The Company completed the
liquidation of its investment portfolio during 1994 realizing $14,331,000 from
sales of securities with a net carrying value of $14,300,000, resulting in a net
gain of $31,000.
The Company paid $13,413,000 of interest on the Floating Rate Notes, and
$3,701,000 of interest on its swap agreements for a total of $17,114,000 paid in
floating rate interest during the year ended December 31, 1995. Interest
payments on the Floating Rate Notes are made quarterly on March 1, June 1,
September 1 and December 1 of each year. Under the terms of the Floating Rate
Notes, mandatory principal payments are required to be made of net cash flow
("Net Cash Flow") (calculated as of the most recent fiscal quarter), which is
defined as all gross receipts minus actual operating expenses incurred; interest
paid or accrued (on a straight-line basis) on the Floating Rate Notes, 14%
Debentures, Current Coupon Convertible Debentures and other indebtedness (as
defined) permitted under the agreement governing the Floating Rate Notes;
dividends paid or accrued; and distributions paid or accrued on the Warrants and
SARs. On September 1, 1995, due to the draw down on the letters of credit
supporting the payment of Base Interest on the Loan, the Company made a
mandatory principal payment on the Floating Rate Notes of $33,704,000, which
reduced the principal balance to $116,296,000. Under the terms of the GSMC Loan,
any amounts received from such loan are not considered in the calculation of Net
Cash Flow.
Interest on the 14% Debentures is payable semi-annually on June 2 and December 2
of each year. The Company paid $9,917,000 of interest on the 14% Debentures
during the year ended December 31, 1995.
F-32
<PAGE>
During the years ended December 31, 1995, 1994 and 1993, interest paid on
commercial paper and other obligations was $198,000, $27,020,000 and
$31,016,000, respectively. The following schedule presents the components of
such interest paid:
<TABLE>
1995 1994 1993
----------------- ------------------ ------------------
<S> <C> <C> <C>
Interest rate swap agreements $15,252,000 $16,620,000
Commercial paper (including
commercial paper fees and expenses) 11,768,000 14,178,000
Bank loans 218,000
Interest on working capital loan and other $198,000
---------------- ------------------- ------------------
$198,000 $27,020,000 $31,016,000
================ =================== ==================
</TABLE>
In December 1994, the Company concluded a study of its overall capital
structure. As a result of this study, the Company issued $150,000,000 in
Floating Rate Notes and $75,000,000 in 14% Debentures, the proceeds from which
were used by the Company to retire its commercial paper and a portion of its
interest rate swaps (see Note 5 of the Notes to Financial Statements). The
Company retained $105,000,000 notional principal amount of interest rate swaps
to hedge a portion of its interest rate exposure on the Floating Rate Notes. For
the year ended December 31, 1994, the Company recorded as a cost of swap
terminations and modifications related to debt extinguishment, $9,855,000 to
retire a portion of its interest rate swaps.
As discussed in Note 5, the annualized net payment relating to interest rate
swaps outstanding at December 31, 1995 was $3,938,000. This amount may change in
1996 and subsequent years as the floating rates receivable under the Company's
interest rate swaps are periodically reset.
During the years ended December 31, 1995, 1994 and 1993, cash interest paid on
the Current Coupon Convertible Debentures was $0, $17,053,000 and $17,053,000,
respectively. Coupon payments on outstanding Current Coupon Convertible
Debentures are due on December 31. However, under the terms of the Indenture, if
December 31 is not a business day, interest will be paid on the next business
day which was the case for the December 31, 1995 payment. Cash interest of
$27,712,000 on the Current Coupon Convertible Debentures was paid on January 2,
1996. The increase in cash interest on the Current Coupon Convertible Debentures
from 1994 to 1995 was due to the scheduled interest rate increase effective
January 1, 1995 to 13% per annum, which is the rate in effect until December 31,
2000. Prior to January 1, 1995, the interest rate in effect was 8% per annum.
In order to maintain its qualification as a real estate investment trust (a
"REIT") under the Internal Revenue Code of 1986, the Company is obligated to
distribute to its stockholders at least 95% of its annual net income as computed
for tax purposes. Through 1992, the Company had distributed to its stockholders
substantially all of its annual cash flow in excess of interest and operating
expenses, reserves and investments, resulting in a substantial return of capital
to stockholders. Through December 31, 1995, cumulative distributions paid of
$15.00 per share included a cumulative return of capital of $5.25 per share.
Distributions prior to the Borrower's Chapter 11 filings on May 11, 1995, were
made in April, July, October and December of each year. During the year ended
December 31, 1995, due to the uncertainties created by the Borrower's Chapter 11
filings, the Company paid only one distribution, which was paid in April.
In August 1995, the Company entered into a Letter of Intent dated as of August
16, 1995 (the "Letter of Intent"), with Equity Office Holdings, L.L.C. ("EOH")
with respect to a possible business combination between the Company and a group
of investors described therein and, in connection therewith, paid to EOH a fee
of $2,000,000. In the same month, the Company entered into an Investment
Agreement, dated as of August 18, 1995 (the "ZML Investment Agreement"), with
Zell/Merrill Lynch Real Estate Opportunity Partners Limited Partnership III
("ZML") pursuant to which ZML made a $10,000,000 working capital loan to the
Company and, in connection therewith, the Company paid ZML a fee of $1,925,000.
The Company also
F-33
<PAGE>
paid ZML a fee of $425,000 upon execution of the Letter of Intent. In addition,
the Company paid other financing fees associated with these transactions of
$300,000. In September 1995, the Company entered into an Agreement and Plan of
Combination, dated as of September 11, 1995 (the "Combination Agreement"), with
EOH. All such expenses paid are classified as interim financing costs.
On November 7, 1995, the Company terminated the Combination Agreement. On
November 8, 1995, the Company repaid ZML the principal of $10,000,000 plus
interest on the working capital loan which had been made pursuant to the ZML
Investment Agreement. The Company drew down $10,200,000 on the GSMC Loan in
order to repay this working capital loan.
The Company has executed non-disturbance agreements with tenants that occupy at
least a full floor in any of the buildings comprising a part of the Property and
certain other tenants upon request. Such agreements provide that, in the event
of a foreclosure of the Loan, such tenant's possession of space within the
Property will not be disturbed so long as such tenant is in compliance with the
terms of its lease. In addition, certain tenants, under their leases, may offset
fixed rent otherwise payable to the Borrower (up to specified maximum amounts)
in the event that the Borrower fails to pay for alterations provided for in
their leases. In the event the aggregate amount that such tenants may offset
(the "Rent Offset Amount") exceeds $37.5 million, an agreement with the Borrower
(enforcement of which is stayed by the pendency of the Borrower's Chapter 11
Cases) requires the Borrower to maintain credit support facilities to provide
additional security in an amount equal to at least 50% of the excess. As of
December 31, 1995, the Company had executed seven rent offset agreements with
tenants. The total Rent Offset Amount at such date was $14,835,000 which is
below the $37.5 million threshold and, accordingly, the Borrower is not required
to maintain credit support facilities for this Rent Offset Amount.
RESULTS OF OPERATIONS - THE COMPANY
The Company's principal source of income during each of the years ended December
31, 1995, 1994 and 1993, was loan interest income recognized on the Loan. As
discussed in Note 1 of the Notes to Financial Statements, loan interest income
was recognized only to the extent of loan interest actually received from the
Borrower during the year ended December 31, 1995. Loan interest income exceeded
loan interest received in 1994 and 1993 by approximately $3.2 million and $4.8
million, respectively. The difference between 1994 and 1993 is attributable
partially to the amortization of original issue discount applicable to the Loan
and partially to the recognition of interest income on the Loan according to the
effective interest method by which interest is calculated on the basis of the
average yield on the notes evidencing the Loan (the "Notes") through the Equity
Conversion Date. Loan interest income accounted for 94.7%, 99.5% and 95.4% of
total revenues during the years ended December 31, 1995, 1994 and 1993,
respectively.
Other interest income earned in the years ended December 31, 1995, 1994 and
1993, was $1,131,000, $553,000 and $5,197,000, respectively, representing 5.3%,
0.5% and 4.6%, respectively, of total revenues. The increase of $578,000 from
1994 to 1995 was due to interest earnings on short term investments due to the
investing of funds received from the letters of credit proceeds discussed in
Note 3 of the Notes to Financial Statements. The decline of $4,644,000 from 1993
to 1994 is principally a result of sales and maturities of portfolio securities.
The Company liquidated its portfolio of investment securities during 1993 and
1994.
