<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 11, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RECKSON ASSOCIATES REALTY CORP. AND
RECKSON OPERATING PARTNERSHIP, L.P.
(Exact name of each registrant as specified in its charter)
<TABLE>
<S> <C> <C>
RECKSON ASSOCIATES REALTY 6798 RECKSON ASSOCIATES REALTY
CORP.--MARYLAND (Primary Standard CORP.--11-3233650
RECKSON OPERATING PARTNERSHIP, Industrial RECKSON OPERATING PARTNERSHIP,
L.P.--DELAWARE Classification L.P.--11-3233647
(State or other jurisdiction of Code Number) (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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225 BROADHOLLOW ROAD
MELVILLE, NEW YORK 11747
(516) 694-6900
(Address, including zip code, and telephone number,
including area code, of each registrant's principal executive offices)
----------------------------------------
DONALD J. RECHLER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
RECKSON ASSOCIATES REALTY CORP.
225 BROADHOLLOW ROAD
MELVILLE, NEW YORK 11747
(516) 694-6900
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------------------------
COPIES TO:
<TABLE>
<S> <C> <C> <C>
EDWARD F. PETROSKY, ESQ. LEE S. PARKS, ESQ. LESTER S. GARFINKEL LOU R. KLING, ESQ.
J. GERARD CUMMINS, ESQ. FRIED, FRANK, HARRIS, SHRIVER TOWER REALTY TRUST, INC. SKADDEN, ARPS, SLATE, MEAGHER
BROWN & WOOD LLP & JACOBSON 292 MADISON AVENUE & FLOM LLP
ONE WORLD TRADE CENTER ONE NEW YORK PLAZA 3(RD) FLOOR 919 THIRD AVENUE
NEW YORK, NEW YORK 10048 NEW YORK, NEW YORK 10004-1980 NEW YORK, NEW YORK 10017 NEW YORK, NEW YORK 10022
(212) 839-5300 (212) 859-8000 (212) 448-1864 (212) 735-3000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective and all other conditions to the merger (the "Merger") of Tower Realty
Trust, Inc., a Maryland corporation ("Tower"), with and into Metropolitan
Partners LLC, a Delaware limited liability company, described in the enclosed
Joint Proxy Statement/Prospectus, have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED SHARE OR PER NOTE PRICE FEE
<S> <C> <C> <C> <C>
Class B Exchangeable Common Stock, par value $0.01
per share, of Reckson Associates................ 11,694,834(1) N/A $263,917,699(2) $73,369.12(2)(3)
7% Senior Unsecured Notes due 2009 of Reckson
Operating Partnership, L.P...................... $116,463,000(4) N/A N/A (5)
Guarantee of 7% Senior Unsecured Notes due 2009,
issued by Reckson Associates.................... N/A N/A N/A (6)
</TABLE>
(1) Represents the sum of (i) 16,958,355 shares of common stock of Tower
outstanding plus (ii) 1,684,772 shares of common stock issuable in exchange
for limited partnership interests ("units") of Tower Realty Operating
Partnership, L.P. on February 26, 1999 (the "Tower Stock Number"),
multiplied by 75% of the exchange ratio of 0.8364. If approval of the
Reckson Associates proposal is not obtained, the number of shares to be
issued in the Merger will be reduced to the product of the Tower Stock
Number multiplied by 75% of the exchange ratio of 0.5725 and in lieu thereof
Reckson Operating Partnership, L.P. ("Reckson OP") will issue the notes
described in note 4 below.
(2) Pursuant to Rules 457(f)(1) and (3) and 457(c), and solely for purposes of
calculating the registration fee, the registration fee was computed on the
basis of the average of the high and low prices of Tower common stock as
reported on the New York Stock Exchange, Inc. Composite Tape on March 4,
1999 ($19.9063) less the amount of cash per share of Tower common stock or
per unit ($5.75) to be paid by Reckson Associates in connection with the
Merger.
(3) No fee is paid herewith. Tower previously paid a fee of $81,404.90 pursuant
to Rule 14a-6(i)(1) for the filing of its preliminary proxy material on
August 14, 1998, which amount is credited against the registration fee
payable in connection with this filing pursuant to Rule 0-11(a)(2).
(4) Principal amount at maturity. Represents the sum of (a) the Tower Stock
Number multiplied by 75% of the principal amount of notes to be issued per
share or per unit ($7.2565) if Reckson Associates stockholders do not
approve the proposal to issue only class B exchangeable stock in the Merger
plus (b) the Tower Stock Number multiplied $0.8046, representing the
additional amount of notes to be issued if there occurs an "Adverse
Recommendation Event" rounded down to highest multiple of one thousand.
(5) Included in calculation set forth in note 2 above. The 7% Senior Unsecured
Notes due 2009 of Reckson OP will be issued only if the Reckson Associates
proposal is not obtained. See note 1 above.
(6) The 7% Senior Unsecured Notes due 2009 of Reckson OP are fully and
unconditionally guaranteed by Reckson Associates on an unsecured, senior
basis. Pursuant to Rule 457(n), no separate filing fee for the Guarantee is
required.
----------------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
REVISED PRELIMINARY COPY--SUBJECT TO COMPLETION--DATED MARCH 11, 1999
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
[TOWER REALTY LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON , 1999
To the Stockholders of Tower Realty Trust, Inc.:
Notice is hereby given that a special meeting of stockholders (together with
any postponement or adjournment thereof, the "Special Meeting") of Tower Realty
Trust, Inc., a Maryland corporation ("Tower"), will be held on [ ,
], 1999, at [ :00] a.m. (Eastern time) at [ ], [ADDRESS], for the
following purposes:
1. To approve the merger of Tower with and into Metropolitan Partners LLC,
a Delaware limited liability company ("Metropolitan Partners"), (the
"Merger") pursuant to, and the transactions contemplated by, the
Agreement and Plan of Merger and the transactions contemplated thereby,
dated as of December 8, 1998 (the "Merger Agreement"), by and among
Tower, Reckson Associates Realty Corp., a Maryland corporation
("Reckson"), Reckson Operating Partnership, L.P., a Delaware limited
partnership ("Reckson OP"), and Metropolitan Partners, in which each
share of common stock, par value $.01 per share, of Tower ("Tower Common
Stock") will, at the election of holders thereof and subject to
proration, either (x) be converted into the right to receive $23.00 in
cash payable to the holder thereof, without interest, or (y) be converted
into either (1) .5725 of a share of class B exchangeable common stock,
par value $.01 per share, of Reckson (the "Reckson Class B Common Stock")
and $7.2565 principal amount of 7% senior unsecured notes due 2009 of
Reckson OP (the "Reckson OP 7% Notes"), guaranteed by Reckson, if the
Share Issuance Approval (as defined below) is not obtained, or (2) .8364
of a share of Reckson Class B Common Stock if the Share Issuance Approval
is obtained. If the Reckson board of directors withdraws or amends or
materially modifies or withdraws its approval or recommendation of the
Share Issuance (as defined below) and if the Share Issuance Approval has
not been obtained, in addition to the consideration set forth in clauses
(x) or (y)(1) above, each share of Tower Common Stock will be converted
into an additional $.8046 principal amount of Reckson OP 7% Notes. As
used herein, the "Share Issuance Approval" is defined as the approval, by
a majority of votes cast at the special meeting of the common
stockholders of Reckson, of the issuance of only Reckson Class B Common
Stock as the non-cash portion of the merger consideration (the "Share
Issuance"); PROVIDED THAT the total votes cast on the Share Issuance
represents over 50% in interest of all shares of common stock of Reckson
entitled to vote on the Share Issuance; and
2. To transact such other business as may properly come before the Special
Meeting.
The board of directors has set the close of business (5:00 p.m., Eastern
time) on [ ], 1999 as the record date (the "Record Date") for
determining stockholders entitled to notice of, and to vote at, the Special
Meeting. Holders of Tower Common Stock as of the Record Date will be entitled to
vote on Item 1 and any matters under Item 2 at the Special Meeting. A list of
stockholders entitled to vote at the Special Meeting will be maintained at
Tower's headquarters, 292 Madison Avenue, New York, New York 10017, prior to the
Special Meeting and will also be available for inspection at the Special
Meeting.
Approval of the Merger (Item 1) requires the affirmative vote of the holders
of record of a majority of the shares of Tower Common Stock outstanding on the
Record Date. As of the Record Date, there were [ ] shares of Tower Common
Stock outstanding, each of which is entitled to one vote in person or by proxy
with respect to each matter to be voted on by holders of Tower Common Stock at
the Special Meeting.
For approval of the Merger, the presence in person or by proxy of at least a
majority of the outstanding shares of Tower Common Stock entitled to vote on the
approval of the Merger is necessary to constitute a quorum at the Special
Meeting.
THE BOARD OF DIRECTORS OF TOWER HAS DETERMINED THAT THE MERGER, THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, TOWER AND ITS STOCKHOLDERS, HAS APPROVED THE MERGER, THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, AND RECOMMENDS THAT HOLDERS
OF TOWER COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER AT THE SPECIAL
MEETING.
BY ORDER OF THE BOARD OF DIRECTORS OF
TOWER,
[SIGNATURE]
PEGGY D. RAWITT, SECRETARY
[ ], 1999
IT IS IMPORTANT THAT THE ENCLOSED PROXY CARD BE SIGNED, DATED AND PROMPTLY
RETURNED IN THE ENCLOSED PREPAID ENVELOPE SO THAT YOUR SHARES WILL BE
REPRESENTED WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. A
PRE-ADDRESSED ENVELOPE IS ENCLOSED FOR THAT PURPOSE. IF NO INSTRUCTIONS ARE
INDICATED ON YOUR PROXY, YOUR SHARES OF TOWER COMMON STOCK WILL BE VOTED "FOR"
APPROVAL OF THE MERGER. EXECUTION OF A PROXY WILL NOT IN ANY WAY AFFECT A
STOCKHOLDER'S RIGHT TO ATTEND THE SPECIAL MEETING AND VOTE IN PERSON. ANY
STOCKHOLDER GIVING A PROXY HAS THE RIGHT TO REVOKE IT AT ANY TIME, BEFORE IT IS
EXERCISED, BY WRITTEN NOTICE TO THE SECRETARY OF TOWER. IN ADDITION,
STOCKHOLDERS ATTENDING THE SPECIAL MEETING MAY REVOKE THEIR PROXIES AT ANY TIME
BEFORE THEY ARE EXERCISED.
YOU SHOULD NOT SEND STOCK
CERTIFICATES WITH YOUR PROXY CARD.
<PAGE>
REVISED PRELIMINARY COPY--SUBJECT TO COMPLETION--DATED MARCH 11, 1999
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
[RECKSON LOGO]
To Reckson Common Stockholders:
The board of directors of Reckson Associates Realty Corp. has approved a
merger in which Tower Realty Trust, Inc. will be acquired by Reckson. The merger
agreement provides that common stockholders of Tower and holders of limited
partnership units of Tower Realty Operating Partnership, L.P. will receive, at
their election, cash or securities subject to proration to ensure 25% of the
outstanding Tower stock and units are exchanged for cash. Your consent is not
required for consummation of the merger. However, the form of the non-cash
portion of the merger consideration payable to Tower stockholders and
unitholders will vary depending upon your vote.
In the merger, if you approve the issuance of only shares of Reckson class B
exchangeable common stock as the non-cash portion of the merger consideration,
Tower stockholders and unitholders will receive for each of their shares or
units, at their election and subject to proration, either (a) $23.00 in cash or
(b) .8364 of a share of Reckson class B exchangeable common stock. If you do not
approve the issuance of only shares of Reckson class B exchangeable common stock
as the non-cash portion of the merger consideration, we will still be obligated
to complete the merger, but Tower stockholders and unitholders will receive for
each of their shares or units, at their election and subject to proration,
either (a) $23.00 in cash or (b) .5725 of a share of Reckson class B common
stock and $7.2565 principal amount of 7% senior unsecured notes due 2009 of
Reckson Operating Partnership, L.P.
Reckson common stock and Tower common stock trade on the New York Stock
Exchange under the symbols "RA" and "TOW." Reckson class B common stock and, if
issued, Reckson OP 7% notes will be listed on the New York Stock Exchange under
the symbols " " and " ."
The Reckson board of directors recommends that you vote to approve the share
issuance proposal because it believes this alternative will result in a
preferable capital structure for Reckson after the merger. We have scheduled a
meeting for you to vote on this important matter.
Whether or not you plan to attend the meeting, it is important that your
shares be voted. Please take the time to vote by completing and mailing the
enclosed proxy card to us. If your shares are held in "street name," you must
instruct your broker to vote for you.
This Joint Proxy Statement/Prospectus provides you with detailed information
about the proposed merger. We encourage you to read this entire document
carefully. In addition, you may obtain information about our company and Tower
from documents filed with the Securities and Exchange Commission.
[Signature]
DONALD J. RECHLER
Chairman and Chief Executive Officer
Reckson Associates Realty Corp.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAS APPROVED THE MERGER DESCRIBED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS OR ANY SECURITIES THAT MAY BE ISSUED IN THE MERGER, NOR
HAVE THEY DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE OR
ADEQUATE. FURTHERMORE, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT DETERMINED
THE FAIRNESS OR MERITS OF THE MERGER. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED , 1999, AND IS
FIRST BEING MAILED TO STOCKHOLDERS ON OR ABOUT , 1999.
<PAGE>
REVISED PRELIMINARY COPY--SUBJECT TO COMPLETION--DATED MARCH 11, 1999
CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
[RECKSON ASSOCIATES LOGO]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ], 1999
To the Common Stockholders of Reckson Associates Realty Corp.:
We are writing to you to notify you that a special meeting of common
stockholders of Reckson Associates Realty Corp., a Maryland corporation, will be
held on [ ], 1999, at [ : ] a.m. (Eastern time) at The Omni, 333
Earle Ovington Boulevard, Mitchel Field, New York, for the following purposes:
1. To consider and vote upon the proposed issuance by Reckson of only
shares of Reckson class B exchangeable common stock as the non-cash
portion of the merger consideration in the merger of Tower Realty Trust,
Inc. with and into Metropolitan Partners LLC, a subsidiary of Reckson, in
accordance with the Agreement and Plan of Merger, dated as of December 8,
1998, by and among Reckson, Reckson Operating Partnership, L.P., Tower
and Metropolitan Partners; and
2. To transact such other business, including the adjournment of the
special meeting, as may properly come before the special meeting or any
adjournments or postponements of the special meeting.
The board of directors has fixed the close of business on March 15, 1999 as
the record date for determining the Reckson common stockholders entitled to
notice of and to vote at the special meeting and at any adjournments or
postponements of the special meeting. Only stockholders of record of Reckson
common stock at the close of business on that date will be entitled to notice
of, and to vote at, the special meeting and at any adjournments or postponements
of the special meeting.
The rules of the New York Stock Exchange require that the share issuance
proposal be approved by the affirmative vote of a majority of the shares of
Reckson common stock cast at the special meeting and entitled to vote on the
share issuance proposal, as long as the total votes cast on the share issuance
proposal represent a majority of all shares entitled to vote on the share
issuance proposal.
A proxy card accompanies this Notice. It is important that your shares of
Reckson common stock be represented at the special meeting, regardless of the
number of shares you hold. We urge you to specify your voting preference by
completing, dating and signing the enclosed proxy card and returning it in the
enclosed prepaid business reply envelope. You may revoke your proxy at any time
before it is voted by delivery to us of a written revocation or a later dated
proxy or by voting in person at the special meeting. If you receive more than
one form of proxy, it is an indication that your shares are registered in more
than one account. All proxy forms received by you should be signed and returned
promptly to ensure that all of your shares are voted.
If your shares are not registered in your own name and you plan to attend
the special meeting and vote your shares in person, you will need to ask the
broker, trust company, bank or other nominee that holds your shares to provide
you with evidence of your share ownership on March 15, 1999 and bring that
evidence to the special meeting. Please complete, sign and return your proxy
card regardless whether you plan to attend the special meeting.
BY ORDER OF THE BOARD OF DIRECTORS OF
RECKSON ASSOCIATES REALTY CORP.,
[Signature]
GREGG M. RECHLER
SECRETARY
Melville, New York
[ ], 1999
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF THE SHARE
ISSUANCE PROPOSAL, WHICH IS DESCRIBED IN DETAIL IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS. YOUR VOTE IS IMPORTANT.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION................................................................ 1
SUMMARY.................................................................................................... 7
The Companies............................................................................................ 7
Summary of the Transaction............................................................................... 7
The Special Meetings..................................................................................... 8
Record Dates; Voting Power............................................................................... 8
Votes Required........................................................................................... 8
Voting Your Shares....................................................................................... 9
Shares Held in "Street Name"............................................................................. 9
Changing Your Vote....................................................................................... 10
What to Send in Now...................................................................................... 10
Electing Cash............................................................................................ 10
Failure to Return a Form of Election..................................................................... 10
Conditions to the Merger................................................................................. 11
Termination of the Merger Agreement...................................................................... 11
Termination Fees and Expenses............................................................................ 12
Metropolitan Partners' Investment in Tower............................................................... 12
Release of Litigation; Litigation Trust.................................................................. 12
Regulatory Matters....................................................................................... 13
Forward-Looking Statements May Prove Inaccurate.......................................................... 13
RISK FACTORS RELATING TO THE MERGER AND AN INVESTMENT IN RECKSON SECURITIES................................ 14
Risk Factors Relating to Failure to Approve the Share Issuance Proposal.................................. 14
Risk Factors Relating to Completion of the Merger........................................................ 14
Risk Factors Relating to an Investment in Reckson Class B Common Stock and Reckson OP 7% Notes........... 15
Risk Factors Relating to Failure of the Merger to be Completed........................................... 29
WHAT TOWER STOCKHOLDERS WILL RECEIVE IN THE MERGER......................................................... 30
SELECTED FINANCIAL DATA.................................................................................... 33
Selected Financial Data of Tower......................................................................... 33
Selected Financial Data of Reckson....................................................................... 37
Selected Financial Data of Reckson OP.................................................................... 38
Selected Pro Forma Combined Financial Data of Reckson.................................................... 40
COMPARATIVE PER SHARE DATA................................................................................. 43
Earnings, Dividends and Book Value....................................................................... 43
Comparative Market Prices and Distributions.............................................................. 44
Distribution Policies.................................................................................... 45
THE MERGER................................................................................................. 48
Background of the Merger................................................................................. 48
Tower's Reasons for the Merger; Recommendation of the Tower Board of Directors........................... 57
Reckson's Reasons for the Merger and the Share Issuance Proposal; Positive and Negative Factors
Considered............................................................................................. 60
Opinion of Tower's Financial Advisor..................................................................... 62
Opinion of Reckson's Financial Advisor................................................................... 69
</TABLE>
i
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<S> <C>
Cautionary Statement Concerning Forward-Looking Statements............................................... 74
Merger Financing......................................................................................... 74
Potential Dispositions of Properties..................................................................... 75
Accounting Treatment..................................................................................... 75
Material U.S. Federal Income Tax Consequences of the Merger.............................................. 75
Regulatory Matters....................................................................................... 77
Appraisal Rights......................................................................................... 78
Federal Securities Laws Consequences; Resale Restrictions................................................ 78
Conduct of the Business if the Merger is not Completed................................................... 78
INTERESTS OF TOWER OFFICERS AND DIRECTORS IN THE MERGER AND RELATED MATTERS................................ 79
Indemnification and Insurance............................................................................ 79
Compensation Arrangements of Tower Executive Officers.................................................... 79
Ownership of Tower Common Stock.......................................................................... 81
THE MERGER AGREEMENT....................................................................................... 84
Structure; Closing; Stockholder Approvals................................................................ 84
Treatment of Tower OP and Tower OP Units................................................................. 85
Merger Consideration; Election and Conversion of Shares of Tower Common Stock and
Tower OP Units; Fractional Shares; Special Dividend.................................................... 85
Stock Options............................................................................................ 87
Material Covenants....................................................................................... 87
Material Representations and Warranties.................................................................. 90
Conditions to the Merger................................................................................. 92
Termination of the Merger Agreement...................................................................... 94
Fees and Expenses........................................................................................ 96
Release of Litigation; Litigation Trust.................................................................. 97
Amendments; Modification; Waiver......................................................................... 97
METROPOLITAN PARTNERS' INVESTMENT IN TOWER................................................................. 98
Registration Rights...................................................................................... 99
THE SPECIAL MEETINGS....................................................................................... 100
Purpose; Time and Place.................................................................................. 100
Recommendations.......................................................................................... 100
Record Dates; Quorums; Votes Required.................................................................... 101
Share Ownership of Management and Principal Stockholders Entering Into Voting
Agreements............................................................................................. 102
Solicitation of Proxies.................................................................................. 102
Election Procedure....................................................................................... 103
Voting of Proxies........................................................................................ 103
Revocability of Proxies.................................................................................. 104
COMPARISON OF CURRENT TOWER STOCKHOLDER RIGHTS AND RIGHTS OF RECKSON STOCKHOLDERS FOLLOWING THE MERGER..... 105
Removal of Directors..................................................................................... 109
Dividend and Other Distributions......................................................................... 110
Appraisal Rights......................................................................................... 111
Fundamental Transactions................................................................................. 111
Ownership Limitations.................................................................................... 112
Business Combinations.................................................................................... 114
</TABLE>
ii
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<TABLE>
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<S> <C>
Control Share Acquisitions............................................................................... 115
TOWER AND TOWER OP......................................................................................... 116
Formation Transactions................................................................................... 116
Financial Information About Industry Segments............................................................ 118
Narrative Description of Tower........................................................................... 118
Recent Developments...................................................................................... 118
Competition.............................................................................................. 119
Possible Environmental Liabilities....................................................................... 120
Insurance................................................................................................ 120
Foreign Operations....................................................................................... 121
Properties............................................................................................... 121
Legal Proceedings........................................................................................ 122
Stockholder Information.................................................................................. 123
Recent Sales of Unregistered Securities.................................................................. 123
SELECTED FINANCIAL DATA--TOWER............................................................................. 124
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 125
RECKSON AND RECKSON OP..................................................................................... 136
Reckson OP's Management's Discussion and Analysis of Financial Condition and Results of Operations....... 138
METROPOLITAN PARTNERS...................................................................................... 147
Formation................................................................................................ 147
Management............................................................................................... 147
TOWER OP................................................................................................... 147
Treatment of Tower OP Unitholders........................................................................ 147
DESCRIPTION OF RECKSON STOCK............................................................................... 147
Reckson Common Stock..................................................................................... 148
Reckson Class B Common Stock............................................................................. 148
Reckson Preferred Stock.................................................................................. 153
Provisions of the Reckson Charter Regarding Stockholder's Rights......................................... 154
Restrictions on Ownership................................................................................ 154
DESCRIPTION OF THE RECKSON OP 7% NOTES..................................................................... 157
Principal and Interest................................................................................... 158
Guarantee................................................................................................ 158
Denominations, Registration and Transfer................................................................. 158
Material Covenants....................................................................................... 159
Merger, Consolidation or Sale............................................................................ 161
Events of Default, Notice and Waiver..................................................................... 161
Modification of the Indenture............................................................................ 163
Discharge, Defeasance and Covenant Defeasance............................................................ 166
Governing Law............................................................................................ 167
DELISTING AND DEREGISTRATION OF TOWER COMMON STOCK......................................................... 167
DESCRIPTION OF TOWER PREFERRED STOCK....................................................................... 168
Dividends................................................................................................ 168
Liquidation.............................................................................................. 168
Redemption at Tower's Option............................................................................. 168
</TABLE>
iii
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<TABLE>
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<S> <C>
Conversion at the Holder's Option........................................................................ 169
Tower Preferred Stock Conversion Price Adjustments....................................................... 169
Priority................................................................................................. 170
Voting................................................................................................... 170
FEDERAL INCOME TAX CONSEQUENCES RELATING TO AN INVESTMENT IN RECKSON CLASS B COMMON STOCK AND RECKSON OP 7%
NOTES.................................................................................................... 171
Taxation of Reckson...................................................................................... 171
Tax Aspects of a REIT's Investment in Partnerships....................................................... 176
Taxation of Taxable Domestic Stockholders................................................................ 176
Constructive Dividends on Reckson Class B Common Stock................................................... 177
Original Issue Discount on Reckson OP 7% Notes........................................................... 178
Taxation of Foreign Stockholders......................................................................... 178
Taxation of Non-U.S. Holders of Reckson OP 7% Notes...................................................... 180
Exchange of Reckson Class B Common Stock for Reckson Common Stock........................................ 180
Information Reporting and Backup Withholding............................................................. 180
Taxation of Tax-Exempt Stockholders...................................................................... 181
Possible Legislative or Other Actions Affecting Tax Consequences......................................... 181
State and Local Taxes.................................................................................... 181
Unaudited Pro Forma Combined Financial Statements of Metropolitan Partners............................... 182
Unaudited Pro Forma Combined Financial Statements of Reckson--Assuming Reckson Stockholders Approve Share
Issuance Proposal...................................................................................... 188
Notes to Pro Forma Combined Financial Statements......................................................... 191
Unaudited Pro Forma Combined Financial Statements of Reckson--Assuming Reckson Stockholders Do Not
Approve Share Issuance Proposal........................................................................ 193
Notes To Pro Forma Combined Financial Statements......................................................... 196
Unaudited Pro Forma Combined Financial Statements of Reckson OP Assuming Reckson Stockholders Do Not
Approve the Share Issuance Proposal.................................................................... 198
Notes to Pro Forma Combined Financial Statements......................................................... 201
Unaudited Pro Forma Condensed Consolidated Financial Statements of Tower................................. 203
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements............................. 207
LEGAL MATTERS.............................................................................................. 209
EXPERTS.................................................................................................... 209
FUTURE STOCKHOLDER PROPOSALS............................................................................... 210
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 210
GLOSSARY................................................................................................... 212
INDEX OF DEFINED TERMS..................................................................................... 217
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
LIST OF ANNEXES
ANNEX A-- Amended and Restated Agreement and Plan of Merger
ANNEX B-- Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
ANNEX C-- Opinion of Salomon Smith Barney Inc.
ANNEX D-- Form of Reckson Associates Realty Corp. Articles Supplementary Establishing and Fixing the
Rights and Preferences of a Class of Shares of Common Stock
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REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information
about our companies from documents filed with the SEC that have not been
included in or delivered with this document. This information is available to
you without charge upon your written or oral request. You can obtain documents
incorporated by reference in this document by requesting them in writing or by
telephone from the appropriate company at the following addresses:
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Reckson Associates Realty Corp. Tower Realty Trust, Inc.
225 Broadhollow Road 292 Madison Avenue
Melville, NY 11747 New York, NY 10017
(516) 694-6900 (212) 448-1864
Attn: Susan McGuire Attn: Peggy D. Rawitt
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If you would like to request documents, please do so by , 1999. If you
request any incorporated documents from us, we will mail them to you by first
class mail, or another equally prompt means, within one business day after we
receive your request.
See "Where You Can Find More Information" on page for more information
about the documents incorporated by reference in this document.
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QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
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Q: WHY ARE RECKSON AND TOWER PROPOSING THE
MERGER?
A: Tower believes that the consideration to
be received by Tower stockholders and
unitholders is fair and in their best
interests. Furthermore, both Tower and
Reckson believe the merger will provide
Reckson with the initial properties with
which it may build a New York City
franchise similar to the franchises it has
established in the suburban markets
surrounding New York City and will result
in cost savings and operating efficiencies
arising out of the combined company's
increased size and the combination of
overlapping support and administrative
systems. In addition, the merger will
enhance the combined company's ability to
market its suburban properties to New York
City tenants and to market New York City
properties to its suburban tenants.
Q: WHAT WILL HOLDERS OF TOWER COMMON STOCK
AND HOLDERS OF TOWER OP UNITS RECEIVE IN
THE MERGER?
A: In the merger, Tower stockholders and
holders of limited partnership interests
of Tower Realty Operating Partnership,
L.P., or Tower OP units, will receive, for
each share and unit, cash and Reckson
class B exchangeable common stock and, if
Reckson stockholders do not approve the
share issuance proposal, 7% senior
unsecured notes due 2009 issued by Reckson
Operating Partnership, L.P., or Reckson
OP, and guaranteed by Reckson. If Reckson
stockholders approve the share issuance
proposal, which provides for the issuance
of only shares of Reckson class B common
stock as the non-cash portion of the
merger consideration, then for each share
of Tower common stock and Tower OP unit,
holders will receive, at their election
and subject to proration if the cash
election is oversubscribed or
undersubscribed, either:
- $23.00 in cash or
- .8364 of a share of Reckson class B
common stock.
If Reckson stockholders do not approve the
share issuance proposal, Reckson will
still be obligated to complete the merger,
subject to the conditions of the merger
agreement. In this case, however, holders
will receive for each share of Tower
common stock and Tower OP unit, at their
election and subject to proration if the
cash election is oversubscribed or
undersubscribed, either:
- $23.00 in cash or
- .5725 of a share of Reckson class B
common stock and $7.2565 principal
amount of Reckson OP 7% notes.
Tower stockholders will not know at the
time of the Tower special meeting whether
Reckson OP 7% notes will be issued in the
merger because the Tower and Reckson
special meetings are scheduled for the
same day.
Additionally, in the event the Reckson
board of directors modifies or withdraws
its recommendation that Reckson
stockholders approve the share issuance
proposal and Reckson stockholders do not
approve the share issuance proposal, Tower
stockholders will also receive in the
merger, regardless of their election, for
each share of Tower common stock, an
additional $0.8046 principal amount of
Reckson OP 7% notes.
Q: DOES THE MERGER REQUIRE THE APPROVAL OF
TOWER STOCKHOLDERS OR RECKSON
STOCKHOLDERS?
A: The merger requires the approval of the
holders of a majority of the shares of
Tower common stock outstanding on the
record date for the special meeting of the
Tower stockholders. The merger does not
require the approval of Reckson
stockholders, and such holders will not be
voting on whether or not the merger
actually occurs. The type of consideration
payable in the merger will, however, vary,
depending upon the vote of the holders of
Reckson common stock. This vote is
necessary in light of New York Stock
Exchange rules. These rules require
stockholder approval of transactions that
result in the issuance of a number of
shares of common stock of a New York Stock
Exchange-listed company equaling or
exceeding 20% of the number of shares of
common stock outstanding of such company
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prior to the transaction. The approval of
Reckson preferred stockholders and
operating partnership unitholders is NOT
required to approve the share issuance
proposal and all references in this Joint
Proxy Statement/ Prospectus to "Reckson
stockholders" excludes Reckson preferred
stockholders and Reckson OP unitholders.
Q: HOW WILL PRORATION AFFECT TOWER
STOCKHOLDERS?
A: Under the terms of the merger agreement,
only 25% of the total number of shares of
Tower common stock and Tower OP units will
be converted into the right to receive
cash in the merger. Similarly, only 75% of
the total number of shares of Tower common
stock and Tower OP units will be converted
into the right to receive Reckson
securities. As a result, the amount of
cash and the amount of Reckson securities
will be subject to proration based on the
elections made by Tower stockholders and
unitholders.
Specifically, if holders of more than 25%
of the aggregate outstanding shares of
Tower common stock and Tower OP units
elect to receive cash in the merger, then
each Tower stockholder and unitholder
making such cash election will have the
amount of cash he or she receives reduced
pro rata with other holders making a cash
election, and will receive, instead of the
foregone cash consideration, Reckson
securities. Conversely, if holders of less
than 25% of the aggregate outstanding
shares of Tower common stock and Tower OP
units elect to receive cash in the merger,
then each Tower stockholder and unitholder
not making a cash election will have the
amount of Reckson securities he or she
receives reduced pro rata with other
holders not making a cash election, and
will receive, instead of the foregone
securities, cash. For purposes of this
proration, Reckson class B common stock
will be substituted at a rate of one share
for each $27.50 of reduction in cash
consideration and, if applicable, Reckson
OP 7% notes will be substituted at a rate
of $1.00 in principal amount for each
$1.00 reduction in cash consideration. For
example:
- Assume, in accordance with the
recommendation of the Tower board of
directors, all Tower stockholders and
unitholders elect to exchange 100% of
their shares of Tower common stock
and Tower OP units for cash and that
Reckson stockholders approve the
share issuance proposal. If you own
1,000 shares of Tower common stock,
in the merger you will receive:
- $5,750, or 25% of 1,000 shares
multiplied by $23.00, in cash, plus
an additional cash amount in
respect of a fractional (30/100)
share of Reckson class B common
stock; and
- 627 shares of Reckson class B
common stock, or 75% of 1,000
shares multiplied by .8364, rounded
down to the nearest whole number.
- Assume all Tower stockholders and
unitholders elect to exchange 100% of
their shares of Tower common stock
and Tower OP units for cash and that
Reckson stockholders do not approve
the share issuance proposal. If you
own 1,000 shares of Tower common
stock, in the merger you will
receive:
- $5,750, or 25% of 1,000 shares
multiplied by $23.00, in cash, plus
an additional cash amount in
respect of a fractional (37.5/100)
share of Reckson class B common
stock and a fractional
($442.375/1,000) Reckson OP 7%
note; and
- 429 shares of Reckson class B
common stock, or 75% of 1,000
shares multiplied by .5725, rounded
down to the nearest whole number;
and
- $5,000 principal amount of Reckson
OP 7% notes, or 75% of 1,000
multiplied by $7.2565, rounded down
to the highest whole multiple of
$1,000.
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The amount of Reckson OP 7% notes in the
preceding example excludes the additional
Reckson OP 7% notes that will be issued to
all Tower stockholders and unitholders in
the event the Reckson board of directors
modifies or withdraws its recommendation
to approve the share issuance proposal and
Reckson stockholders do not approve such
proposal. In this instance, each Tower
stockholder or unitholder will receive an
additional $0.8046 principal amount of
Reckson OP 7% notes for each share or unit
held.
Q: WHY IS THE TOWER BOARD OF DIRECTORS
RECOMMENDING THAT TOWER STOCKHOLDERS AND
UNITHOLDERS MAKE THE ELECTION TO RECEIVE
$23.00 IN CASH PER SHARE?
A: The value of the Reckson securities is
uncertain and will fluctuate over time.
Based upon the $21.25 closing price of
Reckson common stock on February 26, 1999
and, even though the trading price of
Reckson common stock is not necessarily
indicative of the future trading price of
Reckson class B common stock, treating
each share of Reckson class B common stock
as having the same value as one share of
Reckson common stock into which it is
convertible, the Tower board of directors
believes that the value of the securities
that a stockholder or unitholder not
making a cash election will receive for
each share or unit is less than $23.00 per
share. See "What Tower Stockholders Will
Receive in the Merger" on page .
In addition, although Tower stockholders
and unitholders who elect to receive cash
in the merger may be subject to proration
as discussed above, the Tower board of
directors believes that such stockholders
and unitholders, by electing to receive
cash, will maximize the value of the
merger consideration received. However,
the Tower board of directors cautions that
the value of the non-cash consideration to
be issued in the merger is subject to
fluctuations and could at any time in fact
be worth more than $23.00.
Q: HOW WILL WHAT TOWER STOCKHOLDERS RECEIVE
IN THE MERGER CHANGE IF THE STOCK PRICE OF
RECKSON COMMON STOCK AND/OR TOWER COMMON
STOCK CHANGES PRIOR TO THE CLOSING OF THE
TRANSACTION?
A: No change will be made to the exchange
ratios or the $23.00 cash amount by reason
of changes in the trading price of Reckson
common stock and/or Tower common stock
prior to the closing of the merger. The
value of the Reckson class B common stock
to be issued at the time of the merger may
be different than it would be if the
merger occurred today.
Q: HOW WERE THE EXCHANGE RATIOS DETERMINED?
A: The exchange ratios were determined as
part of the overall negotiation between
the parties regarding the merger
consideration, taking into account the
other terms of the transaction. In
particular, the exchange ratios, the
percentage of merger consideration payable
in cash, the amount of Reckson OP 7% notes
payable if the share issuance proposal is
not approved, the terms of the various
securities, including the dividend rate
and exchange rights of the Reckson class B
common stock and the interest rates and
redemption features of the Reckson OP 7%
notes, were all part of an overall
negotiation. In determining the exchange
ratios, the parties agreed that the stated
value of the Reckson class B common stock
would be $27.50. Following negotiation, it
was also agreed that each share of Tower
common stock and each Tower OP unit would
be exchanged for consideration with a
stated or face value of $23.00 in the
merger. Accordingly, assuming Reckson
stockholders approve the share issuance
proposal, in order for Tower stockholders
to receive for each share Tower common
stock an amount of Reckson class B common
stock with a stated value of $23.00, each
share of Tower common stock and each Tower
OP unit would have to be exchanged for
23/27.50 of a share of Reckson class B
common stock, or .8364. Similarly, Reckson
and Tower determined as a part of their
negotiation that if Reckson stockholders
do not approve the share issuance
proposal, Reckson OP 7% notes would
replace Reckson class B common stock at a
rate of $1.00 face amount for each $1.00
of stated value of replaced stock. READERS
ARE CAUTIONED THAT THE
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RECKSON CLASS B COMMON STOCK STATED VALUE
AND THE RECKSON OP 7% NOTE FACE AMOUNT DO
NOT REPRESENT ACTUAL VALUES OR ANTICIPATED
TRADING PRICES AND THAT RECKSON AND TOWER
CURRENTLY EXPECT THE RECKSON OP 7% NOTES
TO TRADE BELOW THEIR FACE AMOUNT AND
RECKSON CLASS B COMMON STOCK TO TRADE
BELOW ITS STATED VALUE OF $27.50 PER
SHARE. ACCORDINGLY, THE NON-CASH PORTION
OF THE MERGER CONSIDERATION MAY HAVE AN
ACTUAL VALUE, OR TRADE AT PRICES, LESS
THAN $23.00 ON A PER SHARE EQUIVALENT
BASIS. As discussed on pages , at
the time it approved the transaction, the
Tower board of directors anticipated the
value of the merger consideration to be
less than $23.00 per share.
Q: WHAT IS RECKSON CLASS B COMMON STOCK AND
HOW DOES IT DIFFER FROM RECKSON'S EXISTING
COMMON STOCK?
A: Reckson class B common stock is a new
class of common stock created by Reckson
for the purpose of completing the merger.
Reckson class B common stock is
exchangeable for Reckson's existing common
stock either by the holder, at any time,
or by Reckson, at any time after 4 1/2
years from the date of the merger. Holders
of Reckson class B common stock will vote
on all matters submitted to holders of
Reckson common stock, and shall vote
together with the holders of Reckson
common stock as a single class. Holders of
Reckson class B common stock will be
entitled to one vote for each share of
Reckson class B common stock held.
Reckson class B common stock differs in
two significant economic respects from
Reckson common stock--its dividend and its
exchange right.
- The quarterly distributions on
Reckson class B common stock will be
$.5600 per share, absent a reduction
of the quarterly distribution on
Reckson common stock below the
current quarterly distribution of
$.3375 per share. The Reckson class B
common stock distribution can
increase based on the growth in
Reckson's fully diluted per share
funds from operations, or FFO, after
the merger. If in any quarter, the
distribution on Reckson common stock
is less than $.3375 per share, then
the amount of the distribution to be
paid in respect of Reckson class B
common stock will be reduced from the
amount otherwise payable in
proportion to the decrease in the
distribution on Reckson common stock
below $.3375 per share.
- Reckson class B common stock will be
exchangeable into Reckson common
stock generally on a one-for-one
basis. If dividends on Reckson class
B common stock fall below levels
specified in the articles
supplementary governing the terms of
the Reckson class B common stock and
at the time of exchange the Reckson
common stock issuable upon exchange
of a share of Reckson class B common
stock is trading at less than $27.50,
then, for exchanges at the holder's
election only, the number of shares
of Reckson common stock issuable upon
exchange of one share of Reckson
class B common stock will be
increased up to 1.25. In any case,
the exchange rate may be adjusted for
stock splits, combinations and other
actions or distributions that dilute
the per share economic rights of the
Reckson common stock issuable in
exchange for Reckson class B common
stock. For a more detailed
description of the rights and terms
of Reckson class B common stock, see
pages through .
Q: DO TOWER COMMON STOCKHOLDERS HAVE
APPRAISAL RIGHTS?
A: No. Tower is incorporated under Maryland
law. Under Maryland law, because shares of
Tower common stock are listed on a
national securities exchange, Tower common
stockholders have no rights to an
appraisal of their shares in connection
with the merger.
Q: DO RECKSON COMMON STOCKHOLDERS HAVE
APPRAISAL RIGHTS?
A: No. Following the merger, Reckson
stockholders will continue to own their
shares of Reckson common stock and,
accordingly,
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will have no rights to an appraisal of
their shares under Maryland law.
Q: I AM A HOLDER OF TOWER OP UNITS. WHAT WILL
I RECEIVE IN THE TRANSACTION? AM I
ENTITLED TO VOTE ON THE APPROVAL OF THE
MERGER?
A: As discussed above, holders of Tower OP
units are being offered the same
consideration, and the same choices
between consideration in the transaction
as holders of Tower common stock. However,
holders of Tower OP units are not entitled
to vote on the approval of the merger.
Q: HOW SOON AFTER THE SPECIAL MEETINGS WILL
THE MERGER OCCUR?
A: If the holders of a majority of the
outstanding shares of Tower common stock
approve the merger, we anticipate the
merger occurring as soon as practicable
after the completion of both the Tower and
Reckson special meetings.
Q: WILL I RECOGNIZE TAXABLE GAIN OR LOSS ON
THE TRANSACTION?
A: Yes. The merger will be a taxable
transaction to you regardless of whether
the consideration received is Reckson
class B common stock, cash, Reckson OP 7%
notes or a combination of such stock, cash
and notes. As a result of the merger, you
will recognize gain or loss for Federal
income tax purposes in an amount by which
the sum of the cash and/or the fair market
value of the Reckson class B common stock
and the issue price of the Reckson OP 7%
notes you receive in the merger exceeds,
or is less than, your tax basis in your
Tower common stock. TAX MATTERS ARE VERY
COMPLICATED AND THE TAX CONSEQUENCES OF
THE MERGER TO YOU WILL DEPEND ON THE FACTS
OF YOUR OWN SITUATION. You are urged to
consult your tax advisor to determine the
particular tax consequences of the merger
to you.
Q: WHAT HAPPENS TO TOWER'S FUTURE DIVIDENDS?
A: Until the merger is completed, Tower
stockholders will continue to receive
regular dividends as authorized by Tower's
board of directors, including any
dividends necessary to maintain Tower's
status as a REIT. After the completion of
the merger, if you have received Reckson
class B common stock, you will receive the
dividends payable to all holders of
Reckson class B common stock as discussed
above and in accordance with the terms of
the legal document governing such stock.
If, instead, you receive no Reckson class
B common stock in the merger, you will no
longer receive dividends after the merger
is completed.
Q: TOWER PREVIOUSLY ANNOUNCED A TRANSACTION
IN WHICH IT WOULD BE ACQUIRED BY RECKSON
AND CRESCENT REAL ESTATE EQUITIES COMPANY
FOR $24.00 IN CASH PER SHARE OF TOWER
COMMON STOCK OR, AT THE ELECTION OF THE
STOCKHOLDER, RECKSON COMMON STOCK AND
CRESCENT COMMON STOCK. ARE TOWER
STOCKHOLDERS STILL ENTITLED TO RECEIVE
SUCH AMOUNTS?
A: No. The previously announced transaction
with Reckson and Crescent has been
abandoned by the parties and the
litigation stemming out of such
transaction has been settled. The only
transaction currently being considered by
Tower stockholders is the one described in
this Joint Proxy Statement/ Prospectus.
Q: WHO CAN ANSWER MY QUESTIONS?
A: RECKSON STOCKHOLDERS. Reckson stockholders
having more questions about the merger or
the share issuance proposal or desiring
additional copies of this Joint Proxy
Statement/Prospectus or proxy cards should
contact:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
Banks and Brokers Call Collect: (212) -
All Others Call Toll-Free: (800) -
or
Reckson Associates Realty Corp.
225 Broadhollow Road
Melville, New York 11747
Attention: Susan McGuire, Investor
Relations
Telephone Number: (516) 694-6900
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TOWER STOCKHOLDERS. Tower stockholders
having more questions about the merger or
desiring additional copies of this Joint
Proxy Statement/Prospectus, proxy cards or
forms of election should contact:
[Information Agent]
[Address]
New York, New York [ ]
Banks and Brokers Call Collect: (212) -
All Others Call Toll-Free: (800) -
or
Tower Realty Trust, Inc.
292 Madison Avenue
New York, New York 10017
Attention: Peggy D. Rawitt,
Executive Vice President,
General Counsel and Secretary
Telephone Number: (212) 448-1864
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. FOR A MORE COMPLETE
UNDERSTANDING OF THE PROPOSED MERGER OF TOWER WITH AND INTO METROPOLITAN
PARTNERS AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE MERGER,
YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS TO WHICH
WE HAVE REFERRED YOU. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE . WE
HAVE INCLUDED PAGE REFERENCES IN PARENTHESES TO DIRECT YOU TO A MORE COMPLETE
DESCRIPTION OF THE TOPICS PRESENTED IN THIS SUMMARY.
THE COMPANIES
TOWER REALTY TRUST, INC. (PAGE )
292 Madison Avenue
New York, NY 10017
(212) 448-1864
Tower is an independent, comprehensive real estate company that manages all
aspects of its operations internally. Through its controlling interest in the
Tower Realty Operating Partnership, L.P., or Tower OP, Tower is engaged in
developing, acquiring, owning, renovating, managing and leasing office
properties primarily in the Manhattan, Phoenix/Tucson and Orlando markets.
Tower, a Maryland corporation, was organized in March 1997 and was formed to
continue and expand the commercial real estate business of its predecessor,
Tower Equities & Realty Corp.
RECKSON ASSOCIATES REALTY CORP. (PAGE )
225 Broadhollow Road
Melville, NY 11747
(516) 694-6900
Reckson is an independent real estate company that manages all aspects of
its operations internally and that specializes in the acquisition, leasing,
financing, management and development of office and industrial properties in the
Tri-State area of Long Island, Westchester, Northern New Jersey and Southern
Connecticut. Reckson was incorporated in September 1994 as a Maryland
corporation and commenced operations effective with the completion of its
initial public offering on June 2, 1995. Reckson was formed for the purpose of
continuing the commercial real estate business of Reckson Associates, a
predecessor of Reckson, and certain of its affiliated partnerships and other
entities which had been engaged in the commercial real estate business in excess
of 40 years.
RECKSON OPERATING PARTNERSHIP, L.P. (PAGE )
c/o Reckson Associates Realty Corp.
225 Broadhollow Road
Melville, NY 11747
(516) 694-6900
Reckson OP is controlled by Reckson and is the entity through which Reckson
conducts its operations.
SUMMARY OF THE TRANSACTION (PAGE )
THE MERGER AGREEMENT IS ATTACHED AT THE BACK OF THIS JOINT PROXY
STATEMENT/PROSPECTUS AS ANNEX A. WE ENCOURAGE YOU TO READ THE MERGER AGREEMENT
AS IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.
In the merger, Tower will be merged with and into Metropolitan Partners,
and, as a result, the separate existence of Tower shall cease. Following the
merger, Tower stockholders will own an interest in Reckson, which will own
indirectly all of Tower's assets other than those assets that may be sold to
third parties as discussed on page .
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The diagram of the structure of the transaction is as follows:
[DIAGRAM OF STRUCTURE OF THE TRANSACTION]
Upon completion of the merger, if Reckson stockholders approve the share
issuance proposal, former Tower stockholders and unitholders will own
approximately 23% of Reckson, or 20% in the event all common limited partnership
interests of Reckson OP were redeemed for Reckson common stock. If Reckson
stockholders do not approve the share issuance proposal, upon completion of the
merger, those percentages will be 17% and 14%, respectively. In addition,
Crescent Real Estate Equities Limited Partnership will hold a preferred
membership interest in Metropolitan Partners, which interest after two years
from the completion of the merger will be converted into either a common
membership interest in Metropolitan Partners or approximately 3.45 million
shares of Reckson common stock, which represented 8.6% of the outstanding shares
of Reckson common stock on February 26, 1999. The number of shares of Reckson
common stock issuable upon the exchange of Crescent's preferred membership
interest in Metropolitan Partners may be adjusted for stock splits, combinations
and other actions or distributions that dilute the economic rights of the
Reckson common stock issuable in exchange for Crescent's preferred membership
interest.
THE SPECIAL MEETINGS (PAGES AND )
RECKSON SPECIAL MEETING. The Reckson special meeting will be held at
[ ]:00 a.m. (Eastern time) on [ , ], 1999, at The Omni, 333 Earle
Ovington Boulevard, Mitchel Field, New York. At the special meeting, Reckson
stockholders will be asked to approve, in connection with the merger, the
proposal that Reckson issue only Reckson class B common stock as the non-cash
portion of the merger consideration.
TOWER SPECIAL MEETING. The Tower special meeting will be held at [ ]:00
a.m. (Eastern time) on [ , ], 1999 at [ , ADDRESS]. At
the special meeting, Tower stockholders will be asked to approve the merger.
RECORD DATES; VOTING POWER (PAGES AND )
RECKSON STOCKHOLDERS. You are entitled to vote at the Reckson special
meeting if you owned shares of Reckson common stock as of the close of business
(5:00 p.m. (Eastern time)), on , 1999, the Reckson record date. On the
Reckson record date, there were shares of Reckson common stock outstanding and
entitled to vote at the Reckson special meeting.
At the Reckson special meeting, Reckson stockholders will be entitled to
cast one vote for each share of Reckson common stock held of record on the
Reckson record date.
TOWER STOCKHOLDERS. You are entitled to vote at the Tower special meeting
if you owned shares of Tower common stock as of the close of business (5:00 p.m.
(Eastern time)), on , 1999, the Tower record date. On the Tower
record date, there were shares of Tower common stock outstanding and
entitled to vote at the Tower special meeting.
At the Tower special meeting, Tower stockholders will be entitled to cast
one vote for each share of Tower common stock held of record on the Tower record
date.
VOTES REQUIRED (PAGES AND )
RECKSON STOCKHOLDERS. The merger does not require the approval of Reckson's
stockholders,
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and such holders will not be voting on whether or not the merger actually
occurs.
The affirmative vote of a majority of the votes cast at the Reckson special
meeting is required to approve the share issuance proposal as long as a majority
of the shares of Reckson common stock entitled to vote on such proposal are
voted with respect to such proposal.
Donald J. Rechler, Scott H. Rechler and Roger M. Rechler, officers and/or
directors of Reckson, have entered into voting agreements that obligate them to
vote a total of 888,034 shares of Reckson common stock, or approximately 2.2% of
all Reckson common stock outstanding on the Reckson record date, in favor of the
share issuance proposal. In addition, on the Reckson record date, directors and
executive officers of Reckson and their affiliates, none of whom have entered
into voting agreements, held approximately 179,000 shares of Reckson common
stock, or .45% of all outstanding Reckson common stock outstanding on the
Reckson record date.
TOWER STOCKHOLDERS. The affirmative vote of the holders of record of a
majority of the shares of Tower common stock outstanding as of the Tower record
date is required to approve the merger.
Nine Tower stockholders, holding a total of 2,580,230 shares of Tower common
stock, or approximately 15.2% of all Tower common stock outstanding on the Tower
record date, have entered into voting agreements that obligate them to vote
these shares in favor of approval of the merger. In addition, on the Tower
record date, directors and executive officers of Tower, and their affiliates,
none of whom have entered into voting agreements, held a total of 506,290 shares
of Tower common stock, or approximately three percent of all Tower common stock
outstanding on the Tower record date.
VOTING YOUR SHARES (PAGE )
After you have carefully read this Joint Proxy Statement/Prospectus, just
indicate on your proxy card how you want to vote, and sign the card and mail it
in the enclosed prepaid return envelope as soon as possible, so that your shares
of Reckson common stock or Tower common stock may be represented at the
applicable special meeting, both of which are scheduled to take place on
[ ], 1999.
If you are a Tower stockholder and you sign and send in your proxy card and
do not indicate how you want to vote, your proxy will be counted as a vote in
favor of the merger. If you are a Tower stockholder and you do not return a
properly signed proxy or you abstain from voting, it will have the effect of a
vote against the merger.
If you are a Reckson stockholder and you sign and send in your proxy card
and do not indicate how you want to vote, your proxy will be counted as a vote
in favor of the share issuance proposal. If you are a Reckson stockholder and
you abstain from voting, your shares will be counted as present for purposes of
determining the presence of a quorum and will have the effect of a vote against
the share issuance proposal. If you fail to vote or return a properly signed
proxy, this failure will not count as a vote either for or against the proposal,
but may prevent the attainment of a quorum, which would prevent a vote from
being taken with respect to the share issuance proposal.
You may attend the applicable special meeting and vote your shares in
person, rather than signing and mailing your proxy card. In addition, you may
withdraw your proxy up to and including the day of the special meetings by
following the directions on page and either change your vote or attend the
special meeting and vote in person.
The Reckson board of directors recommends that Reckson stockholders vote FOR
the proposal that Reckson issue only shares of Reckson class B common stock as
the non-cash portion of the merger consideration. The Tower board of directors
recommends that Tower stockholders vote FOR the approval of the merger.
SHARES HELD IN "STREET NAME" (PAGE )
Your broker will vote your shares for you only if you provide instructions
on how to vote. You should follow the directions provided by
9
<PAGE>
your broker regarding how to instruct your broker to vote your shares. Without
your instructions, your shares will not be voted. Failure of Tower stockholders
to give instructions will have the same effect as voting against the merger.
Failure of Reckson stockholders to give instructions will not count as a vote on
the share issuance, but may prevent the satisfaction of a New York Stock
Exchange requirement that the total votes cast on the share issuance proposal
represent over 50% in interest of all outstanding Reckson common stock.
CHANGING YOUR VOTE (PAGE )
You can change your vote at any time before your proxy is voted at the
applicable special meeting. You can do this in one of three ways. First, you can
send a written notice stating that you would like to revoke your proxy. Second,
you can complete and submit a new proxy card. If you choose either of these two
methods, you must submit your notice of revocation or your new proxy card to
Reckson or Tower, as applicable, at the address on page . Third, you can
attend the Reckson special meeting or the Tower special meeting, as applicable,
and vote in person. However, your attendance alone will not revoke your proxy.
If your shares are not registered in your name and you plan to attend the
applicable special meeting and vote your shares in person, you will need to ask
the broker, trust company, bank or other nominee that holds your shares to
provide you with evidence of your share ownership on the record date for your
company's special meeting and bring that evidence to the special meeting. If you
have instructed a broker to vote your shares, you must follow directions
received from your broker to change your vote.
WHAT TO SEND IN NOW (PAGE )
Tower stockholders should send in their Tower stock certificates with a
completed form of election to the exchange agent prior to the special meeting
only if they are electing to receive $23.00 in cash instead of Reckson
securities. Tower stockholders should not send stock certificates with their
proxy cards.
Reckson stockholders should only send in their proxy card.
ELECTING CASH (PAGE )
In order to receive cash in the merger, whether or not he or she is voting
in favor of the merger a Tower stockholder must fill out a form of election,
indicating that he or she wants to receive cash in the merger, and mail it in
the envelope provided, together with his or her Tower common stock certificates,
so that it is received by 5:00 p.m., Eastern time, on the day before the Tower
special meeting. In the event a Tower stockholder's shares are held in "street
name," his or her broker will provide him or her with instructions as to voting
his or her shares and electing to receive cash.
Similarly, a Tower OP unitholder must fill out a form of election indicating
that he or she wants to receive cash in the merger and mail it in the envelope
provided so that it is received by 5:00 p.m., Eastern time, on the day before
the Tower special meeting.
FAILURE TO RETURN A FORM OF ELECTION (PAGE )
If a Tower stockholder or unitholder does not return a form of election, or
if a Tower stockholder does not send his or her Tower common stock certificates
with the enclosed form of election, each of his or her shares of Tower common
stock and Tower OP units will, subject to proration, be automatically exchanged
in the merger for Reckson securities. Following the merger, Reckson will send
those holders of Tower common stock who have not returned a form of election, or
who have not sent their Tower common stock certificates with their form of
election, written instructions for surrendering their Tower common stock
certificates. For shares held in "street name," a broker will provide Tower
stockholders with instructions.
Tower stockholders who do not surrender their stock certificates prior to
the first anniversary of the closing of the merger may lose the right to receive
any consideration for their shares.
10
<PAGE>
CONDITIONS TO THE MERGER (PAGE )
The completion of the merger depends upon meeting several conditions,
including the following:
(1) the approval of the merger by Tower stockholders;
(2) the absence of a material adverse change to the business of each of
Tower and Reckson involving at least $40 million;
(3) there being no legal restraints or prohibitions that prevent the
completion of the merger;
(4) the receipt by Tower of an opinion of counsel to Reckson in respect of
Reckson's status as a REIT; and
(5) the receipt by Reckson of a certificate of Tower's counsel stating that
nothing has come to such counsel's attention that would cause it to
revoke or modify its previously delivered opinion in respect of Tower's
status as a REIT.
All of the conditions to the merger, except item (1) above, may be waived by the
party entitled to assert the condition. The parties, however, do not foresee any
reasonably applicable circumstance under which item (3) above would be waived.
We do not currently expect that it will be necessary to waive any of the
conditions in order to complete the merger and, accordingly, no determination
has been made by any of the parties as to whether it would waive any waivable
condition if required or what the parties would do if such a condition were
waived. However, if Reckson or Tower decides to waive any material waivable
conditions after its special meeting, it may determine to make a new
solicitation of proxies.
TERMINATION OF THE MERGER AGREEMENT (PAGE )
Tower and Reckson may jointly agree to terminate the merger agreement at any
time without completing the merger. The merger agreement may also be terminated
in other circumstances, including the following:
(1) Either Tower, on the one hand, or Reckson or Metropolitan Partners, on the
other hand, may terminate the merger agreement, if, among other
circumstances:
(a) the merger has not been completed by May 31, 1999. However, no party may
terminate the merger agreement if its breach is the reason that the
merger has not been completed;
(b) a law or court order prohibits the merger; or
(c) the Tower stockholders do not approve the merger.
(2) Metropolitan Partners alone may terminate the merger agreement if, prior to
the Tower special meeting, the Tower board of directors, among other things:
(a) withdraws or adversely modifies its recommendation of the merger;
(b) makes any positive or neutral recommendation regarding a proposal for an
alternative acquisition transaction; or
(c) enters into any agreement which would result in an alternative
acquisition transaction occurring.
(3) Any of Reckson, Reckson OP or Metropolitan Partners, on the one hand, or
Tower, on the other hand, may terminate the merger agreement upon a material
breach of any agreement of the other party contained in the merger agreement
which remains uncorrected for 20 business days after notice is given to the
breaching party, or if any representation or warranty of the other party
shall become untrue and, as a result, a condition to the merger cannot be
satisfied.
(4) Tower may terminate the merger agreement if the Tower board of directors
determines to accept an alternative acquisition transaction in accordance
with the provisions described on page under "The
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<PAGE>
Merger Agreement--Material Covenants-- No Solicitation by Tower."
(5) Tower may terminate the merger agreement if Reckson fails to deliver to
Crescent timely funding notices requiring Crescent to make a $75 million
contribution into escrow at or prior to the closing of the merger.
TERMINATION FEES AND EXPENSES (PAGE )
Tower must pay a termination fee of $15 million to Reckson if the merger
agreement is terminated in any of the following circumstances:
- the Tower board of directors accepts a proposal for an alternative
acquisition transaction;
- the Tower board of directors withdraws or adversely modifies its
recommendation of the merger;
- the Tower board of directors makes any positive or neutral recommendation
regarding any proposal for an alternative acquisition transaction;
- Tower enters into any agreement which would result in an alternative
acquisition transaction occurring; or
- the Tower board of directors authorizes any of the above.
Tower must pay a termination fee of $7.5 million to Reckson if the merger
agreement is terminated in the following circumstance:
- the Tower stockholders do not approve the merger, and a proposal for an
alternative acquisition transaction has been publicly announced and not
withdrawn, terminated or lapsed, which provides for a purchase price of
greater than $23.00 per share of Tower common stock for all shares and
which is reasonably capable of being financed by the person making the
alternative acquisition proposal.
Tower must pay a termination fee of $3.5 million to Reckson if the merger
agreement is terminated because the Tower stockholders do not approve the merger
in the circumstance in which the situation described in the preceding paragraph
does not apply.
In addition to payment of the $15 million and $7.5 million termination fees
described above, Tower must pay up to $1.75 million to Reckson in expenses. For
an explanation of the termination fees and expenses, see page .
METROPOLITAN PARTNERS' INVESTMENT IN TOWER
(PAGE )
Concurrent with the signing of the merger agreement, Metropolitan Partners
invested $40 million in Tower. Under the terms of that investment;
- if Tower fails to complete the merger when it is obligated to do so under
the merger agreement, or fails to use its best efforts to seek Tower
stockholder approval of the merger, Tower must pay Metropolitan Partners
$30 million in cash; and
- if Reckson fails to complete the merger when it is obligated to do so
under the merger agreement, or fails to use its best efforts to seek
Reckson stockholder approval of the share issuance proposal or to register
the Reckson securities, Reckson will forfeit 75% of the securities
purchased for Metropolitan Partners' $40 million investment.
RELEASE OF LITIGATION; LITIGATION TRUST (PAGE )
In connection with the merger, Tower, Crescent, Reckson and Metropolitan
Partners entered into agreements to release each other, concurrently with the
signing of the merger agreement, from all claims arising from or relating to the
previously announced and since terminated acquisition of Tower by Crescent and
Reckson. If Crescent, however, fails to fully fund a $75 million capital
contribution to Metropolitan Partners and the conditions for such funding are
met, the releases between Tower and Crescent terminate and the Tower board of
directors may establish a litigation trust for the purpose of pursuing the
resulting litigation against Crescent. If the Tower board of directors
determines to establish a litigation trust
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<PAGE>
in this circumstance, all of Tower's rights relating to the litigation will be
assigned to the trust and Tower stockholders and unitholders will receive one
contingent payment right for each of their shares of Tower common stock or Tower
OP units. These contingent payment rights will entitle each holder to his or her
PRO RATA portion of any amounts received by the trust as a result of the
litigation or otherwise in the litigation trust, net of expenses.
The litigation trust will initially be funded by reducing the special
dividend which Tower has the right to pay its stockholders under the merger
agreement by up to four million dollars and contributing such amount to the
litigation trust.
In the event Crescent fails to fully fund the $75 million capital
contribution to Metropolitan Partners, Reckson will still be obligated to
complete the merger, if the conditions of the merger agreement are met.
REGULATORY MATTERS (PAGE )
Neither Reckson nor Tower believes that the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 applies to the merger or that the waiting period
requirements under the Hart-Scott-Rodino Act are applicable to the merger.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE (PAGE )
Tower and Reckson have each made forward-looking statements in this document
and in documents that are incorporated by reference that are subject to risks
and uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of Reckson and Tower. Also,
statements including words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates" or similar expressions are forward-looking
statements. Stockholders should note that many factors, some of which are
discussed elsewhere in this document and in the documents incorporated by
reference, could affect the future financial results of Reckson and could cause
actual results to differ materially from those expressed in forward-looking
statements contained or incorporated by reference in this document. For further
information on these factors, see pages - .
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<PAGE>
RISK FACTORS RELATING TO THE MERGER AND
AN INVESTMENT IN RECKSON SECURITIES
In addition to the other information included in this Joint Proxy
Statement/Prospectus, including the matters addressed in "The Proposed
Merger--Cautionary Statement Concerning Forward-Looking Statements" on page ,
the risk factors described below should be considered carefully by Reckson
stockholders in deciding whether to vote for the share issuance proposal and by
Tower stockholders in deciding whether to approve and adopt the merger and the
merger agreement and in determining whether to elect to receive cash or Reckson
securities.
RISK FACTORS RELATING TO FAILURE TO APPROVE THE SHARE ISSUANCE PROPOSAL
INCREASED LEVERAGE AND DEBT SERVICE.
If Reckson stockholders do not approve the share issuance proposal, Reckson
OP will issue approximately $101.5 million principal amount of Reckson OP 7%
notes in the merger instead of Reckson solely issuing shares of Reckson class B
common stock. This principal amount will be increased to approximately $116.5
million if the Reckson board of directors has withdrawn or amended its
recommendation in favor of the share issuance proposal and Reckson stockholders
do not approve the share issuance proposal. This additional indebtedness will
increase the risk that Reckson's cash flow would be insufficient to meet
required payments of principal and interest on its overall indebtedness. In
addition, the issuance of the Reckson OP 7% notes may impair Reckson's ability
to refinance any indebtedness it incurs in the future. As of December 31, 1998,
Reckson's total existing indebtedness was approximately $867 million. If the
share issuance proposal is approved, after completion of the merger, Reckson's
total indebtedness will be approximately $1.106 billion. If the share issuance
proposal is not approved, after completion of the merger, Reckson's total
indebtedness will be approximately $1.201 billion.
RISK FACTORS RELATING TO COMPLETION OF THE MERGER
CONFLICTS OF INTERESTS COULD RESULT IN DECISIONS NOT IN STOCKHOLDERS' BEST
INTERESTS.
Several Tower directors and executive officers have interests in the merger
that differ from the interests of Tower stockholders generally. In October 1997,
Tower entered into an employment agreement with Robert L. Cox; in April 1998,
Tower entered into employment letters and agreements with Peggy D. Rawitt and
Lester S. Garfinkel; and in June 1998, Tower entered into employment agreements
with Clifford L. Stein, Reid Berman, Scott Jensen and Eric S. Reimer. The term
of each of these employment agreements is three years, subject, in the case of
Messrs. Garfinkel and Cox and Ms. Rawitt, to automatic one-year extensions. The
base salary for 1998 for Mr. Cox was $150,000, for Ms. Rawitt was $175,000, for
Mr. Garfinkel was $195,000 ($225,000 for 1999), for Mr. Stein was $135,000, for
Mr. Reimer was $150,000, for Mr. Berman was $75,000 and for Mr. Jensen was
$135,000. Ms. Rawitt received a bonus of $131,250 for 1998.
In addition, if the employment of Mr. Cox or Ms. Rawitt is terminated
following the merger under circumstances entitling him or her to severance
payments and benefits under his or her respective employment letter and
agreement, he or she will receive the severance amount listed below.
Furthermore, following the merger, under the terms of the Tower employment
agreement with each of Messrs. Garfinkel, Stein, Reimer, Berman and Jensen, the
merger will constitute a change of control that gives the employee the right to
terminate his employment for "good cause" and then receive the cash severance
payment listed below next to his name.
Additionally, Messrs. Garfinkel, Stein and Cox have stay bonus arrangements
with Tower. If Mr. Garfinkel remains a Tower employee in good standing through
the completion of the merger, he will receive a $900,000 bonus in addition to
his severance payment. Mr. Cox will receive a similar
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<PAGE>
$75,000 bonus and Mr. Stein will receive a similar $135,000 bonus. These "stay
bonuses" are payable regardless of whether the officer is terminated following
the merger.
<TABLE>
<CAPTION>
TOTAL IF BOTH
SEVERANCE AND
SEVERANCE STAY STAY BONUS
NAME AMOUNT BONUS ARE PAYABLE
- --------------------------------------------------- ------------ ---------- --------------
<S> <C> <C> <C>
Robert L. Cox...................................... $ 687,000 $ 75,000 $ 762,000
Peggy D. Rawitt.................................... $ 332,250 --
Lester S. Garfinkel................................ $ 1,116,882 $ 900,000 $ 2,016,882
Clifford L. Stein.................................. $ 464,198 $ 135,000 $ 599,198
Eric S. Reimer..................................... $ 515,775 --
Reid Berman........................................ $ 257,888 --
Scott Jensen....................................... $ 464,198 --
</TABLE>
Under her employment agreement, Ms. Rawitt was granted 10,000 shares of
restricted Tower common stock which will upon the merger be converted into, at
her election and subject to proration, cash or Reckson securities.
In addition, Messrs. Cox, Garfinkel and Reimer, Ms. Rawitt and Robert M.
Adams, Lawrence H. Feldman, Reuben Friedberg, Joseph D. Kasman, Esko I.
Korhonen, Stephen S. Siegel and Richard M. Wisely, each of whom are or were
directors and/or executive officers of Tower, have entered into indemnification
agreements with Tower. These agreements provide that Tower will maintain
directors' and officers' liability insurance and indemnify directors and
officers to the full extent permitted by applicable law. Under the merger
agreement, Reckson has agreed to assume these agreements. Reckson has also
agreed to indemnify these directors and officers to the fullest extent permitted
by law for a period of six years and 90 days after the completion of the merger
and to maintain any directors' and officers' liability insurance similar to that
in effect on December 8, 1998 for a period of three years and 90 days from the
completion of the merger.
The board of directors of Tower, which includes Messrs. Cox and Garfinkel,
was aware of these and other interests and considered them in approving the
merger.
RISK FACTORS RELATING TO AN INVESTMENT IN RECKSON CLASS B COMMON STOCK AND
RECKSON OP 7% NOTES
LACK OF PUBLIC MARKET FOR RECKSON CLASS B COMMON STOCK AND RECKSON OP 7% NOTES
AND POTENTIAL VOLATILITY OF MARKET MAY REDUCE LIQUIDITY AND ADVERSELY AFFECT
TRADING PRICE OF SECURITIES.
There has not been a public market for either the Reckson class B common
stock or the Reckson OP 7% notes. Although Reckson has agreed to list the class
B common stock and the Reckson OP 7% notes on the New York Stock Exchange,
neither Reckson nor Tower can assure that an active trading market will develop
or, if one does develop, that it will be maintained. Moreover, particularly if
the Reckson OP 7% notes are issued in the merger, the aggregate size of the
potential markets for the Reckson class B common stock and the Reckson OP 7%
notes will be relatively small when compared to other publicly traded
securities. Small size can have an adverse effect on whether trading markets
will develop as well as on the liquidity of trading markets.
In addition, in recent years, the stock and debt markets have experienced
extreme price fluctuations, sometimes without regard to the performance of
particular companies. Broad market and industry fluctuations may adversely
affect the trading price of the Reckson class B common stock and, if issued, the
Reckson OP 7% notes, regardless of the actual operating performance of Reckson.
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<PAGE>
NON-CASH PORTION OF MERGER CONSIDERATION MAY NOT HAVE AN ACTUAL VALUE OF $23.00
PER SHARE OF TOWER COMMON STOCK.
The value and trading price of the Reckson class B common stock may be
greater or less than or the same as the trading price of the Reckson common
stock into which it may be exchanged. Although the trading price of Reckson
common stock is not necessarily indicative of the future trading price of
Reckson class B common stock, on February 26, 1999, the trading price of Reckson
common stock was $21.25 per share. If Reckson stockholders approve the share
issuance proposed in the merger, one share of Tower common stock will be
converted into .8364 of a share of Reckson class B common stock, which, based on
the $21.25 trading price of Reckson common stock and a one-for-one exchange
ratio, would be worth $17.77. If Reckson stockholders do not approve the share
issuance proposal, one share of Tower common stock will be converted into .5725
of a share of Reckson class B common stock, which based on the same assumptions,
would be worth $12.17 and $7.2565 principal amount of Reckson OP 7% notes. In
addition, both Tower and Reckson expect the Reckson OP 7% notes to trade below
their face amount. Accordingly, there can be no assurance that the non-cash
portion of the merger consideration will have an actual value, or trade at
prices, equal to $23.00 on a per share equivalent basis. See "The Merger--Tower
Reasons for the Merger; Recommendation of the Tower Board of Directors; Opinion
of Tower's Financial Advisor."
FIXED MERGER CONSIDERATION DESPITE POTENTIAL CHANGES IN STOCK PRICES MAY RESULT
IN A DECREASED VALUE FOR TOWER STOCKHOLDERS.
The market price of the Reckson class B common stock and the Reckson OP 7%
notes at the time of the merger may vary significantly from the expected prices
on the date of execution of the merger agreement, the date of this Joint Proxy
Statement/Prospectus and the date of the Tower and Reckson special meetings.
These variances may arise due to changes in the business, operations and
prospects of Reckson, market assessments of the likelihood that the merger will
be completed, and interest rates, general market and economic conditions and
other factors. Although the variation in the trading price of Reckson common
stock is not necessarily indicative of that which would occur in the trading
price of Reckson class B common stock, it should be noted that during the
12-month period ending on February 26, 1999, the most recent date practicable,
the closing per share price of Reckson common stock varied from a low of $19.00
to a high of $26.375 and ended that period at $21.25. Historical trading markets
are not necessarily indicative of future performance.
The exchange ratios for shares of Tower common stock converted into Reckson
securities were fixed at the time of the signing of the merger agreement and are
not subject to adjustment based on changes in the trading price of Reckson
common stock and/or Tower common stock prior to the closing of the merger or on
the actual prices of Reckson class B common stock or Reckson OP 7% notes at the
time of their issuance or of any other securities. Because the Reckson
securities will be new securities, issued in the merger for the first time,
holders of Tower and Reckson common stock will not know the market price of
these securities at the time of their special meetings.
Additionally, because the special meetings are scheduled for the same day,
Tower stockholders will not know at the time of the Tower special meeting
whether Reckson OP 7% notes will be issued in the merger.
RECKSON IS DEPENDENT ON THE TRI-STATE AREA MARKET DUE TO LIMITED GEOGRAPHIC
DIVERSIFICATION AND RECKSON'S FINANCIAL RESULTS MAY SUFFER AS A RESULT OF A
DECLINE IN ECONOMIC CONDITIONS IN THE TRI-STATE AREA.
A decline in the economic conditions in the Tri-State area and for
commercial real estate could adversely affect Reckson's business, financial
condition and results of operations. All of the properties owned by Reckson OP
are located in the Tri-State area, although Reckson's organizational documents
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<PAGE>
do not restrict Reckson from owning properties outside of this area. Each of
Reckson's four markets is located in the suburbs of New York City and may be
similarly affected by economic changes in this area. A significant downturn in
the financial services industry and related industries would likely have a
negative effect on these markets and on the performance of Reckson properties.
The following is a breakdown of Reckson's office and industrial properties
for each of Reckson's four markets at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SQUARE ANNUAL BASE
PROPERTIES FOOTAGE RENT(1)
--------------- ---------- -------------
<S> <C> <C> <C>
Long Island
- Office................................................................ 23 3,671,413 $ 71,152,658
- Industrial............................................................ 94 5,638,435 29,268,258
Westchester
- Office................................................................ 25 3,298,623 56,521,355
- Industrial............................................................ 4 256,948 2,130,019
New Jersey
- Office................................................................ 17 1,993,999 34,946,506
- Industrial............................................................ 30 4,497,662 18,391,236
Connecticut
- Office................................................................ 8 1,123,188 22,020,613
- Industrial............................................................ 1 452,414 2,900,684
</TABLE>
- ------------------------
(1) Represents base rents for leases in place as of December 31, 1998 for the
period January 1, 1999 through December 31, 1999, excluding the
reimbursement by tenants of electrical costs.
DEBT SERVICING AND REFINANCING, INCREASES IN INTEREST RATES AND FINANCIAL
COVENANTS COULD ADVERSELY AFFECT RECKSON'S ECONOMIC PERFORMANCE.
DEPENDENCE UPON DEBT FINANCING; RISK OF INABILITY TO SERVICE OR REFINANCE
DEBT. In order to qualify as a REIT for Federal income tax purposes, Reckson is
required to distribute at least 95% of its taxable income. As a result, Reckson
may be more reliant on debt or equity financings than many other companies that
are not REITs and, therefore, are able to retain more of their income.
Reckson is subject to the risks associated with debt financing. Reckson's
cash flow could be insufficient to meet required payments of principal and
interest. Reckson may not be able to refinance existing indebtedness, which in
virtually all cases requires substantial principal payments at maturity, or the
terms of such refinancing might not be as favorable as the terms of the existing
indebtedness. As of December 31, 1998, the weighted average maturity of
Reckson's existing indebtedness was 4.4 years and Reckson's total existing
indebtedness was approximately $867 million. After completion of the merger, if
the share issuance proposal is approved, the weighted average maturity of
Reckson's indebtedness will be 4.7 years, and if the share issuance proposal is
not approved, the weighted average maturity of Reckson's indebtedness will be
5.1 years. In addition, Reckson may not be able to refinance any indebtedness it
incurs in the future. Reckson also may not be able to obtain funds by selling
assets or raising equity to make required payments on maturing indebtedness.
RISING INTEREST RATES COULD ADVERSELY AFFECT CASH FLOW. Increases in
interest rates could increase Reckson OP's interest expense, which could
adversely affect Reckson OP's ability to service indebtedness or Reckson's
ability to pay distributions to its stockholders. As of December 31, 1998,
approximately 56% of Reckson's debt was variable rate debt and Reckson's total
debt was $867 million. If the share issuance proposal is approved, after
completion of the merger, 54% of Reckson's total debt of approximately $1.106
billion will be variable rate debt. If the share issuance proposal is not
17
<PAGE>
approved, after completion of the merger, 49% of Reckson's total debt of
approximately $1.201 billion will be variable rate debt. In addition, Reckson
may incur indebtedness in the future that also bears interest at a variable rate
or Reckson may be required to refinance Reckson's debt at higher rates.
REQUIREMENTS OF CREDIT FACILITIES COULD ADVERSELY AFFECT RECKSON'S FINANCIAL
CONDITION AND RECKSON'S ABILITY TO MAKE DISTRIBUTIONS. The ability of Reckson OP
to borrow under its credit facilities is subject to financial covenants,
including covenants relating to limitations on unsecured and secured borrowings,
minimum interest and fixed charge coverage ratios, a minimum equity value and a
maximum dividend payout ratio. Reckson OP relies on borrowings under its credit
facilities to finance acquisition and development activities and for working
capital purposes and, if Reckson OP is unable to borrow under its credit
facilities, it could adversely affect Reckson's financial condition. Reckson OP
has obtained a three-year unsecured credit facility from The Chase Manhattan
Bank, Union Bank of Switzerland and PNC Bank, National Association, which
provides for a maximum borrowing amount of up to $500 million. Reckson OP has
also obtained a separate $75 million one-year unsecured credit facility from
Chase. The credit facilities also contain a financial covenant limiting the
amount of distributions that Reckson may make to holders of its common stock
during any fiscal quarter if the distributions exceed, when added to all
distributions made during the three immediately preceding quarters, the greater
of:
- 90% of Reckson's FFO;
- 100% of its funds available for distribution; and
- the amount Reckson must distribute to continue to qualify as a REIT.
Additionally, if the Reckson OP 7% notes are issued in the merger, then Reckson
will also be subject to the covenants contained in the Indenture governing those
notes. Although Reckson OP presently is in compliance with the covenants under
its credit facilities, there is no assurance that Reckson OP will continue to be
in compliance or that it will be able to service its indebtedness or that
Reckson will be able to pay distributions to Reckson's stockholders.
NO LIMITATION ON DEBT. Currently, Reckson has a policy of incurring debt
only if, upon incurrence, Reckson's Debt Ratio is then 50% or less. As of
December 31, 1998, Reckson's Debt Ratio was 39.4%. After completion of the
merger, if the share issuance proposal is approved, Reckson's Debt Ratio will be
40.3%, and if the share issuance proposal is not approved, Reckson's Debt Ratio
will be 43.8%. For these purposes, Debt Ratio is defined as the total debt of
Reckson OP as a percentage of the market value of outstanding shares of common
stock and preferred stock of Reckson, including the conversion of outstanding
partnership units in Reckson OP, plus total debt. Under this policy, Reckson
could incur additional debt if its stock price increases, even if Reckson may
not have a corresponding increase in its ability to repay debt. In addition, as
of December 31, 1998, Reckson's debt-to-equity ratio was 1:1.54. After
completion of the merger, if the share issuance proposal is approved, Reckson's
debt-to-equity ratio will be 1:1.48, and if the share issuance proposal is not
approved, Reckson's debt-to-equity ratio will be 1:1.28. Reckson calculated its
debt-to-equity ratio by comparing the total debt of Reckson OP to the value of
the outstanding Reckson common stock and the common Reckson OP units, each based
upon the market value of the common stock, and the liquidation preference of the
preferred stock of Reckson and the preferred units of limited partnership
interest in Reckson OP, excluding all units of general partnership interest
owned by Reckson. As described above, Reckson's credit facilities contain
financial covenants which limit the ability of Reckson OP to incur additional
indebtedness. However, Reckson's organizational documents do not contain any
limitation on the amount of indebtedness Reckson may incur. Accordingly, the
Reckson board of directors could alter or eliminate Reckson's policy of
maintaining a Debt Ratio of 50% or less and would do so, for example, if it were
necessary in order for Reckson to continue to qualify as a REIT. If this policy
were changed, Reckson could become more highly leveraged, resulting in higher
interest payments that could adversely affect Reckson's
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ability to pay distributions to Reckson's stockholders and could increase the
risk of default on Reckson OP's existing indebtedness.
RECKSON MAY NOT BE ABLE TO PAY ON GUARANTEES.
The guarantee of the Reckson OP 7% notes by Reckson effectively provides no
benefit to investors and should not be viewed by investors as enhancing the
credit of the Reckson OP 7% notes or as providing any additional value to the
Reckson OP 7% notes. Reckson OP conducts all of Reckson's operations, and the
only asset of Reckson is its interest in Reckson OP. As a result, if Reckson OP
is unable to meet its obligations on the Reckson OP 7% notes, Reckson will not
have any assets from which to pay on its guarantee of the Reckson OP 7% notes.
TRANSACTIONS BY RECKSON OP OR RECKSON COULD ADVERSELY AFFECT HOLDERS OF RECKSON
OP 7% NOTES.
Except with respect to a covenant limiting the incurrence of indebtedness, a
covenant requiring Reckson OP to maintain a certain percentage of unencumbered
assets and a covenant requiring any successor in a business combination with
Reckson OP to assume all of the obligations of Reckson OP under the Indenture,
the Indenture does not contain any provisions that would protect holders of debt
securities in the event of:
- a highly leveraged or similar transaction involving Reckson OP or the
management of Reckson OP, the management of Reckson, or any affiliate of
any of these parties,
- a change in control, or
- certain reorganizations, restructuring, mergers or similar transactions
involving Reckson OP or Reckson.
INTENDED BENEFITS MAY NOT BE REALIZED; RECKSON AND TOWER MAY NOT BE SUCCESSFULLY
INTEGRATED.
The completion of the merger poses risks for the ongoing operations of the
combined companies, including:
- that the combined company does not achieve the costs, savings and
operating efficiencies Reckson expects from the merger;
- that the Tower portfolio does not perform as well as Reckson anticipates;
and
- that Reckson does not effectively integrate Tower's operations, which
involve the operation and leasing of buildings in New York City, a market
in which Reckson has not previously owned and operated properties.
RECKSON'S ACQUISITION, DEVELOPMENT AND CONSTRUCTION ACTIVITIES COULD RESULT IN
LOSSES.
Reckson intends to acquire existing office and industrial properties to the
extent that suitable acquisitions can be made on advantageous terms.
Acquisitions of commercial properties entail risks such as the risks that
Reckson may not be in a position or have the opportunity in the future to make
suitable property acquisitions on advantageous terms and that its investments
will fail to perform as expected. Additionally, some of the properties that
Reckson acquires require significant additional investment and upgrades and are
subject to the risk that estimates of the cost of improvements to bring such
properties up to standards established for the intended market position may
prove inaccurate. From Reckson's initial public offering in June 1995 through
December 31, 1998, Reckson has acquired 63 office properties with aggregate
square footage of approximately 8.5 million and 44 industrial properties with
aggregate square footage of approximately 4.3 million, excluding Reckson's
investment in the Morris Companies, and has made approximately $46 million of
additional upgrades and investments in these properties.
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Reckson also intends to continue the selective development and construction
of office and industrial properties in accordance with Reckson's development and
underwriting policies as opportunities arise. Since its initial public offering,
Reckson has developed or re-developed eight properties comprising approximately
930,000 square feet. Reckson's development and construction activities include
the risks that:
- Reckson may abandon development opportunities after expending resources to
determine feasibility;
- construction costs of a project may exceed Reckson's original estimates;
- occupancy rates and rents at a newly completed property may not be
sufficient to make the property profitable;
- financing may not be available to Reckson on favorable terms for
development of a property; and
- Reckson may not complete construction and lease-up on schedule, resulting
in increased construction costs, carrying costs to complete construction
and, in certain instances, penalties owed to tenants with executed leases.
Reckson's development activities are also subject to risks relating to the
inability to obtain, or delays in obtaining, all necessary zoning, land-use,
building, occupancy and other required governmental permits and authorizations.
If any of the above occur, Reckson's ability to pay distributions to its
stockholders and the ability of Reckson OP to service its indebtedness could be
adversely affected. In addition, new development activities, regardless of
whether they are ultimately successful, typically require a substantial portion
of management's time and attention.
ADVERSE REAL ESTATE MARKET CONDITIONS; INCREASE IN OPERATING EXPENSES OR CAPITAL
EXPENDITURES, TENANT DEFAULTS AND UNINSURED LOSSES COULD ADVERSELY AFFECT
RECKSON'S FINANCIAL RESULTS.
Reckson's properties' revenues and value may be adversely affected by a
number of factors, including:
- the national, state and local economic climate and real estate conditions,
such as oversupply of or reduced demand for space and changes in market
rental rates;
- the need to periodically renovate, repair and relet Reckson's space;
- increasing operating costs, including real estate taxes and utilities,
which Reckson may not be able to pass through to tenants;
- defaults by Reckson's tenants or their failure to pay rent on a timely
basis; and
- uninsured losses.
A significant portion of Reckson's expenses, such as mortgage payments, real
estate taxes, insurance and maintenance costs, are generally not reduced when
circumstances cause a decrease in income from Reckson's properties. In addition,
Reckson's real estate values and income from properties are also affected by
such factors as Reckson's compliance with laws, including tax laws, interest
rate levels and the availability of financing.
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID, RECKSON MAY NOT BE ABLE TO
SELL PROPERTIES WHEN APPROPRIATE. Real estate investments generally cannot be
sold quickly. Reckson may not be able to vary its portfolio promptly in response
to economic or other conditions. In addition, provisions of the Internal Revenue
Code may limit Reckson's ability to sell properties in some situations when it
may be economically advantageous to do so, thereby adversely affecting returns
to Reckson's stockholders.
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COMPETITION IN RECKSON'S MARKETS IS SIGNIFICANT. The competition for
tenants in the office and industrial markets in the Tri-State area is
significant and includes properties owned by other REITs, local privately held
companies, institutional investors and other owners. There is also significant
competition for acquisitions in Reckson's markets from the same types of
competitors. Moreover, many users of industrial space in Reckson's markets own
the buildings that they occupy.
INCREASING OPERATING COSTS COULD ADVERSELY AFFECT CASH FLOW. Reckson's
properties are subject to operating risks common to commercial real estate, any
and all of which may adversely affect occupancy or rental rates. Reckson's
properties are subject to increases in Reckson's operating expenses such as
cleaning, electricity, heating, ventilation and air conditioning; elevator
repair and maintenance; insurance and administrative costs; and other costs
associated with security, landscaping, repairs and maintenance of Reckson's
properties. While Reckson's tenants generally are currently obligated to pay a
portion of these costs, there is no assurance that tenants will agree to pay
operating costs upon renewal or that new tenants will pay operating costs
initially. If operating expenses increase, the local rental market may limit the
extent to which rents may be increased to meet increased expenses without at the
same time decreasing occupancy rates. While Reckson has cost-saving measures at
each of Reckson's properties, if any of the above occurs, Reckson's ability to
pay distributions to its stockholders and the ability of Reckson OP to service
its indebtedness could be adversely affected.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE. Reckson carries
comprehensive liability, fire, extended coverage and rental loss insurance on
all of its properties. However, losses arising from acts of war or relating to
pollution are not generally insured because they are either uninsurable or not
economically insurable. If an uninsured loss or a loss in excess of insured
limits should occur, Reckson could lose its capital invested in a property, as
well as any future revenue from the property. Reckson would remain obligated on
any mortgage indebtedness or other obligations related to the property.
INVESTMENTS IN MORTGAGE DEBT COULD LEAD TO LOSSES. Reckson may invest in
mortgages secured by office or industrial properties. Reckson may acquire such
properties through foreclosure proceedings or negotiated settlements. In
addition to the risks associated with investments in commercial properties,
investments in mortgage indebtedness present additional risks, including the
risk that the fee owners of such properties may not make payments of interest on
a current basis and Reckson may not realize its anticipated return or sustain
losses relating to the investments. Although Reckson currently has no intention
to originate mortgage loans as a significant part of its business, Reckson may
make loans to a purchaser in connection with Reckson's sale of real estate. The
underwriting criteria Reckson would use would be based upon the credit and value
of the underlying real estate.
PROPERTY OWNERSHIP THROUGH PARTNERSHIPS AND JOINT VENTURES COULD LIMIT RECKSON'S
CONTROL OF SUCH INVESTMENTS.
Partnership or joint venture investments may involve risks not otherwise
present for investments made solely by Reckson, including the possibility that
Reckson's partners or co-venturers might become bankrupt, that such partners or
co-venturers might at any time have different interests or goals than Reckson
does, and that such partners or co-venturers may take action contrary to
Reckson's instructions, requests, policies or objectives, including Reckson's
policy with respect to maintaining its qualification as a REIT. Other risks of
joint venture investments include impasse on decisions, such as a sale, because
neither the partner or co-venturer nor Reckson would have full control over the
partnership or joint venture. There is no limitation under Reckson's
organizational documents as to the amount of available funds that may be
invested in partnerships or joint ventures.
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The following is a description of the significant joint ventures in which
Reckson is involved:
RECKSON'S INVESTMENT IN THE OMNI, ITS SINGLE LARGEST PROPERTY, INCLUDES
RISKS THAT RECKSON CANNOT REFINANCE OR DISPOSE OF THE PROPERTY IN RECKSON'S SOLE
DISCRETION AND RECKSON CAN HAVE ITS GENERAL PARTNERSHIP INTEREST CONVERTED TO A
LIMITED PARTNERSHIP INTEREST. Reckson OP owns a 60% general partner interest in
Omni Partners, L.P., the partnership that owns the Omni, a 575,000 square foot
office building located in Reckson's Nassau West Corporate Center office park.
Odyssey Partners, L.P. and an affiliate of Odyssey own the remaining 40%
interest. Through its partnership interest, Reckson OP acts as managing partner
and has the sole authority to conduct the business and affairs of Omni Partners,
L.P. subject to the limitations set forth in its amended and restated agreement
of limited partnership. These limitations include Odyssey's right to negotiate
under certain circumstances a refinancing of the mortgage debt encumbering the
Omni and the right to approve any sale of the Omni made on or before March 13,
2007. Reckson OP will continue to act as the sole managing partner of Omni
Partners, L.P. unless conditions specified in the Omni Partnership Agreement
occur. Upon the occurrence of any of these conditions, Reckson OP's general
partnership interest shall convert to a limited partnership interest and an
affiliate of Odyssey shall be the sole managing partner, or at the option of
Odyssey, Reckson OP shall be a co-managing partner with an affiliate of Odyssey.
In addition, on March 13, 2007, Reckson OP will have the right to purchase
Odyssey's interest in Omni Partners, L.P. at an option price based on 90% of its
fair market value. If Reckson OP fails to exercise this option, Odyssey has the
right to require Reckson OP to purchase Odyssey's interest in Omni Partners,
L.P. on March 13, 2007 at the option price. Reckson OP has the right to extend
the option exercise date until March 13, 2012. If Reckson OP is required to
purchase Odyssey's interest, it will have the right to apply to the payment of
the option price all sums due under a loan made by Reckson OP in March 1997 to
Odyssey in the amount of approximately $17 million. The Odyssey loan matures on
March 13, 2007, subject to Reckson OP's right to extend until March 13, 2012 the
option exercise date as set forth above, and is secured by a pledge of all of
Odyssey's right, title and interest in Omni Partners, L.P.
RECKSON'S JOINT VENTURE IN AN OFFICE BUILDING IN TARRYTOWN, NEW YORK IMPOSES
A RESTRICTION THAT RECKSON NOT ENTER INTO LARGE LEASES OR REFINANCE OR DISPOSE
OF THE BUILDING WITHOUT THE CONSENT OF ITS CO-VENTURER. Reckson OP owns a 60%
managing member interest in a limited liability company that owns 520 White
Plains Road, a 171,761 square foot office building located in Tarrytown, New
York. The remaining 40% member interest is held by Tarrytown Corporate Center
III, L.P., a partnership affiliated with the Halpern organization, the
organization from which Reckson acquired eight Class A office properties for
approximately $86 million in February 1996. When we refer to Class A office
buildings in this Joint Proxy Statement/Prospectus, we mean well maintained,
high quality buildings that achieve rental rates that are at the higher end of
the range of rental rates for office properties in the particular market. The
member agreement governing the joint venture arrangement requires Reckson OP to
obtain the consent of Tarrytown Corporate Center prior to engaging in activities
such as entering into or modifying a lease for more than 25,000 rentable square
feet, financing or refinancing indebtedness encumbering the property and selling
or otherwise transferring the property.
RECKSON'S MANAGEMENT OF RECKSON MORRIS OPERATING PARTNERSHIP IS SUBJECT TO
THE APPROVAL OF ITS JOINT VENTURE PARTNERS WITH RESPECT TO MATTERS SUCH AS THE
SALE OF ALL OR SUBSTANTIALLY ALL OF THE RECKSON MORRIS PROPERTIES. In October
1997, Reckson entered into an agreement to invest up to $150 million in the
Morris Companies, a New Jersey developer and owner of the "big box" warehouse
facilities. The Morris Companies properties include 23 industrial buildings
encompassing approximately 4.0 million square feet. As of December 31, 1998,
Reckson has invested approximately $93.8 million for an approximate 71.8%
controlling interest in Reckson Morris Operating Partnership, L.P. In connection
with the transaction, the Morris Companies contributed 100% of their interests
in certain industrial properties to Reckson Morris OP in exchange for operating
partnership units in Reckson Morris OP. Although Reckson controls Reckson Morris
OP, the former owners of the Morris Companies have
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approval rights over a number of matters, such as the sale of all or
substantially all of the Reckson Morris properties.
RECKSON'S INTEREST IN JOINT VENTURES WITH MATRIX IS GENERALLY SUBJECT TO THE
RIGHT OF FIRST OFFER OF MATRIX AND MATRIX CAN ALSO PUT ITS INTEREST TO RECKSON
IF CERTAIN LEASING CONDITIONS ARE SATISFIED. As of December 31, 1998, Reckson OP
had invested $15.3 million into joint ventures with Matrix Development Group for
the development of industrial properties located in a New Jersey submarket.
Although the terms of each of the joint ventures vary, Matrix generally
identifies projects for development for which Reckson provides the capital.
Reckson OP controls the joint ventures and receives a priority return on its
invested capital. Reckson also receives a return of its capital upon any sale or
refinancing of a project, and, generally, two-thirds of proceeds in excess of
Reckson's return of its capital. Matrix typically has a right of first offer in
the event Reckson seeks to dispose of a project and has the right to put its
interest in a project to Reckson once specified leasing parameters have been
satisfied.
RECKSON'S PRIVATIZATION OF GOVERNMENT OFFICE BUILDINGS AND CORRECTIONAL
FACILITIES IS DEPENDENT UPON CONTINUED OUTSOURCING BY GOVERNMENTS AND
COMPETITIVE BIDDING. From time to time, Reckson OP may make joint venture
investments in real estate assets with Reckson Strategic Venture Partners.
Reckson Services Industries an entity that Reckson spun-off to its shareholders
in 1998, owns 100% of the common ownership interests of Reckson Strategic
Venture Partners and, accordingly, controls Reckson Strategic Venture Partners.
The strategy of Reckson Strategic Venture Partners is to acquire interests in
established entrepreneurial enterprises with experienced management teams in
market sectors which are in the early stages of their growth cycle or offer
circumstances for attractive investments as well as opportunities for future
growth. Joint venture investments with Reckson Strategic Venture Partners may
involve various types of real estate assets and involve different risks than
those in Reckson's office and industrial sectors, as to which Reckson has no
prior experience or expertise. No assurance can be given as to the success of
these investments. As of December 31, 1998, Reckson OP had made a joint venture
investment with Reckson Strategic Venture Partners of $10.1 million in the area
of privatization of government occupied office buildings and correctional
facilities. In addition to the joint venture risks discussed above, this
investment includes the following specific risks:
- dependence upon the continued outsourcing of real estate functions by
governmental entities;
- the ability to compete effectively in bidding on specific projects; and
- significant government regulation and/or oversight.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND MAY BE COSTLY.
Federal, state and local laws and regulations relating to the protection of
the environment may require a current or previous owner or operator of real
estate to investigate and clean up hazardous or toxic substances or petroleum
product releases at a property. An owner of real estate is liable for the costs
of removal or remediation of certain hazardous or toxic substances on or in the
property. These laws often impose such liability without regard to whether the
owner knew of, or caused, the presence of the contaminants. Clean-up costs and
the owner's liability generally are not limited under the enactments and could
exceed the value of the property and/or the aggregate assets of the owner. The
presence of or the failure to properly remediate the substances may adversely
affect the owner's ability to sell or rent the property or to borrow using the
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the clean-up costs of the
substances at a disposal or treatment facility, whether or not such facility is
owned or operated by the person. Even if more than one person was responsible
for the contamination, each person covered by the environmental laws may be held
responsible for the clean-up costs incurred. In addition, third parties may sue
the owner or operator of a site for damages and costs resulting from
environmental contamination emanating from that site.
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Environmental laws also govern the presence, maintenance and removal of
asbestos-containing materials. These laws impose liability for release of
asbestos-containing materials into the air and third parties may seek recovery
from owners or operators of real properties for personal injury associated with
asbestos-containing materials. In connection with the ownership, operation,
management and development of real properties, Reckson may be considered an
owner or operator of properties containing asbestos-containing-materials. Having
arranged for the disposal or treatment of contaminants, Reckson may be
potentially liable for removal, remediation and other costs, including
governmental fines and injuries to persons and property.
All of Reckson's office properties and all of Reckson's industrial
properties have been subjected to a "Phase I" or similar environmental site
assessment after April 1, 1994 that were completed by independent environmental
consultant companies, except for the property located at 35 Pinelawn Road which
was originally developed by Reckson and subjected to a Phase I in April 1992.
These Phase I or similar environmental site assessments involved general
inspections without soil sampling, ground water analysis or radon testing and,
for Reckson's properties constructed in 1978 or earlier, survey inspections to
ascertain the existence of asbestos-containing materials. These environmental
site assessments have not revealed any environmental liability that would have a
material adverse effect on Reckson's business.
FAILURE TO QUALIFY AS A REIT WOULD BE COSTLY.
Reckson has been organized in conformity with the requirements for
qualification as a REIT under the Internal Revenue Code beginning with Reckson's
taxable year ended December 31, 1995. Although Reckson management believes,
based on the advice of its counsel, that Reckson is organized and operates in a
manner so as to qualify as a REIT, no assurance can be given that Reckson will
qualify or remain qualified as a REIT.