Interest expense on the Current Coupon Convertible Debentures during the years
ended December 31, 1995, 1994 and 1993, was $22,979,000, $22,478,000 and
$22,020,000, respectively. The yearly increases are attributable to the
recognition of interest expense according to the effective interest method by
which interest is calculated on the basis of the average interest expense on the
Current Coupon Convertible Debentures through
F-34
<PAGE>
the maturity date, December 31, 2000. Cash interest paid on the Current Coupon
Convertible Debentures in respect of 1995 was $27,712,000.
Interest expense on Zero Coupon Convertible Debentures during the years ended
December 31, 1995, 1994 and 1993 was $33,420,000, $30,320,000 and $27,507,000,
respectively. The increase of $3,100,000 or 10.2% from 1994 to 1995 was a result
of accruals of interest on the increasing accretion of the principal amount of
the Zero Coupon Convertible Debentures. Such accruals of interest grow at the
annual rate of 10.2%.
Interest expense on the 14% Debentures and Floating Rate Notes, which replaced
commercial paper borrowings and retired a portion of the Company's interest rate
swap agreements in December 1994, and other interest expense, increased
$4,461,000 from 1994 to 1995, principally due to an increase in interest rates
and higher interest rates on the 14% Debentures and Floating Rate Notes compared
to the interest rate on commercial paper, which was offset partially by the
lower cost of servicing swaps due to the retirement of certain swap agreements
in December 1994. The decrease of $4,113,000 in such interest expense between
1993 and 1994, principally reflects a combination of lower average commercial
paper borrowings outstanding during the year, the repayment of bank loans in
1993, and the lower cost of servicing interest rate swaps due to higher variable
interest rates received on certain swaps. These savings were partially offset by
the higher cost of commercial paper due to higher interest rates.
Combined interest expense on all debt totaled $85,563,000, $77,501,000 and
$78,343,000, for each of the years ending December 31, 1995, 1994 and 1993,
respectively. These amounts accounted for 82.3% and 90.8% of total expenses in
1994 and 1993, respectively. In 1995, principally due to actions taken as a
result of the Borrower's Chapter 11 filings, all non-interest expenses increased
(see below), which resulted in combined interest expense representing only 39.5%
of total expenses.
General and administrative expenses for the years ended December 31, 1995, 1994
and 1993, were $11,267,000, $4,170,000 and $3,728,000, respectively. The
increase of $7,097,000 in general and administrative expenses from 1994 to 1995
was principally due to increased legal fees, investor relations related expenses
and financial advisory fees, in turn principally due to actions taken as a
result of the Borrower's Chapter 11 filings.
Amortization of financing costs during the years ended December 31, 1995, 1994
and 1993, was $9,258,000, $705,000 and $705,000, respectively. The increase of
$8,553,000 from 1994 to 1995 was due principally to the write off of deferred
debt issuance and letter of intent costs totaling $4,650,000 relating to the
termination of the working capital loan and the Combination Agreement. For
additional information see Note 1 of the Notes to Financial Statements. In
addition, amortization of deferred debt issuance costs increased due to the
issuance of the 14% Debentures and Floating Rate Notes in December 1994.
The Company was required to record a charge to earnings of $10,795,000 for the
year ended December 31, 1995, to increase the SARs liability to reflect the
aggregate principal amount of 14% Debentures that would have been issuable upon
exchange of the SARs on December 31, 1995. The Company will be required to make
future adjustments to earnings to reflect the aggregate principal amount of 14%
Debentures issuable upon exchange of the SARs based upon the current market
price of the Company's stock unless an amendment to the Company's Certificate of
Incorporation is adopted and filed and any necessary Board resolutions are
adopted which would result in an automatic exchange of SARs for Warrants (see
Note 5 of the Notes to Financial Statements). Under the terms of the Merger
Agreement, Whitehall has agreed not to exercise its SARs prior to the
termination of the Merger Agreement unless the Company has taken action and as a
result of such action the failure to exercise the SARs would adversely affect
the rights of the holders of the SARs, the value of the SARs or the position of
the holders of the SARs in the Company.
F-35
<PAGE>
Consummation of the transactions contemplated by the Merger Agreement would
resolve many of the significant uncertainties created by the Borrower's Chapter
11 filings. Subsequent to the Borrower's Chapter 11 filings and prior to the
execution and delivery of the Merger Agreement, the Company had based the value
assigned to the Property and hence to the Loan on an independent appraisal as of
December 31, 1994, which was supported by a concurring review. The appraisal, at
that time, gave the clearest indication as to the value of the Property.
However, the terms of the Merger Agreement could be considered to indicate that
the market value of the Property now may be less than the carrying value of the
Loan as reported in the June 30, 1995 interim financial statements. Accordingly,
as reported in the Company's September 30, 1995 interim financial statements,
the Company reflected a valuation reserve, totaling $74,000,000, to reduce the
carrying value of the Loan to reflect the economics of the transactions
contemplated by the Merger Agreement. In addition, the Company recorded certain
transaction costs and expenses aggregating $25,163,000, which reflected the
breakup fee relating to the termination of the Combination Agreement,
professional fees, and certain liquidation expenses and other liabilities
specifically provided for in the Merger Agreement. In addition to the
$99,163,000 of expenses recording the estimated effects of the execution and
delivery of the Merger Agreement, the Company incurred $553,000 of expenses
related to the Special Meeting.
On November 7, 1995, the Company entered into a Rights Offering Agreement with
Whitehall and Goldman Sachs, an affiliate of Whitehall, pursuant to which the
parties have agreed that, if the Company's stockholders do not approve the
Merger Agreement at the Special Meeting, the Company will have the right to
elect, within 30 days after the date of the Special Meeting, to make a $200
million publicly registered Rights Offering at a price set by the Company's
Board of Directors, but not less than $6.00 per share of Common Stock. The
purpose of the Rights Offering Agreement is to provide the Company with a
pre-negotiated potential means to raise the funds it would require to be able to
acquire the Property and to service its obligations if the Company's
stockholders do not approve the Merger Agreement. No decision has been made by
the Company's Board of Directors as to whether this option would be exercised if
the Company's stockholders do not approve the Merger Agreement; such a decision
will be made in the light of the circumstances prevailing at the time of any
such failure to approve the Merger Agreement, including any alternatives that
may then be available to the Company. Any election by the Company to proceed
with the Rights Offering would not require prior approval of the Company's
stockholders.
Management and the Board of Directors believe that, if the Company's
stockholders do not approve the Merger Agreement or if the transactions
contemplated by the Merger Agreement are not consummated, the Company would be
subject to substantial uncertainties. The Company expects that, in the absence
of additional financing, its cash resources will be exhausted by the end of
April 1996. There can be no assurance as to the availability to the Company of
any alternatives to proceeding with the Rights Offering and there can be no
assurance that, if the Board of Directors elects to proceed with the Rights
Offering, Goldman Sachs or PaineWebber, Incorporated will agree to underwrite
the Rights Offering or that the Rights Offering can be successfully concluded
or, if concluded, as to the timing of such conclusion. Approval of the Merger
Agreement by the Company's stockholders is, in any event, a condition to the
effectiveness of the proposed Chapter 11 Plan and, accordingly, in the event of
a rejection of the Merger Agreement, a new reorganization plan will have to be
negotiated; there can be no assurance as to the results that such negotiations
would reach or even that such negotiations would be successful. While the Rights
Offering is designed to produce proceeds to the Company of $200 million (before
expenses), most of these proceeds would be used to retire the Floating Rate
Notes. Thus, the Board of Directors believes that, even if the Rights Offering
were successful, the Company would require additional funds in order to be able
to demonstrate in the Chapter 11 Cases that the Company could successfully
operate the Property. While Whitehall and Goldman Sachs agreed in the Rights
Offering Agreement to make certain changes in the terms of the 14% Debentures to
facilitate additional borrowings by the Company, there can be no assurance that
the Company could obtain the required additional financing on terms satisfactory
to it, if at all.
F-36
<PAGE>
Due to the factors described above, Management believes that there is
substantial doubt about the Company's ability to continue as a going concern if
the Company's stockholders do not approve the Merger Agreement or if the
transactions contemplated by the Merger Agreement are not consummated. The
financial statements do not include any adjustment to reflect the possible
future effects on the recoverability of assets or the amounts of liabilities
that may result from the outcome of these uncertainties.
In connection with the Company's retirement of commercial paper borrowings in
1994 and 1993, the Company exchanged payments with certain counterparties to
retire all of the asset swaps and certain of the liability swaps in 1994 and
made payments to certain counterparties to reduce the duration of certain
liability swaps in 1993, which thereby reduced the Company's net swap liability.