If Reckson fails to qualify as a REIT in any taxable year, Reckson will be
subject to Federal income tax, including any applicable alternative minimum tax,
on its taxable income at regular corporate rates. Moreover, unless entitled to
relief under certain statutory provisions, Reckson also will be disqualified
from treatment as a REIT for the four taxable years following the year during
which qualification was lost. This treatment would significantly reduce net
earnings available to service indebtedness, make investments or pay
distributions to shareholders because of the additional tax liability to Reckson
for the years involved. Also, Reckson would not then be required to pay
distributions to its stockholders.
CONFLICTS OF INTEREST COULD RESULT IN DECISIONS NOT IN RECKSON'S BEST INTERESTS.
TAX CONSEQUENCES UPON A SALE OR REFINANCING OF PROPERTIES MAY RESULT IN
CONFLICTS OF INTEREST FOR DIRECTORS AND OFFICERS OF RECKSON. Holders of units of
limited partnership interest in Reckson OP or co-owners of properties not owned
entirely by Reckson may suffer different and more adverse tax consequences than
Reckson will upon the sale or refinancing of Reckson properties. Reckson may
have different objectives from these co-owners and holders of limited
partnership units regarding the appropriate pricing and timing of any sale or
refinancing of these properties. While Reckson, as the sole general partner of
Reckson OP, has the exclusive authority as to whether and on what terms to sell
or refinance each property owned solely by Reckson OP, the directors and
officers of Reckson who hold limited partnership units may seek to influence
Reckson not to sell or refinance the properties, even though such a sale might
otherwise be financially advantageous to Reckson, or may seek to influence
Reckson to refinance a property with a higher level of debt.
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RECKSON MAY HAVE CONFLICTS OF INTERESTS WITH RECKSON SERVICE INDUSTRIES.
CONFLICTS AS A RESULT OF OVERLAPPING MANAGEMENT. Donald J. Rechler serves
as Reckson's Chairman of the Board and its Chief Executive Officer and Chairman
of the Board of Reckson Service Industries. Scott H. Rechler serves as Reckson's
President and its Chief Operating Officer and President and Chief Executive
Officer of Reckson Service Industries and is a director of Reckson and Reckson
Service Industries. Michael Maturo serves as Executive Vice President, Treasurer
and Chief Financial Officer of Reckson and Reckson Service Industries and is a
director of Reckson Service Industries. Furthermore, Roger Rechler, Gregg
Rechler and Mitchell Rechler are executive officers of Reckson and Roger Rechler
and Mitchell Rechler are directors of Reckson, while all three individuals are
members of the management advisory committee and directors of Reckson Service
Industries. Although each of the individuals referred to above is committed to
the success of Reckson, they are also committed to the success of Reckson
Service Industries. Reckson's senior management and directors beneficially owned
approximately 12% of the outstanding common stock of Reckson, with a total
market value, based on the New York Stock Exchange closing price of $22.19 per
share on December 31, 1998, of approximately $132.3 million, and approximately
27% of the outstanding common stock of Reckson Service Industries, with a total
market value, at a stock price of $4.125 per share on December 31, 1998, of
approximately $27.3 million. The conversion of all limited partnership units in
Reckson OP into shares of common stock and the exercise of all vested stock
options have been assumed in calculating the ownership of Reckson common stock
and Reckson Service Industries common stock. There is a risk that the common
membership of management, members of the boards of directors and ownership of
Reckson and Reckson Service Industries will lead to conflicts of interest in the
duties owed to stockholders by common directors and officers in connection with
transactions between the two companies, as well as a conflict in allocating
management time.
CONFLICTS IN TRANSACTIONS WITH RECKSON SERVICE INDUSTRIES UNDER THE
INTERCOMPANY AGREEMENT. Reckson OP and Reckson Service Industries have entered
into an intercompany agreement to formalize their relationship at the outset and
to limit conflicts of interest. The Reckson intercompany agreement was not
negotiated at arms' length as it was negotiated while 95% of the outstanding
common stock of Reckson Service Industries was owned by Reckson OP. Under the
Reckson intercompany agreement, Reckson Service Industries granted Reckson OP a
right of first opportunity to make any REIT-qualified investment that becomes
available to Reckson Service Industries. In addition, if a REIT-qualified
investment opportunity becomes available to an affiliate of Reckson Service
Industries, including Reckson Strategic Venture Partners, 100% of the common
ownership interest of which is indirectly owned by Reckson Service Industries,
the Reckson intercompany agreement requires Reckson Service Industries'
affiliate to allow Reckson OP to participate in the REIT-qualified investment
opportunity to the extent of Reckson Service Industries' interest in the
affiliate.
Under the Reckson intercompany agreement, Reckson OP granted Reckson Service
Industries a right of first opportunity to provide to Reckson OP and its tenants
any type of non-customary commercial services for occupants of office,
industrial and other property types that Reckson may not be permitted to provide
because they may generate non-qualifying REIT income under Federal tax laws.
Reckson Service Industries will provide services to Reckson OP at rates and on
terms as attractive as either the best available for comparable services in the
market or those offered by Reckson Service Industries to third parties. In
addition, Reckson OP will give Reckson Service Industries access to its tenants
with respect to non-customary commercial services that may be provided to such
tenants.
Under the Reckson intercompany agreement, subject to certain conditions,
Reckson OP granted Reckson Service Industries a right of first refusal to become
the lessee of any real property acquired by Reckson OP if Reckson OP determines
that, because the operation of the property would involve the performance of
non-customary services that under the Internal Revenue Code a REIT may not
generally provide, it is required to enter into a "master" lease arrangement.
Pursuant to such master
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lease arrangement, Reckson OP would own the property, but lease it entirely to a
single lessee that would operate the property.
With respect to services that Reckson Service Industries will provide to
Reckson OP, management will have a conflict of interest in determining the
market rates to charge Reckson OP for these services. In addition, management
will have a conflict of interest in determining whether Reckson OP or Reckson
Service Industries would pursue a REIT-qualified investment opportunity outside
Reckson's core business strategy of investing in office and industrial
properties in the Tri-State area. Furthermore, Reckson OP and Reckson Service
Industries may structure investments so that joint ventures between Reckson OP
and Reckson Strategic Venture Partners may pursue the portion of investments
generating REIT-qualified income and Reckson Strategic Venture Partners will
pursue directly the other portion of such investments. Accordingly, Reckson
Strategic Venture Partners and Reckson Strategic Venture Partners-Reckson OP
joint ventures may have conflicts of interest in the structuring, valuation,
management and disposition of these investments.
CONFLICTS IN RECKSON'S LOANS TO RECKSON SERVICE INDUSTRIES. In June 1998,
Reckson OP established a credit facility with Reckson Service Industries, in the
amount of $100 million for Reckson Service Industries' service sector operations
and other general corporate purposes. In addition, in June 1998, Reckson OP
established a second credit facility with Reckson Service Industries, for the
funding of investments of up to $100 million by Reckson Service Industries in
Reckson Strategic Venture Partners. Advances under this second facility are
reduced by the amount of any investment by Reckson OP into a joint venture with
Reckson Strategic Venture Partners. Advances under the Reckson Strategic Venture
Partners facility in excess of $25 million in respect of any single platform are
subject to approval by the Reckson board of directors, while advances under the
Reckson Service Industries facility in excess of ten million dollars in respect
of any single investment in non-customary commercial services, as well as
advances for investments in opportunities in non-customary commercial services,
are subject to approval by the Reckson board of directors, or a board committee.
Each credit facility has a term of five years and advances under each are
recourse obligations of Reckson Service Industries. Interest accrues on advances
made under the credit facilities at a rate equal to the greater of (a) the prime
rate plus two percent and (b) 12% per annum, with the rate on amounts that are
outstanding for more than one year increasing annually at a rate of four percent
of the prior year's rate. Prior to maturity, interest is payable quarterly but
only to the extent of net cash flow and on an interest-only basis and will be
prepayable without penalty at the option of Reckson Service Industries. As long
as there are outstanding advances under the credit facilities, Reckson Service
Industries is prohibited from paying dividends on any shares of its capital
stock. The credit facilities are subject to certain other covenants and prohibit
advances thereunder to the extent the advances could, in Reckson's
determination, endanger its status as a REIT. The terms of the credit facilities
were not negotiated at arms' length and thus may not reflect terms that could
have been obtained from independent third parties. Additional indebtedness may
be incurred by subsidiaries of Reckson Service Industries. As of December 31,
1998, borrowings under these credit facilities aggregated approximately $33.7
million.
POLICIES WITH RESPECT TO CONFLICTS OF INTEREST MAY NOT BE
SUCCESSFUL. Reckson has adopted policies designed to eliminate or minimize
conflicts of interest. These policies include the approval of all transactions
in which directors or officers of Reckson have a conflicting interest by a
majority of the directors who are neither officers nor affiliated with Reckson.
These policies do not prohibit sales of assets to or from affiliates, but would
require the sales to be approved by the independent directors of Reckson.
However, there is no assurance that these policies will be successful and, if
they are not successful, decisions could be made that might fail to reflect
fully the interests of all of Reckson's stockholders.
26
<PAGE>
LIMITS ON OWNERSHIP AND CHANGES IN CONTROL MAY DETER CHANGES IN MANAGEMENT AND
THIRD PARTY ACQUISITION PROPOSALS.
OWNERSHIP LIMIT. To maintain Reckson's qualification as a REIT, five or
fewer individuals, as defined in the Internal Revenue Code to include certain
entities, may not own, directly or indirectly, more than 50% in value of
Reckson's outstanding capital stock during the last half of a taxable year,
other than the first year. In order to protect against the risk of losing REIT
status, among other reasons, Reckson's charter limits ownership of its issued
and outstanding common stock by any single stockholder to nine percent of the
lesser of the number or value of the outstanding shares of common stock. It also
will limit ownership of Reckson class B common stock to be issued in the merger
by any single stockholder to nine percent in value of the outstanding shares of
all of Reckson's common stock and limits ownership of Reckson's issued and
outstanding 7 5/8% series A convertible cumulative preferred stock to nine
percent in the value of the outstanding shares of all of Reckson's capital
stock. In addition, a stockholder may not acquire shares of the Reckson series A
preferred stock that would result in the stockholder's owning in excess of 20%
of the lesser of the number or value of outstanding shares of Reckson series A
preferred stock. These provisions may delay, defer or prevent a change of
control of Reckson or other transaction by a third party without the consent of
the Reckson board of directors even if a change in control were in the best
interests of the stockholders of Reckson.
STAGGERED BOARD. The Reckson board of directors is divided into three
classes. The terms of the Class I, Class II and Class III directors expire in
1999, 2000 and 2001, respectively. Directors are elected for three-year terms.
These provisions may deter changes in control because of the increased time
period necessary for a third party to acquire control of management through
positions on the Reckson board of directors.
REQUIRED CONSENT OF HOLDERS OF UNITS FOR CHANGE IN CONTROL
TRANSACTIONS. Under the terms of Reckson OP's partnership agreement, through
June 2, 2000, Reckson OP may not sell, transfer or otherwise dispose of all or
substantially all of its assets, whether by way of sale or by merger, sale or
consolidation into another person, without the consent of the holders of 85% of
the outstanding common limited partnership units. This voting requirement could
delay, defer or prevent a change in control of Reckson.
FUTURE ISSUANCES OF STOCK. Subject to the rights of holders of preferred
stock of Reckson, the charter of Reckson authorizes the Reckson board of
directors to issue additional shares of stock without stockholder approval.
Reckson may also issue shares of Reckson common stock in exchange for limited
partnership units pursuant to Reckson OP's partnership agreement. Issuance of
Reckson common stock or Reckson class B common stock or similar securities could
have the effect of diluting Reckson class B common stockholders' interests in
Reckson.
THE RECKSON CHARTER PERMITS THE ISSUANCE OF PREFERRED STOCK WHICH COULD
DELAY, DEFER OR PREVENT A CHANGE IN CONTROL. The charter of Reckson authorizes
the Reckson board of directors to issue up to 25 million shares of preferred
stock, of which 9.2 million shares of Reckson series A preferred stock have been
issued; and 8,000 shares of which have been converted to shares of common stock,
to reclassify unissued shares of stock, and to establish the preferences,
conversion and other rights, voting powers, restrictions, limitations and
restrictions on ownership, limitations as to dividends or other distributions,
qualifications, and terms and conditions of redemption for each such class or
series of any stock issued. Although the Reckson board of directors does not
currently intend to do so, it could establish a series of preferred stock that,
depending on the terms of such series, could delay, defer or prevent a
transaction or a change in control of Reckson that might involve a premium price
for Reckson common stock or otherwise be in the best interest of the
stockholders of Reckson.
LIMITATIONS ON ACQUISITION OF AND CHANGES IN CONTROL PURSUANT TO MARYLAND
LAW. The Maryland General Corporation Law contains provisions, referred to as
the "control share acquisition statute",
27
<PAGE>
which eliminate the voting rights of shares acquired in a Maryland corporation
in such quantities so as to constitute "control shares," as defined under the
Maryland General Corporation Law. The Maryland General Corporation Law also
contains provisions referred to as the "business combination statute," which
generally limit business combinations between a Maryland corporation and any 10%
owners of the corporation's stock or any affiliate of a 10% owner. These
provisions may have the effect of inhibiting a third party from making an
acquisition proposal for Reckson or of delaying, deferring or preventing a
change in control of Reckson under circumstances that otherwise could provide
the holders of shares of common stock with the opportunity to realize a premium
over the then-prevailing market price of such shares. However, as permitted by
the Maryland General Corporation Law, the Reckson bylaws contain a provision
exempting any and all acquisitions by any person of shares of stock of Reckson
from the control share acquisition statute. In addition, the board of directors
has adopted a resolution exempting Reckson from the provisions of the business
combination statute. Reckson may amend or eliminate these provisions at any
time.
EXTERNAL MARKET FACTORS MAY ADVERSELY IMPACT PRICE OF RECKSON SECURITIES.
EFFECT OF EARNINGS AND CASH DISTRIBUTIONS. The market value of the equity
securities of a REIT may be based primarily upon the market's perception of the
REIT's growth potential and its current and future cash distributions, and may
be secondarily based upon the real estate market value of the underlying assets.
For the year ended December 31, 1998, Reckson distributed approximately 75.7% of
its cash available for distribution to its stockholders. Although Reckson has
retained operating cash flow for investment and working capital purposes, which
has increased the value of Reckson's underlying assets, this has not
proportionally increased the market price of the equity securities of Reckson.
Reckson's failure to meet the market's expectation with regard to future
earnings and cash distributions likely would adversely affect the market price
of the equity securities of Reckson.
ADVERSE IMPACT OF RISING INTEREST RATES. One factor which influences the
price of the securities is the dividend or interest rate on the securities
relative to market interest rates. Rising interest rates may lead potential
buyers of equity securities of Reckson to expect a higher dividend rate, which
would adversely affect the market price of the securities. In addition, rising
interest rates would result in increased expense, thereby adversely affecting
cash flow and the ability of Reckson OP to service its indebtedness.
RISK OF IMPACT OF YEAR 2000 ISSUE ON RECKSON'S OPERATIONS AND FINANCIAL RESULTS.
Some of Reckson's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions, or engage in similar normal
business activities.
Reckson's year 2000 project is estimated to be completed not later than July
31, 1999, which is prior to any anticipated impact on Reckson's operating
systems. Additionally, Reckson has received assurances from its contractors that
all of its building management and mechanical systems are currently year 2000
compliant or will be made compliant prior to any impact on those systems.
However, Reckson cannot guarantee that all contractors will comply with their
assurances and therefore Reckson may not be able to determine year 2000
compliance of those contractors. At that time, Reckson will determine the extent
to which they will be able to replace non-compliant contractors. Reckson
believes that with modifications to existing software and conversion to new
software, the year 2000 issue will not pose significant operational problems for
their computer systems. However, if modifications and conversions are not made,
or are not completed timely, the year 2000 issue could have a material impact on
Reckson's operations.
28
<PAGE>
Through December 31, 1998, Reckson has expended approximately $375,000 and
expects to expend an additional one million dollars in connection with upgrading
building management, mechanical and computer systems. The costs of the project
and the date on which Reckson believes it will complete the year 2000
modifications are based on Reckson's management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and costs
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
RISK FACTORS RELATING TO FAILURE OF THE MERGER TO BE COMPLETED
FAILURE TO APPROVE THE MERGER.
If the holders of a majority of the outstanding shares of Tower common stock
fail to approve the merger or if it is not completed for any reason, Tower may
be subject to a number of material risks, including the requirement that Tower
pay up to $16.75 million in termination fees and expenses to Reckson, and a
possible decline in the market price of Tower common stock to the extent current
market prices reflect a market assumption that the merger will be completed. See
"The Merger Agreement--Termination Fees and Expenses." In the event that,
following termination of the merger, the Tower board of directors determines to
seek another merger or business combination, there can be no assurance that it
will be able to find a partner willing to pay an equivalent or more attractive
price than would be provided by the merger. Under the terms of the merger
agreement, prior to the termination of the merger, Tower is not permitted
directly or indirectly to (a) solicit, initiate or encourage any alternative
acquisition proposal or (b) engage in discussions or negotiations with, or
disclose any non-public information relating to Tower or its subsidiaries or
afford access to Tower's or its subsidiaries' properties, books or records to,
any person that has made, or indicated interest in making, an alternative
acquisition proposal. Nevertheless, Tower may furnish information, participate
in negotiations and discussions and enter into agreements regarding an
alternative acquisition proposal with a third party if the Tower board of
directors determines in good faith, after consultation with outside legal
counsel, that the failure to take such action would present a reasonable risk of
a breach of the duties of the Tower board of directors under applicable law. See
"The Merger Agreement--Certain Covenants--No Solicitation by Tower."
METROPOLITAN PARTNERS OR TOWER MAY BE REQUIRED TO PAY A SUBSTANTIAL PENALTY TO
THE OTHER IF IT IS OBLIGATED TO COMPLETE THE MERGER BUT FAILS TO DO SO.
In the event that a court issues a final non-appealable judgment that
Metropolitan Partners and Reckson are obligated to complete the merger but have
breached their covenants to do so, or that Metropolitan Partners or Reckson
failed to use their reasonable best efforts to take all actions necessary to
cause the closing conditions to the merger to be satisfied, Metropolitan
Partners will be obligated to return to Tower for no consideration 75% of the
Tower series A preferred stock that Metropolitan Partners purchased for $40
million at the time of the signing of the merger agreement.
In the event that a court issues a final non-appealable judgment that Tower
is obligated to complete the merger but has breached its covenant to do so, or
that Tower failed to use its reasonable best efforts to take all actions
necessary to obtain approval of the merger agreement by the Tower stockholders
or assist in registering the offering of the Reckson class B common stock and
the Reckson OP 7% notes, Tower is required to pay Metropolitan Partners, in
addition to any termination fees payable under the merger agreement, a fee of
$30 million in cash.
29
<PAGE>
WHAT TOWER STOCKHOLDERS WILL RECEIVE IN THE MERGER
The table on the following page illustrates, based on the indicated stock
prices, the value of the cash, Reckson class B common stock and Reckson OP 7%
notes that Tower stockholders will receive in the merger for each Tower share,
assuming 100% of the holders of Tower common stock and Tower OP units elect to
receive cash in the merger. This value has been calculated by (a) valuing each
share of Reckson class B common stock at an amount equal to the indicated
trading price of one share of Reckson common stock for which it will be
initially exchangeable and (b) valuing the Reckson OP 7% notes issuable in the
merger if Reckson stockholders do not approve the share issuance proposal at
89.4% of the face amount thereof which is what the Tower board of directors
valued them at when approving the merger. If Reckson stockholders approve the
share issuance proposal, and assuming 100% cash elections as described above,
each share of Tower common stock will be converted into, on average, 25% of
$23.00 in cash and 75% of .8364 of a share of Reckson class B common stock, or
$5.75 in cash and .6273 of a share of Reckson class B common stock. Similarly,
on the basis of the same 100% election assumption, if Reckson stockholders do
not approve the share issuance proposal, each share of Tower common stock will,
on average, be converted into $5.75 in cash, 75% of $7.2565 (or $5.4424)
principal amount of Reckson OP 7% notes and 75% of .5725 (or .4294) of a share
of Reckson class B common stock.
It should be noted that both the value and the trading price of the Reckson
class B common stock may be greater, less than or the same as the trading price
of the Reckson common stock into which it may be exchanged. Moreover, the
exchange rate of one-for-one applicable to the exchange of Reckson class B
common stock into Reckson common stock is subject to increase if dividends on
Reckson class B common stock fall below levels specified in the articles
supplementary that governs the terms of the Reckson class B common stock and at
the time of exchange the Reckson common stock issuable upon exchange of a share
of Reckson class B common stock is trading at less than $27.50. The assumption
of valuing Reckson class B common stock as equal to the value of the underlying
Reckson common stock has the effect of ignoring the dividend provision of the
Reckson class B common stock which the Tower board of directors and the Reckson
board of directors believe represents incremental value. Note 1 to the following
table sets forth, at illustrative prices, including the closing per share price
of Reckson common stock on February 26, 1999, the increase in the value of the
merger consideration that results from taking into account the dividend
provisions of the Reckson class B common stock. Furthermore, valuing the Reckson
OP 7% notes at 89.4% of their face amount, which is what the Tower board of
directors valued them at when approving the merger, may have the effect of
overvaluing or undervaluing the Reckson OP 7% notes. Thus, the amounts set forth
in the table below should not be viewed as indicative of the actual trading
prices or values of the consideration to be received in the merger, either on an
absolute basis, or, in the case of columns (C) and (E), relative to each other.
Finally, the following table does not reflect any interests that Tower
stockholders and unitholders may receive if Crescent fails to fully fund a $75
million capital contribution to Metropolitan Partners. If such an event occurs,
the Tower board of directors may establish a litigation trust for the purpose of
pursuing litigation against Crescent and all of Tower's rights with respect to
such litigation will be assigned to such trust. Each Tower stockholder and
unitholder will receive one contingent payment right for each of his or her
shares of Tower common stock and Tower OP units. These contingent payment rights
will entitle each holder to his or her pro rata portion of any amounts received
by the trust as a result of litigation or otherwise in the litigation trust, net
of expenses.
The closing price of Reckson common stock on February 26, 1999 is
highlighted.
30
<PAGE>
WHAT TOWER STOCKHOLDERS WILL RECEIVE IN THE MERGER FOR EACH SHARE OF TOWER
COMMON STOCK
<TABLE>
<CAPTION>
ASSUMING RECKSON'S STOCKHOLDERS
ASSUMING RECKSON'S STOCKHOLDERS DO NOT APPROVE THE SHARE ISSUANCE PROPOSAL
APPROVE THE SHARE ISSUANCE PROPOSAL
(RECKSON CLASS B COMMON STOCK, CASH AND RECKSON
(RECKSON CLASS B COMMON STOCK AND CASH) OP 7% NOTES)
---------------------------------------- ------------------------------------------------
TOTAL PER SHARE TOTAL PER SHARE MERGER
VALUE OF RECKSON MERGER VALUE OF RECKSON CONSIDERATION:
CLASS B COMMON CONSIDERATION: CLASS B COMMON ---------------------------
STOCK CONSTITUTING ------------------- STOCK CONSTITUTING VALUE OF RECKSON CLASS B
THE STOCK PORTION VALUE OF RECKSON THE STOCK PORTION COMMON STOCK (.4294 OF A
OF THE PER SHARE CLASS B COMMON OF THE PER SHARE SHARE) PLUS VALUE OF NOTES
MERGER STOCK (.6273 OF A MERGER (89.4% OF $5.4424 PRINCIPAL
CLOSING CONSIDERATION SHARE) AND CASH CONSIDERATION AMOUNT) PLUS AMOUNT OF CASH
PRICE OF (EQUAL TO 75% X ($5.75) RECEIVED (EQUAL TO 75% OF ($5.75) RECEIVED (EQUAL TO
RECKSON .8364 (OR .6273) X (EQUAL TO AMOUNT IN .5725 (OR .4294) X AMOUNT IN COLUMN (D) +
COMMON AMOUNT IN COLUMN COLUMN (B) PLUS AMOUNT IN COLUMN $4.87 (OR 89.4% OF $5.4424)
STOCK (A)) $5.75) (A)) + $5.75)
(A) (B)(1) (C)(1) (D)(1) (E)(1)(2)
- ----------- ------------------- ------------------- ------------------- ---------------------------
$ 25.00 $ 15.68 $ 21.43 $ 10.73 $ 21.36
<S> <C> <C> <C> <C>
24.50 15.37 21.12 10.52 21.14
24.00 15.06 20.81 10.31 20.93
23.50 14.74 20.49 10.09 20.71
23.00 14.43 20.18 9.88 20.50
22.50 14.11 19.86 9.66 20.28
22.00 13.80 19.55 9.45 20.07
21.50 13.49 19.24 9.23 19.85
21.25 13.33 19.08 9.12 19.74
21.00 13.17 18.92 9.02 19.64
20.50 12.86 18.61 8.80 19.42
20.00 12.55 18.30 8.59 19.21
19.50 12.23 17.98 8.37 18.99
19.00 11.92 17.67 8.16 18.78
18.50 11.61 17.36 7.94 18.56
18.00 11.29 17.04 7.73 18.35
</TABLE>
- ------------------------
(1) The estimated valuation of Reckson class B common stock is higher than the
estimated valuation of Reckson's existing common stock for which it is
exchangeable if the dividend provisions of the Reckson class B common stock
are taken into account. As discussed under "The Merger--Opinion of Tower's
Financial Advisor--Valuation of Reckson Class B Common Stock," Merrill Lynch
derived a present value of $3.35 for the excess of the expected dividends
payable on a share of Reckson class B common stock for the 4.5 years after
the merger over the expected dividends payable on a share of Reckson common
stock for the same 4.5-year period. Based on the assumption that a Tower
holder will receive 75% of .8364 of a share of Reckson class B common stock
for each Tower share or unit, Tower stockholders and unitholders would
receive, in addition to the right to Reckson class B common stock for each
share or unit held, a stream of dividend payments valued at $2.10, or the
product of $3.35 X 75% X .8364, if Reckson stockholders approve the share
issuance proposal, or at $1.44, or the product of $3.35 X 75% X .5725, if
Reckson stockholders do not approve the share issuance proposal. As noted
under the discussion of Merrill Lynch's analysis, the methodologies and
assumptions that were used by Merrill Lynch related, among other things, to
discount rates, projected FFO and capitalization rates determined as of
December 2, 1998, the date Merrill Lynch conducted the analysis for purposes
of its opinion and presentation to the Tower board of directors. The $3.35
amount, from which the $2.10 and
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<PAGE>
$1.44 were derived, represents the highest end of Merrill Lynch's range of
valuations for the dividend stream. For illustrative purposes, the following
table indicates the increase in value of the merger consideration, columns C
and E, at three different Reckson common stock closing prices, after adding
the incremental value, i.e., $2.10 or $1.44, as applicable, attributable to
the Reckson class B common stock dividend provisions:
<TABLE>
<CAPTION>
MERGER CONSIDERATION IF RECKSON MERGER CONSIDERATION IF RECKSON
CLOSING PRICE STOCKHOLDERS APPROVE THE STOCKHOLDERS DO NOT APPROVE THE
OF RECKSON SHARE ISSUANCE PROPOSAL SHARE ISSUANCE PROPOSAL
COMMON STOCK (C) (E)
- --------------- --------------------------------------- ---------------------------------------
<S> <C> <C>
$ 25.00 $ 23.53 $ 22.80
21.50 21.34 21.29
18.00 19.14 19.79
</TABLE>
(2) Each Tower stockholder and unitholder will receive an additional $0.8046
principal amount of Reckson OP 7% notes in respect of each share of Tower
common stock and Tower OP unit held if the Reckson board of directors
withdraws or amends or modifies in any material respect, or publicly
announces an intention to withdraw or amend or modify in any material
respect, its approval or recommendation that Reckson stockholders approve
the share issuance proposal AND the share issuance proposal is not approved
by Reckson stockholders.
32
<PAGE>
SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA OF TOWER
The historical selected financial data of Tower and Tower Predecessor as of
and for the period ended December 31, 1997 and for the period from January 1,
1997 to October 15, 1997, as of and for the years ended December 31, 1996, 1995
and for the year ended December 31, 1994 have been derived from the respective
audited financial statements. The selected financial data as of and for the
periods ended December 31, 1993 and September 30, 1998 and as of December 31,
1994 are derived from the respective unaudited financial statements and reflect
all adjustments consisting of normal recurring adjustments, necessary for a fair
presentation of such data. The following historical data should be read in
conjunction with the consolidated and combined historical financial statements
of Tower and Tower Predecessor and notes thereto and "Tower and Tower
OP--Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Joint Proxy Statement/Prospectus. The
results of operations of Tower for the nine months ended September 30, 1998 may
not be indicative of the results for the full year. Moreover, historical
operating results of Tower and Tower Predecessor may not be comparable to future
operating results. In addition, Tower believes that the recorded value of Tower
properties, which reflects the historical cost of such real estate assets less
accumulated depreciation, is not indicative of the fair value of the Tower
properties.
The pro forma financial and other data reflect the historical results of
Tower's operations for the reporting periods from its commencement of operations
on March 27, 1997 to September 30, 1998, and the historical results of Tower
Predecessor's operations for the reporting period from January 1, 1997 to
October 15, 1997, adjusted to reflect the Tower initial public offering, the
related formation transactions, the application of the net proceeds from the
Tower initial public offering, and the acquisition of the 1997 acquisition
properties, the 1998 acquisition properties and the modification of debt on 810
Seventh Avenue and the sale of the preferred stock of Tower to Metropolitan
Partners as if such transactions had occurred on January 1, 1997 for statement
of operations data, and as if the modification of debt and the sale of the
preferred stock of Tower to Metropolitan Partners had occurred on September 30,
1998 for balance sheet data. The pro forma financial information should be read
in conjunction with the unaudited pro forma condensed consolidated financial
statements of Tower, the historical consolidated and combined financial
statements of Tower and Tower Predecessor and notes thereto and "Tower and Tower
OP--Management's Discussion and Analysis of the Financial Condition and Results
of Operations" included elsewhere in this Joint Proxy Statement/Prospectus. The
pro forma financial information is not necessarily indicative of what the
financial position and results of operations of Tower would have been as of the
dates and for the periods indicated, nor does it purport to represent or project
the financial position and results of operations for future periods.
33
<PAGE>
<TABLE>
<CAPTION>
TOWER
--------------------------------------------------
PRO FORMA HISTORICAL
FOR FOR PRO FORMA
THE NINE THE NINE FOR HISTORICAL TOWER PREDECESSOR
MONTHS MONTHS THE YEAR MARCH 27, --------------------------------------------
ENDED ENDED ENDED 1997-- JANUARY 1,
SEPTEMBER SEPTEMBER DECEMBER DECEMBER 1997-- YEAR ENDED DECEMBER 31,
30, 30, 31, 31, OCTOBER 15, -------------------------------
1998 1998 1997 1997 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF PROPERTIES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Rental income............ $ 85,029 $ 82,568 $ 101,613 $ 16,409 $ 21,908 $ 26,138 $ 25,202 $ 25,994
Management fees(1)....... -- -- -- 1,090 318 1,261 961 82
Construction, leasing and
other income........... 752 660 1,693 861 576 1,335 1,041 320
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
Total revenues........... 85,781 83,228 103,306 18,360 22,802 28,734 27,204 26,396
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
Property operating and
maintenance
expenses(1)............ 20,391 19,513 26,861 3,941 4,538 5,481 5,332 5,278
Real estate taxes........ 11,226 11,040 14,643 2,266 3,792 4,722 4,571 3,971
General and
administrative......... 6,601 6,585 5,236 2,844 2,189 3,494 3,497 2,512
Interest expense......... 13,427 15,144 17,108 2,369 11,725 15,511 15,150 12,751
Depreciation and
amortization........... 13,439 13,149 16,676 2,813 5,541 6,853 6,897 7,415
Ground rent/air rights
expense................ 512 512 599 126 473 599 599 599
Costs related to sale of
the Company............ 3,865 3,865 -- -- -- -- -- --
Severance and other
compensation costs..... 2,454 2,454 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
Total expenses........... 71,915 72,262 81,123 14,359 28,258 36,660 36,046 32,526
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
Equity in joint venture
company and
unconsolidated
subsidiaries(1)........ 557 557 370 353 134 461 193 1
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
Income (loss) before
minority interest and
extraordinary gain on
early extinguishment of
debt................... 14,423 11,523 22,553 4,354 (5,322) (7,465) (8,649) (6,129)
Minority interest(2)..... (1,286) (1,027) (2,013) (373) -- -- -- --
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
Income (loss) before
extraordinary gain on
early extinguishment of
debt................... $ 13,137 $ 10,496 $ 20,540 $ 3,981 $ (5,322) $ (7,465) $ (8,649) $ (6,129)
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
Income before early
extinguishment of debt
per common share (basic
and dilutive).......... $ 0.61 $ 0.62 $ 1.00 $ 0.24
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number
of shares outstanding
(basic and dilutive)... 16,942 16,942 16,920 16,920
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Balance Sheet Data (end of
period):
Real estate, net of
accumulated
depreciation........... $ 672,657 $ 618,113 $ -- $ 129,064 $ 128,138 $ 132,904
Total assets............. 717,815 656,096 -- 172,967 173,889 184,174
Debt on real estate...... 228,760 228,990 -- 202,892 199,962 202,454
Total liabilities........ 329,699 259,759 -- 234,857 230,977 235,343
Minority interest in
operating
partnership............ 35,065 33,920 -- -- -- --
Stockholders'
equity/owners'
deficit................ 353,051 382,417 -- (61,870) (57,088) (51,169)
<CAPTION>
1993
---------
<S> <C>
Statements of Operations
Data:
Rental income............ $ 23,496
Management fees(1)....... 221
Construction, leasing and
other income........... 604
---------
Total revenues........... 24,321
---------
Property operating and
maintenance
expenses(1)............ 5,938
Real estate taxes........ 4,409
General and
administrative......... 2,591
Interest expense......... 12,756
Depreciation and
amortization........... 7,982
Ground rent/air rights
expense................ 599
Costs related to sale of
the Company............ --
Severance and other
compensation costs..... --
---------
Total expenses........... 34,275
---------
Equity in joint venture
company and
unconsolidated
subsidiaries(1)........ --
---------
Income (loss) before
minority interest and
extraordinary gain on
early extinguishment of
debt................... (9,954)
Minority interest(2)..... --
---------
Income (loss) before
extraordinary gain on
early extinguishment of
debt................... $ (9,954)
---------
---------
Income before early
extinguishment of debt
per common share (basic
and dilutive)..........
Weighted average number
of shares outstanding
(basic and dilutive)...
Balance Sheet Data (end of
period):
Real estate, net of
accumulated
depreciation........... $ 137,662
Total assets............. 188,742
Debt on real estate...... 204,853
Total liabilities........ 236,211
Minority interest in
operating
partnership............ --
Stockholders'
equity/owners'
deficit................ (47,469)
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
TOWER
--------------------------------------------------
PRO FORMA HISTORICAL
FOR FOR PRO FORMA
THE NINE THE NINE FOR HISTORICAL TOWER PREDECESSOR
MONTHS MONTHS THE YEAR MARCH 27, --------------------------------------------
ENDED ENDED ENDED 1997-- JANUARY 1,
SEPTEMBER SEPTEMBER DECEMBER DECEMBER 1997-- YEAR ENDED DECEMBER 31,
30, 30, 31, 31, OCTOBER 15, -------------------------------
1998 1998 1997 1997 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF PROPERTIES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Cash dividends declared
per common share....... 0.42 0.35 -- -- -- --
Funds from operations
available for common
shares(3).............. $ 28,236 $ 6,581 $ 219 $ 129 $ (1,449) $ 1,292
----------- ----------- ----------- --------- --------- ---------
----------- ----------- ----------- --------- --------- ---------
Cash flow from operating
activities............. $ 31,661 $ 6,526 $ 5,290 $ 951 $ 1,762 $ 4,118
Cash flow from investing
activities............. (65,912) (540,188) (3,771) (6,787) (3,440) (3,137)
Cash flow from financing
activities............. 40,079 535,008 (1,785) 5,613 238 30
Property Data (end of
period):
Number of Properties..... 25 22 -- 7 6 6
<CAPTION>
1993
---------
<S> <C>
Other Data:
Cash dividends declared
per common share....... --
Funds from operations
available for common
shares(3).............. $ (1,972)
---------
---------
Cash flow from operating
activities............. $ --
Cash flow from investing
activities............. --
Cash flow from financing
activities............. --
Property Data (end of
period):
Number of Properties..... 3
</TABLE>
- ------------------------------
(1) The operations of Tower Equities Management, Inc., a Delaware corporation,
are combined with the property operations in the historical financial
statements of Tower Predecessor for the years ended December 31, 1993
through 1996 and for the period from January 1, 1997 through March 26, 1997,
and are accounted for under the equity method in Tower's historical
financial statements subsequent to that date. Therefore, the historical
financial statements of Tower Predecessor include Tower Equities
Management's revenues and expenses on a gross basis in the respective income
and expense line items for the years ended December 31, 1993 through
December 31, 1996 and for the period from January 1, 1997 through March 26,
1997 and the historical financial statements of Tower subsequent to that
date present the Tower Equities Management's net operations in the line item
titled "Equity in joint venture company and unconsolidated subsidiaries."
The historical financial statements of Tower from March 27, 1997 through
December 31, 1997 reflect the elimination of all revenues and expenses for
management fees, construction, leasing and other services performed by Tower
for its consolidated properties.
Equity in joint venture company and unconsolidated subsidiaries also includes
Tower's ten percent interest, subject to an increase to up to 27.5% if
performance goals are achieved, in the partnership owning 2800 North Central
Avenue, Phoenix, Arizona on a historical basis, and prior to October 16,
1997 Tower Predecessor's 18% interest in the DRA joint venture companies
that owned, prior to the Tower initial public offering, the following
properties: 286 Madison Avenue, New York, New York; 290 Madison Avenue, New
York, New York; 292 Madison Avenue, New York, New York; the six Corporate
Center properties, Phoenix, Arizona; 5151 East Broadway, Tucson, Arizona;
and One Orlando Center, Orlando, Florida.
Subsequent to the initial public offering, Tower owns ten percent of 2800
North Central Avenue and 95% of the economic interest in Tower Equities
Management. Tower Predecessor owned, on December 31, 1996, 3.8% of 2800
North Central Avenue and approximately 18% of the DRA joint venture
companies, which represents Lawrence H. Feldman's effective ownership
interest.
(2) Represents an approximate 8.9% and 8.6% historical interest at September 30,
1998 and December 31, 1997, respectively, in Tower OP.
(3) Tower generally considers funds from operations an appropriate measure of
liquidity of an equity REIT because industry analysts have accepted it as a
performance measure of equity REITs. "Funds from operations," as defined by
the National Association of Real Estate Investment Trusts, means net income
(loss), computed in accordance with GAAP, excluding gains or losses from
debt restructuring and sales of property, plus depreciation and amortization
on real estate assets, the add back of nonrecurring costs related to the
sale of Tower and other compensation related charges, and after adjustments
for unconsolidated partnerships and joint venture companies. Tower's
determination of funds from operations may not be comparable to funds from
operations reported by other REITs. Tower believes that in order to
facilitate a clear understanding of the combined historical operating
results of Tower Predecessor and Tower, funds from operations should be
considered in conjunction with net income (loss) as presented in the
consolidated and combined financial statements and notes thereto of Tower
and Tower Predecessor included elsewhere in this Joint Proxy
Statement/Prospectus. Funds from operations should not be considered as an
alternative to net income, determined in accordance with GAAP, as an
indication of Tower's performance or to cash flows from operating
activities, determined in accordance with GAAP, or as a measure of
35
<PAGE>
liquidity or the ability to make distributions. Tower's and Tower
Predecessor's historical funds from operations for the respective periods is
calculated as follows:
<TABLE>
<CAPTION>
TOWER
------------------------
NINE HISTORICAL TOWER PREDECESSOR
MONTHS MARCH 27, -------------------------------------------------------
ENDED 1997-- JANUARY 1,
SEPTEMBER DECEMBER 1997-- YEAR ENDED DECEMBER 31,
30, 31, OCTOBER 15, ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ----------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Funds From Operations:
Net income (loss)............................. $ 10,496 $ 3,981 $ 1,153 $ (7,465) $ (8,649) $ (6,129) $ (9,954)
Add:
Real estate depreciation and amortization... $ 13,149 2,813 5,541 6,853 6,897 7,415 7,982
Real estate depreciation and amortization of
unconsolidated joint venture company...... 24 33 -- 741 303 6 --
Minority interest........................... 1,027 373 -- -- -- -- --
Severance and other compensation costs...... 2,454 -- -- -- -- -- --
Costs related to sale....................... 3,865 -- -- -- -- -- --
Less:
Gain on extinguishment of debt.............. -- -- (6,475) -- -- -- --
----------- ----------- ----------- --------- --------- --------- ---------
Funds from Operations....................... $ 31,015 $ 7,200 $ 219 $ 129 $ (1,449) $ 1,292 $ (1,972)
----------- ----------- ----------- --------- --------- --------- ---------
----------- ----------- ----------- --------- --------- --------- ---------
Funds from Operations Available for shares
of Tower Common Stock..................... $ 28,236 $ 6,581
----------- -----------
----------- -----------
</TABLE>
36
<PAGE>
SELECTED FINANCIAL DATA OF RECKSON
The following table sets forth selected financial and operating data for
Reckson and on a combined historical basis for Reckson's predecessor entities
("Reckson Group"). The selected historical operating and balance sheet data of
Reckson at and for the years ended December 31, 1998, 1997 and 1996 and for the
period from June 3, 1995 to December 31, 1995 and selected operating data of the
Reckson Group for the period from January 1, 1995 to June 2, 1995 and for the
year ended December 31, 1994 have been derived from audited financial
statements.
<TABLE>
<CAPTION>
RECKSON
RECKSON ASSOCIATES REALTY CORP. GROUP(1) RECKSON GROUP
-------------------------------------------------------- -------------- YEAR ENDED
JUNE 3, 1995 JANUARY 1, DECEMBER 31,
YEAR ENDED YEAR ENDED YEAR ENDED TO 1995 HISTORICAL(1)
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TO JUNE 2, --------------
1998 1997 1996 1995(1) 1995 1994
------------ ------------ ------------ -------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues(2).......... $ 265,140 $ 152,668 $ 95,110 $ 38,355 $ 22,270 $ 55,192
------------ ------------ ------------ -------------- -------------- --------------
Property operating
expenses................. 47,919 28,943 18,959 7,144 3,985 10,496
Real estate taxes.......... 35,541 20,579 13,935 5,755 3,390 7,798
Ground rents............... 1,761 1,269 1,107 579 234 500
Rent expense to an
affiliate................ -- -- -- -- 99 358
Construction costs and
expenses................. -- -- -- -- 1,929 7,487
Interest................... 47,795 21,585 13,331 5,331 7,622 17,426
Depreciation and
amortization............. 52,957 27,237 17,670 7,233 3,606 8,274
Marketing, general and
administrative........... 15,919 8,292 5,949 1,859 1,759 3,346
------------ ------------ ------------ -------------- -------------- --------------
Total expenses............. 201,892 107,905 70,951 27,901 22,624 55,685
------------ ------------ ------------ -------------- -------------- --------------
Operating income (loss).... 63,248 44,763 24,159 10,454 (354) (493)
Investment income.......... -- -- -- -- 210 841
Gain (loss) on sales of
properties............... -- 672 -- -- 35 954
Equity in income (losses)
of investees............. 1,233 55 1,031 100 303 (56)
Minority interests......... (10,672) (8,624) (6,768) (3,067) -- --
Distributions to preferred
unitholders.............. (1,753) -- -- -- -- --
------------ ------------ ------------ -------------- -------------- --------------
Income (loss) before
extraordinary item....... 52,056 36,866 18,422 7,487 194 1,246
Gain (loss) on
extinguishment of
debts.................... (1.670) (2,230) (895) (4,234) -- 4,434
Dividends to preferred
shareholders............. (12,491) -- -- -- -- --
------------ ------------ ------------ -------------- -------------- --------------
Net income (loss) available
to common shareholders... $ 37,895 $ 34,636 $ 17,527 $ 3,253 $ 194 $ 5,680
------------ ------------ ------------ -------------- -------------- --------------
PER SHARE DATA:
Cash dividends declared per
share.................... $ 1.41 $ 1.24 $ 1.19(3) $ 0.67(3)
------------ ------------ ------------ --------------
Basic net income per
share.................... $ 0.96 $ 1.06 $ 0.88(3) $ 0.22(3)
------------ ------------ ------------ --------------
Weighted average shares
outstanding.............. 39,473,000 32,727,000 19,928,000(3) 14,678,000(3)
------------ ------------ ------------ --------------
Diluted net income per
share(4)................. $ 0.95 $ 1.04 $ 0.87(3) $ 0.22(3)
------------ ------------ ------------ --------------
Diluted weighted average
shares outstanding....... 40,010,000 33,260,000 20,190,000(3) 14,725,000(3)
------------ ------------ ------------ --------------
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
RECKSON GROUP
RECKSON ASSOCIATES REALTY CORP. ------------------------------
--------------------------------------------------- YEAR ENDED
YEAR ENDED DECEMBER DECEMBER 31,
YEAR ENDED 31, JUNE 3, 1995 TO JANUARY 1, 1995 HISTORICAL
DECEMBER 31, -------------------- DECEMBER 31, TO JUNE 2, (1)
1998 1997 1996(1) 1995(1) 1995(1) 1994
------------ --------- --------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Commercial real estate, before
accumulated depreciation......... $1,743,223 $1,015,282 $ 519,504
Total assets....................... 1,854,816 1,113,257 543,758
Mortgage notes payable............. 253,463 180,023 161,513
Unsecured credit facility.......... 465,850 210,250 108,500
Unsecured term loan................ 20,000 -- --
Senior unsecured notes............. 150,000 150,000 --
Minority interest.................. 188,816 92,405 61,066
Shareholders' equity............... 706,064 448,665 186,867
OTHER DATA:
Funds from operations (basic)
(5).............................. $ 97,697 $ 69,548 $ 41,133 $ 17,246 $ 3,800 $ 8,566
Funds from operations (diluted)
(5).............................. 99,449 -- -- -- -- --
Net cash provided by operating
activities....................... 118,207 70,643 39,422 17,023 1,619 8,072
Net cash (used in) provided by
investing activities............. (613,300) (546,951) (273,703) (78,315) (710) 1,538
Net cash (used in) provided by
financing activities............. 475,614 485,448 239,985 68,275 (5,092) (9,184)
Ratio of earnings to fixed
charges(6)....................... 2.11x 2.77x 2.72x 2.71x 1.02x(7) (7)(8)
Gross leasable area at end of
period (square feet in
thousands):
Office........................... 10,155 7,595 4,397 1,930 1,570 1,570
Industrial....................... 10,845 6,050 4,403 3,500 2,959 2,959
</TABLE>
- ------------------------------
(1) Historical data include data attributable to the Omni, a 575,000 square foot
office building located in Reckson's Nassau West Corporate Center office
park, and which was owned by Omni Partners, L.P., from its opening in 1990
through December 20, 1993, the date on which Omni Partners, L.P. was
recapitalized and its financial statements were unconsolidated. Concurrently
with Reckson's initial public offering, Reckson acquired a 60% managing
general partner interest in Omni Partners, L.P. and consolidated its
financial statements.
(2) Historical total revenues include construction revenue of $2,361 (Reckson
Group January 1, 1995 to June 2, 1995) and $8,175 (1994).
(3) Adjusted to reflect a two-for-one stock split effective on April 15, 1997.
(4) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings
Per Share. For further discussion of earnings per share and impact of
Statement No. 128, see the notes to Reckson's consolidated financial
statements which are incorporated by reference herein.
(5) Reckson considers funds from operations to be an appropriate measure of the
performance of an equity REIT. The White Paper on Funds from Operations
approved by the Board of Governors of NAREIT in March 1995 defines funds
from operations as net income (loss), computed in accordance with generally
accepted accounting principles, excluding gains or losses from debt
restructuring and sales of property plus real estate related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint venture companies. Reckson implemented this new method of calculation
on January 1, 1996. Reckson computes funds from operations in accordance
with the standards established by NAREIT, which may not be comparable to
funds from operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than Reckson. Funds from operations does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles and is not indicative of cash
available to fund cash needs. Funds from operations should not be considered
as an alternative to net income as an indicator of Reckson's operating
performance or as an alternative to cash flow as a measure of liquidity.
(6) The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of income from
continuing operations before minority interests, fixed charges and preferred
dividends. Fixed charges consist of interest expense, including interest
costs capitalized, and the amortization of debt issuance costs plus
preferred dividends.
(7) Prior to completion of Reckson's initial public offering on June 2, 1995,
its predecessors operated in a manner as to minimize net taxable income to
their owners. The initial public offering and the related formation
transactions permitted Reckson to deleverage its properties significantly,
resulting in a significantly improved ratio of earnings to fixed charges.
(8) The excess of fixed charges over earnings amounted to approximately $493 for
the year ended December 31, 1994.
SELECTED FINANCIAL DATA OF RECKSON OP
The following table sets forth selected financial and operating data for
Reckson OP and on a combined historical basis for the Reckson Group. The
selected operating and balance sheet data of Reckson OP at and for the years
ended December 31, 1998, 1997 and 1996 and for the period from June 3, 1995 to
December 31, 1995 and selected operating data of the Reckson Group for the
period from January 1, 1995 to June 2, 1995 and for the year ended December 31,
1994 have been derived from audited financial statements.
38
<PAGE>
<TABLE>
<CAPTION>
RECKSON OP
-------------------------------------------------------- RECKSON GROUP
JUNE 3, 1995 ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED TO JANUARY 1, YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 TO JUNE 2, DECEMBER 31,
1998 1997 1996 1995(1) 1995(1) 1994(1)
------------ ------------ ------------ -------------- --------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues(2)....................... $ 266,312 $ 153,348 $ 96,030 $ 38,455 $ 20,889 $ 56,931
Total expenses.................... 201,003 107,639 70,935 27,892 20,695 55,685
Income (loss) before
distribution to preferred unit
holders, minority interests
and extraordinary items....... 65,309 45,709 25,095 10,563 194 1,246
Minority interests.............. 2,819 920 915 246 -- --
Extraordinary items--gain
(loss)........................ (1,993) (2,808) (1,259) (6,022) -- 4,434
Preferred distributions......... 14,244 -- -- -- -- --
Net income available to common
unit holders.................. 46,253 41,981 22,921 4,295 194 5,680
PER UNIT DATA:(3)
Net income per common unit:
General Partner................. $ .98 $ 1.06 $ .87(4) $ .22(4)
Limited Partners................ $ .98 $ 1.03 $ .86(4) $ .19(4)
Weighted average common units
outstanding:
General Partner................. 39,473,000 32,727,000 19,928,000(4) 14,678,000(4)
Limited Partners................ 7,728,000 7,016,000 6,503,000(4) 5,648,000(4)
BALANCE SHEET DATA:
(period end)
Real estate, before accumulated
depreciation.................. $1,743,223 $1,015,282 $ 519,504
Total assets.................... 1,854,520 1,113,105 543,391
Mortgage notes payable.......... 253,463 180,023 161,513
Unsecured Credit facility....... 465,850 210,250 108,500
Unsecured Term Loan............. 20,000 -- --
Senior unsecured notes.......... 150,000 150,000 --
Market value of equity.......... 1,332,882 1,141,592 653,606
Total market capitalization
including debt................ 2,119,936 1,668,800 921,423
OTHER DATA:
Funds from operations(5)........ $ 98,501 $ 69,619 $ 40,938 $ 17,190 $ 3,800 $ 8,566
Ratio of earnings to fixed
charges(6).................... 2.12x 2.78x 2.71x 2.71x 1.02x(7) --(7)(8)
Total square feet (at end of
period) (square feet in
thousands).................... 21,000 13,645 8,800 5,430 4,529 4,529
Number of properties (at end of
period)....................... 204 155 110 81 72 72
</TABLE>
- ------------------------------
(1) Historical data include data attributable to the Omni, a 575,000 square foot
office building located in Reckson's Nassau West Corporate Center office
park, and which was owned by Omni Partners, L.P., from its opening in 1990
through December 20, 1993 (the date on which Omni Partners, L.P. was
recapitalized and its financial statements were unconsolidated).
Concurrently with Reckson's initial public offering, Reckson OP acquired a
60% managing general partner interest in Omni Partners, L.P. and
consolidated its financial statements.
(2) Historical total revenues include construction revenue of $2,361 (Reckson
Group January 1, 1995 to June 2, 1995) and $8,175 (1994).
(3) The earnings per unit amounts are based on the weighted average units
outstanding for the period then ended.
(4) Adjusted to reflect a two-for-one unit split effective on April 15,1997.
(5) Reckson OP considers funds from operations to be an appropriate measure of
the performance of an equity REIT. The White Paper on Funds from Operations
approved by the Board of Governors of NAREIT in March 1995 defines funds
from operations as net income (loss), computed in accordance with generally
accepted accounting principles, excluding gains or losses from debt
restructuring and sales of property plus real estate related depreciation
and amortization, and after adjustments for unconsolidated partnerships and
joint venture companies. Reckson OP implemented this new method of
calculation on January 1, 1996. Reckson OP computes funds from operations in
accordance with the standards established by NAREIT, which may not be
comparable to funds from operations reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than Reckson OP. Funds
from operations does not represent cash generated from operating activities
in accordance with generally accepted accounting principles and is not
indicative of cash available to fund cash needs. Funds from operations
should not be considered as an alternative to net income as an indicator of
Reckson OP's operating performance or as an alternative to cash flow as a
measure of liquidity.
(6) The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of income from
continuing operations before minority interests, fixed charges and preferred
dividends. Fixed charges consist of interest expense, including interest
costs capitalized, and the amortization of debt issuance costs plus
preferred dividends.
(7) Prior to completion of Reckson's initial public offering on June 2, 1995,
Reckson OP's predecessors operated in a manner as to minimize net taxable
income to their owners. The initial public offering and the related
formation transactions permitted Reckson OP to deleverage its properties
significantly, resulting in a significantly improved ratio of earnings to
fixed charges.
(8) The excess of fixed charges over earnings amounted to approximately $493 for
the year ended December 31, 1994.
39
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL DATA OF RECKSON
The following table presents selected pro forma combined financial data of
Reckson and Reckson OP. Such pro forma combined financial data give effect to
the proposed merger of Tower into Metropolitan Partners and Reckson's investment
in Metropolitan Partners. The pro forma financial data assume that the merger of
Tower into Metropolitan Partners took place on December 31, 1998, with respect
to the balance sheet data and that the merger and investment occurred as of
January 1, 1998, with respect to the statement of income information. This table
shows how the merger is effected if the Reckson stockholders approve the share
issuance proposal as well as if the Reckson stockholders do not approve the
share issuance proposal. If the Reckson stockholders approve the share issuance
proposal the merger is effected by the exchange of $5.75 in cash and 0.6273 of a
share of Reckson class B common stock for each outstanding share of Tower common
stock and each Tower OP unit, whereby approximately $107.2 million in cash is
paid and approximately 11,694,835 shares of Reckson class B common stock are
issued in exchange for all outstanding shares of Tower common stock and Tower OP
units. If Reckson stockholders do not approve the share issuance proposal the
merger is effected by the exchange of $5.75 in cash, .4294 of a share of Reckson
class B common stock and approximately $5.44 principal amount of Reckson OP 7%
notes for each outstanding share of Tower common stock and each Tower OP unit,
whereby approximately $107.2 million in cash is paid and approximately 8,004,894
shares of Reckson class B common stock and approximately $101.5 million
aggregate principal amount of Reckson OP 7% notes are issued and in exchange for
all outstanding Tower common stock and Tower OP units. This table does not give
effect to the additional $0.8046 principal amount of Reckson OP 7% notes issued
upon conversion of each share of Tower common stock and each Tower OP unit if
the Reckson board of directors withdraws or amends or materially modifies its
approval or recommendation to approve the share issuance proposal and Reckson
stockholders do not approve the share issuance proposal.
The selected pro forma data also reflects the sale of four of Tower's New
York City properties to an unrelated third party immediately prior to the
merger, as well as Metropolitan Partners holding Tower's Arizona and Florida
properties for disposal.
The selected pro forma financial data are presented for illustrative
purposes only and are not indicative of the consolidated financial position or
results of operations of future periods or the results that actually would have
been realized had Metropolitan Partners and Tower been a combined company and
Reckson had made an investment in Metropolitan Partners during the specified
period. The selected pro forma combined financial data are based on, are
qualified in their entirety by reference to, and should be read in conjunction
with, the historical consolidated financial statements of Reckson, which are
incorporated by reference herein, and Reckson OP, which are included elsewhere
in this Joint Proxy Statement/Prospectus, and the unaudited pro forma combined
financial statements of Reckson and Reckson OP. See "Unaudited Pro Forma
Financial Statements" included elsewhere in this Joint Proxy
Statement/Prospectus for additional information regarding this pro forma
information.
40
<PAGE>
<TABLE>
<CAPTION>
SHARE ISSUANCE SHARE ISSUANCE PROPOSAL IS NOT
PROPOSAL IS APPROVED
APPROVED ----------------------------------
------------------- RECKSON OP RECKSON
AS OF AND FOR AS OF AND FOR
RECKSON THE THE
AS OF AND FOR YEAR ENDED YEAR ENDED
THE YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1998 1998 1998
------------------- ---------------- ----------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
REVENUES:
Base rents........................................... $ 323,003 $ 323,003 $ 323,003
Tenant escalations and reimbursements................ 27,744 27,744 27,744
Equity in earnings of real estate joint ventures..... 603 603 603
Equity in earnings of service companies.............. 1,530 1,530 1,530
Interest income on mortgage notes and notes
receivable......................................... 7,739 7,739 7,739
Other................................................ 5,026 4,965 5,026
-------- -------- --------
Total revenues................................... 365,645 365,584 365,645
-------- -------- --------
-------- -------- --------
EXPENSES:
Operating expenses:
Property operating expenses.......................... 69,646 69,646 69,646
Real estate taxes.................................... 48,510 48,510 48,510
Ground rents......................................... 2,444 2,444 2,444
Marketing, general and administrative................ 17,919 17,030 17,919
-------- -------- --------
Total operating expenses:........................ 138,519 137,630 138,519
-------- -------- --------
-------- -------- --------
Interest............................................. 65,561 73,095 73,095
Depreciation and amortization........................ 65,741 65,741 65,741
Total expenses:.................................. 269,821 276,466 277,355
-------- -------- --------
Income before minority interest and extraordinary
items.................................................. 95,824 89,118 88,290
Minority partners' interest in consolidated partnership
(income)............................................... (9,083) (9,139) (9,083)
Distributions to preferred unitholders/shareholders...... (14,244) (14,244) (14,244)
-------- -------- --------
Income before limited partners' minority interest in
operating partnership income and extraordinary items... 72,497 65,735 64,963
--------
--------
Limited partners' minority interest in operating
partnership income..................................... (8,412) (8,300)
-------- --------
Income before extraordinary item......................... $ 64,085 $ 56,663
-------- --------
-------- --------
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
SHARE ISSUANCE SHARE ISSUANCE PROPOSAL IS NOT
PROPOSAL IS APPROVED
APPROVED ----------------------------------
------------------- RECKSON OP RECKSON
AS OF AND FOR AS OF AND FOR
RECKSON THE THE
AS OF AND FOR YEAR ENDED YEAR ENDED
THE YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1998 1998 1998
------------------- ---------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
INCOME PER SHARE:
Basic income per share of Reckson common stock before
extraordinary item..................................... $ 1.09 $ 1.07
-------- --------
-------- --------
Basic weighted average number of shares of Reckson common
stock outstanding...................................... 39,473 39,473
-------- --------
-------- --------
Diluted income per share of Reckson common stock before
extraordinary item..................................... $ 1.07 $ 1.06
-------- --------
-------- --------
Diluted weighted average number of shares of Reckson
common stock outstanding............................... 40,010 40,010
-------- --------
-------- --------
Basic income per share of Reckson class B common stock
before extraordinary item.............................. $ 1.81 $ 1.78
-------- --------
-------- --------
Basic weighted number of shares of Reckson class B common
stock outstanding...................................... 11,695 8,005
-------- --------
-------- --------
Diluted income per share of Reckson class B common stock
before extraordinary item.............................. $ 1.22 $ 1.17
-------- --------
-------- --------
Diluted weighted average number of shares of Reckson
class B common stock outstanding....................... 11,695 8,005
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
SHARE ISSUANCE PROPOSAL IS NOT
SHARE ISSUANCE APPROVED
PROPOSAL IS ----------------------------------
APPROVED RECKSON OP RECKSON
------------------- AS OF AND FOR AS OF AND FOR
RECKSON THE THE
AS OF AND FOR THE YEAR ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1998 1998 1998
------------------- ---------------- ----------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
REVENUES:
OTHER FINANCIAL DATA:
Commercial real estate, after accumulated depreciation... $ 2,035,379 $ 2,035,379 $ 2,035,379
Total assets......................................... 2,516,991 2,516,695 2,516,991
Mortgage notes payable................................... 492,242 492,242 492,242
Credit facility.......................................... 485,850 485,850 485,850
Senior unsecured notes................................... 150,000 245,521 245,521
Minority interests....................................... 127,173 127,173 127,173
Shareholders' equity..................................... 959,030 1,049,860 867,283
</TABLE>
42
<PAGE>
COMPARATIVE PER SHARE DATA
EARNINGS, DIVIDENDS AND BOOK VALUE
The following tables present historical per share data of Reckson,
historical and pro forma per share data of Tower and pro forma combined per
share data as if the merger had occurred as of January 1, 1998. The tables also
present Tower's pro forma equivalent per share data. The first table presents
the pro forma combined and pro forma equivalent data assuming Reckson
stockholders approve the share issuance proposal and the Reckson OP 7% notes are
not issued. The second table assumes Reckson stockholders do not approve the
share issuance proposal and a combination of Reckson class B common stock and
Reckson OP 7% notes is issued.
The pro forma combined per share data are intended for information purposes,
and do not purport to represent what the combined entity's results of continuing
operations would actually have been had the transaction in fact occurred at an
earlier date, or project the results for any future date or period. Upon
completion of the merger, the actual financial position and results of
operations of the combined company will differ, perhaps significantly, from the
pro forma amounts reflected in these tables due to a variety of factors,
including changes in operating results between the date of the pro forma
financial information and the date on which the merger is completed and
thereafter, as well as the factors discussed under "Risk Factors Relating to the
Merger and an Investment in Reckson Securities."
<TABLE>
<CAPTION>
SHARE ISSUANCE
SHARE ISSUANCE PROPOSAL APPROVED PROPOSAL NOT APPROVED
------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
TOWER
RECKSON TOWER PRO FORMA PRO FORMA PRO FORMA
(A) (B) COMBINED(C) EQUIVALENT(D) COMBINED(C)
----------- ----------- ------------------------ ----------------- ------------------------
<CAPTION>
RECKSON RECKSON RECKSON
RECKSON CLASS B CLASS B RECKSON CLASS B
COMMON COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK STOCK
----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) per
common share
from continuing
operations:
Basic:
Year ended
December 31,
1998............ $ 0.96 $ -- $ 1.09 $ 1.81 $ 1.14 $ 1.07 $ 1.78
Diluted:
Year ended
December 31,
1998............ $ 0.95 $ -- $ 1.07 $ 1.22 $ 0.77 $ 1.06 $ 1.17
Distributions per
common share:
Year ended
December 31,
1998............ $ 1.35 $ -- $ 1.35 $ 2.24 $ 1.41 $ 1.35 $ 2.24
Book Value per
common share:
Year ended
December 31,
1998............ $ 17.63 $ -- $ 18.54 $ 18.54 $ 11.63 $ 18.05 $ 18.05
<CAPTION>
<S> <C>
TOWER
PRO FORMA
EQUIVALENT(D)
-------------------
RECKSON
CLASS B
COMMON
STOCK
-------------------
<S> <C>
Income (loss) per
common share
from continuing
operations:
Basic:
Year ended
December 31,
1998............ $ 0.76
Diluted:
Year ended
December 31,
1998............ $ 0.50
Distributions per
common share:
Year ended
December 31,
1998............ $ 0.96
Book Value per
common share:
Year ended
December 31,
1998............ $ 7.75
</TABLE>
- ------------------------------
(a) The twelve-month information for Reckson represents Reckson's historical
information as of and for the year ended December 31, 1998. See "Selected
Financial Data--Selected Financial Data of Reckson."
(b) The nine-month information for Tower represents Tower's historical
information as of and for the nine months ended September 30, 1998. The
twelve-month information for Tower represents Tower's pro forma adjusted
historical
43
<PAGE>
information as of and for the period starting on March 27, 1997 and
ending December 31, 1997. See "Selected Financial Data--Selected
Financial Data of Tower" and "Unaudited Pro Forma Financial
Statements--Unaudited Pro Forma Financial Statements of Tower."
(c) See "Unaudited Pro Form Financial Statements--Unaudited Pro Forma
Combined Financial Statements of Reckson."
(d) Tower's pro forma equivalent per share information represents the pro
forma combined per share information for Reckson class B common stock
multiplied by an exchange ratio of .6273 if the share issuance proposal
is approved and .4294 if the share issuance proposal is not approved.
COMPARATIVE MARKET PRICES AND DISTRIBUTIONS
The following table presents trading information for Tower common stock and
Reckson common stock on the NYSE Composite Transactions Tape on July 8, 1998,
December 7, 1998 and February 26, 1999. July 8, 1998 was the last full trading
day prior to the public announcement of the prior merger agreement among Tower,
Reckson and Crescent. December 7, 1998 was the last full trading day prior to
the publication in THE WALL STREET JOURNAL of a story stating that the
announcement of the merger was imminent. February 26, 1999 was the last
practicable trading day for which information was available prior to the date of
this Joint Proxy Statement/Prospectus. The table also sets forth the equivalent
pro forma sale prices of Tower common stock on such dates as determined by
multiplying the applicable last reported sale price of Reckson common stock,
which for purposes of this analysis is being used as an estimate of the expected
market price of Reckson class B common stock, by the exchange ratio of .6273
(I.E., .8364 X 75%) and adding $5.75 (I.E., $23.00 X 25%). Because the exchange
ratio is fixed and because there is currently no market for Reckson class B
common stock, the market value of the shares of Reckson class B common stock
that holders of Tower common stock will receive in the merger is subject to
fluctuation and may be higher or lower than the values set forth below.
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR RECKSON COMMON
STOCK AND TOWER COMMON STOCK.
<TABLE>
<CAPTION>
TOWER
TOWER RECKSON EQUIVALENT
COMMON STOCK COMMON STOCK PRO
(DOLLARS PER SHARE) (DOLLARS PER SHARE) FORMA
------------------------------- ------------------------------- (DOLLARS PER
HIGH LOW CLOSE HIGH LOW CLOSE SHARE)
--------- --------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
July 8, 1998...................... $ 23.938 $ 23.188 $ 23.688 $ 25.688 $ 25.250 $ 25.500 $ 21.750
December 7, 1998.................. 18.813 18.503 18.625 23.875 23.188 23.313 20.374
February 26, 1999................. 19.563 19.063 19.500 21.438 21.063 21.250 19.080
</TABLE>
The principal trading market for each of Tower common stock and Reckson
common stock is the NYSE under the symbols, "TOW" and "RA," respectively. The
following tables set forth, for the periods indicated, the high and low sales
price per share on the NYSE and the distributions paid per share on each of
Tower common stock and Reckson common stock. All information provided in the
44
<PAGE>
following table with respect to Reckson has been adjusted to reflect the
two-for-one stock split on April 15, 1997.
<TABLE>
<CAPTION>
TOWER COMMON STOCK(1) RECKSON COMMON STOCK
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
HIGH LOW DISTRIBUTIONS HIGH LOW DISTRIBUTIONS
--------- --------- ------------ --------- --------- ------------
Fiscal Year 1996
First Quarter................................ $ 16.125 $ 14.563 $ 0.2891
Second Quarter............................... 16.500 14.625 0.3000
Third Quarter................................ 18.563 15.063 0.3000
Fourth Quarter............................... 21.313 17.500 0.3000
Fiscal Year 1997
First Quarter................................ $ 23.625 $ 20.250 $ 0.3000
Second Quarter............................... 27.875 20.000 0.3125
Third Quarter................................ 27.125 22.000 0.3125(2)
Fourth Quarter............................... $ 28.500 $ 22.375 $ 0.3536 29.125 24.000 0.3125(2)
Fiscal Year 1998
First Quarter................................ $ 26.438 $ 22.563 $ 0.4225 $ 26.813 $ 24.000 $ 0.3125
Second Quarter............................... 22.250 20.750 0.4225 26.375 22.375 0.3375(3)
Third Quarter................................ 23.938 19.333 0.4225 26.313 19.000 0.3375
Fourth Quarter............................... 20.813 16.938 0.4225 24.750 19.500 0.3375
Fiscal Year 1999
First Quarter (through February 26, 1999).... $ 20.688 $ 19.063 $ 0.4225 $ 24.000 $ 20.500 $ 0.3375
</TABLE>
- ------------------------
(1) Tower common stock commenced trading on October 10, 1997.
(2) Reckson paid the third quarter and fourth quarter distributions during the
quarter ended December 31, 1997.
(3) In addition to the regular quarterly distribution, Reckson made a one-time
distribution of shares of the common stock of Reckson Service Industries,
Inc., valued at $1.03 per share of Reckson Services Industries, to its
stockholders of record on May 26, 1998 in a ratio equal to one share of
Reckson Service Industries for every 12.5 shares of Reckson common stock
held. Reckson distributed the Reckson Service Industries shares on June 11,
1998.
On the respective record dates for the Tower and Reckson special meetings,
there were approximately [ ] holders of record of Tower common stock and [ ]
holders of record of Reckson common stock.
DISTRIBUTION POLICIES
TOWER
Tower has adopted a policy of paying regular quarterly distributions on
shares of Tower common stock and Tower OP units, and cash distributions have
been paid on Tower common stock and Tower OP units for each quarterly period
since Tower's formation. Approximately 63.96% of Tower's distributions in 1998
represented a return of capital. In order to maintain its qualification as a
REIT, Tower must make annual distributions to its stockholders of at least 95%
of its taxable income, which, for this purpose, does not include net capital
gains. There may be circumstances where Tower may be required to make
distributions in excess of cash available for distribution in order to meet such
REIT distribution requirements. In such event, Tower presently would expect to
borrow funds, or to sell assets for cash, to the extent necessary to obtain cash
sufficient to make the distributions required to meet the REIT distribution
requirements.
45
<PAGE>
Tower currently anticipates that it will maintain at least the current
distribution rate for the immediate future, unless actual results of operations,
economic conditions or other factors differ from its current expectations.
Future distributions, if any, paid by Tower will be at the discretion of the
board of directors of Tower and will depend on the actual cash flow of Tower,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code, and such
other factors as the board of directors of Tower deems relevant. Additionally,
under the Maryland General Corporation Law, a distribution may not be made if,
after giving effect to the distribution, the corporation would not be solvent
(as defined in the Maryland General Corporation Law). In no event will dividends
be paid on the Tower common stock following the completion of the merger.
RECKSON
COMMON STOCK. Reckson currently pays regular quarterly distributions of
$0.3375 per share to holders of Reckson common stock, which is equivalent to an
annual distribution of $1.35 per share. Future distributions by Reckson will be
at the discretion of the Reckson board of directors and will depend on:
- the actual funds from operations of Reckson,
- its financial condition,
- its capital requirements,
- the annual distribution requirements under the REIT provisions of the
Internal Revenue Code, and
- other factors that the Reckson board of directors may deem relevant.
Reckson cannot assure stockholders that distributions on its stock will be made
in the future. Additionally, under the Maryland General Corporation Law, a
distribution may not be made if, after giving effect to the distribution, the
corporation would not be solvent (as defined in the Maryland General Corporation
Law).
Distributions by Reckson to the extent of its current and accumulated
earnings and profits for Federal income tax purposes generally will be taxable
to stockholders as ordinary dividend income. Distributions in excess of current
and accumulated earnings and profits will be treated as a non-taxable reduction
of a stockholder's basis in his or her shares of Reckson common stock to the
extent thereof, and thereafter as taxable gain. Reckson has determined that, for
Federal income tax purposes, 100% of the $0.99 per share distributions paid for
1998, representing dividends for three quarters, represented earnings and
profits. In addition, on June 11, 1998, Reckson paid a stock dividend equivalent
to $.0824 per share relating to Reckson OP's distribution of its common stock
interest in Reckson Service Industries to Reckson. The stock dividend was also
considered ordinary income for federal income tax purposes. Various factors,
including Reckson's future acquisitions, if any, may affect the percentage of
future distributions, including distributions to holders of Reckson class B
common stock, that represents earnings and profits for Federal income tax
purposes.
In the future, Reckson may implement a dividend reinvestment program under
which holders of Reckson common stock may elect to have distributions
automatically reinvested in additional shares of Reckson common stock. Reckson
may, from time to time, repurchase shares of Reckson common stock in the open
market for purposes of fulfilling its obligations under this dividend
reinvestment program, if adopted, or may elect to issue additional shares of
Reckson common stock.
RECKSON CLASS B COMMON STOCK. Distributions by Reckson in respect of the
Reckson class B common stock will also be at the discretion of the Reckson board
of directors subject to factors affecting distributions on Reckson common stock.
Additionally, under the Maryland General Corporation Law, a distribution may not
be made if, after giving effect to the distribution, the
46
<PAGE>
corporation would not be solvent as defined in the Maryland General Corporation
Law. There can be no assurance that any distributions to holders of Reckson
class B common stock will be made by Reckson. To the extent authorized by the
Reckson board of directors and absent a decrease in the distribution paid on
Reckson's existing common stock, the quarterly distribution on the Reckson class
B common stock will be $0.5600 per share for the first four full calendar
quarters the Reckson class B common stock is outstanding. For the partial
quarter preceding the first such full calendar quarter, the distribution will be
pro rated.
After the first four full calendar quarters and subject to decreases
proportional to any decrease in distributions on Reckson's existing common
stock, as described below, the quarterly distribution per share will be
increased over $0.5600 by 70% of the growth, if any, of the fully diluted FFO
per share of Reckson common stock during the measuring period then completed
over the twelve-month period ending with the quarter during which the merger
occurs, which period will serve as the base year. For purposes of this
adjustment, the first four full calendar quarters following the merger and each
subsequent consecutive four calendar quarter period will be measuring periods.
After each measuring period, Reckson's fully diluted FFO per share during the
base year will be compared to Reckson's fully diluted FFO per share during the
four quarter period then completed. The excess, if any, of fully diluted FFO per
share of Reckson common stock during the then completed four quarter period over
the base year will represent the growth used to determine the quarterly
distributions during the following four quarter period. Holders of Reckson class
B common stock are cautioned that because FFO growth is always measured against
the base year distributions on Reckson class B common stock could increase
following a measuring period with fully diluted FFO per share higher than fully
diluted FFO per share in the base year, and subsequently decrease from such
higher level to the extent subsequent measuring periods have lower fully diluted
FFO per share. In such event, however, unless the distribution on Reckson's
existing common stock is less than $0.3375, the quarterly per share distribution
on Reckson class B common stock shall be no less than the quarterly per share
distribution on Reckson's existing common stock plus $0.2225.
For example, if the merger occurs on April 15, 1999, the period from July 1,
1998 to June 30, 1999 will serve as the base year. Fully diluted FFO per share
during this period will be compared to fully diluted FFO per share for July 1,
1999 to June 30, 2000, to determine the growth to calculate the distribution on
Reckson class B common stock for the period from July 1, 2000 to June 30, 2001.
Similarly fully diluted FFO per share for the base year will be compared to
fully diluted FFO per share for July 1, 2000 to June 30, 2001 to determine the
growth to calculate the distribution on Reckson class B common stock for the
period from July 1, 2001 to June 30, 2002. Assuming, for illustration only, that
fully diluted FFO per share for July 1, 1998 to June 30, 1999 is $ , that
fully diluted FFO per share for July 1, 1999 to June 30, 2000 is $ , and
that Reckson does not decrease the distribution paid on Reckson's common stock
below $.3375, then the quarterly distribution on a share of Reckson class B
common stock for July 1, 2000 to June 30, 2001 would be $ . This is
calculated by adding $0.56 to 1/4 of 70% of the excess of over . Making the
same assumptions, and further assuming that fully diluted FFO per share for July
1, 2000 to June 30, 2001 is $ , then the quarterly distribution for July 1,
2001 to June 30, 2002 would be $ . This is calculated by adding $0.56 to
1/4 of 70% of the excess of over . READERS ARE CAUTIONED THAT FFO
PER SHARE AND DISTRIBUTION FIGURES FOR FUTURE PERIODS IN THIS PARAGRAPH AND THE
FOLLOWING PARAGRAPH ARE PRESENTED SOLELY TO ILLUSTRATE THE CALCULATION OF
DISTRIBUTIONS ON RECKSON CLASS B COMMON STOCK. THESE FIGURES ARE NOT ESTIMATES
OF AND DO NOT REPRESENT RECKSON'S EXPECTATIONS FOR THE ACTUAL FIGURES.
If in any quarter, the distribution on Reckson's existing common stock is
less than $0.3375 per share, then the amount of the distribution to be paid in
respect of Reckson class B common stock according to the formula above will be
decreased in proportion to the decrease in the distribution on Reckson's
existing common stock below $0.3375 per share. For example, using the prior
paragraph's assumptions, if the quarterly distribution on a share of Reckson
common stock is reduced to $0.2700, or 80% of $0.3375, then the distribution on
a share of Reckson class B common stock for such quarter would be reduced to
$0. , or 80% of $0. . See "Description of Reckson Stock--Reckson Class B
Common Stock" on page .
47
<PAGE>
THE MERGER
THE DISCUSSION IN THIS JOINT PROXY STATEMENT/PROSPECTUS OF THE MERGER AND
ALL MATERIAL TERMS OF THE MERGER AGREEMENT IS SUBJECT TO, AND QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO, THE MERGER AGREEMENT, DATED AS OF DECEMBER 8, 1998, BY
AND AMONG TOWER, RECKSON, RECKSON OP AND METROPOLITAN PARTNERS, PROVIDING FOR
THE MERGER OF TOWER WITH AND INTO METROPOLITAN PARTNERS, A COPY OF WHICH IS
ATTACHED AS ANNEX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS, AND IS
INCORPORATED HEREIN BY REFERENCE.
Reckson, a Maryland corporation, and Tower, a Maryland corporation, are
furnishing this Joint Proxy Statement/Prospectus to holders of Reckson common
stock and holders of Tower common stock in connection with the solicitation of
proxies by the Reckson board of directors in connection with a special meeting
of holders of Reckson common stock and in connection with the solicitation of
proxies by the Tower board of directors in connection with a special meeting of
holders of Tower common stock each to be held on , 1999, and at any
adjournments or postponements of the special meetings.
At the Reckson special meeting, Reckson common stockholders will be asked to
vote upon a proposal, in connection with the merger, to issue only Reckson class
B common stock as the non-cash portion of the consideration to be paid pursuant
to the merger agreement instead of a combination of Reckson class B common stock
and Reckson OP 7% notes.
At the Tower special meeting, Tower common stockholders will be asked to
vote upon a proposal to approve the merger agreement providing for the merger of
Tower with and into Metropolitan Partners.
In the merger, other than shares of Tower common stock and Tower OP units
owned directly or indirectly by Tower, Reckson, Reckson OP, Metropolitan
Partners or any of their wholly owned subsidiaries, each share of Tower common
stock and each Tower OP unit issued and outstanding immediately prior to the
closing of the merger will be converted, without any action on the part of the
holder thereof, into:
- at the election of the stockholder or unitholder and subject to the
proration provisions set forth in the merger agreement, either:
(a) the right to receive $23.00 in cash without interest, or
(b) either:
(1) .8364 of a share of Reckson class B common stock if Reckson
stockholders approve the share issuance proposal or
(2) .5725 of a share of Reckson class B common stock and $7.2565
principal amount of Reckson OP 7% notes if Reckson stockholders do
not approve the share issuance proposal, and
- if there has occurred an Adverse Recommendation Event and Reckson
stockholders have not approved the share issuance proposal, in addition to
the consideration set forth in clause (a) or (b)(2) above, an additional
$0.8046 principal amount of Reckson OP 7% notes.
BACKGROUND OF THE MERGER
At a meeting held on December 8, 1998, the Tower board of directors
determined that the merger is fair to, and in the best interests of, Tower and
its stockholders, approved the merger, the merger agreement and the transactions
contemplated thereby and determined to recommend to Tower
48
<PAGE>
stockholders that they vote for approval and adoption of the merger and the
merger agreement. See "--Tower's Reasons for the Merger; Recommendation of the
Tower Board of Directors" and "--Interests of Certain Persons in the Merger and
Related Matters." The following discussion sets forth information relating to
the background of the merger.
The Tower board of directors, as part of its ongoing oversight and planning,
has from time to time considered various financial and other alternatives that
may increase the value of Tower to all of its stockholders. In addition, issues
relating to the long-term strategy of Tower were discussed regularly by senior
management and the Tower board of directors. In this regard, senior management
and the Tower board of directors were of the view that, during the recent past,
the REIT industry has been characterized by consolidation driven in large
measure by the economies of scale available to larger entities in the industry.
They likewise believed that greater size permitted efficiencies and lower
capital raising costs, lower costs for goods and services resulting from larger
centralized buying power, amortization of ongoing general and administrative
costs over a broader portfolio base and other potential advantages for
stockholders that could be gained in a combination with another operator. In
addition, senior management and the Tower board of directors believed that the
high level of acquisition activity of larger office property REITs had generally
increased the prices of commercial real estate, especially in the lucrative New
York City market. The Tower board of directors also believed that the REIT
industry in general was potentially facing an overall decline. Accordingly, in
early 1998, Tower asked Merrill Lynch to preliminarily review with the Tower
board of directors strategic options that might be available to Tower in order
to enhance stockholder value.
In late February 1998, Lawrence H. Feldman, Tower's then Chairman, President
and Chief Executive Officer, engaged in discussions with a REIT regarding a
possible transaction involving Tower and another REIT. Shortly thereafter,
negotiations with that REIT were discontinued by the mutual decision of the
parties on account of several factors, including, but not limited to, concerns
relating to the structure and the identity of senior management and its impact
on the combined company's ability to maximize shareholder value on a going
forward basis and that the other party appeared to be interested only in
acquiring control of Tower which at that time was not of interest to the Tower
board of directors.
At a meeting held on March 12, 1998, the Tower board of directors continued
to consider various alternatives that might be available with respect to Tower
in order to enhance value to stockholders. During such discussion, the Tower
board of directors considered the current state of Tower, its competition and
ability to compete effectively, its opportunities for growth and the benefits
that might come from a strategic alliance with an outside investor or a merger
or sale of Tower. The Tower board of directors also considered the extent of
Tower's ability to acquire additional properties and the availability of debt
financing with respect thereto. At this meeting, the Tower board of directors
formed a Strategic Assessment Committee composed of Mr. Feldman, Lester S.
Garfinkel, Esko I. Korhonen and Robert M. Adams, three of whom were, at the
time, independent outside directors, to work with senior management to explore
strategic alternatives. The Tower board of directors also retained Merrill Lynch
as its exclusive financial advisor to advise the Strategic Assessment Committee
and to assist Tower in maximizing stockholder value.
Russell C. Platt, then a managing director of Morgan Stanley Asset
Management Inc., and Francis X. Tansey, the President of DRA Advisors, Inc.,
each such entity being a significant stockholder of Tower, were named to the
Tower board of directors on March 30, 1998.
On April 7, 1998, representatives of Merrill Lynch conducted a detailed
briefing and discussion with the Tower board of directors during which they
outlined the methodology they would employ if the Tower board of directors
determined to seek strategic alliances, third-party equity investors or
potential acquirers. Merrill Lynch then summarized the process it would follow
in collecting and
49
<PAGE>
disseminating information about the business of Tower, identifying potential
partners, investors and acquirers and examining and reporting on potential
strategies for increasing stockholder value by methods other than sale or
merger. Merrill Lynch also discussed a time frame in which a transaction could
potentially be accomplished and appropriate procedures that Tower should follow
throughout the process. At this meeting the Tower board of directors reviewed
the viability and the impact that potential real estate acquisitions being
considered by Tower could have on Tower's future strategic opportunities.
Following this discussion, the Tower board of directors reviewed and clarified
the purposes and roles of the Strategic Assessment Committee and Mr. Tansey was
added to it. The Strategic Assessment Committee was delegated authority to
direct and oversee the process conducted by Merrill Lynch in developing possible
alternative transactions available to Tower. In addition, Skadden, Arps, Slate,
Meagher & Flom LLP was retained as counsel to the Strategic Assessment Committee
and the outside directors. On April 17, 1998, following the resignation of
Joseph Kasman, Tower's Chief Financial Officer, the Tower board of directors
appointed Mr. Garfinkel as Chief Financial Officer of Tower. The Strategic
Assessment Committee, at meetings held between April 7 and May 27 from time to
time discussed whether it would be appropriate for it to consist only of
non-management directors. On May 27, 1998, the Strategic Assessment Committee
was reconstituted to consist of only Messrs. Adams, Korhonen and Tansey; Messrs.
Feldman and Garfinkel remained as management advisors to the Committee.
During the period from April 17, 1998 to May 26, 1998, Merrill Lynch was in
contact with 16 companies, including Reckson and Crescent, regarding the
feasibility of, and their interest in pursuing, a transaction with Tower. During
that same period, Merrill Lynch delivered to all of such companies a letter
describing the process that Tower intended to conduct and also included a
package of background materials regarding Tower consisting of publicly available
information. By early May 1998, Merrill Lynch delivered a package of
confidential information prepared by Tower to third parties and assembled a list
of more than 20 firms and entities who were viewed as potential partners,
investors and acquirers. Eventually, 15 entities executed confidentiality
agreements and were provided copies of the package of confidential information.
Throughout May and early June, Merrill Lynch, Tower senior management and the
Strategic Assessment Committee had regular conferences concerning the progress
of these efforts.
During the first week of May 1998, interested parties were asked to provide
a written expression of interest describing the terms on which they had an
interest in pursuing a transaction with Tower no later than May 15, 1998. That
date was later extended to May 18, 1998. On or around such date, one written and
three oral expressions of interest were received from four public entities, one
of which was Reckson. These preliminary indications of value, before any due
diligence was conducted, ranged from $20.00 to $27.00 per share of Tower common
stock.
On May 21, 1998, at a special meeting of the Tower board of directors,
Merrill Lynch reviewed the indications of interest received to date and
described the discussions with each interested party, the proposed form and
amount of consideration to be paid by each of such interested parties in a
potential transaction involving Tower, the advantages and disadvantages of each
such indication and related matters. Merrill Lynch reported that four entities
were continuing to perform due diligence on Tower but that no formal offer
letter had been received to date. The Tower board of directors directed Merrill
Lynch to continue discussions with each of such interested parties as well as to
continue to pursue other opportunities to maximize stockholder value.
Throughout late May and early June, the interested parties conducted due
diligence on Tower and were given access to the Tower data room. Merrill Lynch
continued to discuss the terms of a potential transaction involving Tower with
each of these interested parties and updated the Strategic Assessment Committee
on a regular basis. At a special meeting of the Tower board of directors on June
3, 1998, Merrill Lynch presented an update on the strategic alternative process
and indicated that another
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public entity had submitted a written preliminary indication of interest and had
subsequently been given access to the Tower data room. During this period,
Merrill Lynch also contacted several other parties, some of whom had previously
been contacted, in order to determine whether they would be interested in
pursuing potential transactions such as making a significant investment in Tower
or being acquired by Tower for what would be a significant percentage of the
outstanding Tower common stock. Merrill Lynch informed all parties that any
definitive proposals that they might make had to be received by June 15, 1998.
At a special meeting of the Tower board of directors on June 19, 1998,
Merrill Lynch summarized for the Tower board of directors the details of the
three written proposals that it had received from parties interested in
consummating a business combination with Tower and the relative estimated
valuation of each such proposal as well as other factors. The first proposal
involved a merger of Tower with a public REIT, the initial bidder, roughly
comparable in size to Tower, in which Tower stockholders would receive stock of
the initial bidder valued, based on the exchange ratio indicated and the then
current trading price of the initial bidder's common stock, at $22.25 per share
of Tower common stock. The second proposal involved a merger of Tower into a
larger public REIT in which Tower stockholders would receive shares of a newly
created class of convertible preferred stock of the buying REIT valued by such
REIT at $24.00 per share of Tower common stock. Based upon the terms of the
convertible preferred stock, Merrill Lynch estimated that the true market value
of the securities to be received by Tower stockholders was valued at a 10% to
15% discount to the face value of $24.00. The third proposal involved a merger
of Tower into Reckson in which Tower stockholders would receive cash or Reckson
equity valued at $24.00 per share of Tower common stock. Reckson's proposal was
subject to a number of significant conditions including completion of due
diligence and, depending on the amount of Reckson equity payable, obtaining
Reckson stockholder approval. Thereafter, the Tower board of directors
extensively discussed the limited resources available to Tower if a stand-alone
alternative was adopted relative to larger REITs, the increasing pressure from
larger REITs whose economies of scale permitted less costly operation and lower
acquisition and financing costs and, accordingly, provided such larger REITs
with a competitive advantage relative to Tower in bidding for properties, the
ability of Tower to retain current members of management, the need of Tower to
augment existing management with additional personnel in order to effectively
operate the business and other factors. Following such discussion and discussion
regarding the relative merits and drawbacks, including relative valuations, of
the three proposals received as well as timing and, in the case of the second
proposal, liquidity concerns, upon the recommendation of the Strategic
Assessment Committee, the Tower board of directors authorized the Strategic
Assessment Committee to enter into exclusive negotiations regarding a "merger of
equals" with the initial bidder only if the initial bidder were to increase its
current stock-for-stock merger proposal to deliver a fixed exchange ratio valued
at $24.00 per share of Tower common stock. Merrill Lynch was directed to engage
in discussions with the initial bidder in order to try to reach agreement as to
price and other terms. Mr. Feldman then announced to the Tower board of
directors his view that $24.00 per share of Tower common stock was too low and
indicated his intention to submit a written offer by the end of the day to
purchase Tower for $25.00 per share of Tower common stock. The Tower board of
directors proceeded to question Mr. Feldman as to the terms and timing of such a
transaction and his ability to complete such a transaction, including obtaining
the necessary financing. In light of Mr. Feldman's potential conflict of
interest, an Executive Committee of the Tower board of directors, composed of
all members of the Tower board of directors other than Mr. Feldman, was formed
for the purposes of discussing issues and taking actions on behalf of Tower with
respect to the sale process in order to ensure the integrity of such process
during the pendency of Mr. Feldman's bid for Tower.
Merrill Lynch subsequently reported to the Strategic Assessment Committee
that it had conveyed the position of the Tower board of directors to the initial
bidder but that the initial bidder was unable to deliver a fixed exchange ratio
with a value of $24.00 per share of Tower common stock. Rather, the
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initial bidder was willing to increase its bid to a fixed exchange ratio with a
value of $23.00 per share of Tower common stock with the addition of a
contingent value right. Merrill Lynch reported to the Strategic Assessment
Committee that, in its view, the value of the contingent value right was minimal
and that, therefore, the overall value of the initial bidder's bid was just over
$23.00 per share of Tower common stock. At the direction of the Strategic
Assessment Committee, Merrill Lynch began extensive discussions at this time
with Reckson, which had indicated its intent to form a joint venture company
with Crescent in order to complete a transaction with Tower. Reckson, together
with Crescent, and their respective advisors, continued to conduct due diligence
during this period.
On June 30, 1998, a special meeting of the Executive Committee was held at
which presentations were made by Reckson and Crescent, jointly, and by Mr.
Feldman. Merrill Lynch informed the Executive Committee that the initial bidder,
prior to the meeting, had determined not to make a presentation. Preceding the
presentations by Reckson and Crescent and by Mr. Feldman, certain members of
management, other than Mr. Feldman, described for the benefit of the Tower board
of directors the strategic direction Tower could pursue if it were to remain a
stand-alone entity. Reckson's and Crescent's presentation included a definitive
offer to acquire Tower for $24.00 per share of Tower common stock with the
ability of Tower stockholders to elect to receive common stock of each of
Reckson and Crescent for up to 40% of the consideration payable in the
transaction, divided equally between the two REITs as well as an explanation of
the terms of their financing. In addition, Reckson and Crescent indicated that
their proposed transaction did not require the approval of either company's
stockholders and, accordingly, would not be conditioned on such approval. The
Executive Committee determined to proceed to negotiate with Reckson and
Crescent. Reckson and Crescent required Tower, and Tower agreed, to negotiate
exclusively with them for the next three days.
On July 3, 1998, the Executive Committee met to receive updates with respect
to the negotiations with Reckson and Crescent and the status of other
alternatives. Mr. Feldman was again questioned as to his ability to complete a
transaction to acquire Tower and with respect to his financing but he was unable
to provide the Tower board of directors with adequate assurances as to these
matters. Accordingly, in light of the progress being made with Reckson and
Crescent, the decision was made by the Executive Committee to extend the period
of exclusivity with Reckson and Crescent for one week. During this period,
Merrill Lynch was contacted by the initial bidder with an unsolicited proposal
to acquire Tower in a stock-for-stock merger with consideration valued at $24.00
per share of Tower common stock. Prior to the Executive Committee reviewing such
proposal, however, the initial bidder formally withdrew it. Thereafter, Mr.
Feldman did not make a firm written commitment to acquire Tower nor did he
provide Tower with information regarding his ability to finance or complete such
a transaction.
On July 8, 1998, at a special meeting of the Tower board of directors to
consider the structure and terms of the proposed transaction, Skadden Arps and
Tower's Maryland counsel, Ballard Spahr Andrews & Ingersoll, LLP, discussed
issues related to the terms of the proposed merger of Tower with and into
Metropolitan Partners, then a joint venture company owned 50% by Reckson and 50%
by Crescent (the "Prior Merger") and again advised the Tower board of directors
of its duties in connection with the transaction. Merrill Lynch then reviewed
certain financial analyses with the Tower board of directors and delivered its
oral opinion as to the fairness, from a financial point of view, of the
consideration to be received by the holders of Tower common stock, other than
Reckson or Crescent or any of their respective affiliates, in the Prior Merger.
The Tower board of directors was informed by Merrill Lynch that Merrill Lynch
would be rendering a written opinion to the Tower board of directors as to the
fairness of the merger consideration payable in the Prior Merger. After an
extensive discussion which included Merrill Lynch and legal counsel and during
which a substantially final version of the merger agreement by and among Tower,
Reckson, Crescent and Metropolitan Partners (the "Prior Merger Agreement") was
reviewed in detail with the Tower board of directors, the Tower board of
directors then approved and adopted the Prior Merger and the Prior Merger
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Agreement and approved the transactions contemplated thereby. The vote of the
Tower board of directors was eight directors in favor and one director against,
with Mr. Feldman casting the sole vote in opposition. Mr. Feldman stated that
his vote in opposition resulted from his belief that the consideration to be
received by the Tower stockholders in the Prior Merger was below that which he
believed Tower to be worth. Mr. Feldman's position, view and valuation were
considered by the other members of the Tower board of directors who voted in
favor of the transaction. The next day, the parties executed the Prior Merger
Agreement and later that day publicly announced the transaction. Subsequently,
on August 2, 1998, the Executive Committee determined that Mr. Feldman should
cease serving in his executive positions with Tower and to seek his resignation
and, if necessary, to terminate him without cause, as Chairman, Chief Executive
Officer and President. Following discussion between Mr. Feldman and
representatives of the Tower board of directors, on August 3, 1998, Mr. Feldman
resigned from such positions and as a Director of Tower. His resignation was
agreed to be treated for purposes of Mr. Feldman's employment agreement and
certain other purposes as a termination by Tower without cause.
During the months of July through October, the parties prepared proxy
material relating to the Prior Merger which was filed, on a confidential basis,
with the SEC, reviewed and commented on by the SEC and subsequently refiled.
Reckson and Crescent continued to conduct due diligence on Tower. During this
period, the parties operated under the Prior Merger Agreement and Tower in
accordance therewith requested various consents of Reckson and Crescent in order
to engage in leasing and other business opportunities. Reckson and Crescent
granted some of the requested consents and, as permitted under the Prior Merger
Agreement, did not grant some of the requested consents. When consent was not
granted, Tower did not pursue the opportunities.
On Thursday, October 29, 1998, at a meeting called at the request of Reckson
and Crescent, Tower was informed that Reckson and Crescent believed that they
had discovered misrepresentations of Tower in the Prior Merger Agreement,
including an issue which could be relevant to Tower's status as a REIT. At such
meeting, Scott H. Rechler, Reckson's President and Chief Operating Officer
outlined the terms of a possible alternative transaction that Reckson would be
interested in pursuing involving a purchase price of approximately $20.00 per
share of Tower common stock payable partly in cash and partly in Reckson common
stock. Mr. Rechler also informed Tower, and the representative of Crescent
present at the meeting confirmed, that Crescent would not be a part of such a
transaction except to provide a portion of the cash financing. Tower indicated
to Reckson and Crescent that it would investigate the issues that they had
raised. Reckson and Crescent agreed that they would provide Tower with any
detailed backup information in their possession concerning the basis for their
belief at a meeting to be held the following morning. During this October 29(th)
meeting, Tower stated its belief that Reckson and Crescent were not terminating
the Prior Merger Agreement, but were raising areas of concern which, if proven
to be true, could result in such termination. Although Tower's representatives
at such meeting believed that Reckson's representatives agreed with such
interpretation pending the results of the investigation of the matters raised
and further discussion, Tower also believes that Crescent's general counsel
stated prior to the conclusion of the October 29(th) meeting that Crescent was
under no circumstances prepared to proceed with the existing transaction, or any
other transaction involving Tower other than the cash financing described above.
In addition, Tower believes that Crescent's general counsel repeatedly stated
that Crescent was convinced that there were a number of problems in the
representations made by Tower in the Prior Merger Agreement and that Crescent
would not be willing to delay a public announcement beyond Monday, November 2,
1998 notwithstanding the results of the investigation to be undertaken.
Crescent, however, disagrees with Tower's belief concerning the content of any
statements by Crescent's general counsel.
Promptly following this meeting, there was an informal meeting of the
Strategic Assessment Committee and certain other Tower directors during which
they were updated as to the developments. That evening a Tower board meeting was
held to further discuss the matters raised at the meeting with
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Reckson and Crescent as well as Tower's possible courses of action. On Friday,
October 30, 1998, representatives of Tower met with representatives of Reckson
and Crescent at the offices of Shaw Pittman Potts & Trowbridge, counsel to
Crescent, in New York. At this meeting, Reckson and Crescent presented their
detailed backup to support the position they had taken at the October 29(th)
meeting. Tower, Reckson and Crescent do not agree on the events of this meeting.
While Tower believes representatives of Reckson and Crescent stated at this
meeting that the Prior Merger Agreement was breached and that they would not
proceed to the closing of the Prior Merger, neither Reckson nor Crescent believe
this occurred and each of Reckson and Crescent disagrees with Tower's belief as
to what occurred. Following the October 30(th) meeting and through the weekend,
representatives of Tower, including directors, officers, outside counsel and
accountants continued to review and investigate the allegations raised on
Friday. The Tower board met on Friday, October 30(th) and again on Sunday,
November 1(st) to receive updates from its advisors concerning the investigation
of the allegations. At such meetings, the Tower board also discussed with its
advisors whether there was in fact a breach of the Prior Merger Agreement by
Tower, whether Reckson and Crescent by their actions had breached the Prior
Merger Agreement and what the respective rights and obligations of the parties
under the Prior Merger Agreement would be assuming both whether there were and
were not misrepresentations made by Tower. The Tower board also discussed
litigation that had recently been brought against Crescent by a third party
which alleged breaches of its acquisition agreement by Crescent, as well as
reports in the media that Crescent was attempting to withdraw from a number of
acquisition commitments. The Tower board also discussed these developments in
the context of its belief regarding Crescent's statements referred to above
regarding its intent with respect to the Prior Merger Agreement. Merrill Lynch
advised the board as to the then current market environment for publicly traded
REITs and the possible impact on Tower of different courses of action. At the
conclusion of the meeting on Sunday, November 1(st), the Tower board authorized
the filing of a lawsuit against Reckson and Crescent. Following the conclusion
of the meeting, Lester S. Garfinkel, Tower's Chief Financial Officer,
communicated to Mr. Rechler that Tower did not agree with the positions raised
by Reckson and Crescent and was not willing to agree to any change in the terms
of the Prior Merger.
On Monday, November 2, 1998, Tower filed suit against Reckson and Crescent
in New York Supreme Court for breaching the Prior Merger Agreement, seeking at
least $75 million in compensatory damage provisions, declaratory damages and
other relief, including injunctive relief requiring Reckson and Crescent to
proceed with the Prior Merger. Simultaneously, Tower issued a press release
relating to the litigation stating that it believed that Reckson and Crescent
had breached the Prior Merger Agreement. Metropolitan Partners issued a press
release denying the breach, indicating that the merger agreement was still in
effect, and stating that it was continuing to comply with its terms. Tower
disagrees with such press release.
On Wednesday, November 9, 1998, two directors of Tower met with
representatives of Reckson and Crescent to discuss the situation.
On Friday, November 10(th), Reckson proposed a revised transaction to Tower
in which Reckson would acquire Tower at a stated value of $22.00 per share of
Tower common stock which consisted of a combination of cash and a new class of
common stock, class B, of Reckson and assigned a stated value of $27.50 to a
share of Reckson class B common stock. The proposal also contemplated that
Reckson and Crescent would be released from the litigation upon the signing of a
definitive merger agreement and that Reckson would receive an opinion of Tower's
counsel at the time of signing confirming Tower's status as a REIT. Discussions
between the parties and their representatives continued over the next several
weeks concerning this proposal by Reckson, during which period the proposed
exchange rate was raised to provide that Reckson would acquire Tower at a stated
value of $23.00 per share of Tower common stock. During this time, the Tower
board of directors and the Strategic Assessment Committee had numerous meetings
at which updates as to the status of the negotiations were given and at which a
number of issues that arose during such negotiations were discussed. Of
particular
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concern to Tower was limiting the representations made by Tower in any merger
agreement, particularly in light of Reckson's and Crescent's due diligence of
Tower to date, and providing for greater certainty of closing, including by
quantifying at an appropriate level the concept of material adverse change and
eliminating or substantially reducing any representations of Tower as to its
status as a REIT. Tower also wanted to structure a transaction which could be
completed even if Reckson's stockholders did not approve the share issuance
proposal. As a result, the transaction was modified to include the Reckson OP 7%
notes in such a circumstance. Because the Tower board of directors believes that
Reckson OP 7% notes to be issued if Reckson stockholders do not approve the
share issuance proposal are less valuable securities than the Reckson class B
common stock that will be replaced by the notes, the Tower board of directors
desired assurances that the Reckson board of directors would continue to
recommend that Reckson stockholders approve the share issuance proposal. As a
result, Tower negotiated a provision requiring that Reckson issue in the merger
approximately $15 million principal amount of additional Reckson OP 7% notes if
the Reckson board of directors modifies or withdraws its recommendation to
approve the share issuance proposal and Reckson stockholders do not approve the
proposal.
Another issue that received a significant amount of attention by the parties
was the status of the pending litigation. The Tower board was of the view that
without the continuing possibility of litigation related to the Prior Merger
Agreement, Tower was at risk if the proposed merger did not close. Reckson and
Crescent insisted that Tower release them at the time of the signing of a
definitive merger agreement and that such release be effective even if the
merger were not completed. At a minimum, Tower determined that a material
benefit from Reckson and Crescent that would not be contingent on a closing of
the transaction was required in order to compensate Tower for releasing them
from the litigation. Following extensive discussion, it was ultimately agreed
that, as part of the transaction, Reckson would purchase $40 million of Tower
preferred stock at the time of the signing of a definitive merger agreement. The
detailed provisions of this preferred stock and certain liquidated damage
provisions, standstill restrictions and registration rights relating to the
Tower preferred stock were negotiated by the parties during this period. From
Tower's perspective, the sale of the preferred stock provided important cash
liquidity to it and represented a benefit which it felt would be valuable
pending both the closing of the merger and in the event the merger was not
completed. With respect to Crescent, the Tower board of directors continued to
believe that since Crescent's commitment was only to provide financing at
consummation of the merger, a release from the pending litigation only at that
time would be appropriate. Extensive negotiations on this point ensued with
Crescent during which Crescent insisted upon a release at the time of signing an
agreement with Reckson. The parties eventually compromised and agreed that any
release by Tower of Crescent from the litigation would terminate in the event
the merger was completed and Crescent failed to provide the financing in breach
of its obligations. In such event, the litigation against Crescent would be, in
Tower's discretion, reinstated and, if so reinstated, Tower stockholders would
receive for each share of Tower stock an interest in a trust established to
manage such litigation, were it to occur. In this circumstance, Tower
stockholders would receive for each share of Tower common stock an interest in a
trust established to manage such litigation. The Tower board retained the
flexibility to contribute up to $4 million in cash to such trust to fund the
costs and expenses of pursuing any such claim against Crescent. Also discussed
extensively during this period were the terms of the Reckson class B common
stock, including, in particular, its dividend rate, and the Reckson OP 7% notes.
During this period, the Tower board spent considerable time assessing the
liquidity of Tower, its borrowing capacity under its line of credit, its
projected cash needs and its ability to refinance the $100 million mortgage at
810 Seventh Avenue, New York City. In that regard, Tower received an extension
on the maturity of the existing mortgage loan for 810 Seventh Avenue from
December 31, 1998 to April 30, 1999, with an option to further extend such loan
through June 30, 1999. Tower was particularly concerned about its liquidity
position in light of the fact that in its view it had not, over the
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course of the prior three months, pursued a number of leasing and other
transactions to which Reckson and Crescent had objected, as permitted under the
terms of the Prior Merger Agreement. Tower viewed the receipt of $40 million
from Reckson in connection with Reckson's purchase of the Tower preferred stock
as resulting in a material improvement of its liquidity position.
On November , 1998, Tower received a proposal from a privately owned REIT
seeking to combine with Tower. Such proposal valued Tower at $ per share of
Tower common stock for purposes of determining the appropriate equity split
between current stockholders of Tower and the stockholders of such privately
owned REIT. However, the proposal valued the other party at a price which the
Tower board viewed as significantly above the net asset value of that party.
Additionally, the party requested the ability to engage in further discussions
with Tower and to conduct due diligence with respect to Tower and its
operations. The Tower board, in light of the unacceptable relative valuations of
the two companies proposed by such third party, Tower's lack of interest in
pursuing a transaction, the main consequence of which would be to take the other
entity public, as well as the preliminary nature of the inquiry and the amount
of due diligence and time necessary, determined not to proceed with such
proposal.
On November 24, 1998, a newly formed private real estate investment fund
sent a letter to Tower in which it proposed to acquire Tower for $24.00 per
share of Tower common stock in cash, subject to due diligence, financing and
other conditions. At the request of the Tower board, a representative of Merrill
Lynch contacted this entity and inquired as to its sources of financing and
other matters. The Merrill Lynch representative was informed by the principal of
this entity that it had never done an acquisition before and, although it
currently did not have sufficient equity or debt, he was confident that the fund
would be able to raise the necessary equity and debt financing following due
diligence of Tower. In light of the highly speculative nature of this proposal,
the lack of financing and any relevant transaction history for this entity and
the imminent finalization of the Reckson transactions, which the Tower board
believed would be placed at great risk if it were delayed, the Tower board
determined not to proceed with such proposal or allow this entity to conduct due
diligence.
On December 7, 1998, at a special meeting of the Tower board to consider the
structure and terms of the proposed transaction, Skadden Arps and Tower's
Maryland counsel, Ballard Spahr, discussed issues related to the terms of the
proposed merger and again advised the Tower board of its duties in connection
with the transaction. Merrill Lynch then reviewed financial analyses with the
Tower board, advised the Tower board as to the fairness from a financial point
of view without taking into account any tax consequences of the consideration to
be received by the holders of Tower OP units and delivered its oral opinion as
to the fairness, from a financial point of view, of the consideration to be
received by the holders of Tower common stock other than Reckson or Crescent or
any of their respective affiliates. Merrill Lynch did not express any opinion as
to the consequences to Tower or any Tower OP unitholder of the merger of Tower
OP into a newly formed subsidiary of Metropolitan Partners. See "--Opinion of
Tower's Financial Advisor." Merrill Lynch subsequently delivered its written
opinion to the Tower board as to the fairness of the merger consideration to be
received by Tower stockholders from a financial point of view, a copy of which
is attached to this Joint Proxy Statement/Prospectus as Annex B. After an
extensive discussion which included Merrill Lynch and legal counsel and during
which a substantially final version of the merger agreement, the documentation
relating to Reckson's purchase of the Tower preferred stock and the releases of
each of Reckson, Crescent and Metropolitan Partners from the litigation were
reviewed in detail with the Tower board of directors, the Tower board of
directors, subject to satisfactory resolution of the remaining open issues
between the parties, unanimously determined that the merger is fair to, and in
the best interests of, the Tower stockholders, approved and adopted the merger
and the merger agreement and related documentation and approved the transactions
contemplated thereby. Following this meeting, the parties continued to negotiate
the remaining open issues relating to the transaction.
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During the course of the night of December 7(th), Tower and its advisors
became concerned about an interpretation of financial covenants in Tower's line
of credit with Fleet Bank, N.A. that might have affected the ability of Tower to
borrow funds under the line of credit between the signing and closing of the
merger agreement. Based on this concern, the parties determined to suspend
discussions in the early morning hours of December 8(th), pending discussion
with Tower's lenders. On the morning of December 8, 1998, a story appeared in
THE WALL STREET JOURNAL that reported that the execution of a merger agreement
by Tower and Reckson was imminent. On December 8(th), Tower and Reckson each
issued press releases acknowledging that they were in discussions with the other
concerning a possible transaction. During the course of the day on December
8(th), Tower discussed the proposed merger and the terms of its line of credit
with its outside accountants, counsel, lenders, investment bankers and
representatives of Reckson. Based on these discussions, Tower concluded that it
anticipated having adequate liquidity under its line of credit pending the
closing of the merger. Also, on December 8(th), Tower and Reckson and their
respective counsel substantially completed the negotiation of the terms of the
merger agreement, the Reckson class B common stock, the Reckson OP 7% notes, the
Stock Purchase Agreement, the Tower preferred stock, the litigation releases and
related documentation.
At a Tower board meeting on the evening of December 8, 1998, the final terms
of all of the documents were reviewed. Officers of Tower indicated to the Tower
board that, based on discussions with representatives of the lenders under the
Fleet Bank line of credit, Tower's accountants, investment bankers and
representatives of Reckson, they were no longer concerned about the ability of
Tower to borrow under the Fleet Bank line of credit between the time of signing
and closing, if necessary. The Tower board then reapproved the transaction in
all respects. Later that evening, the parties executed the merger agreement, the
Stock Purchase Agreement and other documentation and, on the following day,
publicly announced the transaction.
Immediately following the execution of the merger agreement, Tower received
another letter from the private equity fund that had contacted Tower before the
merger agreement was executed, indicating that it had seen the article in THE
WALL STREET JOURNAL reporting that the merger announcement was imminent and
expressing its continued interest in acquiring Tower for $24.00 per share. This
letter was dated December 8, 1998 and had apparently been delivered prior to the
execution of the merger agreement, although no one at Tower actually received it
until after the signing. A copy of the letter was promptly delivered to the
Tower board of directors and to Reckson. At a meeting of the Tower board of
directors on December 21, 1998, the Tower board of directors, together with
representatives of Skadden Arps, Ballard Spahr and Merrill Lynch, discussed the
appropriate response to the letter, including in light of certain provisions
under the merger agreement. Although the Tower board was skeptical of this third
party's interest and its ability to complete a transaction in light of the prior
contact with it, at the request of the Tower board of directors, Mr. Tansey,
Chairman of the Tower board of directors, contacted the principal of the private
equity fund with a view to receiving additional information as to the viability
of its proposal. In the course of their conversation, the principal indicated
that he would not be able to provide details as to the financing of an
acquisition of Tower as requested unless and until he was able to conduct a
thorough due diligence investigation of Tower but that, in fact, he was no
longer interested in the transaction with Tower.
TOWER'S REASONS FOR THE MERGER; RECOMMENDATION OF THE TOWER BOARD OF DIRECTORS
AT A SPECIAL MEETING HELD ON DECEMBER 8, 1998, THE TOWER BOARD OF DIRECTORS
DETERMINED THAT THE MERGER IS ADVISABLE, FAIR TO AND IN THE BEST INTERESTS OF
TOWER AND ITS STOCKHOLDERS, APPROVED THE MERGER AND THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY, AND DETERMINED TO RECOMMEND TO HOLDERS OF
TOWER COMMON STOCK THAT THEY VOTE FOR APPROVAL OF THE MERGER IN ACCORDANCE WITH
THE MERGER AGREEMENT AND TRANSACTIONS CONTEMPLATED THEREBY.
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The decision of the Tower board of directors to approve the merger and the
merger agreement and to recommend approval of the merger by the holders of Tower
common stock was based on a number of factors. The following are the material
factors considered by the Tower board of directors, some of which contain both
positive and negative elements:
- the Tower board of directors' understanding of the present and anticipated
environment in the commercial real estate industry. (This was considered
by the Tower board of directors to be a positive factor.);
- how possible consolidation within the real estate industry could affect
Tower's competitive position on a stand-alone basis (This was considered
by the Tower board of directors to be a positive factor.);
- the ability of the existing management team, without the addition of
experienced mid-level management assistants to replace the loss of key
personnel, to operate the business effectively as a stand-alone entity
(This was considered by the Tower board of directors to be a positive
factor.);
- the Tower board of directors' consideration of information concerning the
financial condition, results of operations, prospects and businesses of
Tower and Reckson, including the revenues of the companies (This was
considered by the Tower board of directors to be a positive factor.);
- concern as to Tower's cash flow as a stand-alone entity over the near
term, particularly in light of it having been required to forego leasing
and other opportunities during the pendency of the Prior Merger Agreement
(This was considered by the Tower board of directors to be a positive
factor.);
- Tower's need to refinance the loan at 810 Seventh Avenue (even after
taking into account the extension of the maturity of the loan to April 30,
1999, with an option to further extend the loan through June 30, 1999)
(This was considered by the Tower board of directors to be a positive
factor.);
- Tower's obligations to pay dividends to maintain its status as a REIT for
tax purposes (This was considered by the Tower board of directors to be a
positive factor.);
- the immediate cash infusion through the sale of $40 million of preferred
stock of Tower to Metropolitan Partners on terms which the Tower board of
directors considered attractive and which provided immediate relief from
possible cash flow difficulties (This was considered by the Tower board of
directors to be a positive factor.);
- presentations from, and discussions with, senior executives of Tower,
representatives of its outside legal counsel and representatives of
Merrill Lynch regarding the business and financial due diligence with
respect to Reckson and the terms and conditions of the merger agreement
(This was considered by the Tower board of directors to be a positive
factor.);
- that the Tower board of directors before entering into the Prior Merger
Agreement undertook, with the assistance of Merrill Lynch, a lengthy
analysis of strategic alternatives, during which a large number of
potential bidders were contacted over an extended period of time (This was
considered by the Tower board of directors to be a positive factor.);
- that for the period of time from November 2, 1998, the day on which Tower
announced that it had commenced litigation against Reckson and Crescent
for having breached the Prior Merger Agreement, through the execution of
the merger agreement, including after the public announcement of Tower on
November 2, 1998, Tower's stock price did not exceed $18.88 (This was
considered by the Tower board of directors to be a positive factor.);
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- that none of the persons who made proposals to acquire Tower before the
execution of the Prior Merger Agreement had submitted acquisition
proposals, either in their original or a modified form, after Tower
announced that it had commenced litigation against Crescent and Reckson
for having breached the Prior Merger Agreement (This was considered by the
Tower board of directors to be a positive factor.);
- that the only two proposals received by the Tower board of directors after
Tower announced that it had commenced litigation against Crescent and
Reckson were not, for the reasons discussed under "--Background of the
Merger," viewed by the Tower board of directors as being in the best
interests of the Tower stockholders or Tower OP unitholders or as
favorable as the merger (This was considered by the Tower board of
directors to be a positive factor.);
- the financial and other analyses presented by Merrill Lynch, including the
opinion of Merrill Lynch that the consideration to be offered to Tower
common stockholders in the merger was fair to such stockholders from a
financial point of view as of the date of the opinion as discussed in
"--Opinion of Tower's Financial Advisor" on page (This was considered by
the Tower board of directors to be a positive factor.);
- that the Tower board of directors valued the merger consideration, based
on the advice of Merrill Lynch using a trading price for Reckson common
stock of $23.94, the closing price on December 2, 1998, at ranges of
$20.77 to $22.86 in the event the Reckson stockholders approved the share
issuance proposal and $20.90 to $22.38 in the event the Reckson
stockholders did not approve the share issuance proposal and compared the
amounts to:
- $18.94, the closing price of Tower common stock on the New York Stock
Exchange Composite Transaction Tape on December 7, 1998, the last full
trading day prior to the publication in THE WALL STREET JOURNAL of a
story stating that the announcement of the merger was imminent (This was
considered by the Tower board of directors to be a positive factor.); and
- the $24.00 per share price of Prior Merger Agreement (This was considered
by the Tower board of directors to be a negative factor.);
- that in light of the events related to the Prior Merger Agreement, the
Tower board of directors believed that the agreements with Reckson
provided for greater certainty of completion, including the possible
forfeiture of $30 million, calculated on a purchase price basis, of
preferred stock by Reckson if, among other things, Reckson fails to
complete the merger when it is obligated to do so. (This was considered by
the Tower board of directors to be a positive factor.);
- that although the Tower board of directors would have preferred that the
only non-cash consideration payable in the merger be Reckson class B
common stock, the alternative mix of stock and Reckson OP 7% notes ensured
that consummation of the transactions did not depend upon the Reckson
stockholder vote, thereby providing greater certainty of completion of the
merger (This was considered by the Tower board of directors to be positive
in certain respects and negative in other respects.);
- that the Prior Merger Agreement provided for a higher price of $24.00 per
share and unit than the value of the merger consideration as discussed
above (This was considered by the Tower board of directors to be a
negative factor.);
- that there existed in the Prior Merger Agreement the opportunity for such
higher price to be paid entirely in cash as compared to the limited amount
of cash payable in the merger (This was considered by the Tower board of
directors to be a negative factor.);
- that although the Tower board of directors believed that the litigation
Tower had commenced arising from the Prior Merger Agreement against
Reckson, Crescent and Metropolitan had
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strong merits, the other parties to the Prior Merger Agreement would not
have voluntarily completed the Prior Merger and that expensive and
inherently uncertain litigation would have been necessary to compel such
completion (This was considered by the Tower board of directors to be both
a positive and a negative factor.);
- that Reckson and Metropolitan Partners required that concurrently with the
execution of the merger agreement, rather than at the completion of the
merger, Tower, Crescent, and Reckson and Metropolitan Partners would agree
to release each other from all actions and claims arising from or relating
to the Prior Merger Agreement (This was considered by the Tower board of
directors to be a negative factor.);
- that if Crescent fails to fully fund a $75 million capital contribution to
Metropolitan Partners, the releases between Tower and Crescent terminate
and Tower may set up a litigation trust in order to pursue its litigation
against Crescent (This was considered by the Tower board of directors to
be a positive factor.);
- the merger agreement permits the Tower board of directors to consider
additional BONA FIDE third-party offers to acquire Tower and permits the
Tower board of directors to provide information to and negotiate with such
parties and to terminate the merger agreement, subject to the payment of
significant fees and expenses to Reckson, if prior to the time of the
merger the Tower board of directors withdraws or modifies in a manner
adverse to Reckson its recommendation in order to permit Tower to execute
a definitive agreement relating to a proposal for Tower that the Tower
board of directors determines is more favorable to stockholders than the
transactions contemplated by the merger agreement (see "The Merger
Agreement--No Solicitation of Proposals" and "--Termination") (This was
considered by the Tower board of directors to be a positive factor
notwithstanding the possible payment of fees.);
- the Tower board of directors' recognition that members of the Tower board
of directors and of Tower's management may have interests in the merger
that are in addition to, and not necessarily aligned with, the interests
of holders of Tower common stock, which interests were considered in
connection with its approval and adoption of the merger agreement, as
discussed in "Interests of Tower Officers and Directors in the Merger and
Related Matters" on page (This was considered by the Tower board of
directors to be a neutral factor.); and
- the restrictions on the conduct of Tower's business pending closing of the
merger, the conditions to closing of the merger and the significant fees
and expenses that would become payable in the event of a termination of
the merger agreement under circumstances described in the merger agreement
(Although these terms were superior to those contained in the Prior Merger
Agreement, this was considered by the Tower board of directors to be a
negative factor.).
The foregoing discussion of the factors considered by the Tower board of
directors is not intended to be exhaustive, but includes all material factors
considered by the Tower board of directors. In reaching its decision to approve
the merger, the Tower board of directors did not quantify or assign any relative
weights to the factors considered, and individual directors may have given
different weights to different factors.
RECKSON'S REASONS FOR THE MERGER AND THE SHARE ISSUANCE PROPOSAL; POSITIVE AND
NEGATIVE FACTORS CONSIDERED
THE RECKSON BOARD OF DIRECTORS:
(A) HAS APPROVED THE TERMS OF THE MERGER AGREEMENT AND COMPLETION OF THE
MERGER,
(B) BELIEVES THAT THE TERMS OF THE MERGER AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT ARE ADVISABLE AND IN THE BEST
INTERESTS OF RECKSON AND ITS STOCKHOLDERS AND
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(C) RECOMMENDS THAT THE HOLDERS OF RECKSON COMMON STOCK VOTE FOR THE
APPROVAL OF THE SHARE ISSUANCE PROPOSAL.
In reaching its determination to approve the merger agreement, the Reckson
board of directors held discussions with Reckson's management and legal and
financial advisors and also considered the following material positive factors:
- Reckson management's judgment that the New York City real estate market
offers an attractive opportunity for Reckson to build a strong franchise,
as it has done in the suburban markets where Reckson currently operates;
- the acquisition of Tower establishes Reckson's presence in the New York
City real estate market and provides the initial properties from which to
build a New York City franchise;
- Reckson management's belief that a New York City franchise will benefit,
and benefit from, Reckson's existing suburban franchises by allowing it to
develop relationships with tenants that may choose to relocate or expand
to properties in Reckson's suburban portfolio and allowing Reckson to
offer its suburban tenants the ability to relocate or expand to Reckson's
New York City properties;
- the combination of Tower's and Reckson's existing operations creates the
opportunities for Reckson to realize cost savings and operating
efficiencies due to the increased size of the combined company and the
combination of overlapping support and administrative systems;
- the potential for the Tower acquisition to increase Reckson's funds from
operations per share;
- Reckson's view that on the whole the Tower properties are well maintained
and leased to good credit quality tenants that will add diversity to the
Reckson tenant base;
- that concurrently with the execution of the merger agreement, Reckson
received a full release from Tower regarding the litigation commenced by
Tower arising from the Prior Merger Agreement; although the Reckson board
of directors believed the Tower claims to be without merit, it viewed the
release as eliminating the inherent uncertainty and expense of the
litigation; and
- the Reckson board of directors' view that the overall terms of the merger
agreement are fair to Reckson.
In reaching its determination to recommend approval of the share issuance
proposal, the Reckson board of directors also considered:
- Reckson management's judgement that the less leveraged capital structure
that would result from the issuance of only Reckson class B common stock
in the merger, instead of a combination of Reckson class B common stock
and Reckson OP 7% notes, is a preferable capital structure for Reckson
after the merger.
The foregoing discussion of the factors considered by the Reckson board of
directors is not intended to be exhaustive, but includes all material factors
considered by the Reckson board of directors. In reaching its decision to
approve the merger, the Reckson board of directors did not quantify or assign
any relative weights to the factors considered, and individual directors may
have given different weights to different factors.
The Reckson board of directors believes that these reasons are relevant to,
and support, its approval of the merger agreement and recommendation of the
share issuance proposal because they are consistent with Reckson's previously
stated mission of maximizing long-term profitability for its stockholders. In
addition, the Reckson board of directors believes that by acquiring these assets
in a
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single transaction Reckson will recognize certain cost savings by eliminating
the management time and effort required to acquire a substantial number of
properties on an individual basis.
The Reckson board of directors also considered potentially negative factors
that could arise from the proposed merger. The material potentially negative
factors the Reckson board of directors considered are as follows:
- the significant costs involved in connection with consummating the merger
and the substantial management time and effort required to effectuate the
merger and integrate the businesses of Tower into Reckson;
- if the Reckson stockholders do not approve the share issuance proposal,
then the merger will result in a more leveraged capital structure than if
the Reckson stockholders approve the proposal;
- the risks of entering the New York City market where Reckson has not
previously owned and operated properties and where Reckson does not have
an established management team; and
- the risk that the anticipated benefits of the acquisition of Tower might
not be fully realized.
In the view of the Reckson board of directors, the negative factors were not
sufficient, either individually or collectively, to outweigh the advantages
offered by the merger.
OPINION OF TOWER'S FINANCIAL ADVISOR
On April 16, 1998, Tower retained Merrill Lynch to act as its exclusive
financial advisor in connection with the evaluation of various strategic
alternatives available to Tower. At the meeting of the Tower board of directors
on December 6, 1998, Merrill Lynch rendered its oral opinion to the Tower board
of directors, and subsequently on December 8, 1998, Merrill Lynch delivered its
written opinion, to the effect that, as of such date and based upon the
assumptions made, matters considered and limits of review described in the
opinion, the proposed consideration to be received by the holders of Tower
common stock was fair to such stockholders from a financial point of view.
Merrill Lynch has not been requested to, and does not expect to, update its
opinion prior to the closing of the merger. No limitations were imposed by
Tower's board of directors upon Merrill Lynch with respect to the investigations
made or procedures followed by it in rendering its opinion. The full text of the
Merrill Lynch opinion, which sets forth assumptions made, matters considered and
limitations on the scope of review undertaken, is attached to this Joint Proxy
Statement/Prospectus as Annex B and is incorporated herein by reference. The
description of the Merrill Lynch opinion set forth herein is qualified in its
entirety by reference to the full text of the Merrill Lynch opinion. Tower
stockholders are urged to read the Merrill Lynch opinion in its entirety. In the
opinion of the Tower board of directors, no events or significant changes in
information have occurred that would alter the Merrill Lynch opinion. However,
if an event or change of this type does occur, including an amendment to the
merger agreement which materially affects the financial terms of such agreement,
a revised fairness opinion may be requested.
THE MERRILL LYNCH OPINION IS ADDRESSED TO THE TOWER BOARD OF DIRECTORS AND
ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
CONSIDERATION TO BE RECEIVED BY THE TOWER STOCKHOLDERS IN THE MERGER AND DOES
NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY THE TOWER BOARD OF
DIRECTORS TO ENGAGE IN THE MERGER AND DOES NOT CONSTITUTE, NOR SHOULD IT BE
CONSTRUED AS, A RECOMMENDATION TO ANY TOWER STOCKHOLDER AS TO WHETHER SUCH
STOCKHOLDER SHOULD CHOOSE CASH OR RECKSON SECURITIES IN THE MERGER OR HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE TOWER SPECIAL MEETING. THE PROPOSED CONSIDERATION
TO BE RECEIVED BY THE TOWER STOCKHOLDERS PURSUANT TO THE MERGER WAS DETERMINED
ON THE BASIS OF NEGOTIATIONS AMONG TOWER, METROPOLITAN PARTNERS AND RECKSON, AND
WAS APPROVED BY THE TOWER BOARD OF DIRECTORS.
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In connection with the preparation of the Merrill Lynch opinion, Merrill
Lynch, among other things:
- reviewed Tower's Annual Report, Form 10-K and related financial
information for the fiscal year ended December 31, 1997, and Tower's
Reports on Form 10-Q and the related unaudited financial information for
the quarterly periods ended March 31, 1998, June 30, 1998 and September
30, 1998;
- reviewed Reckson's Annual Report, Form 10-K and related information for
the fiscal year ended December 31, 1997, and Reckson's Reports on Form
10-Q and the related unaudited financial information for the quarterly
periods ended March 31, 1998, June 30, 1998 and September 30, 1998;
- reviewed information, including financial forecasts, relating to the
business, earnings, cash flow, funds from operations, adjusted funds from
operations, assets, liabilities and prospects of Tower furnished to
Merrill Lynch by Tower;
- reviewed Reckson's management's internal financial projections for the
year ending December 31, 1999, furnished to Merrill Lynch by Reckson;
- conducted discussions with members of senior management and
representatives of Tower and Reckson concerning the matters described in
the preceding four bullet points, as applicable, as well as their
respective businesses and prospects before and after giving effect to the
merger;
- reviewed the market prices and valuation multiples for Tower common stock
and compared them with those of publicly traded companies that Merrill
Lynch deemed to be reasonably similar to Tower;
- conducted discussions with members of senior management and
representatives of Tower and Reckson concerning the matters described in
the preceding four bullet points, as applicable, as well as their
respective businesses and prospects before and after giving effect to the
merger;
- reviewed the proposed financial terms of the Reckson class B common stock
and compared them with the terms of convertible preferred issues of
publicly traded companies that Merrill Lynch deemed to be reasonably
similar to the Reckson class B common stock;
- reviewed the proposed financial terms of the Reckson OP 7% notes;
- reviewed the results of operations of Tower and Reckson and compared them
with those of publicly traded companies that Merrill Lynch deemed to be
reasonably similar to Tower and Reckson, respectively;
- compared the proposed financial terms of the merger with the financial
terms of other transactions that Merrill Lynch deemed to be relevant;
- reviewed a pro forma analysis of the consequences of the merger on funds
from operations growth per share of Reckson common stock;
- participated in discussions and negotiations among representatives of
Tower and Reckson and their financial and legal advisors;
- reviewed a draft dated December 5, 1998 of the merger agreement;
- reviewed a draft dated December 5, 1998 of the Reckson Articles
Supplementary relating to the Reckson class B common stock;
- reviewed a draft dated December 5, 1998 of the form of the Reckson OP 7%
notes;
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- reviewed a draft dated December 5, 1998 of the Stock Purchase Agreement by
and between Tower and Metropolitan Partners; and
- reviewed such other financial studies and analyses and took into account
such other matters as Merrill Lynch deemed necessary, including its
assessment of general economic, market and monetary conditions.
Non-public information discussed by senior management of Tower with
representatives of Merrill Lynch consisted of funds from operations projections
of $2.34 per share of Tower common stock for 1998.
In preparing the Merrill Lynch opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to Merrill Lynch, discussed with or reviewed by or for Merrill Lynch,
or publicly available, and Merrill Lynch did not assume any responsibility for
independently verifying such information or undertake an independent evaluation
or appraisal of any of the assets or liabilities (contingent or otherwise) of
Tower, Reckson or Metropolitan Partners, nor was Merrill Lynch furnished with
any such evaluation or appraisal. Merrill Lynch also assumed that Tower would be
treated as a real estate investment trust for Federal income tax purposes. In
addition, Merrill Lynch did not assume any obligation to conduct any physical
inspection of the properties or facilities of Tower or Reckson. With respect to
the financial forecast information furnished to or discussed with Merrill Lynch
by Tower or Reckson, Merrill Lynch assumed that such information had been
reasonably prepared and reflected the best currently available estimates and
judgment of Tower's or Reckson's management as to the expected future financial
performance of Tower or Reckson, as the case may be. Merrill Lynch also assumed
that the final form of the merger agreement was substantially similar to the
draft reviewed by Merrill Lynch.
The Merrill Lynch opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of the Merrill Lynch
opinion. In connection with the preparation of the Merrill Lynch opinion
delivered to the Tower board of directors on December 8, 1998, Merrill Lynch was
not asked by Tower or the Tower board of directors to solicit, nor did it
solicit, third-party indications of interest for the acquisition of all or any
part of Tower. Merrill Lynch assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the merger, no restrictions, including any divestiture requirements or
amendments or modifications, would be imposed that would have a material adverse
effect on the contemplated benefits of the merger. Merrill Lynch did not value,
or evaluate the merits of, the litigation among Tower, Reckson and Crescent that
was ongoing as of the date of the Merrill Lynch opinion for purposes of
rendering the Merrill Lynch opinion.
Merrill Lynch expressed no opinion as to the prices at which Reckson common
stock or Reckson class B common stock will trade following consummation of the
merger. The Merrill Lynch opinion does not address the relative merits of the
merger and alternative business combinations with third parties. Merrill Lynch
did not consider any tax consequences of the merger or other transactions in
connection therewith.
At the meeting of the Tower board of directors held on December 6, 1998,
Merrill Lynch presented certain financial analyses accompanied by written
materials in connection with the delivery of the Merrill Lynch opinion. The
following is a summary of the material financial and comparative analyses
performed by Merrill Lynch in arriving at the Merrill Lynch opinion. The focus
of the Merrill Lynch analysis was on the calculation of the relative values of
Tower common stock and the Reckson class B common stock. Each of the factors and
analyses that Merrill Lynch considered and performed were in support of the
Merrill Lynch opinion.
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VALUATION OF THE RECKSON CLASS B COMMON STOCK
To determine the value of the Reckson class B common stock, Merrill Lynch
prepared and evaluated financial analyses resulting in ranges of values for the
Reckson class B common stock, each based on different assumed closing prices for
Reckson's existing common stock. Based on a per share closing price of Reckson's
existing common stock of $23.94, on December 2, 1998, Merrill Lynch derived
values for the Reckson class B common stock ranging from $23.94 to $27.29 per
share. The $23.94 per share value is equal to the December 2, 1998 closing price
of Reckson's existing common stock for which a share of Reckson class B common
stock is exchangeable initially on a one-for-one basis. The $27.29 per share
value is equal to the sum of (a) the $23.94 per share closing price of Reckson's
existing common stock as of December 2, 1998 and (b) $3.35, the present value
per share, assuming an 8% annual discount rate, of the Excess Dividends (as
defined below) over the 4.5 year period that the Reckson class B common stock is
anticipated to be outstanding before being called for exchange. "Excess
Dividends" means the spread, if any, between the dividend payable on Reckson
class B common stock and the estimated dividend payable on Reckson common stock.
Merrill Lynch's analyses assumed (a) an 8.5% annual funds from operations growth
rate for the period 2001 through 2003; and (b) an 8.5% annual dividend growth
rate on Reckson common stock for the same period. On the basis of the foregoing
methodologies, Merrill Lynch's valuation of the Reckson class B common stock
ranged from $28.00 to $31.34 per share, assuming Reckson's existing common stock
closes at $28.00 per share, and from $20.00 to $23.34 per share, assuming
Reckson's existing common stock closes at $20.00 per share.
VALUATION OF THE RECKSON OP 7% NOTES
To determine the value of the Reckson OP 7% notes, Merrill Lynch performed
yield and liquidity analyses. To determine an estimate of the yield investors
would receive from the Reckson OP 7% notes, Merrill Lynch analyzed the trading
performance of recent senior, unsecured debt offerings of CarrAmerica Realty
Corp., Crescent Real Estate Equities Company and Highwoods Properties, Inc.
Based on this comparable analysis, Merrill Lynch estimated the spread for the
Reckson OP 7% notes to be 388 basis points over the comparable ten-year U.S.
Treasury Note. This yield analysis gave an implied value to the Reckson OP 7%
notes of 90.2% of their face amount, or $4.91 per Reckson OP 7% note. In
addition, Merrill Lynch applied a 0.125% discount to the 7% coupon rate on the
notes, effectively reducing the coupon rate on the Reckson OP 7% notes to
6.875%, to reflect a potential lack of liquidity in the market for the Reckson
OP 7% notes immediately following the closing of the merger. Combining the
results of its yield analysis and liquidity analysis, Merrill Lynch estimated
that the discount at which the Reckson OP 7% notes would trade, utilizing
industry standard bond pricing methodologies, would be approximately 89.4% of
the face amount of the Reckson OP 7% notes, or $4.86 per note.
VALUATION OF THE TOTAL CONSIDERATION PAYABLE TO TOWER STOCKHOLDERS
Assuming that Reckson shareholders vote in favor of the Share Issuance, 75%
of the total Merger consideration will be payable in Reckson class B common
stock and 25% will be payable in cash. The range of values for the portion of
the consideration payable in Reckson class B common stock was determined to be
$15.02 to $15.52 per share of Tower common stock. This range is the product of
- 75% of the value of the Reckson class B common stock, ranging from $23.94
to $27.29 per share, as determined on page under the caption
"Valuation of the Reckson Class B Common Stock;" and
- the .8364 exchange ratio.
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Merrill Lynch then added the cash portion of the merger consideration of $5.75
per share of Tower common stock to this range, resulting in a value for the
merger consideration ranging from $20.77 per share to $22.86 per share of Tower
common stock.
Assuming Reckson stockholders vote against the share issuance proposal and
assuming all holders of Tower common stock and units elect to receive cash in
the merger, 51% of the outstanding shares of Tower common stock and tower units
will be exchanged for Reckson class B common stock, 25% will be exchanged for
cash and 24% will be exchanged for Reckson OP 7% notes with a face amount of
$5.44 per share of Tower common stock. In this case, Merrill Lynch determined
the range of values for the portion of the consideration payable in Reckson
class B common stock to be $10.21 to $10.55 per share of Tower common stock.
This rage is the product of
- 51% of the value of the Reckson class B common stock, ranging from $24.94
to $27.29 per share, as determined on page under the caption
"Valuation of the Reckson Class B Common Stock;" and
- the .8364 exchange ratio.
The range of values for the portion of the consideration payable in Reckson OP
7% notes was determined to be $4.86 to $4.91 per share of Tower common stock as
discussed on page under the caption "Valuation of the Reckson OP 7%
Notes." Merrill Lynch then added the cash portion of the merger consideration of
$5.75 per share of Tower common stock to these ranges, resulting in a value for
the merger consideration ranging from $20.82 per share to $21.21 per share of
Tower common stock.
HISTORICAL TRADING PERFORMANCES AND CURRENT CAPITALIZATION
Merrill Lynch reviewed certain trading information for each of Tower and
Reckson and, on the basis thereof, calculated their respective market values,
market capitalizations and trading multiples based on the closing stock prices
on December 2, 1998, of $18.9375 for Tower and $23.9375 for Reckson. Merrill
Lynch then calculated the market value of each of Tower and Reckson as a
multiple of projected funds from operations, and funds from operations less
recurring capital expenditures ("AFFO"). First Call, an industry service
provider of earnings estimates based on an average of earnings estimates
published by various investment banking firms, provided mean estimates of funds
from operations for comparable REIT and Merrill Lynch Equity Research supplied
estimates of AFFO for comparable REITs. For Tower the funds from operations
multiples for 1998 and 1999 were 8.2x and 7.6x, respectively. For Reckson the
funds from operations multiples for 1998 and 1999 were 11.9x and 10.8x,
respectively, and the AFFO multiples for 1998 and 1999 were 13.8x and 12.5x,
respectively.
Merrill Lynch also reviewed the share price history for Tower for the period
October 10, 1997 through December 2, 1998, and for Reckson for the period
December 2, 1997 through December 2, 1998 and noted certain events and public
announcements which related to the companies and the REIT industry as a whole
during the process in order to demonstrate the effect, or lack thereof, on the
share prices of the respective companies during such periods.
ANALYSIS OF SELECTED COMPARABLE PUBLICLY TRADED COMPANIES
Using publicly available information and estimates of future financial
results published by First Call and taken from Merrill Lynch Equity Research,
Merrill Lynch compared funds from operations and AFFO data for each of Tower and
Reckson with the corresponding funds from operations and AFFO data for a group
of publicly traded companies engaged primarily in the ownership, management,
operation and acquisition of office properties which Merrill Lynch deemed to be
reasonably comparable to Tower and Reckson. For the purpose of its analyses, the
following companies were used as comparable companies to Tower: CarrAmerica
Realty Corp., Cornerstone Properties Inc., Mack-Cali Realty Corp., Prime Group
Realty Trust, Reckson and SL Green Realty Corp.; and the following companies
were used as comparable companies to Reckson: Boston Properties Inc.,
CarrAmerica Realty Corp., Crescent Real Estate Equities Company, Equity Office
Properties Trust, Mack-Cali Realty Corp. and Vornado Realty Trust.
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Merrill Lynch's calculations resulted in the following relevant ranges for
the Tower comparable companies and for Tower as of December 2, 1998: a range of
market value as a multiple of projected 1998 funds from operations of 8.0x to
11.9x, with a mean of 9.8x as compared to Tower at 8.2x; a range of market value
as a multiple of projected 1999 funds from operations of 6.8x to 10.8x, with a
mean of 8.8x as compared to Tower at 7.6x; a range of market value as a multiple
of projected 1998 AFFO of 10.9x to 13.8x, with a mean of 11.7x; and a range of
market value as a multiple of projected 1999 AFFO of 9.5x to 12.5x, with a mean
of 10.8x. Based upon these projected multiples, Merrill Lynch determined the
implied per share valuation of Tower to be $17.91 to $24.92.
Merrill Lynch's calculations resulted in the following relevant ranges for
the Reckson comparable companies and for Reckson as of December 2, 1998: a range
of market value as a multiple of projected 1998 funds from operations of 9.2x to
14.1x, with a mean of 11.1x as compared to Reckson at 11.9x; a range of market
value as a multiple of projected 1999 funds from operations of 8.2x to 11.9x,
with a mean of 9.8x as compared to Reckson at 10.8x; a range of market value as
a multiple of projected 1998 AFFO of 10.4x to 16.8x, with a mean of 12.8x as
compared to Reckson at 13.8x; and a range of market value as a multiple of
projected 1999 AFFO of 9.5x to 14.1x, with a mean of 11.4x as compared to
Reckson at 12.5x. Based upon these projected multiples, Merrill Lynch determined
the implied per share valuation of Reckson to be $18.13 to $30.70.
None of the companies utilized in the above analysis for comparative
purposes is, of course, identical to Tower or Reckson. Accordingly, a complete
analysis of the results of the foregoing calculation cannot be limited to a
quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the Tower comparable companies and the Reckson comparable companies and other
factors that could affect the public trading volume of the Tower comparable
companies and the Reckson comparable companies, as well as that of Tower or
Reckson. In addition, the multiples of market value to estimated 1998 and
projected 1999 funds from operations and AFFO for the Tower comparable companies
and the Reckson comparable companies are based on projections prepared by
research analysts using only publicly available information. Accordingly, such
estimates may or may not prove to be accurate.
COMPARABLE TRANSACTIONS ANALYSIS
Merrill Lynch also compared applicable financial ratios of the merger with
those of other selected mergers and strategic transactions involving REITs which
Merrill Lynch deemed to be relevant. These transactions were Apartment
Investment & Management Co.'s merger with Ambassador Apartments, Inc., Camden
Property Trust's merger with Oasis Residential, Camden Property Trust's merger
with Paragon Group, Inc. and Bradley Real Estate Inc.'s merger with Tucker
Properties Corp.
Using publicly available information and estimates of financial results as
published by First Call, Merrill Lynch calculated the implied offer value per
share for the acquired company, as of the day before the announcement of the
respective transaction, as a multiple of the estimated funds from operations per
share for such company for the current year, if the transaction was announced in
the first half of the year, or for the next year if the deal was announced in
the second half of the year. This analysis yielded a range of transaction funds
from operations multiples of 6.6x to 11.2x with a mean of 9.8x. Merrill Lynch
then applied these multiples to the projected 1998 Tower funds from operations
of $2.34 per share and derived a range of values for Tower Common Stock of
$15.44 per share to $26.21 per share.
DISCOUNTED CASH FLOW ANALYSIS
Merrill Lynch performed discounted cash flow analyses (i.e., analyses of the
present value of the projected cash flows, taking debt service into account, for
the periods using the discount rates indicated) of Tower based upon projections
provided by Tower's management for the years 1998
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through 2003, inclusive, using discount rates reflecting an equity cost of
capital ranging from 15.5% to 17.5% and terminal value multiples of calendar
year 2003 AFFO ranging from 9.5x to 10.5x. Based upon Tower's 1998 and 1999
budget and property level cash flow projections for 2000 through 2003, and
assuming no acquisitions in years 1999 through 2003, distributions per share
were not projected to increase. The projections prepared by management of Tower
were estimates only and inherently subject to known and unknown risks,
uncertainties, and other factors, many of which are outside of Tower's control,
which may cause the actual results to differ significantly from those set forth
in the projections. The range of implied present values per share of Tower
common stock was $16.34 to $18.92 using the discounted dividend method and
$18.27 to $20.94 based upon the discounted AFFO method.
Merrill Lynch also performed discounted cash flow analyses of Reckson based
upon projections and assumptions agreed to by Reckson's management to be
reasonable for the years 1998 through 2003, inclusive, using discount rates
reflecting an equity cost of capital ranging from 15.0% to 17.0% and terminal
value multiples of calendar year 2003 AFFO ranging from 11.0x to 13.0x. The
range of present values per share of Reckson common stock was $21.32 to $26.02
using the discounted dividend method and $23.05 to $27.81 based upon the
discounted AFFO method.
NET ASSET VALUATION ANALYSIS
Merrill Lynch performed a net asset valuation for Tower based on an
asset-by-asset real estate valuation of Tower's properties, an estimation of the
current value for Tower's other assets and liabilities, and an estimation of
Tower's debt balances as of November 25, 1998. The real estate valuation
utilized property specific projections prepared by Tower's management. Merrill
Lynch reviewed Tower management's economic and market assumptions used in the
Pro-Ject cash flow projections for reasonableness. Merrill Lynch also reviewed
Tower management's lease-up assumptions for non-stabilized properties for
reasonableness. For the operating portfolio of Tower, the valuation utilized a
10-year discounted cash flow method on property cash flows (net operating income
less alterations, commissions, capital expenditures and reserves) for the period
July 1, 1998 through June 30, 2008 and a range of capitalization rates of 8.50%
to 10.75%, and a range of discount rates of 10.75% to 12.75%. Merrill Lynch
analyzed the resultant going-in capitalization rates and values per square foot
against comparable sales, published market research and data obtained from
discussions with local appraisers. These calculations indicated a per share net
asset valuation range for Tower of $19.34 to $23.48.
PRO FORMA COMBINATION ANALYSIS
Merrill Lynch analyzed the pro forma effects resulting from the merger,
including the potential impact on Reckson's projected stand-alone funds from
operations per share and the anticipated incremental increase to Reckson's funds
from operations per share resulting from the merger. Merrill Lynch observed
that, after giving effect to Reckson and Tower management projections, the
merger would be accretive to Reckson's projected funds from operations per share
in each of the years 1998 through 2003, inclusive; and that, after giving effect
to Tower management projections, the merger would be accretive to Reckson's
projected funds from operations per share in each of the years 1999, 2000, 2001
and 2002.
The summary set forth above does not purport to be a complete description of
the analyses performed by Merrill Lynch in arriving at the Merrill Lynch
opinion. The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial or summary description. Merrill Lynch
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create a misleading view of the
process underlying the Merrill Lynch opinion. In its analyses, Merrill Lynch
made numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond Tower's and
Reckson's control. Any estimates
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contained in Merrill Lynch's analyses are not necessarily indicative of actual
values, which may be significantly more or less favorable than as set forth
therein. All valuations prepared by Merrill Lynch are estimated values which do
not purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future. All such estimates are
inherently subject to uncertainty.
The Tower board of directors selected Merrill Lynch to render a fairness
opinion because Merrill Lynch is an internationally recognized investment
banking firm with substantial experience in transactions similar to the merger
and because it is familiar with Tower and its business. In addition, Merrill
Lynch acted as the lead managing underwriter in connection with Tower's initial
public offering in October 1997 and, in connection therewith, received customary
fees. Merrill Lynch has from time to time rendered investment banking, financial
advisory and other services to Tower, Reckson and/or their affiliates and may
continue to do so and has received, and may receive, customary compensation for
the rendering of such services. Merrill Lynch is continually engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, secondary
distributions of listed and unlisted securities and private placements.
Pursuant to a letter agreement dated April 16, 1998, Tower agreed to pay
Merrill Lynch a transaction fee of $4.4 million, $1 million of which was paid by
Tower upon delivery of the Merrill Lynch opinion and $3.4 million of which is
payable by Tower upon the completion of the merger. In connection with the
fairness opinion Merrill Lynch delivered on July 9, 1998 relating to the Prior
Merger, Tower paid Merrill Lynch a fee of $1 million, which amount will be
credited toward the fee payable to Merrill Lynch upon consummation of the
merger. Tower also agreed to reimburse Merrill Lynch for its reasonable
out-of-pocket expenses incurred in connection with its advisory work, including
the reasonable fees and disbursements of its legal counsel, and to indemnify
Merrill Lynch and related persons against liabilities arising out of or in
conjunction with its rendering of services under such letter agreement,
including liabilities under the federal securities law.
In the ordinary course of its business, Merrill Lynch may actively trade in
the securities of Tower and Reckson for its own account and the account of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
OPINION OF RECKSON'S FINANCIAL ADVISOR
Salomon Smith Barney was retained by Reckson to act as its financial advisor
in connection with the proposed merger. In connection with such engagement,
Reckson requested that Salomon Smith Barney evaluate the fairness, from a
financial point of view, to Reckson of the consideration to be paid by Reckson
in the merger. On December 5, 1998, at a meeting of the Reckson board of
directors held to evaluate the proposed merger, Salomon Smith Barney delivered
to the Reckson board of directors an oral opinion, which opinion was
subsequently confirmed by delivery of a written opinion dated December 8, 1998,
the date of execution of the merger agreement, that, as of the date of its
opinion and based upon and subject to the matters stated in the opinion, the
merger consideration was fair, from a financial point of view, to Reckson.
In arriving at its opinion, Salomon Smith Barney reviewed the merger
agreement, the terms of the Reckson class B common stock as set forth in the
proposed form of the articles supplementary of Reckson and the terms of the
Reckson OP 7% notes as set forth in the proposed form of Indenture attached as
exhibits to the merger agreement, and held discussions with certain senior
officers, directors and other representatives and advisors of Reckson and
representatives and advisors of Tower concerning the businesses, operations and
prospects of Reckson and Tower. Salomon Smith Barney examined publicly available
business and financial information relating to Reckson and Tower as well as
financial forecasts and other information and data for Reckson and Tower which
were provided to or otherwise discussed with Salomon Smith Barney by the
management of Reckson and representatives
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and advisors of Tower, including information relating to strategic implications
and operational benefits anticipated to result from the merger. Salomon Smith
Barney reviewed the financial terms of the merger as set forth in the merger
agreement in relation to, among other things: current and historical market
prices and trading volumes of Reckson common stock and Tower common stock; the
historical and projected earnings and other operating data of Reckson and Tower;
and the capitalization and financial condition of Reckson and Tower. Salomon
Smith Barney also considered, to the extent publicly available, the financial
terms of other transactions recently effected which Salomon Smith Barney
considered relevant in evaluating the merger and analyzed financial, stock
market and other publicly available information relating to the businesses of
other companies whose operations Salomon Smith Barney considered relevant in
evaluating those of Reckson and Tower. Salomon Smith Barney also evaluated the
potential pro forma financial impact of the merger on Reckson. In addition,
Salomon Smith Barney conducted such other analyses and examinations and
considered other financial, economic and market criteria as Salomon Smith Barney
deemed appropriate in arriving at its opinion. Salomon Smith Barney noted that
its opinion was necessarily based upon information available, and financial,
stock market and other conditions and circumstances existing and disclosed, to
Salomon Smith Barney as of the date of its opinion.
In rendering its opinion, Salomon Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Salomon Smith Barney. With respect to financial
forecasts and other information and data provided to or otherwise reviewed by or
discussed with Salomon Smith Barney, the management of Reckson and
representatives and advisors of Tower advised Salomon Smith Barney that such
forecasts and other information and data were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of Reckson and Tower as to the future financial performance of
Reckson and Tower and the strategic implications and operational benefits
anticipated to result from the merger. Salomon Smith Barney assumed, with the
consent of the Reckson board of directors, that Tower was organized and has
operated in conformity with the requirements for qualification as a REIT for
Federal income tax purposes and that the merger and the related transactions
will not adversely affect the REIT status of Reckson. Salomon Smith Barney did
not express any opinion as to what the value of the Reckson class B common stock
or the Reckson OP 7% notes actually will be when issued pursuant to the merger
or the prices at which the Reckson class B common stock or the Reckson OP 7%
notes will trade or otherwise be transferable subsequent to the merger. Salomon
Smith Barney did not make and was not provided with an independent evaluation or
appraisal of the assets or liabilities, contingent or otherwise, of Reckson or
Tower nor did Salomon Smith Barney make any physical inspection of the
properties or assets of Reckson or Tower. Salomon Smith Barney was not requested
to consider, and Salomon Smith Barney's opinion does not address, the relative
merits of the merger as compared to any alternative business strategies that
might exist for Reckson or the effect of any other transaction in which Reckson
might engage. Although Salomon Smith Barney evaluated the merger consideration
from a financial point of view, Salomon Smith Barney was not asked to and did
not recommend the specific consideration payable in the merger, which was
determined through negotiation between Reckson and Tower. No other limitations
were imposed by Reckson on Salomon Smith Barney with respect to the
investigations made or procedures followed by Salomon Smith Barney in rendering
its opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SALOMON SMITH BARNEY DATED DECEMBER
8, 1998, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX C AND SHOULD
BE READ CAREFULLY IN ITS ENTIRETY. THE OPINION OF SALOMON SMITH BARNEY IS
DIRECTED TO THE RECKSON BOARD OF DIRECTORS AND RELATES ONLY TO THE FAIRNESS OF
THE MERGER CONSIDERATION FROM A FINANCIAL POINT OF VIEW TO RECKSON, DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER OR RELATED TRANSACTIONS AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER WITH RESPECT TO ANY MATTER
RELATING TO THE PROPOSED MERGER. THE SUMMARY OF THE OPINION OF SALOMON SMITH
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BARNEY SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion, Salomon Smith Barney performed a variety of
financial and comparative analyses, including those described below. The summary
of these analyses does not purport to be a complete description of the analyses
underlying Salomon Smith Barney's opinion. The preparation of a fairness opinion
is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, a fairness opinion
is not readily susceptible to summary description. Accordingly, Salomon Smith
Barney believes that its analyses must be considered as a whole and that
selecting portions of its analyses and factors, without considering all analyses
and factors, could create a misleading or incomplete view of the processes
underlying its analyses and opinion.
No company, transaction or business used in Salomon Smith Barney's analyses
as a comparison is identical to Reckson, Tower or the merger, nor is an
evaluation of the results of such analyses entirely mathematical; rather it
involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, transactions or
business segments being analyzed. In its analyses, Salomon Smith Barney made
numerous assumptions with respect to Reckson, Tower, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of Reckson and Tower. The estimates
contained in Salomon Smith Barney's analyses and the valuation ranges resulting
from any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than those suggested by the analyses. In addition, analyses relating
to the value of businesses or securities do not purport to be appraisals or to
reflect the prices at which businesses or securities actually may be sold.
Accordingly, Salomon Smith Barney's analyses and estimates are inherently
subject to substantial uncertainty.
Salomon Smith Barney's opinion and analyses were only one of many factors
considered by the Reckson board of directors in its evaluation of the merger and
should not be viewed as determinative of the views of the Reckson board of
directors or management with respect to the merger consideration or the proposed
merger.
INTRODUCTION
Salomon Smith Barney derived an implied reference range for the Reckson
class B common stock and the Reckson OP 7% notes as described below in the
"Class B Common Stock Analysis" and the "Senior Notes Analysis," respectively.
Salomon Smith Barney then used these reference ranges to derive an implied
reference range for the merger consideration as described below in the "Merger
Consideration Analysis" assuming both that Reckson stockholders approve the
share issuance proposal and that Reckson stockholders do not approve the share
issuance proposal. Salomon Smith Barney then compared the implied reference
ranges for the merger consideration against the implied equity reference ranges
for Tower derived from three valuation methodologies more fully described below
under "Net Asset Analysis," "Selected Company Analysis" and "Selected
Transactions Analysis." Salomon Smith Barney also analyzed potential pro forma
financial effects of the merger on Reckson as described below in "Pro Forma
Merger Analysis."
CLASS B COMMON STOCK ANALYSIS
In analyzing the Reckson class B common stock, Salomon Smith Barney examined
the difference in Reckson's projected dividends for Reckson common stock and
Reckson class B common stock over the four and one-half year period commencing
on January 1, 1999 at which point, at Reckson's option,
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the Reckson class B common stock may be exchanged into shares of Reckson common
stock. Reckson class B common stock dividend projections were calculated based
on internal estimates of the management of Reckson as to Reckson's projected
funds from operations growth for the five-year period 1999 through 2003. Based
on a range of estimated rates of return for REIT equity investments of 12.0% to
16.0%, the net present value of the difference between the dividends on a share
of Reckson class B common stock and a share of Reckson common stock, referred to
as the "excess dividend value," was between $2.65 and $2.89 per share. In order
to estimate a reference range for a share of Reckson class B common stock, the
excess dividend value was added to the closing stock price of Reckson common
stock on December 4, 1998 of $23.13 per share since each share of Reckson class
B common stock is exchangeable into a share of Reckson common stock on a
one-for-one basis. Based on the closing price of Reckson common stock on
December 4, 1998, this analysis indicated an implied reference range for the
Reckson class B common stock of approximately $25.77 to $26.01 per share.
SENIOR NOTES ANALYSIS
Salomon Smith Barney analyzed the present value of the Reckson OP 7% notes
by discounting the interest and principal payment stream of the Reckson OP 7%
notes utilizing discount rates of 8.0% to 8.5%. These discount rates were
determined based on an estimate of the market yield for a security of similar
credit quality as the Reckson OP 7% notes. This analysis indicated an implied
reference range of approximately 90.0% to 93.2% of the par value of the Reckson
OP 7% notes.
MERGER CONSIDERATION ANALYSIS
Salomon Smith Barney analyzed the merger consideration assuming both that
Reckson stockholders approve the share issuance proposal and that Reckson
stockholders do not approve the share issuance proposal, without giving effect,
in the event that the share issuance proposal is not approved, to the potential
issuance of additional Reckson OP 7% notes in the case of an Adverse
Recommendation Event. The merger consideration was analyzed (1) in the event
that the share issuance proposal is approved, by adding (A) the product of (x)
the Reckson class B common stock exchange ratio of 0.6273 and (y) the reference
range for the Reckson class B common stock derived from the "Class B Common
Stock Analysis" described above and (B) the cash amount per share of Tower
common stock of $5.75, which analysis yielded an implied reference range of
approximately $21.92 to $22.07 per share, and (2) in the event that the share
issuance proposal is not approved, by adding (A) the product of (x) the Reckson
class B common stock exchange ratio of 0.4291 and (y) the reference range for
the Reckson class B common Stock derived from the "Class B Common Stock
Analysis" described above and (B) the cash amount per share of Tower common
stock of $5.75, and (C) the product of (y) the reference range for the Reckson
OP 7% notes derived from the "Senior Notes Analysis" described above and (z) the
Reckson OP 7% notes amount per share of Tower common stock of $5.45, which
analysis yielded an implied reference range of approximately $21.71 to $21.99
per share.
NET ASSET ANALYSIS
Salomon Smith Barney performed a net asset analysis of Tower by applying to
each of Tower's assets a range of capitalization rates estimated based on market
conditions and discussions with the management of Reckson. The range of
capitalization rates was applied to Tower's 1999 net operating income
projections as adjusted by Reckson. These capitalization rates resulted in an
operating property reference range of approximately $684 million to $724
million. The value of Tower's land holdings, based on estimates of Reckson
management, was added to the operating property reference range, resulting in a
total property reference range of approximately $703 million to $743 million.
Tower's outstanding net debt was then subtracted from the total property
reference range, which amount was
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then divided by the total outstanding shares of Tower common stock and
outstanding Tower OP units, resulting in an implied equity reference range for
Tower of approximately $21.74 to $23.85 per share.
SELECTED COMPANIES TRADING ANALYSIS
Using publicly available information, Salomon Smith Barney analyzed the
market values and trading multiples of Tower and two groups of selected publicly
traded REITs, collectively, the "selected companies," consisting of (1) primary
companies: Parkway Properties, Inc., SL Green Realty Corp., Kilroy Realty
Corporation, Great Lakes REIT, Inc., and Brandywine Realty Trust and (2)
secondary companies: Reckson, Mack-Cali Realty Corporation, Arden Realty, Inc.,
and Prentiss Properties Trust. Salomon Smith Barney compared market values as a
multiple of projected funds from operations for the years ended December 31,
1998 and December 31, 1999. All multiples were based on closing stock prices on
December 4, 1998. Estimated funds from operations data for the selected
companies were based on research analysts' estimates, and estimated funds from
operations data for Tower were based both on research analysts' estimates and
estimates of the management of Reckson as to Tower's funds from operations based
on Tower's existing asset portfolio, including potential cost savings and
operational efficiencies associated with general and administrative cost
reductions. Applying a range of multiples for the selected companies to Tower's
estimated 1998 and 1999 funds from operations research analysts' estimates and
funds from operations portfolio estimates resulted in an implied average equity
reference range for Tower of approximately $19.18 to $21.66 per share.
SELECTED TRANSACTIONS ANALYSIS
Using publicly available information, Salomon Smith Barney reviewed the
purchase prices and implied transaction multiples paid in the following 11
selected transactions in the REIT industry, collectively, the "selected
transactions," consisting of (acquiror/target): (1) Irvine Co./Irvine Apartment
Communities; (2) ProLogis Trust/Meridian Industrial Trust, Inc.; (3) Public
Storage, Inc./Storage Trust Realty; (4) Regency Realty Corporation/Pacific
Retail Trust; (5) New Plan Realty Trust/Excel Realty Trust, Inc.; (6) Security
Capital Pacific Trust/Security Capital Atlantic Incorporated; (7) Avalon
Properties, Inc./Bay Apartment Communities, Inc.; (8) Kimco Realty
Corporation/The Price REIT Inc.; (9) AIMCO/Ambassador Apartments, Inc.; (10)
Camden Property Trust/Oasis Residential, Inc.; and (11) Prime Retail
Inc./Horizon Group Properties, Inc. Salomon Smith Barney compared the purchase
prices paid in the selected transactions as a multiple of latest 12 months and
one-year forward funds from operations. All multiples were based on financial
information available at the time of the relevant transaction. Applying a range
of multiples for the selected transactions to Tower's latest 12 months funds
from operations and estimated 1999 funds from operations research estimates and
funds from operations portfolio estimates resulted in an implied average equity
reference range for Tower of approximately $21.84 to $25.10 per share.
PRO FORMA MERGER ANALYSIS
Salomon Smith Barney analyzed pro forma effects resulting from the merger,
including the impact of the merger on Reckson's projected funds from operations
for the years 1999 and 2000, based on internal estimates of the management of
Reckson. The results of the pro forma merger analysis suggested that the merger
could be accretive to Reckson's funds from operations in each of the years
analyzed assuming both that Reckson stockholders approve the share issuance
proposal and that Reckson stockholders do not approve the share issuance
proposal. The actual results achieved by the combined company may vary from
projected results and the variations may be material.
MISCELLANEOUS
Pursuant to the terms of Salomon Smith Barney's engagement, Reckson has
agreed to pay Salomon Smith Barney for its services in connection with the
merger an aggregate financial advisory
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fee of $3.5 million, three million dollars of which will be payable upon
completion of the merger. Reckson has also agreed to reimburse Salomon Smith
Barney for reasonable travel and other out-of-pocket expenses incurred by
Salomon Smith Barney in performing its services, including the reasonable fees
and expenses of its legal counsel, and to indemnify Salomon Smith Barney and
related persons against liabilities, including liabilities under the Federal
securities laws, arising out of Salomon Smith Barney's engagement.
Salomon Smith Barney has advised Reckson that, in the ordinary course of
business, Salomon Smith Barney and its affiliates may actively trade or hold the
securities of Reckson and Tower for their own account or for the account of
customers and, accordingly, may at any time hold a long or short position in
such securities. Salomon Smith Barney has in the past provided investment
banking services to Reckson and Tower unrelated to the proposed merger, for
which services Salomon Smith Barney has received compensation. In addition,
Salomon Smith Barney and its affiliates, including Citigroup Inc. and its
affiliates, may maintain relationships with Reckson, Tower and their respective
affiliates.
Salomon Smith Barney is an internationally recognized investment banking
firm and was selected by Reckson based on its experience, expertise and
familiarity with Reckson, Tower and their respective businesses. Salomon Smith
Barney regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Tower and Reckson have each made forward-looking statements in this document
and in documents that are incorporated by reference in this Joint Proxy
Statement/Prospectus that are subject to risks and uncertainties.
Forward-looking statements include the information concerning possible or
assumed future results of operations of Tower and Reckson set forth in
"Summary," "Selected Historical and Unaudited Pro Forma Combined Financial
Data," "The Proposed Merger--Background of the Merger," "Recommendation to Tower
Stockholders," and statements preceded or followed by or that include the words
"believes," "expects," "anticipates," "intends," "plans," "estimates" or similar
expressions.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of Reckson may differ materially from those expressed in these forward-looking
statements. Many of the factors that will determine these results and values are
beyond the ability of Tower and Reckson to control or predict. Determining
factors include, among others, general economic and business conditions, local
real estate conditions, future acquisitions and restructurings, the availability
and creditworthiness of prospective tenants, lease rents, the availability of
financing and the other risks detailed in this Joint Proxy Statement/Prospectus
under the heading "Risk Factors Relating to the Merger and an Investment in
Reckson Securities" and included from time to time in reports filed by Tower and
Reckson with the SEC, including the reports incorporated by reference in this
Joint Proxy Statement/Prospectus. For the type of statements described in this
and the preceding paragraph, Tower and Reckson claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
MERGER FINANCING
The total amount of cash and new borrowings required to complete the merger,
including payment of the cash consideration to Tower stockholders and Tower OP
unitholders, refinancing of a portion of Tower's existing indebtedness, payments
in respect of Tower employment arrangements, and other
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transaction fees and expenses is estimated to be approximately $[ ] million
without taking into account the potential dispositions discussed below.
Reckson is currently negotiating with potential lenders regarding the terms
of a commitment for new, secured financing in amount of $240 million.
In addition, Crescent Real Estate Equities Limited Partnership has agreed to
provide $85 million through the purchase of a preferred membership interest in
Metropolitan Partners. Crescent's preferred interest accrues distributions at a
rate of 7.5% per year for a two-year period and may be redeemed by Metropolitan
Partners at any time during that period for $85 million, plus an amount
sufficient to provide Crescent with a 9.5% internal rate of return on its
investment in Metropolitan Partners. After two years, Crescent's preferred
membership interest must be exchanged for either a common membership interest in
Metropolitan Partners or common stock of Reckson. See "Metropolitan
Partners--Formation."
POTENTIAL DISPOSITIONS OF PROPERTIES
Reckson has engaged brokers to, and anticipates that it will, dispose of the
Tower properties located outside the New York City metropolitan area. In
addition, an agreement in principle with a third party has been reached in which
the third party has agreed to purchase four of Tower's New York City properties
for approximately $84.5 million. The agreement in principle is not yet binding
on the parties and therefore there can be no assurances that such sale will
occur.
ACCOUNTING TREATMENT
Metropolitan Partners will account for the merger as a purchase of a
business, which means that the assets and liabilities of Tower, including
intangible assets, will be recorded at their fair values. The results of
operations and cash flows of Tower will be included in Metropolitan Partners'
financial statements prospectively as of the completion of the merger. Reckson
will consolidate its investment in Metropolitan Partners.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following summarizes the material U.S. Federal income tax consequences
of the merger to holders of Tower common stock. This summary is based on
provisions of the Internal Revenue Code, regulations promulgated under the
Internal Revenue Code and administrative and judicial interpretations of the
Internal Revenue Code, all of which are subject to change, possibly with
retroactive effect. This summary assumes that holders of Tower common stock hold
their shares as capital assets within the meaning of section 1221 of the
Internal Revenue Code, which generally covers property held for investment. This
summary does not address all aspects of U.S. Federal income taxation that may be
relevant to particular holders of Tower common stock in light of their personal
investment circumstances or to holders of Tower common stock subject to special
treatment under the Internal Revenue Code, including financial institutions,
tax-exempt organizations, insurance companies, broker-dealers, regulated
investment companies, holders of Tower common stock who received their shares
through the exercise of employee stock options or otherwise as compensation, and
persons holding Tower common stock as part of a "straddle," "hedge," "conversion
transaction," "synthetic security" or other integrated investment. This summary
does not discuss the U.S. Federal income tax consequences of the merger to a
holder who, for U.S. Federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership or a foreign estate or
trust, nor does it discuss any foreign, state or local tax consequences of the
merger.
EACH HOLDER OF TOWER COMMON STOCK IS URGED TO REVIEW THE DISCUSSION UNDER
"FEDERAL INCOME TAX CONSEQUENCES RELATING TO AN INVESTMENT IN RECKSON CLASS B
COMMON STOCK AND RECKSON OP 7% NOTES" AND TO CONSULT HIS OR HER TAX ADVISOR WITH
RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF THE
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MERGER TO SUCH HOLDER, INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN TAX LAWS AND OF CHANGES IN APPLICABLE TAX LAWS.
THE SPECIAL DIVIDEND
Under the merger agreement, Tower may declare a special dividend to the
holders of Tower common stock, the record date for which will be the close of
business on the last business day prior to the date of the closing. The special
dividend will be at a rate equal to Tower's most recent quarterly dividend,
multiplied by the number of days elapsed since the last dividend record date
through and including the date of the closing of the merger and divided by 91.
The special dividend may be increased to the extent Tower reasonably determines
that the amount provided in the preceding formula may not be sufficient for
Tower to qualify as a REIT for its last taxable year.
To the extent the special dividend is paid out of Tower's earnings and
profits, the special dividend will be taxable to holders of Tower common stock
as ordinary income, except to the extent designated by Tower as capital gain
income, and will not be eligible for the dividends received deduction generally
available to corporations. To the extent the special dividend is in excess of
Tower's earnings and profits, it will generally not be taxable to a holder of
Tower common stock, but rather will reduce the holder's adjusted tax basis in
his or her shares. To the extent the special dividend exceeds the adjusted tax
basis in a holder's shares, it will be included in the holder's taxable income
as long-term capital gain, or short-term capital gain if the shares have been
held for one year or less. In the event the special dividend is reduced to fund
the litigation trust, holders of Tower common stock should generally be deemed
for U.S. Federal income tax purposes to have received their pro rata portion of
the cash used to fund the litigation trust, and should be subject to U.S.
Federal income taxation on the amount deemed received in the manner described
above. Following this distribution, for U.S. Federal income tax purposes, a
holder of an interest in the litigation trust should (a) have a tax basis in the
trust equal to his or her pro rata portion of the cash used to fund the
litigation trust, (b) be treated as an owner of an undivided interest in the
assets of the litigation trust, and (c) be allocated his or her pro rata share
of income and expense of the litigation trust. The ability of a holder of an
interest in the litigation trust to deduct allocations of trust expenses may be
limited under the Internal Revenue Code. HOLDERS OF TOWER COMMON STOCK ARE URGED
TO CONSULT THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF HOLDING
INTERESTS IN THE LITIGATION TRUST.
THE MERGER
In the opinion of Brown & Wood LLP, the receipt of any combination of cash,
shares of Reckson class B common stock and Reckson OP 7% notes in exchange for
Tower common stock as a result of the merger will be a taxable transaction for
U.S. Federal income tax purposes, and may also be a taxable transaction under
applicable foreign, state, local or other tax laws. In general, for U.S. Federal
income tax purposes, a holder of Tower common stock will recognize capital gain
or loss equal to the difference between his or her adjusted tax basis in the
Tower common stock and the amount of cash, the fair market value of any Reckson
class B common stock and the fair market value of any Reckson OP 7% notes
received in exchange for the holder's Tower common stock. Gain or loss generally
must be calculated separately for each block of Tower common stock exchanged in
the merger. A block of stock is generally considered to be a group of shares
acquired at the same cost in a single transaction. Net capital gain recognized
in the merger by individuals who have held their Tower common stock for more
than one year generally will be taxed at a maximum U.S. Federal income tax rate
of 20%. Gain recognized in the merger by individuals who have held their Tower
common stock for one year or less generally will be taxed at ordinary income tax
rates. There are limitations on the deductibility of capital losses for both
individual and corporate taxpayers.
Payments made in connection with the merger, and on the Reckson OP 7% notes,
may be subject to "backup withholding" at a rate of 31%, unless a holder of
Tower common stock (a) is a corporation
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or comes within an exempt category and, when required, demonstrates this fact or
(b) provides a correct taxpayer identification number to the exchange agent, and
otherwise complies with applicable backup withholding rules. A holder of Tower
common stock who does not provide a correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount paid as backup
withholding does not constitute an additional tax and will generally be
creditable against the stockholder's U.S. Federal income tax liability.
Individual holders of Tower common stock may generally avoid backup withholding
by completing a substitute IRS Form W-9 or, for foreign persons, an IRS Form W-8
or IRS Form W-8BEN and submitting it to the exchange agent for the merger when
they submit their Tower common stock certificate(s). For those Tower
stockholders wishing to elect to receive $23 in cash instead of Reckson
securities, a substitute IRS Form W-9 will be included in the form of election
to be submitted with stock certificate(s) to the exchange agent prior to the
Tower special meeting. For Tower stockholders not making a cash election, a
substitute IRS Form W-9 also will be included in the letter of transmittal to be
submitted with stock certificate(s) to the exchange agent after the merger. Each
holder of Tower common stock should consult its tax advisor as to its
qualification for exemption from backup withholding and/or the procedure for
obtaining an exemption or otherwise providing a taxpayer identification number.
STATUS OF RECKSON AS A REIT
As noted above, Reckson, like Tower, has elected to be taxed as a real
estate investment trust. For special considerations relating to the holding of
stock in a REIT as well as to the taxation of a REIT, see "Federal Income Tax
Consequences Relating to an Investment in Reckson Class B Common Stock and
Reckson OP 7% Notes."
ORIGINAL ISSUE DISCOUNT ON RECKSON OP 7% NOTES
As partial consideration for Tower common stock exchanged in the merger, if
Reckson stockholders do not approve the share issuance proposal, Tower
stockholders will receive Reckson OP 7% notes. Although this cannot be
determined with certainty, it is possible that the Reckson OP 7% notes will be
issued with original issue discount. The following summary is a general
description of the U.S. Federal income tax consequences to holders of the
Reckson OP 7% notes if the Reckson OP 7% notes are issued and carry original
issue discount. The following summary is based upon final Treasury regulations
released by the IRS on January 27, 1994, as amended on June 11, 1996, under the
original issue discount provisions of the Internal Revenue Code.
The Reckson OP 7% notes will be issued with original issue discount if, upon
their issuance, their "stated redemption price at maturity" exceeds their "issue
price" by more than a DE MINIMIS amount, which is, generally 1/4of 1% of a
note's stated redemption price at maturity multiplied by the number of complete
years to maturity from its issue date. In the case of Reckson OP 7% notes, their
"stated redemption price at maturity" will be their stated principal amount. The
"issue price" of a Reckson OP 7% note will equal its fair market value, as
determined on the issue date, assuming that, as expected, the Reckson 7% OP
notes trade on the New York Stock Exchange. If the Reckson 7% OP notes are
issued, and are issued with original issue discount, a holder of a Reckson OP 7%
note will be required to include such original issue discount in income as
ordinary interest income for U.S. Federal income tax purposes as such original
issue discount accrues under a constant yield method. This generally will result
in the inclusion of amounts in income in advance of receipt of the cash payments
attributable to income on the note, regardless of the holder's regular method of
accounting.
REGULATORY MATTERS
Neither Reckson nor Tower believes that the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 applies to the merger or that waiting period
requirements under the Hart-Scott-Rodino Act are applicable to the merger.
However the completion of the merger may be delayed by reason of the
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Hart-Scott-Rodino Act. At any time before or after completion of the merger, the
Federal Trade Commission or the Antitrust Division of the Department of Justice
could take any action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the completion of
the merger or seeking divestiture of substantial assets of Reckson or Tower. At
any time before or after the completion of the merger, any state could take any
action under its own antitrust laws it deems necessary or desirable. This action
could include seeking to enjoin the consummation of the merger or seeking
divestiture of Tower assets, of Tower assets held by Metropolitan Partners, or
of assets of Reckson. Private parties may also seek to take legal action under
the antitrust laws.
APPRAISAL RIGHTS
Tower is incorporated under Maryland law. Under Maryland law, because shares
of Tower common stock are listed on a national securities exchange, Tower common
stockholders have no rights to an appraisal of their shares in connection with
the merger. Following the merger, Reckson stockholders will continue to own
their shares of Reckson comon stock and, accordingly, will have no rights to an
appraisal of their shares under Maryland law.
FEDERAL SECURITIES LAWS CONSEQUENCES; RESALE RESTRICTIONS
All Reckson class B common stock and Reckson OP 7% notes received by holders
of Tower common stock in the merger will be freely transferable, except that
Reckson class B common stock and Reckson OP 7% notes received by persons who are
deemed to be "affiliates" of Tower prior to the merger may be resold by them
only in transactions permitted by the resale provisions of Rule 145 promulgated
under the Securities Act, or Rule 144 promulgated under the Securities Act in
the case of such persons who become affiliates of Reckson, or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of a party generally include individuals or entities that control, are
controlled by, or are under common control with, a party and may include
officers and directors of such party, as well as principal stockholders of a
party.
CONDUCT OF THE BUSINESS IF THE MERGER IS NOT COMPLETED
If the merger is not completed, it is expected that Tower's business and
operations will continue to be conducted substantially as they currently are
being conducted.
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INTERESTS OF TOWER OFFICERS AND DIRECTORS IN THE MERGER
AND RELATED MATTERS
In considering the recommendation of the Tower board of directors with
respect to the merger agreement, stockholders should be aware that certain
members of the management of Tower and members of the Tower board of directors
have interests in the merger that are different from, or in addition to, the
interests of Tower stockholders. Three executive officers of Tower, Mr.
Garfinkel, Mr. Cox and Mr. Feldman, were members of the nine-person Tower board
of directors that approved the merger. Certain executive officers, directors and
key employees of Tower have been granted stock options and/or restricted shares
and/or have entered agreements providing them with rights upon a change in
control of Tower. The following sets forth the cash payments and other benefits
which will be provided to key executives, directors and key employees of Tower
in connection with the merger.
INDEMNIFICATION AND INSURANCE
Robert M. Adams, Robert L. Cox, Lawrence H. Feldman, Reuben Friedberg,
Lester S. Garfinkel, Joseph D. Kasman, Esko I. Korhonen, Peggy D. Rawitt, Eric
S. Reimer, Stephen S. Siegel and Richard M. Wisely have entered into
indemnification agreements with Tower which provide that Tower will maintain
directors' and officers' liability insurance and indemnify directors and
officers to the full extent permitted by applicable law. Reckson has agreed in
the merger agreement that after the merger Metropolitan Partners will provide to
each current or former director or officer of Tower the same exculpation and
indemnification for acts or omissions occurring prior to the closing of the
merger provided by Tower to such individuals immediately prior to the merger
pursuant to Tower's charter or bylaws or in any agreement with Tower or its
subsidiaries that was in effect at the date of the merger agreement, and that
all such rights will survive the merger and continue in full force and effect in
accordance with their terms. Further, under the terms of the merger agreement,
for a period of six years and ninety days after the closing of the merger,
Metropolitan Partners will indemnify the current and former officers and
directors of Tower to the fullest extent permitted by law. In addition, for a
period of three years and ninety days after the closing of the merger,
Metropolitan Partners is obligated to maintain in effect policies of directors'
and officers' liability insurance that are no less advantageous to such persons
than are policies covering each person as at the date of execution of the merger
agreement except that Metropolitan Partners will not be required to pay more
than 200% of the aggregate premium paid by Tower in 1998. Reckson has
unconditionally guaranteed the obligations of Metropolitan Partners described in
this paragraph.
COMPENSATION ARRANGEMENTS OF TOWER EXECUTIVE OFFICERS
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
In October 1997, Tower entered into employment agreements with Messrs.
Feldman and Cox, in April 1998, Tower entered into employment agreements with
Ms. Rawitt and Mr. Garfinkel, and in June 1998, Tower entered into employment
agreements with Clifford L. Stein, Reid Berman, Scott Jensen and Mr. Reimer. The
term of each of these Tower employment agreements is three years, subject, in
the case of Messrs. Feldman, Garfinkel and Cox and Ms. Rawitt, to automatic
one-year extensions. The base salary for 1998 for Mr. Feldman was $175,000, for
Mr. Cox was $150,000, for Ms. Rawitt was $175,000, for Mr. Garfinkel was
$195,000 ($225,000 for 1999), for Mr. Stein was $135,000, for Mr. Reimer was
$150,000, for Mr. Berman was $75,000 and for Mr. Jensen was $135,000.
Pursuant to the terms of the Tower employment agreements, except with
respect to Ms. Rawitt, in the event an executive officer's employment is
terminated by Tower other than for Cause, as defined in each Tower employment
agreement, or is terminated by such Tower executive officer for "Good Reason,"
as defined in each Tower employment agreement but generally including a change
in control of Tower as defined in each Tower employment agreement, each Tower
executive officer will be entitled
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to receive a severance payment equal to either 2.99 times the "base amount," as
defined in the Internal Revenue Code, or 2.99 times the Tower executive
officer's then current "base salary," payable in monthly installments over a
12-month period, as determined under their respective Tower employment
agreement. With respect to Ms. Rawitt, in the event Ms. Rawitt's employment is
terminated by Tower within six months following a change in control of Tower, or
is terminated by Ms. Rawitt for Good Reason, Ms. Rawitt will be entitled to
receive a severance payment equal to one-year's then current base salary plus
the bonus paid to Ms. Rawitt during the preceding year of her employment.
If the employment of any of the following Tower executive officers is
terminated following a change in control of Tower under circumstances entitling
him or her to severance payments and benefits under the applicable Tower
employment agreement, the appropriate amount of the cash severance payment would
be as follows:
<TABLE>
<CAPTION>
TOWER EXECUTIVE OFFICERS SEVERANCE AMOUNT
- --------------------------------------------------------------------------- -----------------
<S> <C>
Robert L. Cox $ 687,000
Peggy D. Rawitt $ 332,250
</TABLE>
Upon a change in control of Tower, under the terms of the applicable Tower
employment agreement, the appropriate amount of the cash severance payment for
each of the following Tower executive officers would be as follows:
<TABLE>
<CAPTION>
TOWER EXECUTIVE OFFICERS SEVERANCE AMOUNT
- --------------------------------------------------------------------------- -----------------
<S> <C>
Lester S. Garfinkel $ 1,116,882
Clifford L. Stein $ 464,198
Eric S. Reimer $ 515,775
Reid Berman $ 257,888
Scott Jensen $ 464,198
</TABLE>
The above amounts will be paid to each Tower executive officer only in the
event that the conditions to such payment contained in the applicable Tower
employment agreement are satisfied, entitling such Tower executive officer to
his or her severance payment.
STAY BONUS FOR MESSRS. GARFINKEL, COX AND STEIN
In addition to the severance payments above, Tower must pay the "stay
bonuses" set forth below, provided that the officer remains an employee of Tower
in good standing through the consummation of a change in control and regardless
of whether the officer is terminated following a change in control. The merger
will constitute a change in control.
<TABLE>
<CAPTION>
TOWER EXECUTIVE OFFICERS STAY BONUS AMOUNT
- -------------------------------------------------------------------------- ------------------
<S> <C>
Lester S. Garfinkel $ 900,000
Clifford L. Stein $ 135,000
Robert L. Cox $ 75,000
</TABLE>
There are no other stay bonuses payable to any other Tower executive
officers following the merger other than those to Messrs: Garfinkel, Stein and
Cox:
RESTRICTED STOCK AWARD
Pursuant to Ms. Rawitt's Tower employment agreement, she was granted 10,000
shares of restricted Tower common stock, which restrictions lapse and which
shares become non-forfeitable (a) in five equal installments commencing on
January 1, 1999, (b) in the event Ms. Rawitt's employment is terminated by Tower
other than for cause, or is terminated by Ms. Rawitt for Good Reason, as defined
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in her Tower employment agreement or (c) a Change in Control, as defined in her
Tower employment agreement. As a result, Ms. Rawitt's restricted Tower common
stock shall vest and become free of all restrictions immediately prior to the
merger and shall be converted into the merger consideration.
OPTION AWARDS
Pursuant to the merger agreement, each outstanding stock option to acquire
shares of Tower common stock shall, effective as of the merger, become fully
vested and exercisable and shall, subject to obtaining the required consent of
each holder of Tower stock options, be cancelled. In consideration of such
cancellation, Tower shall pay to each holder of Tower stock options an amount in
cash equal to the product of (i) the excess, if any, of $23.00 over the exercise
price of such option and (ii) the number of shares of Tower common stock
exercisable by such option. Since all Tower stock options held by the Tower
executive officers have an exercise price of $26.00, the executive officers of
Tower will not receive any payment for their Tower stock options.
RESIGNATIONS OF LAWRENCE H. FELDMAN AND RUSSELL C. PLATT
On August 3, 1998, Mr. Feldman resigned from his positions as Chairman,
Chief Executive Officer, President and Director of Tower. Mr. Cox was promoted
to serve as Chief Executive Officer and President of Tower until the closing of
the merger and Mr. Tansey was appointed Chairman.
On January 11, 1999, shortly after his resignation from Morgan Stanley Asset
Management Inc., Mr. Platt resigned from his position as Director of Tower. On
March 2, 1999, the board of directors appointed J. Timothy Morris, a principal
of Morgan Stanley & Co., as Director of Tower.
OWNERSHIP OF TOWER COMMON STOCK
Shown below is certain information as of , 1999, with respect to
beneficial ownership of shares of Tower common stock by each director, each of
the five most highly compensated executive officers, all directors and Tower
executive officers as a group, and each person Tower believes beneficially holds
more than 5% of the outstanding Tower common stock. Unless otherwise indicated,
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the named person or members of the group possess sole voting and investment
power with respect to the shares.
<TABLE>
<CAPTION>
PERCENT OF ALL
NUMBER OF SHARES SHARES OF
AND TOWER OP PERCENT OF ALL TOWER
UNITS SHARES OF TOWER COMMON STOCK
BENEFICIALLY COMMON AND TOWER OP
NAME OF BENEFICIAL OWNER(1) OWNED STOCK(2) UNITS(3)
- ------------------------------------------- ---------------- ------------------- -----------------
<S> <C> <C> <C>
Lawrence H. Feldman........................ 887,946 5.0% 4.8%
Robert L. Cox.............................. 106,723 * *
Eric S. Reimer............................. 78,722 * *
Reuben Friedberg........................... 30,119 * *
Lester S. Garfinkel(4)..................... 1,000 * *
Peggy D. Rawitt(5)......................... 10,000 * *
Robert M. Adams(6)......................... 53,993 * *
Stephen B. Siegel(7)....................... -- -- --
Richard M. Wisely(8)....................... 38,000 * *
Francis X. Tansey(9)(10)................... 924,800 5.5 5.0
J. Timothy Morris(11)(12).................. 1,655,430 9.8 8.9
DRA Opportunity Fund(13)................... 465,400 2.7 2.5
Office Invest Sub LLC(14).................. 459,400 2.7 2.5
Morgan Stanley Asset Management,
Inc.(15)................................. 1,655,430 9.8 8.9
Carlyle Realty Partners, L.P.(16).......... 123,150 * *
Carlyle Realty Qualified Partners,
L.P.(17)................................. 130,506 * *
Carlyle Realty Partners Sunrise,
L.P.(18)................................. 79,489 * *
Carlyle Realty Coinvestment, L.P.(19)...... 51,470 * *
All executive officers and directors as a
group (12 persons)....................... 4,172,848 23.0% 22.4%
</TABLE>
- ------------------------
* Represents less than 1.0% of the class.
(1) Unless otherwise indicated, the business address of each person listed is
c/o Tower Realty Trust, Inc., 292 Madison Avenue, 3rd Floor, New York, New
York 10017.
(2) Assumes that all Tower OP units held by the person are exchanged for shares
of Tower common stock on a one-for-one basis. The total number of shares of
Tower common stock outstanding used in calculating this percentage assumes
that none of the Tower OP units held by other persons are exchanged for
shares of Tower common stock.
(3) Assumes that all Tower OP units held by the person are exchanged for shares
of Tower common stock. The total number of shares of Tower common stock
outstanding used in calculating this percentage assumes that all of the
Tower OP units held by other persons are exchanged for shares of Tower
common stock.
(4) Includes 1,000 shares of Tower common stock held jointly by Mr. Garfinkel
and his spouse.
(5) Includes 12,500 options which vested on April 8, 1998 and excludes 10,000
shares of restricted Tower common stock that shall vest and become free of
all restrictions immediately prior to the closing of the merger.
(6) The business address of Mr. Adams is Adams Financial Services, Inc., 13
South Bayles Avenue, Port Washington, New York 11050.
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(7) The business address of Mr. Siegel is Insignia/Edward S. Gordon Co., 200
Park Avenue, 19th Floor, New York, New York 10166.
(8) The business address of Mr. Wisely is LungCheck, Inc., 8255 East Raintree
Drive, Scottsdale, Arizona, 85260-2515.
(9) The business address of Mr. Tansey is DRA Advisors, Inc., 1180 Avenue of the
Americas, New York, New York 10036.
(10) Includes 465,400 shares of Tower common stock held by DRA Opportunity Fund
and 459,400 shares of Tower common stock held by Office Invest Sub LLC,
which may be deemed to be beneficially owned by Mr. Tansey in his capacity
as President of DRA Advisors, Inc., an affiliate of DRA Opportunity Fund and
Office Invest Sub LLC.
(11) The business address of Mr. Morris is Morgan Stanley, Dean Witter, Discover
& Co., 1585 Broadway, New York, New York 10036. On January 11, 1999, soon
after his resignation from Morgan Stanley, Mr. Platt resigned from the Tower
board of directors. On March 2, 1999, the Tower board of directors appointed
Mr. Morris as Director
(12) Includes 1,655,430 shares of Tower common stock held by certain private
investment funds and separate accounts advised by Morgan Stanley Asset
Management, Inc. (the "Morgan Stanley Investors"), which may be deemed to be
formerly beneficially owned by Mr. Platt in his capacity as Managing
Director of Morgan Stanley Asset Management and currently beneficially owned
by Mr. Morris, in his capacity as a Principal of Morgan Stanley & Co. Mr.
Morris and Mr. Platt each disclaim beneficial ownership of such shares of
Tower common stock.
(13) The business address of DRA Opportunity Fund is 1180 Avenue of the
Americas, New York, New York 10036. Francis X. Tansey is the President of
DRA Advisors, Inc., an affiliate of DRA Opportunity Fund.
(14) The business address of Office Invest Sub LLC is c/o DRA Advisors, Inc.,
1180 Avenue of the Americas, New York, New York 10036. Francis X. Tansey is
the President of DRA Advisors, Inc., an affiliate of Office Invest Sub LLC.
(15) Morgan Stanley Asset Management, as investment adviser to the Morgan
Stanley Investors, and Morgan Stanley, Dean Witter, Discover & Co., as the
owner of all the Tower common stock of Morgan Stanley Asset Management, are
deemed beneficially to own the shares of Tower common stock beneficially
owned by the Morgan Stanley Investors. See Notes 10 and 11 above. Morgan
Stanley Asset Management maintains its principal office at 1221 Avenue of
the Americas, New York, New York 10020 and Morgan Stanley, Dean Witter,
Discover & Co. maintains its principal office at 1585 Broadway, New York,
New York 10036. Morgan Stanley Asset Management disclaims beneficial
ownership of such shares of Tower common stock.
(16) Carlyle Realty Partners, L.P. is an affiliate of The Carlyle Group, the
business address of which is 1001 Pennsylvania Avenue, N.W., Suite 220
South, Washington, D.C. 20004-2505. Esko I. Korhonen, a director of Tower,
was until December, 1998 a principal of Carlyle.
(17) Carlyle Realty Qualified Partners, L.P. is an affiliate of Carlyle. Esko I.
Korhonen, a director of Tower, was until December, 1998 a principal of
Carlyle.
(18) Carlyle Realty Partners Sunrise, L.P. is an affiliate of Carlyle. Esko I.
Korhonen, a director of Tower, was until December, 1998 a principal of
Carlyle.
(19) Carlyle Realty Coinvestment, L.P. is an affiliate of Carlyle. Esko I.
Korhonen, a director of Tower, was until December, 1998 a principal of
Carlyle.
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THE MERGER AGREEMENT
This section of this Joint Proxy Statement/Prospectus describes various
aspects of the proposed merger, including material provisions of the merger
agreement. The description of the merger agreement contained in this Joint Proxy
Statement/Prospectus does not purport to be complete and is qualified in its
entirety by reference to the merger agreement, a copy of which is attached
hereto as Annex A, and which is incorporated in this Joint Proxy
Statement/Prospectus by reference. All holders of Tower common stock and Reckson
common stock are urged to read carefully the merger agreement in its entirety.
STRUCTURE; CLOSING; STOCKHOLDER APPROVALS
The merger agreement contemplates the merger of Tower with and into
Metropolitan Partners, a newly formed limited liability company and subsidiary
of Reckson, with Metropolitan Partners surviving the merger. The closing of the
merger will take place on a date which will be no later than the second business
day after the last condition precedent to the merger set forth in the merger
agreement has been satisfied or waived, unless another time or date is agreed to
by Tower and Reckson.
The merger will become effective at such time that a Certificate of Merger
has been filed with the Secretary of State of Delaware and Articles of Merger
have been accepted for record by the State Department of Assessment and Taxation
of Maryland or at such other time as may be agreed by Tower and Reckson and
specified in these filings. These filings are expected to occur on or as soon as
practicable after the closing date. The affirmative vote of the holders of a
majority of the outstanding shares of Tower common stock is required to approve
and adopt the merger and the merger agreement.
VOTING AGREEMENTS
The following principal holders of Tower common stock have executed voting
agreements pledging to vote their shares of Tower common stock in favor of the
merger:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
TOWER COMMON STOCK PERCENT OF ALL PERCENT OF ALL SHARES OF
AND TOWER OP UNITS SHARES OF TOWER TOWER COMMON STOCK
NAME BENEFICIALLY OWNED COMMON STOCK(1) AND TOWER OP UNITS(2)
- -------------------------------------------------- -------------------- ------------------- -------------------------
<S> <C> <C> <C>
DRA Opportunity Fund.............................. 465,400 2.7% 2.5%
Office Invest Sub LLC............................. 459,400 2.7 2.5
Morgan Stanley Asset Management, Inc.(3).......... 1,655,430 9.8 8.9
---------- --- ---
Total........................................... 2,580,230 15.2% 13.8%
---------- --- ---
---------- --- ---
</TABLE>
- ------------------------
(1) Calculated based only on the number of shares of Tower common stock held by
the person divided by the total number of shares of Tower common stock
outstanding, in each case, on the Tower record date.
(2) Assumes that all Tower OP units held by the person are exchanged for shares
of Tower common stock. The total number of shares of Tower common stock
outstanding used in calculating this percentage assumes that all of the
Tower OP units held by other persons are exchanged for shares of Tower
common stock.
(3) Morgan Stanley Asset Management, Inc. executed a voting agreement as
attorney-in-fact for seven Tower stockholders that hold an aggregate of
1,655,430 shares of Tower common stock, which shares were purchased in
connection with the stockholders' participation in the Morgan Stanley Real
Estate Special Situations Investment Program. Morgan Stanley Asset
Management, Inc. has the power to vote all of these shares.
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Pursuant to the voting agreements, the parties named above have agreed to
vote all shares of Tower common stock owned of record by each of them, or that
they otherwise have the power to vote in favor of the approval and adoption of
the merger and the merger agreement and against (1) approval of any proposals
made in opposition or competition to the merger, (2) any merger, consolidation,
sale of assets, business combination, share exchange, reorganization or
recapitalization of Tower with any party other than Metropolitan Partners, (3)
any liquidation or winding up of Tower or (4) any other action that may
reasonably be expected to result in a breach of the covenants or representations
of Tower under the merger agreement which would materially and adversely affect
Tower or its ability to complete the transactions contemplated by the merger
agreement. Each such stockholder is also restricted from soliciting third party
acquisition proposals with respect to Tower or engaging in discussions or
negotiations with respect to such potential third party acquisition proposals
and was required to terminate any discussions or negotiations related to such
third party acquisition proposals upon execution of the voting agreement.
TREATMENT OF TOWER OP AND TOWER OP UNITS
The merger agreement also provides for a merger of Tower OP with and into a
newly formed subsidiary created by Metropolitan Partners. Each holder of a Tower
OP unit will receive the same consideration, and have the right to make the same
cash election, for their Tower OP units in the merger of Tower OP as holders of
Tower common stock.
MERGER CONSIDERATION; ELECTION AND CONVERSION OF SHARES OF TOWER COMMON STOCK
AND TOWER OP UNITS; FRACTIONAL SHARES; SPECIAL DIVIDEND
MERGER CONSIDERATION
Each share of Tower common stock and each Tower OP unit will be converted
into, at the election of the holders thereof, either (x) the right to receive
$23.00 in cash payable to the holder thereof, without interest, or (y) either
(1) .8364 of a share of Reckson class B common stock if Reckson stockholders
approve the share issuance proposal, or (2) .5725 of a share of Reckson class B
common stock and $7.2565 principal amount of Reckson OP 7% notes guaranteed by
Reckson, if Reckson stockholders do not approve the share issuance proposal. If
the Reckson board of directors withdraws or amends or materially modifies its
approval or recommendation to approve the share issuance proposal and Reckson
stockholders do not approve the share issuance proposal, in addition to the
consideration described above, each share of Tower common stock and each Tower
OP unit will be converted into an additional $0.8046 principal amount of Reckson
OP 7% notes. The total amount of cash and the number of shares of Reckson class
B common stock and Reckson OP 7% notes that any stockholder receives is subject
to proration. See "--Proration of Shares" below. Upon conversion of Tower common
stock and Tower OP units into merger consideration, such shares of Tower common
stock and Tower OP units shall be cancelled and will cease to exist. All shares
of Tower common stock owned by Tower, Reckson, Reckson OP, Metropolitan Partners
or any of their wholly owned subsidiaries immediately prior to the merger will
be cancelled in the merger and no payment will be made for such shares.