The Company recorded, as a cost of swap terminations and modifications related
to debt extinguishment, $9,855,000 and $3,451,000 for the years ended December
31, 1994 and 1993, respectively, as a result of these transactions. The 1993
payments were made pursuant to agreements between the Company and certain of its
lenders, whereby the Company had agreed to apply a portion of the proceeds from
the issuance of Common Stock (see Note 5 of the Notes to Financial Statements)
for this purpose.
During the year ended December 31, 1994, the Company incurred $1,942,000 of
expenses in connection with its evaluation of alternative financings.
During the years ended December 31, 1994 and 1993, the Company recognized
non-recurring income of $31,000 and $8,593,000, respectively, consisting of
gains on sales of portfolio securities.
Net (loss) income during the years ended December 31, 1995, 1994 and 1993 was
($195,129,000), $15,143,000 and $35,926,000 reflecting the matters discussed
above.
F-37
<PAGE>
THE PROPERTY
The financial information and analysis included in the following discussions of
the "Financial Condition and Outlook - The Property", "Results of Operations -
The Property", and "Cash Flow - The Property" have been furnished to the Company
by the Debtors.
PROCEEDINGS UNDER CHAPTER 11, PLAN OF REORGANIZATION
On May 11, 1995 (the "Petition Date"), Rockefeller Center Properties ("RCP") and
its affiliate, RCP Associates (collectively, the "Debtors", previously referred
to as the Borrower), filed voluntary petitions for reorganization under Chapter
11 (the "Chapter 11 Cases"), title 11 of the United States Code, as amended (the
"Bankruptcy Code"), in the United States Bankruptcy Court of the Southern
District of New York (the "Bankruptcy Court"). The Chapter 11 Cases have been
assigned case numbers 95 B 42089 and 95 B 42088 (PBA), respectively. The
separate Chapter 11 Cases of the Debtors have been consolidated for procedural
purposes and are being jointly administered pursuant to an order of the
Bankruptcy Court. A statutory unsecured creditors' committee has been appointed
for the Debtors.
Subsequent to the Petition Date, the Debtors have continued in possession of
their properties and are operating and managing their businesses as
debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
The Debtors have sought and obtained orders from the Bankruptcy Court intended
to stabilize new business and minimize the disruption caused by the Chapter 11
proceedings, including orders: (i) authorizing the Debtors to pay certain
prepetition liabilities, wages, and other employee obligations and (ii)
approving the use of cash collateral.
On September 12, 1995, the Debtors reported to the Bankruptcy Court that they
intended to transfer the Property to the Company. On February 9, 1996,
Rockefeller Group, Inc. ("RGI") and the Debtors filed a Second Amended Joint
Plan of Reorganization, as Modified, dated February 8, 1996 (the "Plan") calling
for the transfer of the Property to the Company or an entity designated by the
Company at a date that is not yet certain. Following the transfer, the Debtors
will be released from all liabilities under the mortgage payable to the Company.
It also is expected that all prepetition claims of RGI and its affiliates
against the Debtors will be waived, but that virtually all other creditors'
prepetition claims against the Debtors will be paid in full, with interest.
The Plan provides for an account to be established with $20 million contributed
by or on behalf of the Company. The balance of funds required to satisfy the
obligations will be paid by RGI. This account will pay for unpaid prepetition
obligations and a limited number of postpetition obligations of the Debtors.
Substantially all other postpetition obligations of the Debtors have been or
will be paid from the postpetition cash flow of the Property or other sources
not affiliated with the Debtors or RGI. The Plan is subject to confirmation by
the Bankruptcy Court. Confirmation of the Plan is conditioned, among other
things, on approval of the Merger Agreement by the Company's stockholders.
F-38
<PAGE>
Liabilities subject to compromise (all or a portion of which may be disputed by
the Debtors) at December 31, 1995 consisted of the following:
Mortgage loan payable to the Company $1,290,902,000
Amounts payable to RGI and affiliates 496,398,000
Real estate tax refunds payable to tenants,
other than RGI affiliates 13,237,000
Other items, primarily trade payables 40,577,000
--------------
$1,841,114,000
==============
The mortgage loan payable to the Company (the "Loan") includes interest accrued
through the Petition Date and has been recorded net of direct costs including
the unamortized original issue discount and the unamortized mortgage recording
tax related to the Loan. Payables to RGI affiliates consist primarily of
interest-free overdrafts in the cash management system, a loan payable to RGI,
brokerage commissions payable to Rockefeller Center Management Corporation, and
other expenses paid by RGI affiliates on behalf of the Debtors.
Liabilities subject to compromise under reorganization proceedings include the
Debtors' present estimates of substantially all liabilities as of the Petition
Date. Payment of these liabilities has been stayed while the Debtors continue to
operate their business as debtors-in-possession. Pursuant to a court order,
priority prepetition claims for wages, salaries, and benefits were paid.
Additional bankruptcy claims and prepetition liabilities may arise by
termination of contractual obligations, Bankruptcy Court determination of
allowed claims, and as certain contingent and/or potentially disputed
prepetition claims are settled for amounts which may differ from those shown in
the combined balance sheet. The Court set September 13, 1995 as the last day for
filing proofs of claim for prepetition claims. With certain exceptions,
creditors have been barred from filing prepetition claims subsequent to that
date. The Debtors have received claims with aggregate amounts substantially in
excess of those recorded at the Petition Date. The Debtors are reconciling these
claims to their records and do not expect that the resolution of these matters
will result in liabilities materially in excess of those recorded at the
Petition Date.
On October 30, 1995, the Bankruptcy Court approved an $80 million
Debtor-In-Possession Revolving Credit Agreement (the "Facility") which may be
used to fund tenant improvements, leasing commissions, required capital
expenditures, and other permitted working capital needs of the Debtors. A total
of $40 million of the Facility may be used in the form of letters of credit. The
Facility is secured by a first mortgage on the Property which is senior to the
existing mortgage held by the Company. The Facility matures on the earlier of
December 31, 1996 or upon the substantial consummation of a plan of
reorganization. The Debtors have the option of choosing either a prime rate or a
LIBOR-based interest rate. As of December 31, 1995, no drawdowns against the
Facility had been taken; however, a total of $1 million in letters of credit had
been issued against the Facility. As of March 8, 1996, a total of $10 million in
letters of credit had been issued against the Facility.
F-39
<PAGE>
The financial statements of the Debtors, from which this information is derived,
have been prepared on a going concern basis and reflect the combined historical
cost basis of the Debtors in their assets and liabilities. The transfer of the
Property to the Company is subject to the approval of the Bankruptcy Court. This
transfer of the Property and the related release of the Loan and cancellation of
the indebtedness to the Company and RGI and its affiliates, if consummated, will
result in substantial non-cash gains to the Debtors. Further, upon consummation
of these transactions, the Debtors will either cease their business activities
or control of the Debtors will vest with parties other than RGI. These
conditions raise substantial doubt as to the ability of the Debtors to continue
as going concerns. The financial statements of the Debtors do not include any
adjustments which would be required to reflect the transfer of the Property to
the Company, the wind-down of the affairs of the Debtors, or any change in
control which may occur with respect to the Debtors. In the event the transfer
of the Property is not approved and the Property is foreclosed upon, other
adjustments would be required. These adjustments could be material.
F-40
<PAGE>
RESULTS OF OPERATIONS - THE PROPERTY
The operating results of the Property during the years ended December 31, 1995,
1994, and 1993 are presented in summary form in the table below:
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1995 1994 1993
-------------- --------------- ---------------
<S> <C> <C> <C>
Gross revenue:
Fixed and percentage rents $176,813 $156,314 $148,960
Operating and real estate tax escalation 17,865 42,201 55,643
Consideration revenues 1,395 3,443 3,227
Sales and service revenues 17,772 18,893 18,767
------------ ------------- -------------
213,845 220,851 226,597
------------ ------------- -------------
Operating Expenses:
Real estate taxes 33,867 40,884 44,336
Real estate tax refund (7,535) - -
Utilities 16,931 16,386 16,553
Maintenance and engineering 31,708 32,062 33,657
Other operating expenses 39,059 39,839 40,639
Depreciation and amortization 28,391 25,761 21,821
Management fee 3,911 2,636 2,579
General and administrative 4,886 4,322 5,871
------------ ------------- -------------
151,218 161,890 165,456
------------ ------------- -------------
Earnings before interest and reorganization items 62,627 58,961 61,141
Interest expense, net 45,038 117,328 114,599
------------ ------------- -------------
Earnings (loss) before reorganization items 17,589 (58,367) (53,458)
Reorganization items:
Professional fees and expenses 2,288 - -
Debtors-in-possession financing fees 826 - -
Interest income (639) - -
------------ ------------- -------------
Total reorganization items 2,475 - -
------------ ------------- -------------
Net income (oss) $15,114 ($58,367) ($53,458)
=========== ============== ==============
</TABLE>
The gross revenue of the Property for the year ended December 31, 1995 decreased
by $7 million or 3% when compared to the prior year. This decrease in gross
revenue was a result of lower operating and real estate tax escalation revenue,
lower consideration revenue, and decreased sales and service revenue. This
decrease was offset partially by increased fixed rent related to new leases and
lease renewals. The decrease in operating and real estate tax escalation revenue
reflected the establishment of new escalation base years in connection with new
leases and lease renewals. This decrease in operating and real estate tax
escalation revenue sharing also was attributable in part to lower real estate
tax costs recorded in the operating expense category. Consideration revenue
consists principally of one-time payments negotiated by tenants for the right to
cancel their leases prior to scheduled termination dates. Sales and service
revenue decreased primarily as a result of increased vacancy.