EXCHANGE OF CERTIFICATES REPRESENTING SHARES OF TOWER COMMON STOCK AND
CERTIFICATES REPRESENTING TOWER OP UNITS
The merger agreement provides that prior to the mailing of this Joint Proxy
Statement/Prospectus, Metropolitan Partners will appoint an exchange agent for
the purpose of paying the merger consideration, and Metropolitan Partners will
make available to the exchange agent, as required under the merger agreement,
the cash and securities certificates for such purpose. The merger agreement
provides that Metropolitan Partners will mail a form of election with or at
substantially the same time as this Joint Proxy Statement/Prospectus to each
holder of Tower common stock and Tower OP units on the Tower record date. The
form of election is to be used by each such holder who wishes to elect
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to receive cash for such holder's shares of Tower common stock or Tower OP
units, as the case may be, subject to proration. Forms of election, together
with certificates for the shares of Tower common stock, if any, to which such
form of election relates, must be received by the exchange agent by 5:00 p.m.,
Eastern time, on the business day before the Tower special meeting. Any form of
election not properly completed or not properly accompanied by the electing
Tower stockholder's stock certificates shall be treated by the exchange agent as
an election to receive either (a) .8364 of a share of Reckson class B common
stock if Reckson stockholders approve the share issuance proposal for each share
of Tower common stock or Tower OP unit, as the case may be, to which such form
of election relates, or (b) .5725 of a share of Reckson class B common stock and
$7.2565 principal amount of Reckson OP 7% notes if Reckson stockholders do not
approve the share issuance approval. Promptly after the closing of the merger,
Metropolitan Partners will cause the exchange agent to send each holder of Tower
common stock, other than such holders of Tower common stock who validly
submitted a form of election to the exchange agent prior to the Tower special
meeting, a letter of transmittal for use in such exchange and instructions
explaining how to surrender certificates to the exchange agent. Holders of Tower
common stock whose shares are converted into the right to receive the merger
consideration and who surrender their certificates to the exchange agent,
together with a properly completed and signed form of election or letter of
transmittal, as the case may be, will receive the merger consideration. Holders
of unexchanged shares of Tower common stock will not be entitled to receive any
dividends, interest payments or other distributions payable by Reckson on the
Reckson class B common stock and Reckson OP 7% notes, if any, into which such
shares have been converted as of the closing of the merger until their
certificates are surrendered. Upon surrender, however, such holders will receive
accumulated dividends and distributions, without interest, payable on the
related shares of Reckson class B common stock and accrued interest on the
Reckson OP 7% notes subsequent to and in respect of a record date after the
closing of the merger, together with cash in lieu of fractional shares. Tower
stockholders who do not surrender their stock certificates prior to the first
anniversary of the closing of the merger may lose the right to receive the
merger consideration.
PRORATION OF SHARES
Under the terms of the merger agreement, 25% of the aggregate outstanding
shares of Tower common stock and outstanding Tower OP units, treated as
equivalents, will be converted into the right to receive cash in the
transaction, and 75% of the aggregate outstanding shares of Tower common stock
and outstanding Tower OP units, treated as equivalents, will be converted into
the right to receive Reckson class B common stock and, if Reckson stockholders
do not approve the share issuance proposal, Reckson OP 7% notes in the
transaction. As a result, the amount of cash a Tower stockholder making a cash
election will receive in the merger, and the amount of Reckson class B common
stock and, if Reckson stockholders do not approve the share issuance proposal,
the Reckson OP 7% notes a Tower stockholder not making a cash election will
receive in the merger, are subject to proration based on the total number of
shares of Tower common stock and Tower OP units that are held by persons who
have made a cash election. To the extent that cash elections made by Tower
stockholders and Tower OP unitholders would otherwise result in more than 25% of
the aggregate outstanding shares of Tower common stock and Tower OP units being
converted into the right to receive cash consideration in the transaction, then
each Tower stockholder and Tower OP unitholder making a cash election will have
the amount of cash it receives reduced pro rata with other holders making a cash
election, and will receive, in lieu of the foregone cash consideration, Reckson
class B common stock and, if Reckson stockholders do not approve the share
issuance proposal, Reckson OP 7% notes. Conversely, to the extent that cash
elections made by Tower stockholders and Tower OP unitholders would otherwise
result in less than 25% of the aggregate outstanding shares of Tower common
stock and Tower OP units being converted into the right to receive cash in the
transaction, then each Tower stockholder and Tower OP unitholder not making a
cash election will have the amount of Reckson class B common stock and, if
Reckson stockholders do not approve the share issuance proposal, Reckson OP 7%
notes it receives reduced pro rata with other holders not making a
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cash election, and will receive, in lieu of the foregone securities, cash. For
purposes of this proration, Reckson class B common stock will be substituted at
a rate of one share for each $27.50 of reduction in cash consideration and, if
applicable, Reckson OP 7% notes will be substituted at a rate of $1.00 in face
amount for each $1.00 reduction in cash consideration.
The 75% cap discussed above excludes the additional Reckson OP 7% notes that
will be issued to all Tower stockholders and Tower OP unitholders in the event
the Reckson board of directors withdraws or amends or materially modifies its
approval or recommendation to approve the share issuance proposal and Reckson
stockholders do not approve such proposal.
SPECIAL DIVIDEND
Tower may declare a special dividend to its stockholders of record as of the
last business day before the closing date, which will be at a rate equal to
Tower's most recent quarterly dividend rate, multiplied by the number of days
elapsed since the last dividend record date through and including the closing
date, and divided by 91. The special dividend may be increased to the extent
that Tower reasonably determines that such increase is necessary to allow Tower
to qualify as a REIT for the taxable year ended December 31, 1997, December 31,
1998 or its taxable year ending on the closing date. An equivalent distribution
will concurrently be made by Tower OP. The litigation trust discussed under "The
Merger Agreement--Release of Litigation; Litigation Trust" will initially be
funded by reducing this special dividend by up to four million dollars and
contributing such amount to the litigation trust.
STOCK OPTIONS
The merger agreement provides that, as of the time of the merger, each Tower
stock option outstanding under any employee or director stock option or
compensation plan or arrangement of Tower, whether or not then vested or
exercisable, will become fully exercisable and vested and each such Tower stock
option will, subject to obtaining any required consent, be cancelled. In
consideration of such cancellation, Tower will pay each such holder of Tower
stock options an amount in cash equal to the product of (1) the excess, if any,
of $23 over the exercise price of such Tower stock option and (2) the number of
shares of Tower common stock subject to such Tower stock options. Since all
Tower stock options have an exercise price of $26, no holder of Tower stock
options will receive any payment for their Tower stock options.
MATERIAL COVENANTS
INTERIM OPERATIONS OF TOWER
From the date of execution of the merger agreement until the closing of the
merger, Tower and its subsidiaries are required to conduct their business in the
ordinary course substantially consistent with past practice and to use their
reasonable best efforts to preserve intact their business organizations and
relationships with third parties and to keep available the services of their
officers and employees. In general, during this period, neither Tower nor any of
its subsidiaries may, without Reckson's prior written consent, take any of the
following actions, among others:
- make or rescind any express or deemed election relative to taxes unless
required by law or necessary to preserve Tower's status as a REIT, the
status of any noncorporate subsidiary of Tower as a partnership for
Federal income tax purposes, or as a qualified REIT subsidiary as defined
under the Code, as the case may be;
- declare, set aside or pay any dividend, other than regular quarterly
dividends, the special dividend described above under "--Merger
Consideration; Election and Conversion of Shares of Tower Common Stock and
Tower OP Units; Fractional Shares; Special Dividend" or regular
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distributions pursuant to the limited partnership agreement of Tower OP or
as necessary to maintain REIT status;
- issue or sell shares of Tower common stock or any securities convertible
into or exchangeable or exercisable for, or any rights, warrants or
options to acquire any such shares of Tower common stock;
- make any capital expenditures in excess of $100,000 or enter into any
commitments for any such expenditure, whether or not set forth in the
budget, except in specified instances;
- acquire, enter into any option to acquire, or exercise an option or other
right or election or enter into any commitment, including any lease or
amendment thereto, for the acquisition of any real property or other
transaction involving payments to or by Tower in excess of $75,000 or
which is not included in the budget;
- encumber assets or commence construction of, or enter into any commitment
to develop or construct, other real estate projects; amend its
organizational documents;
- grant options or other rights or commitments relating to any Tower
securities, or any other security the value of which is measured by shares
of Tower common stock, or any security subordinated to the claim of its
general creditors;
- pay, discharge or satisfy claims, liabilities or obligations whether
absolute, accrued, asserted, contingent or otherwise; settle any tax
certiorari proceeding with respect to Tower without the written consent of
Reckson and Metropolitan Partners;
- incur, assume or guarantee by Tower or any subsidiary of Tower any
indebtedness for borrowed money, except in connection with permitted
acquisitions and dividends;
- except in connection with a transaction permitted by the budget, create or
assume by Tower or any subsidiary of Tower any lien on any asset other
than certain permitted liens and liens which, in the aggregate, do not
have and could not reasonably be expected to have a material adverse
effect on Tower and its subsidiaries, taken as a whole;
- grant any severance or termination pay, enter into any employment,
deferred compensation or other similar agreement or any amendment to any
such existing agreement, increase the benefits payable under any existing
severance or termination pay policies or employment agreement, increase
the compensation, bonus or other benefits payable or adopt any new plan,
program or arrangement;
- complete, or enter into any agreement or agreement in principle with
respect to or take any steps to facilitate, any acquisition of stock or
assets or operations of another entity, other than any acquisition by
Tower in respect of which the cash consideration paid by Tower is less
than $100,000 individually and for all such transactions taken together,
the aggregate cash consideration paid by Tower is less than $1,000,000;
- sell, lease or amend any existing lease, mortgage, subject to lien or
otherwise dispose of any real property in excess of 7,500 square feet,
unless in the budget; make any loans, advances or capital contributions
to, or investments in, any other person; and
- acquire or enter into any option or agreement to acquire any real property
or other transaction involving in excess of $100,000 which is not included
in the budget; or authorize, agree to or commit to take any of the
foregoing actions.
SPECIAL MEETINGS; PROXY MATERIAL
Reckson has agreed, in accordance with applicable law and its organizational
documents, to cause the Reckson special meeting of the stockholders to be duly
called and held as promptly as practicable for the purpose of voting on the
share issuance proposal and Tower has agreed, in accordance with
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applicable law and its organizational documents, to cause the Tower special
meeting of the stockholders to be duly called and held as promptly as
practicable for the purpose of voting on the approval and adoption of the merger
and the merger agreement. In connection with the Reckson special meeting and the
Tower special meeting, Reckson and Tower, subject to the duties of their
respective boards of directors agreed to, (a) promptly prepare and file with the
SEC, use their reasonable best efforts to have cleared by the SEC and thereafter
mail to stockholders of Reckson on the one hand, and to the stockholders of
Tower on the other hand, as promptly as practicable, a joint proxy statement and
a form of joint proxy, in connection with the vote of Reckson's stockholders on
the one hand, and Tower's stockholders on the other hand, with respect to, in
the case of Reckson, the share issuance proposal, and, in the case of Tower, the
merger and the merger agreement, (b) use their reasonable best efforts to obtain
the necessary approvals by their respective stockholders of the share issuance
approval, in the case of Reckson and the merger and the merger agreement and the
transactions contemplated thereby, in the case of Tower, and (c) otherwise
materially comply with all legal requirements applicable to the Reckson special
meeting and the Tower special meeting.
NO SOLICITATION BY TOWER
The merger agreement provides that, from the date of execution of the merger
agreement until the termination thereof, Tower will not directly or indirectly,
through advisors, agents or other intermediaries, and Tower will use its
reasonable best efforts to ensure that Tower's respective officers, directors,
advisors, representatives or other agents will not, directly or indirectly, (a)
solicit, initiate or encourage any Acquisition Proposal (as defined below) or
(b) engage in discussions or negotiations other than to disclose the provisions
of the merger agreement with, or disclose any non-public information relating to
Tower or its subsidiaries or afford access to Tower's or its subsidiaries'
properties, books or records to, any person that has made, or indicated interest
in making, an Acquisition Proposal. Notwithstanding the foregoing, Tower may
furnish information and participate in negotiations and discussions and enter
into agreements regarding an Acquisition Proposal with a third party
("Acquisition Agreements") if the Tower board of directors determines in good
faith, after consultation with outside legal counsel, that the failure to take
such action would present a reasonable risk of a breach of the duties of the
Tower board of directors under applicable law.
In addition, prior to approving or recommending an Acquisition Proposal or
entering into an Acquisition Agreement or withdrawing, amending or modifying its
recommendation that Tower's stockholders vote to approve and adopt the merger
and the merger agreement, Tower shall (A) notify Reckson in writing that it
intends to approve, recommend or accept such Acquisition Proposal or enter into
such Acquisition Agreement or withdraw, amend or modify its current
recommendation, and (B) attach the most current version of any such Acquisition
Proposal or Acquisition Agreement to such notice.
Pursuant to the merger agreement, Tower has agreed to immediately terminate
discussions, if any, with all third parties relating to an Acquisition Proposal.
The merger agreement does not prohibit Tower or the Tower board of directors
from taking and disclosing to Tower's stockholders a position with respect to a
tender or exchange offer by a third party pursuant to Exchange Act Rules 14d-9
and 14e-2(a), if failure to so disclose would be inconsistent with its
obligations under applicable law, or to make any other disclosures required in
its judgment by applicable law.
DIRECTOR AND OFFICER LIABILITY
Pursuant to the merger agreement, Metropolitan Partners has agreed that (a)
it will exculpate and indemnify each current or former officer, director,
employee or agent of Tower or any of its subsidiaries in the same manner as
provided to such parties by Tower immediately prior to the time of closing in
Tower's charter and bylaws or in its partnership, operating or similar agreement
or in an agreement between any such indemnified party and Tower or any of
Tower's subsidiaries, in each case
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as in effect on the date the merger agreement was executed; (b) for six years
and ninety days after the closing of the merger, it will indemnify and hold
harmless the indemnified parties to the fullest extent permitted by law against
all losses, expenses, claims, damages, liabilities, judgments or amounts paid in
settlement in respect to any threatened, pending or contemplated claim, action,
suit or proceeding and advance to such indemnified parties all costs incurred in
connection therewith; and (c) for three years and ninety days after the closing
of the merger, it will provide officers' and directors' liability insurance in
respect of acts or omissions occurring prior to the closing of the merger
covering each such person currently covered by Tower's officers' and directors'
liability insurance policy on terms no less favorable than those of such policy
in effect on the date of the merger agreement, subject to a limit on premiums of
$266,000 per year. Reckson has unconditionally guaranteed the obligations of
Metropolitan Partners described in this paragraph. Director and officer
liability arrangements are more fully described under "Interests of Material
Persons in the Merger and Related Matters--Indemnification and Insurance" on
page .
REASONABLE BEST EFFORTS
Each party has agreed to use its reasonable best efforts to take, or cause
to be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to complete the
transactions contemplated by the merger agreement. In addition, Tower has agreed
to use its reasonable best efforts to obtain The Carlyle Group's consent to
transfer Tower's interest in 2800 Associates, L.P.
OTHER MATERIAL COVENANTS
The merger agreement contains mutual covenants of the parties, including
covenants relating to: public announcements; notification; access to
information; further assurances; employee matters; cooperation in connection
with governmental and regulatory filings and in obtaining consents and
approvals; and confidential treatment of non-public information.
The merger agreement also contains covenants of Reckson, including covenants
requiring Reckson to: use reasonable best efforts to (a) list the Reckson class
B common stock to be issued in connection with the merger and the shares of
Reckson common stock issuable upon conversion of the Reckson class B common
stock on the NYSE prior to the closing of the merger and (b) list the Reckson OP
7% notes to be issued in connection with the merger in the event Reckson's
stockholders do not approve the share issuance proposal on the American Stock
Exchange, Inc.; to prepare and file with the SEC a registration statement on
Form S-4; to vote all shares of Tower common stock beneficially owned by it in
favor of approval and adoption of the merger and the merger agreement at the
Tower special meeting; and to guarantee the performance of Metropolitan
Partners, subject to certain exceptions, under the merger agreement. The parties
have since agreed to have the Reckson OP 7% notes listed on the New York Stock
Exchange rather than the American Stock Exchange.
MATERIAL REPRESENTATIONS AND WARRANTIES
The merger agreement contains customary reciprocal representations and
warranties by each of Tower, Reckson, Reckson OP and Metropolitan Partners
relating to, among other things:
- due organization and good standing;
- corporate authorization to enter into the contemplated transactions;
- governmental approvals required in connection with the contemplated
transactions;
- absence of any breach of organizational documents and material agreements
as a result of the contemplated transactions;
- capitalization;
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- authorization, execution, delivery and performance and enforcement of
required consents, approvals, orders and authorizations of governmental
authorities relating to the merger agreement;
- filings with the SEC;
- financial statements;
- information included in this Joint Proxy Statement/Prospectus;
- absence of changes since September 30, 1998 that would have a material
adverse effect;
- taxes;
- receipt of an opinion of their respective financial advisors;
- the stockholder vote required;
- the recommendation of their respective boards of directors;
- compliance with the Investment Company Act of 1940;
- compliance with the HSR Act; and
- finders' fees.
"Material adverse effect" means a material adverse effect on the condition,
business, assets or results of operations of Tower and its subsidiaries, taken
as a whole, or Reckson and its respective subsidiaries, taken as a whole, as the
case may be, that is not a result of a decline or deterioration in the economy
in general or the real estate markets in which such entities operate. The
parties have also agreed that no representation and warranty shall be deemed
breached by reason of any facts known to Reckson or Crescent or certain related
parties prior to the execution of the merger agreement or, other with respect to
the representations and warranties made by Tower in section 3.11 of the merger
agreement, by reason of any matters relating to Tower's status as a REIT.
In addition, Tower has made representations and warranties to Reckson
regarding:
- its subsidiaries;
- material contracts and arrangements; and
- the exemption of the merger from state takeover statutes.
Each of Reckson, Reckson OP and Metropolitan Partners has also made
representations and warranties to Tower with respect to:
- compliance with laws;
- environmental matters;
- real property;
- litigation;
- ownership of investments in other companies;
- the financing of the transaction;
- the authorization of the issuance of the Reckson class B common stock;
- the operations of Metropolitan Partners;
- the surviving entity after the merger; and
- knowledge of information related to the conduct of Tower prior to the
closing of the merger.
The representations and warranties in the merger agreement do not survive
the completion of the merger.
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CONDITIONS TO THE MERGER
CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER
The obligations of Tower, Reckson, Reckson OP and Metropolitan Partners to
complete the merger are subject to the satisfaction or, to the extent permitted
under applicable law, waiver of the following conditions:
- the approval and adoption of the merger and the merger agreement by the
affirmative vote of the holders of a majority of the outstanding shares of
Tower common stock;
- there being no applicable law or regulation, judgment, injunction, order
or decree prohibiting the consummation of the merger;
- no action or proceeding by any governmental entity having been commenced
and pending, or, to the knowledge of the parties, threatened, against
Tower, Reckson, Reckson OP or Metropolitan Partners or any of their
respective affiliates, partners, associates, officers or directors, or any
officers or directors of such partners, that seeks to prevent or delay the
transactions contemplated by the merger agreement or that challenges any
of the terms or provisions of the merger agreement or that seeks material
damages in connection therewith;
- the Form S-4 registration statement of which this Joint Proxy
Statement/Prospectus is a part having become effective under the
Securities Act and not being subject to any stop order or related
proceedings by the SEC, and any material "blue sky" and other applicable
state securities laws necessary to register and qualify (1) (a) the shares
of Reckson class B common stock assuming that the share issuance proposal
is obtained and (b) the shares of Reckson class B common stock, Reckson OP
7% notes and related guarantees to be issued assuming the share issuance
proposal is not obtained and, with respect to clauses (a) and (b) above,
the shares of Reckson common stock issuable upon conversion of the Reckson
class B common stock following the merger having been complied with and
(2) the Indenture shall have been qualified under the Trust Indenture Act
of 1939, as amended, and the rules and regulations thereunder; and
- the shares of Reckson class B common stock to be issued in the merger and
the shares of Reckson common stock issuable upon conversion of such
Reckson class B common stock having been approved for listing on the New
York Stock Exchange, subject to official notice of issuance.
CONDITIONS TO THE OBLIGATIONS OF TOWER
The obligations of Tower to effect the merger are further subject to the
satisfaction, or, to the extent permitted by applicable law, waiver of the
following conditions:
- the performance in all material respects by Reckson, Reckson OP and
Metropolitan Partners of each of their respective agreements and covenants
contained in or contemplated by the merger agreement that are required to
be performed by it at or prior to closing of the merger pursuant to the
terms of the merger agreement, except for such failures of performance as
would not impair in any non-DE MINIMIS respect the value of Reckson,
Reckson OP and Metropolitan Partners, taken together;
- the representations and warranties of Reckson, Reckson OP and Metropolitan
Partners contained in the merger agreement being true and correct in all
respects as of the closing of the merger, it being understood that for
purposes consummating the merger, all representations and warranties shall
be interpreted without giving effect to the words "materially" or
"material"
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individually or as it appears in the term "Material Adverse Effect" or
qualifications or exceptions based on such words, except:
- to the extent such representations and warranties refer to an earlier
date, in which case they shall be true in all respects as of the
earlier date,
- as otherwise contemplated by the merger agreement,
- as may result from any actions or transactions by or involving Tower or
any of its affiliates, and
- to the extent the failure of such representations and warranties to be
true in all respects, individually or in the aggregate, would not have
a material adverse effect; an aggregate effect or impact involving $40
million or more will be deemed to have or constitute a material adverse
effect and an aggregate effect or impact will not be deemed to have or
constitute a material adverse effect unless it involves $40 million or
more;
- Tower having received a bring-down opinion of Brown & Wood LLP, counsel to
Reckson, dated as of the time of the merger, covering the period through
the closing of the merger and otherwise substantially in the form of its
opinion delivered to Tower on December 8, 1998; and
- the Tower articles supplementary shall be duly and validly filed with the
State Department of Assessment and Taxation of Maryland.
On December 9, 1998, the State Department of Assessments and Taxation of
Maryland received and accepted for record the Tower Articles Supplementary
described in last bullet point above.
CONDITIONS TO THE OBLIGATIONS OF RECKSON AND METROPOLITAN PARTNERS
The obligations of Reckson and Metropolitan Partners to effect the merger
are further subject to the satisfaction or, to the extent permitted by
applicable law, waiver of the following conditions:
- the performance in all material respects by Tower of its agreements and
covenants contained in or contemplated by the merger agreement that are
required to be performed by it at or prior to the closing of the merger
pursuant to the terms of the merger agreement, except for such failures of
performance as would not impair in any non-DE MINIMIS respect the value of
Tower;
- the representations and warranties of Tower contained in the merger
agreement being true and correct in all respects as of the closing of the
merger, it being understood that for purposes consummating the merger, all
representations and warranties shall be interpreted without giving effect
to the words "materially" or "material" individually or as it appears in
the term "Material Adverse Effect" or qualifications or exceptions based
on such words, except:
- to the extent such representations and warranties refer to an earlier
date, in which case they shall be true in all respects as of the
earlier date,
- as otherwise contemplated by the merger agreement,
- as may result from any actions or transactions by or involving Reckson
or Metropolitan Partners or any of their affiliates, and
- to the extent the failure of such representations and warranties to be
true in all respects, individually or in the aggregate, would not have
a Material Adverse Effect; an aggregate effect or impact involving $40
million or more will be deemed to have or constitute a Material Adverse
Effect and an aggregate effect or impact will not be deemed to have or
constitute a Material Adverse Effect unless it involves $40 million or
more;
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- Reckson having received a certificate of Battle Fowler LLP, counsel to
Tower, stating that nothing has come to the attention of Battle Fowler LLP
which would cause it to revoke, rescind or modify in any material respect
its opinion relating to the qualification of Tower as a REIT, delivered to
Reckson and its counsel concurrently with the execution of the merger
agreement; PROVIDED, HOWEVER, that the foregoing condition shall be deemed
satisfied if the only reason that it would not otherwise be satisfied is
the failure of that certain letter from Reckson to Tower dated December 8,
1998, in which Reckson made representations to Tower relating to the
impact of Reckson's preferred stock investment in Tower on Tower's status
as a REIT, to be true and correct at all times since the execution
thereof; and
- those consents, authorizations, orders and approvals of, or filings or
registration with, any governmental commission, board, other regulatory
body or third parties required in connection with the execution, delivery
and performance of the merger agreement by Tower, excluding the financing
agreements related to the properties located at or known as Corporate
Center and 2800 North Central Avenue having been obtained or made.
TERMINATION OF THE MERGER AGREEMENT
RIGHT TO TERMINATE
The merger agreement provides that it may be terminated at any time prior to
the time of the merger as follows:
(1) by mutual written consent of Tower, Reckson, Reckson OP and Metropolitan
Partners;
(2) by either Tower, on the one hand, or Reckson, Reckson OP or Metropolitan
Partners, on the other hand, if:
(a) the merger has not been completed by May 31, 1999, or such other date
as the parties may have agreed upon, but no party may terminate if
its breach is the reason that the merger has not been completed; or
(b) any law or regulation makes consummation of the merger illegal or any
judgment, injunction, order or decree enjoining Tower, Reckson,
Reckson OP or Metropolitan Partners from consummating the merger is
entered and such judgment, injunction, order or decree has become
final and non-appealable;
(3) by either Tower, on the one hand, or Metropolitan Partners, on the other
hand, if the holders of a majority of the outstanding shares of Tower
common stock fail to approve and adopt the merger and the merger
agreement at the Tower special meeting;
(4) by Metropolitan Partners if, prior to the Tower special meeting, the
Tower board of directors:
(a) has withdrawn or modified or amended, or publicly announced its
intention to withdraw, in a manner adverse to Metropolitan Partners
its approval or recommendation of the merger;
(b) makes any recommendation with respect to any Acquisition Proposal
other than a recommendation to reject such Acquisition Proposal;
(c) enters into any agreement which would result in consummation of an
Acquisition Proposal other than the merger; or
(d) resolves to do any of the foregoing;
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(5) by Metropolitan Partners if:
(a) Reckson shall have notified Tower in writing on or before December
30, 1998 that it approved the schedule required by Section
856(c)(6)(A) of the Code, and Tower shall have failed to file the
amended Federal income tax return for its taxable year ending
December 31, 1997 and the schedule for such taxable year on or before
December 31, 1998 in accordance with the merger agreement, PROVIDED,
HOWEVER, that the termination right described in this clause (a) can
be exercised by Metropolitan Partners only on or before January 31,
1999, or
(b) if, pursuant to the merger agreement, Reckson shall have notified
Tower in writing on or before December 30, 1998 that it did not
approve the schedule, and either (1) Tower shall have failed to file
the amended return and the schedule on or before January 25, 1999 in
accordance with the merger agreement or (2) Tower shall have filed
the amended return and the schedule on or before January 25, 1999 in
accordance the merger agreement, but the schedule as filed was
prepared in a fraudulent manner; PROVIDED, HOWEVER, that the
termination right described in this clause (b) can be exercised by
Metropolitan Partners only on or before February 24, 1999;
(6) by Reckson, Reckson OP or Metropolitan Partners:
(a) upon a material breach of any covenant or agreement of Tower set
forth in the merger agreement, except for that covenant discussed in
the preceding clause, which remains uncured for 20 business days
after notice of such breach has been delivered to Tower by Reckson,
Reckson OP or Metropolitan Partners, or
(b) if any representation or warranty of Tower shall become untrue, in
either case such that either of the conditions set forth in clauses
(1) or (2) above under "--Conditions to the Merger; Conditions to the
Obligations of Reckson and Metropolitan Partners" would be incapable
of being satisfied;
(7) by Tower:
(a) upon a material breach of any covenant or agreement of any of
Reckson, Reckson OP or Metropolitan Partners set forth in the merger
agreement which remains uncured for 20 business days after notice of
such breach has been delivered by Tower to Reckson, Reckson OP and
Metropolitan Partners, or
(b) if any representation or warranty of Reckson or Metropolitan Partners
shall become untrue, in either case such that either of the
conditions set forth in clauses (1) and (2) above under "--Conditions
to the Merger; Conditions to the Obligations of Tower" would be
incapable of being satisfied;
(8) by Tower, if its board of directors determines to accept an Acquisition
Proposal in accordance with the provisions described above under
"--Material Covenants; No Solicitation by Tower" and if it pays the fee
described below under "--Fees and Expenses; Termination Fee"; or
(9) by Tower, if Reckson fails to deliver to Crescent timely funding notices
requiring Crescent to make a $75 million contribution into escrow at or
prior to the closing of the merger.
On December 30, 1998, Reckson approved the schedule described in clause (4)
above. On December 31, 1998, Tower filed the amended return and schedule with
the Internal Revenue Service.
EFFECT OF TERMINATION
Except for any breach of the merger agreement by any party thereto (which
breach and subsequent liability are not affected by the termination of the
merger agreement), if the merger agreement is
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validly terminated, no provision thereof shall survive except for the provisions
relating to the effect of termination; fees and expenses; confidentiality;
survival of representations and warranties; and Tower's operations as a REIT,
and the merger agreement shall become void and of no effect with no liability on
the part of any of the parties thereto. The confidentiality agreement entered
into between Tower and Reckson as of April 20, 1998 will continue in effect
notwithstanding termination of the merger agreement.
In addition, Metropolitan Partners has agreed that neither Tower nor its
directors, officers, employees, representatives or agents, nor any person who
shall make an Acquisition Proposal, shall be deemed, by reason of the making of
such proposal, to have tortiously or otherwise wrongfully interfered with or
caused a breach of the merger agreement, or other agreements, instruments and
documents executed in connection with the merger agreement, or the rights of
Metropolitan Partners or any of its affiliates.
FEES AND EXPENSES
TERMINATION FEE
Reckson will receive a termination fee (as described below) if the merger
agreement is terminated:
(1) in the circumstances described in paragraph (3) or (7) under
"--Termination of the Merger Agreement; Right to Terminate" above;
(2) pursuant to Tower's stockholders failing to approve and adopt the merger
agreement and the merger at the Tower special meeting and at the time of
such stockholder vote, an alternative acquisition proposal had been
publicly announced and not withdrawn, terminated or lapsed which provides
greater consideration per share to the stockholders of Tower than the
merger consideration and which is reasonably capable of being financed by
the person making such acquisition proposal; or
(3) pursuant to Tower's stockholders failing to approve and adopt the merger
agreement and merger at the Tower special meeting, in circumstances in
which the situation described in paragraph (2) immediately above does not
apply.
The termination fee which Reckson may be entitled to receive is exclusive of
all other remedies for those particular events, and will be an amount equal to
the lesser of:
(x) (a) $15 million in the case of paragraph (1) above, (b) $7.5 million in
the case of paragraph (2) above and (c) $3.5 million in the case of
paragraph (3) above plus, in the case of a termination fee payable
pursuant to paragraph (1) or (2) above, an expense amount (as described
below), and
(y) the maximum amount that can be paid to the party entitled to the
termination fee in the year in which the merger agreement is terminated
and in all relevant taxable years thereafter without causing it to fail
to meet the REIT income requirements under the Code.
Tower's obligation to pay any unpaid portion of a termination fee unpaid as
a result of Reckson's limitation under clause (y) above shall terminate on
December 8, 2001 and Tower shall have no obligation to make any further
payments. An expense amount relating to the termination fees described in
clauses (x)(a) and (x)(b) above shall be equal to the actual, direct
out-of-pocket expenses incurred by the party entitled to the termination fee in
connection with the transactions contemplated by the merger agreement; PROVIDED
THAT in no event shall the expense amount payable to Reckson relating to such
termination fee exceed $1.75 million.
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In addition, in the event of a suit by any party to the merger agreement for
a breach of the merger agreement, the prevailing party will be entitled to
actual, out-of-pocket litigation expenses incurred by such prevailing party in
such action.
RELEASE OF LITIGATION; LITIGATION TRUST
In connection with the merger, Tower, Crescent and Reckson and Metropolitan
Partners entered into agreements to release each other, concurrently with the
execution of the merger agreement, from all claims arising from or relating to
the Prior Merger Agreement. If Crescent, however, fails to fully
fund a $75 million capital contribution to Metropolitan Partners, assuming the
conditions for such funding are met, the releases between Tower and Crescent
terminate and the Tower board of directors may establish a litigation trust for
the purpose of pursuing the resulting litigation against Crescent. If the Tower
board of directors determines to establish a litigation trust in such
circumstance, the following shall occur:
- Holders of Tower common stock and Tower OP units at the time of the merger
will receive one contingent payment right in the litigation trust for each
of their shares of Tower common stock or Tower OP units, which will
entitle such holders to their PRO RATA portion of any amounts received by
the litigation trust or otherwise in the litigation trust, net of
expenses;
- The litigation trust will initially be funded by reducing the special
dividend which Tower has the right to pay its stockholders under the
merger agreement by up to $4 million and contributing such amount to the
litigation trust (see "--Merger Consideration; Election and Conversion of
Shares of Tower Common Stock and Tower OP Units; Fractional Shares;
Special Dividend" above);
- The litigation trust will be managed by trustees designated by the Tower
board of directors; and
- Metropolitan Partners, Reckson and Reckson OP and their respective
affiliates will fully cooperate with the litigation trust and its
representatives in pursuing all related litigation against Crescent;
however, Metropolitan Partners, Reckson and Reckson OP do not have any
obligation to take any action in connection with this litigation trust
requiring it to incur non-DE MINIMIS out-of-pocket expenses.
- In the event Crescent fails to fully fund the $75 million capital
contribution to Metropolitan Partners, Reckson will still be obligated to
complete the merger, subject to the conditions of the merger agreement.
AMENDMENTS; MODIFICATION; WAIVER
Any provision of the merger agreement may be amended, modified or waived
prior to the closing of the merger only if the amendment or waiver is in writing
and signed, in the case of an amendment, by Tower, Reckson, Reckson OP and
Metropolitan Partners, or in the case of a waiver, by the party against whom the
waiver is to be effective; after the approval by Tower stockholders of the
merger in accordance with the merger agreement and transactions contemplated
thereby, however, no amendment or waiver may be made except as allowed under
applicable law.
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METROPOLITAN PARTNERS' INVESTMENT IN TOWER
On December 8, 1998, Metropolitan Partners purchased 2,169,197 shares of
series A convertible preferred stock, par value $.01 per share, liquidation
preference $18.44 per share, of Tower for an aggregate purchase price of $40
million. In connection with this sale of securities, Tower entered into a
registration rights agreement with Metropolitan Partners that provides
registration rights with respect to such shares of Tower series A preferred
stock. The Tower series A preferred stock will initially have a per share
distribution equal to the per share distribution on the Tower common stock which
is currently $1.69 annually, resulting in a yield of 9.16%. Prior to a
termination of the merger agreement, the Tower series A preferred stock is not
redeemable or convertible and has no voting rights.
If the merger agreement is terminated:
- Tower series A preferred stock will have an annual cumulative distribution
of $1.844 per share.
- Holders of Tower series A preferred stock may generally convert it, in
whole or in part, to Tower common stock on a one-for-one basis. However,
the exchange notes may be adjusted for stock splits, combinations and
other action, or distributions that dilute the economic rights of the
Tower common stock issuable upon conversion of the Tower series A
preferred stock.
- Tower will have the right to redeem the Tower series A preferred stock, at
a price equal to the liquidation preference plus accrued and unpaid
dividends, during the 120 days following termination of the merger
agreement and at any time after December 9, 2002.
- If the dividends payable on the Tower series A preferred stock are in
arrears for six consecutive periods, then the holders of the Tower series
A preferred stock shall have the right to elect two additional directors
to the Tower board of directors, as described in the Tower charter.
Furthermore, in the event the merger agreement is terminated, in addition to
the termination fees payable under the merger agreement the following
arrangements have been agreed to by Tower, Reckson and Metropolitan Partners:
- Metropolitan Partners will forfeit to Tower 75% of the shares of Tower
series A preferred stock purchased in the event that a court issues a
final, nonappealable judgment that:
(a) Reckson and Metropolitan Partners are obligated to complete the
merger but have breached their respective covenants to do so; or
(b) Reckson and Metropolitan Partners failed to use their reasonable best
efforts to take all actions necessary to register with the SEC the
offering of the Reckson class B common stock and the Reckson OP 7%
notes or to list the Reckson class B common stock, and the underlying
common stock into which it is exchangeable, on the NYSE; or
(c) Reckson failed to use its reasonable best efforts to obtain the
approval of Reckson stockholders of the share issuance proposal.
- Tower will pay Metropolitan Partners $30 million in cash in the event that
a court issues a final non-appealable judgment that:
(a) Tower is obligated to complete the merger but has breached its
covenant to do so; or
(b) Tower failed to use its reasonable best efforts to take all actions
necessary to obtain the approval and adoption of the merger and the
merger agreement by the Tower stockholders or assist in registering
with the SEC the offering of the Reckson class B common stock and the
Reckson OP 7% notes.
In connection with its acquisition of the Tower series A preferred stock,
Metropolitan Partners agreed to certain limitations on its and its affiliates'
ability, following the termination of the merger
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agreement until December 8, 2003, to transfer the shares of Tower series A
preferred stock, or any Tower common stock into which it has been converted.
Metropolitan Partners also agreed that during such period, it would be subject
to certain customary standstill restrictions.
For a discussion of the terms of the Tower series A preferred stock, see
"Description of Tower Preferred Stock."
REGISTRATION RIGHTS
In connection with the Stock Purchase Agreement and sale of Tower series A
preferred stock to Metropolitan Partners, Tower and Metropolitan Partners
entered into a registration rights agreement, dated as of December 8, 1998,
providing Metropolitan Partners with registration rights with respect to the
shares of series A preferred stock purchased from Tower and the shares of Tower
common stock issuable upon conversion thereof.
Metropolitan Partners, as a holder of such shares of series A preferred
stock and shares of Tower common stock issuable upon conversion of such shares
is entitled to three demand registrations and unlimited piggyback registrations,
however, no piggyback registrations will be permitted on a shelf registration
effected by Tower where the proposed methods of distribution under such shelf
registration do not including underwritten offerings. Metropolitan Partners is
permitted to request shelf registrations as well as underwritten registrations.
A registration pursuant to a demand request must be effective only for 90 days,
except in the case of a shelf registration which must be effective only for 120
days. These registration rights are transferable to up to five third parties,
but such transferees shall not be entitled to piggyback registration rights
unless the number of shares such transferee seeks to have included in such
piggyback registration exceeds, assuming conversion of such shares of Tower
series A preferred stock into Tower common stock, one percent of the outstanding
shares of Tower common stock at such time.
Tower shall pay expenses with respect to the three demand registrations. The
managing underwriters for any demand registration shall be either Merrill Lynch
or Salomon Smith Barney, or such other underwriter as Tower and Metropolitan, or
its permitted transferees, may agree.
The registration rights agreement terminates upon the earlier of (a) ten
years, (b) the later of five years or such time as the three demand
registrations have been effected or (c) at such time that no holder owns more
than one percent of the outstanding Tower common stock; however, so long as
demand registrations are available, the registration rights agreement will not
terminate unless Metropolitan Partners and its affiliates beneficially own,
collectively, less than .5% of the outstanding Tower common stock.
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THE SPECIAL MEETINGS
PURPOSE; TIME AND PLACE
RECKSON
This Joint Proxy Statement/Prospectus is being furnished to holders of
Reckson common stock in connection with the solicitation of proxies by the
Reckson board of directors for use at the Reckson special meeting, to be held at
[ ]:00 a.m. (Eastern time) on [ ], 1999, at the Omni, 333 Earle
Ovington Boulevard, Mitchel Field, New York and any adjournments or
postponements of the meeting, to consider and vote upon the proposal to issue
only Reckson class B common stock as the non-cash portion of the merger
consideration and to transact such other business as may properly come before
the Reckson special meeting or any adjournments or postponements of the Reckson
special meeting. Reckson is seeking stockholder approval of the share issuance
proposal to comply with the requirements of the New York Stock Exchange that
govern the listing of the Reckson common stock on the exchange. The rules of the
New York Stock Exchange require stockholder approval of transactions that result
in the issuance of a number of shares of common stock of a listed company equal
to or in excess of 20% of the number of shares of common stock of the company
outstanding prior to the transaction. Approval of the share issuance proposal by
Reckson stockholders is not required by the Maryland General Corporation Law or
by Reckson's charter or bylaws, nor is such approval required to complete the
merger.
Each copy of this Joint Proxy Statement/Prospectus mailed to holders of
Reckson common stock is accompanied by a form of proxy for use at the Reckson
special meeting.
TOWER
This Joint Proxy Statement/Prospectus is also being furnished to holders of
Tower common stock in connection with the solicitation of proxies by the Tower
board of directors for use at the Tower special meeting which will be held at
[ ]:00 a.m. (Eastern time) on [ , ,] 1999 at [ ]. At
the Tower special meeting, holders of Tower common stock will be asked to
consider and vote upon approval of the merger in accordance with the merger
agreement and the transactions contemplated by the merger agreement and to
consider such other matters as may properly come before the Tower special
meeting.
Each copy of this Joint Proxy Statement/Prospectus mailed to holders of
Tower common stock is accompanied by a form of proxy for use at the Tower
special meeting.
This Joint Proxy Statement/Prospectus is also furnished to stockholders of
Tower and Tower OP unitholders as a prospectus in connection with the issuance
by Reckson of shares of Reckson class B common stock and, if Reckson
stockholders do not approve the share issuance proposal, Reckson OP 7% notes, in
each case, pursuant to the merger agreement.
RECOMMENDATIONS
RECKSON
THE RECKSON BOARD OF DIRECTORS (A) HAS APPROVED THE TERMS OF THE MERGER
AGREEMENT AND CONSUMMATION OF THE MERGER CONTEMPLATED THEREBY, (B) BELIEVES THAT
THE TERMS OF THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY ARE ADVISABLE AND IN THE BEST INTERESTS OF RECKSON AND ITS STOCKHOLDERS
AND (C) RECOMMENDS THAT THE HOLDERS OF RECKSON COMMON STOCK VOTE FOR THE
APPROVAL OF THE SHARE ISSUANCE PROPOSAL.
TOWER
THE TOWER BOARD OF DIRECTORS (A) HAS APPROVED THE MERGER, THE TERMS OF THE
MERGER AGREEMENT AND CONSUMMATION OF THE MERGER CONTEMPLATED THEREBY, (B)
BELIEVES THAT THE TERMS OF THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY ARE ADVISABLE, FAIR TO AND IN THE BEST
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INTERESTS OF TOWER AND ITS STOCKHOLDERS AND (C) RECOMMENDS THAT THE HOLDERS OF
TOWER COMMON STOCK VOTE FOR THE APPROVAL OF THE MERGER.
RECORD DATES; QUORUMS; VOTES REQUIRED
RECKSON
The Reckson board of directors has fixed the close of business on March 15,
1999 as the record date for the determination of the holders of Reckson common
stock entitled to receive notice of and to vote at the Reckson special meeting
and at any adjournments or postponements of the Reckson special meeting.
As of the Reckson record date, there were [ ] shares of Reckson common
stock outstanding held by approximately holders of record. Each share of
Reckson common stock outstanding on the Reckson record date is entitled to one
vote upon each matter properly submitted at the Reckson special meeting.
The presence, in person or by proxy, at the Reckson special meeting of
holders of a majority of the shares of Reckson common stock outstanding on the
Reckson record date is necessary to constitute a quorum to transact business at
the Reckson special meeting. To approve the share issuance proposal, the
affirmative vote of a majority of the votes cast at the Reckson special meeting
is necessary and a majority of the shares of Reckson common stock entitled to
vote upon the share issuance proposal must be voted at the Reckson special
meeting.
Reckson recognizes that a vote by stockholders against the share issuance
proposal could be interpreted either as a vote in opposition to the merger or as
expressing a preference for issuing the Reckson OP 7% notes instead of Reckson
class B common stock. However, because the Reckson board of directors previously
determined that entering into the merger agreement was in the best interests of
Reckson and its stockholders and the obligation of Reckson to complete the
merger is not conditioned upon Reckson stockholders approving the share issuance
proposal, Reckson will remain contractually bound to complete the merger
regardless of the outcome of the vote upon the share issuance proposal.
TOWER
The Tower board of directors has fixed the close of business on March 12,
1999 as the record date for determining the holders of Tower common stock
entitled to notice of, and to vote at, the Tower special meeting. Only holders
of record of shares of Tower common stock outstanding at the close of business
on the Tower record date will be entitled to notice of, and to vote at, the
Tower special meeting.
At the close of business on the Tower record date, shares of
Tower common stock were issued and outstanding and were held by approximately
holders of record. Holders of record of Tower common stock are entitled to
one vote per share on any matter which may properly come before the Tower
special meeting.
The presence at the Tower special meeting, either in person or by proxy, of
the holders of a majority of the outstanding shares of Tower common stock and
entitled to vote on the Tower record date is necessary to constitute a quorum of
the Tower common stock, which, in turn, is needed to transact business at the
Tower special meeting. However, in the event that a quorum is not present at the
Tower special meeting, it is expected that such meeting will be adjourned or
postponed in order to solicit additional proxies.
Approval of the merger by the affirmative vote of the holders of a majority
of the outstanding shares of Tower common stock is required by the Maryland
General Corporation Law and the Tower charter.
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SHARE OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS ENTERING INTO VOTING
AGREEMENTS
RECKSON
As of the Reckson record date, directors and executive officers of Reckson
and their affiliates beneficially owned an aggregate of 1,151,154 shares of
Reckson common stock, excluding shares that may be acquired within 60 days upon
exercise of employee stock options, or 2.9% of the shares of Reckson common
stock outstanding on the Reckson record date. The directors and executive
officers of Reckson have indicated their intention to vote their shares of
Reckson common stock in favor of the share issuance proposal. Three directors
have entered into voting agreements that obligate them to vote a total of
888,034 shares of Reckson common stock, or 2.2% of the shares of Reckson common
stock outstanding on the Reckson record date, in favor of the share issuance
proposal.
As of the Reckson record date, the directors and executive officers of Tower
did not own any shares of Reckson common stock.
TOWER
As of the Tower record date, directors and executive officers of Tower and
their affiliates beneficially owned an aggregate of 506,290 shares of Tower
common stock, excluding shares that may be acquired within 60 days upon exercise
of Tower stock options, or 3% of the shares of Tower common stock outstanding on
the Tower record date. The directors and executive officers of Tower have
indicated their intention to vote their shares of Tower common stock in favor of
approval of the merger. Nine principal holders of Tower common stock have
executed voting agreements pledging to vote an aggregate of 2,580,230 shares of
Tower common stock in favor of the merger, collectively representing
approximately 15.2% of the voting power of Tower. See "The Merger Agreement--
Structure; Closing; Stockholder Approvals."
As of Tower record date, directors and executive officers of Reckson did not
own any shares of Tower common stock.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Reckson board of
directors for the Reckson special meeting and the Tower board of directors for
the Tower special meeting. The cost of solicitation of proxies will be paid by
Reckson for Reckson proxies and by Tower for Tower proxies. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of Reckson or Tower in person or by telephone, telegram
or other means of communication. Directors, officers and employees soliciting
proxies will not be additionally compensated, but may be reimbursed for
out-of-pocket expenses incurred in connection with soliciting proxies.
Arrangements have also been made with brokerage firms, banks, custodians
nominees and fiduciaries for the forwarding of proxy solicitation materials to
owners of Reckson common stock or Tower common stock held of record by such
entities and these entities will be reimbursed by Reckson or Tower for
reasonable expenses incurred in forwarding the proxy solicitation materials.
Reckson has retained D.F. King & Co., Inc. and Tower has retained [ ]
to assist in the solicitation of proxies from their respective stockholders and
to verify records related to the solicitations. The fees to be paid to D.F. King
for such services are not expected to exceed $[ ], plus reasonable out of
pocket expenses. The fees to be paid to [ ] for such services are not expected
to exceed $[ ], plus reasonable out of pocket expenses. In order to ensure
sufficient representation at their special meetings, directors, officers and
employees of Reckson and Tower may request by telephone or telegram the return
of proxy cards. The extent to which this will be necessary depends entirely upon
how promptly proxy cards are returned. Stockholders are urged to send in their
proxies without delay.
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STOCKHOLDERS SHOULD NOT SEND STOCK CERTIFICATES
WITH THEIR PROXY CARDS.
ELECTION PROCEDURE
Holders of Tower common stock or Tower OP units who wish to elect to receive
cash in the merger must fill out and return an executed form of election in the
envelope provided so that it is received by the exchange agent before 5:00 p.m.,
Eastern time, on the day before the Tower special meeting. Holders of Tower
common stock must include their stock certificates with their form of election.
Those holders of Tower common stock or Tower OP units who do not timely return a
form of election or, in the case of holders of Tower common stock, the
appropriate stock certificates with such form of election, following the
completion of the merger, will receive, subject to proration if the cash
election is undersubscribed or oversubscribed, either (1) .8364 of a share of
Reckson class B common stock if Reckson stockholders approve the share issuance
proposal or (2) .5725 of a share of Reckson class B common stock and $7.2565
principal amount of Reckson OP 7% notes, guaranteed by Reckson, if Reckson
stockholders do not approve the share issuance proposal. Holders of Tower common
stock must surrender their common stock certificates before they will be able to
receive any Reckson securities. Holders of Tower common stock who do not
surrender their certificates prior to the completion of the merger will receive
instructions for the surrender and exchange of their certificates following the
completion of the merger.
Persons who become holders of Tower common stock or Tower OP units who need
copies of the form of election may obtain the form of election from the [Tower
Information Agent] by calling (800) .
TOWER STOCKHOLDERS MUST SEND STOCK CERTIFICATES WITH
THEIR FORM OF ELECTION.
VOTING OF PROXIES
Shares of Reckson common stock and Tower common stock represented by
properly executed proxies received in time for the appropriate special meeting,
and not revoked, will be voted at the applicable special meeting in the manner
specified by the proxies. If a proxy is properly executed but does not contain
voting instructions, shares of Reckson common stock represented by the proxy
will be voted FOR the share issuance proposal and shares of Tower common stock
represented by the proxy will be voted FOR the approval of the merger.
Abstentions may be specified on the proposals for both special meetings. A
properly executed proxy marked "ABSTAIN" for either proposal will be counted as
present for purposes of determining whether there is a quorum and for purposes
of determining the aggregate voting power and number of shares represented and
entitled to vote at the applicable special meeting with respect to the indicated
proposal. Since the affirmative vote of the holder of a majority of the
outstanding shares of Tower common stock are required for approval by Tower
stockholders of the merger, a proxy marked "ABSTAIN" with respect to the Tower
proposal will have the effect of a vote against the proposal. In addition, the
failure of a Tower stockholder to return a proxy will have the effect of a vote
against the approval of the merger. Since the approval of the share issuance
proposal requires the affirmative vote of a majority of the votes cast by
Reckson stockholders and an abstention counts as a vote cast, an abstention by a
Reckson common stockholder will have the effect of a vote against the Reckson
proposal.
Under New York Stock Exchange, rules, brokers who hold shares in street name
for customers are precluded from exercising voting discretion with respect to
the approval of non-routine matters such as the proposal for the stockholders of
Reckson to approve the share issuance proposal and the proposal for the
stockholders of Tower to approve the merger. Thus, absent specific instructions
from the
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beneficial owners of shares held in street name, brokers are not empowered to
vote these shares (I.E., "broker non-votes"). Since under the Tower charter, the
affirmative vote of the holders of shares entitled to cast a majority of all the
shares of Tower common stock outstanding on the Tower record date is required
for approval of the merger, a broker non-vote on the Tower merger proposal will
have the effect of a vote against the proposal. However, because a broker
non-vote is not considered a vote cast for purposes of the share issuance
proposal, a broker non-vote on the Reckson share issuance proposal will not
count as a vote either for or against the proposal, but may prevent satisfaction
of a New York Stock Exchange requirement that the total votes cast on the share
issuance proposal represent over 50% in interest of all outstanding Reckson
common stock.
It is not expected that any matter other than as described in this Joint
Proxy Statement/Prospectus will be brought before the special meetings; however,
if other matters are properly presented, the persons authorized to vote the
shares covered by a proxy will have authority to vote in accordance with their
judgment on any other properly presented matter, including any proposal to
adjourn or postpone a special meeting or concerning the conduct of a special
meeting.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed card does not prevent a stockholder
from voting in person. A stockholder may revoke a proxy at any time without
condition or qualification prior to its exercise by:
(1) delivering, prior to the Reckson special meeting, to the Secretary,
Reckson Associates Realty Corp., 225 Broadhollow Road, Melville, New York
11747, or prior to the Tower special meeting, to the Secretary, Tower
Realty Trust, Inc., 292 Madison Avenue, New York, New York 10017, as
applicable, a written notice of revocation bearing a later date or time
than the proxy; or
(2) delivering, prior to the Reckson special meeting, to the Secretary of
Reckson, or prior to the Tower special meeting, to the Secretary of
Tower, as applicable, a duly executed proxy bearing a later date or time
than the revoked proxy; or
(3) attending and voting at the Reckson special meeting or the Tower special
meeting, as applicable.
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COMPARISON OF CURRENT TOWER STOCKHOLDER RIGHTS AND
RIGHTS OF RECKSON STOCKHOLDERS FOLLOWING THE MERGER
The rights of Tower stockholders are currently governed by the Maryland
General Corporation Law, the Tower charter and the Tower bylaws. The rights of
Reckson stockholders are currently governed by the Maryland General Corporation
Law, the Reckson charter and the Reckson bylaws.
Although the following summary discusses the material differences between
the rights of Tower stockholders and Reckson stockholders, it is not intended to
be complete and is qualified in its entirety by reference to the Maryland
General Corporation Law, the Tower charter, the Tower bylaws, the Reckson
charter and the Reckson bylaws. Copies of the Reckson charter and the Reckson
bylaws are incorporated by reference herein and will be sent to stockholders of
Tower upon request. See "Where You Can Find More Information."
AUTHORIZED STOCK
TOWER. The authorized stock of Tower consists of 150,000,000 shares of
Tower common stock and 50,000,000 shares of preferred stock, in each case par
value $.01 per share, of which 2,169,197 issued and outstanding shares have been
classified as series A convertible preferred stock, par value $.01 per share.
RECKSON. The authorized stock of Reckson consists of 100,000,000 shares of
Reckson common stock, 12,000,000 of which will be classified as Reckson class B
common stock; 25,000,000 shares of Reckson preferred stock, 9,200,000 of which
were designated as 7 5/8% series A convertible cumulative preferred stock and of
which 9,192,000 were issued and outstanding as of February 26, 1999; and
75,000,000 shares of excess stock of Reckson, in each case, par value $.01 per
share.
BOARD OF DIRECTORS AND STOCKHOLDER ADVANCE NOTICE BYLAW PROVISIONS
TOWER. The Tower charter provides that the number of directors shall not be
fewer than three nor greater than 15 persons, which number may be increased or
decreased under the Tower bylaws. With exceptions specified in the Tower
charter, a majority of the Tower board of directors shall consist of persons who
are not (a) officers or employees of Tower or Tower OP or any subsidiary of
Tower or of Tower OP or (b) affiliates, as defined in the charter of Tower, of
Tower or Tower OP. The Tower bylaws provide that at any regular meeting or at
any special meeting called for that purpose, a majority of the entire Tower
board of directors may establish, increase or decrease the number of directors,
so long as the number is never less than the minimum number required by the
Maryland General Corporation Law. The Tower board of directors is divided into
three classes, with directors of each class serving until the third annual
meeting of stockholders after the annual meeting at which that class was
elected. Tower currently has eight directors. Under the Tower bylaws, any
vacancy in the Tower board of directors, other than one caused by an increase in
the number of directors, shall be filled by a vote of a majority of the
remaining Tower board of directors. Any director so elected will hold office
until the next annual meeting of stockholders and until his successor is elected
and qualifies.
Nominations of persons for election to the board of directors and the
proposal of business to be considered by the stockholders may be made at an
annual meeting of stockholders (a) pursuant to Tower's notice of meeting, (b) by
or at the direction of the board of directors or (c) by any stockholder of Tower
who was a stockholder of record both at the time of giving of notice and at the
time of the annual meeting of stockholders, who is entitled to vote at the
meeting and who complied with the notice procedures of the Tower bylaws.
Nominations of persons for election to the Tower board of directors may be made
at a special meeting of stockholders at which directors are to be elected (a)
pursuant to Tower's notice of meeting, (b) by or at the direction of the Tower
board of directors or (c) provided that the Tower board of directors has
determined that directors shall be elected at such special meeting, by any
stockholder of Tower who is a stockholder of record both at the time of giving
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of notice and at the time of the special meeting, who is entitled to vote at the
meeting and who complied with the advance notice procedures of the Tower bylaws.
The Tower bylaws state that for nominations and other business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given notice to the secretary of Tower not less than 60 days nor more than
90 days before the first anniversary of the preceding year's annual meeting.
However, if the date of the annual meeting is advanced by more than 30 days or
delayed by more than 60 days from that anniversary date, notice by the
stockholder must be delivered not earlier than the 90(th) day before the annual
meeting and not later than the close of business on the later of the 60(th) day
before the annual meeting or the tenth day following the public announcement of
the date of the meeting is first made. For a special meeting, the Tower bylaws
state that only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
notice of meeting. However, in the event that a special meeting is called for
the purpose of electing one or more directors to the Tower board of directors,
any Tower stockholder may nominate a person or persons for election as director
as specified in Tower's notice of meeting, if the stockholder delivers a notice
to the secretary of Tower not earlier than the 90(th) day before the special
meeting and not later than the close of business on the later of the 60(th) day
before the special meeting or the tenth day after the day on which a public
announcement is first made of the date of the meeting and the nominees proposed
by the Tower board of directors to be elected at the meeting.
RECKSON. The Reckson bylaws provide that the number of directors of Reckson
may be established by the Reckson board of directors but may not be fewer than
the minimum number required by the Maryland General Corporation Law nor more
than 15. Reckson currently has ten directors. Any vacancy may be filled, at any
regular meeting or at any special meeting called for that purpose, by a majority
of the remaining directors, except that a vacancy resulting from an increase in
the number of directors must be filled by a majority of the entire Reckson board
of directors.
The Reckson board of directors is divided into three classes of directors.
Directors of each class are chosen for three-year terms upon the expiration of
their current terms and each year one class of directors is elected by Reckson
common stockholders. Reckson believes that classification of the Reckson board
of directors will help to assure the continuity and stability of Reckson's
business strategies and policies as determined by the Reckson board of
directors. The use of a staggered board may delay or defer a change of control
of Reckson or removal of incumbent management. Holders of shares of Reckson
common stock have no right to cumulative voting in the election of directors.
Consequently, at each annual meeting of Reckson stockholders, the holders of a
majority of the shares of Reckson common stock are able to elect all of the
successors of the class of directors whose terms expire at that meeting.
The Reckson bylaws contain advance notice bylaw provisions that are
substantially similar to the Tower bylaws. However, the time period within which
a Reckson stockholder may nominate an individual as a director of Reckson or
propose business for consideration at an annual meeting differs from the time
period for Tower stockholders. Specifically, the Reckson bylaws state that any
Reckson stockholder of record wishing to nominate a Reckson director or have a
Reckson stockholder proposal considered at an annual meeting must provide
written notice and supporting documentation to Reckson relating to the
nomination or proposal not less than 75 days nor more than 180 days prior to the
anniversary date of the prior year's annual meeting or special meeting in lieu
thereof. In the event that the Reckson annual meeting is called for a date more
than seven calendar days before or delayed more than 60 calendar days from the
anniversary of the prior year's annual meeting or special meeting, Reckson
stockholders generally must provide written notice within 20 calendar days after
the date on which public announcement of the date of the meeting is made. Like
the Tower bylaws, the Reckson bylaws provide that only such business shall be
conducted at a special meeting of the stockholders as shall have been brought
before the meeting pursuant to Reckson's notice of meeting. However, if Reckson
calls a special meeting of the stockholders for the purpose of electing one or
more directors, a
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Reckson stockholder may nominate a person or persons for election as director by
delivering to the secretary of Reckson a notice not earlier than the 180(th) day
before the special meeting and not later than the close of business on the later
of the 75(th) day before the special meeting or the tenth day after the day on
which public announcement is first made of the date of the special meeting and
the nominees proposed by the Reckson board of directors to be elected at the
meeting.
The purpose of requiring Reckson stockholders to give Reckson advance notice
of nominations and other business is to afford the Reckson board of directors a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Reckson board of directors, to inform Reckson
stockholders and make recommendations about the qualifications or business, as
well as to provide a more orderly procedure for conducting meetings of Reckson
stockholders. Although the Reckson bylaws do not give the Reckson board of
directors any power to disapprove stockholder nominations for the election of
Reckson directors or proposals for action, they may have the effect of
precluding a contest for the election of Reckson directors or the consideration
of Reckson stockholder proposals if the proper procedures are not followed, and
of discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal,
without regard to whether consideration of the nominees or proposals might be
harmful or beneficial to Reckson and its stockholders.
For a discussion of certain voting rights of holders of Reckson series A
preferred stock, see "--Voting Rights--Reckson" below.
SPECIAL MEETINGS
TOWER. The Maryland General Corporation Law provides that a special meeting
of stockholders may be called by the president, the board of directors or any
person specified in the charter or the bylaws. The Tower bylaws allow the chief
executive officer to call a special meeting of stockholders. In addition, the
Maryland General Corporation Law and Tower bylaws require the Secretary of the
corporation to call a special meeting on the written request of stockholders
entitled to cast at least 25% of all the votes entitled to be cast at the
meeting.
RECKSON. The Maryland General Corporation Law provides that a special
meeting of stockholders may be called by the president, the board of directors
or any person specified in the charter or bylaws. The Reckson charter and the
Reckson bylaws allow special meetings of the stockholders to be called by (a)
the president, (b) the chief executive officer or (c) the Reckson board of
directors. In addition, the Maryland General Corporation Law and the Reckson
bylaws require the secretary of Reckson to call a special meeting on the written
request of stockholders entitled to cast at least 25% of all the votes entitled
to be cast at the meeting.
AMENDMENTS TO CHARTER AND BYLAWS
TOWER. Under the Maryland General Corporation Law, unless otherwise
provided in the corporation's charter, a proposed charter amendment requires (a)
the board of directors of the corporation to adopt a resolution that declares
the proposed amendment to be advisable and (b) the affirmative vote of
two-thirds of the outstanding shares of stock entitled to be cast on the matter.
However, the Tower charter provides that the affirmative vote of the holders of
a majority of the outstanding shares of Tower common stock is required for
amendments to the Tower charter regarding the issuance of shares of authorized
stock, and other amendments to the Tower charter require the affirmative vote of
two-thirds of the outstanding shares of Tower common stock, voting together as a
single class.
Under the Maryland General Corporation Law, the power to adopt, alter and
repeal the bylaws is vested in the stockholders, except to the extent that the
charter or bylaws vest it in the board of
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directors. The Tower charter and the Tower bylaws expressly provide for the
amendment of the Tower bylaws by the affirmative vote of holders of a majority
of the Tower common stock or by the affirmative vote of a majority of the Tower
board of directors.
RECKSON. Under the Maryland General Corporation Law and the Reckson
charter, a proposed charter amendment requires an affirmative vote of at least
two-thirds of the outstanding shares of stock entitled to be cast on the matter.
Under the Maryland General Corporation Law, the power to adopt, alter and
repeal the bylaws is vested in the stockholders, except to the extent that the
charter or bylaws vest it in the board of directors. The Reckson bylaws vest
exclusive power to the Reckson board of directors to adopt, alter or repeal any
provision of the Reckson bylaws and to make new bylaws.
VOTING RIGHTS
TOWER. The outstanding voting securities of Tower are the shares of Tower
common stock. Generally, under the Maryland General Corporation Law and the
Tower charter, each share of Tower common stock is entitled to one vote on all
matters submitted to Tower stockholders. Other than as required by law, the
Tower series A convertible preferred stock does not currently have any voting
rights or power, and the consent of the holders is not required for the taking
of any corporate action. However, if the merger agreement terminates, after the
termination date, each share of the Tower series A convertible preferred stock
has the following voting rights:
Whenever dividends on the Tower series A convertible preferred stock are in
arrears for six consecutive quarterly dividend periods, the holders of Tower
series A convertible preferred stock, voting separately as a class with all
other series of Tower preferred stock on parity with the Tower series A
convertible preferred stock as to the payment of dividends and as to the
distribution of assets upon liquidation, dissolution and winding up, and
upon which like voting rights have been conferred and are exercisable (the
"Tower Defaulted Preferred Stock"), shall be entitled to elect two
additional directors of Tower (a) at a special meeting of the stockholders
requested by the holders of at least 25 percent of the Tower Defaulted
Preferred Stock in accordance with the Tower charter, unless the request is
received within 45 days immediately preceding the date fixed for the next
annual meeting of the stockholders, (b) at any annual meeting of the
stockholders held for the purpose of electing directors or (c) by the
unanimous written consent of the holders of the Tower Defaulted Preferred
Stock. The voting rights continue until the time that all dividends
accumulated and unpaid on the Tower series A convertible preferred stock
have been paid or declared and funds set aside in full. Whenever the terms
of the directors elected by the holders of Tower Defaulted Preferred Stock
terminates and the special voting powers vested in the holders of Tower
Defaulted Preferred Stock expires, the number of directors shall be the
number provided in the bylaws of Tower, irrespective of any increase made as
a consequence of the special voting rights of the Tower Defaulted Preferred
Stock.
RECKSON. The outstanding voting securities of Reckson are the shares of
Reckson common stock and Reckson series A preferred stock. Under the Maryland
General Corporation Law and the Reckson charter, each share of Reckson common
stock is entitled to one vote on all matters submitted to Reckson stockholders,
subject to the provisions in the Reckson charter regarding Reckson excess stock.
Each share of Reckson class B common stock will be entitled to one vote on all
matters submitted to Reckson stockholders, and shares of Reckson common stock
and Reckson class B common stock will vote together as a single class. Each
share of Reckson series A preferred stock is entitled to the following voting
rights:
- Whenever dividends on the Reckson series A preferred stock are in arrears
for six or more quarterly periods, the holders of Reckson series A
preferred stock, voting together as a class with all other series of
Reckson preferred stock upon which like voting rights have been
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conferred and are exercisable, will be entitled to vote for the election
of two additional directors of Reckson at a special meeting called by the
holders of record of at least ten percent of the Reckson series A
preferred stock, unless such request is received less than 90 days before
the date fixed for the next annual or special meeting of the stockholders,
or at the next annual meeting of stockholders, and at each subsequent
annual meeting until all dividends accumulated on such shares of Reckson
series A preferred stock for the past dividend periods and the then
current dividend period shall have been fully paid or declared and a sum
sufficient for the payment of the dividends is set aside for payment. In
such case, the entire board of directors of the Reckson will be increased
by two directors.
- So long as any shares of such Reckson series A preferred stock remain
outstanding, Reckson will not, without the affirmative vote or consent of
the holders of at least two-thirds of the shares of Reckson series A
preferred stock outstanding at the time, given in person or by proxy,
either in writing or at a meeting, with such series voting separately as a
class, (a) authorize or create, or increase the authorized or issued
amount of, any class or series of capital stock ranking senior to the
Reckson series A preferred stock as to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up of
Reckson, or reclassify any authorized capital stock of Reckson into such
stock, or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such stock; or
(b) amend, alter or repeal the provisions of the Reckson charter or the
designating amendment for the Reckson series A preferred stock, whether by
merger, consolidation or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of the Reckson
series A preferred stock or its holders. Holders of Reckson series A
preferred stock shall not be entitled to any voting right in connection
with this type of event, however, if as a result of such event (a) the
Reckson series A preferred stock remains outstanding with its terms
materially unchanged or (b) Reckson is not the surviving entity but the
surviving entity issues to holders of Reckson series A preferred stock the
same number of shares of any other series of preferred stock with rights,
preferences, privileges and voting powers that are materially unchanged
from the rights, preferences, privileges, voting powers and other terms of
the Reckson series A preferred stock. Any increase in the amount of the
authorized Reckson preferred stock or the creation or issuance of any
other series of Reckson preferred stock, or any increase in the amount of
authorized shares of Reckson series A preferred stock or any other series
of Reckson preferred stock, in each case ranking on a parity with or
junior to the Reckson series A preferred stock as to payment of dividends
or the distribution of assets upon liquidation, dissolution or winding up
of Reckson, shall not be deemed to materially and adversely affect the
rights, preferences, privileges or voting powers of the Reckson series A
preferred stock.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote or consent would otherwise be
required shall be effected, all outstanding shares of the Reckson series A
preferred stock have been converted, redeemed or called for redemption and
sufficient funds have been deposited in trust to effect such redemption.
REMOVAL OF DIRECTORS
TOWER. Under the Tower charter, subject to the rights of holders of Tower
preferred stock to elect directors, any director, or the entire Tower board of
directors, may be removed from office at any time, but only for cause and then
only by the affirmative vote of the holders of at least a majority of the votes
entitled to be cast in the election of directors. For the purpose of the
foregoing, "cause" means with respect to any particular director a final
judgment of a court of competent jurisdiction holding that such director caused
demonstrable material harm to Tower through bad faith or active and deliberate
dishonesty.
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RECKSON. The Reckson charter permits the removal of any director, or the
entire Reckson board of directors, at any time, with or without cause, by the
affirmative vote of a majority of the votes entitled to be cast for the election
of directors.
DIVIDEND AND OTHER DISTRIBUTIONS
TOWER. Under the Maryland General Corporation Law, a board of directors may
authorize a corporation to make distributions to its stockholders, in accordance
with the corporation's charter, unless, after giving effect to the distribution,
the corporation would not be able to pay its indebtedness as the indebtedness
becomes due in the usual course of business or the corporation's total assets
would be less than the sum of its total liabilities plus, unless the charter
permits otherwise, the amount that would be needed, if the corporation were to
be dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights on dissolution are
superior to those receiving the distribution. Under the Maryland General
Corporation Law, the directors of a corporation are entitled to contribution
from every other director held liable for making improper dividend payments,
stock repurchases or redemptions, using the required standard of care for
directors under the Maryland General Corporation Law. Directors held to be
liable pursuant to this provision of the Maryland General Corporation Law are
entitled to be subrogated to the rights of the corporation against stockholders
receiving dividends on, or assets for the sale or redemption of, their stock
with knowledge that such dividend, repurchase or redemption was unlawful.
RECKSON. As a Maryland corporation, Reckson is subject to the same
provisions of the Maryland General Corporation Law as Tower, described
immediately above. Reckson stockholders have the following dividend and
distribution rights:
- The liquidation preference of the outstanding shares of the Reckson series
A preferred stock is not added to the liabilities of Reckson for the
purposes of determining under the Maryland General Corporation Law whether
a distribution may be made to holders of stock with preferential rights
upon dissolution of Reckson which are junior to the Reckson series A
preferred stock.
- Although limited by the preferential rights of Reckson preferred stock and
the provisions of the Reckson charter regarding excess stock, holders of
Reckson common stock are entitled, and holders of Reckson class B common
stock will be entitled, to receive distributions on their stock as
authorized by the Reckson board of directors and declared by Reckson out
of assets legally available for distributions and to share ratably in the
assets of Reckson legally available for distribution to Reckson common
stockholders in the event of its liquidation, dissolution or winding up
after payment of or adequate provisions of all known debts and liabilities
of Reckson.
- Holders of Reckson series A preferred stock are entitled to receive, as
authorized by the board of directors and declared by Reckson, out of funds
legally available for the payment of distributions, cumulative cash
distributions at the rate of 7 5/8% per year of the liquidation preference
per share, which is equivalent to $1.90625 per year per share.
Distributions on the Reckson series A preferred stock are cumulative and
are payable quarterly in arrears on January 31, April 30, July 31 and
October 31 of each year or, if not a business day, the next succeeding
business day.
- No distributions on the Reckson series A preferred stock shall be
authorized by the Reckson board of directors or be paid or set apart for
payment by Reckson if the terms and provisions of any agreement of
Reckson, including any agreement relating to its indebtedness, prohibits
such authorization, payment or setting apart for payment or provides that
such authorization, payment or setting apart for payment would constitute
a breach or a default of the agreement, or if such authorization or
payment is restricted or prohibited by law.
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- Notwithstanding the foregoing, distributions on the Reckson series A
preferred stock accumulate whether or not Reckson has earnings, whether or
not there are funds legally available for the payment of distributions on
the Reckson series A preferred stock and whether or not such distributions
on the Reckson series A preferred stock are authorized. Accumulated but
unpaid distributions on the Reckson series A preferred stock will not bear
interest and holders of the Reckson series A preferred stock will not be
entitled to any distributions in excess of full cumulative distributions
as described above.
Reckson transferred the net proceeds of the sale of the Reckson series A
preferred stock to Reckson OP in exchange for 7 5/8% series A preferred units in
Reckson OP, the economic terms of which are substantially identical to those of
the Reckson series A preferred stock. Reckson OP will be required to make all
required distributions on the Reckson series A preferred units (which will
mirror the payments of distributions, including accumulated and unpaid
distributions upon redemption, and of the liquidation preference amount on the
shares of Reckson series A preferred stock) prior to any distribution of cash or
assets to the holders of the units of limited partnership interest in Reckson OP
or to the holders of any other interests in Reckson OP, except for any other
series of preferred units ranking on a parity with the Reckson series A
preferred units with respect to the payment of distributions or amounts upon a
liquidation, dissolution or winding upon of Reckson, and except for
distributions required to enable Reckson to maintain its qualification as a
REIT.
The Reckson series A preferred stock ranks senior to the Reckson common
stock and the Reckson class B common stock as to the payments of distributions
and to amounts distributed upon a liquidation, dissolution or winding up of
Reckson.
For information regarding the distributions on the Reckson class B common
stock, see "Comparative Per Share Data--Distribution Policies" and "Description
of Reckson Stock."
APPRAISAL RIGHTS
TOWER. Tower common stockholders have no appraisal rights under the
Maryland General Corporation Law because the Tower common stock is traded on a
national securities exchange, the New York Stock Exchange.
RECKSON. Holders of Reckson common stock and future holders of Reckson
class B common stock have no appraisal rights under the Maryland General
Corporation Law because Reckson common stock is, and Reckson class B common
stock will be, traded on a national securities exchange, the New York Stock
Exchange.
FUNDAMENTAL TRANSACTIONS
TOWER. The Maryland General Corporation Law generally requires that
mergers, consolidations and sales, leases or exchanges of all or substantially
all of a corporation's property and assets be approved by the board of directors
and by the affirmative vote of two-thirds of all of the votes entitled to be
cast on the matter. However, under the Maryland General Corporation Law a
corporation's charter may require a greater or lesser proportion of votes
although not less than a majority of all the votes entitled to be cast on the
matter. The Tower charter provides that mergers, consolidations and sales,
leases or exchanges of all or substantially all of Tower's property and assets
must be authorized by the affirmative vote of holders of shares entitled to cast
a majority of all the votes entitled to be cast on the matter.
RECKSON. The Maryland General Corporation Law generally requires that
mergers, consolidations and sales, leases or exchanges of all or substantially
all of a corporation's property and assets be approved by the board of directors
and by the affirmative vote of two-thirds of all of the votes entitled to be
cast on the matter. However, under the Maryland General Corporation Law a
corporation's
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charter may require a greater or lesser proportion of votes, although not less
than a majority of all the votes entitled to be cast on the matter. The Reckson
charter does not contain such a provision.
OWNERSHIP LIMITATIONS
TOWER. For Tower to qualify as a REIT under the Internal Revenue Code, it
must satisfy requirements concerning the ownership of its outstanding shares of
stock. Specifically, it must satisfy the Five or Fewer Requirement and the
shares of stock of Tower must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of twelve months or a proportionate
part of a shorter taxable year. These two requirements do not apply until after
the first taxable year for which Tower makes an election to be taxed as a REIT.
See "Federal Income Tax Considerations-- Requirements for Qualification as a
REIT."
The Tower charter, subject to exceptions described below, provides that no
holder may own, or be deemed to own by virtue of the attribution provisions of
the Internal Revenue Code, more than 9.8% of the number or value of the
outstanding shares of any class of stock of Tower, subject to the Tower
look-through ownership limit described below. Various entities, such as pension
trusts qualifying under Section 401(a) of the Internal Revenue Code, mutual
funds qualifying as regulated investment companies under Section 851 of the
Internal Revenue Code, and corporations, will be looked through for purposes of
the "closely held" test of Section 856(h) of the Internal Revenue Code. With
limited exceptions, the Tower charter will allow such an entity under the Tower
look-through ownership limit to own up to 15.0% of the shares of any class or
series of Tower's stock, as long as the ownership does not cause any individual
beneficial owner of such entity to exceed the Tower ownership limit or otherwise
result in a violation of the tests described in clauses (b), (c) or (d) of the
succeeding paragraph.
Any transfer of stock of Tower that would (a) result in any person owning,
directly or indirectly, stock of Tower in excess of the Tower ownership limit or
the Tower look-through ownership limit, if applicable, (b) result in Tower
common stock being owned by fewer than 100 persons, as determined without
reference to any rules of attribution, (c) result in Tower being "closely held"
within the meaning of Section 856(h) of the Internal Revenue Code, or (d) cause
Tower to own, actually or constructively, 9.9% or more of the ownership interest
in a tenant of Tower's, Tower OP's or a subsidiary partnership's real property,
within the meaning of Section 856(d)(2)(B) of the Internal Revenue Code, will be
null and void, and the intended transferee will acquire no rights in such shares
of stock.
The ownership attribution rules under the Internal Revenue Code are complex
and may cause shares owned actually or constructively by a group of related
individuals and/or entities to be owned constructively by one individual or
entity. As a result, the acquisition of less than 9.8% of the shares of Tower
common stock or any class or series of Tower preferred stock or the acquisition
of an interest in an entity that owns, actually or constructively, shares of
stock by an individual or entity could nevertheless cause that individual or
entity, or another individual or entity, to own constructively in excess of 9.8%
of the outstanding shares of Tower common stock or any class or series of
preferred stock and thus subject such shares to the Tower ownership limit or the
Tower look-through ownership limit, if applicable. The Tower board of directors
may grant an exemption from the Tower ownership limit for one or more persons
who would not be treated as "individuals" for purposes of the Internal Revenue
Code if it is satisfied, based upon the advice of counsel or a ruling from the
IRS or other evidence satisfactory to the Tower board of directors, that the
ownership will not cause any person who is an individual to be treated as owning
shares of stock in excess of the Tower ownership limit, applying the applicable
constructive ownership rules, and will not otherwise jeopardize Tower's status
as a REIT. The Tower board of directors may require undertakings, or
representations from the applicant for the waiver regarding the presentation of
the REIT status of Tower. In addition, the Tower board of directors may give a
look-through entity an exception to the Tower look-through ownership limit if
the
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look-through entity satisfies the Tower board of directors that its share
ownership will not adversely affect Tower's ability to qualify as a REIT.
If, notwithstanding the restrictions described above, and the relevant
exceptions described in this summary, any shares of Tower common stock are
purportedly transferred in a transfer that would (a) result in any person
owning, directly or indirectly, shares of Tower common stock in excess of the
Tower ownership limit or the Tower look-through ownership limit, if applicable,
(b) result in the shares of Tower common stock being owned by fewer than 100
persons as determined without reference to any rules of attribution, (c) result
in Tower being "closely held" within the meaning of Section 856(h) of the
Internal Revenue Code, or (d) cause Tower to own, actually or constructively,
9.9% or more of the ownership interests in a tenant of Tower's, Tower OP's or a
subsidiary partnership's real property, within the meaning of Section
856(d)(2)(B) of the Internal Revenue Code, such shares will be designated as
"shares-in-trust" and will be transferred automatically to a trust, effective on
the day before the purported transfer of the shares. The record holder of the
shares of Tower common stock that are designated as shares-in-trust (the
"Prohibited Owner") will be required to submit the shares-in-trust to Tower for
registration in the name of the trustee of the trust. The trustee will be
designated by Tower but will not be affiliated with Tower. The beneficiary of
the trust will be one or more charitable organizations named by Tower.
Shares-in-trust will remain issued and outstanding shares of stock and will
be entitled to the same rights and privileges as all other shares of the same
class or series. The trustee will receive all dividends and distributions on the
shares-in-trust and will hold the dividends or distributions in trust for the
benefit of the beneficiary. The trustee will vote all shares-in-trust. The
trustee will designate a permitted transferee of the shares-in-trust, if the
permitted transferee (a) purchases the shares-in-trust for valuable
consideration and (b) acquires the shares-in-trust without the acquisition
resulting in another transfer to another trust.
The Prohibited Owner with respect to shares-in-trust will be required to
repay to the trustee the amount of any dividends or distributions received by
the Prohibited Owner (a) that are attributable to any shares-in-trust and (b)
the record date of which was on or after the date that such shares become
shares-in-trust. Any vote taken by a Prohibited Owner prior to Tower's discovery
that the shares-in-trust were held in trust will be rescinded as null and void
and recast by the trustee. However, if Tower has already taken irreversible
corporate action based on such vote, then the trustee shall not have the
authority to rescind and recast the vote. The Prohibited Owner generally will
receive from the trustee the lesser of (a) the price per share such Prohibited
Owner paid for the shares of stock that were designated as shares-in-trust or,
in the case of a gift or devise, the market price per share on the date of such
transfer or (b) the price per share received by the trustee from the sale of the
shares-in-trust. Any amounts received by the trustee in excess of the amounts to
be paid to the Prohibited Owner will be distributed to the beneficiary of the
trust.
The shares-in-trust will be deemed to have been offered for sale to Tower,
or its designee, at a price per share equal to the lesser of (a) the price per
share in the transaction that created the shares-in-trust or, in the case of a
gift or devise, the market price per share on the date of such transfer or (b)
the market price per share on the date that Tower, or its designee, accepts such
offer. Subject to the trustee's ability to designate a permitted transferee,
Tower will have the right to accept such offer for a period of 90 days after the
later of (a) the date of the purported transfer which resulted in the creation
of such shares-in-trust or (b) the date Tower determines in good faith that a
transfer resulting in the shares-in-trust occurred.
Any person who acquires or attempts to acquire stock in violation of the
foregoing restrictions, or any person who owned shares of stock that were
transferred to a trust, will be required (a) to give immediately written notice
to Tower of such event and (b) to provide to Tower any other information
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that Tower may request in order to determine the effect, if any, of the transfer
on Tower's status as a REIT.
All persons who own, directly or indirectly, more than five percent or such
lower percentages as required pursuant to regulations under the Internal Revenue
Code of the outstanding shares of stock of Tower must, within 30 days after
January 1 of each year, provide to Tower a written statement or affidavit
stating (a) the name and address of the direct or indirect owner; (b) the number
of shares of stock owned directly or indirectly; and (c) a description of how
the shares are held. In addition, each direct or indirect stockholder shall
provide to Tower any additional information that Tower may request in order to
determine the effect, if any, of the stockholder's ownership on Tower's status
as a REIT and to ensure compliance with the Tower ownership limit.
In general, neither the Tower ownership limit nor the Tower look-through
ownership limit, as applicable, will apply to the acquisition of shares of stock
by an underwriter that participates in a public offering of shares of Tower
stock.
All certificates representing shares of Tower common stock will bear a
legend referring to the restrictions described above.
The Tower ownership limit could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority of, shares of Tower common stock might receive a premium from their
shares of Tower common stock over the then-prevailing market price or which such
holders might believe to be otherwise in their best interest. Additionally, the
same ownership limits apply to the Tower series A convertible preferred stock.
RECKSON. Reckson's charter imposes extensive limitations and restrictions
on ownership of Reckson stock. See "Description of Reckson Stock."
BUSINESS COMBINATIONS
Under the Maryland General Corporation Law, certain "business combinations"
(including a merger, consolidation, share exchange or, in some circumstances, an
asset transfer or issuance or reclassification of equity securities) between a
Maryland corporation and any person who beneficially owns ten percent or more of
the voting power of the corporation's shares or an affiliate of the corporation
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate of an Interested Stockholder are prohibited for five years after
the most recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of the corporation and approved by the affirmative vote
of at least (a) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of voting stock of the corporation other than
shares held by the Interested Stockholder with whom or with whose affiliate the
business combination is to be effected, unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in the
Maryland General Corporation Law) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its shares. These provisions of the Maryland General Corporation
Law do not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder.
TOWER. The Tower bylaws contain a provision exempting from the business
combination statute any and all acquisitions by any owner of shares of stock of
Tower. There can be no assurance that this provision will not be amended or
repealed in the future.
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RECKSON. The Reckson board of directors has elected to exempt from these
provisions of Maryland law any and all business combinations between any person
and Reckson. There can be no assurance that the Reckson board of directors will
not amend or repeal this exemption in the future.
CONTROL SHARE ACQUISITIONS
The Maryland General Corporation Law provides that "control shares" of a
Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares of stock owned by the
acquirer, by officers or by directors who are employees of the corporation.
Control shares are voting shares of stock which, if aggregated with all other
voting shares of stock previously acquired by the acquirer or in respect of
which the acquirer is able to exercise or direct the exercise of voting power,
except solely by virtue of a revocable proxy, would entitle the acquirer to
exercise voting power in electing directors within one of the following ranges
of voting power: (a) one-fifth or more but less than one-third, (b) one-third or
more but less than a majority, or (c) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A control
share acquisition means the acquisition of control shares, subject to exceptions
specified by the Maryland General Corporation Law.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of several conditions, including an undertaking to pay expenses,
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to conditions and limitations, the corporation may redeem any or all of
the control shares, except those for which voting rights have previously been
approved, for fair value determined, without regard to the absence of voting
rights for the control shares, as of the date of the last control share
acquisition by the acquirer or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquirer
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of appraisal rights may not be less than the highest
price per share paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
TOWER. The Tower bylaws contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of Tower's
shares of stock. This provision may be amended or repealed in the future.
RECKSON. The Reckson bylaws contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of shares of
stock of Reckson. This provision may be amended or repealed in the future.
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TOWER AND TOWER OP
Tower was organized in March 1997 and was formed to continue and expand the
commercial real estate business of Tower Equities & Realty Corp. (collectively,
with its predecessor entities and affiliates, "Tower Equities & Realty"). Tower
operates as a fully integrated, self-administered, and self-managed real estate
company and operates in a manner with the expectation of qualifying as a REIT
for Federal income tax purposes.
Through its controlling interest in Tower OP, Tower is engaged in
developing, acquiring, owning, renovating, managing and leasing office
properties primarily in the Manhattan, Phoenix/Tucson and Orlando markets. As of
June 30, 1998, Tower's portfolio of properties included 25 office buildings
encompassing approximately 4.6 million rentable square feet. Tower also owns or
has an option to acquire four parcels of land adjacent to four of the Tower
properties which can support 2.2 million rentable square feet of development.
On October 16, 1997, Tower completed an initial public offering of
13,817,250 shares of Tower common stock, including the exercise of the
underwriters' over-allotment option of 1,802,250 shares, at a price of $26.00
per share. Tower also effected concurrent private placements of 1,153,845 shares
of Tower common stock to certain private investment funds at $26.00 per share
and realized net proceeds therefrom of approximately $353.35 million. The net
proceeds from the Tower initial public offering were contributed to Tower OP in
exchange, in part, for Tower's approximate 91.4% interest therein which includes
a 90.4% limited partner interest and a 1% general partner interest. Tower OP
used the proceeds received from Tower, the $107.0 million net cash proceeds from
Tower's term loan facility borrowed concurrent with and subsequent to the Tower
initial public offering and approximately $12.3 million of proceeds received
from Morgan Stanley Asset Management from the conversion of convertible notes of
Tower held by certain private investment funds and separate accounts advised by
Morgan Stanley Asset Management (the "MSAM Notes") into Tower common stock, as
follows: (i) approximately $281.0 million for repayment of certain indebtedness,
including associated prepayment penalties, relating to the Tower properties and
the Tower partnerships that own the Tower properties; (ii) approximately $137.0
million to acquire certain equity, debt and fee interests in the Tower
properties; (iii) approximately $3.1 million to pay for commitment fees and
expenses relating to the term loan and Tower's $200.0 million unsecured line of
credit with Fleet Bank; (iv) approximately $3.0 million to pay transfer taxes
and other expenses associated with the acquisitions of the Tower properties; and
(v) the remaining approximately $48.6 million for working capital.
FORMATION TRANSACTIONS
The principal transactions made in connection with the formation of Tower
and the acquisition of the Tower properties included the following:
- Tower acquired, directly or indirectly, a 100% interest in each of Tower's
initial 21 properties and a 10% interest in the 2800 North Central Avenue
property and the ground lease encumbering the Maitland Forum Property for
an aggregate of 1,128,160 shares of restricted Tower common stock,
1,583,640 Tower OP units, approximately $118.7 million in cash, and the
assumption of approximately $244.6 million in mortgage indebtedness and
approximately $13 million of non-interest-bearing deferred tax liabilities
payable over 10 years. However, the tax liabilities have been discounted
as of the date of the Tower initial public offering to approximately $9.8
million, as described in Tower's financial statements included herein, as
follows:
- Tower OP acquired directly or indirectly from certain officers and
directors of Tower interests in each of the 21 initial properties,
including an interest in the Maitland Forum ground lease, two parcels of
land adjacent to two of the initial properties which can support 370,000
square feet of development, and substantially all the assets of the Tower
Equities & Realty and
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another management company, Properties Atlantic, Inc., in exchange for
1,509,490 Tower OP units; and
- Tower acquired from third parties, directly or indirectly, debt, equity
and fee interests in the 21 initial properties, including an interest in
the Maitland Forum ground lease, in exchange for 1,128,160 shares of
restricted Tower common stock, 74,150 Tower OP units and $118.7 million
in cash.
- Tower OP entered into the $107.0 million seven-year term loan with Merrill
Lynch Credit Corporation and borrowed approximately $54.0 million under
such facility at the closing of the Tower initial public offering.
Subsequent to the Tower initial public offering, Tower additionally
borrowed approximately $53.0 million under the term loan, the proceeds of
which were used to repay certain indebtedness encumbering one of the 21
initial properties and for working capital purposes.
- Tower OP utilized $246.5 million of the net proceeds of the Tower initial
public offering, the concurrent private placements and the $54.0 million
initial draw on the term loan to repay mortgage indebtedness, including
$1.9 million of prepayment penalties encumbering the 21 initial properties
and the Tower property partnerships concurrent with the closing of the
Tower initial public offering.
- The Tower Equities & Realty and Properties Atlantic, Inc. management and
leasing companies that were owned entirely by some of the officers of
Tower contributed substantially all of the assets of such companies to
Tower OP and Tower OP, in turn, recontributed such assets to Tower
Equities Management in exchange for 100% of the non-voting common stock
and 5% of the voting common stock in Tower Equities Management which
collectively is entitled to receive approximately 95% of the dividends.
This structure was designed to assist Tower in maintaining its status as a
REIT.
- Tower issued 886,200 shares of restricted Tower common stock in exchange
for the cancellation of indebtedness outstanding under the MSAM Notes.
- Tower Equities Management and entities that held interests in retail
properties controlled directly or indirectly by Tower Equities & Realty
entered into management agreements with respect to each of these
properties. Four of these properties are controlled by some of the
officers and directors and have non-cancellable management contracts.
However, these management contracts may be cancelled upon a sale of the
applicable property. The remaining three properties are under management
contracts which may be terminated upon payment of two years of management
fees or upon a sale of the applicable property. In consideration for the
services to be provided under the management agreements, Tower Equities
Management is entitled to receive market rate property and construction
management fees, as well as applicable leasing commissions.
- Tower OP acquired, at no cost, an option to acquire from an unaffiliated
third party for approximately $10.3 million, exclusive of various closing
costs, approximately 43 acres of undeveloped land in Phoenix that can
support 1.0 million square feet of office development. This option was
exercised by Tower in November 1997. In addition, the Tower OP acquired
from certain officers and directors for no additional consideration an
option to acquire for approximately $3.8 million, approximately $4.75 per
buildable square foot, approximately 3.6 acres of land adjacent to Tower's
One Orlando Center property that can support approximately 800,000 square
feet of development. As of May 9, 1997, such property was appraised at
approximately $5.1 million.
- Tower has established the three-year $200.0 million unsecured revolving
line of credit with Fleet Bank which has been and will continue to be used
primarily to finance the acquisition of, and
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investment in, office properties, to refinance existing indebtedness, and
for general working capital needs.
- Tower has paid to an affiliate of The Carlyle Group $925,000 in
consideration of obtaining such affiliate's consent to transfer certain
interests in the 2800 North Central Avenue property to Tower.
- As part of the formation transactions, Tower acquired certain interests in
the Tower property partnerships from certain officers and directors and
certain third parties. Certain of the interests in three of the Tower
property partnerships were acquired from Edward Feldman, the father of
Lawrence H. Feldman, pursuant to a bankruptcy proceeding under Chapter 7
of U.S. Bankruptcy Code. In conjunction with the transfer of those
interests to Tower, Tower entered into a court-approved settlement
agreement whereby Tower has obtained a release of all potential claims of
the bankruptcy trustee and any creditor of the bankruptcy estate relating
directly or indirectly to Tower in exchange for a cash payment of $2.0
million. Accordingly, Tower believes that this bankruptcy proceeding will
have no impact on Tower's operations.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Historically, Tower has been involved in only one industry, namely
commercial office real estate. Therefore, all of the financial statements
contained herein relate to this industry segment.
NARRATIVE DESCRIPTION OF TOWER
Tower operates from its midtown Manhattan headquarters and its two full
service regional offices in Orlando and Phoenix. Tower is a fully integrated
real estate company with in-house expertise in acquisition, development,
construction, property management and leasing. As of September 30, 1998, the 25
office buildings owned by Tower contained approximately 4.6 million square feet
and had a weighted average occupancy rate of 95.72%. Substantially all of the
properties are located either in Manhattan, Orlando or Phoenix.
Tower's business focuses on acquiring office properties at a significant
discount to replacement cost that are attractively priced due to physical,
leasing and/or operational deficiencies. Accordingly, Tower seeks to acquire
office properties that present an attractive opportunity to create value and
enhance cash flow through Tower's hands-on approach to property repositioning,
including the implementation of property specific renovation programs for
underperforming assets. Tower believes that the significant expertise of its
management in property development, redevelopment, construction, management and
leasing provides it with the expertise necessary to identify, acquire, upgrade,
renovate and reposition underperforming office properties.
RECENT DEVELOPMENTS
On December 31, 1997, Tower acquired the office property located at 810
Seventh Avenue in New York City. The 42-story glass tower consists of
approximately 700,000 square feet and includes office space and parking
facilities. As of June 30, 1998, the building was 90.6% leased. The total cost
of the building was approximately $150 million, including closing costs.
On January 13, 1998, Tower acquired two two-story office properties known as
the Blue Cross/Blue Shield office complex located at 2444 Las Palmeritas Drive
in Phoenix. The two buildings combined contain approximately 126,000 square feet
and, as of the date of acquisition, were 100% leased pursuant to a triple net
lease to Blue Cross/Blue Shield of Arizona, Inc. The properties were acquired
for approximately $16.9 million in cash.
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On May 9, 1998, Tower acquired the office property located at 90 Broad
Street in New York City, bringing the total number of properties in Tower's
portfolio to 25. The 25-story building contains approximately 335,000 square
feet and was acquired for approximately $34.3 million in cash.
On August 3, 1998, Mr. Feldman resigned from his positions as Chairman,
Chief Executive Officer, President and Director of Tower. Mr. Cox was promoted
to serve as Chief Executive Officer and President of Tower until the closing of
the merger and Mr. Tansey was appointed Chairman of the Tower board of
directors. Tower expects to pay Mr. Feldman a severance payment equal to 2.99
times his "base amount" as described in his employment agreement and as defined
in Section 280G of the Internal Revenue Code, payable over a twelve-month period
or approximately $84,273 per month. This severance amount of approximately $1.0
million was charged to operations by Tower during the third quarter of 1998.
On December 7, 1998, Tower Realty Trust entered into a mortgage extension
agreement with Credit Suisse First Boston in connection with Tower's refinancing
of 810 Seventh Avenue. Under the mortgage extension agreement, the $100 million
mortgage's due date is extended from December 31, 1998 to April 30, 1999. The
mortgage can be further extended to June 30, 1999 upon the payment of an
extension fee of $500,000. On December 31, 1998, Tower paid down $40 million of
the $100 million mortgage to Credit Suisse First Boston. Costs associated with
the transaction include payment of a 1% backend fee ($400,000) and accrued
interest of $565,147, in addition to other expenses paid by Tower on December 7,
1998. Tower expects to close on an amendment to its revolving credit agreement
with Fleet Bank for the purpose of making 810 Seventh Avenue an unencumbered
asset and adding to Tower's unencumbered asset borrowing base. In that regard,
Tower plans to draw $60 million from its revolving line of credit with Fleet
Bank in order to fully repay its mortgage with Credit Suisse First Boston.
Tower's mortgage with Credit Suisse First Boston will then be assigned to Fleet
Bank and Tower's line of credit will be reduced from $200 million to $165
million. Costs associated with such transaction are expected to be approximately
$1.2 million. In order for Tower to complete this transaction, Tower is required
to receive a consent from Reckson. This consent was obtained and 810 Seventh
Avenue became an unencumbered asset on March 1, 1999.
On December 8, 1998, Metropolitan Partners purchased 2,169,197 Tower series
A preferred shares for an aggregate purchase price of $40 million. In connection
with this sale of securities, Tower entered into a registration rights agreement
with Metropolitan Partners that provides registration rights with respect to
such Tower series A preferred shares. The Tower series A preferred shares will
initially have a dividend equal to the dividend on the Tower common stock which
is currently $1.69 per share annually, resulting in a yield of 9.16%. Holders of
Tower series A preferred stock will not have rights to convert such shares into
shares of Tower common stock unless the merger is terminated. If the merger is
terminated, the Tower series A preferred stock will be convertible into Tower
common stock, initially, on a one-for-one basis by the holders thereof, subject
to customary adjustments. In addition, if Metropolitan Partners breaches its
obligation to close the merger, Metropolitan Partners is required to return to
Tower for no consideration 75% of Tower series A preferred stock purchased by
Metropolitan equivalent to $30 million based on the purchase price.
COMPETITION
Tower competes with other owners and developers that have greater resources
and more experience than Tower. Additionally, the number of competitive
properties in any particular market in which the Tower properties are located
could have a material adverse effect on both Tower's ability to lease space at
its properties or any newly acquired property and on the rents charged at the
properties. Tower believes its major competitors are local real estate companies
in its markets that specialize in the redevelopment and development of office
buildings and (1) in the New York City office market: SL Green Realty Corp., (2)
in the Metropolitan Orlando office market: Highwoods Properties, Inc., and (3)
in the Metropolitan Phoenix office market: Prentiss Properties Trust and
CarrAmerica Realty
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Corporation. Tower believes, however, that its line of credit with Fleet Bank
and its access as a public company to the capital markets to raise funds during
periods when conventional sources of financing may be unavailable or
prohibitively expensive will provide Tower with substantial competitive
advantages.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various Federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of hazardous or toxic
substances, or the failure to remediate such property properly, may adversely
affect the owner's ability to borrow using such real property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of
hazardous substances at the disposal or treatment facility, whether or not such
facility is or ever was owned or operated by such person. In connection with the
ownership, operation, management and development of real properties, Tower may
be considered an owner or operator of such properties or as having arranged for
the disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as other related
costs, including governmental fines and injuries to persons and property.
Environmental laws and common law principles could be used to impose liability
for release of an exposure to hazardous substances, including
asbestos-containing materials into the air, and third parties may seek recovery
from owners or operators of real properties for personal injury or property
damage associated with exposure to released hazardous substances, including
asbestos-containing materials. As the owner of the Tower properties, Tower may
be potentially liable for any such costs.
Tower engaged an independent consulting firm to perform Phase I
Environmental Site Assessments, or updates on Environmental Site Assessments
performed within the last 18 months, on all of the Tower properties. The purpose
of Phase I Environmental Site Assessments is to identify potential sources of
contamination for which Tower may be responsible and to assess the status of
environmental regulatory compliance. For a number of the Tower properties, the
Phase I Environmental Site Assessments reference prior Phase II Environmental
Site Assessments obtained on such Tower properties. Phase II Environmental Site
Assessments generally involve more invasive procedures than Phase I
Environmental Site Assessments, such as soil sampling and testing or the
installation and monitoring of groundwater wells. The Environmental Site
Assessments have not revealed any environmental condition, liability or
compliance concern that Tower believes would have a material adverse effect on
Tower's business, assets or results of operations nor is Tower aware of any such
condition, liability or concern.
INSURANCE
Tower OP carries comprehensive liability, fire, extended coverage and rental
loss insurance covering all of the Tower properties, with policy specifications
and insured limits which Tower believes are adequate and appropriate under the
circumstances. There are, however, certain types of losses that are not
generally insured because they are either uninsurable or not economically
feasible to insure. Should an uninsured loss or a loss in excess of insured
limits occur, Tower could lose its capital invested in a property, as well as
the anticipated future revenues from the property and, in the case of debt which
is with recourse to Tower, would remain obligated for any mortgage debt or other
financial obligations related to the property. Any such loss would adversely
affect Tower. Moreover, Tower will generally be liable for any unsatisfied
obligations other than non-recourse obligations. Company management believes
that the Tower properties are adequately insured. No assurance can be given that
material losses in excess of insurance proceeds will not occur in the future.
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FOREIGN OPERATIONS
Tower does not engage in any foreign operations or derive revenues from
foreign sources.
PROPERTIES
As of September 30, 1998, Tower owned or held interests in 25 office
properties comprising approximately 4.6 million net rentable square feet. The
Tower properties are wholly owned by Tower through its subsidiaries, except 2800
North Central Avenue, which is owned by a joint venture company in which Tower
owns a 10% limited partnership interest. Tower also owns or has an option to
acquire four development parcels, which can support 2.2 million of rentable
square feet of development.
<TABLE>
<CAPTION>
RENTABLE
SQUARE FEET
PERCENT YEAR BUILT/ RENTABLE PER RENT PERCENT ANNUALIZED
OWNED RENOVATED SQUARE FEET ROLL LEASED RENT (1)
----------- ------------- ----------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
NEW YORK
Tower 45......................... 100% 1989 443,114 440,629 100.00% 21,211,588
286 Madison Avenue (3)........... 100% 1918 111,999 112,095 98.75% 2,810,960
290 Madison Avenue............... 100% 1950 38,512 38,512 86.18% 1,033,781
292 Madison Avenue............... 100% 1920/86 186,901 186,901 91.40% 5,439,001
100 Wall Street.................. 100% 1969/94 458,848 458,846 96.25% 12,798,711
810 Seventh Avenue............... 100% 1970/90 692,023 692,055 92.50% 20,908,296
120 Mineola Boulevard............ 100% 1984/92 100,810 100,810 88.27% 2,645,529
90 Broad Street.................. 100% 335,904 338,212 78.17% 5,909,405
----------- ----------- --------- --------------
2,368,111 2,368,062 91.44% 72,757,271
----------- ----------- --------- --------------
----------- ----------- --------- --------------
ARIZONA
Corporate Center Building
10010-30....................... 100% 1976/86 188,614 189,079 100.00% 2,977,766
Corporate Center Building
10040.......................... 100% 1976/86 23,155 23,178 100.00% 383,507
Corporate Center Building
10050.......................... 100% 1976/86 42,398 42,501 100.00% 718,967
Corporate Center Building
10210.......................... 100% 1976/86 45,100 45,259 100.00% 716,845
Corporate Center Building
10220.......................... 100% 1976/86 24,128 24,128 100.00% 460,420
Corporate Center Building 9630
(5)............................ 100% 1976/86 130,164 130,611 100.00% 2,837,836
2800 North Central
Avenue (6)..................... 10% 1987 357,923 357,647 98.98% 6,355,836
Century Plaza.................... 100% 1974/90 219,769 216,815 90.23% 2,850,063
5151 East Broadway............... 100% 1975/89/96 246,486 245,916 94.38% 3,802,112
Blue Cross/Blue Shield........... 100% 126,084 126,084 100.00% 1,969,784
----------- ----------- --------- --------------
1,403,821 1,401,218 98.36% 23,073,156
----------- ----------- --------- --------------
----------- ----------- --------- --------------
ORLANDO
One Orlando Center............... 100% 357,184 357,181 99.50% 8,479,216
5750 Major Boulevard............. 100% 82,815 86,034 93.68% 1,351,848
Maitland Forum(7)................ 100% 266,060 266,881 99.92% 4,379,375
Maitland West (8)................ 100% 59,610 59,610 96.33% 882,832
----------- ----------- --------- --------------
765,669 769,706 97.36% 15,093,271
----------- ----------- --------- --------------
----------- ----------- --------- --------------
4,537,601 4,538,986 95.72% 110,923,698
----------- ----------- --------- --------------
----------- ----------- --------- --------------
<CAPTION>
PERCENT OF ANNUAL NET
ANNUALIZED RENT PORTFOLIO EFFECTIVE RENT
PER LEASED ANNUALIZED PER LEASED
SQUARE FOOT RENT SQUARE FOOT (2)
----------------- ----------- ---------------
<S> <C> <C> <C>
NEW YORK
Tower 45......................... 47.87 19.12% 42.87
286 Madison Avenue (3)........... 25.42 2.53% 26.15
290 Madison Avenue............... 31.15 0.93% 33.29
292 Madison Avenue............... 31.84 4.90% 31.85
100 Wall Street.................. 28.98 11.54% 30.40
810 Seventh Avenue............... 32.66 18.85% 36.56
120 Mineola Boulevard............ 29.73 2.38% 27.32
90 Broad Street.................. 22.50 5.33% 23.66
----- ----------- -----
35.15 65.59% 34.87
----- ----------- -----
----- ----------- -----
ARIZONA
Corporate Center Building
10010-30....................... 15.79 2.68% 15.78
Corporate Center Building
10040.......................... 16.56 0.35% 16.79
Corporate Center Building
10050.......................... 16.96 0.65% 17.19
Corporate Center Building
10210.......................... 15.89 0.65% 16.01
Corporate Center Building
10220.......................... 19.08 0.42% 19.96
Corporate Center Building 9630
(5)............................ 21.80 2.56% 22.05
2800 North Central
Avenue (6)..................... 17.94 5.73% 16.43
Century Plaza.................... 14.37 2.57% 13.95
5151 East Broadway............... 16.34 3.43% 17.40
Blue Cross/Blue Shield........... 15.62 1.78% 16.75
----- ----------- -----
15.81 20.80% 17.04
----- ----------- -----
----- ----------- -----
ORLANDO
One Orlando Center............... 23.86 7.64% 25.45
5750 Major Boulevard............. 17.42 1.22% 14.46
Maitland Forum(7)................ 16.47 3.95% 15.34
Maitland West (8)................ 15.37 0.80% 13.16
----- ----------- -----
20.64 13.61% 21.26
----- ----------- -----
----- ----------- -----
25.54 100.00% 24.39
----- ----------- -----
----- ----------- -----
</TABLE>
- ------------------------------
(*) Data does not include years in which tenant improvements were made to the
Tower properties.
(1) Annualized Rent represents the annualized monthly Base Rent in effect plus
estimated annualized monthly tenant pass-throughs of increases in operating
and other expenses, excluding electricity costs paid by tenants, under each
lease executed as of December 31, 1997, or, if such monthly rent had been
reduced by a rent concession, the monthly rent that
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<PAGE>
would have been in effect at such date in the absence of such concession.
Base Rent represents the fixed base rental amount paid by a tenant under the
terms of the related lease agreement, which amount generally does not
include payments on account of real estate taxes, operating expense
escalations and utility charges. Annualized Rent represents actual payments
attributable to leases executed as of December 31, 1997 with adjustments for
rent concessions as reflected above and normal year-end adjustments. Tower
believes that Annualized Rent is helpful to investors as a measure of the
revenues Tower could expect to receive from its leases. Annualized Rent
should not be considered an alternative to Annualized Net Effective Rent as
an indication of the financial performance of a lease nor is it indicative
of Tower's ability to generate cash flow, including its ability to make cash
distributions.
(2) Annualized Rent Per Leased Square Foot represents the Base Rent for the
month of December 1997 under each lease executed as of December 31, 1997,
presented on a straight-line basis in accordance with GAAP, taking into
account the amortization of tenant improvement costs and leasing
commissions, if any, paid or payable by Tower during such period,
annualized.
(3) During the first quarter of 1998 leases have been signed for 100% of the
rentable square feet with tenants scheduled to move in by the end of the
first quarter of 1998.
(4) In 1996 Tower completed certain mechanical upgrades with respect to this
Tower property.
(5) Includes two free-standing restaurants adjacent to the Tower property which
account for, in the aggregate, 17,000 rentable square feet. Currently, 100%
of such property is leased.
(6) Data are presented without proration on account of Tower's partial ownership
interest. Tower's interest in the cash flow from this Tower property
increases to up to 27.5% if performance goals are achieved.
(7) Maitland Forum consists of two buildings.
(8) Consists of three properties located at Maitland Center Parkway.
LEGAL PROCEEDINGS
As a result of the acquisition of the Tower properties, Tower has become a
successor party in interest to certain legal proceedings arising in the ordinary
course of the business of Tower Equities & Realty and the other third-party
predecessor entities. Tower does not expect that these proceedings, in the
aggregate, will have a material adverse effect on Tower.
On or about January 21, 1999, an action captioned DBD INTERNATIONAL LIMITED,
INC. V. TOWER REALTY TRUST, INC., Index No. 99 CV 9 (Cir. Ct. Dunn Co.), was
commenced in the Circuit Court of the State of Wisconsin. The plaintiff alleges
that Tower purportedly breached a contract regarding the plaintiff's provision
of image management services to Tower. The plaintiff seeks, among other things,
compensatory damages in the amount of $798,788, prejudgment interest and
attorneys' fees.
On November 2, 1998, Tower commenced an action in New York State Supreme
Court against Reckson, Crescent and Metropolitan Partners alleging breach of the
merger agreement between the parties dated July 9, 1998. Tower sought $75
million in compensatory damages, declaratory and other relief. Tower's press
release on November 2, 1998 stated that this action was filed because Tower had
been informed by Crescent, Reckson and Metropolitan Partners that they would not
proceed with the transactions contemplated by the Prior Merger Agreement. On
December 22, 1998, the action was discontinued. As discussed under "The Merger
Agreement--Release of Litigation; Litigation Trust," under certain limited
circumstances this action can be recommenced following the merger by Tower
against Crescent for the benefit of Tower's stockholders.
In July 1998, David Miller, a purported stockholder of Tower, commenced a
putative class action against Tower and certain of its then directors and
officers in the Supreme Court of New York, New York County captioned MILLER V.
ADAMS, ET AL., Index No. 98/113363 (Sup. Ct. N.Y. Co.). This action challenges,
among other things, the process employed by Tower and its directors in
reviewing, approving and assessing the fairness of the Prior Merger Agreement.
Following Tower's press release on November 2, 1998, this action was
discontinued without prejudice. On or about December 18, 1998, David Miller
commenced a putative class action in the Supreme Court of New York, New York
county captioned MILLER V. ADAMS, ET. AL., Index No. 98/606208 (Sup. Ct. N.Y.
Co.), among other things,
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<PAGE>
challenging the process employed by Tower and its directors in reviewing,
approving and assessing the fairness of the merger agreement. Miller is seeking,
among other things, equitable and declaratory relief and unspecified
compensatory damages.
On or about September 29, 1998, a complaint entitled STEPHEN MIKOLAS V.
LAWRENCE FELDMAN, FELDMAN EQUITIES, TOWER 45 ASSET MANAGEMENT CORPORATION, 286
MADISON LP, 290 MADISON LP, 292 MADISON LP, TOWER EQUITIES & REALTY AND TOWER
REALTY TRUST, INC., Index No. 98 Civ. (S.D.N.Y.) was filed in the U.S. District
Court for the Southern District of New York in which the plaintiff alleges
unlawful retaliation in violation of federal, state and city statutes.
On or about July 10, 1998, a complaint entitled KAREN SCHWARTZ (F/K/A/ KAREN
RUSSO) V. LAWRENCE FELDMAN, FELDMAN EQUITIES, TOWER 45 ASSET MANAGEMENT
CORPORATION, 286 MADISON LP, 290 MADISON LP, 292 MADISON LP, TOWER EQUITIES &
REALTY AND TOWER REALTY TRUST, INC., Index No. 98 Civ. 4918 (S.D.N.Y.), was
filed in the U.S. District Court for the Southern District of New York in which
the plaintiff alleges she was discriminated against in the terms and conditions
of her employment on the basis of her religion in violation of federal, state
and city statutes.
Tower intends to contest these claims vigorously. As with any litigation,
however, it is not possible to predict the resolution of these pending actions
and Tower therefore bears risks associated with these actions.
STOCKHOLDER INFORMATION
At February 26, 1999, Tower had approximately 62 holders of record of Tower
common stock and as of April 17, 1998 approximately 5,093 beneficial owners of
its shares of Tower common stock. In addition, the Tower OP units, which are
redeemable in specific circumstances for shares of Tower common stock, were held
by 69 entities or persons, beneficially or otherwise.
RECENT SALES OF UNREGISTERED SECURITIES
Concurrently with the consummation of the Tower initial public offering and
pursuant to the formation transactions, Tower issued (a) 1,153,845 shares of
Tower common stock in the concurrent private placements, (b) 886,200 shares of
Tower common stock in connection with the cancellation of the MSAM Notes, and
(c) 1,128,160 shares of Tower common stock in connection with the acquisition of
certain interests in the 21 initial properties. In addition, Tower OP issued
1,583,640 Tower OP units to "accredited" investors, including certain officers
and directors, in consideration for their contribution to Tower OP of ownership
interests in the 21 initial properties. Subsequent to December 31, 1997, Tower
OP issued 129,032 Tower OP units as partial consideration in the acquisition of
a certain management contract in connection with the acquisition of the 810
Seventh Avenue property.
The issuance of shares of Tower common stock and Tower OP units pursuant to
the formation transactions and the acquisition of 810 Seventh Avenue constitutes
a private placement of securities which is exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) and Rule 506 of
Regulation D promulgated thereunder.
Concurrently with the execution of the merger agreement, Tower sold
2,169,197 shares of newly issued series A convertible preferred stock, par value
$.01 per share, liquidation preference $18.44 per share, to Metropolitan
Partners for an aggregate purchase price of $40 million. The Tower series A
preferred stock will initially have a per share distribution equal to the per
share distribution on the Tower common stock which is currently $1.69 annually,
resulting in a yield of 9.16%. Prior to a termination of the merger agreement,
the Tower series A preferred stock is not redeemable or convertible and has no
voting rights. See "Metropolitan Partners' Investment in Tower," above.
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<PAGE>
SELECTED FINANCIAL DATA--TOWER
The following sets forth selected financial and operating data for Tower and
Tower Predecessor. The following data should be read in conjunction with the
consolidated and combined financial statements of Tower and Tower Predecessor,
and notes thereto, and "--Management's Discussion and Analysis of Financial
Condition and Results of Operations" below. The balance sheet data as of
December 31, 1997, 1996, and 1995 and the statement of operations data for the
periods March 27, 1997 to December 31, 1997 and January 1, 1997 to October 15,
1997 and the years ended December 31, 1996, 1995 and 1994 have been derived from
the respective audited financial statements. The balance sheet data as of
September 30, 1998, December 31, 1994 and December 31, 1993 and the statement of
operations data for the nine months ended September 30, 1998 and the year ended
December 31, 1993 have been derived from the respective unaudited financial
statements, which in the opinion of management reflect all adjustments,
consisting of normal recurring adjustments, required for a fair presentation of
the information presented.
The results of operations for the nine months ended September 30, 1998 may
not be indicative of results for the full year. Moreover, historical operating
results of Tower and Tower Predecessor, including net income, may not be
comparable to future operating results. In addition, Tower believes that the
recorded value of the Tower properties, which reflects the historical cost of
such real estate assets less accumulated depreciation, is not indicative of the
fair value of the Tower properties.
<TABLE>
<CAPTION>
TOWER TOWER PREDECESSOR
---------------------------- -------------------------------------------------------
NINE MONTHS MARCH 27, JANUARY 1,
ENDED 1997- 1997- YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, OCTOBER 15, ------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------- ------------- ----------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Rental income.................. $ 82,568 $ 16,409 $ 21,908 $ 26,138 $ 25,202 $ 25,994 $ 23,496
Management fees(1)............. 1,090 318 1,261 961 82 221
Construction, leasing and other
income....................... 660 861 576 1,335 1,041 320 604
------------- ------------- ----------- --------- --------- --------- ---------
Total revenues................. 83,228 18,360 22,802 28,734 27,204 26,396 24,321
------------- ------------- ----------- --------- --------- --------- ---------
Property operating and
maintenance expenses(1)...... 19,513 3,941 4,538 5,481 5,332 5,278 5,938
Real estate taxes.............. 11,040 2,266 3,792 4,722 4,571 3,971 4,409
General and administrative..... 6,585 2,844 2,189 3,494 3,497 2,512 2,591
Interest expense............... 15,144 2,369 11,725 15,511 15,150 12,751 12,756
Depreciation and
amortization................. 13,149 2,813 5,541 6,853 6,897 7,415 7,982
Ground rent/air rights
expense...................... 512 126 473 599 599 599 599
Costs related to sale of the
Company...................... 3,865 -- -- -- -- -- --
Severance and other
compensation costs........... 2,454 -- -- -- -- -- --
------------- ------------- ----------- --------- --------- --------- ---------
Total Expenses................. 72,262 14,359 28,258 36,660 36,046 32,526 34,275
------------- ------------- ----------- --------- --------- --------- ---------
Equity in joint venture company
and unconsolidated
subsidiaries(1).............. 557 353 134 461 193 1 --
------------- ------------- ----------- --------- --------- --------- ---------
Income (loss) before minority
interest and extraordinary
gain on early extinguishment
of debt...................... 11,523 4,354 (5,322) (7,465) (8,649) (6,129) (9,954)
Minority interest(2)........... (1,027) (373) -- -- -- -- --
------------- ------------- ----------- --------- --------- --------- ---------
Income (loss) before
extraordinary gain on early
extinguishment of debt....... $ 10,496 $ 3,981 $ (5,322) $ (7,465) $ (8,649) $ (6,129) $ (9,954)
------------- ------------- ----------- --------- --------- --------- ---------
------------- ------------- ----------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) The operations of Tower Equities Management, Inc., a Delaware corporation,
are combined with the property operations in the historical financial
statements of Tower Predecessor for the years ended December 31, 1993
through 1996 and for the
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<PAGE>
period from January 1, 1997 through March 26, 1997, and are accounted for
under the equity method in Tower's historical financial statements
subsequent to that date. Therefore, the historical financial statements of
Tower Predecessor include the Tower Equities Management's revenues and
expenses on a gross basis in the respective income and expense line items
for the years ended December 31, 1993 through December 31, 1996 and for the
period from January 1, 1997 through March 26, 1997 and the historical
financial statements of Tower subsequent to that date present the Tower
Equities Management's net operations in the line item titled "Equity in
joint venture company and unconsolidated subsidiaries." The historical
financial statements of Tower from March 27, 1997 through December 31, 1997
reflect the elimination of all revenues and expenses for management fees,
construction, leasing and other services performed by Tower for its
consolidated properties.
Equity in joint venture company and unconsolidated subsidiaries also includes
Tower's 10% interest, subject to an increase to up to 27.5% if certain
performance criteria are achieved, in the partnership owning 2800 North
Central Avenue, Phoenix, Arizona on a historical basis, and prior to October
16, 1997 Tower Predecessor's 18% interest in the DRA joint venture companies
that owned, prior to the Tower initial public offering, the following
properties: 286 Madison Avenue, New York, New York; 290 Madison Avenue, New
York, New York; 292 Madison Avenue, New York, New York; the six Corporate
Center properties, Phoenix, Arizona; 5151 East Broadway, Tucson, Arizona;
and One Orlando Center, Orlando, Florida.
Subsequent to the initial public offering, Tower owns 10% of 2800 North
Central Avenue and 95% of the economic interest in the Tower Equities
Management. Tower Predecessor owned, on December 31, 1996, 3.8% of 2800
North Central Avenue and approximately 18% of the DRA joint venture
companies, which represents Lawrence H. Feldman's effective ownership
interest.
(2) Represents an approximate 8.9% and 8.6% historical interest at September 30,
1998 and December 31, 1997, respectively, in the Tower Operating
Partnership.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the historical consolidated and combined financial
statements and related notes thereto for Tower and for Tower Predecessor,
respectively, appearing elsewhere in this Joint Proxy Statement/Prospectus. The
following discussion is based primarily on the consolidated financial statements
of Tower for the period subsequent to the Tower initial public offering and on
the combined financial statements of Tower Predecessor for the periods prior to
the Tower initial public offering. The combined financial statements include the
assets, liabilities and operations of the Tower properties and predecessor
management companies acquired by Tower in the formation transactions from Tower
Predecessor. In addition, Tower Predecessor includes interests in 2800 North
Central Avenue and the Tower properties held by the DRA joint venture companies,
on the equity basis of accounting.
Historical results set forth in the "Selected Financial Data," the combined
financial statements of Tower Predecessor, and the consolidated financial
statements of Tower should not be taken as an indication of future operations of
Tower.
OVERVIEW
Tower was incorporated in the State of Maryland on March 21, 1997. Tower
operates so as to qualify as a REIT for Federal income tax purposes. As of
October 16, 1997, Tower completed the Tower initial public offering of
13,817,250 shares of common stock, including the exercise of the underwriters'
over-allotment option of 1,802,250 shares, and effected the concurrent private
placements of 1,153,845 shares of common stock at a price of $26.00 per share.
The net proceeds realized therefrom were approximately $353.35 million. In
addition, in connection with the formation transactions relating to the Tower
initial public offering and the concurrent private placements, including the
acquisition of certain property interests and the cancellation of certain
indebtedness, Tower issued 1,949,360 shares of common stock. Upon consummation
of these offerings, Tower acquired a sole 1% general partner interest, and a
90.4% limited partner interest in Tower OP. At September 30, 1998, Tower had a
1% general partner interest and a 89.9% limited partner interest in Tower OP.
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<PAGE>
Tower was formed to continue and expand the commercial real estate business
of Tower Equities & Realty, including developing, acquiring, owning, renovating,
managing, and leasing office properties in the Manhattan, Phoenix, Tucson and
Orlando markets. Upon consummation of the initial public offering and the
concurrent private placements and the formation transactions, Tower OP owned or
had interests in the 21 initial properties. On December 31, 1997, Tower
purchased the approximately 700,000 square foot office building located at 810
Seventh Avenue in Midtown Manhattan for approximately $150 million, including
closing costs, and on January 16, 1998, Tower purchased the approximately
126,000 square foot Blue Cross/Blue Shield office complex located in Phoenix,
Arizona for $16.9 million. Tower also owns or has an option to acquire four
development parcels, which can support 2.2 million rentable square feet of
development. In November 1997, Tower exercised its option to purchase one of the
optioned development parcels located in Phoenix, Arizona for approximately $10.3
million.
On March 31, 1997 interests in certain partnerships, properties and limited
liability companies were contributed to Tower OP in exchange for OP units in
Tower OP. Certain of these interests were owned by Tower OP after consummation
of the offering. Simultaneously with such contributions of interests, Tower
issued $12.3 million of notes to certain investors advised by Morgan Stanley
Asset Management. The notes were collateralized by certain of the properties.
Upon completion of the offering, all notes were converted into Tower common
stock.
RESULTS OF OPERATIONS
Tower's results of operations include Tower Equities Management's operations
from March 27, 1997 and the property operations from October 16, 1997, the date
of the closing of the Tower initial public offering. Tower Predecessor's
operations included the management company's operations from January 1, 1997,
through March 26, 1997 and the operations of the Tower Predecessor properties
for all periods presented. Results of operations of Tower and Tower Predecessor
are not directly comparable between periods as a result of the effects of
valuation of assets and liabilities recorded in accordance with Accounting
Principles Board Opinion No. 16. The results of operations for the nine-month
period ended September 30, 1998 and the nine-month period ended September 30,
1997 include the operations of Tower and Tower Predecessor, respectively.
Consequently, the comparison of the periods provides only limited information
regarding the operations of Tower as currently constituted. The
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<PAGE>
following table sets forth selected statement of operations data for Tower on a
pro forma and historical basis and Tower Predecessor on a historical basis for
the periods indicated:
<TABLE>
<CAPTION>
TOWER
TOWER PREDECESSOR TOWER
TOWER HISTORICAL HISTORICAL PREDECESSOR
TOWER PRO TOWER PREDECESSOR TOWER PRO MARCH 27, JANUARY 1, HISTORICAL
FORMA HISTORICAL HISTORICAL FORMA 1997- 1997- YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, OCTOBER 15, COMBINED DECEMBER 31,
1998 1998 1997 1997 1997 1997 1997 1996
------------- ------------- ------------- ------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Statement of
Operations
Data:
Rental Income.. $ 85,029 $ 82,568 $ 20,513 $ 101,613 $ 16,409 $ 21,908 $ 38,317 $ 26,138
Management
Fees......... -- -- 318 -- 1,090 318 1,408 1,261
Construction,
leasing and
other fees... 752 660 562 1,693 861 576 1,437 1,335
------------- ------------- ------------- ------------- ------------- ----------- ----------- -------------
Total
revenue...... 85,781 83,228 $ 21,393 103,306 $ 18,360 $ 22,802 $ 41,162 $ 28,734
------------- ------------- ------------- ------------- ------------- ----------- ----------- -------------
Expenses:
Property
operating and
maintenance.. 20,391 19,513 4,209 26,861 3,941 4,538 8,479 5,481
Real estate
taxes........ 11,226 11,040 3,493 14,643 2,266 3,792 6,058 4,722
General and
administrative.. 6,601 6,585 2,130 5,236 2,844 2,189 5,033 3,494
Interest
expense...... 13,427 15,144 10,772 17,108 2,369 11,725 14,094 15,511
Depreciation
and
amortization.. 13,439 13,149 5,255 16,676 2,813 5,541 8,354 6,853
Ground rent/air
rights
expense...... 512 512 449 599 126 473 599 599
Costs related
to sale of
Tower........ 3,865 3,865 -- -- -- -- -- --
Severance and
other
compensated
costs........ 2,454 2,454 -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- ----------- ----------- -------------
Total
expenses..... 71,915 72,262 26,308 81,123 14,359 28,258 42,617 36,660
------------- ------------- ------------- ------------- ------------- ----------- ----------- -------------
Equity in
income of
joint venture
companies.... 557 557 85 370 353 134 487 461
------------- ------------- ------------- ------------- ------------- ----------- ----------- -------------
Net income
(loss) before
extraordinary
gain on early
extinguishment
of debt...... 14,423 11,523 (4,830) 22,553 4,354 (5,322) (968) (7,465)
Extraordinary
gain on early
extinguishment
of debt...... -- -- 6,475 -- -- 6,475 6,475 --
------------- ------------- ------------- ------------- ------------- ----------- ----------- -------------
Net income
(loss) before
minority
interest..... 14,423 11,523 1,645 22,553 4,354 1,153 5,507 (7,465)
Less: minority
interests.... (1,286) (1,027) -- (2,013) (373) -- (373) --
Net income
(loss)....... $ 13,137 $ 10,496 $ 1,645 $ 20,540 $ 3,981 $ 1,153 $ 5,134 $ (7,465)
------------- ------------- ------------- ------------- ------------- ----------- ----------- -------------
------------- ------------- ------------- ------------- ------------- ----------- ----------- -------------
</TABLE>
127
<PAGE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 (HISTORICAL) TO NINE MONTHS
ENDED SEPTEMBER 30, 1997 (HISTORICAL)
Total revenues increased by $61.8 million, or 288.85%, to $83.2 million in
1998 as compared to $21.4 million in 1997. Rental income increased by $62.1
million, or 302.9%, to $82.6 million in 1998 as compared to $20.5 million in
1997, primarily as a result of the Tower properties acquired concurrent with and
subsequent to the Tower initial public offering, as described above. Rental
income for the nine months ended September 30, 1998 included (a) $24.0 million
of rental income from the Tower properties previously held by DRA which were
reflected as an 18% investment on the equity method of accounting by Tower
Predecessor and (b) rental revenues of $34.4 million from 100 Wall Street,
Century Plaza, 810 Seventh Avenue and the Blue Cross/Blue Shield office complex,
Tower properties acquired concurrent with or subsequent to the Tower initial
public offering. The remaining increase in rental income can be attributed to an
increase in base rent, primarily resulting from (a) an increase in leasing
activity from the date of the Tower initial public offering and (b) additional
unbilled rent resulting from the effect of re-straightlining the lease payments
over the remaining lease terms from the date of the Tower initial public
offering.
Management fee income decreased by $0.3 million, or 100.0% to $0 in 1998.
These fees relate to services provided to the Tower properties which have been
eliminated since the consummation of the Tower initial public offering as well
as services to third-party Tower properties which fees are reflected in the
Tower Equities Management in 1998. Total expenses in 1998 increased by $46.0
million, or 174.9%, to $72.3 million from $26.3 million in 1997 primarily as a
result of the inclusion of the DRA properties and the Tower properties purchased
concurrent with and subsequent to the Tower initial public offering. Expenses,
excluding interest and depreciation and amortization, as a percentage of total
revenue increased from 48.1% in 1997 to 52.8% in 1998, primarily as a result of
an increase in general and administrative costs and severance and other
compensation costs. Property operating and maintenance increased as a percentage
of revenue due to the inclusion of the Tower properties located in Arizona,
where utility costs are typically higher. The decrease in real estate taxes as a
percentage of revenue is primarily due to the inclusion of 100 Wall Street,
which has a lower real estate tax assessment as compared to Tower's other New
York properties. The components of expenses, excluding interest and depreciation
and amortization, as a percentage of total revenue are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Property operating and maintenance.............................................. 23.4% 19.7%
Real Estate taxes............................................................... 13.3 16.3
General and administrative...................................................... 15.5 10.0
Ground rent/air rights.......................................................... 0.6 2.1
--- ---
Total......................................................................... 52.8% 48.1%
--- ---
--- ---
</TABLE>
Interest expense increased by $4.3 million to $15.1 million in 1998 compared
to $10.8 million in 1997 as a result of new acquisitions, utilization of the
Fleet Bank line of credit and proceeds from the term loan for new acquisitions
and capital expenditures.
Depreciation and amortization increased by $7.8 million, or 147.2%, to $13.1
million in 1998 as compared to $5.3 million in 1997 due to depreciation of
additional properties in 1998 as compared to 1997.
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Equity in joint venture companies and unconsolidated subsidiaries increased
by approximately $0.5 million primarily as a result of the operations of the
Tower Equities Management, which is accounted for as an unconsolidated
subsidiary in 1998.
Minority interest, which did not exist at September 30, 1997, pertains to
interests in certain partnerships, properties and Properties Atlantic which were
contributed to Tower OP in exchange for Tower OP units concurrent with and
subsequent to the Tower initial public offering.
Net income increased by $15.3 million to $10.5 million in 1998 as compared
to a net loss of $4.8 million in 1997, as a result of the acquisition of
properties and other factors described above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 (PRO FORMA) TO THE HISTORICAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
Pro forma net income for the nine months ended September 30, 1998 was $13.1
million. Historical net income for the nine months ended September 30, 1998 was
$10.5 million.
The increase in rental income from $82.6 million in nine months ended
September 30, 1998 to $85.0 million in Pro Forma nine months 1998 is primarily
due to revenue from 90 Broad Street. The decrease in total expenses from $72.3
million in nine months ended September 30, 1998 to $71.9 million in Pro Forma
nine months 1998 is attributed to decrease in interest expense of $1.7 million
related to the repayment of 810 Seventh Avenue mortgage utilizing the credit
line facility at a lower interest offset by the impact of the 1998 acquisition
properties.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 COMBINED (HISTORICAL) TO YEAR ENDED
DECEMBER 31, 1996 (HISTORICAL)
Total revenues increased by $12.4 million, or 43.3%, to $41.2 million in
1997 as compared to $28.7 million in 1996. Rental income increased by $12.2
million, or 46.6%, to $38.3 million in 1997 as compared to $26.1 million in 1996
primarily due to (a) $6.3 million of rental income from the Tower properties
held by the DRA joint venture companies properties from October 16, 1997 through
December 31, 1997 which are reflected as an 18% investment on the equity method
of accounting by Tower Predecessor and (b) the purchase of 100 Wall Street and
Century Plaza at the time of the Tower initial public offering and the related
rental revenues from those properties from October 16, 1997 through December 31,
1997 of $3.2 million. The remaining increase in rental income can be attributed
to an increase in base rent, primarily resulting from the effect of
re-straightlining the lease payments over the remaining lease terms, as of
October 16, 1997, of approximately $2 million, and other increases from
properties which were owned by Tower Predecessor.
Management fee income increased by $0.1 million, or 11.7%, to $1.4 million
in 1997 as compared to $1.3 million in 1996. These fees are now reflected in
Tower Equities Management upon consummation of the Tower initial public
offering. Construction, leasing, and other fees relating to seven retail
properties as well as the DRA joint venture companies and 2800 North Central
Avenue also increased by $0.1 million, or 7.6%, to $1.4 million in 1997 as
compared to $1.3 million in 1996. These construction, leasing and other fees are
earned by Tower Equities Management upon consummation of the Tower initial
public offering. Tower Equities Management and 2800 North Central Avenue are
accounted for under the equity method in Tower's financial statements. Fees
related to the DRA joint venture company properties are now eliminated.
Total expenses in 1997 increased by $6.0 million, or 16.3%, to $42.6 million
as compared to $36.6 million in 1996. Expenses excluding interest and
depreciation and amortization increased from $14.3 million in 1996 to $20.2
million in 1997 due to the inclusion of the Tower properties held by the DRA
joint venture companies subsequent to the Tower initial public offering and the
purchase of 100 Wall Street and Century Plaza. Expenses, excluding interest and
depreciation and amortization as a
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percentage of total revenue decreased slightly from 49.8% in 1996 to 48.9% in
1997 reflecting economies realized through spreading fixed costs over larger
total revenues. The components of expenses excluding interest and depreciation
and amortization as a percentage of total revenue are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Property operating and maintenance.............................................. 20.6% 19.1%
Real estate taxes............................................................... 14.7 16.4
General and administrative...................................................... 12.2 12.2
Ground rent and air rights...................................................... 1.5 2.1
--- ---
49.0% 49.8%
--- ---
--- ---
</TABLE>
The increase in property operating and maintenance expenses as a percentage
of revenue has been offset by a decrease in real estate taxes and ground rent
and air rights. The increase in property operating and maintenance as a
percentage of revenue is primarily attributed to the inclusion of certain DRA
properties located in Arizona, which have higher operating costs, subsequent to
the Tower initial public offering. The decrease in real estate taxes as a
percentage of revenue is primarily due to the inclusion of 100 Wall Street,
which has a lower real estate tax assessment as compared to Tower's other New
York properties, and the decrease in ground rent and air rights, which are fixed
costs, as a percentage of revenue, is due to the increase in Tower's revenue
base.
Interest expense decreased by $1.4 million to $14.1 million in 1997 as
compared to $15.5 million in 1996 due to the repayment of debt with the proceeds
of the Tower initial public offering.
Depreciation and amortization increased $1.5 million or 22.0% to $8.3
million in 1997 as compared to $6.8 million in 1996 due to depreciation of
additional properties in 1997 as compared to 1996 (primarily subsequent to the
Tower initial public offering).
Equity in joint venture companies and unconsolidated subsidiaries remained
relatively constant from year to year.
Minority interest pertains to interests in certain partnerships, properties,
and Properties Atlantic which were contributed to Tower OP in exchange for Tower
OP units. The percentage of minority interest for the period subsequent to the
Tower initial public offering through December 31, 1997 is approximately 8.6%.
Net income increased by $12.6 million to $5.1 million in 1997 as compared to
a net loss of $7.5 million in 1996, reflecting the reasons previously discussed
and a $6.5 million extraordinary gain on the extinguishment of debt by Tower
Predecessor.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 (PRO FORMA) TO THE YEAR ENDED
DECEMBER 31, 1997 (HISTORICAL COMBINED)
For the year ended December 31, 1997, pro forma net income was $20.5 million
compared to a historical combined 1997 net loss of Tower and Tower Predecessor
of $1.3 million, before the extraordinary gain on extinguishment of debt of $6.5
million. The pro forma operating results for 1997 include rental revenues and
property expenses, including operating, maintenance, real estate taxes and
depreciation, of the Tower properties held by the DRA joint venture companies on
a consolidated basis whereas the historical financial statements of Tower
Predecessor include the DRA joint venture companies on the equity method of
accounting. Likewise, pro forma operating results include twelve months of
operations for the Century Plaza and 100 Wall Street properties, the results of
which are only included in the historical operations from October 16, 1997
through December 31, 1997, and twelve months of operations for 810 Seventh
Avenue, the acquisition of which was completed on
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December 31, 1997 and 90 Broad Street and the Blue Cross/Blue Shield office
complex, both of which were acquired during 1998, and therefore were not
included in the historical operations of Tower.
The decrease in the pro forma management fees, and construction, leasing and
other fees of $1.2 million primarily results from Tower's transfer, in
connection with the Tower initial public offering, of certain management
contracts and predecessor management companies and personnel to Tower Equities
Management, which is accounted for on the equity basis of accounting.
For the historical combined year ended December 31, 1997 as compared with
the pro forma operations for the same period, interest expense increased by $3.0
million or 21.4%, in the pro forma statement of operations due to an increase in
the number of properties in Tower's portfolio.
The increase in minority interest in the pro forma 1997 results of
operations as compared with the combined historical operations is due to the
assumption for pro forma purposes that Tower OP units, not owned by Tower, were
outstanding as of the beginning of the period, whereas such Tower OP units were
only included in the determination of historical operations from the date of the
Tower initial public offering through December 31, 1997, as well as to the
increase in the income before minority interest.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Total revenues increased by $1.5 million, or 5.6%, to $28.7 million in 1996
as compared to $27.2 million in 1995. Rental income increased by $0.9 million,
or 3.7%, to $26.1 million in 1996 as compared to $25.2 million in 1995 due to
the following: base rents increased $0.5 million, or 2.5%, to $19.9 million in
1996 as compared to $19.4 million in 1995, primarily due to (i) the resolution
of a tenant dispute that reduced 1995 base rent by approximately $0.9 million,
(ii) the purchase of 5750 Major Boulevard in October 1996 which increased base
rents by $0.1 million, and (iii) a decrease of approximately $0.4 million
related to tenant turnover at Maitland Forum. Escalation income, primarily for
common area maintenance and real estate taxes, remained constant from 1995 to
1996 at $5.4 million for each year. Miscellaneous rental revenues increased $0.5
million to $0.8 million in 1996 as compared to $0.3 million in 1995 due to early
lease termination fees received from tenants.
Management fee income increased $0.3 million, or 31.2%, to $1.3 million in
1996 as compared to $1.0 million in 1995 due to a full year of management fees
in 1996 from the properties held by the DRA joint venture companies versus a
partial year of management fees in 1995. Construction, leasing, and other fees
relating to one office and seven retail properties as well as the properties
held by the DRA joint venture companies and 2800 North Central Avenue increased
$0.3 million, or 28.2%, to $1.3 million in 1996 as compared to $1.0 million in
1995. The increase is attributable to fees received from the properties held by
the DRA joint venture companies.
Total expenses in 1996 increased by $0.6 million, or 1.7%, to $36.6 million
as compared to $36.0 million in 1995. Expenses excluding interest and
depreciation and amortization increased from $14.0 million in 1995 to $14.3
million in 1996 due to an increase in occupancy and the purchase of 5750 Major
Boulevard. Expenses, excluding interest, depreciation and amortization as a
percentage of total revenue decreased from 51.5% in 1995 to 49.8% in 1996
reflecting economies realized through
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<PAGE>
spreading fixed costs over larger total revenues. Each component of expenses
excluding interest, depreciation and amortization decreased as a percentage of
total revenue as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Property operating and maintenance.............................................. 19.1% 19.6%
Real estate taxes............................................................... 16.4 16.8
General and administrative...................................................... 12.2 12.9
Ground rent and air rights...................................................... 2.1 2.2
--- ---
49.8% 51.5%
--- ---
--- ---
</TABLE>
Interest expense increased by $0.4 million, or 2.4%, to $15.5 million in
1996 as compared to $15.1 million in 1995 due to additional borrowings in 1996
of $1.5 million related to the three Maitland Center Parkway Properties, $2.4
million related to Maitland Forum and $2.5 million related to the purchase of
5750 Major Boulevard.
Equity in joint venture companies increased $0.3 million primarily due to a
full year of ownership in 1996 of the DRA joint venture companies versus a
partial year of ownership in 1995.
Net loss decreased by $1.2 million, or 13.7%, to $7.4 million in 1996 as
compared to $8.6 million in 1995, primarily reflecting economies realized
through the spreading of fixed costs over the larger total revenues as discussed
previously.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $7.2 million and $1.3 million at September
30, 1998 and December 31, 1997, respectively. Cash and cash equivalents include
cash on hand and short term, highly liquid investments with original maturities
of three months or less. These financial investments, which potentially subject
Tower to concentrations of credit risk, are invested primarily through
short-term obligations issued or guaranteed by the U.S. government or its
agencies. Tower believes that this mitigates their risk. Included in cash and
cash equivalents at September 30, 1998 and December 31, 1997 are segregated
security deposits amounting to approximately $5.9 million and $3.8 million. The
significant increase in cash and cash equivalents is a result of the net
increase in amounts outstanding under the Fleet Bank line of credit of $62.4
million and cash flows from operations of $31.4 million, net of approximately
$65.9 million for additions to real estate primarily as a result of the $16.9
million purchase of the Blue Cross/Blue Shield office complex, the $34.3 million
purchase of the 90 Broad Street property and $22.2 million relating to
distributions to stockholders and holders of Tower OP units.
Tower believes that its principal short-term liquidity needs are to fund
normal recurring expenses, debt service requirements, and deferred real estate
taxes. The Tower properties require periodic investment of capital for
tenant-related capital expenditures and for general capital improvements. In
addition, Tower has adopted a policy of paying regular quarterly distributions
on its common stock and the Tower OP units. Based upon its cash and cash
equivalents as of September 30, 1998, its expected cash flows from operations
and the funds available under the Fleet Bank line of credit, Tower expects to
meet its cash requirements for the foreseeable future.
The Fleet Bank line of credit has a three-year term and bears interest at
the rate of approximately 150 basis points over LIBOR (London Interbank Offered
Rate). As of September 30, 1998, $62.4 million was outstanding under the Fleet
Bank line of credit.
In conjunction with its Fleet Bank line of credit Tower must maintain the
following financial ratios:
- Total outstanding indebtedness must not exceed 55% of Total Value, as
defined in the line of credit, during the first year of the facility and
must not exceed 50% thereafter.
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- Collateral indebtedness must not exceed 40% of Total Value during the
first year of the facility and 35% thereafter.
- Recourse indebtedness cannot exceed five percent of Total Value.
- Other financial covenants that must be met by Tower include interest
expense and fixed charges to debt ratios, among others.
As of September 30, 1998, Tower has complied with the financial debt covenants.
As a general policy, Tower intends to maintain a debt policy limiting
Tower's total consolidated indebtedness plus its pro rata share of joint venture
company debt to 50% of Tower's total market capitalization. As of September 30,
1998, the debt to total market capitalization, including Tower's 10% interest in
the debt of 2800 North Central Avenue, was 46.3%. However, Tower may from time
to time modify its debt policy in light of current economic conditions, relative
costs of debt and equity capital, market values of its properties, general
conditions in the market for debt and equity securities, fluctuations in the
market price for its common stock, growth and acquisition opportunities and
other factors. Accordingly, there can be no assurance that Tower may not
increase its debt to total market capitalization ratio beyond the limit
described above.
At December 31, 1997, Tower had total outstanding indebtedness of
approximately $228.9 million, exclusive of Tower's ten percent portion of the
debt on 2800 North Central Avenue of $2.7 million at December 31, 1997. This
total outstanding indebtedness was collateralized by nine of the Tower
properties and represents 35.5% of Tower's total market capitalization based on
the $24.625 closing price of the shares of Tower common stock at December 31,
1997.
In connection with the acquisition of 810 Seventh Avenue, Tower incurred a
$100 million mortgage loan from Credit Suisse First Boston Mortgage Capital LLC
that was to mature on December 31, 1998. This mortgage has been extended through
April 30, 1999 with an option to further extend the loan through June 30, 1999
for a 1% payment to the bank ($1.0 million), a broker fee of .5% ($0.5 million)
and an additional one percent fee to be paid upon maturity.
Tower 1997 cash flows from operating activities were $6.5 million. This is
an increase of $5.6 million over operating cash flows of $0.9 million for the
period ending December 31, 1996. This increase is primarily attributed to an
increase in net income of $12.5 million, due to the operations of the Tower
properties acquired in conjunction with the Tower initial public offering from
October 16, 1997 through December 31, 1997, offset by a $6.5 million
extraordinary gain on early extinguishment of debt.
Cash flows used in investing activities for Tower's 1997 operations
increased by $533.4 million from $6.8 million for the year ended December 31,
1996 to $540.2 million. The primary uses of cash included the acquisition of
real estate, joint venture company and deferred charges of $534.4 million in
connection with the formation transactions. In addition, Tower expended an
additional $1.1 million for improvements to real estate and $3.9 million for
deposits on acquisition properties (the Blue Cross/ Blue Shield office complex
and 90 Broad Street).
Cash flows from financing activities for Tower's 1997 operations increased
$529.4 million from $5.6 million at December 31, 1996 to $535.0 million at
December 31, 1997. The most significant inflows of cash relate to the net
proceeds from the Tower initial public offering of $353.3 million, proceeds from
real estate debt of $217.9 million, which includes $100.0 million for a mortgage
note on 810 Seventh Avenue, approximately $107.0 million from the term loan, and
approximately $12.3 million borrowed under the MSAM Notes, which were repaid
with stock in conjunction with the Tower initial public offering. In addition,
Tower has declared a $0.3536 per share or $6.5 million distribution payable as
of December 31, 1997. This amount was paid on January 15, 1998.
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INFLATION
Tower's leases with the majority of its tenants require the tenants to pay
most operating expenses, including insurance and real estate taxes, and
increases in common area maintenance expenditures which partially offsets
Tower's exposure to increases in costs and operating expenses resulting from
inflation.
YEAR 2000
Tower has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue. The Year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Tower believes that the cost of remediation associated with
its computer systems will be minimal and the remediation is anticipated to be
completed in the first quarter of 1999.
Tower's Year 2000 compliance program focuses on addressing Year 2000
readiness in the following areas:
- Tower's information technology hardware and software;
- other material technology systems; and
- Year 2000 compliance of third parties with which Tower has a material
relationship. In this regard, Tower has retained consultants to assist it
in its efforts.
Tower has completed an initial assessment and remediation of its key
information technology systems, including its operating systems and critical
financial and nonfinancial applications. Remediation efforts as of the date
hereof include addressing critical financial applications. Based on this initial
assessment and remediation efforts, Tower believes that these key information
technology systems will be "Year 2000 compliant" by the first quarter of 1999.
However, there can be no assurance that coding errors or other defects will not
be discovered in the future. Tower is currently evaluating the remaining
noncritical information technology systems for Year 2000 compliance.
As of September 30, 1998, Tower owned and operated a portfolio of 25 office
properties. Tower is continually evaluating whether the material non-information
technology systems such as security control equipment, fire suppression
equipment and other physical plant and equipment at such properties are Year
2000 compliant, and has been advised by most of its vendors that such systems
and equipment are or will be compliant. All Tower properties, as a part of
general operating policy, are developing contingency plans that will be deployed
in the event key operational systems, such as security control equipment, fail
(e.g., when a power failure occurs).
Tower depends upon the proper functioning of third-party computer and
non-information technology systems. These third parties include tenants,
commercial banks and other lenders, construction contractors, and vendors. Tower
has initiated communications with third parties with whom it has important
financial or operational relationships to determine the extent to which they are
vulnerable to the Year 2000 issue. Tower has not yet received sufficient
information from all parties about their remediation plans to predict the
outcome of their efforts.
If third parties with whom Tower or one of its affiliates interacts have
Year 2000 problems that are not remedied, the following problems could result:
(1) In the case of construction contractors and other vendors, the delayed
construction or re-development of properties;
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(2) In the case of vendors, disruption of important services upon which
Tower or its affiliates depend, such as professional services, including
accounting and legal services, telecommunications and electrical power;
and
(3) In the case of banks and other lenders, the disruption of capital flows
potentially resulting in liquidity stress.
Due to the nature of Tower's tenants' businesses, Tower does not believe the
Year 2000 issue will materially impact the tenants' ability to pay rent.
However, financial difficulties of significant tenants as a result of the Year
2000 issues could have a material adverse effect on Tower's results of
operations or financial position. Though Tower does not expect the Year 2000
issue to have a material adverse effect on its result of operations or financial
position there can be no assurances of that position.
ENVIRONMENTAL MATTERS
Tower is not aware of any environmental issues at any of the Tower
properties. Tower believes it has sufficient insurance coverage at each of the
Tower properties.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, Tower adopted the SFAS 130. SFAS 130 specifies
the presentation and disclosure requirements for reporting comprehensive income,
which includes items which have been formerly reported as a component of
stockholders' equity. SFAS 130 does not have an impact on Tower's financial
statements.
During 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("FASB 131"), which is effective for fiscal years beginning after December 15,
1997. FASB 131 establishes the disclosure requirements for reporting segment
information. Management believes that when adopted, FASB 131 will require Tower
to report additional geographic information based on Tower's major geographic
areas of focus.
During 1998, the FASB issued Financial Accounting Standards Board No. 132,
"Employers Disclosures About Pensions and Other Post-retirement Benefits" ("FASB
132"). This statement changes the current financial statement disclosure
requirements related to pensions, settlements and curtailments of pensions and
post-retirement benefits other than pensions. The statement is effective for
fiscal years beginning after December 15, 1997. Management believes that when
adopted, FASB 132 will not have a significant impact on Tower's financial
statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. This statement addresses the accounting for derivative
instruments including certain derivative instruments embedded in other contracts
and for hedging activities. Tower is currently assessing the impact of adoption
of this new Statement.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, "Accounting for Mortgage Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS 134 addressed the accounting for and
disclosure of mortgage backed securities as either held-to maturity,
held-for-sale, or trading security. The statement is effective for the first
fiscal quarters beginning after December 15, 1998. SFAS 134 is not expected to
have an impact on Tower's financial statements.
During 1998, the AICPA issued SOP 98-5 and SOP 98-1, which are effective for
the fiscal years beginning after December 15, 1998. In addition, the Emerging
Issues Task Force of the Financial Accounting Standards Board released EITF
97-11. EITF 97-11 was adopted during the first quarter of fiscal 1998 and
resulted in Tower having to expense internal property acquisition costs they
would have otherwise capitalized.
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RECKSON AND RECKSON OP
Reckson was incorporated in September 1994 and commenced operations
effective with the completion of its initial public offering on June 2, 1995.
Reckson, together with Reckson OP, was formed for the purpose of continuing the
commercial real estate business of the predecessors of Reckson, its affiliated
partnerships and other entities. For more than 40 years, Reckson has been
engaged in the business of owning, developing, acquiring, constructing, managing
and leasing suburban office and industrial properties in the New York City
metropolitan area. Based on industry surveys, Reckson believes that it is one of
the largest owners and managers of Class A suburban office and industrial
properties in the Tri-State area of New York, New Jersey and Connecticut.
Reckson operates as a self-managed REIT with in-house capabilities in property
management, development, construction and acquisitions. As of December 31, 1998,
Reckson owned and controlled, directly or indirectly, 204 properties
encompassing approximately 21.0 million rentable square feet, all of which it
manages. The properties consist of 73 Class A suburban office properties
encompassing approximately 10.1 million rentable square feet, 129 industrial
properties encompassing approximately 10.8 million rentable square feet and two
10,000 square foot retail properties. In addition, as of December 31, 1998,
Reckson owned or had contracted to acquire approximately 980 acres of land
(including approximately 400 acres under option) that may present future
development opportunities. In addition, Reckson has invested $17 million in a
note receivable secured by the interest of Odyssey Partners, L.P. in Omni
Partners, L.P. The office properties are Class A suburban office buildings that
are well-located, well-maintained and professionally managed. In addition, these
properties are modern or have been modernized to compete with newer buildings in
their markets. We believe that these properties achieve among the highest rent
and occupancy rates within their markets. The majority of the office properties
are located in eleven planned office parks and are tenanted by, among others,
national services firms, such as telecommunications firms, "big five" accounting
firms, securities brokerage houses, insurance companies and health care
providers. The industrial properties are utilized for distribution, warehousing,
research and development and light manufacturing/assembly activities and are
located primarily in three planned industrial parks.
All of Reckson's interests in the Reckson properties are held directly or
indirectly by, and all of its operations relating to the Reckson properties are
conducted through, Reckson OP. Reckson controls Reckson OP as the sole general
partner and, as of December 31, 1998, owned approximately 83.8% of Reckson OP's
outstanding units of partnership interest.
Reckson's executive offices are located at 225 Broadhollow Road, Melville,
New York 11747 and its telephone number at the location is (516) 694-6900. At
December 31, 1998, Reckson had approximately 250 employees.
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ORGANIZATIONAL CHART
[CHART OF RECKSON'S CORPORATE STRUCTURE]
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RECKSON OP'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of Reckson OP and the combined financial statements of the
Reckson Group and related notes included in this Joint Proxy
Statement/Prospectus.
Reckson OP considers certain statements set forth herein to be
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, and Section 21E of the Exchange Act of 1934 with respect to Reckson
OP's expectations for future periods. Forward-looking statements, including,
without limitation, statements relating to the timing and success of
acquisitions, the financing of Reckson OP's operations, the ability to lease
vacant space and the ability to renew of relet space under expiring leases,
involve risks and uncertainties. Although Reckson OP believes that the
expectations reflected in such forward-looking statements are based on
reasonable assumptions, the actual results may differ materially from those set
forth in the forward-looking statements and Reckson OP can give no assurance
that its expectation will be achieved. Factors that might cause the results of
Reckson OP to differ materially from those indicated by such forward-looking
statements include general economic conditions, general real estate industry
risks, tenant default and bankruptcies, loss of major tenants, the impact of
competition and acquisition, redevelopment and development risks, the ability to
finance business opportunities and local real estate risks such as an oversupply
of space or a reduction in demand for real estate in Reckson OP's real estate
markets. Consequently, forward-looking statements should be regarded solely as
reflections of Reckson OP's current operating and development plans and
estimates. These plans and estimates are subject to revision from time to time
as additional information becomes available, and actual results may differ from
those indicated in the referenced statements.
OVERVIEW AND BACKGROUND
The Reckson Group, the predecessor to Reckson, was engaged in the ownership,
management, operation, leasing and development of commercial real estate
properties, principally office and industrial buildings, and also owned certain
undeveloped land located primarily on Long Island, New York. Reckson OP
commenced operations on June 2, 1995 and is the successor to the operations of
the Reckson Group. Reckson is the sole general partner in Reckson OP. During
June 1995, Reckson contributed approximately $162 million in cash to Reckson OP
in exchange for an approximate 73% general partnership interest. As a result,
Reckson OP owned or had an interest in 72 properties, including one joint
venture property.
Reckson OP owns all of the interests in its real estate properties either
directly or through Reckson FS Limited Partnership. At December 31, 1998,
Reckson OP owned 204 properties, including two joint venture properties,
encompassing approximately 21.0 million square feet. The properties include 73
suburban office properties containing approximately 10.1 million square feet,
129 industrial properties containing approximately 10.8 million square feet and
two retail properties containing 20,000 square feet.
Since June 2, 1995, Reckson OP has acquired or contracted to acquire
approximately $1.14 billion of Class A suburban office and industrial properties
encompassing approximately 12.8 million square feet located in the Tri-State
area of Long Island, Westchester county, southern Connecticut and New Jersey. In
that regard, Reckson OP has acquired 13 office properties and 33 industrial
properties encompassing approximately 2.1 and 2.6 million square feet,
respectively, located on Long Island for an aggregate purchase price of
approximately $302 million. Since its initial investment in Westchester county,
Reckson OP has acquired 17 office properties encompassing approximately 2.4
million square feet and three industrial properties encompassing approximately
163,000 square feet for an aggregate purchase price of approximately $304
million. Since its initial investment in southern Connecticut,
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Reckson OP has acquired two office properties encompassing approximately 325,000
square feet for an aggregate purchase price of approximately $61.3 million. In
May 1997, Reckson OP acquired five office properties encompassing approximately
496,000 square feet located in New Jersey for an aggregate purchase price of
approximately $56.9 million and, in connection with this acquisition,
established its New Jersey Division. Since its initial investment in New Jersey,
Reckson OP has acquired 12 office properties encompassing approximately 1.5
million square feet and seven industrial properties encompassing approximately
1.1 million square feet for an aggregate purchase price of approximately $231.6
million. Additionally, Reckson OP has invested approximately $52.1 million for
approximately 154 acres of land located in Long Island, 32 acres of land located
in Westchester county and 380 acres of land located in New Jersey, which allows
for approximately 4.3 million square feet of future development opportunities.
In addition, Reckson OP has invested approximately $61.3 million in mortgage
indebtedness encumbering four Class A office properties on Long Island
encompassing approximately 577,000 square feet, an 825,000 square foot
industrial building located in New Jersey and a 400 acre parcel of land located
in New Jersey. On January 6, 1998, Reckson OP made its initial investment in the
Morris Companies, a New Jersey developer and owner of "Big Box" warehouse
facilities. The Morris Companies' properties include 23 industrial buildings
encompassing approximately 4.0 million square feet. In connection with the
transaction, the Morris Companies contributed 100% of their interests in some
industrial properties to Reckson Morris Operating Partnership, L. P., in
exchange for operating partnership units in Reckson Morris OP. Reckson OP has
agreed to invest up to $150 million in the Morris Companies. As of December 31,
1998, Reckson OP has invested approximately $93.8 million for an approximate
71.8% controlling interest. In addition, at December 31, 1998, Reckson OP had
advanced approximately $31 million to the Morris Companies primarily to fund
construction costs related to development properties to be contributed to
Reckson Morris OP.
During 1997, Reckson formed Reckson Service Industries and Reckson Strategic
Venture Partners. Reckson OP owned a 95% non-voting common stock interest in
Reckson Service Industries through June 10, 1998. On June 11, 1998, Reckson OP
distributed its 95% common stock interest in Reckson Service Industries of
approximately $3 million to its partners. Additionally, during June 1998,
Reckson OP established a credit facility with Reckson Service Industries in the
amount of $100 million for Reckson Service Industries' service sector operations
and other general corporate purposes. As of December 31, 1998, Reckson OP had
advanced $33.7 million under the Reckson Service Industries facility, all of
which is outstanding. In addition, Reckson OP approved the funding of
investments of up to $100 million with or in Reckson Strategic Venture Partners,
through Reckson Strategic Venture Partners-controlled joint venture
REIT-qualified investments or advances made to Reckson Service Industries under
terms similar to the Reckson Service Industries Facility. As of December 31,
1998, approximately $17.3 million had been invested through this Reckson
Strategic Venture Partners facility, of which $10.1 million represents Reckson
Strategic Venture Partners-controlled joint venture investments and $7.2 million
represents advances to Reckson Service Industries under the facility. These
amounts have been included in investment in real estate joint ventures and
investments in and advances to affiliates, respectively, on Reckson OP's balance
sheet. Reckson Service Industries serves as the managing member of Reckson
Strategic Venture Partners. Reckson Service Industries invests in operating
companies that generally provide commercial services to the Reckson Service
Industries customer base, which includes the tenants of Reckson Service
Industries' executive suite business and to properties owned by Reckson OP and
its tenants and third parties. Reckson Strategic Venture Partners was formed to
provide Reckson OP with a research and development vehicle to invest in
alternative real estate sectors. Reckson Strategic Venture Partners invests
primarily in real estate and real estate related operating companies generally
outside of Reckson OP's core office and industrial focus. Reckson Strategic
Venture Partners' strategy is to identify and acquire interests in established
entrepreneurial enterprises with experienced management teams in market sectors
which are in the
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early stages of their growth cycle or offer unique circumstances for attractive
investments as well as a platform for future growth.
Reckson OP and Reckson Service Industries have entered into an intercompany
agreement to formalize their relationship and to limit conflicts of interest.
Under the intercompany agreement, Reckson Service Industries granted Reckson OP
a right of first opportunity to make any REIT-qualified investment that becomes
available to Reckson Service Industries. In addition, if a REIT-qualified
investment opportunity becomes available to an affiliate of Reckson Service
Industries, including Reckson Strategic Venture Partners, the intercompany
agreement requires the affiliate to allow Reckson OP to participate in the
REIT-qualified investment opportunity to the extent of Reckson Service
Industries' interest in the affiliate.
Under the intercompany agreement, Reckson OP granted Reckson Service
Industries a right of first opportunity to provide to Reckson OP and its tenants
any type of non-customary commercial services for occupants of office,
industrial and other property types that Reckson may not be permitted to provide
because they may generate REIT non-qualifying income under federal tax laws.
Reckson Service Industries will provide services to Reckson OP at rates and on
terms as attractive as either the best available for comparable services in the
market or those offered by Reckson Service Industries to third parties. In
addition, Reckson OP will give Reckson Service Industries access to its tenants
with respect to non-customary commercial services that may be provided to the
tenants.
Under the intercompany agreement, as long as various conditions are met,
Reckson OP granted Reckson Service Industries a right of first refusal to become
the lessee of any real property acquired by Reckson OP if Reckson OP determines
that, because the operation of the property would involve the performance of
non-customary services that under the Internal Revenue Code a REIT may not
generally provide, it is required to enter into a "master" lease arrangement.
Under a master lease arrangement, Reckson OP would own the property, but lease
it entirely to a single lessee that would operate the property.
On December 8, 1998, Reckson, Reckson OP, Metropolitan Partners and Tower
executed the merger agreement and Tower, Reckson, Crescent and Metropolitan
Partners exchanged mutual releases for any claims related to the prior merger
agreement. Simultaneously with the execution of the merger agreement,
Metropolitan Partners purchased from Tower approximately 2.2 million shares of
Tower series A preferred stock, for an aggregate purchase price of $40 million.
See "The Merger" and "Metropolitan Partners' Investment in Tower."
On August 27, 1998 Reckson OP announced the formation of a joint venture
with Reckson Strategic Venture Partners and the Dominion Group, an
Oklahoma-based, privately-owned group of companies that focuses on the
development, acquisition and ownership of government occupied office buildings
and correctional facilities. The new venture, Dominion Properties LLC, is owned
by Dominion Venture Group LLC, and by a subsidiary of Reckson OP. The Dominion
Properties venture will engage primarily in acquiring, developing and/or owning
government-occupied office buildings and privately operated correctional
facilities. Under the Dominion Properties venture's operating agreement, Reckson
Strategic Venture Partners is to invest up to $100 million, some of which may be
invested by Reckson OP. The initial contribution by Reckson Strategic Venture
Partners was approximately $39 million of which approximately $10.1 million was
invested by a subsidiary of Reckson OP. Reckson OP's subsidiary funded its
capital contribution through the Reckson Strategic Venture Partners facility
discussed above. In addition, Reckson OP advanced approximately $2.9 million to
Reckson Service Industries through the Reckson Strategic Venture Partners
commitment discussed above for an investment in Reckson Strategic Venture
Partners which was then invested on a joint venture basis with the Dominion
Group in service business activities related to the real estate activities. As
of December 31, 1998, the Dominion Properties venture had investments in 11
government office buildings and two correctional facilities.
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The market capitalization of Reckson OP at December 31, 1998 was
approximately $2.2 billion. Reckson OP's market capitalization is calculated
based on the value of Reckson OP's common units, which, for this purpose, is
assumed to be the same per unit as the value of a share of Reckson's common
stock, and the stated values of Reckson OP's preferred units and the $867
million (including its share of joint venture debt and net of minority partners'
interest) of debt outstanding at December 31, 1998. As a result, Reckson OP's
total debt to total market capitalization ratio at December 31, 1998 equaled
approximately 39.4%.
In December 1998, New York State announced it had selected Reckson to
develop a 655 acre tract of land in western Suffolk County on Long Island.
Reckson estimates it will invest $250 million in the development of this project
over a number of years.
RESULTS OF OPERATIONS
Reckson OP's total revenues increased by $113 million or 73.7% from 1997 to
1998 and $57.3 million or 60% from 1996 to 1997. The growth in total revenues is
substantially attributable to Reckson OP's acquisition of 47 properties and the
development of two properties which aggregate approximately 7.4 million square
feet in 1998, the acquisition of 45 properties comprising approximately 4.8
million square feet in 1997 and the acquisition of 29 properties comprising
approximately 3.3 million square feet in 1996. Total revenues were also
positively affected by increases in occupancies in Reckson OP's properties and
to increases in rental rates throughout its markets. Property operating
revenues, which include base rents and tenant escalations and reimbursements,
increased by $108.7 million or 75.6% from 1997 to 1998 and $51 million or 55%
from 1996 to 1997. The 1998 increase in property operating revenues is comprised
of $2.1 million attributable to increases in rental rates and changes in
occupancies and $106.6 million attributable to acquisitions of properties. The
remaining balance of the increase in total revenues in 1998 is primarily
attributable to increases in interest income on Reckson OP's investments in
mortgage notes and notes receivable and income related to Reckson OP's interest
in its service companies primarily attributable to the executive center
business. The 1997 increase in property operating revenues is comprised of $2.1
million attributable to increases in rental rates and changes in occupancies and
$48.9 million attributable to acquisitions of properties. The remaining balance
of the increase in total revenues in 1997 is substantially attributable to
interest income on Reckson OP's investments in mortgage notes and notes
receivable. The increase from 1996 to 1997 was offset by a decrease in the
equity in earnings of service companies as a result of the management and
construction companies focusing most of their resources on Reckson OP's core
portfolio and redevelopment opportunities rather than third party services.
Reckson OP's base rent was increased by the impact of the straight-line rent
adjustment by $7.7 million in 1998, $4.5 million in 1997 and $3.8 million in
1996.
Property operating expenses, real estate taxes and ground rents increased by
$34.4 million from 1997 to 1998 and by $16.8 million from 1996 to 1997. These
increases are primarily due to the acquisition of properties. Gross operating
margins, which are defined as property operating revenues less property
expenses, taken as a percentage of property operating revenues, for 1998,
1997and 1996 were 66.2%, 64.7% and 63.4%, respectively. The year to year
increases in gross operating margins results from increases realized in rental
rates, Reckson OP's ability to realize operating efficiencies as a result of
operating a larger portfolio of properties with concentrations of properties in
office and industrial parks or in its established sub-markets, a stable
operating cost environment and the increased ownership of net leased properties.
Marketing, general and administrative expenses were $15.0 million in 1998,
$8.0 million in 1997 and $5.9 million in 1996. The increase in marketing,
general and administrative expenses is due to the increased costs of managing
the acquisition properties, the cost of opening and maintaining Reckson OP's
Westchester, Southern Connecticut and New Jersey divisions and the increase in
corporate management and administrative costs associated with the growth of
Reckson OP. Reckson OP's
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business strategy has been to expand into the other Tri-State area suburban
markets by applying its standards for high quality office and industrial space
and premier tenant service to its New Jersey, Westchester and Southern
Connecticut divisions. In doing this, Reckson OP seeks to create a superior
franchise value that it enjoys in its home base of Long Island. Over the past
three years Reckson OP has supported this effort by increasing the marketing
programs in the other divisions and strengthening the resources and operating
systems in these divisions. The cost of these efforts are reflected in both the
marketing, general and administrative expense as well as the revenue growth of
Reckson OP. Marketing, general and administrative expenses as a percentage of
total revenues were 5.64% in 1998, 5.23% in 1997 and 6.18% in 1996.
Interest expense was $47.8 million in 1998, $21.6 million in 1997 and $13.3
million in 1996. The increase of $26.2 million from 1997 to 1998 is attributable
to (a) an increase in mortgage debt including approximately $14.8 million
resulting from the Morris acquisition in January 1998, approximately $45.1
million resulting from the acquisition of six office properties encompassing
approximately 980,000 square feet in Westchester County, New York from Cappelli
Enterprises and affiliated entities in April 1998 and the refinancing of 395
North Service Road in the amount $21.4 million in October 1998; (b) a full year
of interest on Reckson OP's $150 million of senior unsecured notes and (c) an
increased average balance on Reckson OP's credit facilities. The increase of
$8.3 million from 1996 to 1997 is attributable to an increase in mortgage debt
including a $50 million mortgage note incurred in connection with the
acquisition of Landmark Square in October 1996, the refinancing of the Omni in
the amount of $58 million in August 1997, increased interest cost attributable
to an increased average balance on Reckson OP's credit facilities and interest
on Reckson OP's senior unsecured notes. The weighted average balance outstanding
on Reckson OP's credit facilities was $377.9 million for 1998, $103.2 million
for 1997 and $71.2 million for 1996.
Included in amortization expense is amortized finance costs of $1.6 million
in 1998, $.80 million in 1997 and $.53 million in 1996. The increase of $.80
million from 1997 to 1998 is primarily attributable to loan costs incurred in
connection with Reckson OP's $500 million credit facility and $50 million term
loan. The increase of $.27 million from 1996 to 1997 was the result of the
amortization of financing costs associated with the credit facilities, the
Landmark Square mortgage, the Omni refinanced mortgage and the senior unsecured
notes.
Extraordinary items, net of minority interest resulted in a $1.7 million
loss in 1998, a $2.2 million loss in 1997 and a $.9 million loss in 1996. The
extraordinary items were all attributed to the write-offs of deferred loan costs
incurred in connection with Reckson OP's restructuring of its credit facilities.
LIQUIDITY AND CAPITAL RESOURCES
SUMMARY OF CASH FLOWS. Net cash provided by operating activities totaled
$119.2 million in 1998, $75.8 million in 1997 and $41.8 million in 1996.
Increases for each year were primarily attributable to the growth in cash flow
provided by the acquisition of properties and to a lesser extent from interest
income from mortgage notes and notes receivable.
Net cash used by investing activities totaled $613.3 million in 1998, $549.3
million in 1997 and $274.6 million in 1996. Cash used in investing activities
related primarily to investments in real estate properties including development
costs and investments in mortgage notes and notes receivable. In addition, in
December 1998, Reckson OP purchased $40 million of preferred stock of Tower
Realty Trust, Inc. in connection with the merger.
Net cash provided by financing activities totaled $474.6 million in 1998,
$482.9 million in 1997 and $238.3 million in 1996. Cash provided by financing
activities during 1998, 1997 and 1996 was primarily attributable to proceeds
from partner contributions and draws on Reckson OP's credit facilities and
additionally, in 1998 the issuance of preferred units and in 1997 proceeds from
the issuance by Reckson OP of senior unsecured notes in the amount of $150
million.
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INVESTING ACTIVITIES. During 1998, Reckson OP acquired (a) on Long Island,
three office properties encompassing an aggregate of approximately 674,000
square feet for approximately $63.4 million and two industrial properties
encompassing approximately 200,000 square feet for approximately $4.4 million;
(b) in Westchester, six office properties encompassing approximately 980,000
square feet for approximately $173 million; (c) in Connecticut, two office
properties encompassing an aggregate of approximately 325,000 square feet for
approximately $61.3 million and (d) in New Jersey, four Class A office
properties encompassing approximately 522,000 square feet for approximately
$90.9 million and six industrial properties encompassing approximately 985,000
square feet for approximately $41.6 million. In addition, on January 6, 1998,
Reckson OP invested approximately $72 million and acquired a controlling
interest in the Morris Companies, an owner and operator of "Big Box" industrial
properties located in Secaucus, New Jersey.
In June 1998, Reckson OP established the Reckson Service Industries credit
facility in the amount of $100 million for Reckson Service Industries' service
sector operations and for other general corporate purposes. As of December 31,
1998, approximately $33.7 million had been advanced to Reckson Service
Industries under this facility. In addition, Reckson OP approved a commitment to
fund investments of up to $100 million with or in Reckson Strategic Venture
Partners. As of December 31, 1998, Reckson OP has invested approximately $17.3
million under this commitment.
FINANCING ACTIVITIES. In connection with the $173 million acquisition of
the Cappelli portfolio and the $10 million purchase of the Cappelli interest in
360 Hamilton Avenue, Reckson OP issued series B, C and D preferred operating
units in the amount of approximately $42.5 million. The series B, C and D
preferred units have a current distribution rate of 6.25% and are convertible to
common units at conversion prices of approximately $32.51, $29.39 and $29.12,
respectively for each preferred unit.
During the year ended December 31, 1998, Reckson contributed approximately
$53 million in cash to Reckson OP in exchange for 2,265,261 common units.
Proceeds from the contributions were used to repay borrowings under the credit
facilities.
Additionally, during April 1998, Reckson contributed approximately $221
million to Reckson OP in exchange for 9,200,000 series A preferred units. The
series A preferred units have a liquidation preference of $25 per unit, a
distribution rate of 7.625% and are convertible to Reckson OP's common units at
a conversion rate of .8769 of a common unit for each preferred unit. Net
proceeds from the contribution were used to repay borrowings under credit
facilities.
On July 23, 1998, Reckson OP obtained a three year $500 million unsecured
revolving credit facility from Chase Manhattan Bank, Union Bank of Switzerland
and PNC Bank as co-managers of the credit facility bank group. Interest rates on
borrowings under the $500 million credit facility are priced off of LIBOR plus a
sliding scale ranging from 112.5 basis points to 137.5 basis points based on the
leverage ratio of Reckson OP. Upon Reckson OP receiving an investment grade
rating on its senior unsecured debt by two rating agencies, the pricing is
adjusted based off of LIBOR plus a scale ranging from 65 basis points to 90
basis points depending upon the rating. The $500 million credit facility
replaced and restructured Reckson OP's existing $250 million unsecured credit
facility and $200 million unsecured short-term facility. As a result, some
deferred loan costs incurred in connection with those facilities were written
off and have been reflected as an extraordinary loss on Reckson OP's statement
of operations. Reckson OP utilizes the $500 million credit facility primarily to
finance the acquisitions of properties and other real estate investments, fund
its development activities and for working capital purposes. At December 31,
1998, Reckson OP had availability under the $500 million credit facility to
borrow an additional $8.1 million, net of $26.1 million of outstanding undrawn
letters of credit.
On December 4, 1998, Reckson OP obtained a one-year $50 million unsecured
term loan from Chase Manhattan Bank. On January 13, 1999, Reckson OP and Chase
Manhattan Bank increased the total availability under the term loan to $75
million. Interest rates on borrowings under the $75 million term loan are priced
off LIBOR plus 150 basis points for the first nine months and 175 basis points
for
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the remaining three months. At December 31, 1998, Reckson OP had availability
under the term loan to borrow an additional $30 million, which was increased to
$55 million on January 13, 1999.
CAPITALIZATION. Reckson OP's indebtedness at December 31, 1998 totaled $867
million (including its share of joint venture debt and net of the minority
partners' interests) and was comprised of $464 million outstanding under the
$500 million credit facility, $20 million outstanding under the $75 million term
loan, $150 million of senior unsecured notes and approximately $233 million of
mortgage indebtedness. Based on Reckson OP's total market capitalization of
approximately $2.2 billion at December 31, 1998, Reckson OP's debt represented
approximately 39.4% of its total market capitalization. Reckson OP's total
market capitalization is calculated based on the value of Reckson OP's common
units, which for this purpose is assumed to be the same per unit as the value of
a share of Reckson common stock, and the stated value of Reckson OP's preferred
units.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures of Reckson OP. Reckson OP's investments in
mortgage notes, Reckson Strategic Venture Partners and advances under the
Reckson Service Industries facility are expected to produce cash flows. Reckson
OP expects to meet its short-term liquidity requirements generally through its
net cash provided by operating activities along with the $500 million credit
facility and the $75 million term loan previously discussed. Reckson OP expects
to meet some of its financing requirements through long-term secured and
unsecured borrowings and the issuance of debt securities and additional equity
securities of Reckson OP. Reckson OP also expects strategic dispositions of
assets or interests in assets to generate cash flows. Reckson OP will refinance
existing mortgage indebtedness or indebtedness under the $500 million credit
facility at maturity or retire the debt through the issuance of additional debt
securities or additional equity securities. Reckson OP anticipates that the
current balance of cash and cash equivalents and cash flows from operating
activities, together with cash available from borrowings and debt and equity
offerings, will be adequate to meet the capital and liquidity requirements of
Reckson OP in both the short and long-term.
INFLATION
Some of Reckson OP's office leases provide for fixed base rent increases or
indexed escalations. In addition, some of Reckson OP's office leases provide for
separate escalations of real estate taxes and electric costs over a base amount.
The industrial leases also generally provide for fixed base rent increases,
direct pass through of a portion of operating expenses and separate real estate
tax escalation over a base amount. Reckson OP believes that inflationary
increases in expenses will generally be offset by contractual rent increases and
expense escalations described above.
The $500 million credit facility and the $75 million term loan bear interest
at a variable rate, which will be influenced by changes in short-term interest
rates, and are sensitive to inflation.
IMPACT OF YEAR 2000
Some of Reckson OP's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculation causing disruptions of operations, including a temporary
inability to process transactions, or engage in similar normal business
activities.
Reckson OP has completed an assessment to modify or replace portions of its
software so that its computer systems will function properly with respect to
dates in the year 2000 and afterwards. Currently, the entire property management
system is year 2000 compliant and has been thoroughly tested. Because Reckson
OP's accounting software is maintained and supported by an unaffiliated third
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party, the total year 2000 project cost as it relates to the accounting software
is estimated to be minimal.
The year 2000 project is estimated to be completed by July 31, 1999, which
is prior to any anticipated impact on its operating systems. Additionally,
Reckson OP has received assurances from its contractors that all of Reckson OP's
building management and mechanical systems are currently year 2000 compliant or
will be made compliant prior to any impact on those systems. However, Reckson OP
cannot guarantee that all contractors will comply with their assurances and
therefore, Reckson OP may not be able to determine year 2000 compliance of those
contractors. At that time, Reckson OP will determine the extent to which Reckson
OP will be able to replace non-compliant contractors. Reckson OP believes that
with modifications to existing software and conversions to new software, the
year 2000 issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
completed timely, the year 2000 issue could have a material impact on the
operations of Reckson OP.
To date, Reckson OP has expended approximately $375,000 and expects to
expend an additional one million dollars in connection with upgrading building
management, mechanical and computer systems. The costs of the project and the
date on which Reckson OP believes it will complete the year 2000 modifications
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of resources
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause material differences include the availability
and costs of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
In a "worst case scenario", Reckson OP believes that failure of the building
management and mechanical systems to operate properly would result in
inconveniences to the building tenants, which might include no elevator service,
lighting or entry and egress. In this case, the management of Reckson OP would
manually override these systems in order for normal operations to resume.
Additionally, in a "worst case scenario" of the failure of the third party to
deliver, on a timely basis, the necessary upgrades to the accounting software,
Reckson OP would be required to process transactions, such as the issuance of
disbursements, manually until an alternative system was implemented.
If Reckson OP is not successful in implementing their year 2000 compliance
plan, Reckson OP may suffer a material adverse impact on its consolidated
results of operations and financial condition. Because of the importance of
addressing the year 2000 issue, Reckson OP expects to develop contingency plans
if it determines that the compliance plans will not be implemented by July 31,
1999.
FUNDS FROM OPERATIONS
Management believes that funds from operations is an appropriate measure of
performance of an equity REIT. Funds from operations is defined by NAREIT as net
income or loss, excluding gains or losses from debt restructurings and sales of
properties, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. Funds from operations does not
represent cash generated from operating activities in accordance with generally
accepted accounting principles and is not indicative of cash available to fund
cash needs. Funds from operations should not be considered as an alternative to
net income as an indicator of Reckson OP's operating performance or as an
alternative to cash flow as a measure of liquidity. See "Selected Financial Data
of Reckson OP". In March 1995, NAREIT issued a White Paper analysis to address
certain interpretive issues under its definition of funds from operations. The
White Paper provides that amortization of deferred financing costs and
depreciation of non-rental real estate assets are no longer to be added back to
net income to arrive at funds from operations.
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Since all companies and analysts do not calculate funds from operations in a
similar fashion, Reckson OP's calculation of funds from operations presented
herein may not be comparable to similarly titled measures as reported by other
companies.
The following table presents Reckson OP's funds from operations calculation
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Income before extraordinary items....................... $ 48,246 $ 44,789 $ 24,180
Less:
Extraordinary loss.................................... 1,993 2,808 1,259
------- ------- -------
Net income.............................................. 46,253 41,981 22,921
Adjustment for Funds from Operations:
Add:
Depreciation and amortization......................... 51,424 26,834 17,429
Minority interests in consolidated partnerships....... 2,819 920 915
Extraordinary loss.................................... 1,993 2,808 1,259
Less:
Gain on sale of property.............................. -- 672 --
Amount distributed to minority partners in consolidated
partnerships.......................................... 3,988 2,252 1,586
------- ------- -------
Funds from Operations (FFO)............................. $ 98,501 $ 69,619 $ 40,938
------- ------- -------
------- ------- -------
Weighted average units outstanding...................... 47,201 39,743 26,431
------- ------- -------
------- ------- -------
</TABLE>
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METROPOLITAN PARTNERS
FORMATION
Reckson controls Metropolitan Partners and owns 100% of its common
membership interests. Crescent has agreed to purchase a convertible preferred
membership interest in Metropolitan Partners for an aggregate purchase price of
$85 million. Ten million dollars of the purchase price was paid by Crescent to
Metropolitan Partners at the time of the execution of the merger agreement and
the remaining portion is payable prior to the closing of the merger and is
expected to be used to fund a portion of the merger consideration. Crescent's
investment accrues distributions at a rate of 7.5% per year for a two-year
period and may be redeemed by Metropolitan Partners at any time during that
period for $85 million, plus an amount sufficient to provide a 9.5% internal
rate of return. If Metropolitan Partners does not redeem the preferred interest,
upon the expiration of the two-year period, Crescent must (a) convert its
interest into a common membership interest in Metropolitan Partners or (b)
exchange its interest for an amount of shares of Reckson common stock equal to
Crescent's capital contributions to Metropolitan Partners to that date divided
by $24.61. The exchange price may be adjusted for stock splits, combinations and
other actions or distributions that dilute the economic rights of the Reckson
common stock issuable in exchange for Crescent's preferred membership interest.
Crescent also has approval rights over a transfer by Reckson of 50% or more of
its interest in Metropolitan Partners.
MANAGEMENT
Metropolitan Partners is governed by the Metropolitan Partners board of
managers. The board is elected by a majority vote of the common member interests
of Metropolitan Partners. Reckson currently owns 100% of the common membership
interests in Metropolitan Partners. The board has the authority to conduct the
management of the business of Metropolitan Partners, but Crescent has veto
rights over some transactions, including transactions between Reckson and
Metropolitan Partners, any sale of all or any substantial portion of the assets
of Metropolitan Partners, and sales of additional interests in Metropolitan
Partners (a) with a preference equal or senior to Crescent's interest, (b) below
a minimum price or (c) in a public offering. Metropolitan Partners also has a
limit on the indebtedness it may incur of 65% of its value.
TOWER OP
TREATMENT OF TOWER OP UNITHOLDERS
Holders of Tower OP units will receive the same per unit consideration for
the merger as holders of Tower common stock. If the merger is approved, Tower OP
will be merged with and into a newly formed entity created by Metropolitan
Partners and the separate existence of Tower OP will cease. In connection with
this merger, if Reckson stockholders approve the share issuance proposal, for
each Tower OP unit, a holder will receive, at his or her election and subject to
proration if the cash election is oversubscribed or undersubscribed, either (a)
$23 in cash or (b) .8364 shares of Reckson class B common stock. If Reckson
stockholders do not approve the share issuance proposal, holders of Tower OP
units will receive for each Tower OP unit, at his or her election and subject to
proration if the cash election is oversubscribed or undersubscribed, either (a)
$23 in cash or (b) .5725 shares of Reckson class B common stock and $7.2565
principal amount of Reckson OP 7% notes.
DESCRIPTION OF RECKSON STOCK
The Reckson charter provides that Reckson may issue up to 100 million shares
of common stock, 25 million shares of Reckson preferred stock and 75 million
shares of Reckson excess stock, in each case par value $.01 per share.
Although the following discusses the material terms of the Reckson class B
common stock, the description of the terms of the Reckson common stock, the
Reckson class B common stock and the
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Reckson preferred stock does not purport to be complete and is subject to and
qualified in its entirety by the Reckson charter and the Reckson Associates
Realty Corp. Articles Supplementary Establishing and Fixing the Rights and
Preferences of a Class of Shares of Preferred Stock, each of which have been
previously filed with the SEC, and the Reckson Class B Common Stock Articles
Supplementary, which is attached as Annex D to this Joint Proxy
Statement/Prospectus. The Reckson charter and each of the articles supplementary
are incorporated into this Joint Proxy Statement/Prospectus by reference. See
the Glossary beginning on page for the definitions of capitalized terms used
in this summary.
RECKSON COMMON STOCK
On March 1, 1999, there were 40,053,358, shares of Reckson common stock and
7,764,630 Reckson OP units excluding 40,053,358 Reckson OP units owned by
Reckson. Reckson OP units may be redeemed for cash, or, at the option of
Reckson, Reckson common stock on a one-for-one basis.
Although limited by the preferential rights of any Reckson preferred stock
and to the provisions of the Reckson charter regarding Reckson excess stock,
holders of shares of Reckson's existing common stock are entitled to receive
distributions on such stock as authorized by the Reckson board of directors and
declared by Reckson out of assets legally available for distributions and to
share ratably in the assets of Reckson legally available for distribution to its
common stockholders in the event of its liquidation, dissolution or winding up
after payment of or adequate provision for all known debts and liabilities of
Reckson.
Subject to the provisions of the Reckson charter regarding Reckson excess
stock, each outstanding share of Reckson common stock entitles the holder to one
vote on all matters submitted to a vote of stockholders, including the election
of directors, and, except as provided by the terms of any Reckson preferred
stock, the holders of Reckson common stock together with the holders of Reckson
class B common stock will possess the exclusive voting power. There is no
cumulative voting in the election of directors, which means that the holders of
a majority of the outstanding shares of Reckson common stock and the Reckson
class B common stock may elect all of the directors then standing for election
and the holders of the remaining shares will not be able to elect any directors.
Holders of Reckson common stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any other securities of Reckson. Although limited by the
provisions of the Reckson charter regarding Reckson excess stock, holders of
shares of Reckson common stock will have equal dividend, liquidation and other
rights. See "--Restrictions on Ownership."
The transfer agent and registrar for Reckson common stock is American Stock
Transfer & Trust Company.
RECKSON CLASS B COMMON STOCK
The Reckson board of directors has classified and designated 12 million
shares of Reckson common stock as Reckson class B common stock. If Reckson
stockholders approve the share issuance proposal, Reckson expects to issue
approximately 11,694,835 shares of Reckson class B common stock in the merger.
If Reckson stockholders do not approve the share issuance proposal, Reckson
expects to issue approximately 8,004,894 shares of Reckson class B common stock
in the merger.
DISTRIBUTIONS
Although limited by the preferential rights of any Reckson preferred stock
and to the provisions of the Reckson class B common stock articles supplementary
regarding Reckson excess stock, the holders of Reckson class B common stock will
be entitled to receive if, when and as authorized by the Reckson board of
directors out of funds legally available for the payment of distributions, cash
distributions equal to the Class B Dividend Amount. Distributions on the Reckson
class B common stock, if authorized, will be payable quarterly in arrears on
January 31, April 30, July 31 and October 31 of each
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year or, if not a business day, the next succeeding business day. Distributions
will be payable to holders of record as they appear in the stock transfer
records of Reckson at the close of business on the applicable record date, which
will be a date designated by the Reckson board of directors for the payment of
distributions that is not more than 30 nor less than 10 days prior to the
following Reckson distribution payment date.
No distributions on Reckson class B common stock will be authorized by the
Reckson board of directors or be paid or set apart for payment by Reckson if the
terms and provisions of any agreement of Reckson, including any agreement
relating to its indebtedness, prohibits an authorization, payment or setting
apart for payment or provides that an authorization, payment or setting apart
for payment would constitute a breach or a default under the agreement, or if
such authorization or payment is restricted or prohibited by law.
Distributions on Reckson class B common stock will be noncumulative. If the
Reckson board of directors does not authorize a distribution on the Reckson
class B common stock payable on any Reckson distribution payment date while any
Reckson class B common stock is outstanding, then holders of the Reckson class B
common stock will have no right to receive a distribution for that Reckson
distribution payment date, and Reckson will have no obligation to pay a
distribution for that Reckson distribution payment date, whether or not
distributions are declared and paid for any future Reckson distribution payment
date with respect to either the Reckson common stock, the Reckson preferred
stock, or any other capital stock of Reckson.
No distributions, whether in cash, securities or property, will be
authorized or paid or set apart for payment to holders of Reckson common stock
for any quarterly period unless for each share of Reckson class B common stock
outstanding, a distribution equal to the Class B Dividend Amount for such period
has been or contemporaneously is authorized and paid or authorized and a sum
sufficient for the payment of the distribution is set apart for payment to
holders of Reckson class B common stock for the then current distribution
period. No interest, or sum of money in place of interest, shall be payable in
respect of any distribution payment or payments on Reckson class B common stock
which may be in arrears.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of Reckson, the holders of Reckson class B common stock will have no
liquidation preference, but will be entitled to share ratably in any
distribution or payment made to holders of Reckson common stock. When
determining the pro rata share of the holders of Reckson class B common stock in
any liquidation, dissolution or winding up payments or distributions, each share
of Reckson class B common stock will be treated as the equivalent of that number
of shares of Reckson common stock into which it may then be exchanged.
Distributions to holders of Reckson class B common stock upon the liquidation,
dissolution or winding up of Reckson will be limited by the preferential rights
of any Reckson preferred stock and by the Reckson class B common stock articles
supplementary regarding Reckson excess stock.
VOTING
Although limited by the provisions of the Reckson class B common stock
articles supplementary regarding Reckson excess stock, holders of Reckson class
B common stock shall have the right to vote on all matters submitted to the
holders of Reckson common stock; holders of Reckson class B common stock and
Reckson common stock vote together as a single class. In any vote, each holder
of Reckson class B common stock will be entitled to one vote for each share of
Reckson class B common stock held by the holder.
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EXCHANGE AT RECKSON'S OPTION
Reckson class B common stock is not redeemable, but Reckson may repurchase
Reckson class B common stock from any holder. Subject to the provisions of the
Reckson class B common stock articles supplementary regarding Reckson excess
stock, Reckson may exchange any or all shares of Reckson class B common stock
for Reckson common stock on a one-for-one basis, subject to adjustment as
described below (the "Exchange Rate"), plus any declared but unpaid
distributions, at any time after four and one-half years from the completion of
the merger.
If fewer than all of the outstanding shares of Reckson class B common stock
are to be exchanged, the shares to be exchanged shall be determined pro rata or
by lot or in any other manner determined by the Reckson board of directors to be
equitable. If fewer than all the shares of Reckson class B common stock
represented by any certificate are exchanged, then new certificates representing
the unredeemed shares will be issued without cost to the holder of the
unexchanged Reckson class B common stock.
At least 30 days, but no more than 60 days, prior to a date fixed for
exchange of some or all of the Reckson class B common stock, written notice
shall be given by first class mail, to each holder of record on a date no more
than three business days prior to the mailing date of the notice at each
holder's address as it appears in the stock transfer records of Reckson. Neither
failure to give notice nor any deficiency in the notice shall affect the
validity of the procedure for the exchange of any share of Reckson class B
common stock. The notice shall state:
- the Exchange Rate;
- the number of shares of Reckson class B common stock to be exchanged and,
if fewer than all the shares held by a holder are to be exchanged, the
number of such shares to be exchanged from the holder;
- the exchange date;
- the manner in which the holder is to surrender to Reckson or the transfer
agent the certificate or certificates representing the shares of Reckson
class B common stock to be exchanged;
- that the holder's right to elect to exchange such holder's Reckson class B
common stock for Reckson common stock will terminate on the fifth business
day prior to the exchange date; and
- that dividends on the shares of Reckson class B common stock to be
exchanged shall cease on the exchange date unless Reckson defaults in the
issuance of the Reckson common stock issuable upon exchange of the Reckson
class B common stock.
Each holder shall surrender the certificate or certificates representing the
shares of Reckson class B common stock so exchanged to Reckson or the transfer
agent, duly endorsed or otherwise in proper form for transfer, as determined by
Reckson, in the manner and at the place designated in the notice, and on the
exchange date the number of full shares of Reckson common stock issuable upon
the exchange of the shares of Reckson class B common stock shall be payable to
the holder whose name appears on such certificate or certificates as the owner
of the shares, and each surrendered certificate will be canceled and retired.
On or after the exchange date, unless Reckson defaults in the issuance of
the shares of Reckson common stock as described above and except as further
provided in the next two paragraphs:
- all distributions on any Reckson class B common stock called for exchange
shall cease on the exchange date, and all rights of the holders of
exchanged shares of Reckson class B common stock as holders of Reckson
class B common stock shall terminate on the exchange date, other than the
right to receive the shares of Reckson common stock issuable upon exchange
of the Reckson class B common stock;
- the shares of Reckson class B common stock called for exchange will not be
transferred except with the consent of Reckson on Reckson's stock transfer
records; and
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- the exchanged shares shall no longer be deemed outstanding for any
purpose. Until shares of Reckson class B common stock called for exchange
are surrendered in the manner described in the notice, no shares of
Reckson common stock will be issued. No provision will be made for
distributions payable on Reckson common stock exchanged for Reckson class
B common stock prior to the exchange date.
If the exchange date falls after a Reckson distribution payment record date
and on or prior to the corresponding Reckson distribution payment date, then
each holder of Reckson class B common stock at the close of business on such
Reckson distribution payment record date shall be entitled to the distribution
payable on the holder of shares on the corresponding Reckson distribution
payment date even though the holders shares were surrendered prior to the
Reckson distribution payment date.
Following the exchange date, Reckson will pay all distributions payable on
the Reckson common stock to be exchanged for Reckson class B common stock with a
record date for such distribution following the exchange date even if Reckson
common stock certificates are surrendered after such record date.
EXCHANGE AT HOLDER'S OPTION
Although limited by the provisions of the Reckson class B common stock
articles supplementary regarding Reckson excess stock, holders of Reckson class
B common stock may exchange any of their Reckson class B common stock for
Reckson common stock at the Exchange Rate, at any time. However, the right of a
holder to exchange shares of Reckson class B common stock that Reckson has
notified the holder will be exchanged at Reckson's option will terminate at the
close of business on the fifth business day prior to the exchange date specified
in Reckson's notice.
Each exchange will be deemed to have been effected immediately prior to the
close of business on the date on which the certificates were surrendered and
notice was received by Reckson and the exchange shall be at the Exchange Rate in
effect at such time and on such date.
Holders of shares of Reckson class B common stock at the close of business
on a Reckson distribution payment record date shall be entitled to receive and
retain the distribution payable on those shares on the corresponding Reckson
distribution payment date even if the shares were exchanged following the
Reckson distribution payment record date and on or prior to the corresponding
Reckson distribution payment date. Except as provided above, Reckson will make
no payment or allowance for unpaid distributions, whether or not in arrears, on
exchanged shares or for distributions on Reckson common stock that is issued
upon such exchange.
EXCHANGE RATE ADJUSTMENTS
The Exchange Rate may be adjusted, including upon the occurrence of the
following events:
- payments or distributions payable in Reckson common stock and
subdivisions, combinations and reclassifications of Reckson common stock;
- the issuance of rights, options or warrants to all holders of Reckson
common stock that entitle the holders to subscribe for or purchase Reckson
common stock at a price per share less than the fair market value per
share of Reckson common stock; and
- distributions to all holders of Reckson common stock of equity securities
or evidences of indebtedness of Reckson or its assets, excluding cash
distributions. In addition to the foregoing adjustments, Reckson will be
entitled to make increases in the Exchange Rate, in addition to those
required as described in this paragraph, as it determines to be advisable
so that any share distributions, subdivision, reclassification or
combination of shares, distribution of rights, options or warrants to
purchase shares or securities, or a distribution of other assets other
than cash distributions made by Reckson to its stockholders shall not be
taxable.
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If during any two consecutive quarters, the total distributions paid on a
share of Reckson class B common stock for each such quarter and the immediately
prior quarter is less than the sum of (a) 1/4th of the Unadjusted Class B
Dividend Amount applicable to the measured quarter plus (b) 1/4th of the
Unadjusted Class B Dividend Amount applicable to the immediately prior quarter,
then the Exchange Rate applicable to an exchange at the holder's option, but not
to an exchange at the option of Reckson, thereafter will be adjusted as follows.
If at the time the exchange option is exercised at the holder's option:
(A) the Exchange Consideration Amount is equal to or greater than
$27.50, then no additional adjustment is required;
(B) the Exchange Consideration Amount is less than $27.50, but equal
to or greater than $22.00, then the Exchange Rate will be multiplied by
the quotient of (1) $27.50 divided by (2) the Exchange Consideration
Amount; and
(C) the Exchange Consideration Amount is less than $22.00, then the
Exchange Rate will be multiplied by 1.25.
No adjustment of the Exchange Rate is required to be made in any case other
than that described in the immediately preceding paragraph until cumulative
adjustments amount to 1% or more of the Exchange Rate. Any adjustments not so
required to be made will be carried forward and taken into account in subsequent
adjustments.