F-41
<PAGE>
The following table shows the occupancy rates for the Property at specified
dates:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
March 31, 1994 - 95.6% March 31, 1995 - 90.1%
June 30, 1994 - 96.1% June 30, 1995 - 88.3%
October 1, 1994 - 90.4% September 30, 1995 - 89.1%
December 31, 1994 - 90.2% December 31, 1995 - 86.3%
</TABLE>
The year-end 1995 occupancy rate reflected a total of 850,000 square feet of
vacant space. This level of vacancy resulted in large measure from the
significant turnover of leases which expired on September 30, 1994 coupled with
continuing softness in the Manhattan office market. In 1995, leasing activity at
the Property was also adversely affected by the Debtors' filing of the Chapter
11 Cases. In addition, a total of 257,000 square feet will become available
during 1996. Releasing the space will represent a significant challenge which
may involve ongoing high levels of expenditures for tenant work and concessions.
During the year ended December 31, 1995, 181 leases covering approximately
646,000 square feet of office, retail, and storage space were concluded and took
effect at net effective annual fixed rents averaging $33.63 per square foot. The
net effective annual rental rates for office space, which accounted for
approximately 565,000 square feet of the total area leased, averaged $31.64 per
square foot. This amount compared to a net effective rental rate of $30.78 per
square foot for office space leases signed during 1994. Net effective annual
rental rates reflect the present value of base rental payments less the current
and future expenditures for tenant improvements, concessions, and brokerage
commissions. The gross rental rates for the office space leases that were
concluded and took effect during the year ended December 31, 1995 averaged
$36.48 per square foot (compared with $39.80 per square foot for office space
leases signed during 1994). The actual rate at which each lease was executed
depended upon its location within the Property, type of space leased, length of
lease term, and other factors. Of the approximately 565,000 square feet of
office space leased during the year ended December 31, 1995, approximately
242,000 square feet represented renewals of existing tenants at an average gross
rental rate of $36.07 per square foot. The combined fixed rent and escalation
payments prior to lease renewal for these renewing tenants had averaged $35.38
per square foot.
The National Broadcasting Company, Inc. ("NBC") currently leases approximately
1.3 million square feet of space in four Rockefeller Center buildings (the GE
Building, the Studio Building, the GE West Building, and 10 Rockefeller Plaza).
NBC will pay annual rent of approximately $27.7 million through September 1997,
and its 1998 annual rent is projected to be $53.2 million. The primary lease
agreements, covering most of the space, call for NBC to pay rent on a "net"
basis starting on October 1, 1997; that is, without including amounts normally
payable with regard to real estate taxes and certain operating expenses, which
NBC would pay directly. Some space is currently being leased on a net basis.
NBC's main lease will expire in the year 2022. NBC has options for two renewal
periods after 2022 through 2042.
F-42
<PAGE>
The following table shows selected lease expiration information for the Property
as of January 1, 1996 and has been furnished to the Company by the Debtors.
Lease turnover during the remaining term of the Loan could offer an opportunity
to increase the revenue of the Property or might have a negative impact on the
Property's revenue. Actual renewal rents and rental income will be affected
significantly by market conditions at the time and by the terms at which the
Debtors can then lease space.
<TABLE>
<CAPTION>
Number of Percentage of
Year leases expiring Area (sq.ft.) total rentable area
- ---- --------------- ------------- -------------------
<S> <C> <C> <C>
1996 103 257,052 4.16%
1997 53 113,324 1.83%
1998 71 223,128 3.61%
1999 59 158,545 2.56%
2000 59 392,862 6.35%
2001 13 35,956 0.58%
2002 22 136,725 2.21%
2003 24 93,617 1.51%
2004 70 393,135 6.36%
2005 29 296,636 4.80%
2006 23 150,194 2.43%
2007 10 101,770 1.65%
2008 10 165,608 2.68%
2009 46 481,408 7.78%
2010 7 95,852 1.55%
2012 3 256,725 4.15%
2013 2 51,598 0.83%
2014 6 300,068 4.85%
2015 1 14,015 0.23%
2017 1 43,575 0.71%
2019 1 2,266 0.04%
2020 2 94,595 1.53%
2022 4 1,295,608 20.95%
Space under temporary occupancy N/A 93,325 1.50%
Vacant space N/A 849,543 13.74%
Space occupied by the Debtors N/A 87,323 1.41%
--- --------- --------
619 6,184,453 100.0%
=== ========= ========
</TABLE>
During the year ended December 31, 1995, the operating expenses of the Property
decreased by $10.7 million or 7% from the prior year. This decrease was
primarily the result of a real estate tax refund ($7.5 million) related to prior
calendar years. In addition, the current year's real estate taxes, other
operating expenses, and maintenance and engineering expenses decreased by $7
million, $.8 million, and $.4 million, respectively. These decreases were offset
partially by higher depreciation and amortization (increase of $2.6 million),
increased management fees ($1.3 million), higher general and administrative
expense ($.6 million), and increased utility costs ($.5 million). The increase
in management fees was due to the amendment of the management agreement
effective October 1, 1995 which increased the annual management fee from
approximately $2.7 million to approximately $2.8 million and added the following
service fees: (i) a fee of $102,500 per month for human resource services; (ii)
a fee of $63,833 per month until the Plan Consummation Date (as defined) for
certain lease preparation and related services; and (iii) until termination by
either party on not less than 30 days' notice given on or subsequent to the Plan
Consummation Date, a fee of $222,084 per month for certain marketing, rental and
corporate communication services. In addition, no fees are being paid for
leasing commissions for rental services.
F-43
<PAGE>
The reduction in real estate taxes resulted from a decrease in both the assessed
valuation of the Property and New York City property tax rates. On June 29,
1995, the Bankruptcy Court approved a settlement between the Debtors and New
York City that incorporated a reduction in the assessed valuation of the
Property. The agreement, for the period from July 1, 1989 through June 30, 1995,
resulted in a total New York City real estate tax refund accruing to the
Property in the amount of $25.6 million, net of certiorari attorneys fees. Of
the total refund, $15.4 million was credited to existing and former tenants
(including $2.2 million payable to RGI affiliates) and $10.2 million was
credited to income, including $2.7 million related to the current year's
expense. Other operating expenses decreased as a result of reduced costs
related to sales of services to tenants. The reduction in maintenance and
engineering costs was attributable to decreased heating, ventilation, and
air-conditioning maintenance expenditures.
Depreciation and amortization charges increased as a result of a higher fixed
asset base which included expenditures required by the Loan Agreement, other
capital expenditures, and improvements to tenant spaces necessitated by lease
commitments. The increase in general and administrative expense was attributable
primarily to increases in legal fees related to collection efforts and an
increase in the required provision for doubtful accounts. The higher utility
costs were primarily a result of increased electric consumption and rates.
As a result of the foregoing, earnings before interest and reorganization items
for 1995 increased $3.7 million or 6%.
Interest expense accruals ceased on May 11, 1995 as a result of the Chapter 11
Cases and therefore, interest expense, net during the year ended December 31,
1995, decreased $72.3 million, or 62%. Interest expense on the Loan exceeded
interest paid by the Debtors on the Loan due to interest expense until May 11,
1995 being recognized based on the average yield of the Notes through
the Equity Conversion Date. The average yield combines the differing coupon
rates of Base Interest with the amortization (using the effective interest
method) of the original issue discount.
The gross revenue of the Property for the year ended December 31, 1994 decreased
by $5.7 million or 2.5% when compared to the prior year. This reduction in gross
revenue was primarily a result of lower operating and real estate tax escalation
revenue. This decrease was offset partially by increases in fixed rent related
to new leases and lease renewals, higher consideration revenue, and increased
sales and service revenues. The decrease in operating and real estate tax
escalation revenue reflects the establishment of new escalation base years in
connection with new leases and lease renewals.