Except as otherwise provided for subdivisions, combinations and
reclassifications of Reckson common stock and distributions to holders of
Reckson common stock in Reckson common stock, if Reckson shall be a party to any
transaction including a merger, consolidation, statutory share exchange, tender
offer for all or substantially all of the Reckson common stock, sale or transfer
of all or substantially all of Reckson's assets or recapitalization of the
Reckson common stock, in each case as a result of which Reckson common stock
will be converted into the right to receive shares, stock, securities or other
property including cash or any combination of shares, stock, securities or other
property, Reckson or its successor in such transaction shall make appropriate
provision so that each share of Reckson class B common stock, if not converted
into the right to receive shares, stock, securities or other property in the
transaction in accordance with the penultimate sentence of this paragraph shall
thereafter be exchangeable into the kind and amount of shares, stock, securities
and other property, including cash or any combination of shares, stock,
securities or other property, receivable upon the completion of the transaction
by a holder of that number of shares of Reckson common stock into which one
share of Reckson class B common stock was convertible immediately prior to the
transaction, assuming such holder of Reckson common stock failed to exercise any
rights of election. If the kind and amount of shares, stock, securities and
other property receivable in the transaction is not the same for each
non-electing share, the kind and amount of property receivable by the holder of
Reckson class B common stock to be converted shall be deemed to be the kind and
amount receivable per share by a plurality of the non-electing shares. Reckson
may not be a party to any transaction in which any share of Reckson class B
common stock is converted into the right to receive shares, stock, securities or
other property, including cash or any combination thereof, with an aggregate
value less than that receivable by the number of shares of Reckson common stock
into which shares of Reckson class B common stock were exchangeable immediately
prior to the transaction, unless the terms of the transaction are consistent
with the provisions described in this paragraph. The aggregate value of the
shares, stock, securities or other property to be received by holders of Reckson
class B common stock in any transaction shall be conclusively determined in good
faith by Reckson's board of directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Reckson class B common stock will
be American Stock Transfer & Trust Company.
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LISTING
Reckson will apply to list the Reckson class B common stock on the New York
Stock Exchange. Acceptance of the Reckson class B common stock and the
underlying shares of Reckson common stock for listing on the New York Stock
Exchange is a condition to completion of the merger.
OTHER
Holders of shares of Reckson class B common stock will have no sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of Reckson. Subject to the provisions of the Reckson class B
common stock articles supplementary regarding Reckson excess stock, all holders
of shares of Reckson class B common stock will have equal dividend, liquidation
and other rights.
RECKSON PREFERRED STOCK
The Reckson board of directors is authorized to fix the number of shares
constituting each series of Reckson preferred stock and the designations and
powers, preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions of each series of Reckson
preferred stock, including provisions concerning voting, redemption, dividends,
dissolution or the distribution of assets, conversion or exchange, and any other
subjects or matters that may be fixed by resolution of the board of directors.
The Reckson board of directors has classified and designated 9,200,000
shares of Reckson preferred stock as 7 5/8% series A convertible cumulative
preferred stock. As of March 1, 1999, 9,192,000 shares of Reckson series A
preferred stock were outstanding. Reckson series A preferred stock has a
liquidation preference of $25.00. The liquidation preference of the outstanding
shares of the Reckson series A preferred stock is not added to the liabilities
of Reckson for the proposes of determining under the Maryland General
Corporation Law whether a distribution may be made to holders of stock with
preferential rights upon dissolution of Reckson which are junior to the shares
of series A preferred stock. Distributions on Reckson series A preferred stock
are cumulative and are payable quarterly in arrears on or about January 31,
April 30, July 31 and October 31 of each year at the rate of 7 5/8% of the
liquidation preference per share, per year, which is equivalent to $1.90625 per
year per share of Reckson series A preferred stock.
Shares of Reckson series A preferred stock are convertible at any time,
unless previously redeemed, in whole or in part, at the option of the holders
into Reckson common stock. The conversion price of $28.51 per share of Reckson
common stock is equivalent to a conversion rate of .8769 of a share of Reckson
common stock for each share of Reckson series A preferred stock and may be
adjusted for stock splits, combinations and other actions or distributions that
dilute the economic rights of the Reckson common stock issuable in exchange for
Reckson series A preferred stock.
Shares of Reckson series A preferred stock are not redeemable prior to April
13, 2003, except to the extent necessary to preserve Reckson's status as a REIT.
On or after April 13, 2003, the shares of Reckson series A preferred stock are
redeemable in whole or part, at the option of Reckson, at specified redemption
prices, plus accumulated and unpaid distributions, if any. Reckson may exercise
this option only if the redemption price, other than the portion of the
redemption price consisting of accumulated and unpaid distributions, is paid
solely out of the sale proceeds of capital stock of Reckson. The Reckson series
A preferred stock does not have a stated maturity date and is not entitled to
the benefit of any sinking fund or mandatory redemption provisions.
The Reckson series A preferred stock ranks senior to Reckson common stock
and Reckson class B common stock as to distributions and the distribution of
assets upon the liquidation, dissolution or winding up of Reckson.
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PROVISIONS OF THE RECKSON CHARTER REGARDING STOCKHOLDER'S RIGHTS
Under the Maryland General Corporation Law, a Maryland corporation generally
cannot dissolve, amend its charter, merge, sell all or substantially all of its
assets, engage in a share exchange or engage in similar transactions outside the
ordinary course of business unless approved by the affirmative vote of
stockholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage is set forth in the corporation's charter. The
Reckson charter does not provide for a lesser percentage in such situations. In
addition, the limited partnership agreement of the Reckson OP provides that
through June 2, 2000, Reckson OP may not sell, transfer or otherwise dispose of
all or substantially all of its assets or engage in any other similar
transaction, regardless of the form of such transaction, without the consent of
the holders of 85% of the outstanding common units of limited partnership
interest.
The Reckson charter authorizes the Reckson board of directors to reclassify
any unissued shares of Reckson common stock into other classes or series of
classes of stock and to establish the number of shares in each class or series
and to set the preferences, conversion and other rights, voting powers,
restrictions, limitations and restrictions on ownership, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such class or series.
The Reckson board of directors is divided into three classes of directors,
each class constituting approximately one-third of the total number of
directors, with the classes serving staggered terms. At each annual meeting of
stockholders, the class of directors to be elected at such meeting will be
elected for a three-year term and the directors in the other two classes will
continue in office. Reckson believes that classified directors helps to ensure
the continuity and stability of Reckson's board of directors and Reckson's
business strategies and policies as determined by the board. The use of a
staggered board may delay or defer a change in control of Reckson or removal of
incumbent management.
For a more detailed discussion of these and other similar provisions of the
Reckson charter, as well as the Reckson bylaws, see "Comparison of Stockholder
Rights."
RESTRICTIONS ON OWNERSHIP
For Reckson to qualify as a REIT under the Internal Revenue Code it must
satisfy the Five or Fewer Requirement and its outstanding capital stock must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months, other than the first year, or during a proportionate part of
a shorter taxable year. Pursuant to the Internal Revenue Code, Reckson stock
held by some types of entities, including pension trusts qualifying under
Section 401(a) of the Internal Revenue Code, U.S. investment companies
registered under the Investment Company Act of 1940, partnerships, trusts and
corporations, will be attributed to the beneficial owners of these entities for
purposes of the Five or Fewer Requirement (I.E., the beneficial owners of these
entities will be counted as stockholders of Reckson).
The Reckson charter, with the exceptions described below, provides that no
stockholder may own, or be deemed to own by virtue of the attribution provisions
of the Internal Revenue Code, more than nine percent (the "Reckson Common Stock
Ownership Limit") of the aggregate number or value of the outstanding shares of
common stock of Reckson. Limitations on the ownership of Reckson Preferred
Stock, including the Reckson series A preferred stock, may also apply. Any
transfer of shares of stock that would result in a violation of the Reckson
Common Stock Ownership Limit or that would result in the disqualification of
Reckson as a REIT, including any transfer that results in shares of capital
stock being owned by fewer than 100 persons or results in Reckson being "closely
held" within the meaning of Section 856(h) of the Internal Revenue Code, will be
null and void, and the intended transferee will acquire no rights to the shares
of stock. The foregoing restrictions on transferability and ownership will not
apply if the Reckson board of directors determines that it is no longer in the
best interests of Reckson to attempt to qualify, or to continue to qualify, as a
REIT. The Reckson board of directors may, in its sole discretion, waive the
Reckson Common Stock Ownership Limit if evidence
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satisfactory to the Reckson board of directors and Reckson's tax counsel is
presented that the changes in ownership will not then or in the future
jeopardize Reckson's REIT status and the Reckson board of directors otherwise
decides that such action is in the best interests of Reckson.
In addition, the Reckson Associates Realty Corp. Articles Supplementary
Establishing and Fixing the Rights and Preferences of a Class of Shares of
Common Stock, the form of which is attached as Annex D to this Joint Proxy
Statement/Prospectus, provides that no holders of Reckson class B common stock
may own, or be deemed to own by virtue of the attribution provisions of the
Internal Revenue Code, more than nine percent of the aggregate value of all
classes of common stock of Reckson, including Reckson common stock and Reckson
class B common stock (the "Reckson Class B Common Stock Ownership Limit," and
together with the Reckson Common Stock Ownership Limit, the "Reckson Ownership
Limits"). Any transfer of shares of Reckson class B common stock in excess of
the Reckson Class B Common Stock Ownership Limit or that would result in the
disqualification of Reckson as a REIT shall be null and void, and the intended
transferee will acquire no rights to the shares of Reckson class B common stock.
Transfer of shares of Reckson class B common stock that may result in the
disqualification of Reckson as a REIT include any transfer that would result in
Reckson owning, whether directly or through the attribution provisions of the
Internal Revenue Code, an interest in a tenant described in Section 856(d)(2)(B)
of the Internal Revenue Code if the income derived by Reckson from such tenant
would cause Reckson to fail to satisfy any of the gross income requirements of
Section 856(c) of the Internal Revenue Code or that would result in Reckson
being "closely held" within the meaning of Section 856(h) of the Internal
Revenue Code. The Reckson board of directors may, in its sole discretion, with
the advice of Reckson's tax counsel, waive the limitation on a person's owning,
within the meaning of certain ownership attribution rules of the Internal
Revenue Code, Reckson class B common stock in excess of the Reckson Class B
Common Stock Ownership Limit if that person is not an individual for purposes of
the Internal Revenue Code and the Reckson board of directors receives the
representations and undertakings from the person necessary to ascertain that the
person's owning Reckson class B common stock will not violate the Reckson Class
B Common Stock Ownership Limit. In addition, the Reckson board may, in its sole
discretion, with the advice of Reckson's tax counsel, waive the limitation on a
person's owning, within the meaning of certain other ownership attribution rules
of the Internal Revenue Code, Reckson class B common stock in excess of the
Reckson Class B Common Stock Ownership Limit if that person does not and
represents that it will not own more than a 9% interest in a tenant of Reckson
and the Reckson board receives the representations and undertakings from the
person necessary to ascertain this fact.
Shares of stock owned, or deemed to be owned, or transferred to a
stockholder in excess of the Reckson Ownership Limits will automatically be
converted into shares of excess stock that will be transferred, by operation of
law, to the trustee of a trust for the exclusive benefit of one or more
charitable organizations described in Sections 170(b)(1)(a), 170(c)(2) and
501(c)(3) of the Internal Revenue Code. The trustee of the trust will be deemed
to own the excess stock for the benefit of the charitable beneficiary on the
date of the violative transfer to the original transferee-stockholder. Any
dividend or distribution paid to the original transferee-stockholder on excess
stock prior to the discovery by Reckson that capital stock has been transferred
in violation of the provisions of the Reckson charter shall be repaid to the
trustee upon demand. Any dividend or distribution authorized and declared but
unpaid shall be rescinded as null and void with respect to the original
transferee-stockholder and shall instead be paid to the trustee of the trust for
the benefit of the charitable beneficiary. Any vote cast by an original
transferee-stockholder of shares of capital stock constituting excess stock
prior to the discovery by Reckson that shares of capital stock have been
transferred in violation of the provisions of the Reckson charter will be
rescinded as null and void. While the excess stock is held in trust, the
original transferee-stockholder will be deemed to have given an irrevocable
proxy to the trustee to vote the capital stock for the benefit of the charitable
beneficiary. The trustee of the trust may transfer the interest in the trust
representing the excess stock to any person whose ownership of the shares of
capital stock converted into excess stock would be permitted under the
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Reckson Ownership Limits. If such transfer is made, the interest of the
charitable beneficiary shall terminate and the proceeds of the sale shall be
payable to the original transferee-stockholder and to the charitable beneficiary
as described below. The original transferee-stockholder shall receive the lesser
of (a) the price paid by the original transferee-stockholder for the shares of
capital stock that were converted into excess stock or, if the original
transferee-stockholder did not give value for the shares (E.G., the stock was
received through a gift, devise or other transaction), the average closing price
for the class of shares from which the shares of excess stock were converted for
the ten trading days immediately preceding such sale or gift, and (b) the price
received by the trustee from the sale or other disposition of the excess stock
held in trust. The trustee may reduce the amount payable to the original
transferee-stockholder by the amount of dividends and distributions relating to
the shares of excess stock which have been paid to the original
transferee-stockholder and are owed by the original transferee-stockholder to
the trustee. Any proceeds in excess of the amount payable to the original
transferee-stockholder shall be paid by the trustee to the charitable
beneficiary. Any liquidation distributions relating to excess stock will be
distributed in the same manner as proceeds of a sale of excess stock. If the
foregoing transfer restrictions are determined to be void or invalid by virtue
of any legal decision, statute, rule or regulations, then the original
transferee-stockholder of any shares of excess stock may be deemed, at the
option of Reckson, to have acted as an agent on behalf of Reckson in acquiring
the shares of excess stock and to hold the shares of excess stock on behalf of
Reckson.
In addition, Reckson will have the right, for a period of 90 days during the
time any shares of excess stock are held in trust, to purchase all or any
portion of the shares of excess stock at the lesser of (a) the price initially
paid for the shares by the original transferee-stockholder, or if the original
transferee-stockholder did not give value for the shares, the average closing
price for the class of stock from which the shares of excess stock were
converted for the ten trading days immediately preceding such sale or gift, and
(b) the average closing price for the class of stock from which the shares of
excess stock were converted for the ten trading days immediately preceding the
date Reckson elects to purchase the shares. Reckson may reduce the amount
payable to the original transferee-stockholder by the amount of dividends and
distributions relating to the shares of excess stock which have been paid to the
original transferee-stockholder and are owed by the original
transferee-stockholder to the trustee. Reckson may pay the amount of any
reductions to the trustee for the benefit of the charitable beneficiary. The
90-day period begins on the later of the date on which notice is received of the
violative transfer if the original transferee-stockholder gives notice to
Reckson of the transfer or, if no notice is given, the date the Reckson board of
directors determines that a violative transfer has been made.
The Reckson class B common stock articles supplementary also provide that
holders of excess stock that was originally Reckson class B common stock shall
not be entitled to exchange any such shares of excess stock for shares of
Reckson common stock. Any exchange of shares of Reckson class B common stock for
shares of Reckson common stock made prior to the discovery by Reckson that such
shares of Reckson class B common stock have been converted into excess stock
shall be null and void and the original transferee-stockholder shall surrender
the shares of Reckson common stock for which the Reckson class B common stock
was exchanged upon demand to Reckson. Surrendered shares of Reckson common stock
shall be converted into excess stock and deposited into the trust.
Notwithstanding the foregoing, at any time on or after the closing date, Reckson
may elect to exchange excess stock that was originally Reckon class B common
stock for Reckson common stock in accordance with the provisions of the Reckson
class B common stock articles supplementary. See "--Class B Common Stock."
These restrictions will not preclude settlement of transactions through the
New York Stock Exchange.
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DESCRIPTION OF THE RECKSON OP 7% NOTES
If Reckson's stockholders fail to approve the share issuance proposal, Tower
stockholders and unitholders will receive in the merger, for each of their
shares or units, at their election and subject to proration, either (a) $23.00
in cash or (b) .5725 of a share of Reckson class B common stock and $7.2565
principal amount of Reckson OP 7% notes. If an Adverse Recommendation Event has
occurred, each share and unit will be converted into the right to receive an
additional $0.8046 principal amount of Reckson OP 7% notes. If the share
issuance proposal is not approved, Reckson OP will issue approximately $101.5
million principal amount of Reckson OP 7% notes or $116.5 million principal
amount if an Adverse Recommendation Event occurs.
The Reckson OP 7% notes will be issued under an Indenture dated as of the
closing of the merger (the "Indenture"), between Reckson OP, Reckson and The
Bank of New York, as trustee. A copy of the form of the Indenture has been filed
with the SEC and will be made available upon request. The terms of the Reckson
OP 7% notes include those provisions contained in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939. The
Reckson OP 7% notes are governed by all terms contained in or made part of the
Indenture, and holders of Reckson OP 7% notes are referred to the Indenture and
the Trust Indenture Act for a statement of these terms. Although the following
summary discusses the material provisions of the Reckson OP 7% notes, it does
not purport to be complete and is subject to and qualified in its entirety by
reference to the actual provisions of the Reckson OP 7% notes and the Indenture.
See Glossary beginning on page for the definitions of capitalized terms used
in this summary.
The Reckson OP 7% notes will be direct, unsecured and unsubordinated
obligations of Reckson OP and will rank evenly with each other and with all
other unsecured and unsubordinated indebtedness of Reckson OP outstanding at any
time. The Reckson OP 7% notes will be effectively subordinated to all existing
and future mortgages and other secured indebtedness of Reckson OP to the extent
of the value of the property securing such indebtedness. The Reckson OP 7% notes
also will be effectively subordinated to all existing and future third-party
indebtedness and other liabilities of Reckson OP's subsidiaries. As of December
31, 1998, on a pro forma basis, secured indebtedness of Reckson OP and its
subsidiaries aggregated approximately $492 million and the total liabilities of
Reckson OP was approximately $1.34 billion. Subject to the limitations set forth
in the Indenture, and as described under "Material Covenants, Limitations on
Incurrence of Debt" below, the Indenture will permit Reckson OP to incur
additional secured and unsecured indebtedness. Additional indebtedness may
consist of, but is not limited to, indebtedness issued under the Indenture.
The Reckson OP 7% notes will mature ten years from the issuance and will not
be subject to redemption or repayment prior to the maturity date. The Reckson OP
7% notes are not subject to any sinking fund provisions.
Except for a covenant limiting the incurrence of indebtedness, a covenant
requiring a certain percentage of unencumbered assets and a traditional merger
covenant, which is described below under the caption "--Merger, Consolidation or
Sale," the Indenture does not contain any other provisions that would limit the
ability of Reckson OP or Reckson to incur indebtedness or that would afford
holders of Reckson OP 7% notes protection in the case of any of the following
events:
- a highly leveraged or similar transaction involving Reckson OP, the
management of Reckson OP or Reckson, or any affiliate of any such party;
- a change of control; or
- a reorganization, restructuring, merger or similar transaction involving
Reckson OP or Reckson that may adversely affect the holders of Reckson OP
7% notes.
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In addition, except as limited by the covenants referred to above, Reckson
OP or Reckson may, in the future, enter into transactions, such as the sale of
all or substantially all of its assets or the merger or consolidation of Reckson
OP or Reckson, that would increase the amount of Reckson OP's indebtedness or
substantially reduce or eliminate Reckson OP's assets, which may have an adverse
effect on Reckson OP's ability to service its indebtedness, including the
Reckson OP 7% notes. In addition, restrictions on ownership and transfers of
Reckson "s common stock and preferred stock which are designed to preserve its
status as a REIT may act to prevent or hinder a change of control. See
"Description of Reckson Stock."
PRINCIPAL AND INTEREST
The Reckson OP 7% notes will bear interest at 7% per year from and including
, 1999, or from and including the immediately preceding interest
payment date for which interest has been paid, and will be payable semiannually
in arrears on each April 1 and October 1, commencing , 1999, to the
persons in whose names the applicable Reckson OP 7% notes are registered in the
security register applicable to the Reckson OP 7% notes at the close of business
on March 15 or September 15, immediately preceding the applicable interest
payment date, regardless of whether such day is a business day. Interest on the
Reckson OP 7% notes will be computed on the basis of a 360-day year of twelve
30-day months.
Any interest not punctually paid or duly provided for on any interest
payment date for a Reckson OP 7% note will cease to be payable to the holder on
the applicable regular record date and may either be paid to the person in whose
name the Reckson OP 7% note is registered at the close of business on a special
record date for the payment of such defaulted interest to be fixed by the
trustee, notice of which shall be given to the holder of the Reckson OP 7% note
not less than 10 days prior to the special record date, or may be paid at any
time in any other lawful manner, all as more completely described in the
Indenture.
The principal of, and any accrued interest on, each Reckson OP 7% note
payable on the maturity date will be paid against presentation and surrender of
the Reckson OP 7% note at the corporate trust office of the trustee, located
initially at . Interest on the Reckson OP 7% notes will be payable
at the corporate trust office of the trustee, or at the option of Reckson OP,
payment of interest may be made by check mailed to the addresses of the holders
entitled to the payment as they appear in the security register or by wire
transfer of funds to the holders at accounts maintained within the United
States. All payments related to the Reckson OP 7% notes will be made in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts.
If any interest payment date or the maturity date falls on a day that is not
a business day, the required payment will be made on the next business day as if
it were made on the date the payment was due and no interest will accrue on the
amount payable for the period from and after the interest payment date or the
maturity date to the next business day.
GUARANTEE
Reckson will fully and unconditionally guarantee the due and punctual
payment of principal of, premium, if any, and interest on the Reckson OP 7%
notes.
DENOMINATIONS, REGISTRATION AND TRANSFER
The Reckson OP 7% notes will be issuable in denominations of $1,000 and any
integral multiple of $1,000.
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Subject to the limitations described in the Indenture, the Reckson OP 7%
notes will be exchangeable for other Reckson OP 7% notes of a like aggregate
principal amount and tenor in different authorized denominations upon surrender
of Reckson OP 7% notes at the corporate trust office of the trustee. In
addition, subject to limitations described in the Indenture, the Reckson OP 7%
notes may be surrendered for registration of transfer at the corporate trust
office of the trustee. Every Reckson OP 7% note surrendered for registration of
transfer or exchange shall be duly endorsed or accompanied by a written
instrument of transfer. No service charge will be made for any registration of
transfer or exchange of any Reckson OP 7% note, but Reckson OP may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection with the transfer or exchange. Reckson OP may at any time
designate additional transfer agents for the Reckson OP 7% notes.
MATERIAL COVENANTS
LIMITATIONS ON INCURRENCE OF DEBT
Reckson OP will not, and will not permit any subsidiary to, incur any
Indebtedness, other than intercompany indebtedness subordinated to the Reckson
OP 7% notes, if, immediately after giving effect to the incurrence of the
additional Indebtedness, the aggregate principal amount of all outstanding
Indebtedness of Reckson OP, and of its subsidiaries determined at the applicable
proportionate interest of Reckson OP in each such subsidiary, determined in
accordance with GAAP, is greater than 60% of the sum of (a) the Total Assets as
of the end of the last calendar quarter covered in Reckson OP's Annual Report on
Form 10-K or Quarterly Report on Form 10-Q, as the case may be, most recently
filed with the SEC prior to the incurrence of the additional Indebtedness or, if
Reckson OP is not then subject to the reporting requirements of the Exchange
Act, as of its most recent calendar quarter and (b) any increase in the Total
Assets since the end of such quarter, including, any increase in Total Assets
resulting from the incurrence of such additional Indebtedness, the Total Assets
adjusted by such increase are referred to as the "Adjusted Total Assets".
Reckson OP will not, and will not permit any subsidiary to, incur any
Indebtedness, other than intercompany indebtedness subordinated to the Reckson
OP 7% notes, if, for the period consisting of the four consecutive fiscal
quarters most recently ended prior to the date on which such additional
Indebtedness is to be incurred, the ratio of Consolidated Income Available for
Debt Service to the Annual Service Charge shall have been less than 1.5 to 1, on
a pro forma basis after giving effect to the incurrence of such Indebtedness and
to the application of the proceeds of such Indebtedness, and calculated on the
assumptions that:
- such Indebtedness and any other Indebtedness incurred by Reckson OP or its
subsidiaries since the first day of the four-quarter period and the
application of the proceeds of such Indebtedness, including to refinance
other Indebtedness, had occurred at the beginning of the period;
- the repayment or retirement of any other Indebtedness by Reckson OP or its
subsidiaries since the first day of the four-quarter period had been
incurred, repaid or retained at the beginning of the period. In making
such computation, the amount of Indebtedness under any revolving credit
facility shall be computed based upon the average daily balance of
borrowings under such facility during the period;
- any income earned as a result of any increase in Adjusted Total Assets
since the end of the four-quarter period had been earned, on an annualized
basis, for the period; and
- in the case of an acquisition or disposition by Reckson OP or any of its
subsidiaries of any asset or group of assets since the first day of the
four-quarter period, including by merger, stock purchase or sale, or asset
purchase or sale, such acquisition or disposition or any related
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repayment of Indebtedness had occurred as of the first day of the period
with the appropriate adjustments with respect to such acquisition or
disposition being included in the pro forma calculation of Consolidated
Income Available for Debt Service to the Annual Service Charge.
Reckson OP will not, and will not permit any subsidiary to, incur any
Indebtedness secured by any lien of any kind upon any of the property of Reckson
OP or any of its subsidiaries if, immediately after giving effect to the
incurrence of such additional secured debt, the aggregate principal amount of
all outstanding secured debt of Reckson OP, and of its subsidiaries determined
at the applicable proportionate interest of Reckson OP in each such subsidiary,
is greater than 40% of Adjusted Total Assets.
MAINTENANCE OF TOTAL UNENCUMBERED ASSETS
Reckson OP will maintain Total Unencumbered Assets of not less than 150% of
the aggregate principal amount of all outstanding unsecured debt.
EXISTENCE
Except as permitted under "Merger, Consolidation or Sale," Reckson OP is
required to do or cause to be done all things necessary to preserve and keep in
full force and effect its existence, rights and franchises and that of each
subsidiary and its respective rights and franchises. Reckson OP or any
subsidiary shall not be required to preserve any right or franchise, however, if
it determines that the preservation of a right or franchise is no longer
desirable in the conduct of its business or the business of the applicable
subsidiary and that the loss of the right or franchise is not disadvantageous in
any material respect to the holders of Reckson OP 7% notes.
MAINTENANCE OF PROPERTIES
Reckson OP is required to cause all of its material properties used or
useful in the conduct of its business or the business of any subsidiary to be
maintained and kept in good condition, repair and working order and supplied
with all necessary equipment and to cause to be made all necessary repairs,
renewals, replacements, betterments and improvements to its material properties,
all as in the judgment of Reckson OP may be necessary to properly conduct the
business carried on in connection with its material properties Reckson OP and
its subsidiaries shall not be prevented, however, from selling or otherwise
disposing for value their properties in the ordinary course of business.
INSURANCE
Reckson OP is required to, and is required to cause each of its subsidiaries
to, keep all of its insurable properties insured against loss or damage at least
equal to their then full insurable value with financially sound and reputable
insurance companies.
PAYMENT OF TAXES AND OTHER CLAIMS
Reckson OP is required to pay or discharge or cause to be paid or
discharged, before becoming delinquent, (a) all taxes, assessments and
governmental charges levied or imposed upon it or any subsidiary or upon its
income, profits or property or that of any subsidiary, and (b) all lawful claims
for labor, materials and supplies which, if unpaid, might by law become a lien
upon the property of Reckson OP or any subsidiary; PROVIDED, HOWEVER, that
Reckson OP shall not be required to pay or discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings.
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PROVISION OF FINANCIAL INFORMATION
Whether or not Reckson OP is subject to Section 13 or 15(d) of the Exchange
Act and for so long as the Reckson OP 7% notes are outstanding, Reckson OP will,
to the extent permitted under the Exchange Act, be required to file with the SEC
the annual reports, quarterly reports and other documents which Reckson OP would
have been required to file with the SEC pursuant to such Section 13 or 15(d) if
Reckson OP were so subject, such documents to be filed with the SEC on or prior
to the respective dates by which Reckson OP would have been required so to file
such documents if Reckson OP were so subject. Reckson OP will also in any event
(1) within 15 days of each required filing date (a) transmit by mail to all
holders of Reckson OP 7% notes, as their names and addresses appear in the
security register, without cost to the holders, copies of the annual reports and
quarterly reports which Reckson OP would have been required to file with the SEC
pursuant to Section 13 or 15(d) of the Exchange Act if Reckson OP were subject
to such sections and (b) file with the trustee copies of the annual reports,
quarterly reports and other documents which Reckson OP would have been required
to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act if
Reckson OP were subject to such sections and (2) if filing such documents by
Reckson OP with the SEC is not permitted under the Exchange Act, promptly upon
written request and payment of the reasonable cost of duplication and delivery,
supply copies of such documents to any prospective holder.
MERGER, CONSOLIDATION OR SALE
Reckson OP or Reckson may consolidate with, or sell, lease or convey all or
substantially all of its assets to, or merge with or into, any other entity only
if the following conditions are met:
- Reckson OP or Reckson, as the case may be, shall be the continuing entity,
or if not, the successor entity formed by or resulting from any such
consolidation or merger or which shall have received the transfer of such
assets shall expressly assume payment of the principal of and premium, if
any, and interest on all the Reckson OP 7% notes and the due and punctual
performance and observance of all of the covenants and conditions
contained in the Indenture and the guarantee of the Reckson OP 7% notes;
- immediately after giving effect to such transaction, no event of default
under the Indenture, and no event which, after notice or the lapse of
time, or both, would become such an event of default, shall have occurred
and be continuing; and
- an officer's certificate and legal opinion covering such conditions shall
be delivered to the trustee.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides that the following events are "events of default"
with respect to the Reckson OP 7% notes:
a. default for 30 days in the payment of any installment of interest on any
Reckson OP 7% note;
b. default in the payment of the principal of any Reckson OP 7% note at its
maturity;
c. default in the performance of any other covenant of Reckson OP or
Reckson contained in the Indenture, if the default has continued for 60
days after written notice as provided in the Indenture;
d. Reckson OP, Reckson, any subsidiary in which Reckson OP has invested, or
is committed or otherwise obligated to invest, at least $20 million in
capital or any entity in which Reckson OP is the general partner shall
fail to pay any principal of, premium or interest on or any other amount
payable in respect of, any recourse Indebtedness that is outstanding in a
principal or notional amount of at least $20 million, or the equivalent
of $20 million in one or more other
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currencies, either individually or in the aggregate (but excluding the
Reckson OP 7% notes), of Reckson OP and its consolidated subsidiaries,
taken as a whole, when the same becomes due and payable, whether by
scheduled maturity, required prepayment, acceleration, demand or
otherwise, and such failure shall continue after the applicable grace
period, if any, specified in any agreement or instrument relating to such
Indebtedness, or any other event shall occur or condition shall exist
under any agreement or instrument evidencing, securing or otherwise
relating to any such Indebtedness and shall continue after the applicable
grace period, if any, specified in such agreement or instrument, if the
effect of such event or condition is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness or otherwise to cause,
or to permit the holder or holders of such Indebtedness to cause such
Indebtedness to mature prior to its stated maturity;
e. one or more final, non-appealable judgments or orders for the payment of
money aggregating $20 million or the equivalent of $20 million in one or
more other currencies or more are rendered against one or more of Reckson
OP, Reckson, any subsidiary in which Reckson OP has invested, or is
committed or otherwise obligated to invest, at least $20 million in
capital and any entity in which Reckson OP is the general partner and
remain unsatisfied and either (a) enforcement proceedings shall have been
commenced by any creditor upon any such judgment or order or (b) there
shall be a period of at least 60 days after entry of such judgment or
order during which a stay of enforcement, by reason of a pending appeal
or otherwise, shall not be in effect; any such judgment or order shall
not give rise to an event of default, however, if and for so long as (1)
the amount of such judgment or order is covered by a valid and binding
policy of insurance between the defendant and the insurer covering full
payment of the judgment or order and (2) the insurer has been notified,
and has not disputed the claim made for payment, of the amount of the
judgement or order; or
f. events of bankruptcy, insolvency or reorganization, or court appointment
of a receiver, liquidator or trustee of Reckson OP, Reckson or any
significant subsidiary or any of their respective property, as set forth
in the Indenture.
If an event of default occurs and is continuing, then the trustee or the
holders of not less than 25% in principal amount of the Reckson OP 7% notes may
declare the principal amount of all of the Reckson OP 7% notes to be due and
payable immediately by written notice to Reckson OP and Reckson. However, at any
time after a declaration of acceleration has been made, but before a judgment or
decree for payment of the money due has been obtained by the trustee, the
holders of not less than a majority in principal amount of the Reckson OP 7%
notes may rescind and annul such declaration and its consequences if (a) Reckson
OP or Reckson deposits with the trustee all required payments of the principal
of and interest on the Reckson OP 7% notes, plus fees, expenses, disbursements
and advances of the trustee and (b) all events of default, other than the
non-payment of accelerated principal of or interest on the Reckson OP 7% notes
have been cured or waived as provided in the Indenture. The Indenture also
provides that the holders of not less than a majority in principal amount of the
Reckson OP 7% notes may waive any past default with respect to such series and
its consequences, except a default (a) in the payment of the principal of or
interest on the Reckson OP 7% notes or (b) in respect of a covenant or provision
contained in the Indenture that cannot be modified or amended without the
consent of the holder of each Reckson OP 7% note affected by the modification or
amendment.
The trustee will be required to give notice to the holders of the Reckson OP
7% notes within 90 days of a default under the Indenture unless the default has
been cured or waived. The trustee may withhold notice to the holders of the
Reckson OP 7% notes of any default with respect to the Reckson OP 7%, notes
except a default in the payment of the principal of or interest on the Reckson
OP 7% notes, if specified responsible officers of the trustee consider the
withholding to be in the interest of the holders.
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The Indenture provides that no holder of the Reckson OP 7% notes may
institute any proceedings, judicial or otherwise, with respect to the Indenture
or for any remedy under the Indenture, except in the case of failure of the
trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an event of default from the holders of not
less than 25% in principal amount of the Reckson OP 7% notes, as well as an
offer of reasonable indemnity. This provision will not prevent, however, any
holder of the Reckson OP 7% notes from instituting suit for the enforcement of
payment of the principal of and interest on the Reckson OP 7% notes at the their
due dates.
Except for provisions in the Indenture relating to its duties in case of
default, the trustee is under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any holders of the
Reckson OP 7% notes then outstanding under the Indenture, unless such holders
shall have offered to the trustee reasonable security or indemnity. The holders
of not less than a majority in principal amount of the Reckson OP 7% notes shall
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the trustee, or of exercising any trust or power
conferred upon the trustee. However, the trustee may refuse to follow any
direction which is in conflict with any law or the Indenture, or which may be
unduly prejudicial to the holders of the Reckson OP 7% notes not joining in the
direction.
Within 120 days after the close of each fiscal year, Reckson OP and Reckson
must deliver a certificate of an officer certifying to the trustee whether or
not such officer has knowledge of any default under the Indenture and, if so,
specifying each such default and the nature and status of the default.
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding securities issued under the Indenture or series of
securities issued under the Indenture, which are affected by such modification
or amendment. For purposes of the Indenture, securities that have been defeased
or which funds for payment have been deposited with trustee, are not considered
outstanding.
No modification or amendment may, however, without the consent of the holder of
each Reckson OP 7% note affected by the modification or amendment:
- change the stated maturity of the principal of, or premium, if any, or any
installment of interest on, any such Reckson OP 7% note;
- reduce the principal amount of, or the rate or amount of interest on, or
any premium payable on redemption of, any such Reckson OP 7% note;
- reduce the amount of principal of an Original Issue Discount Security (as
defined in the Indenture) that would be due and payable upon declaration
of acceleration of the maturity thereof or would be provable in
bankruptcy;
- adversely affect any right of repayment of the holder of any such Reckson
OP 7% note;
- change the place of payment, or the coin or currency, for payment of
principal of, premium, if any, or interest on any such Reckson OP 7% Note;
- impair the right to institute suit for the enforcement of any payment on
or after the stated maturity with respect to any such Reckson OP 7% note;
- reduce the above-stated percentage of outstanding securities issued under
the Indenture of any series the consent of whose holders is necessary to
modify or amend the Indenture, to waive
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compliance with certain provisions of the Indenture or certain defaults
and consequences under the Indenture or to reduce the quorum or voting
requirements set forth in the Indenture;
- modify or affect in any manner adverse to the holders the terms and
conditions of the obligations of Reckson in respect of the payment of
principal, and premium, if any, and interest on any securities issued
under the Indenture that Reckson has guaranteed; or
- modify any of the foregoing provisions or any of the provisions relating
to the waiver of past defaults except defaults in the payment of the
principal of, premium, if any, and interest on the Reckson OP 7% notes,
defaults in respect of a covenant or other provision of the Indenture that
cannot be modified or amended without the consent of each holder of
Reckson OP 7% notes affected by the modification or amendment and waivers
of covenants relating to:
(1) limitations on indebtedness,
(2) maintenance of properties,
(3) insurance,
(4) the existence of Reckson OP and its subsidiaries,
(5) Total Unencumbered Assets,
(6) payment of taxes, and
(7) provision of financial information,
except to increase the required percentage to effect such action or to
provide that other provisions may not be modified or waived without the
consent of the holder of each outstanding security issued under the
Indenture affected by the modification or waiver.
In addition to Reckson OP's obligation to pay the principal of and interest
on the Reckson OP 7% notes, the Indenture contains several other affirmative and
negative covenants as described under "--Certain Covenants." None of Reckson OP,
Reckson and the trustee may omit compliance with these covenants unless the
holders of not less than a majority in principal amount of Reckson OP 7% notes
waive compliance.
Modifications and amendments of the Indenture will be permitted to be made by
Reckson OP, Reckson and the trustee without the consent of any holder of Reckson
OP 7% notes for any of the following purposes:
(1) to evidence the succession of another entity to Reckson OP as obligor or
Reckson as guarantor under the Indenture;
(2) to add to the covenants of Reckson OP or Reckson for the benefit of the
holders of all or any series of security issued under the Indenture or to
surrender any right or power conferred upon Reckson OP or Reckson in the
Indenture;
(3) to add events of default for the benefit of the holders of all or any
series of security issued under the Indenture;
(4) to add or change any provisions of the Indenture to facilitate the
issuance of, or to liberalize certain terms of, securities issued under
the Indenture in bearer form, or to permit or facilitate the issuance of
securities under the Indenture in uncertificated form as long as the
modification does not adversely affect the interests of the holders of
any series of securities issued under the Indenture in any material
respect;
(5) to amend or supplement any provisions of the Indenture as long as the
amendment or supplement does not materially adversely affect the
interests of the holders of any Reckson OP 7% notes then outstanding;
(6) to secure the Reckson OP 7% notes;
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(7) to establish the form or terms of any series of securities issued under
the Indenture;
(8) to provide for the acceptance of appointment by a successor trustee or
facilitate the administration of the trusts under the Indenture by more
than one trustee;
(9) to cure any ambiguity, defect or inconsistency in the Indenture as long
as the cure does not adversely affect the interests of holders of any
series of securities issued under the Indenture in any material respect;
or
(10) to supplement any of the provisions of the Indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series
of securities issued under the Indenture as long as the supplement does
not adversely affect the interests of the holders of any series of
securities issued under the Indenture in any material respect.
In addition, without the consent of any holder of Reckson OP 7% notes,
Reckson or a subsidiary of Reckson may directly assume the due and punctual
payment of the principal of, any premium and interest on all the Reckson OP 7%
notes and the performance of every covenant of the Indenture on the part of
Reckson OP to be performed or observed. Upon any such assumption, Reckson or the
subsidiary shall succeed to, and be substituted for and may exercise every right
and power of, Reckson OP under the Indenture with the same effect as if Reckson
or the subsidiary had been the issuer of the Reckson OP 7% notes and Reckson OP
shall be released from all obligations and covenants with respect to the Reckson
OP 7% notes. No assumption shall be permitted unless Reckson has delivered to
the trustee (a) an officers' certificate and an opinion of counsel, stating,
among other things, that the guarantee and all other covenants of Reckson in the
Indenture remain in full force and effect and (b) an opinion of independent
counsel that the holders of Reckson OP 7% notes will have no materially adverse
United States federal tax consequences as a result of the assumption, and that,
if any Reckson OP 7% notes are then listed on the New York Stock Exchange, that
such Reckson OP 7% notes shall not be delisted as a result of such assumption.
In determining whether the holders of the requisite principal amount of
outstanding securities of a series issued under the Indenture have given any
request, demand, authorization, direction, notice, consent or waiver under the
Indenture or whether a quorum is present at a meeting of holders of securities
issued under the Indenture, the Indenture provides that:
(1) the principal amount of an Original Issue Discount Security that shall
be deemed to be outstanding shall be the amount of the principal of the
Original Issue Discount Security that would be due and payable as of the
date of determination upon declaration of acceleration of the maturity of
the Original Issue Discount Security;
(2) the principal amount of securities issued under the Indenture
denominated in a foreign currency that shall be deemed outstanding shall
be the U.S. dollar equivalent, determined on the issue date of the
foreign-denominated security Reckson OP 7% note, of the principal amount
or, in the case of an Original Issue Discount Security, the U.S. dollar
equivalent on the issue date of the foreign-denominated security of the
amount determined as provided in (1) above;
(3) the principal amount of an Indexed Security (as defined in the
Indenture) that shall be deemed outstanding shall be the principal face
amount of the Indexed Security at original issuance, unless otherwise
provided with respect to the Indexed Security pursuant to the Indenture;
and
(4) Securities issued under the Indenture owned by Reckson OP, Reckson or
any other obligor upon the securities issued under the Indenture or any
affiliate of Reckson OP, Reckson or of such other obligor shall be
disregarded.
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The Indenture contains provisions for convening meetings of the holders of
Reckson OP 7% notes. A meeting will be permitted to be called at any time by the
trustee, and also, upon request, by Reckson OP, Reckson or the holders of at
least 10% in principal amount of the Outstanding Reckson OP 7% notes, in any
such case upon notice given as provided in the Indenture. Except for any consent
that must be given by the holder of each Reckson OP 7% note affected by certain
modifications and amendments of the Indenture, any resolution presented at a
meeting or adjourned meeting duly reconvened at which a quorum is present will
be permitted to be adopted by the affirmative vote of the holders of a majority
in principal amount of the Outstanding Reckson OP 7% notes. Except as referred
to above, however, any resolution with respect to any request, demand,
authorization, direction, notice, consent, waiver or other action that may be
made, given or taken by the holders of a specified percentage, which is less
than a majority, in principal amount of the Outstanding Reckson OP 7% notes may
be adopted at a meeting or adjourned meeting duly reconvened at which a quorum
is present by the affirmative vote of the holders of such specified percentage
in principal amount of the Outstanding Reckson OP 7% notes. Any resolution
passed or decision taken at any meeting of holders of Reckson OP 7% notes duly
held in accordance with the Indenture will be binding on all holders of Reckson
OP 7% notes. The quorum at any meeting called to adopt a resolution, and at any
reconvened meeting, will be entities holding or representing a majority in
principal amount of the Outstanding Reckson OP 7% notes. However, if any action
is to be taken at a meeting with respect to a consent or waiver which may be
given by the holders of not less than a specified percentage in principal amount
of the Outstanding Reckson OP 7% notes, the entities holding or representing
such specified percentage in principal amount of the Outstanding Reckson OP 7%
notes will constitute a quorum.
Notwithstanding the foregoing provisions, any action to be taken at a
meeting of holders of Reckson OP 7% notes with respect to any action that the
Indenture expressly provides may be taken by the holders of a specified
percentage which is less than a majority in principal amount of the Outstanding
Reckson OP 7% notes may be taken at a meeting at which a quorum is present by
the affirmative vote of holders of such specified percentage in principal amount
of the Outstanding Reckson OP 7% notes.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Reckson OP may discharge most of its obligations to the holders of Reckson
OP 7% notes that have not already been delivered to the trustee for cancellation
and that either have become due and payable or will become due and payable
within one year or are scheduled for redemption within one year by irrevocably
depositing with the trustee, in trust, funds in the currency or currencies,
currency unit or units or composite currency or currencies in which the Reckson
OP 7% notes are payable in an amount sufficient to pay the entire indebtedness
on the Reckson OP 7% notes in respect of principal and premium, if any, and
interest to the date of the deposit, if such Reckson OP 7% notes have become due
and payable, or to the stated maturity or redemption date, as the case may be.
The Indenture provides that, unless these provisions are made inapplicable
to the Reckson OP 7% notes, Reckson OP may elect either (a) to defease and
discharge itself and Reckson from any and all obligations with respect to the
Reckson OP 7% notes, except for the obligation to pay additional amounts, if
any, upon the occurrence of certain events of tax, assessment or governmental
charge with respect to payments on the Reckson OP 7% notes and the obligations
to register the transfer or exchange of the Reckson OP 7% notes, to replace
temporary or mutilated, destroyed, lost or stolen Reckson OP 7% notes, to
maintain an office or agency in respect of the Reckson OP 7% notes and to hold
moneys for payment in trust ("defeasance") or (b) to release itself and Reckson
from their obligations with respect to the Reckson OP 7% notes under certain
sections of the Indenture (including the restrictions described under "Material
Covenants"), and any omission to comply with these obligations shall not
constitute a default or an event of default with respect to the Reckson OP 7%
notes ("covenant defeasance"), in either case upon the irrevocable deposit by
Reckson OP or Reckson
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with the trustee, in trust, of an amount, in such currency or currencies,
currency unit or units or composite currency or currencies in which the Reckson
OP 7% notes are payable at stated maturity, or Government Obligations, or both,
applicable to such Reckson OP 7% notes which through the scheduled payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient to pay the principal of, and premium, if any, and interest on
the Reckson OP 7% notes, on the scheduled due dates of the principal of premium,
if any, and interest.
The defeasance trust will only be permitted to be established if, among
other things, Reckson OP or Reckson has delivered to the trustee an opinion of
counsel to the effect that the holders of such Reckson OP 7% notes will not
recognize income, gain or loss for federal income tax purposes as a result of
the defeasance or covenant defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if the defeasance or covenant defeasance had not occurred, and the
Opinion of Counsel, in the case of defeasance, must refer to and be based upon a
ruling of the Internal Revenue Service or a change in applicable United States
federal income tax law.
If after Reckson OP or Reckson has deposited funds and/or Government
Obligations to effect defeasance or covenant defeasance with respect to the
Reckson OP 7% notes, (a) the holder of a Reckson OP 7% note is entitled to, and
does, elect pursuant to the Indenture or the terms of the Reckson OP 7% note to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Reckson OP 7% note,
or (b) a Conversion Event occurs in respect of the currency, currency unit or
composite currency in which such deposit has been made, the indebtedness
represented by the Reckson OP 7% note shall be deemed to have been, and will be,
fully discharged and satisfied through the payment of the principal of, and
premium, if any, and interest on the Reckson OP 7% note as they become due out
of the proceeds yielded by converting the amount so deposited in respect of the
Reckson OP 7% note into the currency, currency unit or composite currency in
which the Reckson OP 7% note becomes payable as a result of such election or
such Conversion Event based on the applicable market exchange rate. Unless
otherwise provided with respect to Reckson OP 7% notes, all payments of
principal of, and premium, if any, and interest on any Reckson OP 7% note that
is payable in a foreign currency that ceases to be used by its government of
issuance shall be made in U.S. dollars.
In the event Reckson OP effects covenant defeasance with respect to any
Reckson OP 7% notes and such Reckson OP 7% notes are declared due and payable
because of the occurrence of any event of default other than the event of
default described in clause (c) under "Events of Default, Notice and Waiver"
with respect to sections no longer applicable to the Reckson OP 7% notes, the
amount in such currency, currency unit or composite currency in which the
Reckson OP 7% notes are payable, and Government Obligations on deposit with the
trustee, will be sufficient to pay amounts due on the Reckson OP 7% notes at the
time of their stated maturity but may not be sufficient to pay amounts due on
the Reckson OP 7% notes at the time of the acceleration resulting from such
event of default. However, Reckson OP and Reckson would remain liable to make
payment of such amounts due at the time of acceleration.
GOVERNING LAW
The Indenture and the Reckson OP 7% notes will governed by the laws of the
State of New York.
DELISTING AND DEREGISTRATION OF TOWER COMMON STOCK
If the merger is completed, Tower common stock will cease to be listed on
the New York Stock Exchange and will cease to be registered under the Exchange
Act.
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DESCRIPTION OF TOWER PREFERRED STOCK
The following description of the material terms of the Tower series A
preferred stock is a summary of the Tower Realty Trust, Inc. Articles
Supplementary for the $40 Million Series A Convertible Preferred Shares,
Liquidation Preference $18.44 per share, and does not purport to be complete and
is subject to and qualified in its entirety by both the Tower charter, which has
been previously filed with the SEC, and the Tower articles supplementary. See
the Glossary beginning on page for the definitions of capitalized terms used
in this summary.
The Tower board of directors has classified and designated 2,167,197 shares
of its preferred stock as Tower Series A Convertible Preferred Stock, par value
$.01 per share, liquidation preference $18.44 per share, and has provided for
the issuance of the preferred stock. As of March 1, 1999, there were 2,169,197
shares of Tower series A preferred stock outstanding, all of which are owned by
Metropolitan Partners.
DIVIDENDS
If authorized and declared by the Tower board of directors, the holders of
Tower series A preferred shares will be entitled to receive, out of assets
legally available for that purpose, annual dividends payable in cash in the
following manner:
(1) Prior to the Trigger Date, in a per share amount equal to the annual per
share amount of dividends payable in respect of the number of shares of
Tower common stock into which such holders' shares of Tower series A
preferred stock would then be convertible had the Trigger Date occurred.
(2) After the Trigger Date, at a rate equal to ten percent of the
liquidation preference per share of Tower series A preferred stock held.
Dividends on the Tower series A preferred stock are cumulative only after
the Trigger Date, whether or not there are assets of Tower legally available for
payment of such dividends, and will be payable quarterly, if authorized and
declared by the Tower board of directors, in arrears on the first business day
of January, April, July and October.
LIQUIDATION
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of Tower and before any payments or distribution of the assets of
Tower shall be made or set apart for the holders of shares of Tower common
stock, the holders of Tower series A preferred stock shall only be entitled to
receive:
(1) $18.44 per share of series A preferred stock;
(2) plus an amount equal to all dividends, whether or not earned or
declared, accrued and unpaid on the Tower series A preferred stock
commencing on the Trigger Date to the date of final distribution to the
holders of series A preferred stock.
REDEMPTION AT TOWER'S OPTION
Tower may redeem the Tower series A preferred stock, in whole or in part at
any time, or from time to time, within 120 days after the Trigger Date or at any
time after December 9, 2002 at a redemption price equal to the aggregate
liquidation preference for all such shares being redeemed, plus accrued and
unpaid dividends.
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CONVERSION AT THE HOLDER'S OPTION
After the Trigger Date and subject to the provisions of the Tower articles
supplementary, holders of shares of Tower series A preferred stock may convert
all or a portion of their shares into fully paid and non-assessable shares of
Tower common stock. Each share of series A preferred stock will be convertible
into a number of shares of Tower common stock equal to $18.44 divided by the
Conversion Price in effect at the time the shares are surrendered for exchange.
Initially, the Tower Preferred Stock Conversion Price is equal to $18.44 or,
effectively, one share of Tower common stock for each share of series A
preferred stock.
No fractional shares or scrip representing fractions of shares of Tower
common stock will be issued upon conversion of the Tower series A preferred
stock. Instead of any fractional interest, Tower will pay to the holder an
amount in cash based upon the current market price of shares of Tower common
stock on the trading day immediately preceding the day of conversion.
TOWER PREFERRED STOCK CONVERSION PRICE ADJUSTMENTS
The Tower Preferred Stock Conversion Price will be adjusted in the following
circumstances:
- payments or distributions payable in Tower common stock and subdivisions,
combinations and reclassifications of Tower common stock;
- the issuance to all holders of Tower common stock of rights, options or
warrants that entitle the holders to subscribe for or purchase Tower
common stock at a price per share less than the fair market value per
share of Tower common stock; and
- distributions to all holders of Tower common stock of equity securities of
Tower or evidences of indebtedness of Tower or its assets, excluding cash
distributions.
Tower shall be entitled to make reductions to the Tower Preferred Stock
Conversion Price, in addition to those required as described in this paragraph,
as it shall determine to be advisable in order that any stock dividends,
subdivision, reclassification or combination of shares, distribution of rights,
options or warrants to purchase stock or securities, or a distribution of other
assets other than cash dividends made by Tower to its stockholders shall not be
taxable.
No adjustment of the Tower Preferred Stock Conversion Price is required to
be made until cumulative adjustments amount to one percent or more of the Tower
Preferred Stock Conversion Price. Any adjustments not required to be made will
be carried forward and taken into account in subsequent adjustments.
Except as otherwise provided for subdivisions, combinations and
reclassifications of Tower common stock and distributions to holders of Tower
common stock in Tower common stock, if Tower shall be a party to any transaction
including a merger, consolidation, statutory share exchange, self tender offer
for substantially all of the Tower common stock, sale of substantially all of
Tower's assets or recapitalization of the Tower common stock, in each case as a
result of which Tower common stock shall be converted into the right to receive
shares, stock, securities or other property, including cash or any combination
of shares, stock, securities or other property, Tower or its successor in such
transaction shall make appropriate provision so that each share of Tower series
A preferred stock, if not converted into the right to receive shares, stock,
securities or other property in the transaction shall thereafter be convertible
into the kind and amount of shares, stock, securities and other property,
including cash or any combination of shares, stock, securities or other
property, receivable upon the completion of the transaction by a holder of that
number of shares of Tower common stock into which one share of series A
preferred stock was convertible immediately prior to completion of the
transaction, assuming such holder of Tower common stock failed to exercise any
rights of election. If the kind and amount of shares, stock, securities and
other property receivable in the transaction is not the same for each
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non-electing share, the kind and amount of property receivable by the holder of
Tower series A preferred stock to be converted shall be deemed to be the kind
and amount receivable per share by a plurality of the non-electing shares.
PRIORITY
As to the payment of dividends or as to the distribution of assets upon
liquidation, dissolution or winding up, no class or series of Tower capital
stock shall rank prior to the Tower series A preferred stock. Any class or
series of shares of Tower shall be deemed to rank:
(1) On parity with the Tower series A preferred stock if the holders of the
class of stock or series and the Tower series A preferred stock are
entitled to the receipt of dividends and of amounts distributable upon
liquidation, dissolution or winding up in proportion to their respective
amounts of accrued and unpaid dividends per share or liquidation
preferences, without preference or priority one over the other; and
(2) Junior to the Tower series A preferred stock, if the stock or series is
Tower common stock or if the holders of Tower series A preferred stock
are entitled to receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, prior to the holders of the stock
or series, and the stock or series does not in either case rank prior to
the Tower series A preferred stock.
VOTING
To the extent that the charter of Tower may provide under Maryland law, the
Tower series A preferred stock does not currently have any voting rights or
powers, and the consent of the holders is not required for the taking of any
corporate action. After the Trigger Date, whenever dividends payable on the
Tower series A preferred stock are cumulatively in arrears for six consecutive
Tower Preferred Stock Dividend Periods, the holders of all Tower series A
preferred stock and any class or series of shares on par with the Tower series A
preferred stock upon which like voting rights have been conferred shall be
entitled to elect two directors to the Tower board of directors as described in
the Tower articles supplementary.
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FEDERAL INCOME TAX CONSEQUENCES RELATING
TO AN INVESTMENT IN RECKSON CLASS B COMMON STOCK
AND RECKSON OP 7% NOTES
The following is a summary of the Federal income tax consequences resulting
from the holding, exchanging or otherwise disposing of Reckson class B common
stock and Reckson OP 7% notes. This discussion is based upon the Internal
Revenue Code, the Treasury regulations promulgated under the Internal Revenue
Code, rulings issued by the IRS, and judicial decisions, all in effect as of the
date of this Joint Proxy Statement/Prospectus and all of which are subject to
change, possibly retroactively. This discussion is for general information only
and does not purport to discuss all aspects of Federal income taxation which may
be important to a particular investor in light of his individual investment or
tax circumstances, or to investors subject to special tax rules including
insurance companies, financial institutions, broker-dealers and, except to the
extent discussed below, tax-exempt organizations and foreign investors. This
summary assumes that persons will hold their Reckson stock as a "capital asset"
within the meaning of Section 1221 of the Internal Revenue Code which generally
covers property held for investment. No advance ruling has been or will be
sought from the IRS regarding any matter discussed herein.
THE FOLLOWING DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY. EACH
TOWER STOCKHOLDER IS URGED TO CONSULT HIS TAX ADVISOR REGARDING THE SPECIFIC
CONSEQUENCES TO HIM OF HOLDING, EXCHANGING OR OTHERWISE DISPOSING OF RECKSON
CLASS B COMMON STOCK AND RECKSON OP 7% NOTES, INCLUDING ANY FEDERAL, STATE,
LOCAL AND NON-U.S. TAX CONSEQUENCES AND OF RECKSON'S ELECTION TO BE TAXED AS A
REAL ESTATE INVESTMENT TRUST.
TAXATION OF RECKSON
GENERAL
The REIT provisions of the Internal Revenue Code are highly technical and
complex. The following sets forth the material aspects of the provisions of the
Internal Revenue Code that govern the Federal income tax treatment of a REIT and
its stockholders. This summary is qualified in its entirety by the applicable
Internal Revenue Code provisions, rules and regulations promulgated under the
Internal Revenue Code, and administrative and judicial interpretations of the
Internal Revenue Code, all of which are subject to change, possibly
retroactively.
Reckson elected to be taxed as a REIT under the Internal Revenue Code
commencing with its taxable year ended December 31, 1995, and Reckson intends to
continue its election to be taxed as a REIT. Reckson's counsel, Brown & Wood
LLP, has provided an opinion that, commencing with Reckson's taxable year ended
December 31, 1995, Reckson has been organized in conformity with the
requirements for qualification as a REIT under the Internal Revenue Code, and
Reckson's proposed method of operation will enable it to meet the requirements
for qualification and taxation as a REIT under the Internal Revenue Code. It
must be emphasized that the opinion of Brown & Wood LLP is based on, and
conditioned upon, representations and covenants as to factual matters, including
representations and covenants made by Reckson regarding the nature of Reckson's
properties and the future conduct of Reckson's business in accordance with the
REIT requirements that are described in this Joint Proxy Statement/Prospectus.
Reckson's qualification and taxation as a REIT depends on its past and
continuing ability to meet, through actual annual operating results,
requirements relating to asset ownership, distribution levels, and diversity of
stock ownership, and the various qualification tests imposed by the Internal
Revenue Code discussed in this Joint Proxy Statement/Prospectus. Counsel will
not review Reckson's compliance with those tests on a continuing basis and,
accordingly, no assurance can be given that Reckson's operating results for any
particular taxable year will satisfy the requirements for taxation as a REIT
under the Internal Revenue Code. An opinion of counsel is not
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binding on the IRS or the courts and there can be no assurance that the IRS will
not challenge Reckson's eligibility for taxation as a REIT. See "--Taxation of
Reckson--Failure to Qualify."
Provided that an entity qualifies for taxation as a REIT, it generally will
not be subject to Federal corporate income tax on its net income that is
currently distributed to its stockholders. This treatment substantially
eliminates the "double taxation" at the corporate and stockholder levels that
generally results from investment in a corporation. However, notwithstanding
qualification, a REIT will be subject to Federal income tax as follows: First, a
REIT will be taxed at regular corporate rates on any undistributed REIT taxable
income, including undistributed net capital gains. Second, a REIT may be subject
to the "alternative minimum tax" on its items of tax preference. Third, if a
REIT has "net income from foreclosure property," it will be subject to tax on
this income at the highest corporate rate. Property is not eligible for the
election to be treated as foreclosure property if the loan or lease with respect
to which the default occurs was made, entered into, or acquired by the REIT with
an intent to evict or foreclose or when the REIT knew or had reason to know that
default would occur. Fourth, if a REIT has net income from prohibited
transactions (which are, in general, sales or other dispositions of property
held primarily for sale to customers in the ordinary course of business other
than foreclosure property), income derived from these sales or other
dispositions will be subject to a 100% tax. Fifth, if a REIT should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below) but has nonetheless maintained its qualification as a REIT because other
requirements have been met, it will be subject to a 100% tax on an amount equal
to (a) the gross income attributable to the greater of the amount by which the
REIT fails the 75% or 95% test multiplied by (b) a fraction intended to reflect
the REIT's profitability. Sixth, if a REIT should fail to distribute during each
calendar year at least the sum of (a) 85% of its REIT ordinary income for such
year, (b) 95% of its REIT capital gain net income for such year (other than
certain retained long-term capital gains that a REIT elects to retain and pay
tax on), and (c) any undistributed taxable income from prior periods, a REIT
would be subjected to a 4% excise tax on the excess of the required distribution
over the amounts actually distributed. Seventh, if a REIT acquires assets from a
subchapter C corporation in a transaction in which the adjusted tax basis of the
asset in the hands of the REIT is determined by reference to the adjusted basis
of the asset in the hands of subchapter C corporation, under Treasury
Regulations not yet promulgated, the subchapter C corporation would be required
to recognize any net built-in gain that would have been realized if the
subchapter C corporation had liquidated on the last day before the date of the
transfer. Pursuant to IRS Notice 88-19, a REIT may elect, in lieu of the
treatment described above, to be subject to tax at the highest regular corporate
tax rate on the excess, if any, of the fair market value over the adjusted basis
of any such asset as of the beginning of the date of acquisition ("Built-in
Gain") if it recognizes gain on the disposition of any assets acquired from a
subchapter C corporation during the ten-year period following their acquisition.
Reckson intends to make this election and, therefore, will be taxed at the
highest regular corporate rate on such Built-in Gain if and to the extent any
assets acquired from a subchapter C corporation are sold within the specified
ten-year period.
REQUIREMENTS FOR QUALIFICATION
The Internal Revenue Code defines a REIT as a corporation, trust or
association (1) that is managed by one or more trustees or directors; (2) the
beneficial ownership of which is evidenced by transferable shares, or by
transferable certificates of beneficial interest; (3) which would be taxable as
a domestic corporation, but for the special Internal Revenue Code provisions
applicable to REITs; (4) that is neither a financial institution nor an
insurance company under the Internal Revenue Code; (5) the beneficial ownership
of which is held by 100 or more persons; (6) in which, during the last half of
each taxable year, not more than 50% in value of the outstanding stock is owned,
directly or indirectly, by five or fewer individuals, as defined in the Internal
Revenue Code to include specified entities; and (7) which meets other tests
described below with respect to the nature of its income and assets. The
Internal Revenue Code provides that conditions (1) through (4) must be met
during an
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entire taxable year, and that condition (5) must be met during at least 335 days
of a taxable year of 12 months or during a proportionate part of a taxable year
of less than 12 months. The Reckson charter provides restrictions regarding
transfers of its shares, which provisions are intended to assist Reckson in
continuing to satisfy the share ownership requirements described in conditions
(5) and (6) above.
To monitor their compliance with the share ownership requirements, REITs are
required to maintain records regarding the actual ownership of their shares. To
do so, REITs must demand written statements each year from specified record
holders of their stock in which the record holders are to disclose the
beneficial owners of the shares, which are the persons required to include in
gross income the REIT dividends. A list of those persons failing or refusing to
comply with this demand must be maintained as part of the REIT's records. A
stockholder who fails or refuses to comply with this demand must submit a
statement with its tax return disclosing the actual ownership of the shares and
certain other information. Reckson believes that it has complied with this
requirement.
A corporation may not elect to become a REIT unless its taxable year is the
calendar year. Reckson has satisfied this requirement.
OWNERSHIP OF PARTNERSHIP INTERESTS
In the case of a REIT that is a partner in a partnership, regulations
provide that the REIT is deemed to own its proportionate share of the
partnership's assets and to earn its proportionate share of the partnership's
income. In addition, the assets and gross income of the partnership retain the
same character in the hands of the REIT for purposes of the gross income and
asset tests applicable to REITs as described below. A summary of certain rules
governing the Federal income taxation of partnerships and their partners is
provided below in "Tax Aspects of Reckson's Investments in Partnerships."
INCOME TESTS
In order to maintain their qualification, REITs annually must satisfy two
gross income requirements. First, at least 75% of a REIT's gross income,
excluding gross income from "prohibited transactions," I.E., sales of property
held primarily for sale to customers in the ordinary course of business, for
each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property or from permitted
temporary investments. Second, at least 95% of a REIT's gross income, excluding
gross income from prohibited transactions, for each taxable year must be derived
from income qualifying under the 75% test, and from dividends, interest and gain
from the sale or disposition of stock or securities. In addition, for each
taxable year before 1998, gain from the sale or other disposition of stock or
securities held for less than one year, gain from prohibited transactions and
gain on the sale or other disposition of real property held for less than four
years, apart from involuntary conversions and sales of foreclosure property,
must have represented less than 30% of a REIT's gross income, including gross
income from prohibited transactions, for such taxable year. Reckson believes it
satisfied all three of these income tests for each taxable year before 1998 and
expects to satisfy the 75% and 95% tests for subsequent taxable years.
Rents received by a REIT will qualify as "rents from real property" in
satisfying the gross income requirements described above only if several
conditions are met. First, the amount of rent must not be based in whole or in
part on the income or profits of any person. However, the amount of rent may be
based on a fixed percentage or percentages of receipts or sales. Second, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to the personal property will not qualify as
"rents from real property." Third, for rents received to qualify as "rents from
real property," the REIT generally must not operate or manage the property or
furnish or render services to the tenants
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of such property, other than through an "independent contractor" from which the
REIT derives no revenue. However, a REIT (or its affiliates) is permitted to
directly perform services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered rendered to the occupant of the property. In addition, a REIT (or its
affiliates) may provide non-customary services to tenants of its properties
without disqualifying all of the rent from the property if the payment for the
services does not exceed 1% of the total gross income from the property. For
purposes of this test, the income received from any non-customary services is
deemed to be at least 150% of the direct cost of providing the services. The
Internal Revenue Code also provides that rents received from a tenant will not
qualify as "rents from real property" if the REIT, or an owner of ten percent or
more of the REIT, directly or constructively, owns 10% or more of the Related
Party Tenant.
If a REIT fails to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, it may nevertheless qualify as a REIT for that year if it
is entitled to relief under the Internal Revenue Code. These relief provisions
will be generally available if the REIT's failure to meet such tests was due to
reasonable cause and not due to willful neglect, the REIT attaches a schedule of
the sources of its income to its return, and any incorrect information on the
schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances Reckson would be entitled to the
benefit of these relief provisions. See "--Taxation of REITs--General." Even
where these relief provisions apply, a tax is imposed with respect to the excess
net income.
ASSET TESTS
At the close of each quarter of its taxable year, a REIT must also satisfy
three tests relating to the nature of its assets. First, at least 75% of the
value of its total assets must be represented by real estate assets (including
its allocable share of real estate assets held by a partnership or a qualified
REIT subsidiary as described below), stock or debt instruments held for not more
than one year purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering, cash, cash items and U.S. government
securities. Second, not more than 25% of a REIT's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, the value of any one issuer's
securities owned by a REIT may not exceed five percent of the value of the
REIT's total assets, and a REIT may not own more than ten percent of any one
issuer's outstanding voting securities. The 25% and five percent tests generally
must be met for any quarter in which a REIT acquires securities of an issuer.
Thus, this requirement must be satisfied not only on the date a REIT first
acquires corporate securities, but also each time the REIT increases its
ownership of corporate securities (including as a result of Reckson increasing
its interest in the Reckson OP either with the proceeds of an offering of
Reckson common stock (including Reckson class B common stock) or by acquiring
Reckson OP units from Reckson Limited Partners upon the exercise of their
Reckson Exchange Rights).
Qualified REIT subsidiaries are corporations that are wholly owned by a REIT
(or another qualified REIT subsidiary). Qualified REIT subsidiaries are not
treated as separate entities from their parent REIT for Federal income tax
purposes. Instead, all assets, liabilities and items of income, deduction and
credit of each qualified REIT subsidiary are treated as assets, liabilities and
items of the REIT. Each qualified REIT subsidiary therefore will not be subject
to Federal corporate income taxation, although it may be subject to state or
local taxation. In addition, a REIT's ownership of the voting stock of each
qualified REIT subsidiary does not violate the general restrictions against
ownership of more than ten percent of the voting securities of any issuer or
more than five percent of the value of the REIT's total assets.
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ANNUAL DISTRIBUTION REQUIREMENTS
In order to maintain its qualification, a REIT is required to distribute
dividends, other than capital gain dividends, to its stockholders in an amount
at least equal to (1) the sum of (a) 95% of its "REIT taxable income" computed
without regard to the dividends paid deduction and net capital gain and (b) 95%
of the net income after tax, if any, from foreclosure property, minus (2) the
sum of specified non-cash income. These distributions must be made in the
taxable year to which they relate, or in the following taxable year if declared
before a REIT timely files its tax return for the prior year and if paid with or
before the first regular dividend payment after the declaration is made. To the
extent that a REIT distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
corporate tax rates. If a REIT should fail to distribute during each calendar
year at least the sum of (1) 85% of its REIT ordinary income for the year, (2)
95% of its REIT capital gain income for the year, and (3) any undistributed
taxable income from prior periods, the REIT would be subject to a four percent
excise tax on the excess of the required distribution over the amounts actually
distributed. Notwithstanding the foregoing, a REIT may elect to retain, rather
than distribute, all or a portion of its net long-term capital gains and pay the
tax on the gains. In such a case, a REIT may elect to have its stockholders
include their proportionate share of the undistributed long-term capital gains
in income and receive a credit for their share of the tax paid by the REIT. For
purposes of the 4% excise tax described above, any retained amounts would be
treated as having been distributed.
It is possible that a REIT, from time to time, could lack sufficient cash to
meet the 95% distribution requirement, for example, due to timing differences
between (1) the actual receipt of income and actual payment of deductible
expenses and (2) the inclusion of such income and deduction of such expenses in
arriving at taxable income of the REIT. In the event that a cash short-fall
occurs, in order to meet the 95% distribution requirement, the REIT may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to pay
dividends in the form of taxable distributions of property.
REIT may be able to rectify a failure to meet the distribution requirement
for a year by paying "deficiency dividends" to stockholders in a later year,
which may be included in the REIT's deduction for dividends paid for the earlier
year. Thus, a REIT may be able to avoid being taxed on amounts distributed as
deficiency dividends; however, the REIT will be required to pay interest based
on the amount of any deduction taken for deficiency dividends.
Reckson believes that it has made and intends to make timely distributions
sufficient to satisfy all annual distribution requirements. In this regard the
limited partnership agreement of Reckson OP authorizes its general partner to
take any steps as may be necessary to cause the Reckson OP to distribute to its
partners amounts sufficient to permit Reckson to meet these distribution
requirements. It is possible, however, that Reckson may experience the timing
differences discussed above, thus requiring Reckson to arrange for short-term or
long-term borrowing to meet the distribution requirements.
FAILURE TO QUALIFY
If a REIT fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, the REIT will be subject to tax, including
any applicable alternative minimum tax, on its taxable income at regular
corporate rates. Distributions to stockholders in any year in which the REIT
fails to qualify as a REIT will not be deductible nor will they be required to
be made. Upon failing to qualify as a REIT, to the extent of the REIT's current
and accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income and, subject to limitations of the Internal Revenue
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
REIT will also be disqualified from
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taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
Reckson would be entitled to any statutory relief.
TAX ASPECTS OF A REIT'S INVESTMENT IN PARTNERSHIPS
In general, partnerships are "pass-through" entities that are not subject to
Federal income tax. Rather, partners are allocated their proportionate shares of
the items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. A REIT must include in its income
its proportionate share of the foregoing partnership items for purposes of the
various REIT income tests and in the computation of its REIT taxable income.
Moreover, for purposes of the REIT asset tests, a REIT must include its
proportionate share of assets held by its subsidiary partnerships. See
"--Taxation of REITs--Ownership of Partnership Interests."
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES
The Internal Revenue Code and IRS regulations provide that income, gain,
loss and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner so that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of unrealized gain
or unrealized loss is generally equal to the difference between the fair market
value of contributed property at the time of contribution, and the adjusted tax
basis of the property at the time of contribution (a "Book-Tax Difference").
These allocations are solely for income tax purposes and do not affect the book
capital accounts or other economic or legal arrangements among the partners.
Where a partner contributes cash to a partnership that holds appreciated
property, the Treasury Regulations provide for similar allocations to the other
partners.
SALE OF PROPERTY
Generally, any gain realized by the Reckson OP on the sale of real property,
if the property is held for more than one year, will be long-term capital gain;
however, a portion of this gain may be treated as depreciation or cost recovery
recapture.
A REIT's share of any gain realized on the sale of any property held
directly or by a subsidiary partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the REIT's or the
subsidiary partnership's business, however, will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See "--Taxation of
Reckson," above. Under existing law, whether property is held as inventory or
primarily for sale to customers in the ordinary course of business is a question
of fact that depends on all the facts and circumstances with respect to the
particular transaction. The Reckson OP intends to hold its properties for
investment with a view toward long-term appreciation, to engage in the business
of acquiring, developing, owning and operating the properties, and to make such
occasional sales of properties as are consistent with these investment
objectives.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
Provided that a corporation qualifies as a REIT, distributions made to the
REIT's taxable domestic stockholders out of current or accumulated earnings and
profits and not designated as capital gain dividends will be taken into account
by them as ordinary income and will not be eligible for the dividends received
deduction generally available for corporations. Distributions and retained
long-term capital gains that are designated as capital gain dividends will be
taxed as long-term capital gains, without regard to how long the stockholder has
held its stock, to the extent that they do not exceed the
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REIT's actual net capital gain for the taxable year. However, corporate
stockholders may be required to treat up to 20% of capital gain dividends as
ordinary income.
A REIT may elect to retain and pay income tax on its long-term capital gain.
If a REIT makes this election, the REIT may elect to have its stockholders
include in their income as long-term capital gain their proportionate share of
the long-term capital gain designated by the REIT. Each stockholder would be
deemed to have paid the stockholder's share of the tax paid by the REIT. The
basis of the stockholder's shares will be increased by the amount of the
undistributed long-term capital gain, less the amount of the tax paid.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's shares, but rather will reduce the adjusted
basis of the stockholder's shares. To the extent that distributions exceed the
adjusted basis of a stockholder's shares, they will be included in income as
long-term capital gain (or short-term capital gain if the shares have been held
for one year or less) PROVIDED THAT the shares are a capital asset in the hands
of the stockholder. Any dividend declared by a REIT in October, November or
December of any year and payable to a stockholder of record on a specified date
in any of these months will be treated as both paid by the REIT and received by
the stockholder on December 31 of the year of declaration, PROVIDED THAT the
dividend is actually paid by the REIT during January of the following calendar
year. Stockholders may not include in their individual income tax returns any
net operating losses or capital losses of a REIT. All or a portion of any loss
realized upon a taxable disposition of a REIT's stock may be disallowed if other
shares of the same class of the stock are purchased within 30 days before or
after the disposition.
The highest Federal marginal individual income tax rate, which applies to
ordinary income and gain from the sale or exchange of capital assets held for
one year or less, is 39.6%. The maximum regular income tax rate on capital gains
derived by non-corporate taxpayers is 20% for sales and exchanges of capital
assets held for more than one year. Any long-term capital gains from the sale or
exchange of depreciable real property that would be subject to ordinary income
taxation (I.E., "depreciation recapture") if treated as personal property will
be subject to a maximum tax rate of 25% instead of the 20% maximum rate. With
respect to distributions designated by a REIT as capital gain dividends and any
retained capital gains that the REIT is deemed to distribute, the REIT may
designate, subject to limits of the Internal Revenue Code and the associated
regulations, whether the distribution is taxable to its individual stockholders
at a Federal income tax rate of 20% or 25%. In addition, the characterization of
income as capital gain or ordinary income may affect the deductibility of
capital losses. Capital losses not offset by capital gains may be deducted
against a non-corporate taxpayer's ordinary income up to a maximum annual amount
of $3,000. Unused capital losses may be carried forward indefinitely by
non-corporate taxpayers. All net capital gain of a corporate taxpayer is subject
to tax at ordinary corporate income tax rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
In general, any loss upon a sale or exchange of shares by a stockholder who
has held shares for six months or less (after applying certain holding period
rules) will be treated as a long-term capital loss to the extent of
distributions from the REIT required to be treated by the stockholder as
long-term capital gain.
CONSTRUCTIVE DIVIDENDS ON RECKSON CLASS B COMMON STOCK
If at any time Reckson makes a distribution of property to its stockholders
that would be taxable to the stockholders as a dividend for U.S. Federal income
tax purposes and, as required under the exchange rate provisions of the Reckson
class B common stock, the exchange rate of the Reckson class B common stock is
increased, the increase may be deemed to be the payment of a taxable
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dividend to the holders of the Reckson class B common stock. In addition, in the
event there is an adjustment to the exchange rate as a consequence of a
"shortfall" in the distributions paid on a share of Reckson class B common stock
for two consecutive quarters, the IRS could argue that there has been a
constructive dividend to the holders of the Reckson class B common stock as a
result of the adjustment. Despite the possibility of this argument by the IRS,
although there is no authority directly addressing the issue and therefore the
matter is not free from doubt, Reckson believes that an adjustment to the
exchange rate as a consequence of a dividend "shortfall" should not result in a
deemed constructive dividend to the holders of the Reckson class B common stock.
EACH HOLDER OF RECKSON CLASS B COMMON STOCK SHOULD CONSULT HIS OR HER TAX
ADVISOR REGARDING THE CONSTRUCTIVE DIVIDEND CONSEQUENCES OF ANY ADJUSTMENTS TO
THE RECKSON CLASS B COMMON STOCK EXCHANGE RATE.
ORIGINAL ISSUE DISCOUNT ON RECKSON OP 7% NOTES
As discussed above, the Reckson OP 7% notes, if issued, may be issued with
original issue discount, in which event holders will be required to include
amounts in income before the receipt of cash corresponding to this income. See
"The Merger--Certain Material U.S. Federal Income Tax Consequences of the
Merger."
TAXATION OF FOREIGN STOCKHOLDERS
The following is a general discussion of the U.S. Federal income and estate
tax consequences of the ownership and disposition of a REIT's stock applicable
to Non-U.S. Holders of such stock. A "Non-U.S. Holder" is any person other than
(1) a citizen or resident of the United States, (2) a corporation or partnership
created or organized in the United States or under the laws of the United
States, any state thereof or the District of Columbia (unless, in the case of a
partnership, Treasury regulations provide otherwise), (3) an estate whose income
is includible in gross income for U.S. Federal income tax purposes regardless of
its source, or (4) a trust if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
regulations, trusts in existence on August 20, 1996, and treated as United
States persons prior to August 20, 1996 that elect to continue to be United
States persons will also not be a Non-U.S. Holder. The discussion below is based
on current law and is for general information only. The discussion does not
address all aspects of U.S. Federal income and estate taxation.
ORDINARY DIVIDENDS
The portion of dividends received by Non-U.S. Holders payable out of a
REIT's earnings and profits which are not attributable to capital gains and
which are not effectively connected with a U.S. trade or business of the
Non-U.S. Holder will be subject to U.S. withholding tax at the rate of 30%, or a
lower rate if permitted under an applicable income tax treaty. In general,
Non-U.S. Holders will not be considered engaged in a U.S. trade or business
solely as a result of their ownership of a REIT's stock. In cases where the
dividend income from a Non-U.S. Holder's investment in a REIT's stock is, or is
treated as, effectively connected with the Non-U.S. Holder's conduct of a U.S.
trade or business, the Non-U.S. Holder generally will be subject to U.S. tax at
graduated rates, in the same manner as U.S. stockholders are taxed with respect
to dividends. A Non-U.S. Holder may also be subject to the 30% branch profits
tax in the case of a Non-U.S. Holder that is a corporation.
NON-DIVIDEND DISTRIBUTIONS
Unless the REIT stock constitutes a USRPI, as discussed below, distributions
made by the REIT that are not paid out of earnings and profits will not be
subject to U.S. income or withholding tax. See "Disposition of Stock of a REIT"
If it cannot be determined that a distribution was, in fact, in excess of
current and accumulated earnings and profits, the distribution will be subject
to withholding at the
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rate applicable to dividends. However, the Non-U.S. Holder may seek a refund of
withheld amounts from the IRS if it is subsequently determined that the
distribution was, in fact, in excess of current and accumulated earnings and
profits. If a REIT's stock constitutes a USRPI, the distributions will be
subject to a ten percent withholding and taxed pursuant to the FIRPTA at the
highest applicable capital gain rate to the extent the distributions exceed a
stockholder's basis in his or her stock.
CAPITAL GAIN DIVIDENDS
USRPI capital gains will be considered effectively connected with a U.S.
trade or business of the Non-U.S. Holder and subject to U.S. income tax at the
rate applicable to U.S. individuals or corporations without regard to whether
the distribution is designated as a capital gain dividend. In addition, the REIT
will be required to withhold tax equal to 35% of the amount of dividends to the
extent the dividends constitute USRPI Capital Gains which tax will be creditable
against such stockholder's U.S. Federal tax liability. Distributions subject to
FIRPTA may also be subject to a 30% branch profits tax in the hands of a foreign
corporate stockholder that is not entitled to a treaty exemption.
DISPOSITION OF STOCK OF A REIT
Unless a REIT's stock constitutes a USRPI, a sale of the REIT's stock by a
Non-U.S. Holder generally will not be subject to U.S. taxation under FIRPTA. The
stock will not constitute a USRPI if the REIT is a "domestically controlled
REIT." A domestically controlled REIT is a REIT in which, at all times during a
specified testing period, less than 50% in value of its shares is held directly
or indirectly by Non-U.S. Holders. Reckson believes that it is, and expects to
continue to be, a domestically controlled REIT, and therefore that the sale of
its stock will not be subject to taxation under FIRPTA. Because the common stock
of Reckson is publicly traded, however, no assurance can be given that it is or
will continue to be a domestically controlled REIT.
If Reckson does not constitute a domestically controlled REIT, a Non-U.S.
Holder's sale of stock in Reckson will nevertheless generally not be subject to
tax under FIRPTA as a sale of a USRPI, PROVIDED THAT(a) the stock is "regularly
traded" under applicable Treasury Regulations on an established securities
market (E.G., the New York Stock Exchange, on which Reckson common stock is
listed) and (b) the selling Non-U.S. Holder held five percent or less of the
outstanding Reckson common stock, at all times during a specified testing
period.
If gain on the sale of stock of a REIT were subject to taxation under
FIRPTA, the Non-U.S. Holder generally would be subject to the same treatment as
a U.S. stockholder with respect to gain (and possibly the additional branch
profits tax or a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of the stock could be required to withhold
ten percent of the purchase price and remit the withheld amount to the IRS. Any
amounts withheld would be credited against the Non-U.S. Holder's actual U.S. tax
liability and otherwise eligible for a refund.
Capital gain on the sale of Reckson common stock that is not subject to
FIRPTA will nonetheless be taxable in the United States to a Non-U.S. Holder in
two cases: (a) if the Non-U.S. Holder's investment in the REIT is effectively
connected with a U.S. trade or business conducted by the Non-U.S. Holder, the
Non-U.S. Holder will be subject to the same treatment as a U.S. stockholder with
respect to such gain on the sale of the REIT stock and, in addition, may be
subject to an additional 30% branch profits tax subject to possible rate
reduction or exemption under an applicable treaty, or (b) if the Non-U.S. Holder
is a nonresident alien individual who was present in the United States for 183
days or more during the taxable year and has a "tax home" in the United States,
the nonresident alien individual will be subject to a 30% tax on the
individual's capital gain.
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TAXATION OF NON-U.S. HOLDERS OF RECKSON OP 7% NOTES
Subject to the discussion of backup withholding below, provided a Non-U.S.
Holder's ownership of the Reckson OP 7% notes is not effectively connected with
a U.S. trade or business:
(1) payments of interest and principal on Reckson OP 7% notes by Reckson OP
or any agent of Reckson OP to a Non-U.S. Holder will not be subject to
U.S. Federal income or withholding tax, PROVIDED THAT in the case of
interest (a)(1) the Non-U.S. Holder does not actually or constructively
own 10% of more of the capital or profits of Reckson OP, (2) the
Non-U.S. Holder is not a controlled foreign corporation that is related
to Reckson OP through stock ownership, (3) the Non-U.S. Holder is not a
bank described in Section 881(c)(3)(A) of the Internal Revenue Code and
(4) either (A) the Non-U.S. Holder certifies to Reckson OP or its agent
on IRS Form W-8 or IRS Form W-8 BEN (or a suitable substitute form),
under penalties of perjury, that it is not a "United States Person" (as
defined in the Internal Revenue Code) and provides its name and address
(an "Owner's Statement"), or (B) a securities clearing organization,
bank or other financial institution that holds customers' securities in
the ordinary course of its trade or business (a "financial instruction")
and holds Reckson OP 7% notes on behalf the Non-U.S. Holder certifies to
Reckson OP or its agent under penalties of perjury that an Owner's
Statement has been received from the Non-U.S. Holder or another
financial institution between it and the Non-U.S. Holder and furnishes
Reckson OP or its agent with a copy thereof or (b) the Non-U.S. Holder
is entitled to the benefits of an income tax treaty under which interest
on the Reckson OP 7% notes is exempt from U.S. Federal withholding tax
and the Non-U.S. Holder provides a properly executed IRS Form 1001 or
IRS Form W-8 BEN claiming the exemption; and
(2) a Non-U.S. Holder will not be subject to U.S. Federal income tax on gain
realized on the sale, exchange or other disposition of a Reckson OP 7%
note unless the Non-U.S. Holder is an individual who is present in the
United States for a period or periods aggregating 183 or more days in
the taxable year of the disposition and specified other conditions are
met.
EXCHANGE OF RECKSON CLASS B COMMON STOCK FOR RECKSON COMMON STOCK.
Holders of Reckson class B common stock may elect to exchange their Reckson
class B common stock for Reckson common stock at any time. In addition, Reckson
may cause holders of Reckson class B common stock to exchange their stock for
Reckson common stock at any time more than four and one-half years from the
closing of the merger. Generally, a holder of Reckson class B common stock will
receive one share of Reckson common stock for each share of Reckson class B
common stock exchanged, absent Reckson common stock splits, combinations or
other actions or distributions that dilute the economic rights of the Reckson
common stock issuable in exchange for Reckson class B common stock. See
"Description of Reckson Stock--Reckson Class B Common Stock--Exchange Rate
Adjustments." Holders of Reckson class B common stock will not recognize gain or
loss upon the exchange of their stock for Reckson common stock, except upon
receiving any cash in lieu of fractional shares of Reckson common stock. Rather,
the holder will acquire a basis in the shares of Reckson common stock received
equal to the basis the holder had in the Reckson class B common stock exchanged,
reduced by any portion of basis attributable to the receipt of cash in lieu of
fractional shares. In addition, the holder will acquire a holding period in the
Reckson common stock received identical to the holding period the holder had in
the Reckson class B common stock exchanged.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Reckson will report to its U.S. stockholders and, to the extent required,
the IRS the amount of distributions paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at a rate of 31% with respect
to
180
<PAGE>
distributions paid unless the holder (1) is a corporation or comes within other
exempt categories and, when required, demonstrates this fact or (2) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A stockholder who does not provide Reckson with his
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, Reckson may be required to
withhold a portion of capital gain distributions to any Non-U.S. Holders who
fails to certify their non-foreign status. The IRS has issued final Treasury
Regulations regarding the backup withholding rules as applied to Non-U.S.
Holders. These final Treasury Regulations alter the current system of backup
withholding compliance and will be effective for payments made after December
31, 1999.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from Federal income taxation. However, they are subject to taxation
on their UBTI. The IRS has ruled that dividend distributions from a REIT to an
exempt employee pension trust do not constitute UBTI, PROVIDED THAT the shares
of the REIT are not otherwise used in an unrelated trade or business of the
exempt employee pension trust. Based on that ruling, amounts distributed by
Reckson to Exempt Organizations generally should not constitute UBTI. However,
if an Exempt Organization finances its acquisition of the Reckson common stock
with indebtedness, a portion of the income thereon will constitute UBTI pursuant
to the "debt-financed property" rules. Furthermore, social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts, and
qualified group legal services plans that are exempt from taxation under
paragraphs (7), (9), (17) and (20), respectively, of Internal Revenue Code
Section 501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions from a REIT as UBTI. In addition, a pension
trust that owns more than ten percent of a REIT's stock may be required to treat
a percentage of the dividends from the REIT as UBTI (the "UBTI Percentage"). The
UBTI rule applies to a pension trust holding more than ten percent of the REIT's
only if (1) the UBTI Percentage is at least five percent, (2) the REIT qualified
as a REIT by reason of the modification of the 5/50 Rule that allows the
beneficiaries of the pension trust to be treated as holding shares of the REIT
in proportion to their actuarial interest in the pension trust, and (3) either
(A) one pension trust owns more than 25% of the value of the REIT's stock or (B)
a group of pension trusts each individually holding more than ten percent of the
value of the REIT's stock collectively owns more than 50% of the value of the
REIT's stock.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
The rules dealing with Federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. Changes to the Federal laws and their interpretation could
adversely affect an investment in Reckson. It cannot be predicted whether, when,
in what forms, or with what effective dates, the tax laws applicable to Reckson
or an investment in its stock will be changed.
STATE AND LOCAL TAXES
Reckson and its stockholders may be subject to state and local tax in
various states and localities, including those states and localities in which it
or they transact business, own property, or reside. The tax treatment in these
jurisdictions may differ from the Federal income tax treatment described above.
Consequently, prospective stockholders should consult their tax advisors
regarding the effect of state and local tax laws upon an investment in Reckson
class B common stock and Reckson OP 7% notes.
181
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF METROPOLITAN PARTNERS
The following pro forma financial statements of Metropolitan Partners give
effect to the proposed merger of Tower and Metropolitan Partners using the
purchase method of accounting. The pro forma combined financial statements are
based on the unaudited historical consolidated financial statements of Tower.
The pro forma adjustments are preliminary and based on Reckson management's
estimates of the value of the tangible and intangible assets acquired. Based on
the timing of the closing of the transaction and other factors, the pro forma
adjustments may differ materially from those presented in these pro forma
financial statements. A change affecting the value assigned to long-term assets
acquired and liabilities acquired and/or assumed would result in a reallocation
of the purchase price and modifications to the pro forma adjustments. The
statement of operations effect of these changes will depend on the nature and
amount of the assets or liabilities adjusted (see Note 1 to the pro forma
combined financial statements of Metropolitan Partners).
The pro forma combined balance sheet of Metropolitan Partners assumes that
the merger took place on December 31, 1998. The pro forma statement of
operations of Metropolitan Partners for the year ended December 31, 1998 assumes
that the merger took place as of January 1, 1998.
The following unaudited pro forma combined financial statements are
presented for illustrative purposes only and are not indicative of the
consolidated financial position or results of operations of future periods or
the results that actually would have been realized had Metropolitan Partners and
Tower been a combined company during the specified periods. The pro forma
combined financial statements, including the notes thereto, are qualified in
their entirety by reference to, and should be read in conjunction with, the
historical consolidated financial statements of Tower for the year ended
December 31, 1997, including the notes thereto, included elsewhere herein.
182
<PAGE>
METROPOLITAN PARTNERS, LLC
PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF DECEMBER 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
METROPOLITAN ADJUSTMENTS METROPOLITAN
PARTNERS TOWER ELIMINATIONS SALE PARTNERS
HISTORICAL PRO FORMA (2) MERGER(3) ASSETS(4) PRO FORMA
------------ --------- ------------- ----------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate, net.......... $ -- $678,880 $ -- $ (2,675)(a)(e) $ (225,000) $451,205
Real estate held for
sale.................. -- -- -- -- 225,000 225,000
Cash and cash
equivalents........... 9 5,064 -- -- -- 5,073
Tenant receivables...... -- 11,395 -- (6,181)(a) -- 5,214
Escrowed funds.......... -- 3,378 -- -- -- 3,378
Other assets............ 222 9,446 (222) (2,659)(a) -- 6,787
Investments in Tower.... 42,299 -- (42,299) -- -- --
Investments in real
estate joint
ventures.............. -- 2,749 -- 951(a) -- 3,700
Deferred charges, net... -- 12,429 -- (8,312)(a)(c) -- 4,117
------------ --------- ------------- ----------------- ----------- --------------
Total Assets........ $42,530 $723,341 $ (42,521) $ (18,876) $ -- $704,474
------------ --------- ------------- ----------------- ----------- --------------
------------ --------- ------------- ----------------- ----------- --------------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Mortgage notes
payable............... $ -- $129,892 $ -- $ 108,887(b)(e) $ -- $238,779
Credit facility......... -- 130,400 -- (130,400)(b) --
Accrued expenses and
other liabilities..... -- 32,780 -- -- -- 32,780
Deferred real estate
taxes................. -- 9,155 -- 3,204(a) -- 12,359
Affiliate payables...... -- 468 -- -- -- 468
------------ --------- ------------- ----------------- ----------- --------------
Total Liabilities... -- 302,695 -- (18,309) -- 284,386
------------ --------- ------------- ----------------- ----------- --------------
Limited partners' interest
in the operating
partnership............. -- 34,625 -- (34,624)(b)(d) -- 1
EQUITY:
Stockholders' equity.... -- 346,021 -- (346,021)(b)(d) -- --
Preferred stock......... 40,000 (40,000) -- -- --
Reckson-common equity... 32,475 -- (2,466) 305,078(b) -- 335,087
Crescent-preferred
equity................ 10,055 -- (55) 75,000(b) -- 85,000
------------ --------- ------------- ----------------- ----------- --------------
Total Equity........ 42,530 386,021 (42,521) 34,057 -- 420,087
------------ --------- ------------- ----------------- ----------- --------------
Total Liabilities
and Equity........ $42,530 $723,341 $ (42,521) $ (18,876) $ -- $704,474
------------ --------- ------------- ----------------- ----------- --------------
------------ --------- ------------- ----------------- ----------- --------------
</TABLE>
See accompanying notes to pro forma financial statements.
183
<PAGE>
METROPOLITAN PARTNERS, LLC
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO-FORMA
METROPOLITAN ADJUSTMENT METROPOLITAN
PARTNERS TOWER ELIMINATIONS SALE ASSETS PARTNERS PRO
HISTORICAL PRO FORMA (2) MERGER (5) (4) FORMA
--------------- ----------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income..................... $ -- $ 112,704 $ -- $ (14,404) $ -- $ 98,300
Other............................. 176 949 (176) (98) -- 851
----- ----------- ----- ----------- ----------- -------------
Total Revenue............. 176 113,653 (176) (14,502) -- 99,151
----- ----------- ----- ----------- ----------- -------------
EXPENSES:
Operating Expenses:
Property operating expenses... -- 26,727 -- (5,000) -- 21,727
Real estate taxes............. -- 15,024 -- (2,055) -- 12,969
Ground rents and air rights... -- 683 -- -- -- 683
Marketing, general and
administrative.............. -- 10,258 -- (8,258) -- 2,000
Sale of the company........... -- 4,963 -- (4,963) -- --
Severance and other
compensation costs.......... -- 2,454 -- (2,454) -- --
----- ----------- ----- ----------- ----------- -------------
Total Operating
Expenses................ -- 60,109 -- (22,730) -- 37,379
----- ----------- ----- ----------- ----------- -------------
Interest.......................... -- 17,843 -- (77) -- 17,766
Depreciation and amortization..... -- 18,063 -- (1,548) (3,731) 12,784
----- ----------- ----- ----------- ----------- -------------
Total Expenses............ -- 96,015 -- (24,355) (3,731) 67,929
----- ----------- ----- ----------- ----------- -------------
Operating Income.................... 176 17,638 (176) 9,853 3,731 31,222
Equity in earnings of service
companies......................... -- 297 -- -- -- 297
----- ----------- ----- ----------- ----------- -------------
Net income before preferred
distributions..................... 176 17,935 (176) 9,853 3,731 31,519
----- ----------- ----- ----------- ----------- -------------
Preferred distribution.............. 55 -- (55) 6,375 -- 6,375
----- ----------- ----- ----------- ----------- -------------
Net income available to common
members........................... $ 121 $ 17,935 $ (121) $ 3,478 $ 3,731 $ 25,144
----- ----------- ----- ----------- ----------- -------------
----- ----------- ----- ----------- ----------- -------------
</TABLE>
See accompanying notes to pro forma financial statements.
184
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Metropolitan Partners is a subsidiary of Reckson, in which Reckson owns all
of the common membership interest. Metropolitan Partners will account for the
merger as a purchase and accordingly will allocate the purchase price to the
assets and liabilities acquired based on their relative fair values.
The pro forma combined balance sheet assumes that the merger took place
December 31, 1998 and includes Tower's unaudited December 31, 1998 pro forma
balance sheet. The pro forma combined statement of operations for the year ended
December 31, 1998 assumes that the merger took place as of January 1, 1998 and
includes Tower's pro forma unaudited statement of operations for the year ended
December 31, 1998.
The pro forma adjustments are preliminary and based on Reckson management's
estimates of the value of the tangible and intangible assets acquired. Based on
the timing of the closing of the transaction and other factors, the pro forma
adjustments may differ materially from those presented in these pro forma
combined financial statements. A change affecting the value assigned to the
long-term assets acquired and liabilities acquired and/or assumed would result
in a reallocation of the purchase price and modifications to the pro forma
adjustments. The statement of operations effect of these changes will depend on
the nature and amount of the assets or liabilities adjusted.
NOTE 2. ELIMINATION ADJUSTMENTS
Reflects the elimination of Metropolitan Partners investment in Tower in
consolidation. Adjustment also reflects the elimination of the dividends paid to
Metropolitan partners on the Tower preferred stock.
NOTE 3. METROPOLITAN PARTNERS BALANCE SHEET PRO FORMA ADJUSTMENTS
a. Adjustment to reflect the components of the purchase price. Under the terms
of the transaction, Metropolitan Partners will effectively pay for each
share of Tower common stock and each Tower OP unit: (a) $5.75 in cash and
(b) 0.6273 of a share of Reckson class B common stock. The value of the
Reckson class B common stock issued, which is convertible on a one-for-one
basis into Reckson common stock, subject to adjustment, is assumed for
purposes of this presentation to be $25.89 which equals the sum of (a)
$23.31, which was Reckson common stock's closing price on the day
immediately preceding the date of the merger agreement and (b) the present
value of the excess of the dividend assumed to be paid to the holders of the
Reckson class B common stock over the dividend assumed to be paid to holders
of Reckson common stock during the 4.5 year period the shares of Reckson
class B common stock are assumed to be outstanding. The actual value or
trading price of the Reckson class B common stock may be greater or less
than or equal to the value used for purposes of this presentation.
Adjustment also reflects the allocation of the excess of the purchase price
over the assets acquired less liabilities assumed to long-term assets based
on their relative fair values.
185
<PAGE>
The following table summarizes the calculation of the excess of the purchase
price over the assets acquired less liabilities assumed:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
--------------------
<S> <C>
Merger consideration.................................................... $ 409,977
Transaction costs....................................................... 32,000
--------
Total purchase price.................................................... 441,977
Assets acquired less liabilities assumed of $380,646 (less write-off of
certain intangible assets of approximately $21,445)................... 359,201
--------
Excess purchase price to be allocated to assets......................... $ 82,776
--------
--------
</TABLE>
The following table is a summary of the amounts allocated to the long-term
assets, the allocation of the excess purchase price over the assets acquired
less liabilities assumed and the fair values of the assets acquired:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL EXCESS FAIR
COST PURCHASE PRICE VALUE
---------- -------------- ----------
<S> <C> <C> <C>
Real estate.......................................... $ 678,880 $ 81,825 $ 760,705
Investment in joint ventures......................... 2,749 951 3,700
---------- ------- ----------
$ 681,629 $ 82,776 $ 764,405
---------- ------- ----------
---------- ------- ----------
</TABLE>
b. Adjustment reflects the anticipated funding of the purchase price.
Metropolitan Partners expects to fund its obligations in connection with the
merger through a combination of assumed debt and newly incurred debt and
with an $85 million preferred investment by Crescent Real Estate Equities
Company. The Adjustment is based on Metropolitan Partners assuming $129.9
million of existing secured debt bearing a weighted average interest rate of
6.95%, and incurring approximately $108.9 million of new secured financing,
which bears interest at 7.75% after the retirement of approximately $84.5
million with the proceeds of the sale of certain properties described below.
The Adjustment assumes that Metropolitan Partners uses a portion of these
proceeds to retire approximately $130.4 million of existing unsecured debt
bearing a weighted average interest rate of 7.3%.
c. Adjustment reflects the payment of costs related to obtaining the
acquisition financing of approximately $1.1 million less the write-off of
approximately $2.3 million of financing costs written-off in connection with
the retirement of certain indebtedness, as described above.
d. Adjustment reflects the elimination of Tower stockholders' equity and the
limited partners' interest in the Tower operating partnership.
e. An agreement in principle with a third party has been reached in which the
third party has agreed to purchase four of Tower's New York City properties
for approximately $845 million. The agreement in principle is not yet
binding on the parties and, therefore, there can be no assurances that such
sale will occur. Adjustment also reflects the elimination of the operations
related to the four buildings disposed of.
NOTE 4. SALE PRO FORMA ADJUSTMENTS
Metropolitan Partners anticipates that it will dispose of the assets in the
Tower portfolio located outside New York. Metropolitan Partners plans to sell
those assets during 1999 and has estimated the sales value, net of related costs
to sell, at approximately $225 million. Adjustment also reflects the elimination
of depreciation expense related to assets held for sale.
186
<PAGE>
NOTE 5. METROPOLITAN PARTNERS STATEMENT OF OPERATIONS PRO FORMA ADJUSTMENTS
Reflects the net decrease in depreciation expense resulting from the step-up
in accounting book basis of real estate as a result of the purchase of Tower by
Metropolitan Partners reduced by the depreciation expense associated with the
real estate held for sale and decrease in interest expense related to the
retirement of certain indebtedness, as described above and in Note 5. Adjustment
also reflects the addback of certain costs related to the sale of Tower ($4,963)
and severance costs ($2,454) that are not expected to have a continuing impact
on Metropolitan Partners and general and administrative costs primarily related
to salaries and other professional fees that will be eliminated due to cost
savings.
The following table summarizes the calculation of pro forma depreciation
expense for the twelve months ended December 31, 1998:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
--------------------
<S> <C>
Pro forma real estate................................................... $ 451,205
Allocation to buildings................................................. 85%
--------
Total allocated to buildings............................................ 383,524
Depreciable life........................................................ 30
--------
Pro forma depreciation expense.......................................... $ 12,784
--------
--------
</TABLE>
The following table summarizes the calculation of pro forma interest expense
for the twelve months ended December 31, 1998:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT RATE INTEREST
---------- --------- ---------
<S> <C> <C> <C>
Debt assumed.................................................... $ 129,892 6.96% $ 9,041
Acquisition financing........................................... 108,887 7.75% $ 8,439
---------- --- ---------
238,779 17,480
Amortization of deferred financing costs........................ 286
---------
Pro forma interest expense...................................... $ 17,766
---------
---------
</TABLE>
NOTE 6. PREFERRED EQUITY
Crescent has agreed to make an $85 million preferred investment in
Metropolitan Partners, $10 million of which has already been funded. The
proceeds of Crescent's investment were used to partially fund Metropolitan
Partners' $40 million investment in Tower upon execution of the merger agreement
and the balance of Crescent's investment will be used to fund, in part,
Metropolitan Partners' cash requirements in connection with the consummation of
its merger with Tower. Crescent's preferred equity earns a 7.5% distribution and
is redeemable for cash at Metropolitan Partners' option during the first two
years with a payment sufficient to provide Crescent with a 9.5% internal rate of
return. After year two the preferred equity must convert into either shares of
Reckson common stock at $24.61 per share or a common equity interest in
Metropolitan Partners based on the ratio of Crescent's investment in
Metropolitan Partners to the total investment in Metropolitan Partners.
187
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF RECKSON--ASSUMING RECKSON
STOCKHOLDERS APPROVE SHARE ISSUANCE PROPOSAL
The following pro forma combined financial statements of Reckson give effect
to the proposed merger of Tower into Metropolitan Partners and Reckson's
investment in Metropolitan Partners assuming Reckson stockholders approve the
share issuance proposal. Metropolitan Partners is a subsidiary of Reckson.
The pro forma combined financial statements are based on the historical
consolidated financial statements and the notes thereto of Reckson. The pro
forma adjustments are preliminary and based on Reckson management's estimates of
the value of the tangible and intangible assets acquired. Based on the timing of
the closing of the transaction and other factors, the pro forma adjustments may
differ materially from those presented in these pro forma financial statements.
A change affecting the value assigned to long-term assets acquired and
liabilities acquired and/or assumed would result in a reallocation of the
purchase price and modifications to the pro forma adjustments. The statement of
operations effect of these changes will depend on the nature and amount of the
assets or liabilities adjusted.
The pro forma combined balance sheet of Reckson assumes that the merger of
Tower into Metropolitan Partners and Reckson's investment in Metropolitan
Partners took place on December 31, 1998. The pro forma statement of operations
of Reckson for the year ended December 31, 1998 assumes that the merger and
investment occurred as of January 1, 1998.
The following unaudited pro forma combined financial statements are
presented for illustrative purposes only and are not indicative of the
consolidated financial position or results of operations of future periods or
the results that actually would have been realized had Metropolitan Partners and
Tower been a combined company and Reckson had made an investment in Metropolitan
Partners during the specified periods. The pro forma combined financial
statements, including the notes thereto, are qualified in their entirety by
reference to, and should be read in conjunction with, the historical
consolidated financial statements of Reckson for the year ended December 31,
1998, including the notes thereto.
188
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
PRO FORMA CONDENSED COMBINING BALANCE SHEET
ASSUMING RECKSON STOCKHOLDERS APPROVE SHARE ISSUANCE PROPOSAL
AS OF DECEMBER 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 PRO FORMA METROPOLITAN ELIMINATION DECEMBER 31, 1998
HISTORICAL ADJUSTMENTS(2) PARTNERS, LLC(3) ADJUSTMENTS(4) PRO FORMA
----------------- -------------- ---------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Real estate, net................ $ 1,584,174 $ -- $ 451,205 $ -- $ 2,035,379
Real estate held for sale....... -- -- 225,000 -- 225,000
Cash and cash equivalents....... 2,349 -- 5,073 -- 7,422
Tenant receivables.............. 5,159 -- 5,214 -- 10,373
Affiliate receivables........... 53,329 -- -- -- 53,329
Deferred rent receivable........ 22,526 -- -- -- 22,526
Investment in mortgage notes and
note receivable............... 99,268 -- -- -- 99,268
Investment in Metropolitan
Partners...................... -- 302,779 -- (302,779) --
Contract and land deposits and
other pre-acquisition costs... 2,253 -- -- -- 2,253
Prepaid expenses and other
assets........................ 46,372 -- -- (42,299) 4,073
Investments in real estate joint
ventures...................... 15,104 -- 3,700 -- 18,804
Deferred lease and loan costs,
net........................... 24,282 -- 4,117 -- 28,399
Other assets.................... -- -- 10,165 -- 10,165
----------------- -------------- -------- -------------- -----------------
Total Assets................ $ 1,854,816 $ 302,779 $ 704,474 $ (345,078) $ 2,516,991
----------------- -------------- -------- -------------- -----------------
----------------- -------------- -------- -------------- -----------------
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Mortgage notes payable.......... $ 253,463 $ -- $ 238,779 $ -- $ 492,242
Senior unsecured notes.......... 150,000 -- -- -- 150,000
Credit facility................. 485,850 -- -- -- 485,850
Accrued expenses and other
liabilities................... 48,565 -- 32,780 -- 81,345
Affiliate payables.............. 2,395 -- 468 -- 2,863
Deferred real estate taxes...... -- -- 12,359 -- 12,359
Dividends and distributions
payable....................... 19,663 -- -- -- 19,663
----------------- -------------- -------- -------------- -----------------
Total Liabilities........... 959,936 -- 284,386 -- 1,244,322
----------------- -------------- -------- -------------- -----------------
Minority partners' interest and
preferred interest in
consolidated partnerships..... 52,173 -- 85,001 (10,001) 127,173
Preferred unit interest in the
operating partnership......... 42,518 -- -- -- 42,518
Limited partners' minority
interest in operating
partnership................... 94,125 49,823 -- -- 143,948
----------------- -------------- -------- -------------- -----------------
188,816 49,823 85,001 (10,001) 313,639
----------------- -------------- -------- -------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock................. 92 -- -- -- 92
Class A common stock............ 400 -- -- -- 400
Class B common stock............ -- 117 -- -- 117
Additional paid-in capital...... 705,572 252,839 335,087 (335,077) 958,421
----------------- -------------- -------- -------------- -----------------
Total Stockholders'
Equity.................... 706,064 252,956 335,087 (335,077) 959,030
----------------- -------------- -------- -------------- -----------------
Total Liabilities and
Stockholders' Equity...... $ 1,854,816 $ 302,779 $ 704,474 $ (345,078) $ 2,516,991
----------------- -------------- -------- -------------- -----------------
----------------- -------------- -------- -------------- -----------------
</TABLE>
See accompanying notes to pro forma financial statements.
189
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
ASSUMING RECKSON STOCKHOLDERS APPROVE SHARE ISSUANCE PROPOSAL
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA METROPOLITAN ELIMINATION DECEMBER 31, 1998
HISTORICAL ADJUSTMENTS PARTNERS LLC(5) ADJUSTMENTS(4) PRO FORMA
----------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES:
Base rents............................... $ 224,703 $ -- $ 98,300 $ -- $ 323,003
Tenants escalations and reimbursements... 27,744 -- -- -- 27,744
Equity in earnings of real estate joint
ventures............................... 603 -- -- -- 603
Equity in earnings of service
companies.............................. 1,233 -- 297 -- 1,530
Interest income on mortgage notes and
notes receivable....................... 7,739 -- -- -- 7,739
Other.................................... 4,351 -- 851 (176) 5,026
----------- ----- ------- ----- --------
Total Revenues....................... 266,373 -- 99,448 (176) 365,645
----------- ----- ------- ----- --------
----------- ----- ------- ----- --------
EXPENSES:
Operating Expenses:
Property operating expenses............ 47,919 -- 21,727 -- 69,646
Real estate taxes...................... 35,541 -- 12,969 -- 48,510
Ground rents........................... 1,761 -- 683 -- 2,444
Marketing, general and
administrative....................... 15,919 -- 2,000 -- 17,919
----------- ----- ------- ----- --------
Total Operating Expenses............. 101,140 -- 37,379 -- 138,519
----------- ----- ------- ----- --------
----------- ----- ------- ----- --------
Interest................................. 47,795 -- 17,766 -- 65,561
Depreciation and amortization............ 52,957 -- 12,784 -- 65,741
----------- ----- ------- ----- --------
Total Expenses....................... 201,892 -- 67,929 -- 269,821
----------- ----- ------- ----- --------
Income before minority interest and
extraordinary items.................... 64,481 -- 31,519 (176) 95,824
Minority partners' and preferred interest
in consolidated partnership (income)... (2,763) -- (6,375) 55 (9,083)
Distribution to preferred unitholders/
shareholders........................... (14,244) -- -- (14,244)
----------- ----- ------- ----- --------
Income before limited partners' minority
interest in operating partnership
income and extraordinary items......... $ 47,474 $ -- $ 25,144 $ (121) $ 72,497
----------- ----- ------- ----- --------
----------- ----- ------- ----- --------
Limited partners' minority interest in operating partnership income.............................................. (8,412)
--------
Net income before extraordinary item............................................................................. $ 64,085
--------
--------
Basic income per share before extraordinary item................................................................. $ 1.09
--------
--------
Basic weighted average number of shares of common stock outstanding.............................................. 39,473
--------
--------
Diluted income per share of common stock before extraordinary item............................................... $ 1.07
--------
--------
Diluted weighted average number of shares of common stock outstanding............................................ 40,010
--------
--------
Basic income per share of Class B common stock before extraordinary item......................................... $ 1.81
--------
--------
Basic weighted average number of shares of Class B common stock outstanding...................................... 11,695
--------
--------
Diluted income per share of Class B common stock before extraordinary item....................................... $ 1.22
--------
--------
Diluted weighted average number of shares of Class B common stock outstanding.................................... 11,695
--------
--------
</TABLE>
See accompanying notes to pro forma financial statements.
190
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Metropolitan Partners LLC ("Metropolitan Partners") is a subsidiary of
Reckson Associates Realty Corp. ("Reckson") in which Reckson owns all of the
common membership interests. Reckson will account for the merger as a purchase
and accordingly will allocate the purchase price to the assets and liabilities
acquired based on their relative fair values.
The pro forma combined balance sheet assumes that the merger took place
December 31, 1998 and Reckson made its investment in Metropolitan Partners on
the same date and includes Reckson's audited December 31, 1998 consolidated
balance sheet. The pro forma combined statement of operations for the year ended
December 31, 1998 assumes that the merger took place as of January 1, 1998 and
includes Reckson's audited statement of operations for the year ended December
31, 1998.
The pro forma financial statements assume that Reckson's shareholders
approve the issuance of only Reckson class B common stock as proposed. If
Reckson's shareholders do not approve the issuance of only Reckson class B
common stock, the merger agreement provides that approximately one-third of the
Reckson class B common stock that was to be paid will be replaced by senior
unsecured notes of Reckson Operating Partnership, L.P., which notes will bear
interest at the rate of 7% per annum and have a term of ten years.
NOTE 2. PRO FORMA ADJUSTMENTS
Reflects Reckson's investments in Metropolitan Partners. Reckson will fund
its investments in Metropolitan Partners with the issuance of approximately
$302.8 million of Reckson class B common stock. The Reckson class B common stock
will pay an initial dividend of $2.24 per share, subject to increases based on
the future growth of Reckson's fully diluted funds from operations per share, is
convertible on a one-for-one basis into Reckson common stock, subject to
adjustment, is redeemable by Reckson after 4.5 years on a one-for-one basis for
Reckson common stock and has no dividend or liquidation preference over Reckson
common stock. Under the terms of the transaction, Metropolitan Partners will
effectively pay for each share of Tower common stock and each Tower OP unit: (i)
$5.75 and (ii) 0.6273 of a share of Reckson class B common stock. The value of
the Reckson class B common stock issued is assumed for purposes of this
presentation to be $25.89, which represents the sum of (i) $23.31, which was
Reckson common stock's closing price on the day immediately preceding the date
of the merger agreement and (ii) the present value of the excess of the
additional dividend to be paid to the holders of the Reckson class B common
stock over the dividend assumed to be paid to holders of Reckson common stock
during the 4.5 year period the shares are assumed to be outstanding. The actual
value of trading price of the Reckson class B common stock may be greater or
less than or equal to the value used for purposes of this presentation.
NOTE 3. METROPOLITAN PARTNERS BALANCE SHEET PRO FORMA ADJUSTMENTS
Reflects the pro forma combined balance sheet of Metropolitan Partners as of
December 31, 1998.
NOTE 4. ELIMINATION ADJUSTMENTS
Reflects the consolidating of Reckson's investment in Metropolitan Partners
in consolidation. Adjustment also reflects the elimination of dividends received
by Metropolitan Partners relating to its investment in the Tower preferred
stock.
191
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. METROPOLITAN PARTNERS STATEMENT OF OPERATIONS PRO FORMA ADJUSTMENTS
Reflects the pro forma combined statement of operations of Metropolitan
Partners for the year ended December 31, 1998.
NOTE 6. MINORITY INTERESTS
Represents the minority interest of the limited partners in Reckson OP based
on pro forma rate of approximately 13.05% as of December 31, 1998.
NOTE 7. PRO FORMA EARNINGS PER COMMON SHARE
Basic pro forma income per share of Reckson common stock and Reckson class B
common stock before extraordinary items is based upon the proration of income
based on the relative amounts distributable to each class of shareholders and
the average number of shares of Reckson common stock outstanding during the year
ended December 31, 1998 of 39,473,000 and 11,694,000 Class B shares issued.
Diluted pro forma income per share of Reckson common stock before
extraordinary items is based upon the diluted weighted average number of Reckson
common stock outstanding during the year ended December 31, 1998 of 40,010,000.
Diluted pro forma net income per share of Reckson class B common stock is
based upon the impact of the conversion of all outstanding Reckson class B
shares to Reckson class B common stock, on a one-for-one basis, resulting in a
weighted average number of shares outstanding during the year ended December 31,
1998 of 59,433,000, net of the add-back of the income allocated to the holders
of the Reckson class B common stock of approximately $21,121 for the year ended
December 31, 1998.
192
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF RECKSON--ASSUMING RECKSON
STOCKHOLDERS DO NOT APPROVE SHARE ISSUANCE PROPOSAL
The following pro forma combined financial statements of Reckson give effect
to the proposed merger of Tower into Metropolitan Partners and Reckson's
investment in Metropolitan Partners assuming Reckson stockholders do not approve
the share issuance proposal. Metropolitan Partners is a subsidiary of Reckson.
The pro forma combined financial statements are based on the historical
consolidated financial statements and the notes thereto of Reckson. The pro
forma adjustments are preliminary and based on Reckson management's estimates of
the value of the tangible and intangible assets acquired. Based on the timing of
the closing of the transaction and other factors, the pro forma adjustments may
differ materially from those presented in these pro forma financial statements.
A change affecting the value assigned to long-term assets acquired and
liabilities acquired and/or assumed would result in a reallocation of the
purchase price and modifications to the pro forma adjustments. The statement of
operations effect of those changes will depend on the nature and amount of the
assets or liabilities adjusted.
The pro forma combined balance sheet of Reckson assumes that the investment
took place on December 31, 1998. The pro forma statement of operations of
Reckson for the year ended December 31, 1998 assumes that the merger took place
as of January 1, 1998.
The following unaudited pro forma combined financial statements are
presented for illustrative purposes only and are not indicative of the
consolidated financial position or results of operations of future periods or
the results that actually would have been realized had Metropolitan Partners and
Tower been a combined company and Reckson had made an investment in Metropolitan
Partners during the specified periods. The pro forma combined financial
statements, including the notes thereto, are qualified in their entirety by
reference to, and should be read in conjunction with, the historical
consolidated financial statements of Reckson for the year ended December 31,
1998, including the notes thereto.
193
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
PRO FORMA CONDENSED COMBINING BALANCE SHEET
ASSUMING RECKSON STOCKHOLDERS DO NOT APPROVE SHARE ISSUANCE PROPOSAL
AS OF DECEMBER 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 PRO FORMA METROPOLITAN ELIMINATION DECEMBER 31, 1998
HISTORICAL ADJUSTMENTS(2) PARTNERS LLC(3) ADJUSTMENTS(4) PRO FORMA
----------------- -------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Real estate, net.............. $ 1,584,174 $ -- $ 451,205 $ -- $ 2,035,379
Real estate held for sale..... -- 225,000 -- 225,000
Cash and cash equivalents..... 2,349 -- 5,073 -- 7,422
Tenant receivables............ 5,159 -- 5,214 -- 10,373
Affiliate receivables......... 53,329 -- -- -- 53,329
Deferred rent receivable...... 22,526 -- -- -- 22,526
Investment in mortgage notes
and note receivable......... 99,268 -- -- -- 99,268
Investment in Metropolitan
Partners.................... -- 302,779 -- (302,779) --
Contract and land deposits and
other pre-acquisition
costs....................... 2,253 -- -- -- 2,253
Prepaid expenses and other
assets...................... 46,372 -- -- (42,299) 4,073
Investments in real estate
joint ventures.............. 15,104 -- 3,700 -- 18,804
Deferred lease and loan costs,
net......................... 24,282 -- 4,117 -- 28,399
Other Assets.................. -- -- 10,165 -- 10,165
----------------- -------------- --------------- -------------- -----------------
Total Assets.............. $ 1,854,816 $ 302,779 $ 704,474 $ (345,078) $ 2,516,991
----------------- -------------- --------------- -------------- -----------------
----------------- -------------- --------------- -------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Mortgage notes payable........ $ 253,463 $ -- $ 238,779 $ -- $ 492,242
Senior unsecured notes........ 150,000 95,521 -- -- 245,521
Credit facility............... 485,850 -- -- -- 485,850
Accrued expenses and other
liabilities................. 48,565 -- 32,780 -- 81,345
Affiliate payables............ 2,395 -- 468 -- 2,863
Deferred real estate taxes.... -- -- 12,359 -- 12,359
Dividends and distributions
payable..................... 19,663 -- -- -- 19,663
----------------- -------------- --------------- -------------- -----------------
Total Liabilities......... 959,936 95,521 284,386 -- 1,339,843
----------------- -------------- --------------- -------------- -----------------
Minority partners' interest
and preferred interest in
consolidated partnerships... 52,173 -- 85,001 (10,001) 127,173
Preferred unit interest in the
operating partnership....... 42,518 42,518
Limited partners' minority
interest in operating
partnership................. 94,125 46,049 -- -- 140,174
----------------- -------------- --------------- -------------- -----------------
188,816 46,049 85,001 (10,001) 309,865
----------------- -------------- --------------- -------------- -----------------
STOCKHOLDERS' EQUITY:
Preferred stock............... 92 -- -- -- 92
Class A common stock.......... 400 -- -- -- 400
Class B common stock.......... -- 80 -- -- 80
Additional paid-in capital.... 705,572 161,129 335,087 (335,077) 866,711
----------------- -------------- --------------- -------------- -----------------
Total Stockholders'
Equity.................. 706,064 161,209 335,087 (335,077) 867,283
----------------- -------------- --------------- -------------- -----------------
Total Liabilities and
Stockholders' Equity.... $ 1,854,816 $ 302,779 $ 704,474 $ (345,078) $ 2,516,991
----------------- -------------- --------------- -------------- -----------------
----------------- -------------- --------------- -------------- -----------------
</TABLE>
See accompanying notes to pro forma financial statements.
194
<PAGE>
RECKSON ASSOCIATES REALTY CORP.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
ASSUMING RECKSON STOCKHOLDERS DO NOT APPROVE SHARE ISSUANCE PROPOSAL
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA METROPOLITAN ELIMINATION DECEMBER 31, 1998
HISTORICAL ADJUSTMENTS(5) PARTNERS LLC(6) ADJUSTMENTS(4) PRO FORMA
----------- --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Base rents............................ $ 224,703 $ -- $ 98,300 $ -- $ 323,003
Tenants escalations and
reimbursements...................... 27,744 -- -- -- 27,744
Equity in earnings of real estate
joint ventures...................... 603 -- -- -- 603
Equity in earnings of service
companies........................... 1,233 -- 297 -- 1,530
Interest income on mortgage notes and
notes receivable.................... 7,739 -- -- -- 7,739
Other............................. 4,351 -- 851 (176) 5,026
----------- ------- ------- ------- --------
Total Revenues.................. 266,373 -- 99,448 (176) 365,645
----------- ------- ------- ------- --------
----------- ------- ------- ------- --------
EXPENSES:
Operating Expenses:
Property operating expenses......... 47,919 -- 21,727 -- 69,646
Real estate taxes................... 35,541 -- 12,969 -- 48,510
Ground rents........................ 1,761 -- 683 -- 2,444
Marketing, general and
administrative...................... 15,919 -- 2,000 -- 17,919
----------- ------- ------- ------- --------
Total Operating Expenses............ 101,140 -- 37,379 -- 138,519
----------- ------- ------- ------- --------
Interest.............................. 47,795 7,534 17,766 -- 73,095
Depreciation and amortization......... 52,957 -- 12,784 -- 65,741
----------- ------- ------- ------- --------
Total Expenses...................... 201,892 7,534 67,929 -- 277,355
----------- ------- ------- ------- --------
Income before minority interest and
extraordinary items................. 64,481 (7,534) 31,519 (176) 88,290
Minority partners' and preferred
interest in consolidated
partnerships (income)............... (2,763) -- (6,375) 55 (9,083)
Distributions to preferred
unitholders/ shareholder............ (14,244) -- -- (14,244)
----------- ------- ------- ------- --------
Income before limited partners'
minority interest in operating
partnership income and extraordinary
items............................... $ 47,474 $ (7,534) $ 25,144 $ (121) $ 64,963
----------- ------- ------- ------- --------
----------- ------- ------- ------- --------
Limited partners' minority interests in operating partnership income...................................... 8,300
--------
--------
Net income before extraordinary item...................................................................... $ 56,663
--------
--------
Basic income per share of common stock before extraordinary item.......................................... $ 1.07
--------
--------
Basic weighted average number of shares of common stock outstanding....................................... 39,473
--------
--------
Diluted income per share of common stock before extraordinary item........................................ $ 1.06
--------
--------
Diluted weighted average number of shares of common stock outstanding..................................... 40,010
--------
--------
Basic income per share of Class B common stock before extraordinary item.................................. $ 1.78
--------
--------
Basic weighted number of average shares of Class B common stock outstanding............................... 8,005
--------
--------
Diluted income per share of Class B common stock before extraordinary item................................ $ 1.17
--------
--------
Diluted weighted average number of shares of Class B common stock outstanding............................. 8,005
--------
--------
</TABLE>
See accompanying notes to pro forma financial statements.
195
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Metropolitan Partners LLC is a subsidiary of Reckson Associates Realty Corp.
in which Reckson owns all of the common membership interest. Reckson will
account for the merger as a purchase and accordingly will allocate the purchase
price to the assets and liabilities acquired based on their relative fair
values.
The pro forma combined balance sheet assumes that the merger took place
December 31, 1998 and Reckson made its investment in Metropolitan Partners on
the same date and includes Reckson's audited December 31, 1998 consolidated
balance sheet. The pro forma combined statements of operations for the year
ended December 31, 1998 assumes that the merger took place as of January 1, 1998
and includes Reckson's audited statement of operations for the year ended
December 31, 1998.
The pro forma financial statements assume that Reckson's shareholders do not
approve the issuance of only Reckson class B common stock, as proposed and
accordingly, as provided for in the merger agreement, approximately one-third of
the consideration that was to be paid in the form of Reckson class B common
stock has been replaced by Reckson OP 7% notes.
NOTE. 2. PRO FORMA ADJUSTMENTS
Reflects Reckson's investment in Metropolitan Partners. Reckson will fund
its investment in Metropolitan Partners with the issuance of approximately
$207.3 million of Reckson class B common stock and the issuance of approximately
$95.5 million of senior unsecured notes, par value $101.6 million. The Reckson
class B common stock will pay an initial dividend of $2.24 per share, subject to
increases based on the future growth of Reckson's fully diluted funds from
operations per share, is convertible on a one-for-one basis into Reckson common
stock, subject to adjustment, is redeemable by Reckson after 4.5 years on a
one-for-one basis for Reckson common stock and has no dividend or liquidation
preference over Reckson common stock. Under the terms of the transaction,
Metropolitan Partners will effectively pay for each share of Tower common stock
and each Tower OP unit: (i) $5.75, (ii) 0.4294 of a share of class B common
stock of Reckson and (iii) $5.13 of Reckson OP 7% notes (par value $5.44). The
value of the Reckson class B common stock issued is assumed for purposes of this
presentation to be $25.89, which equals the sum of (i) $23.31, which was Reckson
common stock's closing price on the day immediately preceding the date of the
merger agreement and (ii) the present value of the excess of the additional
dividend assumed to be paid to the holders of the Reckson class B common stock
over the dividends assumed to be paid to holders of Reckson common stock during
the 4.5 year period the shares are assumed to be outstanding. The actual value
or trading price of the Reckson class B common stock may be greater or less than
or equal to the value used for purposes of this presentation.
NOTE 3. METROPOLITAN PARTNERS BALANCE SHEET PRO FORMA ADJUSTMENTS
Reflects the pro forma combined balance sheet of Metropolitan Partners as of
December 31, 1998.
NOTE 4. ELIMINATION ADJUSTMENTS
Reflects the consolidating elimination of Reckson's investment in
Metropolitan Partners. Adjustment also reflects the elimination of the dividends
received by Metropolitan Partners relating to its investment in the Tower
preferred stock.
196
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. PRO FORMA ADJUSTMENTS
Reflects the increase in interest costs related to the issuance of the 7%
senior unsecured notes.
NOTE 6. METROPOLITAN PARTNERS STATEMENT OF OPERATIONS PRO FORMA ADJUSTMENTS
Reflects the pro forma combined statement of operations of Metropolitan
Partners for the year ended December 31, 1998.
NOTE 7. MINORITY INTERESTS
Represents the minority interest of the limited partners in Reckson OP based
on the pro forma rate of approximately 13.91% as of December 31, 1998.
NOTE 8. PRO FORMA EARNINGS PER COMMON SHARE
Basic pro forma income per share of Reckson common stock and Reckson class B
common stock before extraordinary items is based upon the proration of income
based on the relative amounts distributable to each class of shareholders and
the average number of shares of Reckson common stock outstanding during the year
ended December 31, 1998 of 39,473,000 and the 8,005,000 Class B shares issued.
Diluted pro forma income per share before extraordinary items is based upon
the diluted weighted average number of shares of Reckson common stock
outstanding during the year ended December 31, 1998 of 40,010,000.
Diluted pro forma income per share of Reckson class B common stock is based
upon the impact of the conversion of all outstanding Reckson class B common
stock to Reckson common stock, on a one-for-one basis resulting in a weighted
average number of shares outstanding during the year ended December 31, 1998 of
55,743,000, net of the add-back of the income allocated to the holders of
Reckson class B common stock of approximately $14,267 for the year ended
December 31, 1998.
197
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF RECKSON OP ASSUMING RECKSON
STOCKHOLDERS DO NOT APPROVE THE SHARE ISSUANCE PROPOSAL
The following pro forma combined financial statements of Reckson OP give
effect to the proposed merger of Tower into Metropolitan Partners and Reckson
OP's investment in Metropolitan Partners assuming Reckson stockholders do not
approve the share issuance proposal. Metropolitan Partners is a subsidiary of
Reckson OP.
The pro forma combined financial statements are based on the historical
consolidated financial statements and the notes thereto of Reckson OP. The pro
forma adjustments are preliminary and based on Reckson OP management's estimates
of the value of the tangible and intangible assets acquired. Based on the timing
of the closing of the transaction and other factors, the pro forma adjustments
may differ materially from those presented in these pro forma financial
statements. A change affecting the value assigned to long-term assets acquired
and liabilities acquired and/or assumed would result in a reallocation of the
purchase price and modifications to the pro forma adjustments. The statement of
operations effect of these changes will depend on the nature and amount of the
assets or liabilities adjusted.
The pro forma combined balance sheet of Reckson OP assumes that investment
took place on December 31, 1998. The pro forma statements of operations of
Reckson OP for the year ended December 31, 1998 assumes that the investment was
made on January 1, 1998.
The following unaudited pro forma combined financial statements are
presented for illustrative purposes only and are not indicative of the
consolidated financial position or results of operations of future periods or
the results that actually would have been realized had Metropolitan Partners and
Tower been a combined company and Reckson OP had made an investment in
Metropolitan Partners during the specified periods. The pro forma combined
financial statements, including the notes thereto, are qualified in their
entirety by reference to, and should be read in conjunction with, the historical
consolidated financial statements of Reckson OP for the year ended December 31,
1998, including the notes thereto.
198
<PAGE>
RECKSON OPERATING PARTNERSHIP, L.P.
PRO FORMA CONDENSED COMBINING BALANCE SHEET
ASSUMING RECKSON STOCKHOLDERS DO NOT APPROVE THE SHARE ISSUANCE PROPOSAL
AS OF DECEMBER 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 PRO FORMA METROPOLITAN ELIMINATION DECEMBER 31, 1998
HISTORICAL ADJUSTMENTS(2) PARTNERS LLC(3) ADJUSTMENTS(4) PRO FORMA
----------------- -------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Real estate, net.............. $ 1,584,174 $ -- $ 451,205 $ -- $ 2,035,379
Real estate held for sale..... -- -- $ 225,000 -- $ 225,000
Cash and cash equivalents..... 2,228 -- 5,073 -- 7,301
Tenant receivables............ 5,159 -- 5,214 -- 10,373
Affiliate receivables......... 53,154 -- -- -- 53,154
Deferred rent receivable...... 22,526 -- -- -- 22,526
Investment in mortgage notes
and notes receivable........ 99,268 -- -- -- 99,268
Investment in Metropolitan
Partners.................... -- 302,779 -- (302,779) --
Contract and land deposits and
other pre-acquisition
costs....................... 2,253 -- -- -- 2,253
Prepaid expenses and other
assets...................... 46,372 -- -- (42,299) 4,073
Investments in real estate
joint ventures.............. 15,104 -- 3,700 -- 18,804
Deferred lease and loan costs,
net......................... 24,282 -- 4,117 -- 28,399
Other Assets.................. -- -- 10,165 -- 10,165
----------------- -------------- --------------- -------------- -----------------
Total Assets.............. $ 1,854,520 $ 302,779 $ 704,474 $ (345,078) $ 2,516,695
----------------- -------------- --------------- -------------- -----------------
----------------- -------------- --------------- -------------- -----------------
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Mortgage notes payable........ $ 253,463 $ -- $ 238,779 $ -- $ 492,242
Senior unsecured notes........ 150,000 95,521 -- -- 245,521
Credit facility............... 485,850 -- -- -- 485,850
Accrued expenses and other
liabilities................. 48,384 -- 32,780 -- 81,164
Affiliate payables............ 2,395 -- 468 -- 2,863
Deferred real estate taxes.... -- -- 12,359 -- 12,359
Dividends and distributions
payable..................... 19,663 -- -- -- 19,663
----------------- -------------- --------------- -------------- -----------------
Total Liabilities......... 959,755 95,521 284,386 -- 1,339,662
----------------- -------------- --------------- -------------- -----------------
Minority partners' and
preferred interest in
consolidated partnership.... 52,173 -- 85,001 (10,001) 127,173
Partners' capital
Preferred capital............. 263,126 -- -- -- 263,126
General partner's capital..... 485,341 207,258 335,087 (335,077) 692,609
Limited partner's capital..... 94,125 -- -- -- 94,125
----------------- -------------- --------------- -------------- -----------------
Total partners' capital... 842,592 207,258 335,087 (335,077) 1,049,860
----------------- -------------- --------------- -------------- -----------------
Total Liabilities and
Partners' Capital....... $ 1,854,520 $ 302,779 $ 704,474 $ (345,078) $ 2,516,695
----------------- -------------- --------------- -------------- -----------------
----------------- -------------- --------------- -------------- -----------------
</TABLE>
See accompanying notes to pro forma financial statements.
199
<PAGE>
RECKSON OPERATING PARTNERSHIP, L.P.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
ASSUMING RECKSON STOCKHOLDERS DO NOT APPROVE THE SHARE ISSUANCE PROPOSAL
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
PRO FORMA METROPOLITAN ELIMINATION RECKSON OP
HISTORICAL ADJUSTMENTS PARTNERS LLC(6) ADJUSTMENTS PRO FORMA
----------- ------------- ----------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Base rents......................... $ 224,703 $ -- $ 98,300 $ -- $ 323,003
Tenant escalations and
reimbursements................... 27,744 -- -- -- 27,744
Equity in earnings of real estate
joint ventures................... 603 -- -- -- 603
Equity in earnings of service
companies........................ 1,233 -- 297 -- 1,530
Interest income on mortgage notes
and notes receivable............. 7,739 -- -- -- 7,739
Other.............................. 4,290 -- 851 (176) 4,965
----------- ------------- ------- ----- --------
Total Revenues................. 266,312 -- 99,448 (176) 365,584
----------- ------------- ------- ----- --------
----------- ------------- ------- ----- --------
EXPENSES:
Operating Expenses:
Property operating expenses...... 47,919 -- 21,727 -- 69,646
Real estate taxes................ 35,541 -- 12,969 -- 48,510
Ground rents..................... 1,761 -- 683 -- 2,444
Marketing, general and
administrative................... 15,030 -- 2,000 -- 17,030
----------- ------------- ------- ----- --------
Total Operating Expenses....... 100,251 -- 37,379 -- 137,630
----------- ------------- ------- ----- --------
Interest........................... 47,795 7,534 17,766 -- 73,095
Depreciation and amortization...... 52,957 -- 12,784 -- 65,741
----------- ------------- ------- ----- --------
Total Expenses................... 201,003 7,534 67,929 -- 276,466
----------- ------------- ------- ----- --------
Income before minority interest and
extraordinary items.............. 65,309 (7,534) 31,519 (176) 89,118
Minority partners' and preferred
interest in consolidated
partnerships (income)............ (2,819) -- (6,375) 55 (9,139)
Distributions to preferred
unitholders/ shareholders........ (14,244) -- -- -- (14,244)
----------- ------------- ------- ----- --------
Income before limited partners'
minority interest in operating
partnership income and
extraordinary items.............. $ 48,246 $ (7,534) $ 25,144 $ (121) $ 65,735
----------- ------------- ------- ----- --------
----------- ------------- ------- ----- --------
Limited Partner...................................................................................... $ 8,399
--------
--------
General Partner--Class A............................................................................. $ 42,900
--------
--------
General Partner--Class B............................................................................. $ 14,436
--------
--------
Income per Unit Limited Partner...................................................................... $ 1.09
--------
--------
General Partner--Class A............................................................................. $ 1.09
--------
--------
General Partner--Class B............................................................................. $ 1.80
--------
--------
</TABLE>
See accompanying notes to pro forma financial statements.
200
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
Metropolitan Partners is a subsidiary of Reckson OP in which Reckson OP owns
all of the common membership interests. Reckson OP will account for the merger
as a purchase and accordingly will allocate the purchase price to the assets and
liabilities acquired based on their relative fair values. Reckson is the sole
general partner of Reckson OP.
The pro forma combined balance sheet assumes that the merger took place
December 31, 1998 and Reckson OP made its investment in Metropolitan Partners on
the same date and includes Reckson OP's audited December 31, 1998 consolidated
balance sheet. The pro forma combined statements of operations for the year
ended December 31, 1998 assumes that the merger took place as of January 1, 1998
and includes Reckson OP's audited statement of operations for the year ended
December 31, 1998.
The pro forma financial statements assume that Reckson's shareholders do not
approve the issuance of only Reckson class B common stock, as proposed and
accordingly, as provided for in the merger agreement, approximately one-third of
the consideration that was to be paid in the form of Reckson class B common
stock has been replaced by Reckson OP 7% notes.
NOTE 2. PRO FORM ADJUSTMENTS
Reflects Reckson OP's investment in Metropolitan Partners. Reckson OP will
fund its investment in Metropolitan Partners with the issuance of approximately
$207.3 million of Reckson class B common stock and the issuance of approximately
$95.5 million of Reckson OP 7% notes, par value $101.6 million. The Reckson
class B common stock will pay an initial dividend of $2.24 per share, subject to
increases based on the future growth of Reckson's fully diluted funds from
operations per share, is convertible on a one-for-one basis into Reckson common
stock, subject to adjustment, is redeemable by Reckson after 4.5 years on a
one-for-one basis for Reckson common stock and has no dividend or liquidation
preference over Reckson common stock. Under the terms of the transaction,
Metropolitan Partners will effectively pay for each share of Tower common stock
and each Tower OP unit: (i) $5.75 in cash, (ii) 0.4294 of a share of Reckson
class B common stock, and (iii) $5.13 of Reckson OP 7% notes, par value $5.44.
The value of the Reckson class B common stock issued is assumed for purposes of
this presentation to be $25.89, which equals the sum of (i) $23.31, which was
Reckson common stock's closing price on the day immediately preceding the date
of the Merger Agreement and (ii) the present value of the excess of the
additional dividend assumed to be paid to the holders of the Reckson class B
common stock over the dividends assumed to be paid to holders of Reckson common
stock during the 4.5 year period the shares are assumed to be outstanding. The
actual value or trading price of the Reckson class B common stock may be greater
or less than or equal to the value used for purposes of this presentation.
The Reckson OP 7% notes bear interest at a rate of 7% per annum, have a
ten-year term and are PARI PASSU with Reckson OP's previously issued $150
million senior unsecured notes.
NOTE 3. METROPOLITAN PARTNERS BALANCE SHEET PRO FORMA ADJUSTMENTS
Reflects the pro forma combined balance sheet of Metropolitan Partners as of
December 31, 1998.
NOTE 4. ELIMINATION ADJUSTMENTS
Reflects the consolidating elimination of Reckson OP's investment in
Metropolitan Partners. Adjustment also reflects the elimination of the dividends
received by Metropolitan Partners relating to its investment in the Tower
preferred stock.
201
<PAGE>
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. PRO FORMA ADJUSTMENTS
Reflects the increase in interest costs related to the issuance of the
Reckson OP 7% notes.
NOTE 6. METROPOLITAN PARTNERS STATEMENT OF OPERATIONS PRO FORMA ADJUSTMENTS
Reflects the pro forma combined statement of operation of Metropolitan
Partners for the year ended December 31, 1998.
NOTE 7. PRO FORMA GENERAL AND LIMITED PARTNER NET INCOME ALLOCATION
General Partner Class A and B basic pro forma income per share before
extraordinary items is based upon the proration of income based on the relative
amounts distributable to each class of unitholders and the average number of
Class A units outstanding during the year ended December 31, 1998 of 39,473,000
and 8,005,000 Class B units issued.
Limited Partner pro forma income before extraordinary items is based upon
the proration of income based on the relative amounts distributable to each
class of unitholders and the average number of limited partnership units
outstanding during the year ended December 31, 1998 of 7,728,000.
NOTE 8. PRO FORMA ADJUSTMENTS
Reflects the increase in interest costs related to the issuance of the
Reckson OP 7% notes.
202
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF TOWER
The unaudited pro forma condensed consolidated balance sheet reflects the
issuance of $40 million of convertible preferred stock and related prepayment of
mortgage debt on 810 Seventh Avenue, the prepayment of the remaining $60 million
of the mortgage note on the 810 Seventh Avenue property with funds drawn on the
Line of Credit Facility, and the modification of the Line of Credit Facility as
if such transactions occurred on September 30, 1998. The unaudited pro forma
condensed consolidated statements of operations reflect the historical results
of Tower for the reporting periods from its commencement of operations on March
27, 1997 to December 31, 1997, the historical results of operations of Tower
Predecessor for the reporting period from January 1, 1997 through October 15,
1997, adjusted to reflect the Tower IPO, the related Formation Transactions, the
application of proceeds from the Tower IPO, additional property acquisitions
completed during 1997 (the "1997 Acquisition Properties"), the issuance of $40
million of convertible preferred stock to prepay $40 million of the mortgage
note on 810 Seventh Avenue, the prepayment of the remaining $60 million mortgage
note on 810 Seventh Avenue with funds drawn on the Line of Credit Facility, the
related modification of the Line of Credit Facility, and the acquisition of 90
Broad Street and the Blue Cross/ Blue Shield properties (the "1998 Acquisition
Properties"), as if such transactions had occurred on January 1, 1997. The
unaudited pro forma financial information is not indicative of the results of
operations of Tower for the periods indicated nor does it purport to represent
or project the results of operations for future periods. The unaudited pro forma
financial information should be read in conjunction with the Tower and Tower
Predecessor historical financial statements and Managements Discussion and
Analysis of the Financial Condition and Results of Operations included elsewhere
in this Proxy Statement/Prospectus.
203
<PAGE>
TOWER REALTY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
MODIFICATION OF
HISTORICAL DEBT AND PREFERRED
SEPTEMBER 30, STOCK
1998 TRANSACTION(1) PRO FORMA
------------------ ------------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Assets:
Real estate, net............................................. $ 672,657 $ -- $ 672,657
Deferred charges, net........................................ 12,798 (588)(a) 12,210
Receivables, net............................................. 8,767 8,767
Escrowed funds............................................... 7,307 7,307
Cash and cash equivalents.................................... 7,175 (3,112)(b) 4,063
Investment in Joint ventures................................. 2,968 2,968
Other assets................................................. 6,143 6,143
-------- ---------- -----------
Total assets............................................... $ 717,815 $ (3,700) $ 714,115
-------- ---------- -----------
-------- ---------- -----------
Liabilities and Shareholders' Equity:
Debt on real estate.......................................... $ 228,760 $ (100,000)(c) $ 128,760
Line of Credit............................................... 62,400 60,000(c) 122,400
Accounts payable and other liabilities....................... 11,027 11,027
Distribution payable......................................... 7,877 7,877
Deferred real estate taxes................................... 9,713 9,713
Other liabilities............................................ 9,613 9,613
Amounts due to affiliates.................................... 309 309
-------- ---------- -----------
Total liabilities.......................................... 329,699 (40,000) 289,699
-------- ---------- -----------
Minority interest in Operating Partnership................... 35,065 (330)(d) 34,735
Shareholders' Equity:
Preferred shares 50,000,000 shares authorized, none issued
and outstanding
Convertible preferred shares 2,169,197 issued and
outstanding................................................ 0 40,000 40,000
Common Shares, $.01 par value, 150,000,000 shares authorized;
16,920,455 issued and Outstanding (pro forma).............. 169 169
Additional Paid in Capital................................... 365,814 365,814
Distribution in excess of accumulated earnings............... (12,932) (3,370)(d) (16,302)
-------- ---------- -----------
Total shareholders' equity................................. 353,051 (36,630) 389,681
-------- ---------- -----------
Total liabilities and Shareholders' Equity................. $ 717,815 $ (3,700) $ 714,115
-------- ---------- -----------
-------- ---------- -----------
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
204
<PAGE>
TOWER REALTY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MODIFICATION NINE MONTHS
OF DEBT AND ENDED
HISTORICAL 1998 PRO FORMA PREFERRED SEPTEMBER
SEPTEMBER 30, ACQUISITION ACQUISITION STOCK 30, 1998
1998 PROPERTIES PROPERTIES TRANSACTION (1) PRO FORMA
------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Rental income................................. $82,568 $2,461(2) $85,029 $85,029
Management fees............................... 0
Other revenues................................ 660 92(2) 752 752
------------- ----------- ----------- ------- -----------
Total revenues.............................. 83,228 2,553 85,781 85,781
------------- ----------- ----------- ------- -----------
Expenses:
Property operating and maintenance............ 19,513 878(2) 20,391 20,391
Real estate taxes............................. 11,040 186(2) 11,226 11,226
General office and administration............. 6,585 16(2) 6,601 6,601
Interest expense.............................. 15,144 927(3) 16,0711(e) (2,644) 13,427
Ground lease and air rights................... 512 -- 512 512
Depreciation and amortization................. 13,149 290(4) 13,439 13,439
Cost related to sale of the Company........... 3,865 -- 3,865 3,865
Severance and other Compensation Costs........ 2,454 -- 2,454 2,454
------------- ----------- ----------- ------- -----------
Total expenses.............................. 72,262 2,297 74,559 (2,644) 71,915
------------- ----------- ----------- ------- -----------
Equity in subsidiary management companies....... 557 -- 557 557
------------- ----------- ----------- ------- -----------
Income (loss) before minority interest.......... 11,523 256 11,779 2,644 14,423
Minority interest in operating partnership...... (1,027) (23)(5) (1,050) (236)(5) (1,286)
------------- ----------- ----------- ------- -----------
Income (loss) before early extinguishment of
debt.......................................... $10,496 $ 233 $10,729 $ 2,408 $13,137
------------- ----------- ----------- ------- -----------
------------- ----------- ----------- ------- -----------
Net income before early extinguishment of debt
per common share, basic and dilutive.......... $ 0.62 $ 0.61(8)
------------- -----------
------------- -----------
Weighted average number of common shares
outstanding, basic and dilutive............... 16,942 16,942
------------- -----------
------------- -----------
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
205
<PAGE>
TOWER REALTY TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TOWER
TOWER PREDECESSOR
<S> <C> <C> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------
<CAPTION>
MODIFICATION
MARCH 27, JANUARY 1, OF DEBT AND
1997 TO 1997 TO 1997 1997 1998 PREFERRED DECEMBER
DECEMBER 31, OCTOBER 15, ACQUISITION PRO FORMA ACQUISITION STOCK 31, 1997
1997 1997 PROPERTIES(6) ADJUSTMENTS(7) PROPERTIES TRANSACTION (1) PRO FORMA
------------ ----------- ------------- -------------- ------------- ------------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income..... $16,409 $21,908 $51,841 2,518(a) $ 8,937(2) $101,613
Management fees... 1,090 318 (1,408)(b)
Construction,
leasing and
other income.... 861 576 1,282 (1,288)(b) 262(2) 1,693
Total
revenues...... 18,360 22,802 53,123 (178) 9,199 103,306
Expenses:
Property operating
and maintenance... 3,941 4,538 15,852 2,530(2) 26,861
Real estate taxes... 2,266 3,792 8,151 (100)(c) 534(2) 14,643
General office and
administration.... 2,844 2,189 1,613 (2,164)(d) 54(2) 7001(d) 5,236
Interest expense.... 2,369 11,725 1,693(e) 3,772(3) (2,451)1(e) 17,108
Ground lease and air
rights............ 126 473 -- -- 599
Depreciation and
amortization...... 2,813 5,541 -- 7,192(f) 1,130(4) 16,676
Total expenses.... 14,359 28,258 25,616 6,621 8,020 (1,751) 81,123
Equity in subsidiary
management
companies......... 353 134 (117)(g) -- 370
Income (loss) before
minority
interest.......... 4,354 (5,322) 27,507 (6,916) 1,179 (1,751) 22,553
Minority
interest.......... (373) -- (1,379)(h) (105)(5) (156)(5) (2,013)
Income (loss) before
early
extinguishment of
debt.............. $ 3,981 $(5,322) $27,507 $(8,295) $ 1,074 $ (1,595) $ 20,540
Income before early
extinguishment of
debt per common
share basic and
dilutive.......... $ 0.24 $ 1.00(8)
Weighted average
number of common
shares
outstanding, basic
and dilutive...... 16,920 16,920
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
206
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) On December 7, 1998, Tower extended the term of its mortgage note on the 810
Seventh Avenue property by paying $1 million to the mortgage lender and
approximately $500 thousand to a broker. On December 31, 1998, Tower
utilized the $40 million of cash received from the issuance of preferred
stock to prepay $40 million of the mortgage. In connection with the
prepayment, Tower paid an additional fee of $400 thousand to the mortgage
lender. On February 25, 1999, Tower modified its line of credit with its
bank and paid a line of credit modification fee of $412 thousand and
approximately $200 thousand to third parties for closing costs. The
modification provided for 810 Seventh Avenue to be considered an unsecured
asset under the credit line enabling utilization of the line to prepay the
remaining $60 million mortgage, and reduced the line of credit facility from
$200 million to $165 million. In connection with the $60 million prepayment
of the remaining mortgage debt, Tower paid an additional fee of $600
thousand to the mortgage lender.
The following describes the pro forma adjustments resulting from these
transactions:
(a) Represents the write-off of the remaining deferred costs on the 810
mortgage note of $1 million, net of the costs paid to the bank to modify
the Line of Credit Facility of $412 thousand.
(b) Cash paid (1) to the bank to modify the Line of Credit Facility ($412
thousand), (2) to the mortgage lender to modify the 810 mortgage ($2
million), and (3) third party fees related to the Line of Credit
modification ($200 thousand) and the 810 mortgage modification ($500
thousand).
(c) Pay down of the 810 mortgage note with $40 million of proceeds from the
issuance of preferred stock and $60 million of funds drawn on the Line of
Credit Facility.
(d) Reflects the impact to distribution in excess of accumulated earnings of
the above noted transactions, as follows: (i) $200 thousand and $500
thousand paid to third parties in connection with the modification of the
Line of Credit Facility and the 810 mortgage note, respectively, (ii) $1
million write-off of deferred financing costs related to the prepayment
of the 810 mortgage note and (iii) $1 million paid to the mortgage lender
related to the modification and $1 million paid to the mortgage lender in
connection with prepayments. In accordance with EITF 96-19, all fees paid
to third parties in connection with the modifications have been recorded
to general and administrative expenses as incurred and fees paid to the
lender in connection with the modification of the credit facility were
deferred and amortized over the term of the Facility. Fees paid to the
mortgage lender in connection with prepayments, along with the
unamortized financing costs, which together total $3 million, have been
accounted for as extraordinary loss on early extinguishment of debt. The
minority interest related to the amounts recorded through distribution in
excess of accumulated earnings has been calculated at 8.93%
(e) The reduction in interest expense is the result of the reversal of
previously recorded interest expense on the $100 million mortgage note of
approximately $6 million and $6.7 million on a historical basis for the
nine months ended September 30, 1998 and on a pro forma basis for the
twelve months ended December 31, 1997, net of interest calculated on the
$60 million outstanding under the Facility at 7.3% for the respective
periods and amortization of the $412 thousand modification fee on the
Facility, which expires in October 2000. A one eighth of one percent
change in the interest rate will result in a $56 thousand and $75
thousand change in interest expense for the respective periods ended
September 30, 1998 and December 31, 1997.
(2) Reflects the historical results of the 90 Broad Street and Blue Cross/Blue
Shield properties prior to their acquisition.
207
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) Interest expense on the funds drawn on the Line of Credit for the 1998
Acquisition Properties at 7.3%. A change of 1/8 of one percent in the
interest rate on the Line of Credit would change interest expense by
approximately $48 thousand for the nine months ended September 30, 1998 and
$65 thousand for the year ended December 31, 1997.
(4) Depreciation expense on the portion of the purchase price allocated to
buildings calculated on a straight line basis over 40 years, based on an
allocation of 20% of the purchase price to land.
(5) Minority interest share of pro forma income at 8.93%.
(6) Reflects the historical results of operations of those properties that were
not part of Tower Predecessor, and that were acquired concurrent with and
subsequent to the Tower IPO. The DRA Properties, Century Plaza and 100 Wall
Street have been included for the period from January 1, 1997 through
October 15, 1997. 810 7(th) Avenue has been included for the period from
January 1, 1997 through December 31, 1997, as this property was not included
in the Tower historical operations from March 27, 1997 through December 31,
1997 or the historical operations of Tower Predecessor from January 1, 1997
through October 15, 1997.
(7) The 1997 Pro Forma adjustments consist of the following:
(a) Represents the straight-line adjustment of all the properties to reflect
a January 1, 1997 purchase.
(b) Reflects the elimination of historical management fees and construction,
leasing and other fees charged from the Tower Management Company to DRA
Joint Venture Companies, Century Plaza, 810 Seventh Avenue and 100 Wall
Street to third party properties, which fees are now reflected in the
Management Company results of operations. The Company share of such
results is reported on the equity method of accounting.
(c) Represents the elimination of real estate taxes for a parcel of land
that has not been acquired in the Formation Transactions.
(d) Represents the following: (1) elimination of management fees paid to the
Tower Management Company by Tower Predecessor and 1997 acquisition
properties of $1.408 million, (2) elimination of third party management
fees and other costs of 1997 acquisition properties that will no longer
be incurred by the REIT of $856 thousand, (3) elimination of accounting
fees related to partnerships acquired that will no longer be incurred by
the REIT of $300 thousand and (4) additional costs of operating as a
public company of $400 thousand.
(e) Represents the net increase in interest expense as a result of the
assumption of additional debt incurred in connection with the acquisition
of the properties net of interest expense related to the repayment of a
portion of the existing debt on the real estate of Tower Predecessor.
(f) Reflects the increase in depreciation and amortization as a result of
the acquisition of the properties using a depreciable life of 40 years
and allocation to land of 20% of acquisition costs.
(g) Reflects the elimination of equity in earnings of properties that are
100% owned subsequent to the formation, net of equity earnings in 2800
North Central and the Tower Management Company.
(h) Reflects the adjustments to pro forma income attributable to the
minority interest at 8.93% in the Operating Partnership.
(8) Includes the dilutive effect of preferred stock dividends of $2,749 thousand
from January 1, 1998 through September 30, 1998 and $3,612 thousand for the
twelve months ended December 31, 1997.
208
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Reckson class B common stock and Reckson
OP 7% notes offered by this Joint Proxy Statement/Prospectus and the legal
matters described under "The Merger-- Material U.S. Federal Income Tax
Considerations of the Merger" and "Federal Income Tax Consequences Relating to
an Investment in Reckson Class B Common Stock and Reckson OP 7% Notes" will be
passed upon for Reckson and Reckson OP by Brown & Wood LLP, New York, New York.
Tax matters relating to Tower's qualification as a REIT will be passed upon for
Tower by Battle Fowler LLP.
EXPERTS
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of Reckson Associates Realty Corp. as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 included in Reckson's Form 8-K dated March 1, 1999; the
consolidated financial statements and schedule of Reckson Associates Realty
Corp. as of December 31, 1997 and December 31, 1996 and for the years then ended
and for the period June 3, 1995 to December 31, 1995 and the combined financial
statements of the Reckson Group for the period January 1, 1995 to June 2, 1995
included in Reckson's Annual Report on Form 10-K for the year ended December 31,
1997; and the combined statement of revenues and certain expenses of the New
Jersey Portfolio (as defined therein) for the year ended December 31, 1996, the
combined statement of revenues and certain expenses for the Hauppauge Portfolio
(as defined therein) for the year ended December 31, 1996 and the statement of
revenues and certain expenses of the Uniondale Office Property (as defined
therein), for the year ended December 31, 1996, appearing in Reckson's Form 8-K,
dated February 18, 1997; and the statement of revenues and certain expenses of
710 Bridgeport Avenue (as defined therein), for the year ended December 31, 1996
and the statement of revenues and certain expenses of the Shorthills Office
Center (as defined therein) for the year ended December 31, 1996 appearing in
Reckson's Form 8-K dated June 12, 1997; and the statement of revenues and
certain expenses of Garden City Plaza for the year ended December 31, 1996,
appearing in Reckson's Form 8-K dated September 9, 1997, and the statement of
revenues and certain expenses of the Christiana Office Property (as defined
therein), for the year ended June 30, 1997, appearing in Reckson's Form 8-K
dated February 10, 1998, and the statement of revenues and certain expenses of
the Stamford Office Property (as defined therein) for the year ended December
31, 1997, appearing in Reckson's Form 8-K dated March 24, 1998; and the
statement of revenues and certain expenses of the Cappelli Portfolio (as defined
therein) for the year ended December 31, 1997, appearing in Reckson's Form 8-K
dated April 6, 1998, incorporated in this Joint Proxy Statement/Prospectus by
reference. These consolidated and combined financial statements are incorporated
by reference in reliance on their reports, given on their authority as experts
in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements and schedule of Reckson Operating Partnership L.P. as of
December 31, 1998 and December 31, 1997 and for each of the three years, the
period ended December 31, 1998 as set forth in their report, which is included
in this Joint Proxy Statement/Prospectus. These financial statements are
included in reliance on their report, given on their authority as experts in
accounting and auditing.
The consolidated balance sheet of Tower as of December 31, 1997 and the
combined balance sheet of Tower Predecessor as of December 31, 1996 and the
consolidated statement of income, retained earnings and cash flows of Tower for
the period from March 27, 1997 through December 31, 1997 and the combined
statements of income, retained earnings and cash flows of Tower Predecessor for
the period from January 1, 1997 through October 15, 1997 and the years ended
December 31, 1996 and 1995, included in this Joint Proxy Statement/Prospectus,
have been included herein in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of that firm as experts in
accounting and auditing.
209
<PAGE>
FUTURE STOCKHOLDER PROPOSALS
Proposals of stockholders intended for inclusion in Reckson's proxy
materials relating to the 1999 annual meeting must have been received at
Reckson's principal executive offices not later than December 8, 1998.
For a proposal of a Reckson stockholder to be presented at Reckson's 1999
annual meeting, other than a stockholder proposal included in Reckson's proxy
materials pursuant to Rule 14a-8 of the Exchange Act, it must have been received
at the principal executive offices of Reckson after November 21, 1998 and before
March 8, 1999, unless the 1999 annual meeting is rescheduled to take place
before May 14, 1999 or after July 21, 1999, in which case Reckson stockholders
generally must provide written notice within 20 calendar days after the date on
which public announcement of the date of such meeting is first made. Any
proposal should be mailed to: Reckson Associates Realty Corp., 225 Broadhollow
Road, Melville, New York, 11747 Attn: Gregg M. Rechler, Secretary.
Due to the contemplated completion of the merger, Tower does not currently
expect to hold a 1999 annual meeting of stockholders. In the event that the
merger is not completed and an annual meeting is held, to be eligible for
inclusion in Tower's proxy statement and form of proxy relating to that meeting,
proposals of stockholders intended to be presented at the annual meeting must be
received by Tower either (a) within a reasonable time after Tower announces
publicly the date of the meeting and before Tower mails its proxy statement to
stockholders in connection with the annual meeting, or (b) no later than June
15, 1999, if Tower has announced publicly its intention not to complete the
merger prior to June 15, 1999.
WHERE YOU CAN FIND MORE INFORMATION
Tower and Reckson file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements or other information that the companies file at the SEC's
public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549 or in
New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330
for further information on the public reference rooms. The public filings of
Tower and Reckson are also available to the public from commercial document
retrieval services and at the Internet World Wide Web site maintained by the SEC
at "http://www.sec.gov." Reports, proxy statements and other information
concerning Tower and Reckson also may be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
Reckson and Reckson OP have filed a Registration Statement to register with
the SEC the offering of the shares of Reckson class B common stock that will be
issued, and the Reckson OP 7% notes that may be issued, to Tower stockholders
and Tower OP unitholders in connection with the merger. This Joint Proxy
Statement/Prospectus is a part of the Registration Statement and constitutes a
proxy statement for each of Reckson and Tower for their special meetings of
stockholders and a prospectus for each of Reckson and Reckson OP for the
offering of the Reckson class B common stock and Reckson OP 7% notes.
As allowed by SEC rules, this Joint Proxy Statement/Prospectus does not
contain all the information that stockholders can find in the Registration
Statement or the exhibits to the Registration Statement.
The SEC allows Reckson and Tower to "incorporate by reference" information
into this Joint Proxy Statement/Prospectus, which means that the companies can
disclose important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this Joint Proxy Statement/Prospectus, except for any information
superseded by information contained directly in the Joint Proxy
Statement/Prospectus. This Joint Proxy Statement/Prospectus incorporates by
reference the documents listed below that Reckson has previously
210
<PAGE>
filed with the SEC. These documents contain important information about Reckson
and its business and financial condition and performance.
<TABLE>
<CAPTION>
RECKSON SEC FILINGS (FILE NO. 1G15313762) PERIOD
- --------------------------------------------- ---------------------------------------------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1997
Quarterly Reports on Form 10-Q Quarters ended March 31, 1998, June 30, 1998
and September 30, 1998
Current Reports on Form 8-K Filed February 18, 1997, June 12, 1997,
(including Form 8-K/A) September 9, 1997, January 8, 1998, January
26, 1998, February 10, 1998, February 12,
1998, March 24, 1998, April 6, 1998, July 22,
1998, August 14, 1998, November 2, 1998,
December 22, 1998 and March 1, 1999
Registration Statement on Form 8-A Filed May 9, 1995 (as amended)
Registration Statement on Form 8-A Filed April 9, 1998
</TABLE>
Reckson and Tower hereby incorporate by reference additional documents that
either company may file with the SEC between the date of this Joint Proxy
Statement/Prospectus and the date of its special meeting.
Documents incorporated by reference can be obtained through Reckson or
Tower, as the case may be, or the SEC or the SEC's Internet World Wide Web site
described above. Documents incorporated by reference are available from the
companies without charge, excluding all exhibits unless specifically
incorporated by reference as an exhibit to this Joint Proxy
Statement/Prospectus. You may obtain documents incorporated by reference in this
Joint Proxy Statement/Prospectus by requesting them in writing or by telephone
from the appropriate party at the following addresses:
<TABLE>
<S> <C>
Reckson Associates Realty Corp. Tower Realty Trust, Inc.
225 Broadhollow Road 292 Madison Avenue
Melville, NY 11747 New York, NY 10017
(516) 694-6900 (212) 448-1864
Attn: Susan McGuire Attn: Peggy D. Rawitt
</TABLE>
If you would like to request documents from either company, please do so by
, 1999 to receive them before the special meetings. If you request any
incorporated documents from either Reckson or Tower, they will mail them to you
by first class mail, or other equally prompt means, within one business day of
your request.
You should rely only on the information contained or incorporated by
reference in this Joint Proxy Statement/Prospectus to vote your shares at the
Reckson special meeting or the Tower special meeting, as the case may be.
Reckson and Tower have not authorized anyone to provide you with information
that is different from what is contained or incorporated by reference in this
Joint Proxy Statement/ Prospectus. This Joint Proxy Statement/Prospectus is
dated , 1999. You should not assume that the information contained
in the Joint Proxy Statement/Prospectus is accurate as of any date other than
that date, and neither the mailing of this Joint Proxy Statement/Prospectus to
stockholders nor the issuance of the Reckson securities in the merger shall
create any implication to the contrary.
211
<PAGE>
GLOSSARY
ACQUISITION PROPOSAL: Any offer or proposal for a merger, consolidation,
recapitalization, liquidation or other business combination involving Tower or
any of its subsidiaries, or the acquisition or purchase of 50% or more of any
class of equity securities of Tower or any of its subsidiaries, or any tender
offer, or exchange offer that if completed would result in any person
beneficially owning 50% or more of any class of equity securities of Tower or
any of its subsidiaries, or all or substantially all of the assets of, Tower and
its subsidiaries, other than the transactions contemplated by the merger
agreement.
ADVERSE RECOMMENDATION EVENT: This occurs if the Reckson board of directors
withdraws or amends or modifies in any material respect, or publicly announces
an intention to withdraw or amend or modify in any material respect, its
approval or recommendation of the share issuance proposal.
AGGREGATE FUNDS FROM OPERATIONS GROWTH: The fraction with respect to any
Class B Year, the numerator of which is the excess of funds from operations per
share of Reckson common stock in such Class B Year over the funds from
operations per share of Reckson common stock in the Base Year, in each case,
calculated on a fully diluted basis and the denominator of which is the Base
Year FFO, calculated on a fully diluted basis.
AICPA: American Institute of Certified Public Accountants.
ANNUAL SERVICE CHARGE: The amount which is expensed or capitalized in any
12-month period for interest on Indebtedness.
BASE YEAR: The 12-month period ending on the last day of the calendar
quarter in which the Class B Issue Date occurs.
BASE YEAR FFO: Class B Year over the funds from operations per share of
Reckson common stock in the Base Year.
BASE YEAR QUARTERLY DIVIDEND: $0.3375 per share.
BOOK TAX DIFFERENCE: The amount of unrealized gain or unrealized loss which
is generally equal to the difference between the fair market value of
contributed property at the time of contribution, and the adjusted tax basis of
such property at the time of contribution.
BUILT-IN GAIN: Pursuant to IRS Notice 88-19, a REIT may elect, in lieu of
the treatment described above, to be subject to tax at the highest regular
corporate tax rate on the excess, if any, of the fair market value over the
adjusted basis of any such asset as of the beginning of the date of acquisition
if it recognizes gain on the disposition of any such assets during the 10 year
period following their acquisition.
CLASS B DIVIDEND AMOUNT: With respect to any quarterly period an amount
equal to 1/4th of the product of (a) the Unadjusted Class B Dividend Amount for
the Class B Year in which such quarterly period occurs, multiplied by (b) the
Dividend Payment Percentage for such quarterly period.
CLASS B ISSUE DATE: The date on which the Reckson class B common stock is
first issued.
CLASS B YEAR: The Base Year and each consecutive 12-month period
thereafter.
CONSOLIDATED INCOME AVAILABLE FOR DEBT SERVICE: Consolidated net income of
Reckson OP and its subsidiaries (1) plus amounts which have been deducted for
(a) interest on Indebtedness of Reckson OP and its Subsidiaries, (b) provision
for taxes of Reckson OP and its subsidiaries based on income, (c) amortization
of debt discount, (d) depreciation and amortization, (e) the effect of any
non-cash charge resulting from a change in accounting principles in determining
consolidated net income for
212
<PAGE>
such period, (f) amortization of deferred charges, and (g) provisions for or
realized losses on properties and (2) less amounts which have been included for
gains on properties.
CONVERSION EVENT: The cessation of use of (a) a currency, currency unit or
composite currency both by the government of the country which issued such
currency and for the settlement of transactions by a central bank or other
public institutions of or within the international banking community or (b) the
euro both within the European Monetary System and for the settlement of
transactions by public institutions of or within the European Community.
DIVIDEND PAYMENT PERCENTAGE: With respect to any quarterly period the
lesser of (a) 1 and (b) the fraction (expressed as a percentage) equal to (1)
the dividend paid per share on the Reckson common stock in such quarter over (2)
the Base Year Quarterly Dividend.
EITF 97-11: Statement issued by the Emerging Issues Task Force of the
Financial Accounting Standards Board, "Accounting for Internal Costs Relating to
Real Estate Property Acquisitions". This requires that the internal
pre-acquisition costs of identifying and acquiring operating property be
expensed as incurred.
EXCHANGE CONSIDERATION AMOUNT: On any date of determination, the product of
(a) the market price of Reckson common stock on such date multiplied by (b) the
exchange rate on such date, without giving effect to any adjustment described in
this paragraph.
FFO: means "funds from operations" as defined by NAREIT.
FASB: Financial Accounting Standards Board.
FASB 131: Financial Accounting Standards No. 131 "Disclosures About
Segments of an Enterprise and Related Information" establishes the disclosure
requirements for reporting segment information. Effective for fiscal years
beginning after December 15, 1997.
FASB 132: Financial Accounting Standards No. 132 "Employers Disclosures
About Pensions and Other Post-retirement Benefits" changes the current financial
statement disclosure requirements related to pensions, settlements and
curtailments of pensions and post-retirement benefits other than pensions.
Effective for fiscal years beginning after December 15, 1997.
FIRPTA: Foreign Investment in Real Property Tax Act of 1980.
FIVE OR FEWER REQUIREMENT: The Internal Revenue Code rule that in order for
an entity to qualify as a REIT under the Internal Revenue Code, among other
things, not more than 50% in value of its outstanding capital stock may be
owned, directly or indirectly, by five or fewer individuals during the last half
of a taxable year, and such shares of capital stock must be beneficially owned
by 100 or more persons at least 335 days of a taxable year of 12 months (other
than the first year) or during a proportionate part of shorter taxable year.
FORECLOSURE PROPERTY: Real property and any personal property incident to
such real property which is acquired as a result of a default either on a lease
of such property or indebtedness which was secured by such property and with
respect to which an appropriate election is made, except that property ceases to
be foreclosure property (a) upon the close of the third taxable year following
the taxable year in which the REIT acquired the property (except that such time
period may be extended for up to three years with permission from the IRS) or,
if earlier, (b) when the REIT engages in construction on the property (other
than for completion of improvements) or (c) if the REIT holds the property for
more than 90 days and uses the property in a business conducted by the REIT
other than through an independent contractor.
213
<PAGE>
GAAP: Accounting principles as are generally accepted in the United States
of America as of the date or time of any required computation.
GOVERNMENT OBLIGATIONS: Securities which are (a) direct obligations of the
United States of America or the government which issued the foreign currency in
which the securities issued under the Indenture of a particular series are
payable, for the payment of which its full faith and credit is pledged or (b)
obligations of a person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which issued
the foreign currency in which the securities issued under the Indenture of such
series are payable, the payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America or such other
government, which, in either case, are not callable or redeemable at the option
of the issuer of the securities, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such
Government Obligation or a specific payment of interest on or principal of any
such Government Obligation held by such custodian for the account of the holder
of a depository receipt, PROVIDED that, except as required by law, such
custodian is not authorized to make any deduction from the amount payable to the
holder of such depository receipt from any amount received by the custodian in
respect of the Government Obligation or the specific payment of interest on or
principal of the Government Obligation evidenced by such depository receipt.
INDEBTEDNESS: Any indebtedness, whether or not contingent, in respect of
(a) borrowed money evidenced by bonds, notes, debentures or similar instruments,
(b) indebtedness secured by any mortgage, pledge, lien, charge, encumbrance or
any security interest existing on property, (c) the reimbursement obligations,
contingent or otherwise, in connection with any letters of credit actually
issued or amounts representing the balance deferred and unpaid of the purchase
price of any property except any such balance that constitutes an accrued
expense or trade payable or (d) any lease of property as lessee which would be
reflected on a balance sheet as a capitalized lease in accordance with GAAP, in
the case of items of indebtedness under (a) through (c) above to the extent that
any such items (other than letters of credit) would appear as a liability on a
balance sheet in accordance with GAAP, and also includes, to the extent not
otherwise included, any obligation to be liable for, or to pay, as obligor,
guarantor or otherwise (other than for purposes of collection in the ordinary
course of business), indebtedness of another Person.
LIBOR: London Interbank Offered Rate.
LIQUIDATION PREFERENCE: $18.44 per share of Tower series A preferred stock.
NAREIT: The National Association of Real Estate Investment Trusts.
NET INCOME FROM FORECLOSURE PROPERTY: The net gain from disposition of
foreclosure property which is held primarily for sale to customers in the
ordinary course of business or (b) other net income from foreclosure property
which would not satisfy the 75% gross income test (discussed below).
PERMITTED DEBT: Indebtedness of Reckson OP or any subsidiary owing to any
subsidiary or Reckson OP; PROVIDED that any such Indebtedness is made pursuant
to an intercompany note and is subordinated in right of payment to the Reckson
OP 7% notes; PROVIDED FURTHER that any disposition, pledge or transfer of any
such Indebtedness to a Person (other than Reckson OP or another subsidiary)
shall be deemed to be an incurrence of such Indebtedness by Reckson OP or a
subsidiary, as the case may be, and not Permitted Debt.
RELATED PARTY TENANT: A tenant of which the REIT, or an owner of ten percent
or more of the REIT, directly or constructively, owns ten percent or more.
SET APART FOR PAYMENT: Recording by Reckson in its accounting ledgers of
any accounting or bookkeeping entry which indicates, pursuant to an
authorization of a dividend or other distribution by
214
<PAGE>
the Reckson board of directors, the allocation of funds to be so paid on any
series or class of shares of Reckson.
SFAS 130: The Standards Board Statement of Financial Accounting Standards
No. 130 specifies the presentation and disclosure requirements for reporting
comprehensive income, which includes items which have been formerly reported as
a component of stockholders' equity.
SOP 98-1: Statement of Position 98-1. "Accounting for the Costs of Computer
Software Developed for Internal Use"; issued by the AICPA. Provides guidance on
whether the costs of computer software developed or obtained for internal use
should be capitalized or expensed. Effective for the fiscal years beginning
after December 15, 1988.
SOP 98-5: Statement of Position 98-5. "Reporting on the Cost of Start-Up
Activities"; issued by the AICPA. This requires that certain costs incurred in
conjunction with start-up activities be expensed. Effective for the fiscal years
beginning after December 15, 1988.
TOTAL UNENCUMBERED ASSETs: The sum of (a) those Undepreciated Real Estate
Assets not subject to a Lien on a consolidated basis, (b) all other assets of
Reckson OP, and of its subsidiaries determined at the applicable proportionate
interest of Reckson OP in each such subsidiary, which are not subject to a Lien
determined in accordance with GAAP (but excluding intangibles and accounts
receivable) and (c) the cost of any property of Reckson OP, or any subsidiary
thereof, in which Reckson OP, or such subsidiary, as the case may be, has a
firm, non-contingent purchase obligation and which is not subject to a Lien.
TOTAL ASSETS: The sum of (a) the Undepreciated Real Estate Assets, (b) all
other assets of Reckson OP, and of its subsidiaries determined at the applicable
proportionate interest of Reckson OP in each such subsidiary, determined in
accordance with GAAP (but excluding intangibles and accounts receivable) and (c)
the cost of any property of Reckson OP, or any subsidiary thereof, in which
Reckson OP, or such subsidiary, as the case may be, has a firm, non-contingent
purchase obligation.
TOWER PREDECESSOR: The following entities controlled and managed by Tower
Equities & Realty: Tower 45, 120 Mineola Boulevard, Maitland Forum, three
Maitland Center Parkway Properties, 5750 Major Boulevard and the predecessor
management companies, including Tower Equities & Realty Corp., CXX Mineola
Management Corp., Forum Realty and Management Corp., and Tower Equities of
Arizona L.L.C.
TOWER PREFERRED STOCK CONVERSION PRICE: The conversion price per share of
Tower common stock for which shares of the Tower series A preferred stock are
convertible, as may be adjusted pursuant to the Tower articles supplementary.
The initial conversion price shall be $18.44, per share which is equivalent to
an initial conversion rate of one share of Tower common stock for each share of
Tower series A preferred stock.
TOWER PREFERRED STOCK DIVIDEND PERIODS: Quarterly dividend periods
commencing on January 1, April 1, July 1 and October 1 of each year and ending
on and including the first day of the next succeeding Tower Preferred Stock
Dividend Period other than (a) the initial Tower Preferred Stock Dividend
Period, which commenced on December 9, 1999 and ended on and included December
31, 1998 and (b) if the Trigger Date occurs on a date other than January 1,
April 1, July 1 or October 1 (the "quarter dates"), the period from the
immediately prior quarter date of the Trigger Date and the period from and
including the Trigger Date to the immediately succeeding quarter date.
TRIGGER DATE: The date of termination of the merger agreement.
UBTI: Unrelated business taxable income.
215
<PAGE>
UBTI PERCENTAGE: The UBTI Percentage is the gross income derived by the
REIT from an unrelated trade or business (determined as if the REIT were a
pension trust) divided by the gross income of the REIT for the year in which the
dividends are paid.
UNADJUSTED CLASS B DIVIDEND AMOUNT: (a) $2.24 per share for the first Class
B Year after the Base Year and (b) with respect to any Class B Year thereafter,
an amount equal to $2.24 multiplied by the sum of (1) one plus (2) 70% of
Aggregate Funds From Operations Growth for the prior Class B Year.
UNDEPRECIATED REAL ESTATE ASSETS: The cost (original cost plus capital
improvements) of real estate assets of Reckson OP and its subsidiaries before
depreciating and amortization, determined on a consolidated basis in accordance
with GAAP.
USRPI: United States real property interest.
USRPI CAPITAL GAINS: Under FIRPTA, a distribution made by a REIT to a
Non-U.S. Holder attributable to Gains from dispositions by the REIT of USRPIs
such as the properties directly or indirectly owned by the REIT.
216
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Acquisition Agreements............. 85
Adjusted Total Assets.............. 156
AFFO............................... 63
Book-Tax Difference................ 172
Built-in Gain...................... 169, 211
Carlyle............................ 79
Complaint.......................... 119
Conversion Event................... 212
Conversion Price................... 165
Dividend Periods................... 214
DRA Joint Venture Companies........ 32, 122
Exchange Consideration Amount...... 212
Exchange Date...................... 147
Exchange Notice.................... 147
Exchange Rate...................... 147
Excluded Properties................ 114
Exempt Organizations............... 177
Expense Amount..................... 93
FASB............................... 132
FASB 131........................... 132
FASB 132........................... 132, 212
FIRPTA............................. 175
Funds from Operations,............. 32
Government Obligations............. 213
Holders............................ 155
Initial Bidder..................... 48
Interested Stockholder............. 111
Material adverse effect............ 87
Merger............................. 46
Merrill Lynch Opinion.............. 59
Morgan Stanley Investors........... 79
Mortgage Debt...................... 129
MSAM............................... 79
MSAM Notes......................... 113
Net income from foreclosure
property......................... 213
Non-U.S. Holder.................... 174
Offering........................... 123
OID................................ 74
Owner's Statement.................. 176
Ownership Limit.................... 108
Parity Shares...................... 167
Prohibited Owner................... 109
Reckson Class B Common Stock
Articles Supplementary........... 152
Reckson Comparable Companies....... 64
Related Party Tenant............... 213
SDAT............................... 80
Secured Debt....................... 156
Term Loan.......................... 113
TIN................................ 73
Tower Articles Supplementary....... 165
Tower Predecessor.................. 123
Trigger Date....................... 165
UBTI Percentage.................... 177
USRPI.............................. 175
</TABLE>
217
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Tower Realty Trust, Inc.:
<TABLE>
<CAPTION>
UNAUDITED FINANCIAL STATEMENTS PAGE
- --------------------------------------------------------------------------------------------------------------- -------------
<S> <C>
Condensed Consolidated Balance Sheet of Tower Realty Trust, Inc (the "Company") as of September 30, 1998....... F-2
Condensed Consolidated Statements of Operations of the Company for the Nine Months Ended September 30, 1998 and
1997 and Condensed Combined Statement of Operations of Tower Predecessor for the Nine Months Ended September
30, 1997..................................................................................................... F-3
Condensed Consolidated Statement of Cash Flows of the Company for the Nine Months Ended September 30, 1998 and
1997 and Condensed Combined Statement of Cash Flows of the Tower Predecessor for the Nine Months Ended
September 30, 1997........................................................................................... F-4
Notes to Condensed Consolidated and Combined Financial Statements.............................................. F-5-F-15
<CAPTION>
AUDITED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Auditors................................................................................. F-16
Consolidated and Combined Balance Sheets of Tower Realty Trust Inc. (the "Company")
as of December 31, 1997 and Combined Balance Sheet of Tower Predecessor as of December 31, 1996................ F-17
Consolidated and Combined Statements of Income of the Company for the period from March 27, 1997 (inception of
the Company) to December 31, 1997 and Combined Statements of Income for Tower Predecessor for the period
January 1, 1997 to October 15, 1997, and the Years Ended December 31, 1996 and 1995.......................... F-18
Consolidated and Combined Statements of Changes in Shareholders' Equity of the Company for the period from
March 27, 1997 (inception of the Company) to December 31, 1997 and Combined Statements of Changes in Owners'
Deficit of Tower Predecessor for the Period January 1, 1997 to October 15, 1997 and the Years Ended December
31, 1996 and 1995............................................................................................ F-19
Consolidated and Combined Statement of Cash Flows of the Company for the period March 27, 1997 (inception of
the Company) to December 31, 1997 and Combined Statements of Cash Flows of Tower Predecessor for the period
January 1, 1997 to October 15, 1997, and the Years Ended December 31, 1996 and 1995.......................... F-20
Notes to Consolidated and Combined Financial Statements........................................................ F-21-F-34
<CAPTION>
FINANCIAL STATEMENT SCHEDULE
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Schedule III--Real Estate Owned................................................................................ F-35-F-37
Reckson Operating Partnership, L.P. and The Reckson Group:
Report of Independent Auditors................................................................................. F-38
Consolidated Balance Sheets as of September 30, 1998 (unaudited), December 31, 1997 and December 31, 1996...... F-39
Consolidated Statement of Income for the nine months ended September 30, 1998, 1997 (unaudited), the years
ended December 31, 1997, 1996 and for the period from June 3, 1995 to December 31, 1995 and the Combined
Statement of Income for the period from January 1, 1995 to June 2, 1995...................................... F-40
Consolidated Statement of Partners' Capital for the nine months ended September 30, 1998 (unaudited), the years
ended December 31, 1997, 1996 and for the period from June 3, 1995 to December 31, 1995 and the Combined
Statement of Owners' (Deficit) for the period from January 1, 1995 to June 2, 1995........................... F-41
Consolidated Statement of Cash Flows for the nine months ended September 30, 1998 and 1997 (unaudited), the
years ended December 31, 1997, 1996 and from the period from June 3, 1995 to December 31, 1995 and the
Combined Statement of Cash Flows for the period January 1, 1995 to June 2, 1995.............................. F-42
Notes to Consolidated Financial Statements..................................................................... F-43
Schedule III--Real Estate and Accumulated Depreciation......................................................... F-63-F-70
</TABLE>
F-1
<PAGE>
TOWER REALTY TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
Real estate........................................................................................ $ 686,697
Less: accumulated depreciation................................................................... (14,040)
-------------
672,657
Deferred charges, net.............................................................................. 12,798
Receivables, net................................................................................... 8,767
Cash and cash equivalents.......................................................................... 7,175
Escrowed cash...................................................................................... 7,307
Other assets....................................................................................... 6,143
Investments in joint ventures...................................................................... 2,968
-------------
Total assets................................................................................... $ 717,815
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Debt on real estate................................................................................ $ 228,760
Line of credit..................................................................................... 62,400
Accounts payable and accrued liabilities........................................................... 11,027
Distributions payable.............................................................................. 7,877
Deferred real estate taxes payable................................................................. 9,713
Other liabilities.................................................................................. 9,613
Amounts due to affiliates.......................................................................... 309
-------------
Total liabilities.............................................................................. 329,699
-------------
Minority interest in Operating Partnership net of dividends declared............................... 35,065
-------------
Stockholders' equity:
Preferred shares 50,000,000 shares authorized, none issued and outstanding......................... --
Common shares, $0.01 par value, 150,000,000 shares authorized, 16,959,355 shares issued and
outstanding...................................................................................... 169
Additional paid in capital......................................................................... 365,814
Distribution in excess of accumulated earnings..................................................... (12,932)
-------------
Total stockholders' equity..................................................................... 353,051
-------------
Total liabilities and stockholders' equity..................................................... $ 717,815
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
TOWER REALTY TRUST, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOWER
THE COMPANY THE COMPANY PREDECESSOR
(CONSOLIDATED) (CONSOLIDATED) (COMBINED)
FOR THE NINE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997(1) 1997
----------------- ------------------- -------------
<S> <C> <C> <C>
Revenues:
Rental income.............................................. $ 82,568 $ -- $ 20,513
Management fees............................................ -- 1,147 318
Construction, leasing and other fees....................... 660 33 562
----------------- ----- -------------
Total revenues........................................... 83,228 1,180 21,393
----------------- ----- -------------
Expenses:
Property operating and maintenance......................... 19,513 -- 4,209
Real estate taxes.......................................... 11,040 -- 3,493
General and administrative................................. 6,585 1,532 2,130
Interest expense........................................... 15,144 229 10,772
Depreciation and amortization.............................. 13,149 -- 5,255
Ground rent/air rights expense............................. 512 -- 449
Sale of the Company........................................ 3,865 -- --
Severance and other compensation costs..................... 2,454 -- --
----------------- ----- -------------
Total expenses........................................... 72,262 1,761 26,308
----------------- ----- -------------
Equity in income of joint ventures and unconsolidated
subsidiaries............................................. 557 187 85
Net income (loss) before extraordinary gain on early
extinguishment of debt and minority interest............. 11,523 (394) (4,830)
Extraordinary gain on early extinguishment of debt......... -- -- 6,475
Minority interest.......................................... (1,027) -- --
----------------- ----- -------------
Net income (loss)........................................ $ 10,496 (394) 1,645
----------------- ----- -------------
----------------- ----- -------------
Net income per common share--basic and dilutive $ .62
-----------------
-----------------
Weighted average number of common shares outstanding--basic
and dilutive............................................. 16,941,961
-----------------
-----------------
</TABLE>
(1) The Company (Consolidated) for the nine months ended September 30, 1997
represents operations from March 27, 1997 (date of inception) to September
30, 1997.
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TOWER REALTY TRUST, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY TOWER PREDECESSOR
THE COMPANY (CONSOLIDATED) (COMBINED)
(CONSOLIDATED) FOR THE NINE FOR THE NINE
FOR THE NINE MONTHS ENDED MONTHS ENDED
MONTHS ENDED SEPTEMBER 30, 1997 SEPTEMBER 30,
SEPTEMBER 30, 1998 (1) 1997
------------------- ------------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ 10,496 $ (394) $ 1,645
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 13,149 -- 4,349
Amortization of deferred financing costs............ 1,288 -- 906
Unbilled rental income.............................. (5,245) -- 1,012
Extraordinary gain on early extinguishment of debt...... -- -- (6,475)
Equity in income of joint ventures and unconsolidated
subsidiaries.......................................... (557) (187) --
Changes in assets and liabilities:
Receivables............................................. 298 (190) (1,567)
Escrowed cash........................................... (934) -- (352)
Other assets............................................ 2,020 -- 907
Deferred real estate taxes liability.................... (45) -- --
Accounts payable and other liabilities.................. 6,534 487 566
Minority interest....................................... 1,027 -- --
Other liabilities and amounts due to affiliates......... 2,948 -- 3,527
Stock compensation to employees......................... 682 -- --
------- ------- -------
Net cash provided by operating activities............... 31,661 (284) 4,518
------- ------- -------
Cash flows from investing activities:
Acquisitions of real estate, joint venture interests and
tenant improvements................................... (65,912) (11,200) (3,362)
Contribution to Management company...................... -- -- 591
Increase in due from affiliates......................... -- (750) --
------- ------- -------
Net cash used in investing activities................... (65,912) (11,950) (2,771)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt on real estate and other debt........ 119,910 12,299 15,581
Repayments of debt on real estate....................... (57,740) -- (17,360)
Partners' contributions, net............................ -- -- (6)
Distributions to OP Unitholders......................... (1,995) -- --
Distributions to common stockholders.................... (20,296) -- --
Proceeds from issuance of common stock.................. -- 1 --
Proceeds from Lawrence H. Feldman in lieu of OP Units... 200 -- --
------- ------- -------
Net cash provided by (used in) financing activities..... 40,079 12,300 (1,785)
------- ------- -------
Net increase (decrease) in cash and cash equivalents.... 5,828 66 (38)
Cash and cash equivalents, beginning of period.......... 1,347 -- 4,985
------- ------- -------
Cash and cash equivalents, end of period................ $ 7,175 $ 66 $ 4,947
------- ------- -------
------- ------- -------
</TABLE>
- ------------------------------
(1) The Company (Consolidated) for the nine months ended September 30, 1997
represents operations from March 27, 1997 (date of inception) to September
30, 1997.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
TOWER REALTY TRUST, INC.
Tower Realty Trust, Inc. (collectively with its subsidiaries, the "Company")
was incorporated in the state of Maryland on March 27, 1997. The Company
operates so as to qualify as a real estate investment trust ("REIT") for federal
income tax purposes. As of October 16, 1997, the Company consummated an initial
public offering (the "Offering") of 13,817,250 shares of common stock, par value
$0.01 per share (the "Common Stock") (including the exercise of the
underwriters' over-allotment option of 1,802,250 shares) and effected concurrent
private placements (the "Concurrent Private Placements") of 1,153,845 shares of
Common Stock at a price of $26.00 per share and realized net proceeds therefrom
of approximately $353.35 million. In addition, in connection with the formation
transactions (the "Formation Transactions") relating to the Offering, including
the acquisition of certain property interests and the cancellation of certain
indebtedness, the Company issued 1,949,360 shares of Common Stock. Upon
consummation of the Offering, the Company acquired a sole 1% general partner
interest in Tower Realty Operating Partnership, L.P., a Delaware limited
partnership (the "Operating Partnership") and a 90.4% limited partner interest
in the Operating Partnership. At September 30, 1998, the Company had a 1%
general partnership interest and a 90.0% limited partner interest in the
Operating Partnership.
The Company was formed to continue and expand the commercial real estate
business of Tower Equities & Real Estate Corp. and its affiliates (collectively
with its predecessor entities and affiliates, "Tower Equities"), including
developing, acquiring, owning, renovating, managing, and leasing office
properties in the Manhattan, Phoenix, Tucson, and Orlando markets. Upon
consummation of the Offering and the Formation Transactions, the Operating
Partnership owned or had interests in 21 office properties (the "Initial
Properties"). On (i) December 31, 1997, the Company purchased the approximately
700,000 square foot office tower located at 810 Seventh Avenue in midtown
Manhattan ("810 Seventh Avenue") for approximately $150.0 million, including
closing costs, (ii) January 16, 1998, the Company purchased the approximately
126,000 square foot Blue Cross/Blue Shield office complex located in Phoenix,
Arizona ("Blue Cross/Blue Shield") for $16.9 million (see Note 4) and (iii) May
6, 1998, the Company purchased the approximately 335,000 square foot, 25 story
downtown New York City office building located on 90 Broad Street (the "90 Broad
Property") for approximately $34.3 million (see Note 4). The Initial Properties,
together with 810 Seventh Avenue, Blue Cross/Blue Shield and the 90 Broad
Property, are collectively referred to herein as the "Properties." The Company
also owns or has an option to acquire four parcels of land adjacent to four
properties (the "Development Parcels"), which can support 2.2 million rentable
square feet of development. In November 1997, the Company exercised its option
to purchase one of the optioned Development Parcels located in Phoenix, Arizona
for approximately $10.3 million.
On March 31, 1997, interests in certain partnerships, properties and limited
liability companies were contributed to the Operating Partnership in exchange
for units of limited partnership interest in the Operating Partnership (the "OP
Units"). Certain of these interests were owned by the Operating Partnership
after consummation of the Offering. Simultaneously with such contribution of
these interests, the Company issued $12.3 million of notes (the "MSAM Notes") to
certain investors advised by Morgan Stanley Asset Management, Inc. ("MSAM"). The
MSAM Notes were collateralized by certain interests in the Properties. Upon
completion of the Offering, all MSAM Notes were converted into Common Stock of
the Company.
F-5
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION: (CONTINUED)
The net proceeds from the Offering were contributed to the Operating
Partnership in exchange, in part, for the Company's approximate 91.4% interest
therein. The Operating Partnership used the proceeds received from the Company,
the $107.0 million net cash proceeds from the Company's term loan facility (the
"Term Loan"), borrowed concurrent with and subsequent to the Offering and
approximately $12.3 million of proceeds received in connection with the issuance
of the MSAM Notes, as follows: (i) approximately $281.0 million for repayment of
certain indebtedness (including associated prepayment penalties) relating to the
Initial Properties and the partnerships that own the Initial Properties (the
"Property Partnerships"), (ii) approximately $137.0 million to acquire certain
equity, debt and fee interests in the Initial Properties; (iii) approximately
$3.1 million to pay for commitment fees and expenses related to the Term Loan
and the Company's $200.0 million unsecured line of credit (the "Line of
Credit"); (iv) approximately $3.0 million to pay transfer taxes and other
expenses associated with the acquisition of the Initial Properties; and (v) the
remaining approximately $48.6 million for working capital.
The Tower Equities management and leasing companies and Properties Atlantic,
Inc. management and leasing company (which, prior to the Offering, was
controlled and operated by Clifford L. Stein, Managing Director, Southeast
Region of the Company) (collectively, the "Predecessor Management Companies")
contributed an undivided 95% interest in the assets of such companies to the
Operating Partnership, which, in turn, recontributed such assets to Tower
Equities Management, Inc. (the "Management Company") in exchange for 100% of the
non-voting stock and 5% of the voting stock in the Management Company (which
entitles the Company to receive 95% of the dividends of the Management Company).
The Management Company and each of the members of Tower Equities that hold
interests in seven retail properties that continue to be owned by Tower Equities
after the consummation of the Offering (the "Excluded Properties") entered into
management agreements with respect to each of the Excluded Properties. In
consideration for the services to be provided under the management agreements,
the Management Company receives a property management fee and applicable
construction fees and leasing commissions which are determined by reference to
existing market areas for similar transactions.
The Company operates so as to qualify as a real estate investment trust
("REIT") for federal income tax purposes. The federal income tax provisions
governing treatment of a REIT are highly technical, complex and subject to
interpretation. Accordingly, there is no assurance that the Internal Revenue
Service, upon examination would not interpret provisions in a manner that
differs from the Company's interpretation of these provisions.
F-6
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION: (CONTINUED)
TOWER PREDECESSOR
The following properties and entities comprising the Tower Predecessor were
controlled and managed by Tower Equities, all of which were controlled by
Lawrence H. Feldman, the former Chairman of the Board, Chief Executive Officer
and President of the Company (see Note 10):
<TABLE>
<CAPTION>
LAWRENCE H. FELDMAN'S
OWNERSHIP PERCENTAGE LOCATION
--------------------------- -------------------------------------
<S> <C> <C>
Tower 45........................ 6% New York City
120 Mineola Boulevard........... 5% Long Island, NY
Maitland Forum.................. 15% Maitland, FL
Maitland Center Parkway (3
properties)................... 90% Maitland, FL
5750 Major Boulevard (purchased
in October 1996).............. 6% Orlando, FL
Predecessor Management
Companies..................... 90% New York City and Maitland, FL
</TABLE>
Lawrence H. Feldman owned a majority general partner interest in the
partnerships owning these properties. Accordingly, the Tower Predecessor
financial statements reflect, on a combined basis, 100% of the assets,
liabilities and operations of these properties.
Lawrence H. Feldman held a non-controlling interest in the partnerships that
owned the properties listed below. Lawrence H. Feldman was a general partner in
these partnerships and DRA Advisors, Inc. ("DRA") was the managing general
partner. These properties are collectively referred to as the "DRA Joint
Ventures." The Tower Predecessor financial statements reflect the investments in
the DRA Joint Ventures using the equity method of accounting. Upon consummation
of the Offering, the Company purchased all of the partnership interests in the
DRA Joint Ventures:
<TABLE>
<CAPTION>
LAWRENCE H. FELDMAN'S
OWNERSHIP PERCENTAGE LOCATION
--------------------------- ----------------------------------
<S> <C> <C>
286 Madison Avenue................ 3% New York City
290 Madison Avenue................ 3% New York City
292 Madison Avenue................ 3% New York City
Corporate Center Building (6
properties)..................... 20% Phoenix, AZ
5151 East Broadway................ 3% Tucson, Arizona
One Orlando Center................ 3% Orlando, Florida
</TABLE>
Lawrence H. Feldman also held a 3.8% non-controlling interest in a
partnership controlling the 2800 North Central Avenue Property ("2800 North
Central"). The Tower Predecessor financial statements reflect this investment
using the equity method of accounting. The Company, upon consummation of the
Offering, acquired this interest and the interests of Tower Equities (10%
aggregate interest).
F-7
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION: (CONTINUED)
In connection with the acquisition of certain Property Partnership
interests, the Company acquired cash and other assets, the economic benefits of
which were retained by the respective partners. The net aggregate remaining
liability of such partners is reflected in the accompanying financial statements
as due to affiliates.
BASIS OF PRESENTATION
The condensed consolidated balance sheet of the Company as of September 30,
1998, the condensed consolidated statements of operations and cash flows of the
Company for the nine-month period ended September 30, 1998 and the condensed
combined statements of operations and cash flows of Tower Predecessor for the
nine-month period ended September 30, 1997 are unaudited. The condensed
consolidated statements of operations and cash flows of the Company for the nine
months ended September 30, 1997 have been derived from the respective audited
consolidated financial statements. The unaudited financial statements of the
Company and Tower Predecessor have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission for interim financial
statements. They do not include all of the disclosures required by generally
accepted accounting principles for a complete presentation of these unaudited
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) necessary for a fair presentation of the
financial statements for these interim periods have been included. The results
of operations for the nine months ended September 30, 1998 are not necessarily
indicative of the results to be obtained for the full year. These financial
statements should be read in conjunction with the December 31, 1997 audited
financial statements and notes thereto, included elsewhere in this Proxy
Statement/Prospectus.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. The most significant estimates and assumptions are related to the
recoverability and depreciable lives of real estate and the determination of the
Company's REIT status. Actual results could differ from those estimates.