The operating expenses of the Property decreased by $3.6 million or 2.2% during
the year ended December 31, 1994 when compared to the prior year. This decrease
was a result of lower real estate taxes (reduction of $3.5 million), decreased
maintenance and engineering expenses ($1.6 million), reduced general and
administrative expense ($1.5 million), and lower other operating expenses ($.8
million). These increases were offset partially by increased charges for
depreciation and amortization ($3.9 million).
CASH FLOW-THE PROPERTY
Because of the cessation of interest payments to the Company after May 11, 1995
as a result of the Chapter 11 Cases for the year ended December 31, 1995, the
Property experienced an operating cash surplus before reorganization items of
$30.4 million, after interest payments of $20.3 million to the Company. During
the year ended December 31, 1994, the property experienced an operating cash
deficit amounting to $41.7 million after interest payments of $105.5 million to
the Company. This increase of $72.1 million in the operating cash
F-44
<PAGE>
flow surplus primarily reflected a decrease in interest paid to the Company
($85.1 million), lower levels of net working capital ($7.1 million), and
increased earnings before interest ($3.7 million). These factors were offset
partially by a net increase in lease incentives associated with the more than
2.6 million square feet of space leased during 1994 and 1995 with new and
renewal tenants ($23.8 million). Lease incentives represent primarily the value
of free rental periods granted to tenants upon initiation or renewal of lease
commitments.
Since May 11, 1995, the Property paid bankruptcy related expenses which were
reported separately as "reorganization items" relating to professional fees and
expenses ($1.7 million) and debtors-in-possession financing fees ($.7 million)
which was offset by interest income ($.6 million) earned in the postpetition
period.
On September 6, 1994, the Company perfected its lien by recording the previously
unrecorded portion of the mortgage at the Debtors' expense. The mortgage
recording tax totaled $34.5 million. The funds were loaned to the Debtors by an
affiliate of the Debtors and are included as amounts payable to RGI and
affiliates in liabilities subject to compromise at December 31, 1995.
For the year ended December 31, 1993, the Property experienced an operating cash
deficit of $17.7 million after interest payments of $103.5 million to the
Company. The higher operating cash deficit for 1994 compared with 1993 reflected
increases in lease incentives associated with new and renewal tenants ($10.6
million), higher levels of net working capital ($9.2 million), lower operating
income before interest ($2.2 million), and increased interest paid to the
Company ($2 million).
The Debtors also expended funds for capital improvements to the Property, tenant
improvements, and leasing commissions as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------
(In thousands) 1995 1994 1993
----------------- ------------------- -------------------
<S> <C> <C> <C>
Tenant improvements $41,100 $23,900 $ 7,900
Capital improvements 11,000 14,400 27,300
Leasing commissions (including legal fees) 6,400 24,900 8,500
Cash held in escrow for lease obligations 3,300 - -
------- ------- -------
$61,800 $63,200 $43,700
======= ======= =======
</TABLE>
The increase in tenant improvements and decrease in leasing commissions from
1994 to 1995 resulted in large measure from the significant turnover of leases
which expired on September 30, 1994.
The Loan Agreement provides for the establishment of loans for the cumulative
portion of capital improvements made by the Debtors in excess of amounts
specified in the Loan Agreement. The cumulative amounts of excess capital
improvements totaled $126.7 million, $126.7 million, and $123 million at
December 31, 1995, 1994, and 1993, respectively. This amount is included as
amounts payable to RGI and affiliates in liabilities subject to compromise at
December 31, 1995. These excess capital improvement loans are deemed to be made
to the Debtors by its partners and bear interest at 80% of the prime rate (as
defined), compounded quarterly. Interest charges on excess capital improvement
loans are added to the loan principal at the end of each year. At December 31,
1995, 1994, and 1993 the amount of excess capital improvement loans (including
accrued interest) totaled $164.6 million, $160.7 million, and $149.7 million,
respectively. As a result of the bankruptcy proceedings, interest has not been
accrued since the Petition Date.
The results of operations of the Property as of December 31, 1995, 1994, and
1993 reflect non-cash interest charges of $3.9 million, $7.3 million, and $6.3
million, respectively, relating to interest on these excess capital improvement
loans.
F-45
<PAGE>
The Debtors are committed to expend significant funds for tenant improvements
and leasing commissions in connection with certain leases. In order to renew
and/or re-lease the available space during 1996, significant expenditures also
could be required. Additionally, the Debtors have committed and may be required
to commit to rent abatements in connection with the renewal and/or re-leasing of
space.
F-46
<PAGE>
QUARTERLY STOCK INFORMATION
<TABLE>
<CAPTION>
Price Range (Composite)
- --------------------------- ------------------------- ------------------------- -------------------------- -----------------------
1995 1Q 2Q 3Q 4Q
- --------------------------- ------------------------- ------------------------- -------------------------- -----------------------
<S> <C> <C> <C> <C>
High $6 7/8 $6 5/8 $8 1/8 $8 3/8
Low $5 $4 1/8 $4 5/8 $7 1/8
- --------------------------- ------------------------- ------------------------- -------------------------- -----------------------
1994 1Q 2Q 3Q 4Q
- --------------------------- ------------------------- ------------------------- -------------------------- -----------------------
High $8 3/8 $5 7/8 $6 $5 3/4
Low $5 1/2 $5 1/8 $5 1/8 $3 3/4
</TABLE>
F-47
<PAGE>
Report of Independent Auditors
The Partners of
Rockefeller Center Properties and RCP Associates
We have audited the accompanying combined balance sheets of Rockefeller Center
Properties and RCP Associates (Debtors-in-Possession) (collectively, the
Partnerships) as of December 31, 1995 and 1994, and the related combined
statements of operations and partners' capital deficiency and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these combined financial statements
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 our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Rockefeller
Center Properties and RCP Associates at December 31, 1995 and 1994, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
The accompanying combined financial statements have been prepared on a going
concern basis and accordingly, reflect the Partnerships' combined historical
costs basis in the assets and liabilities presented therein. As more fully
described in Note 1 to the combined financial statements, on May 11, 1995 the
Partnerships filed petitions for reorganization under Chapter 11 of the
Bankruptcy Code. In early February, 1996, the Partnerships and Rockefeller
Group, Inc. ("RGI" - currently the ultimate owner of the Partnerships) filed a
Second Amended Joint Plan of Reorganization (the "Plan") before the United
States Bankruptcy Court for the Southern District of New York (the "Bankruptcy
Court"). Among other things, the Plan calls for an orderly transfer of the
Property (which constitutes substantially all of the combined assets of the
Partnerships) to RCPI in exchange for the release of the Partnerships from any
continuing obligation under the Loan to RCPI. The transfer of the Property to
RCPI is subject to approval by the Bankruptcy Court. The transfer of the
Property, and the release of the Partnerships from any continuing obligation
under the Loan, combined with any cancellation of the Partnerships' indebtedness
to RGI and its affiliates, if consummated, will result in substantial non-cash
gains to the Partnerships. Further, upon consummation of these transactions, the
Partnerships will either cease their business activities or control of the
Partnerships will vest with parties other than RGI. These conditions raise
substantial doubt as to the ability of the Partnerships to continue as going
concerns. The accompanying financial statements do not reflect the adjustments
which would be required to reflect the transfer of the Property to RCPI, the
release or cancellation of indebtedness, the wind-down of the affairs of the
Partnerships, or any changes in control which may occur with respect to the
Partnerships. In the event that the transfer of the Property is not approved
and, the Property is foreclosed upon, other adjustments would be required. All
such adjustments could be material.
/s/ Ernst & Young LLP
New York, New York
February 7, 1996
F-48
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
COMBINED BALANCE SHEET
AT DECEMBER 31, 1995 AND 1994
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1995 1994
- ------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,171 $ 3
Cash held in escrow for lease obligations 3,299 -
Accounts receivable, less allowance for
doubtful accounts of $2,607 and $2,833 9,307 4,027
Due from RGI affiliates 2,205 1,286
Real estate tax refund receivable 9,735 -
Other current assets 1,132 856
---------- ----------
51,849 6,172
Fixed assets, at cost:
Land 402,419 402,419
Buildings 510,716 499,226
Furniture, fixtures and equipment 26,813 26,422
---------- ----------
939,948 928,067
Less accumulated depreciation (229,021) (214,035)
---------- ----------
710,927 714,032
Deferred renting expenses, less accumulated
amortization of $30,978 and $20,659 148,879 93,735
Lease incentives 72,500 31,327
Deferred financing expenses, less accumulated
amortization of $1,285 in 1994 - 30,094
Other assets 2,892 2,960
---------- ----------
Total assets $ 987,047 $ 878,320
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
DEFICIENCY
Current liabilities not subject to compromise:
Accounts payable and accrued expenses $11,822 $26,848
Due to RGI affiliates 2,238 273,778
Mortgage payable, net of unamortized
issue discount of $36,101 in 1994 - 1,263,899
Loans payable to RGI - 160,715
Non-current mortgage interest payable - 36,321
Liabilities subject to compromise 1,841,114 -
Partners' capital deficiency (868,127) (883,241)
---------- ----------
Total liabilities and partners' capital deficiency $ 987,047 $ 878,320
========== ==========
</TABLE>
See accompanying notes.
F-49
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
COMBINED STATEMENTS OF OPERATIONS AND
PARTNERS' CAPITAL DEFICIENCY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Rental revenue:
Fixed and percentage rents $178,208 $159,757 $152,187
Operating and real estate tax escalations 17,865 42,201 55,643
-------- -------- --------
Total rental revenue 196,073 201,958 207,830
Sales of services 17,772 18,893 18,767
-------- -------- --------
Gross revenues 213,845 220,851 226,597
-------- -------- --------
Real estate taxes 33,867 40,884 44,336
Real estate tax refund (7,535)
Maintenance and engineering 31,708 32,062 33,657
Other operating expenses 26,260 26,025 26,026
Utilities 16,931 16,386 16,553
Cost of service sales 12,033 13,060 13,919
Depreciation and amortization 28,391 25,761 21,821
General and administrative expenses 4,886 4,322 5,871
Management fees 3,911 2,636 2,579
Ground rent 766 754 694
-------- -------- --------
Cost of revenues 151,218 161,890 165,456
-------- -------- --------
Earnings before interest and reorganization items 62,627 58,961 61,141
Interest expense, net 45,038 117,328 114,599
-------- -------- --------
Earnings (loss) before reorganization items 17,589 (58,367) (53,458)
Reorganization items:
Professional fees and expenses 2,288 - -
Debtors-in-possession financing fees 826 - -
Interest income (639) - -
-------- -------- --------
Total reorganization items 2,475 - -
-------- -------- --------
Net income (loss) $ 15,114 ($ 58,367) ($ 53,458)
Partners' capital deficiency, beginning of period (883,241) (824,874) (771,416)
-------- -------- --------
Partners' capital deficiency, end of period ($868,127) ($883,241) ($824,874)
======== ======== ========
</TABLE>
See accompanying notes.
F-50
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
COMBINED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(In thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings (loss) before reorganization items $17,589 ($ 58,367) ($ 53,458)
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 28,391 25,761 21,821
Accrued interest expense 21,475 6,016 6,893
Real estate tax refund payable to tenants 13,237 - -
Amortization of original issue discount and
deferred financing expenses 3,247 5,827 4,176
Real estate tax refund receivable (9,735) - -
Increase in lease incentives, net (41,173) (17,378) (6,826)
Changes in certain assets and liabilities (2,608) (3,531) 9,671
------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES BEFORE REORGANIZATION ITEMS 30,423 (41,672) (17,723)
OPERATING CASH FLOWS FROM REORGANIZATION ITEMS
Professional fees and expenses paid (1,678) - -
Debtors-in-possession financing fees (733) - -
Interest income 639 - -
----- - -
NET CASH USED IN REORGANIZATION ITEMS (1,772) - -
------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 28,651 (41,672) (17,723)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred renting expenses paid (47,491) (48,737) (16,358)
Capital expenditures (10,971) (14,423) (27,317)
Increase in cash held in escrow for tenant lease obligations (3,299) - -
------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (61,761) (63,160) (43,675)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from RGI affiliates 59,278 135,601 45,938
Loans from RGI - 3,747 15,457
Deferred financing expenses paid - (34,517) -
------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 59,278 104,831 61,395
------ ------- ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 26,168 (1) (3)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3 4 7
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $26,171 $ 3 $ 4
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $20,339 $105,495 $103,545
======= ======== ========
</TABLE>
See accompanying notes.
F-51
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1. PROCEEDINGS UNDER CHAPTER 11, PLAN OF REORGANIZATION
The accompanying financial statements include the combined accounts of
two partnerships, Rockefeller Center Properties ("RCP") and its
affiliate, RCP Associates, (collectively, the "Partnerships"), in which
Rockefeller Group, Inc. ("RGI") and one of its subsidiaries, Radio City
Music Hall Productions, Inc. ("RCMHPI"), are the sole partners (the
"Partners"). The Partnerships together own the real property interests
constituting most of the land and buildings in the landmarked portion of
Rockefeller Center (the "Property"). Transactions between the
Partnerships have been eliminated in the accompanying combined financial
statements.
On May 11, 1995 (the "Petition Date"), the Partnerships filed voluntary
petitions for reorganization under Chapter 11 (the "Chapter 11 Cases"),
title 11 of the United States Code, as amended (the "Bankruptcy Code")
in the United States Bankruptcy Court of the Southern District of New
York (the "Bankruptcy Court"). The Chapter 11 Cases have been assigned
case numbers 95 B 42089 and 95 B 42088 (PBA) respectively. The separate
Chapter 11 Cases of the Partnerships have been consolidated for
procedural purposes and are being jointly administered pursuant to an
order of the Bankruptcy Court. A statutory unsecured creditors'
committee has been appointed for RCP.
Subsequent to the Petition Date, the Partnerships have continued in
possession of their properties and are operating and managing their
businesses as debtors-in-possession pursuant to Sections 1107 and 1108
of the Bankruptcy Code. The Partnerships have sought and obtained orders
from the Bankruptcy Court intended to stabilize new business and
minimize the disruption caused by the Chapter 11 proceedings, including
orders: (i) authorizing the Partnerships to pay certain prepetition
liabilities, wages, and other employee obligations and (ii) approving
the use of cash collateral.
On September 12, 1995, the Partnerships reported to the Bankruptcy Court
that they intended to transfer the Property to the mortgage holder,
Rockefeller Center Properties, Inc. ("RCPI"). On February 9, 1996, RGI
and the Partnerships filed a Second Amended Joint Plan of
Reorganization, as Modified, dated February 8, 1996 (the "Plan") calling
for the transfer of the Property to RCPI or an entity designated by RCPI
at a date that is not yet certain. Following the transfer, the
Partnerships will be released from all liabilities under the mortgage
payable to RCPI. It also is expected that all prepetition claims of RGI
and its affiliates against the Partnerships will be waived, but that
virtually all other creditors' prepetition claims against the
Partnerships will be paid in full, with interest.
The Plan provides for an account to be established with $20 million
contributed by or on behalf of RCPI. The balance of funds required to
satisfy the obligations will be paid by RGI. This account will pay for
prepetition obligations which are to be satisfied and a limited number
of postpetition obligations of the Partnerships. Substantially all other
postpetition obligations of the Partnerships have been or will be paid
F-52
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
from the postpetition cash flow of the Property or other sources not
affiliated with the Partnerships or RGI. The Plan is subject to
confirmation by the Bankruptcy Court. Confirmation of the Plan is
conditioned, among other things, on approval by RCPI's shareholders of
RCPI's plan of recapitalization and merger.
Liabilities subject to compromise (all or a portion of which may be
disputed by the Partnerships) at December 31, 1995 consisted of the
following:
Mortgage payable to RCPI (Note 4) $1,290,902,000
Amounts payable to RGI and affiliates (Note 6) 496,398,000
Realestate tax refunds payable to tenants,
other than RGI affiliates 13,237,000
Other items, primarily trade payables 40,577,000
--------------
$1,841,114,000
==============
The mortgage payable to RCPI (the "Loan") includes interest accrued
through the Petition Date and has been recorded net of direct costs
including the unamortized original issue discount and the unamortized
mortgage recording tax related to the Loan. Payables to RGI affiliates
consist primarily of interest-free overdrafts in the cash management
system, a loan payable to RGI, brokerage commissions payable to
Rockefeller Center Management Corporation, and other expenses paid by
RGI affiliates on behalf of the Partnerships.
Liabilities subject to compromise under reorganization proceedings
include the Partnerships' present estimates of substantially all
liabilities as of the Petition Date. Payment of these liabilities has
been stayed while the Partnerships continue to operate their business as
debtors-in-possession. Pursuant to a court order, priority prepetition
claims for wages, salaries, and benefits were paid. Additional
bankruptcy claims and prepetition liabilities may arise by termination
of contractual obligations, Bankruptcy Court determination of allowed
claims, and as certain contingent and/or potentially disputed
prepetition claims are settled for amounts which may differ from those
shown in the combined balance sheet. The Court set September 13, 1995 as
the last day for filing proofs of claim for prepetition claims. With
certain exceptions, creditors have been barred from filing prepetition
claims subsequent to that date. The Partnerships have received claims
with aggregate amounts substantially in excess of those recorded at the
Petition Date. The Partnerships are reconciling these claims to their
records and do not expect that the resolution of these matters will
result in liabilities materially in excess of those recorded at the
Petition Date.
F-53
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
The financial statements have been prepared on a going concern basis and
reflect the combined historical cost basis of the Partnerships in their
assets and liabilities. The transfer of the Property to RCPI is subject
to the approval of the Bankruptcy Court. This transfer of the property
and the related release of the Loan and cancellation of the indebtedness
to RCPI and RGI and its affiliates, if consummated, will result in
substantial non-cash gains to the Partnerships. Further, upon
consummation of these transactions, the Partnerships will either cease
their business activities or control of the Partnerships will vest with
parties other than RGI. These conditions raise substantial doubt as to
the ability of the Partnerships to continue as going concerns. The
financial statements do not include any adjustments which would be
required to reflect the transfer of the Property to RCPI, the wind-down
of the affairs of the Partnerships, or any change in control which may
occur with respect to the Partnerships. In the event the transfer of the
Property is not approved and the Property is foreclosed upon, other
adjustments would be required. These adjustments could be material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code - For financial reporting purposes, the Partnerships have applied
the provisions of the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). In accordance
with SOP 90-7, those liabilities and obligations whose disposition is
dependent upon the outcome of the Chapter 11 Cases have been segregated
and classified as "Liabilities Subject to Compromise" in the combined
balance sheet at December 31, 1995. In addition, as of the Petition
Date, the accrual of interest expense ceased and bankruptcy related
expenses were reported separately as "reorganization items" in the
accompanying combined statements of operations and partners' capital
deficiency. Bankruptcy related expenses include professional fees and
debtor-in-possession financing fees, net of interest income earned in
the postpetition period.
Cash and Cash Equivalents - Cash and cash equivalents include cash in
banks and highly liquid short-term investments that are readily
convertible to cash.
Fixed assets - Fixed assets are recorded at cost and include all major
capital improvements. Ordinary maintenance, minor repairs, and items
costing less than $1,000 each are expensed as incurred.
Depreciation - Buildings and improvements are depreciated using the
straight-line method over their useful lives, which range from 15 to 50
years. Other capital expenditures are depreciated using the
straight-line method over their estimated useful lives, which range from
3 to 15 years.
Deferred renting expenses - Expenditures associated with obtaining new
tenants and preparing the premises for occupancy are categorized as
deferred renting expenses. These costs are amortized on a straight-line
basis over the related lease terms.
F-54
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Deferred financing expenses - Mortgage recording taxes paid, net of a
mortgage recording tax credit, have been recorded as deferred financing
expenses. Until the Petition Date these costs were being amortized over
the initial term of the Loan using the interest method. As of the
Petition Date, the unamortized amount was set off against the Loan in
liabilities subject to compromise, and amortization ceased.
Lease incentives - Lease incentives represent primarily the value of
free rental periods granted to tenants upon initiation or renewal of
lease commitments. Once rental payments begin, the lease incentives are
amortized over the remainder of the lease term.
Cash held in escrow for lease obligations - Cash held in escrow
represents legally segregated funds to be used for specific lease
obligations of the Partnerships.
Sales of services - In addition to the rental of real property, RCP
provides maintenance and utility services to tenants.
Interest expense - Until the Petition Date, interest expense on the Loan
had been recognized based on the average yield of the mortgage notes
through December 31, 2000 (the Equity Conversion Date). The average
yield combines the differing coupon rates of interest (Base Interest)
with the amortization (using the interest method) of the original issue
discount. Interest expense accruals ceased on the Petition Date as a
result of the bankruptcy proceedings.
Interest income - Interest income represents earnings from short-term
time deposits.
Income taxes - The net income or loss of the Partnerships is included in
determining the net income of their partners which have the
responsibility to pay any related income taxes.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires that management
make estimates and assumptions that affect the amounts reported in the
financial statements and the accompanying notes. Actual results could
differ from these estimates.
3. Debtor-In-Possession Revolving Credit Agreement
On October 30, 1995, the Bankruptcy Court approved an $80 million
Debtor-In-Possession Revolving Credit Agreement (the "Facility") which
may be used to fund tenant improvements, leasing commissions, required
capital expenditures, and other permitted working capital needs of the
Partnerships. A total of $40 million of the Facility may be used in the
form of letters of credit. The Facility is secured by a first mortgage
on the Property which is senior to the existing mortgage held by RCPI.
The Facility matures on
F-55
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
the earlier of December 31, 1996 or upon the substantial consummation of
a plan of reorganization. The Partnerships have the option of choosing
either a prime rate or a LIBOR-based interest rate. As of December 31,
1995, no drawdowns against the Facility had been taken; however, a total
of $1 million in letters of credit had been issued against the Facility.
4. RCPI Mortgage Loan
Rockefeller Center Properties, Inc., a real estate investment trust,
used the net proceeds of its initial public offerings to make a $1.3
billion participating mortgage loan (the "Loan") to the Partnerships.
The net proceeds of the offerings, which totaled $1,233,752,000, were
loaned to the Partnerships on September 19, 1985, thus creating original
issue discount of approximately $66,248,000 with respect to the Loan.
As of the Petition Date, interest payments were discontinued. The Loan,
net of the unamortized original issue discount, has been reclassified
within liabilities subject to compromise on the balance sheet, and
interest expense accruals have ceased. If interest accruals had
continued, an additional $72.1 million of Loan interest would have been
recorded.
The Loan is secured by recorded fee and leasehold mortgages in the
aggregate amount of $1.3 billion. A total of $1,255.2 million of the
mortgages was not recorded until September 1994, at which time mortgage
recording taxes totaling $34.5 million were paid at the Partnerships'
expense. The Loan is further secured by a recorded Assignment of Rents
pursuant to which the Partnerships have assigned to RCPI, as security
for repayment of the Loan, the Partnerships' rights to collect certain
rents with respect to the Property.
The Loan Agreement required the Partnerships to maintain a standby,
irrevocable letter of credit or to deposit with a trustee either cash or
specified types of collateral with an equivalent fair market value.
During June 1995, RCPI drew on the letters of credit and received full
payment of $50 million. The $50 million, which was ultimately paid by
RGI, has not been reflected in the accounts of the Partnerships.
The Loan provides for specified quarterly Base Interest payments during
its remaining term with annualized coupon rates increasing from 7.97% in
1993 to 8.43% in 2000. The combination of the varying rates of Base
Interest with the amortization of the original issue discount resulted
in an effective annual interest rate approximating 8.51% over the term
of the Loan.
Certain leases grant tenants the right to reduce or offset rent payable
if the Partnerships breach certain obligations under the leases,
including the funding of tenant improvements and other items. An
amendment to the Loan agreement dated February 22, 1994 required the
Partnerships to provide additional collateral security in connection
with these leases. The minimum security amount, which at
F-56
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
any time is equal to 50% of the excess of the tenants' right to offset
rent over $37.5 million, is required to be placed in an escrow account.
At December 31, 1995, these obligations totaled $14.8 million which did
not require the Partnerships to provide additional collateral security.
At December 31, 1994, tenant improvement obligations aggregated $39.3
million, which necessitated an escrow amount of $900,000.
As a result of the significant uncertainties caused by the bankruptcy
proceedings, it is not practicable at this time for the Partnerships to
estimate the fair value of the Loan.
5. NBC Transaction
National Broadcasting Company, Inc. ("NBC") leases approximately 1.3
million square feet of space in four Rockefeller Center buildings (the
GE Building, the Studio Building, the GE West Building, and 10
Rockefeller Plaza).
Under agreements signed in 1988, the primary NBC lease, which is for
premises leased in the three buildings known as 30 Rockefeller Plaza,
has been extended to the year 2022. Through 1997, NBC will continue to
pay rent on the basis of its prior lease. The agreements, however,
provide that, prior to 1997, NBC will have the right to directly pay a
portion of the operating expenses and real estate taxes on its leased
space and reduce its lease payments accordingly.
From 1997 to 2022, NBC will pay rent at fixed rates varying according to
the types of space involved (such as office or studio) and location
within the three buildings. This rent, which will increase by 15% in
each of 2007 and 2017, has been determined on a "net" basis, that is,
without including amounts normally payable with regard to real estate
taxes and certain operating expenses. Further, NBC has options for one
10-year renewal period and one 9-year and five month renewal period, at
net rents determined according to the then fair market rental value.
The transaction was structured to accommodate arrangements between New
York City and NBC for certain financial assistance in connection with
the project. The three affected buildings were subjected to a
condominium regime, and the NBC-occupied areas were conveyed to the
City's Industrial Development Agency ("IDA") for nominal consideration.
These areas were then leased back to the Partnerships at nominal rents,
with NBC becoming a subtenant of the Partnerships. Upon the expiration
of the period of City benefits, ownership will revert to the owner of
the Property. IDA ownership is a technical structure required to
effectuate the transaction and will have no economic effect upon the
ownership of the Property.
F-57
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
6. Related Party Transactions
RGI and affiliates occupy approximately 2% of the total rentable space
within the Property. The terms of the leases with RGI provide for an
annual base rent of approximately $5,257,000.
The Property includes Radio City Music Hall and the land on which it is
situated. Radio City Music Hall is operated by an RGI affiliate which
pays rent consisting primarily of responsibility for all costs
(including real estate taxes) related to the operation of the facility.
The Property includes a six-story parking garage. The garage is leased
to Rockefeller Center Management Corporation ("RCMC") for an annual base
rent of approximately $2,300,000.
Rental revenue in the accompanying combined statements of operations and
partners' capital deficiency included $9,100,000, $8,223,000, and
$7,778,000 earned during 1995, 1994, and 1993, respectively, under the
terms of these leases including their proportionate share of increases
in certain costs and expenses of the Property.
Under the terms of a management agreement, RCMC provides management and
administrative services for the Property. During 1995, 1994, and 1993,
RCMC charged the Partnerships $3,911,000, $2,636,000, and $2,579,000,
respectively, in management fees under the terms of this agreement.
For all leases executed before October 1, 1995, this management
agreement also allowed RCMC to receive commissions with respect to
leases negotiated within the Property, including overrides when another
broker is the procuring broker. During 1995, 1994, and 1993, RCMC earned
$4,924,000, $22,389,000, and $2,888,000, respectively, in leasing
commissions from the Partnerships. Cushman & Wakefield, Inc., an RGI
subsidiary, was paid $1,102,000, $1,673,000, and $571,000 in leasing
commissions by the Partnerships during 1995, 1994, and 1993,
respectively.
Under the terms of a franchise agreement with RCMC (as agent for the
Partnerships), Rockefeller Group Telecommunications Services, Inc., a
subsidiary of RGI, is permitted to provide shared telecommunication
services to tenants within the Property. No fees are paid to the
Partnerships for the right to provide these services. The Partnerships
have committed to pay for certain of the capital additions associated
with telecommunication services up to an aggregate of $13,000,000.
During 1995, 1994, and 1993, the cost of capital additions borne by the
Partnerships approximated $947,000, $1,153,000, and $658,000,
respectively. Total expenditures through December 31, 1995 approximated
$10,535,000.
F-58
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
As a result of the bankruptcy proceedings, any or all of these related
party agreements described above may be subject to renegotiation or
cancellation.
Prior to the Petition Date, the Partnerships participated in a cash
management system under which their funds, together with the funds of
other related companies, were managed by a subsidiary of RGI. At
December 31, 1994, and 1993, the balances due to RGI affiliates include
$269,475,000, and $125,388,000, respectively, representing interest-free
overdrafts in the cash management system. This system was suspended as
of April 18, 1995; however, residual balances due to RGI at December 31,
1995 aggregated $313,695,000.
Salaried employees of the Partnerships participate in the defined
benefit pension plan maintained by RGI. Accordingly, the Partnerships
were charged their proportionate share of RGI's pension cost which
aggregated $667,000, $574,000 and $489,000 in 1995, 1994, and 1993,
respectively. The hourly employees of the Partnerships are covered by
defined contribution plans. The contribution to the multi-employer
sponsored plans in 1995, 1994, and 1993 aggregated $1,416,000,
$1,332,000, and $1,370,000, respectively.
The Partnerships provide certain health care and life insurance benefits
for current and retired salaried employees through plans maintained by
RGI. Accordingly, the Partnerships were charged their proportionate
share of RGI's health care and life insurance costs which aggregated
$1,219,000, $1,150,000, and $1,725,000 in 1995, 1994, and 1993,
respectively.
The Loan with RCPI (see Note 4) provides that, if the cumulative cost of
capital improvements made by the Partnerships is in excess of specified
amounts contained in the agreement for any calendar year, the excess
amount is deemed a renewable one-year loan from RGI to the Partnerships
for the next calendar year. The cumulative amount of excess capital
improvements totaled $126,681,000, $126,681,000, and $122,934,000 at
December 31, 1995, 1994, and 1993, respectively. As of the December 31,
1995, the loans payable to RGI have been classified as liabilities
subject to compromise on the balance sheet, and the accrual of interest
ceased as of the Petition Date. If interest accruals had continued, $7.3
million of additional interest would have been recorded.
These excess capital improvement loans had accrued interest at 80% of
the prime rate, compounded quarterly. Loans for the cumulative excess
capital improvements existing at the end of the preceding year did not
begin to earn interest until the beginning of the following year. Unpaid
interest was added to the principal balance and also earned interest at
80% of the prime rate, compounded quarterly. The cumulative amount of
unpaid interest totaled $37,980,000, $34,034,000, and $26,720,000 at
December 31, 1995, 1994, and 1993, respectively.
F-59
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
As of December 31, 1995, the following related party payables and
accrued expenses were classified as liabilities subject to compromise:
Cash management system $313,695,000
Loan payable to RGI, including
accrued interest 164,661,000
Commissions payable 11,436,000
Other 6,606,000
-------------
$496,398,000
=============
If the Plan (Note 1) is approved, it is expected that RGI's claim to
these amounts would be waived.
7. Commitments and Contingencies
As of December 31, 1995, the Partnerships had a total of $36.6 million
of outstanding commitments to tenants for improvements to leased
premises. Of this amount, a total of $19.7 million had been accrued as a
prepetition liability and was classified on the balance sheet within
liabilities subject to compromise. It is expected that the remaining
improvements ($16.9 million) will be completed during 1996. Additional
commitments are expected to arise as new leases are signed.
As required by the Loan Agreement, the Partnerships are committed to
make certain capital improvements totaling $197.6 million prior to
December 31, 2000. Qualifying capital expenditures through December 31,
1995 approximated $223.2 million, of which $170.4 million satisfy the
$197.6 million requirement.
8. Tenant Leasing Arrangements
The Partnerships lease to tenants office, retail, and storage space in
the Property through non-cancelable operating leases expiring
principally over the next 28 years. The leases require fixed minimum
monthly payments over their terms and generally provide for adjustments
to rent for the tenants' proportionate share of changes in certain costs
and expenses of the Property. Certain leases also provide for additional
rent which is based upon a percentage of sales of the lessee.
F-60
<PAGE>
ROCKEFELLER CENTER PROPERTIES AND RCP ASSOCIATES
DEBTORS-IN-POSSESSION
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
The following is a schedule of minimum future rentals on non-cancelable
operating leases as of December 31, 1995:
Year ending December 31,
------------------------
1996 $ 167,374,000
1997 165,585,000
1998 174,484,000
1999 168,975,000
2000 160,251,000
Later years 1,722,891,000
--------------
Total minimum future rentals $2,559,560,000
==============
As a result of lease incentives, the actual lease payments may vary
significantly from the amounts presented above.
9. Cash Flows From Changes in Certain Assets and Liabilities
The cash flows from changes in certain assets and liabilities of the
Partnerships as of December 31, 1995, 1994, and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(Increase) decrease in accounts
receivable ($5,280,000) $ 316,000 $ 856,000
(Increase) decrease in other current
and non-current assets (208,000) (509,000) 669,000
Increase (decrease) in accounts
payable and accrued expenses 2,880,000 (3,338,000) 8,146,000
---------- ---------- ----------
($2,608,000) ($3,531,000) $9,671,000
========== ========== ==========
</TABLE>
F-61
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,298
<SECURITIES> 0
<RECEIVABLES> 1,176,220<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F2>
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,190,776
<CURRENT-LIABILITIES> 0<F3>
<BONDS> 770,667
0
0
<COMMON> 383
<OTHER-SE> 316,216
<TOTAL-LIABILITY-AND-EQUITY> 1,190,776
<SALES> 0
<TOTAL-REVENUES> 21,470
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 121,778
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,821
<INCOME-PRETAX> (195,129)
<INCOME-TAX> 0
<INCOME-CONTINUING> (195,129)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (195,129)
<EPS-PRIMARY> (5.10)
<EPS-DILUTED> 0
<FN>
<F1> Loan Receivable includes accrued interest.
<F2> Classified Balance Sheet is not presented.
<F3> Classified Balance Sheet is not presented.
</TABLE>