Net income per common share has been computed by dividing net income
applicable to common stockholders by the weighted average number of Common
Shares outstanding (16,941,961) for the nine months ended September 30, 1998. A
total of 975,000 shares were reserved for issuance under the Company's 1997
Incentive Plan and Non-Employee Directors' Stock Option Plan. The effect of the
outstanding options has been excluded from the calculation of net income per
common share as these options had an antidilutive effect in the current period.
2. SALE OF THE COMPANY:
On July 9, 1998, the Company entered into an agreement (the "Merger
Agreement") relating to the merger of the Company with Metropolitan Partners
LLC, a newly formed joint venture between Reckson Associates Realty Corp.
("Reckson") and Crescent Real Estate Equities Company ("Crescent"). The Merger
Agreement and the transactions contemplated thereunder (collectively, the
"Merger") were approved by the Company's Board of Directors on July 8, 1998.
F-8
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SALE OF THE COMPANY: (CONTINUED)
Pursuant to the Merger Agreement, each share of the Company's Common Stock
will be exchanged, at the election of each Company stockholder, for either $24
in cash or .4615 of a share, par value $.01 per share, of Reckson common stock
and .3523 of a share of beneficial interest, par value $.01 per share, of
Crescent (the "Crescent Shares") in lieu of the $24 in cash (such fractions of
shares being subject to downward adjustments if the stock prices of Reckson
common stock and Crescent Shares increase by more than 7% after July 7, 1998)
for up to an aggregate of 40% of the total consideration payable in the
transaction. In addition, if a stockholder of the Company elects to receive
Reckson common stock and Crescent Shares, they will be entitled to share in the
benefit of up to, and including, a 7% increase in the value of each share of
Reckson common stock and Crescent Shares after July 7, 1998. If, however, there
has been an increase of more that 7% in the stock price of either Reckson common
stock or Crescent Shares, then the exchange ratio for the applicable common
stock will be adjusted downward in proportion to the increase in excess of 7%,
such that Company stockholders who receive Reckson and Crescent stock will
receive fewer shares. As a result, the benefit of any appreciation in the stock
value of either Reckson common stock or Crescent Shares is effectively limited
to 7%.
On November 2, 1998, the Company commenced an action in New York State
Supreme Court against Reckson, Crescent and Metropolitan alleging, among other
things, breach of the Merger Agreement. The Company is seeking compensatory
damages of not less than $75 million, declaratory and other relief and specific
performance by the defendants of their respective obligations under the Merger
Agreement. Even if this litigation is ended in a matter favorable to the
Company, the Merger may not be consummated. If the Merger were to be completed,
such completion would be subject to customary closing conditions, including the
approval of the Company's Stockholders. (see Note 10).
In connection with the Merger and other strategic initiatives explored by
the Company (the "Initiatives"), the Company entered into an agreement with
Merrill Lynch & Co. ("Merrill Lynch") on April 16, 1998 whereby Merrill Lynch
acts as the exclusive financial advisor to the Company in connection with the
Initiatives. Pursuant to the terms of this agreement, Merrill Lynch is entitled
to .6% of the aggregate purchase price paid to the Company for its sale upon
closing of the applicable sale agreement. If the Merger does not occur as
anticipated, the Company will be responsible for payments in the amount of
approximately $1.0 million to Merrill Lynch. As of September 30, 1998, the
Company has charged $1.0 million to operations, representing the retainer and
the delivered fairness opinion under the agreement, which is included in the
Sale of the Company item on the condensed consolidated statements of operations.
Other items relating to the Initiatives that have been included in the Sale
of the Company item for three- and nine-month periods ended September 30, 1998
consist of legal, accounting and consulting fees incurred through September 30,
1998. The Company anticipates that significant additional costs will be incurred
to the extent that the Merger is completed or in connection with the litigation
relating to the Merger Agreement.
3. SEVERANCE AND OTHER COMPENSATION COSTS:
On April 18, 1998, Joseph D. Kasman resigned as Senior Vice President and
Chief Financial Officer of the Company. Pursuant to, and under the terms and
conditions of, his employment agreement with the Company, severance payments
will be payable over the course of a 12-month
F-9
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. SEVERANCE AND OTHER COMPENSATION COSTS: (CONTINUED)
period in monthly instalments of approximately $46,000. A severance provision of
approximately $556,000.00 has been charged to operations during the second
quarter of 1998.
During the second quarter of 1998, Lawrence H. Feldman transferred
approximately 28,900 OP Units and $200,000 of cash to the Company, and in turn,
the Company issued 28,900 shares of Common Stock and $200,000 of cash to four
current and former employees for their efforts during the time of the Offering.
In connection with this event, the Company recorded $887,000 of compensation
expense during the second quarter of 1998.
On August 3, 1998, Lawrence H. Feldman resigned from his positions as
Chairman of the Board, Chief Executive Officer and President of the Company. In
connection with his resignation, the Company expects to pay Mr. Feldman a
severance payment equal to 2.99 times his "base amount" as described in his
employment agreement and as defined in Section 290G of the Internal Revenue Code
of 1986, as amended, payable over a twelve-month period or approximately $84,273
per month. During the third quarter of 1998, the Company recorded approximately
$1.0 million of severance expense to operations. On August 3, 1998, Francis X.
Tansey, a director of the Company, was appointed Chairman of the Board and
Robert L. Cox, a director and Executive Vice President and Chief Operating
Officer of the Company, was appointed acting Chief Executive Officer and
President of the Company.
4. ACQUISITION OF REAL ESTATE:
During the nine months ended September 30, 1998, the Company, through the
Operating Partnership, acquired the Blue Cross/Blue Shield office complex, an
approximately 126,000 square foot twin office building located in the Northwest
submarket of Phoenix, Arizona, for $16.9 million and the 90 Broad Property, a
335,000 square foot, 25-story downtown New York City office building located in
the center of the city's financial district, for approximately $34.3 million. In
conjunction with these acquisitions, the Company drew down funds from its Line
of Credit.
5. LINE OF CREDIT:
Upon consummation of the Offering, the Company entered into Line of Credit
with Merrill Lynch Capital Corporation. The Line of Credit may be used, among
other things, to finance acquisitions of additional office properties, to
refinance existing indebtedness, and for general working capital requirements.
As of September 30, 1998, the Company has an outstanding balance under the Line
of Credit Facility of $62.4 million. The funds were primarily drawn upon for the
acquisitions of Blue Cross/Blue Shield and the 90 Board Street Property and to
fund capital improvements for the Properties.
In conjunction with its Line of Credit, the Company must maintain certain
financial ratios:
i. Total outstanding indebtedness must not exceed 55% of Total Value (as
defined in the Line of Credit) during the first year of the facility and
must not exceed 50% thereafter.
ii. Collateral indebtedness must not exceed 40% of Total Value (as defined)
during the first year of the facility and 35% thereafter.
iii. Recourse indebtedness cannot exceed 5% of Total Value (as defined).
F-10
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. LINE OF CREDIT: (CONTINUED)
iv. Other financial covenants that must be met by the Company include
interest expense and fixed charges to debt ratios, among others.
As a general policy, the Company intends to maintain a debt policy limiting
the Company's total consolidated indebtedness plus its pro rata share of joint
venture debt to 50% of the Company's total market capitalization. As of
September 30, 1998, the debt to total market capitalization, including the
Company's 10% interest in the debt of 2800 North Central, was 46.3%. However,
the Company may from time to time modify its debt policy in light of current
economic conditions, relative costs of debt and equity capital, market values of
its Properties, general conditions in the market for debt and equity securities,
fluctuations in the market price for its Common Stock, growth and acquisition
opportunities and other factors. Accordingly there can be no assurance that the
Company may not increase its debt to total market capitalization ratio beyond
the limit described above.
The Company pays interest on the outstanding amounts on the Line of Credit
at LIBOR (London Interbank Offered Rate) plus 150 basis points (weighted average
of 7.3% for the nine months ended September 30, 1998). Interest expense on the
Line of Credit for the period ended September 30, 1998 amounted to approximately
$2.4.
In connection with the acquisition of 810 Seventh Avenue, the Company
obtained a $100.0 million mortgage loan from Credit Suisse First Boston Mortgage
Capital LLC that matures on December 31, 1998. The Company intends to refinance
this mortgage during the fourth quarter of 1998. In addition, the Company has
obtained a $11.3 million construction loan from KeyBank National Association
("KeyBank") in connection with the development of a Development Parcel in
Arizona, which loan matures on May 1, 2000. There are currently no amounts
outstanding under the loan from KeyBank.
During the nine months ended September 30, 1998, the Company has capitalized
approximately $1.1 million, of interest costs pursuant to Statement of Financial
Accounting Standards 34, "Capitalization of Interest Cost," related to
properties that are under development or in construction and not ready for their
intended use.
6. DISTRIBUTIONS:
On September 18, 1998, the Company declared a cash distribution for the
third quarter of 1998 in the amount of $.4225 per share and OP Unit, which was
paid on October 15, 1998 to stockholders and OP Unitholders of record on
September 30, 1998. The distributions totaled approximately $7.9 million.
On June 19, 1998, the Company declared a cash distribution for the second
quarter of 1998 in the amount of $.4225 per share and OP Unit, which was paid on
July 15, 1998 to stockholders and OP Unitholders of record on June 30, 1998. The
distributions totaled approximately $7.9 million.
On March 17, 1998, the Company declared a cash distribution for the first
quarter of 1998 in the amount of $.4225 per share and OP Unit, which was paid on
April 15, 1998 to stockholders and OP Unitholders of record on March 31, 1998.
The distributions totaled approximately $7.8 million.
On December 19, 1997, the Company declared a cash distribution for the
period from October 16, 1997 through December 31, 1997 in the amount of $.3536
per share or OP Unit, which was paid on January 19, 1998 to stockholders and OP
Unitholders of record as of December 31, 1997. The distributions totaled
approximately $6.5 million.
F-11
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company issued 129,032 OP Units on March 6, 1998 relating to the
contribution to the Operating Partnership of the entity that held the management
agreement on the 810 Seventh Avenue property.
During the second quarter of 1998, Lawrence H. Feldman transferred
approximately 28,900 OP Units and $200,000 of cash to the Company, and in turn,
the Company issued 28,900 shares of Common Stock and paid $200,000 of cash to
four current and former employees for their efforts during the time of the
Offering. The transaction has been accounted for as a contribution of capital
with corresponding charge to compensation expense in the accompanying financial
statements.
In connection with the acquisition of the 90 Broad Property, the Company
assumed $280,000 of debt.
8. RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective January 1, 1998, the Company adopted the Financial Accounting
Standard Board Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 specifies the presentation and
disclosure requirements for reporting comprehensive income, which includes items
which have been formerly reported as a component of stockholders' equity. SFAS
130 does not have an impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131"). SFAS 131 establishes disclosure
standards for information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders.
Management expects to adopt this standard in connection with the preparation of
the 1998 annual financial statements. When adopted, SFAS 131 will require the
Company to report additional geographic information based on the Company's major
geographic areas of focus.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement addresses the accounting for derivative
instruments including certain derivative instruments embedded in other contacts
and for hedging activities. This statement is effective for years beginning
after June 15, 1999. The Company's management believes that this statement will
not have a material impact on the Company's financial statements.
In October 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 134, "Accounting for Mortgage Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS 134 addressed the accounting for and
disclosure of mortgage backed securities as either held-to-maturity,
held-for-sale, or trading security. The statement is effective for the first
fiscal quarter beginning after December 15, 1998. SFAS 134 does not have an
impact on the Company's financial statements.
During 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities" ("SOP 98-5") and Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1), which are effective for the fiscal years
F-12
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. RECENTLY ISSUED ACCOUNTING STANDARDS: (CONTINUED)
beginning after December 15, 1998. In addition, the Emerging Issues Task Force
of the Financial Accounting Standards Board released Issue No. 97-11,
"Accounting for Internal Costs Relating to Real Estate Property Acquisitions"
("ET 97-11"). SOP 98-5 requires that certain costs incurred in conjunction with
start-up activities be expensed. SOP 98-1 provides guidance on whether the costs
of computer software developed or obtained for internal use should be
capitalized or expensed. EITF 97-11 requires that the internal pre-acquisition
costs of identifying and acquiring operating property be expensed as incurred.
Management believes that, when adopted, SOP 98-5 and SOP 98-1 will not have a
significant impact on the Company's Financial Statements. EITF 97-11 was adopted
during the first quarter of fiscal 1998 and resulted in the Company having to
expense internal property acquisition costs they would have otherwise
capitalized.
9. COMMITMENTS AND CONTINGENCIES:
The Company is party to and has become a successor party-in-interest to
certain legal proceedings arising in the ordinary course of business. The
Company believes it has adequate insurance and does not expect that these
proceedings, in the aggregate, will have a material adverse effect on the
operations, cash flows or financial position of the Company.
The Company has written agreements with several key members of management of
severance and stay bonuses. The amounts described in these agreements will be
triggered upon a change in control as defined in the agreements and are of a
significant nature. These amounts will have a material adverse effect on the
financial position, cash flows and operations of the Company upon a change in
control of the Company.
In the event of a termination of the Merger Agreement (as described in Note
2) by the Company, the Company will be subject to a termination fee pursuant to
the terms of the Merger Agreement. This fee ranges from $1.75 million to $9.0
million to each of Reckson and Crescent and is dependent on the reasons for
termination.
On or about July 10, 1998, a complaint was filed in the U.S. District Court
for the Southern District of New York (the "July Complaint") against a Tower
Equities management company, the Company, three of the Company's subsidiaries
and one former officer and director of the Company (collectively, the
"Defendants") in which the plaintiff alleges she was discriminated against in
the terms and conditions of her employment on the basis of her religion in
violation of federal, state and city statutes. The plaintiff was never employed
by the Company and was not employed by any of the other Defendants at the time
of the formation of the Company in March 1997. The Defendants deny the
allegations and intend to vigorously defend the action. An answer to the July
Complaint is scheduled to be filed on or about November 17, 1998. The Company
does not expect that this action will have a material adverse effect on its
operations, cash flows or financial position.
On or about September 29, 1998, a complaint was filed in the U.S. District
Court for the Southern District of New York (the "September Complaint") against
the Defendants in which the plaintiff alleges unlawful retaliation in violation
of federal, state and city statutes. The plaintiff was never employed by the
Company and was not employed by any of the other Defendants at the time of the
formation of the Company in March 1997. The Defendants deny the allegations and
intend to vigorously defend the action. An answer to the September Complaint is
scheduled to be filed on or
F-13
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
about November 17, 1998. The Company does not expect that this action will have
a material adverse effect on its operations, cash flows or financial position.
In July 1998, David Miller, a purported stockholder of the Company,
commenced a putative class action against the Company and certain of its then
directors and officers in the Supreme Court of New York, New York County,
captioned MILLER V. ADAMS, ET AL., Index No. 98-113363 (Sup. Ct. N.Y. Co.) (the
"Miller Action"). The Miller Action challenges, among other things, the process
employed by the Company and its directors in reviewing an approving the Merger
and the fairness of the terms of the Merger to the Company's public
stockholders. Among other things, the Miller Action seeks injunctive relief of,
in the alternative, rescission and monetary damages of an unspecified amount. In
view of the fact that Crescent, Reckson and Metropolitan have indicated that
they do not intend to perform under the Merger Agreement, the plaintiff in the
Miller Action has agreed to voluntarily withdraw the complaint, without
prejudice.
See Note 2 regarding contingencies with respect to the Merger.
10. SUBSEQUENT EVENT:
On November 2, 1998, the Company commenced an action in New York State
Supreme Court against Reckson, Crescent and Metropolitan alleging, among other
things, breach of the Merger Agreement. The Company is seeking compensatory
damages and specific performance by the defendants of their respective
obligations under the Merger Agreement of $75 million, declaratory and other
relief. Even if this litigation is ended in a manner favorable to the Company,
the Merger may not be consummated. If the Merger were to be completed, such
completion would be subject to customary closing conditions, including the
approval of the Company's Stockholders. The Company intends to vigorously
prosecute its claims under this action.
11. PRO FORMA FINANCIAL INFORMATION:
Due to the impact of the Offering and the Formation Transactions, the
Properties acquired concurrent with and subsequent to the Offering, the
historical results of operations are not indicative of future results of
operations. The following Pro Forma Information for the nine months ended
September 30, 1998 and September 30, 1997 are presented as if the Offering and
the Formation Transactions and all property acquisitions, including the
acquisitions of the Blue Cross/Blue Shield office complex and the 90 Broad
Property, which occurred subsequent to December 31, 1997, had occurred at
January 1, 1998 and 1997. The pro forma information is based upon historical
information and does not purport to present what actual results would have been
had such transactions, in fact, occurred at January 1, 1998 and 1997, or to
projected results for any future periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Total revenues.......................................................... $ 85,719 $ 76,407
Net income.............................................................. $ 10,561 $ 11,605
Net income per common share--basic and dilutive......................... $ 0.62 $ 0.69
</TABLE>
F-14
<PAGE>
TOWER REALTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (CONTINUED)
12. OTHER
The Company is obligated in accordance with its lease provisions, to provide
certain tenants with tenant improvements.
The Company maintains security deposits at September 30, 1998 and December
31, 1997 of $5.9 million and $3.8 million, respectively. These amounts are
recorded as cash and cash equivalents.
13. RECLASSIFICATION
Certain prior-year amounts have been reclassified to conform to the current
year presentation.
F-15
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Tower Realty Trust, Inc.
We have audited the accompanying consolidated and combined financial
statements and the financial statement schedule of Tower Realty Trust, Inc. and
its subsidiaries (the "Company") and Tower Predecessor as listed on page F-1 of
this Schedule S-4, Joint Proxy Statement/Prospecuts. These consolidated and
combined financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tower Realty
Trust, Inc. as of December 31, 1997 and the combined financial position of Tower
Predecessor as of December 31, 1996, and the consolidated results of operations
and cash flows of Tower Realty Trust, Inc. for the period from March 27, 1997
through December 31, 1997, and the combined results of operations and cash flows
of Tower Predecessor for the period from January 1, 1997 through October 15,
1997, and the years ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be set forth therein.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1998.
F-16
<PAGE>
CONSOLIDATED AND COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOWER
THE COMPANY PREDECESSOR
(CONSOLIDATED) (COMBINED)
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Assets:
Real estate................................................ $ 620,557 $ 169,619
Less: accumulated depreciation........................... (2,444) (40,555)
-------------- --------------
618,113 129,064
Deferred charges, net...................................... 11,495 11,636
Receivables, net........................................... 3,820 18,018
Cash and cash equivalents.................................. 1,347 4,985
Escrowed cash.............................................. 6,373 413
Other assets............................................... 12,537 3,555
Investments in joint venture and unconsolidated
subsidiaries............................................. 2,411 5,316
-------------- --------------
Total assets........................................... $ 656,096 $ 172,987
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debt on real estate...................................... $ 228,990 $ 202,892
Accounts payable and other liabilities................... 7,494 12,867
Distributions payable.................................... 6,543
Deferred real estate taxes............................... 9,758 12,951
Other liabilities and amounts due to affiliates.......... 6,974 6,147
-------------- --------------
Total liabilities...................................... 259,759 234,857
-------------- --------------
Minority interest in Operating Partnership................. 33,920
Commitments and Contingencies (See Note 13)
Shareholders' equity (owners' deficit):
Preferred shares 50,000,000 shares authorized, none
issued and outstanding................................. -- --
Common shares $.01 par value, 150,000,000 shares
authorized, 16,920,455 shares issued and outstanding... 169 --
Additional paid-in capital............................... 364,250 --
Owners' deficit.......................................... -- (61,870)
Distributions in excess of accumulated earnings.......... (2,002) --
-------------- --------------
Total shareholders equity/(owners' deficit).............. 362,417 (61,870)
-------------- --------------
Total liabilities and shareholders' equity/(owners'
deficit)............................................... $ 656,096 $ 172,987
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE COMPANY
(CONSOLIDATED) TOWER PREDECESSOR
----------- (COMBINED)
MARCH 27, ---------------------------------
1997 JANUARY 1,
THROUGH 1997 YEARS ENDED
DECEMBER THROUGH DECEMBER 31,
31, OCTOBER 15, --------------------
1997 (1) 1997 (1) 1996 1995
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income................................. $ 16,409 $ 21,908 $ 26,138 $ 25,202
Management fees............................... 1,090 318 1,261 961
Construction, leasing and other fees.......... 861 576 1,335 1,041
----------- ----------- --------- ---------
Total revenues.................................. 18,360 22,802 28,734 27,204
----------- ----------- --------- ---------
Expenses:
Property operating and maintenance............ 3,941 4,538 5,481 5,332
Real estate taxes............................. 2,266 3,792 4,722 4,571
General and administrative.................... 2,844 2,189 3,494 3,497
Interest expense.............................. 2,369 11,725 15,511 15,150
Depreciation and amortization................. 2,813 5,541 6,853 6,897
Ground rent/air rights expense................ 126 473 599 599
----------- ----------- --------- ---------
Total expenses.................................. 14,359 28,258 36,660 36,046
----------- ----------- --------- ---------
Equity in joint venture and unconsolidated
subsidiaries.................................. 353 134 461 193
----------- ----------- --------- ---------
Income (loss) before minority interest and
extraordinary gain early extinguishment of
debt.......................................... 4,354 (5,322) (7,465) (8,649)
Minority interest............................... (373)
----------- ----------- --------- ---------
Net income (loss) before extraordinary gain on
early extinguishment of debt.................. 3,981 (5,322) (7,465) (8,649)
Extraordinary gain on early extinguishment of
debt.......................................... -- 6,475 -- --
----------- ----------- --------- ---------
Net income (loss)............................... $ 3,981 $ 1,153 $ (7,465) $ (8,649)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Net income per common share--basic and
dilutive...................................... $ 0.24
-----------
-----------
Weighted average number of common shares
outstanding................................... 16,920,455
Effect of dilutive securities................... --
-----------
Weighted average number of dilutive shares
outstanding................................... 16,920,455
-----------
-----------
</TABLE>
- ------------------------
(1) The Company operations include the results of the Operating Partnership
(including the Management Company on the equity basis of accounting) from
March 27, 1997 through December 31, 1997 and the property operations from
October 16, 1997, the Offering date, through December 31, 1997. Tower
Predecessor's, operations included the management companies' operations from
January 1, 1997 through March 26, 1997, at which time the Company was
formed, and the operations of the Tower Predecessor properties from January
1, 1997 through October 15, 1997.
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY AND OWNERS' DEFICIT
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THE COMPANY--SHAREHOLDERS' EQUITY
(CONSOLIDATED) TOWER
-------------------------------------- PREDECESSOR
DIST. IN (COMBINED)
ADDITIONAL EXCESS -----------
COMMON PAID-IN ACCUMULATED OWNERS'
TOTAL SHARES CAPITAL EARNINGS DEFICIT
---------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994...................... $ -- -- -- -- $ (51,169)
Net loss.......................................... -- -- -- -- (8,649)
Contributions, net................................ -- -- -- -- 2,730
---------- ----- ---------- ------------- -----------
Balance at December 31, 1995...................... -- -- -- -- (57,088)
Net loss.......................................... -- -- -- -- (7,465)
Contributions, net................................ -- -- -- -- 2,683
---------- ----- ---------- ------------- -----------
Balance at December 31, 1996...................... -- -- -- -- (61,870)
Net income 1/1/97--10/15/97....................... -- -- -- -- 1,153
March 27, 1997, opening equity of the Company..... 1 -- 1 -- --
---------- ----- ---------- ------------- -----------
Balance at October 16, 1997....................... 1 -- 1 -- (60,717)
Acquisition of Tower Predecessor's Interest
(including the issuance of 1,949,455 common
shares)......................................... 11,073 -- $ 11,073 -- 60,717
Net proceeds from issuance of common shares
(14,971,000 common shares)...................... 353,345 $ 169 353,176 -- --
Distributions declared (.3536 per common share)... (5,983) -- -- $ (5,983) --
Net income........................................ 3,981 -- -- 3,981 --
---------- ----- ---------- ------------- -----------
Balance at December 31, 1997...................... $ 362,417 $ 169 $ 364,250 $ (2,002) --
---------- ----- ---------- ------------- -----------
---------- ----- ---------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TOWER
THE COMPANY PREDECESSOR
(CONSOLIDATED) (COMBINED)
MARCH 27, -----------
1997 JANUARY 1,
THROUGH 1997 YEARS ENDED
DECEMBER THROUGH DECEMBER 31,
31, OCTOBER 15, --------------------
1997 1997 (1996) (1995)
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................. $ 3,981 $ 1,153 $ (7,465) $ (8,649)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............. 2,813 4,590 6,853 6,897
Amortization of deferred financing
costs................................... 84 906 504 575
Unbilled rental income.................... (936) 1,012 1,205 3,084
Equity income in joint venture and
unconsolidated subsidiaries............. (353) -- (461) (193)
Gain on disposal of assets................ -- (39) (30)
Extraordinary gain of early extinguishment
of debt................................. -- (6,475) -- --
Changes in assets and liabilities:
Deferred Charges...................... -- -- (867) (373)
Receivables........................... (2,529) (1,593) 345 2,673
Escrowed cash......................... (5,765) (352) (116) 268
Other assets.......................... (5,610) 907 42 (616)
Deferred real estate taxes............ -- 566 -- 366
Accounts payable and other
liabilities......................... 14,096 -- 1,267 90
Minority interest..................... 373 -- -- --
Other liabilities and amounts due
to/from affiliates.................. 372 4,576 (317) (2,330)
----------- ----------- --------- ---------
Net cash provided by operating activities....... 6,526 5,290 951 1,762
----------- ----------- --------- ---------
Cash Flows from Investing Activities:
Additions to real estate...................... (1,103) (3,362) (2,659) (967)
Acquisition of real estate, joint venture and
deferred charges............................ (534,393) (409) (3,850)
Contribution to Management Company............ (400) -- (317) (2,503)
Deposits on future acquisitions............... (3,937) -- -- --
Due from affiliated Company................... (355) -- -- --
Proceeds from disposal of assets.............. 39 30
----------- ----------- --------- ---------
Net cash used in investing activities........... (540,188) (3,771) (6,787) (3,440)
----------- ----------- --------- ---------
Cash Flows from Financing Activities:
Partner's contributions, net.................. (6) 2,683 2,730
Net proceeds from issuance of common shares... 353,345 -- -- --
Escrow for Mortgage Interest.................. (608) -- -- --
Loan Origination Fees......................... (1,052) -- -- --
Proceeds from debt on real estate and other
debt........................................ 219,300 15,581 7,039 424
Repayments of debt on real estate............. (35,977) (17,360) (4,109) (2,916)
----------- ----------- --------- ---------
Net cash provided by (used in) financing
activities.................................... 535,008 (1,785) 5,613 238
----------- ----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents................................... 1,346 (266) (223) (1,440)
Cash and cash equivalents, beginning of
periods....................................... 1 4,985 5,208 6,648
----------- ----------- --------- ---------
Cash and cash equivalents, end of periods....... $ 1,347 $ 4,719 $ 4,985 $ 5,208
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Supplemental Cash Flow Information:
Cash paid for interest........................ $ 1,621 $ 9,753 $ 15,007 $ 14,575
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
(1) ORGANIZATION AND BASIS OF PRESENTATION
TOWER REALTY TRUST, INC.
Tower Realty Trust, Inc. (collectively with its subsidiaries, the "Company")
was organized in the state of Maryland on March 27, 1997. The Company intends to
operate so as to qualify as a real estate investment trust ("REIT") for federal
income tax purposes, commencing with its taxable year ending December 31, 1997.
Upon consummation of the Company's initial public offering on October 16, 1997
(the "Offering"), the Company acquired a sole 1% general partner interest in
Tower Realty Operating Partnership, L.P., a Delaware limited partnership (the
"Operating Partnership"), and a 90.4% limited partner interest in the Operating
Partnership.
The Company has been formed to continue and expand the commercial real
estate business of Tower Equities & Real Estate Corp. and its affiliates
(collectively with its predecessor entities and affiliates, "Tower Equities"),
including developing, acquiring, owning, renovating, managing, and leasing
office properties in the Manhattan, Phoenix, Tucson, and Orlando markets. Upon
consummation of the Offering and certain related transactions (collectively, the
"Formation Transactions"), the Operating Partnership owned or had interests in
21 office properties. The Company also owns or has an option to acquire four
parcels of land adjacent to four of the Properties (the "Development Parcels"),
which can support 2.2 million of rentable square feet of development. On
December 31, 1997, the Company purchased 810 Seventh Avenue for approximately
$150.0 million, including closing costs. The properties are collectively
referred to as the "Properties".
On March 31, 1997 interests in certain partnerships, properties and limited
liability companies were contributed to the Operating Partnership in exchange
for units of limited partnership interest in the Operating Partnership ("OP
Units"). Certain of these interests are owned by the Operating Partnership after
consummation of the Offering. Simultaneously with such contribution of
interests, the Company issued $4.0 million of notes to certain investors advised
by Morgan Stanley Asset Management, Inc. ("MSAM") which were collateralized by
certain of the Properties. Upon completion of the Offering on October 16, 1997,
the balance on borrowings under the notes of approximately $12.3 million was
converted into shares of common stock of the Company.
As of October 16, 1997, the Company consummated an initial public offering
of 13,817,250 shares of Common Stock (including the exercise of the
underwriters' over-allotment option of 1,802,250 shares), effected concurrent
private placements (the "Concurrent Private Placements") of 1,153,845 shares of
Common Stock and issued 1,949,360 shares of Common Stock in connection with the
purchase of certain properties at a price of $26.00 per share and realized net
proceeds therefrom of $353.35 million.
Such net proceeds were contributed to the Operating Partnership in exchange,
in part, for the Company's approximate 91.4% interest therein. The Operating
Partnership used the proceeds received from the Company, the $107.0 million net
cash proceeds from the Company's term loan facility (the "Term Loan"), borrowed
concurrent with and subsequent to the Offering and approximately $12.3 million
of proceeds received from Morgan Stanley Asset Management ("MSAM"), from the
conversion of the Notes into common stock, as follows: (i) approximately $281.0
million for repayment of certain indebtedness (including associated prepayment
penalties) relating to the Properties and the partnerships that own the
Properties (the "Property Partnerships"); (ii) approximately $137.0 million to
acquire certain equity, debt and fee interests in the Properties; (iii)
approximately $3.1 million to pay for commitment fees and expenses relating to
the Term Loan and the Company's $200.0 million unsecured line of credit (the
"Line of Credit"); (iv) approximately $3.0 million to pay transfer taxes and
other expenses associated with the acquisitions of the Properties; and (v) the
remaining approximately $48.6 million for working capital.
F-21
<PAGE>
The Tower Equities management and leasing companies and Properties Atlantic,
Inc. management and leasing company (which, prior to the Offering, was
controlled and operated by Clifford Stein, Managing Director, Southeast Region
of the Company) contributed an undivided 95% interest in the assets of such
companies to the Operating Partnership which, in turn, recontributed such assets
to Tower Equities Management, Inc. (the "Management Company") in exchange for
100% of the non-voting stock and 5% of the voting stock in the Management
Company (which entitles the Company to receive 95% of the dividends of the
Management Company).
The Management Company and each of the members of Tower Equities that hold
interests in seven retail properties that continue to be owned by Tower Equities
after the consummation of the Offering (the "Excluded Properties") entered into
management agreements with respect to each of the Excluded Properties. In
consideration for the services to be provided under the management agreements,
the Management Company will receive a property management fee and applicable
construction fees and leasing commissions which will be determined by reference
to existing market rates for similar transactions.
TOWER PREDECESSOR
The following entities comprising the Tower Predecessor were controlled and
managed by Tower Equities and Real Estate Corp. and its affiliates (collectively
with its predecessor entities and affiliates, "Tower Equities"), all of which
are controlled by Lawrence H. Feldman, Chairman of the Board, Chief Executive
Officer and President of the Company:
<TABLE>
<CAPTION>
LAWRENCE H. FELDMAN'S
OWNERSHIP INTEREST LOCATION
--------------------------- ------------------------------------
<S> <C> <C>
Tower 45............................ 6% New York City
120 Mineola Boulevard............... 5% Long Island, NY
Maitland Forum...................... 15% Maitland, Fl
Maitland Center Parkway
(3 properties).................... 90% Maitland, Fl
5750 Major Boulevard (purchased in
October 1996)..................... 6% Orlando, Fl
Management Companies................ 90% New York City and Maitland, Fl
</TABLE>
Lawrence H. Feldman owned a majority general partner interest in the
partnerships owning these properties. Accordingly, the Tower Predecessor
financial statements reflect, on a combined basis, 100% of the assets,
liabilities and operations of these properties.
Lawrence H. Feldman held a non-controlling interest in the partnerships that
own the following properties listed in the following table. Lawrence H. Feldman
was a general partner and an affiliate of DRA Advisors, Inc. ("DRA") which was
the managing general partner in each partnership (the "DRA Joint Ventures"). The
Tower Predecessor financial statements reflect the investments in the DRA Joint
F-22
<PAGE>
Ventures using the equity method of accounting. Upon consummation of the
Offering, the Company purchased all of the partnership interests in the DRA
Joint Ventures.
<TABLE>
<CAPTION>
LAWRENCE H. FELDMAN'S
OWNERSHIP INTEREST LOCATION
--------------------------- ----------------------------------
<S> <C> <C>
286 Madison....................... 3% New York City
290 Madison....................... 3% New York City
292 Madison....................... 3% New York City
Corporate Center Building
(6 properties).................. 20% Phoenix, AZ
5151 East Broadway................ 3% Tucson, AZ
One Orlando Center................ 3% Orlando, FL
</TABLE>
Lawrence H. Feldman also held a 3.8% non-controlling interest in a
partnership controlling the 2800 North Central Avenue Property ("2800 North
Central"). The Tower Predecessor financial statements reflect this investment
using the equity method of accounting. The Company, upon consummation of the
Offering, acquired this interest and the interests of Tower Equities (10%
aggregate interest).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION/COMBINATION
The accompanying consolidated financial statements of the Company reflect
the accounts of the Operating Partnership and its wholly-owned subsidiaries and
majority owned partnerships from March 27, 1997 to December 31, 1997 including
the entities comprising the Tower Predecessor and the DRA Joint Ventures from
the date of acquisition, October 16, 1997. All significant inter-company
balances and transactions have been eliminated in consolidation.
The Company's investments in non-controlled entities and the Company's
investment in the Management Company are reflected using the equity method of
accounting.
The accompanying combined financial statements of Tower Predecessor have
been presented on a combined historical cost basis because of common ownership
and management, and because the assets and liabilities and operations of Tower
Predecessor were the subject of a business combination with the Company and the
Operating Partnership. All significant inter-company transactions have been
eliminated in the combined financial statements.
BASIS OF PRESENTATION
The Company operations include the result of the Operating Partnership
(including the Management Company on the equity basis of accounting) from March
27, 1997 through December 31, 1997 and the Property operations from October 16,
1997, the date of the Offering, through December 31, 1997. Tower Predecessors'
operations included the management companies operations from January 1, 1997
through March 26, 1997, at which time the Company was formed, and the operations
of the Tower Predecessor Properties from January 1, 1997 through October 15,
1997.
REAL ESTATE
Real estate and leasehold improvements are stated at cost less accumulated
depreciation. Whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable, the Company's and Tower
Predecessor's policy is to assess any impairment in value by making a comparison
of the current and projected cash flows of each property over its remaining
useful life (undiscounted and without interest charges) to the carrying amount
of each property. In cases where the Company and Tower Predecessor do not expect
to recover its carrying costs, the Company
F-23
<PAGE>
and Tower Predecessor recognize an impairment loss to reflect the property at
its estimated fair value. No such impairment losses have been recognized in
these financial statements.
Depreciation on buildings and improvements is provided under the
straight-line method over an estimated useful life of 40 years. Depreciation on
tenant improvements is provided over the lesser of the useful life or the terms
of the related leases. Depreciation on furniture and fixtures is provided under
the straight-line method over an estimated useful life of five to seven years.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. When assets are sold or retired, their
costs and related accumulated depreciation are removed from the accounts with
the resulting gains or losses reflected in net income (loss).
DEFERRED CHARGES
Deferred financing costs are recorded at cost and are being amortized using
the interest method over the life of the related debt. Leasing commissions are
deferred and amortized over the lesser of the useful life or the terms of the
related leases.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and short-term, highly
liquid investments that have original maturities of 3 months or less when
purchased. At December 31, 1997 and 1996, the Company and Tower Predecessor had
on deposit with a major financial institution substantially all of its cash and
cash equivalents, which balances at times exceeded insurable limits.
ESCROWED CASH
Escrowed cash as of December 31, 1997 and 1996 are comprised of funds held
for the payment of real estate taxes, mortgage interest and other. Of the total
funds held in escrow, approximately $2.3 million are restricted by agreement.
DEFERRED REAL ESTATE TAXES
Deferred real estate taxes represent a portion of real estate taxes accrued
from 1988 through 1995 for the Tower 45 property which are payable to the taxing
authority commencing on July 1, 1998 in payments of approximately $1.3 million
per year. This liability has been reflected in the Company's balance sheet at
its present value as of the date of the Offering.
REVENUE RECOGNITION
The Company and Tower Predecessor, each as lessor, have retained
substantially all of the risks and benefits of the rental Properties and account
for the leases as operating leases.
Rental income is recognized ratably over the terms of the leases. Unbilled
rental revenue (unbilled receivables) represents the excess rental income
recognized on a straight-line basis over minimum rent payments received pursuant
to the terms of individual lease agreements. The unbilled receivable related to
base rental income amounted to $0.9 million and $15.2 million at December 31,
1997 and 1996, respectively, and is included in receivables.
The Company's lease agreements with its tenants provide for tenants to pay
their pro rata share of escalations (including real estate taxes and other
operating expenses) in excess of base amounts, as defined. Total escalations
included in rental income amounted to approximately $1.9 million for the Company
in 1997, and $7.4 million and $8.9 million for Tower Predecessor in 1997 and
1996, respectively.
F-24
<PAGE>
Management fee income from third party or joint venture properties is
recognized as earned under the terms of the related agreements. Construction
fees are recognized ratably over each project's construction period and leasing
fees are generally recognized upon tenant occupancy of the leased premises
unless such fees are irrevocably due and payable upon lease execution, in which
case recognition occurs on the lease execution date.
INCOME TAXES
The Company has elected to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its short taxable year ended December 31, 1997. As a REIT, the Company generally
will not be subject to federal corporate income tax on its taxable income that
is distributed to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income.
No provision for income taxes is included in the combined financial
statements of Tower Predecessor since Tower Predecessor's statements combine the
operations and balances of partnerships, which are not directly subject to
income tax. The tax effect of its activities accrues to the individual partners
and/or principals of the respective entity. The Management Company is a legal
entity subject to federal income tax on its taxable income at regular corporate
rates.
NET INCOME PER COMMON SHARE--BASIC AND DILUTIVE
The Company has adopted the provisions of Statement of Financial Accounting
Standard No. 128 ("SFAS 128") "Earnings Per Share". Net income per common share
has been computed by dividing net income applicable to common shareholders by
the weighted average number of common shares outstanding (16,920,455 at December
31, 1997). For the period from the Offering through December 31, 1997, there
were no dilutive securities. The Company has issued stock options at $26 per
share. These options were antidilutive at December 31, 1997.
The OP Units have been excluded from the diluted earnings per share
calculation as there would be no effect on the amounts since the minority
interests' share of income would also be added back to net income.
DISTRIBUTIONS
The Company expects to make regular quarterly distributions. Earnings and
profits, which will determine the taxability of distributions to shareholders,
will differ from income reported for financial reporting purposes due to the
differences for federal tax purposes primarily in the estimated useful lives
used to compute depreciation. Distributions declared in 1997 represent an
approximate 84.53% return of capital for federal income tax purposes.
On December 31, 1997, the Company declared a distribution payable in January
1998 equal to $.3536 per common share and OP Units outstanding at December 31,
1997. The common shares and OP Units outstanding at December 31, 1997, totaled
16,920,455 and 1,583,640, respectively.
MINORITY INTEREST
Minority interest in the Operating Partnership represents the limited
partners' proportionate share of the equity in the Operating Partnership. Income
is allocated to minority partners based on the weighted average percentage
ownership of OP Units throughout the year.
F-25
<PAGE>
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates and assumptions are related to
the recoverability and depreciable lives of real estate. Actual results could
differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130") and No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"), which are effective for fiscal years beginning after
December 15, 1997.
SFAS 130 specifies the presentation and disclosure requirements for
reporting comprehensive income, which includes those items which have been
formerly reported as a component of shareholders' equity. Management believes
that when adopted SFAS 130 will not have a significant impact on the Company's
financial statements.
SFAS 131 establishes the disclosure requirements for reporting segment
information. Management believes that when adopted, SFAS 131 will require the
Company to report additional geographic information based on the Company's major
geographic areas of focus.
During 1998, the SFAS issued Statement of Financial Accounting Standard No.
132, "Employers' Disclosures About Pensions and Other Postretirement Benefits"
("SFAS 132"). This statement changes the current financial statement disclosure
requirements related to pensions, settlements and curtailments of pensions and
postretirement benefits other than pensions. The statement is effective for
fiscal years beginning after December 15, 1997. Management believes that when
adopted, SFAS 132 will not have a significant impact on the Company's financial
statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
financial statement presentation.
(3) REAL ESTATE
Real estate consisted of the following at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land.................................................................. $ 140,030 $ 25,662
Building and improvements............................................. 462,842 143,838
Tenant improvements................................................... 17,658 119
Furniture, fixtures, and equipment.................................... 27 --
---------- ----------
Total............................................................... 620,557 169,619
Less: Accumulated depreciation........................................ (2,444) (40,555)
---------- ----------
$ 618,113 $ 129,064
---------- ----------
---------- ----------
</TABLE>
F-26
<PAGE>
(4) DEFERRED CHARGES AND OTHER ASSETS, NET
Deferred charges and Other Assets consisted of the following at December 31,
1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ----------
<S> <C> <C>
Deferred leasing and tenant charges.................................... $ 2,939 $ 17,018
Deferred financing costs............................................... 4,301 1,049
Brokerage commissions.................................................. 4,499 7,330
Less: Accumulated amortization......................................... (244) (13,761)
--------- ----------
$ 11,495 $ 11,636
--------- ----------
--------- ----------
</TABLE>
Other assets consisted of the following at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deposits on future acquisitions.......................................... $ 3,937 $ --
Goodwill, net............................................................ 2,990 --
Prepaid real estate tax and other prepaid expenses....................... 5,610 --
Other.................................................................... -- 3,555
--------- ---------
$ 12,537 $ 3,555
--------- ---------
--------- ---------
</TABLE>
Deposits on future acquisitions at December 31, 1997 consisted of amounts
related to the acquisition of the Blue Cross Building in Arizona which occurred
in January of 1998, and 90 Broad Street, which is currently under contract. Upon
consummation of the acquisitions, these costs will be recorded as part of the
costs of the properties (see Note 17).
Goodwill relates to the Company's purchase of Properties Atlantic, Inc., a
brokerage and leasing company, as part of the Formation Transactions and is
being amortized over 5 years. The Company has assessed the recoverability of
this goodwill based on the estimated undiscounted cash flows, and has determined
that no impairment write-down is necessary.
(5) RECEIVABLES, NET
Receivables consisted of the following at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Due from tenants......................................................... $ 2,080 $ 2,776
Unbilled rent receivable................................................. 936 15,242
Other miscellaneous receivables.......................................... 804 --
--------- ---------
Total.................................................................. $ 3,820 $ 18,018
--------- ---------
--------- ---------
</TABLE>
Included within other miscellaneous receivables is an amount due from an
affiliated Company of $.35 million.
(6) INVESTMENT IN JOINT VENTURE AND UNCONSOLIDATED SUBSIDIARIES
Included in Investments in joint venture and unconsolidated subsidiaries at
December 31, 1997 are the Company's investments in 2800 North Central and the
Management Company. The Company accounts for its 95% investment in the
Management Company and its 10% investment in 2800 North Central using the equity
method of accounting, and thus reports its share of income and losses based on
its ownership interest in the respective entities. Additionally, prior to the
date of the Offering, the
F-27
<PAGE>
Company recorded its 18% investment in the DRA Joint Ventures using the equity
method of accounting.
At December 31, 1997 and 1996 these investments have the following carrying
amounts (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Investment in TEMI......................................................... $ 400 $ --
Investment in 2800 North Central........................................... 2,011 764
Investment in the DRA Joint Ventures....................................... -- 4,552
--------- ---------
Total.................................................................... $ 2,411 $ 5,316
--------- ---------
--------- ---------
</TABLE>
(7) DEBT ON REAL ESTATE
Debt on real estate consisted of the following at December 31, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Term loan............................................................. $ 107,000 $ --
Corporate Center...................................................... 21,000 --
Corporate Center...................................................... 990 --
810 Seventh Avenue.................................................... 100,000 --
Various mortgage debt................................................. 202,982
---------- ----------
Total Mortgage Debt Payable........................................... $ 228,990 $ 202,982
---------- ----------
---------- ----------
</TABLE>
The Operating Partnership has entered into a $107.0 million seven-year Term
Loan with Merrill Lynch Credit Corporation and borrowed approximately $54.0
million under such facility at the closing of the Offering and an additional
$53.0 million subsequent to the Offering but prior to December 31, 1997.
Interest on the Term Loan was fixed at a rate equal to .9% in excess of
seven-year United States Treasury Notes at the closing of the Offering or 6.82%
as of December 31, 1997. Interest is due monthly. This debt is collateralized by
the One Orlando and Tower 45 properties. Mortgage fees to obtain such Term Loan
amounted to approximately $2.0 million, which are being amortized on a straight
line basis which approximates the interest method over the term of the loan.
The year end interest rate on the Corporate Center debt is 7.55% and 8.37%,
related to the $21.0 million and $.990 million, respectively. Interest is due
monthly and principal is due on January 1, 2006. This debt is collateralized by
the Corporate Center properties.
The mortgage debt on 810 Seventh Avenue is collateralized by the property.
The interest rate is 6.72% as of December 31, 1997. This debt matures on June
30, 1998. The Company intends to refinance this debt prior to the maturity date.
Mortgage fees to obtain such term loan amounted to approximately $1.2 million,
which are being amortized on a straight line basis, which approximates the
interest method, over the one-year term.
The Company has entered into the $200.0 million unsecured Line of Credit
with Merrill Lynch Capital Corporation. The Line of Credit may be used, among
other things, to finance its acquisition of additional office properties, to
refinance existing indebtedness and for general working capital requirements. No
amounts were outstanding on the Line of Credit as of December 31, 1997.
Commitment fees to obtain such line amounted to approximately $1.1 million,
which are being amortized on a straight-line basis, which approximates the
interest method, over the three-year term of the credit facility.
F-28
<PAGE>
In conjunction with the line of credit, the Company must maintain certain
financial ratios:
i. Total outstanding indebtedness must not exceed 55% of Total Value (as
defined in the Line of Credit Agreement) during the first year of the
facility and must not exceed 50% thereafter.
ii. Collateral indebtedness must not exceed 40% of Total Value (as defined)
during the first year of the facility and 35% thereafter;
iii. Recourse Indebtedness cannot exceed 5% of Total Value (as defined).
iv. Other financial covenants that must be met by the Company include
interest expense to debt and fixed charges to debt ratios, amongst
others.
As of December 31, 1997, the Company has complied with the financial debt
covenants.
As a general policy, the Company intends to maintain a debt policy limiting
the Company's total consolidated indebtedness plus its pro rata share of joint
venture debt to 50% of the Company's total market capitalization. As of December
31, 1997 the debt to total market capitalization, including the Company's 10%
interest in the debt of 2800 North Central, was 36%.
Principal repayments of debt on real estate at December 31, 1997, are due
approximately as follows (in thousands):
<TABLE>
<S> <C>
YEARS ENDING DECEMBER 31:
- ----------------------------------------------------------------------------------
1998.............................................................................. $ 100,298
1999.............................................................................. 319
2000.............................................................................. 342
2001.............................................................................. 366
2002.............................................................................. 391
Thereafter........................................................................ 127,274
----------
$ 228,990
----------
----------
</TABLE>
The mortgage debt as of December 31, 1996 related to mortgage debt at
interest rates ranging from 5.50% to 9.51%. This debt was collateralized by
certain assets of Tower Predecessor and was primarily extinguished prior to or
in conjunction with the Offering.
(8) ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consisted of the following at
December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accrued interest......................................................... $ 748 $ 6,022
Accounts payable......................................................... 4,498 3,336
Advanced rent and deposits............................................... 836 2,322
Deferred income.......................................................... 1,412 1,187
--------- ---------
$ 7,494 $ 12,867
--------- ---------
--------- ---------
</TABLE>
Included within accounts payable is $.37 million due to an affiliated
Company.
F-29
<PAGE>
(9) LEASING ACTIVITIES AND CONCENTRATION OF CREDIT AND MARKET RISK
The future minimum lease payments to be received by the Company as of
December 31, 1997, under non-cancelable operating leases, which expire on
various dates through 2011, are as follows:
<TABLE>
<S> <C>
YEARS ENDING DECEMBER 31:
- ----------------------------------------------------------------------------------
1998.............................................................................. $ 80,388
1999.............................................................................. 78,116
2000.............................................................................. 69,705
2001.............................................................................. 61,476
2002.............................................................................. 52,622
Thereafter........................................................................ 139,183
----------
$ 481,490
----------
----------
</TABLE>
The geographic concentration of the future minimum lease payments to be
received is detailed as follows:
<TABLE>
<CAPTION>
LOCATION AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
New York, New York................................................................ $ 349,811
Phoenix/Tucson, Arizona........................................................... 51,512
Orlando, Florida.................................................................. 80,167
----------
$ 481,490
----------
----------
</TABLE>
Of the Company's total future minimum lease payments as of December 31,
1997, approximately 73% will be derived from New York properties. Approximately
61% of the Company's rental income for the period October 16, 1997 through
December 31, 1997 was generated from the New York Properties.
No one tenant represents more than 5% of the Company's future minimum
rentals.
(10) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the Formation Transactions the Company entered into the
following non-cash investing and financing activities:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Mortgage debt assumed.............................................................. $ 56,624
OP units and restricted stock issued for acquisitions of the Tower Predecessor
properties and the DRA Joint Venture properties.................................. $ 40,954
OP units issued for the purchase of Properties Atlantic, Inc....................... $ 3,120
OP units issued for a portion of the Company's 10% interest
in 2800 North Central............................................................ $ 1,173
Assumption of deferred real estate tax liability related to Tower 45............... $ 9,758
Conversion of MSAM debt to restricted stock........................................ $ 12,299
</TABLE>
In addition to the above non-cash activities related to the formation
transactions, during 1997, the Company declared a dividend of approximately
$6,543,000 which was paid on January 15, 1998.
F-30
<PAGE>
(11) RELATED PARTY TRANSACTIONS
Under the terms of various management agreements, the Company and Tower
Predecessor receive cost reimbursements and property management, leasing and
tenant service fees from certain affiliates in which Tower Equities have
ownership interests. Cost reimbursements are comprised primarily of salary and
employee benefit recoveries and reimbursements of certain administrative costs.
Fees and cost reimbursements derived from these agreements totaled approximately
$0.2 million and $2.2 million for the period from January 1, 1997 through
October 15, 1997 and for the year ended December 31, 1996, respectively.
(12) SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of
50,000,000 preferred shares in one or more series, to establish the number of
shares in each series and to fix the designation, powers, preferences, and
rights of each such series and the qualifications, limitations or restrictions
thereof. As of December 31, 1997 no preferred shares were issued.
PARTNERSHIP OPERATING UNITS
The outstanding OP Units are redeemable at the option of the holder for a
like number of common shares, or at the option of the Company, the cash
equivalent thereof. Total OP Units outstanding at December 31, 1997, were
1,583,640.
SHARE-BASED COMPENSATION PLANS
The Company has two fixed option plans which reserve shares of Common Stock
for issuance to executives, key employees, and directors.
During 1997 the Company adopted the disclosure-only provision of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). Accordingly, no compensation cost has been recognized for the options
described above because the exercise price of the options equaled the fair
market value on the date of the grant. Had the compensation cost for these
options been determined based on the fair value at the grant date consistent
with the provisions of SFAS No. 123, the Company's net income and net income per
common share for 1997 would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
NET INCOME PER
NET INCOME COMMON SHARE
----------- -----------------
<S> <C> <C>
Period from March 27, 1997 through
December 31, 1997.............................................. $ 3,796 $ 0.22
</TABLE>
The fair value of each share option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 6.4%; different risk-free
interest rate of 5.94%, options with expected lives of 4 years; and volatility
of 15.0% for all grants.
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. The Company anticipates making awards in the
future under its share-based compensation plans.
F-31
<PAGE>
A summary of the status of the Company's share options as of December 31,
1997, and the changes during the period ended on December 31, 1997 is presented
below:
<TABLE>
<CAPTION>
1997
-------------------------------------
<S> <C> <C>
#SHARES OF WEIGHTED AVERAGE
UNDERLYING OPTIONS EXERCISE PRICE
------------------ -----------------
Outstanding at beginning of the year.................... -- --
Granted................................................. 975,000 $ 26
Exercised............................................... -- --
Forfeited............................................... -- --
Expired................................................. -- --
------- -----
Outstanding at end of year.............................. 975,000 $ 26
------- -----
------- -----
Weighted-average fair value of options granted during
the year.............................................. 2.27
</TABLE>
1997 PLAN
The 1997 plan provides for the granting of stock options, restricted stock
and performance shares and incentive awards from time to time with respect to up
to a number of shares of Common Stock equal to 9.5% of the total number of
issued and outstanding shares of Common Stock (on a fully diluted basis the
exchange of all OP Units for shares of Common Stock) to executive or other key
employees of the Company. Stock options may be granted in the form of "incentive
stock options" or non-statutory stock options, and are exercisable for up to 10
years following the date of the grant. The exercise price of each option must be
equal to or greater than the fair value of the Common Stock on the grant date.
These options vest in three annual instalments beginning on the first
anniversary of the date of grant.
DIRECTORS' PLAN
A maximum of 200,000 shares of Common Stock will be issuable under the
Directors' Plan to non-employee directors. The Directors' Plan will provide for
the grant of options to purchase Common Stock.
The Directors' Plan provides that each eligible director who is a member of
the Board of Directors as of the date that the registration statement relating
to the Offering is declared effective by the Securities and Exchange Commission
(the "Commission") will be awarded nonqualified options to purchase 20,000
shares of Common Stock on the closing date of the Offering (each such director,
a "Founding Director"). Each eligible director who is not a Founding Director (a
"Non-Founding Director") will receive non-qualified options to purchase 20,000
shares of Common Stock on the date of the commencement of the term of office of
such Non-Founding Director. The options granted Founding Directors upon
effectiveness of the registration statement relating to the Offering will have
an exercise price equal to the initial public offering price and will vest in
three annual instalments beginning on the first anniversary of the date of
grant, subject to the Director's continuous service through such vesting date.
The exercise price of options under future grants will be 100% of the fair
market value of the Common Stock on the date of grant. Upon termination of
service as a director, options which have not vested will be forfeited and
vested options may be exercised until they expire.
As of December 31, 1997, there were 975,000 options outstanding with a
weighted-average remaining contractual life of 9.7 years and a weighted-average
exercise price of $26. None of these options were exercisable as of December 31,
1997.
F-32
<PAGE>
(13) COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
As a result of its acquisition of the Properties, the Company is party to
and has become a successor party-in-interest to certain legal proceedings
arising in the ordinary course of the business. The Company believes it has
adequate insurance and does not expect that these proceedings, in the aggregate,
will have a material adverse effect on the financial position, operating
results, or cash flows of the Company.
AIR RIGHTS AND GROUND LEASES
On November 30, 1980 Tower Predecessor entered into an air rights lease
agreement with the Village of Mineola which expires in May 2012, subject to the
Company's right to extend the term pursuant to two 30-year renewal options. The
lease provides for a current annual lease payment of $33,000, increasing to
$46,500 in 2001.
On November 30, 1986, Tower Predecessor entered into an agreement to lease
for 250 years the air and corresponding development rights adjacent to one of
the properties. The Operating Partnership has an option that is exercisable from
November 1, 1996 through October 31, 2001 to acquire the lessor's site for a
price, as of July 31, 1997, of $11 million. This price increases through the
expiration of the option on October 31, 2001, at a rate of 50% of the percentage
increase in the consumer price index as defined in the lease (approximately $13
million as of July 31, 1997). Upon the Company's exercise of this option, its
obligation to pay rent under the air rights lease would automatically be
eliminated.
YEAR 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things a temporary inability to process transactions, send invoices, or
engage in similar normal business activity.
The Company is currently in the process of completing its assessment of the
impact of the year 2000 on its computer systems and property operations. Based
on the results of their preliminary assessment, the Company does not believe
that the year 2000 will have a material impact on the results of operations,
cash flows or financial position of the Company.
ENVIRONMENTAL MATTERS
The Company is not aware of any environmental issues at any of its
properties. The Company believes it has sufficient insurance coverage at each of
its properties.
OTHER
The Company is obligated, in accordance with its lease provisions, to
provide certain tenants with tenant improvements.
(14) SAVINGS PLAN
Effective January 1, 1994, Tower Predecessor adopted a 401(k) Savings Plan
(the "Plan") for its employees. Under the Plan, as amended, employees, age 21
and older, are eligible to participate in the Plan immediately upon employment.
F-33
<PAGE>
Base salary and wages are eligible for contribution to the Plan.
Participants may make salary deferral contributions from 1% to 15% per payroll
period.
The Plan provides that matching employer contributions are to be determined
at the discretion of Tower Predecessor. Pursuant to the Offering, the Plan was
transferred to the Company. There were no discretionary matching contributions
for the years ended December 31, 1997, 1996 and 1995.
Participants are immediately vested in their pre-tax contributions, and are
vested in the Company's and Tower Predecessor's discretionary matching
contributions after two years of service.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose the fair value of financial instruments
for which it is practicable to estimate that value. The Company determines the
fair value based on the discounted future cash flows at a discount rate that
approximates the Company's effective current borrowing rate. Except for the
items noted below, the fair value of the Company's financial instruments is not
significantly different than their carrying values at December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31,1997
FAIR VALUE CARRYING VALUE
----------------- -----------------
<S> <C> <C>
(IN THOUSANDS)
Term loan.............................................. $ 107,977 $ 107,000
</TABLE>
(16) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Due to the impact of the Offering, related formation transactions, and the
22 properties acquired in conjunction with and subsequent to the Offering, the
historical results of operations are not indicative of future results of
operations. The following Pro Forma Condensed Statements of Income for the years
ended December 31, 1997 and 1996 are presented as if the Offering and related
formation transactions and property acquisitions had occurred at January 1, 1997
and January 1, 1996. The pro forma information is based upon historical
information and does not purport to present what actual results would have been
had such transactions, in fact, occurred at January 1, 1997 and January 1, 1996,
or to project results for any future periods.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31 ,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
<CAPTION>
(IN THOUSANDS,
EXCEPT FOR PER SHARE
DATA)
<S> <C> <C>
Total revenues...................................................... $ 94,107 $ 89,401
Net income.......................................................... $ 17,984 $ 16,060
Net income per common share--basic and dilutive..................... $ 1.06 $ 0.95
</TABLE>
(17) SUBSEQUENT EVENTS
On January 15, 1998, the Company completed its acquisition of a building in
Arizona for a purchase price of $16.9 million. The Company funded this purchase
through a drawdown on its Line of Credit. In addition, the Company entered into
an agreement to purchase a Manhattan building for approximately $34.0 million.
In addition, the Company drew down an additional $4.5 million on the Line of
Credit to pay closing costs on its acquisition of 810 Seventh Avenue.
F-34
<PAGE>
SCHEDULE III
TOWER REALTY TRUST, INC.
AND PREDECESSOR COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
GROSS AMOUNT
CARRIED AT
COSTS CLOSE OF
INITIAL COST CAPITALIZED PERIOD
----------------------------- SUBSEQUENT -------------
BUILDING AND TO LAND AND
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION IMPROVEMENTS
- ----------------------------- ---------------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
286 Madison Avenue........... New York, New York $ -- $ 2,226,307 $ 8,754,798 $ 44,793 $ 2,294,744
290 Madison Avenue........... New York, New York -- 1,137,721 4,550,886 2,001 1,137,721
292 Madison Avenue........... New York, New York -- 5,089,907 20,359,628 258,668 5,126,331
Tower 45..................... New York, New York 67,000,000 23,790,993 108,722,331 167,000 23,757,993
100 Wall Street.............. New York, New York -- 11,793,632 47,074,876 0 11,818,013
810 Seventh Avenue........... New York, New York 100,000,000 30,317,000 119,826,465 0 30,317,000
120 Mineola Blvd............. Mineola, New York -- 2,740,776 11,862,871 2,376 2,740,776
5151 East Broadway........... Tucson, Arizona -- 6,965,623 16,253,125 0 6,860,762
Corporate Center............. Phoenix, Arizona 21,989,769 9,730,139 38,920,556 2,765 9,730,139
Century Plaza................ Phoenix, Arizona -- 2,279,974 9,119,896 142,065 2,311,085
Black Canyon Loop............ Phoenix, Arizona -- 11,676,671 -- 0 11,676,671
One Orlando Center........... Orlando, Florida 40,000,000 23,849,316 55,648,405 62,637 23,849,316
57-50 Major Blvd............. Orlando, Florida -- 1,565,009 6,795,112 1,972,763 1,565,009
Maitland Forum............... Maitland, Florida -- 5,708,302 24,886,810 117,944 5,685,810
Maitland West................ Maitland, Florida -- 1,158,595 4,978,040 285 1,158,595
------------- ------------- -------------- ------------- -------------
$228,989,769 $ 140,029,965 $477,753,799 $ 2,773,297 $140,029,965
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
<CAPTION>
BUILDING AND
PROPERTY NAME IMPROVEMENTS TOTAL
- ----------------------------- ----------------- -------------
<S> <C> <C>
286 Madison Avenue........... $ 8,799,591 $ 11,094,335
290 Madison Avenue........... 4,552,887 5,690,608
292 Madison Avenue........... 20,618,296 25,744,627
Tower 45..................... 108,889,331 132,647,324
100 Wall Street.............. 47,074,876 58,892,889
810 Seventh Avenue........... 119,826,465 150,143,465
120 Mineola Blvd............. 11,865,247 14,606,023
5151 East Broadway........... 16,253,125 23,113,887
Corporate Center............. 38,923,321 48,653,460
Century Plaza................ 9,261,961 11,573,046
Black Canyon Loop............ -- 11,676,671
One Orlando Center........... 55,711,042 79,560,358
57-50 Major Blvd............. 8,767,875 10,332,884
Maitland Forum............... 25,004,754 30,690,564
Maitland West................ 4,978,325 6,136,920
----------------- -------------
$ 480,527,096 $ 620,557,061
----------------- -------------
----------------- -------------
</TABLE>
F-35
<PAGE>
TOWER REALTY TRUST, INC. SCHEDULE III
AND PREDECESSOR COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ACCUMULATED DATE ACQUIRED
PROPERTY NAME LOCATION DEPRECIATION DATE OF CONSTRUCTION (YEARS) DEPRECIABLE
- ------------------------ ------------------------ ------------ --------------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
286 Madison Avenue...... New York, New York $ 46,381 1929 October 16, 1997 S/L 40
290 Madison Avenue...... New York, New York 23,703 1929 October 16, 1997 S/L 40
292 Madison Avenue...... New York, New York 106,146 1955 October 16, 1997 S/L 40
Tower 45................ New York, New York 974,770 1987 October 16, 1997 S/L 40
100 Wall Street......... New York, New York 245,229 1975 October 16, 1997 S/L 40
810 Seventh Avenue...... New York, New York 0 1970 December 31, 1997 S/L 40
120 Mineola Blvd........ Mineola, New York 111,955 1983 October 16, 1997 S/L 40
5151 East Broadway...... Tucson, Arizona 84,760 1975 October 16, 1997 S/L 40
Corporate Center........ Phoenix, Arizona 202,862 1975 October 16, 1997 S/L 40
Century Plaza........... Phoenix, Arizona 48,277 -- October 16, 1997 S/L 40
Black Canyon Loop....... Phoenix, Arizona 0 N/A November 24,1997 N/A
One Orlando Center...... Orlando, Florida 289,835 1988 October 16, 1997 S/L 40
57-50 Major Blvd........ Orlando, Florida 60,988 1972 October 16, 1997 S/L 40
Maitland Forum.......... Maitland, Florida 202,847 1986 October 16, 1997 S/L 40
Maitland West........... Maitland, Florida 46,393 1981 October 16, 1997 S/L 40
------------
$2,444,146
------------
------------
</TABLE>
F-36
<PAGE>
TOWER REALTY TRUST, INC.
AND TOWER PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
Real Estate and Accumulated Depreciation
(dollars in thousands)
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
JANUARY
MARCH 27, 1,
1997- 1997-
DECEMBER OCTOBER
31, 1997 15, 1997 1996 1995
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Real estate:
Balance at beginning of year.................... -- $ 169,619 $ 163,879 $ 163,326
Additions to and improvement of real estate..... 620,557 3,350 6,509 967
Disposition of real estate...................... -- (769) (414)
----------- --------- --------- ---------
Balance at end of year........................ 620,557 $ 172,969 $ 169,619 $ 163,879
----------- --------- --------- ---------
----------- --------- --------- ---------
Accumulated depreciation:
Balance at beginning of year.................... -- $ 40,555 $ 35,741 $ 30,422
Depreciation expense............................ 2,444 4,590 5,583 5,733
Accumulated depreciation on real estate sold.... -- (769) (414)
----------- --------- --------- ---------
Balance at end of year........................ 2,444 $ 45,145 $ 40,555 $ 35,741
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Reckson Operating Partnership, L. P.
We have audited the accompanying consolidated balance sheets of Reckson
Operating Partnership, L. P. (the "Operating Partnership") as of December 31,
1998 and 1997, and the related consolidated statements of income, partners'
capital, and cash flows for each of the three years in the period ended December
31 1998. We have also audited the financial statement schedule listed in the
Index. These financial statements and financial statement schedule are the
responsibility of the Operating Partnership's management. Our responsibility is
to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Reckson
Operating Partnership, L. P. at December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
ERNST & YOUNG LLP
New York, New York
February 11, 1999
F-38
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1998 1997
------------ ------------
ASSETS
Commercial real estate properties, at cost (Notes 2, 3, 5, 7 and 8)
Land................................................................................ $ 212,540 $ 138,526
Buildings and improvements.......................................................... 1,372,549 818,229
Developments in progress:
Land................................................................................ 69,143 36,857
Development costs................................................................... 82,901 17,616
Furniture, fixtures and equipment..................................................... 6,090 4,054
------------ ------------
1,743,223 1,015,282
Less accumulated depreciation................................................... (159,049) (111,068)
------------ ------------
1,584,174 904,214
Investments in real estate joint ventures............................................. 15,104 7,223
Investment in mortgage notes and notes receivable (Note 8)............................ 99,268 104,509
Cash and cash equivalents (Note 12)................................................... 2,228 21,676
Tenant receivables.................................................................... 5,159 4,975
Investments in and advances to affiliates (Note 7).................................... 53,154 18,090
Deferred rent receivable.............................................................. 22,526 14,973
Prepaid expenses and other assets (Notes 7 and 8)..................................... 46,372 13,705
Contract and land deposits and pre-acquisition costs.................................. 2,253 7,559
Deferred lease and loan costs, less accumulated amortization of $18,170 and $14,844
respectively........................................................................ 24,282 16,181
------------ ------------
Total Assets...................................................................... $ 1,854,520 $ 1,113,105
------------ ------------
------------ ------------
LIABILITIES
Mortgage notes payable (Note 2)....................................................... $ 253,463 $ 180,023
Unsecured credit facility (Notes 3 and 12)............................................ 465,850 210,250
Unsecured term loan (Note 3).......................................................... 20,000 --
Senior unsecured notes (Note 4)....................................................... 150,000 150,000
Accrued expenses and other liabilities (Note 5)....................................... 48,384 30,799
Distributions payable................................................................. 19,663 120
Affiliate payables (Note 7)........................................................... 2,395 1,764
------------ ------------
Total Liabilities................................................................. 959,755 572,956
------------ ------------
Commitments and other comments (Notes 9, 10, and 12).................................. -- --
Minority interests in consolidated partnerships....................................... 52,173 7,697
------------ ------------
PARTNERS' CAPITAL (Note 6)
Preferred Capital, 9,234,518 and -- units outstanding, respectively................... 263,126 --
General Partner's Capital, 40,035,419 and 37,770,158 units outstanding,
respectively........................................................................ 485,341 446,702
Limited Partners' Capital, 7,764,630 and 7,218,688 units outstanding, respectively.... 94,125 85,750
------------ ------------
Total Partners' Capital........................................................... 842,592 532,452
------------ ------------
Total Liabilities and Partners' Capital......................................... $ 1,854,520 $ 1,113,105
------------ ------------
------------ ------------
</TABLE>
(see accompanying notes to financial statements)
F-39
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED TOTAL
PREFERRED PARTNER'S PARTNERS' PARTNERS'
CAPITAL CAPITAL CAPITAL CAPITAL
---------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995...................... $ -- $ 59,893 $ 26,148 $ 86,041
---------- -------- ------- --------
Net Income..................................... -- 17,325 5,596 22,921
Contributions.................................. -- 131,716 27,881 159,597
Distributions.................................. -- (24,136) (7,746) (31,882)
---------- -------- ------- --------
BALANCE DECEMBER 31, 1996...................... -- 184,798 51,879 236,677
---------- -------- ------- --------
Net Income..................................... -- 34,742 7,239 41,981
Contributions.................................. -- 267,827 35,339 303,166
Distributions.................................. -- (40,665) (8,707) (49,372)
---------- -------- ------- --------
BALANCE DECEMBER 31, 1997...................... -- 446,702 85,750 532,452
Net Income..................................... -- 38,667 7,586 46,253
Contributions.................................. 263,126 54,089 11,484 328,699
Distributions.................................. -- (55,193) (10,695) (65,888)
Contribution of a 1% interest in Reckson FS
Limited Partnership.......................... -- 1,076 -- 1,076
---------- -------- ------- --------
BALANCE DECEMBER 31, 1998...................... $ 263,126 $ 485,341 $ 94,125 $ 842,592
---------- -------- ------- --------
---------- -------- ------- --------
</TABLE>
(see accompanying notes to financial statements)
F-41
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
NET INCOME AVAILABLE TO COMMON UNITHOLDERS......................................... $ 46,253 $ 41,981 $ 22,921
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 52,957 27,237 17,670
Extraordinary loss on extinguishment of debts.................................... 1,993 2,808 1,259
Minority partners' interests in consolidated partnerships........................ 2,819 920 915
Gain on sale of interest in Reckson Executive Centers, LLC....................... (9) -- --
Gain on sales of property and securities......................................... (43) (672) --
Distribution from and share of net loss (income) from investments in
partnerships................................................................... 470 408 191
Equity in earnings of service companies.......................................... (1,233) (55) (931)
Equity in earnings of real estate joint ventures................................. (603) (459) (266)
Changes in operating assets and liabilities:
Prepaid expenses and other assets................................................ (6,499) (1,931) (619)
Tenant and affiliate receivables................................................. (184) (1,183) (256)
Deferred rents receivable........................................................ (7,553) (4,500) (3,837)
Accrued expenses and other liabilities........................................... 30,849 11,240 4,716
--------- --------- ---------
Net cash provided by operating activities........................................ 119,217 75,794 41,763
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in capital escrow reserves.............................................. (700) -- --
Cash from contributed net assets................................................. -- -- --
Purchases of commercial real estate properties................................... (449,241) (429,379) (181,130)
Interest receivables............................................................. 2,602 (2,392) (870)
Investment in mortgage notes and notes receivable................................ 4,072 (50,282) (50,892)
Contract deposits and preacquisition costs....................................... 8,839 (1,303) (6,668)
Additions to developments in progress............................................ (97,570) (40,367) (8,427)
Additions to commercial real estate properties................................... (21,181) (12,038) (12,441)
Payment of leasing costs......................................................... (8,802) (5,417) (5,028)
Investments in securities........................................................ (42,299) (1,756) --
Additions to furniture, fixtures and equipment................................... (2,071) (1,159) (115)
Investments in real estate joint ventures........................................ (7,773) (1,734) (5,832)
Investment in service companies.................................................. -- (4,241) (3,170)
Distribution from a service company.............................................. 15 -- --
Proceeds from sales of property and securities................................... 809 725 --
--------- --------- ---------
Net cash (used in) investing activities.......................................... (613,300) (549,343) (274,573)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings......................................................... -- -- 54,402
Principal payments on borrowings................................................. (4,735) (1,624) (380)
Proceeds from issuance of senior unsecured notes................................. -- 150,000 --
Proceeds from mortgage refinancing's, net of refinancing costs................... 11,458 20,134 --
Payment of loan costs and prepayment penalties................................... (4,738) (4,983) (2,525)
Investments in and advances to affiliates........................................ (24,409) (20,182) (2,952)
Proceeds from credit facilities.................................................. 393,100 421,000 144,500
Principal payments on credit facilities.......................................... (137,500) (319,250) (76,000)
Proceeds from term loan.......................................................... 20,000 -- --
Contributions.................................................................... 272,734 299,991 145,317
Distributions.................................................................... (57,683) (53,327) (22,546)
Contribution by a minority partner in a consolidated partnership................. 10,000 -- --
Distributions to minority partners in consolidated partnerships.................. (3,592) (8,855) (1,492)
--------- --------- ---------
Net cash provided by financing activities.......................................... 474,635 482,904 238,324
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................... (19,448) 9,355 5,514
Cash and cash equivalents at beginning of period................................... 21,676 12,321 6,807
--------- --------- ---------
Cash and cash equivalents at end of period......................................... $ 2,228 $ 21,676 $ 12,321
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest......................................... $ 41,822 $ 20,246 $ 13,261
--------- --------- ---------
--------- --------- ---------
</TABLE>
(see accompanying notes to financial statements)
F-42
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Reckson Operating Partnership, L. P. (the "Operating Partnership") is
engaged in the ownership, management, operation, leasing and development of
commercial real estate properties, principally office and industrial buildings
and also own certain undeveloped land (collectively, the "Properties") located
in the New York tri-state area (the "Tri State Area").
ORGANIZATION AND FORMATION OF THE OPERATING PARTNERSHIP
The Operating Partnership commenced operations on June 2, 1995 and is the
successor to the operations of the Reckson Group. The sole general partner in
the Operating Partnership, Reckson Associates Realty Corp. (the "Company") is a
self administered and self managed Real Estate Investment Trust ("REIT"). During
June, 1995, the Company contributed approximately $162 million in cash to the
Operating Partnership in exchange for an approximate 73% general partnership
interest.
The Operating Partnership executed various option and purchase agreements
whereby it issued 2,758,960 units in the Operating Partnership ("Units") to the
continuing investors and assumed approximately $163 million (net of the Omni
mortgages) of indebtedness in exchange for interests in certain property
partnerships, fee simple and leasehold interests in properties and development
land, certain business assets of the executive center entities and 100% of the
non-voting preferred stock of the management and construction companies.
During 1997, the Company formed Reckson Service Industries, Inc. ("RSI") and
Reckson Strategic Venture Partners, LLC ("RSVP"). The Operating Partnership
owned a 95% non voting common stock interest in RSI through June 10, 1998. On
June 11, 1998, the Operating Partnership distributed its 95% common stock
interest in RSI of approximately $3 million to its owners, including the Company
which, in turn, distributed the common stock of RSI to its stockholders.
Additionally, during June 1998, the Operating Partnership established a credit
facility with RSI (the "RSI Facility") in the amount of $100 million for RSI's
service sector operations and other general corporate purposes. As of December
31, 1998, the Company had advanced $33.7 million under the RSI facility all of
which is outstanding. In addition, the Operating Partnership approved the
funding of investments of up to $100 million with or in RSVP (the "RSVP
Commitment"), through RSVP-controlled joint venture REIT-qualified investments
or advances made to RSI under terms similar to the RSI Facility. As of December
31, 1998, approximately $17.3 million had been invested through the RSVP
Commitment, of which $10.1 million represents RSVP controlled joint venture
investments and $7.2 million represents advances to RSI under the RSVP
Commitment. Such amounts have been included in investment in real estate joint
ventures and investments in and advances to affiliates, respectively, on the
Company's balance sheet. RSI serves as the managing member of RSVP. RSI invests
in operating companies that generally provide commercial services to the RSI
customer base which includes the tenants of RSI's executive suite business and
to properties owned by the Company and its tenants and third parties. RSVP was
formed to provide the Company with a research and development vehicle to invest
in alternative real estate sectors. RSVP invests primarily in real estate and
real estate related operating companies generally outside of the Company's core
office and industrial focus. RSVP's strategy is to identify and acquire
interests in established entrepreneurial enterprises with experienced management
teams in market sectors which are in the early stages of their growth cycle or
offer unique circumstances for attractive investments as well as a platform for
future growth.
F-43
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On January 6, 1998, the Operating Partnership made an initial investment in
the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse
facilities. The Morris Companies properties include 23 industrial buildings
encompassing approximately 4.0 million square feet. In connection with the
transaction the Morris Companies contributed 100% of their interests in certain
industrial properties to Reckson Morris Operating Partnership, L.P. ("RMI") in
exchange for operating partnership units in RMI. The Operating Partnership has
agreed to invest up to $150 million in the Morris Companies. As of December 31,
1998, the Operating Partnership has invested approximately $93.8 million for an
approximate 71.8% controlling interest in RMI.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the consolidated
financial position of the Operating Partnership and its subsidiaries as at
December 31, 1998 and 1997 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998. The
Operating Partnership's investments in Metropolitan Partners, LLC, RMI and Omni
Partners, L. P. ("Omni"), are reflected in the accompanying financial statements
on a consolidated basis with a reduction for minority partners' interest. The
operating results of the service businesses currently conducted by Reckson
Management Group, Inc., ("RMG"), and Reckson Construction Group, Inc., are
reflected in the accompanying financial statements on the equity method of
accounting. The operating results of Reckson Executive Centers, L.L.C., ("REC"),
a service business of the Operating Partnership were reflected in the
accompanying financial statements on the equity method of accounting through
March 31, 1998. On April 1, 1998, the Operating Partnership sold its 9.9%
interest in REC to RSI. Additionally, the operating results of RSI were
reflected in the accompanying financial statements on the equity method of
accounting through June 10, 1998. On June 11, 1998 the Operating Partnership
distributed its 95% common stock interest in RSI to its owners, including the
Company which, in turn, distributed the common stock of RSI to its stockholders.
The Operating Partnership also invests in real estate joint ventures where it
may own less than a controlling interest, such investments are also reflected in
the accompanying financial statements on the equity method of accounting. All
significant intercompany balances and transactions have been eliminated in the
consolidated financial statements.
During 1997 the Financial Accounting Standards Board ("FASB") issued
statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") which is
effective for fiscal years beginning after December 15, 1997. SFAS 130
established standards for reporting comprehensive income and its components in a
full set of general-purpose financial statements. SFAS 130 requires that all
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The adoption
of this standard had no impact on the Operating Partnership's financial position
or results of operations. Additionally in June 1997, the FASB also issued SFAS
No. 131 "Disclosures about segments of an Enterprise and Related Information"
("SFAS 131") which is effective for fiscal years beginning after December 15,
1997. SFAS 131 establishes standards for reporting information about operating
segments in annual financial statements and in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of this standard had no
impact on the Operating Partnership's financial position or results of
operations, but did affect the disclosure of segment information. See Note 11.
F-44
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table presents the minority partners' interest in the
consolidated partnerships income:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----- ----- -----
Omni Partners, L. P...................................................... 40% 40% 40%
Metropolitan Partners, LLC............................................... 25% -- --
Reckson Morris Operating Partnership, L. P. (1).......................... 28% -- --
Reckson FS Limited Partnership (2)....................................... -- 1% 1%
</TABLE>
- ------------------------
(1) Approximate
(2) On May 26, 1998, the general partner of Reckson FS Limited Partnership
transferred and assigned its 1% general partnership interest to the
Operating Partnership in exchange for 101,970 units of general partnership
interest.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REAL ESTATE
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of ten to thirty years for buildings and improvements and
five to ten years for furniture, fixtures and equipment. Tenant improvements,
which are included in buildings and improvements, are amortized on a
straight-line basis over the term of the related leases.
CASH EQUIVALENTS
The Operating Partnership considers highly liquid investments with a
maturity of three months or less when purchased, to be cash equivalents.
DEFERRED COSTS
Lease fees and loan costs are capitalized and amortized over the life of the
related lease or loan.
INCOME TAXES
No provision has been made for income taxes in the accompanying consolidated
financial statements since such taxes, if any, are the responsibility of the
individual partners.
REVENUE RECOGNITION
Minimum rental income is recognized on a straight-line basis over the term
of the lease. The excess of rents recognized over amounts contractually due are
included in deferred rents receivable on the accompanying balance sheets.
Contractually due but unpaid rents are included in tenant receivables
F-45
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on the accompanying balance sheets. Certain lease agreements provide for
reimbursement of real estate taxes, insurance, common area maintenance costs and
indexed rental increases, which are recorded on an accrual basis.
The Operating Partnership records interest income on investments in mortgage
notes and notes receivable on an accrual basis of accounting. The Operating
Partnership does not accrue interest on impaired loans where, in the judgment of
management, collection of interest according to the contractual terms is
considered doubtful. Among the factors the Operating Partnership considers in
making an evaluation of the collectibility of interest are, the status of the
loan, the value of the underlying collateral, the financial condition of the
borrower and anticipated future events. Loan discounts are amortized over the
life of the real estate using the constant interest method.
NET INCOME PER COMMON PARTNERSHIP UNIT
Net income per common partnership unit is determined by allocating net
income after preferred distributions to the general and limited partners' based
on their weighted average common partnership units outstanding during the
respective periods presented.
DISTRIBUTIONS TO PREFERRED UNIT HOLDERS
Holders of preferred units of limited partnership interest are entitled to
distributions based on the stated rates of return (subject to adjustment) for
those units.
Holders of preferred units of general partnership interest are entitled to
distributions based on an annual distribution rate of 7.625%.
CAPITALIZED INTEREST
Interest incurred on borrowings used to fund the property development and
construction are capitalized as developments in progress and allocated to the
individual property costs once construction is completed
CONSTRUCTION OPERATIONS
Construction operations are accounted for utilizing the completed contract
method. Under this method, costs and related billings are deferred until the
contract is substantially complete. Estimated losses on uncompleted contracts
are recorded in the period that management determines that a loss may be
incurred.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. MORTGAGE NOTES PAYABLE
At December 31, 1998, there were 17 mortgage notes payable with an aggregate
outstanding principal amount of approximately $253 million. Properties with an
aggregate carrying value at December 31, 1998 of approximately $330 million are
pledged as collateral against the mortgage notes payable. In addition, $48.6
million of the $253 million are recourse to the Operating Partnership. The
F-46
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. MORTGAGE NOTES PAYABLE (CONTINUED)
mortgage notes bear interest at rates ranging from 6.45% to 9.25%, and mature
between 1999 and 2012. The weighted average interest rate on the outstanding
mortgage notes payable at December 31, 1998 is 7.8%. Certain of the mortgage
notes payable are guaranteed by certain minority partners in the Operating
Partnership.
Scheduled principal repayments during the next five years and thereafter are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1999.............................................................................. $ 10,752
2000.............................................................................. 32,131
2001.............................................................................. 19,440
2002.............................................................................. 12,937
2003.............................................................................. 19,295
Thereafter........................................................................ 158,908
----------
$ 253,463
----------
----------
</TABLE>
3. CREDIT FACILITIES
On July 23, 1998, the Operating Partnership obtained a three year $500
million unsecured revolving credit facility (the "Credit Facility") from Chase
Manhattan Bank, Union Bank of Switzerland and PNC Bank as co-managers of the
credit facility bank group. Interest rates on borrowings under the Credit
Facility are priced off of LIBOR plus a sliding scale ranging from 112.5 basis
points to 137.5 basis points based on the leverage ratio of the Operating
Partnership. Upon the Operating Partnership receiving an investment grade rating
on its senior unsecured debt by two rating agencies, the pricing is adjusted
based off of LIBOR plus a scale ranging from 65 basis points to 90 basis points
depending upon the rating. The Credit Facility replaced and restructured the
Operating Partnership's existing $250 million unsecured credit facility and $200
million unsecured bridge facility. As a result, certain deferred loan costs
incurred in connection with those facilities were written off. Such amount has
been reflected as an extraordinary loss on the Operating Partnership's statement
of operations. The Operating Partnership utilizes the Credit Facility primarily
to finance the acquisitions of properties and other real estate investments,
fund its development activities and for working capital purposes. At December
31, 1998, the Operating Partnership had availability under the Credit Facility
to borrow an additional $8.1 million (net of $26.1 million of outstanding
undrawn letters of credit).
On December 4, 1998, the Operating Partnership obtained a one year $50
million unsecured term loan (the "Term Loan") from Chase Manhattan Bank. On
January 13, 1999, the Operating Partnership and Chase Manhattan Bank increased
the total availability under the Term Loan to $75 million. Interest rates on
borrowings under the Term Loan are priced off LIBOR plus 150 basis points for
the first nine months and 175 basis points for the remaining three months. At
December 31, 1998, the Operating Partnership had availability under the Term
Loan to borrow an additional $30 million which was increased to $55 million on
January 13, 1999.
The Operating Partnership capitalized interest incurred on borrowings to
fund certain development costs in the amount of $7,344,102, $2,351,201 and
$800,434 for the years ended December 31, 1998, 1997 and 1996, respectively.
F-47
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SENIOR UNSECURED NOTES
On August 28, 1997, the Operating Partnership sold $150 million of 10-year
senior unsecured notes in a privately placed transaction. The senior unsecured
notes were priced at par with interest at 110 basis points over the 10-year
treasury note for an all in coupon of 7.2%. Interest is payable semiannually
with principal and unpaid interest due on August 28, 2007.
5. LAND LEASES
The Operating Partnership leases, pursuant to noncancellable operating
leases, the land on which ten of its buildings were constructed. The leases,
which contain renewal options, expire between 2018 and 2080. The leases contain
provisions for scheduled increases in the minimum rent and one of the leases
additionally provides for adjustments to rent based upon the fair market value
of the underlying land at specified intervals. Minimum ground rent is recognized
on a straight-line basis over the terms of the leases. The excess of amounts
recognized over amounts contractually due is approximately $2,316,000 and
$1,948,000 at December 31, 1998 and 1997 respectively. These amounts are
included in accrued expenses and other liabilities on the accompanying balance
sheets. Future minimum lease commitments relating to the land leases as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 1,781
2000............................................................... 1,783
2001............................................................... 1,800
2002............................................................... 1,819
2003............................................................... 1,818
Thereafter......................................................... 50,174
---------
$ 59,175
---------
---------
</TABLE>
6. PARTNERS' CAPITAL
The Operating Partnership made loans to certain senior officers to purchase
units at market prices ranging from $12.13 per unit to $21.94 per unit. The
loans bear interest at rates ranging between 8% to 8.5% and are secured by the
units purchased. Approximately $436 thousand of such loans will be forgiven
ratably at each anniversary of employment over a three to four year period and
approximately $176,000 of such loans is due and payable with accrued interest on
January 9, 2002. The loan balances of approximately $248,000 and $362,000 at
December 31, 1998 and 1997, respectively have been included as a reduction of
general partner's capital on the accompanying consolidated statement of
partners' capital.
On April 21, 1998, the Operating Partnership issued 25,000 Series B
preferred units of limited partnership interest at a stated value of $1,000 per
unit and 11,518 Series C preferred units of limited partnership interest at a
stated valued of $1,000 per unit in connection with the acquisition of the
Cappelli portfolio. The Series B preferred units have a current distribution
rate of 6.25% and are convertible to common units at a conversion price of
approximately $32.51 for each preferred unit. The Series C preferred units have
a current distribution rate of 6.25% and are convertible to common units at a
conversion price of approximately $29.39 for each preferred unit.
F-48
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PARTNERS' CAPITAL (CONTINUED)
During the year ended December 31, 1998, the Operating Partnership issued
2,265,261 units of general partnership interest to the Company in exchange for
approximately $53 million. The proceeds were used to repay borrowings under the
credit facilities.
Additionally, the Operating Partnership issued 9,200,000 Series A preferred
units of general partnership interest to the Company in exchange for
approximately $221 million. The Series A preferred units have a liquidation
preference of $25 per unit, a distribution rate of 7.625% and are convertible to
common units at a conversion rate of .8769 common units for each preferred unit.
On July 2, 1998, the Operating Partnership issued 6,000 Series D preferred
units of limited partnership interest at a stated value of $1,000 per unit in
connection wit the acquisition of the remaining 50% interest in 360 Hamilton
Avenue located in White Plains, New York. The Series D preferred units have a
current distribution rate of 6.25% and are convertible to common units at a
conversion price of approximately $29.12 for each preferred unit.
7. RELATED PARTY TRANSACTIONS
The Operating Partnership, through its subsidiaries and affiliates, provides
management, leasing and other tenant related services to the Properties. Certain
executive officers of the Company have continuing ownership interests in the
unconsolidated service companies.
The Operating Partnership in connection with its formation, was granted
options, exercisable over a 10 year period to acquire six properties owned by
the Reckson Group (the "Predecessor") (the "Reckson Option Properties") and four
properties in which the Predecessor owns a non-controlling minority interest
(the "Other Option Properties" and, together with the Reckson Option Properties,
the "Option Properties") at a purchase price equal to the lesser of (i) a fixed
purchase price and (ii) the Net Operating Income, as defined, attributable to
such Option Property during the 12 month period preceding the exercise of the
option divided by a capitalization rate of 11.5%, but the purchase price shall
in no case be less than the outstanding balance of the mortgage debt encumbering
the Option Property on the acquisition date.
As of December 31, 1998, the Operating Partnership acquired four of the
Reckson Option Properties for an aggregate purchase price of approximately $35
million. In connection with the purchase of such Option Properties the Operating
Partnership issued 475,032 common units at prices ranging from $16.38 per unit
to $21.00 per unit (split adjusted) as partial consideration in the
transactions. Such units were issued to certain members of management and
entities whose partners included members of management. Additionally, during
1998, one of the Other Option Properties was sold by the Predecessor to a third
party.
The Operating Partnership made construction loan advances to fund certain
redevelopment and leasing costs relating to one of the Other Option Properties.
At December 31, 1997 and 1996, advances due the Operating Partnership were
approximately $4,200,000 and $2,940,000, respectively. Such amounts bear
interest at the rate of 11% per annum and are due on demand. In January 1998,
the outstanding advances including accrued and unpaid interest was repaid in
full.
The Operating Partnership and RSI have entered into an intercompany
agreement (the "Reckson Intercompany Agreement") to formalize their relationship
and to limit conflicts of interest. Under the Reckson Intercompany Agreement,
RSI granted the Operating Partnership a right of first opportunity to make any
REIT qualified investment that becomes available to RSI. In addition, if a
REIT-qualified
F-49
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
investment opportunity becomes available to an affiliate of RSI, including RSVP,
the Reckson Intercompany Agreement requires such affiliate to allow the
Operating Partnership to participate in such opportunity to the extent of RSI's
interest.
Under the Reckson Intercompany Agreement, the Operating Partnership granted
RSI a right of first opportunity to provide commercial services to the Operating
Partnership and its tenants. RSI will provide services to the Operating
Partnership at rates and on terms as attractive as either the best available for
comparable services in the market or those offered by RSI to third parties. In
addition, the Operating Partnership will give RSI access to its tenants with
respect to commercial services that may be provided to such tenants and, under
the Reckson Intercompany Agreement, subject to certain conditions, the Operating
Partnership granted RSI a right of first refusal to become the lessee of any
real property acquired by the Operating Partnership if the Operating Partnership
determines that, consistent with Reckson's status as a REIT, it is required to
enter into a "master" lease agreement.
On March 23, 1998, the Company sold approximately $5.9 million of common
stock to RSI at the market closing price of $25 per share. The Operating
Partnership loaned RSI the $5.9 million to execute this transaction. Such amount
was repaid to the Operating Partnership by RSI during August 1998.
On June 11, 1998, the Operating Partnership distributed its 95% voting
common stock interest in RSI of approximately $3 million to its partners.
Additionally, during June 1998, the Operating Partnership established a credit
facility with RSI (the "RSI Facility") in the amount of $100 million for RSI's
service sector operations and other general corporate purposes. As of December
31, 1998, the Company had advanced $33.7 million under the RSI facility all of
which is outstanding. In addition, the Operating Partnership approved the
funding of investments of up to $100 million with or in RSVP (the "RSVP
Commitment"), through RSVP-controlled joint venture REIT-qualified investments
or advances made to RSI under terms similar to the RSI Facility. As of December
31, 1998, approximately $17.3 million had been invested through the RSVP
Commitment, of which $10.1 million represents RSVP controlled joint venture
investments and $7.2 million represents advances to RSI under the RSVP
Commitment. Such amounts have been included in investment in real estate joint
ventures and investments in and advances to affiliates, respectively, on the
Operating Partnership's balance sheet.
On August 27, 1998 the Operating Partnership announced the formation of a
joint venture with RSVP and the Dominion Group, an Oklahoma-based,
privately-owned group of companies that focuses on the development, acquisition
and ownership of government occupied office buildings and correctional
facilities. The new venture, Dominion Properties LLC (the "Dominion Venture"),
is owned by Dominion Venture Group LLC, and by a subsidiary of the Operating
Partnership. The Dominion Venture will engage primarily in acquiring, developing
and/or owning government-occupied office buildings and privately operated
correctional facilities. Under the Dominion Venture's operating agreement, RSVP
is to invest up to $100 million, some of which may be invested by the Operating
Partnership (the "RSVP Capital"). The initial contribution of RSVP Capital was
approximately $39 million of which approximately $10.1 million was invested by a
subsidiary of the Operating Partnership. The Operating Partnership's subsidiary
funded its capital contribution through the RSVP Commitment. In addition, the
Operating Partnership advanced approximately $2.9 million to RSI through the
RSVP Commitment for an investment in RSVP which was then invested on a joint
venture basis with the Dominion Group in certain service business activities
related to the real estate activities.
F-50
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
As of December 31, 1998, the Dominion Venture had investments in 11 government
office buildings and two correctional facilities.
During 1998, the Operating Partnership made investments in and advances to
RMG of approximately $29.5 million. Such investments and advances were used by
RMG in connection with RMG's acquisition of an approximate 64% ownership
interest in an executive office suite business. Concurrently with RMG's
investment, RSI received an option to purchase RMG's interest at cost plus 8%.
RMG is owned 97% by the Operating Partnership and 3% by an entity owned by
certain officers of the Company. On November 9, 1998, RSI exercised its option
and, as a result RMG earned income during the period of ownership of
approximately $707,000. In addition, RSI assumed the outstanding debt plus
accrued interest owing to the Operating Partnership.
8. COMMERCIAL REAL ESTATE INVESTMENTS
During 1997, the Operating Partnership acquired five office properties
encompassing approximately 881,000 square feet and 15 industrial properties
encompassing approximately 968,000 square feet on Long Island for an aggregate
purchase price of approximately $131 million.
During 1997, the Operating Partnership acquired eight office properties
encompassing approximately 830,000 square feet and three industrial properties
encompassing approximately 163,000 square feet in Westchester for an aggregate
purchase price of approximately $117 million. In addition, the Operating
Partnership acquired approximately 32 acres of land located in Westchester for a
purchase price of approximately $8 million.
During 1997, the Operating Partnership acquired one industrial property
encompassing approximately 452,000 square feet in Connecticut for a purchase
price of approximately $27 million.
During 1997, the Operating Partnership acquired 13 office properties
encompassing approximately 1.5 million square feet and one industrial property
encompassing approximately 128,000 square feet in New Jersey for an aggregate
purchase price of approximately $156 million. In addition, the Operating
Partnership acquired approximately 303 acres of land located in New Jersey for
an aggregate purchase price of approximately $16.2 million.
In October 1997, the Operating Partnership sold 671 Old Willets Path in
Hauppauge, New York for approximately $725,000 and recorded a gain on the sale
of approximately $672,000.
On January 6, 1998, the Operating Partnership made an initial investment in
the Morris Companies, a New Jersey developer and owner of "Big Box" warehouse
facilities. The Morris Companies properties include 23 industrial buildings
encompassing approximately 4.0 million square feet. In connection with the
transaction the Morris Companies contributed 100% of their interests in certain
industrial properties to RMI in exchange for operating partnership units in RMI.
The Operating Partnership has agreed to invest up to $150 million in the Morris
Companies. As of December 31, 1998, the Operating Partnership has invested
approximately $93.8 million for an approximate 71.8% controlling interest in
RMI.
During 1998, the Operating Partnership acquired three office properties
encompassing approximately 674,000 square feet, two industrial properties
encompassing approximately 200,000 square feet and approximately 79.9 acres of
vacant land which allows for approximately 816,000 square
F-51
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMERCIAL REAL ESTATE INVESTMENTS (CONTINUED)
feet of future development opportunities on Long Island for an aggregate
purchase price of approximately $82.8 million.
During 1998, the Operating Partnership acquired four office properties
encompassing approximately 522,000 square feet, six industrial properties
encompassing approximately 985,000 square feet and approximately 112.2 acres of
vacant land which allows for approximately 815,000 square feet of future
development opportunities in New Jersey for an aggregate purchase price of
approximately $138.1 million.
During 1998, the Operating Partnership acquired Stamford Towers located in
Stamford, Connecticut for approximately $61.3 million. Stamford Towers is a
Class A office complex consisting of two eleven story towers totaling
approximately 325,000 square feet.
During 1998, the Operating Partnership acquired a portfolio of six office
properties encompassing approximately 980,000 square feet in Westchester County,
New York from Cappelli Enterprises and affiliated entities ("Cappelli") for a
purchase price of approximately $173 million. The Cappelli acquisition includes
a five building, 850,000 square foot Class A office park in Valhalla and Court
House Square, a 130,000 square foot Class A office building located in White
Plains. The Operating Partnership also obtained from Cappelli the remaining 50%
interest in 360 Hamilton Avenue, a 365,000 square foot vacant office tower in
downtown White Plains for $10 million plus the return of his capital
contributions of approximately $1.5 million. In addition, the Operating
Partnership received an option from Cappelli to acquire the remaining
development parcels within the Valhalla office park on which up to 875,000
square feet of office space can be developed. These acquisitions were financed
in part through proceeds from a draw under the credit facilities, the issuance
of 42,518 (approximately $42.5 million) preferred operating partnership units
(the "Cappelli Preferred Units"), and the assumption of approximately $47.1
million of mortgage debt. Additionally, during 1998, the Operating Partnership
issued and advanced to Cappelli $19 million under two liquidity loans (the
"Cappelli Liquidity Loans"). The Cappelli Liquidity Loans bear interest at rates
ranging from 10% to 10.5% per annum and are secured by Cappelli's right, title
and interest in the Cappelli Preferred Units. Such amounts have been included in
investments in mortgage notes and notes receivable on the accompanying balance
sheet. On February 3, 1999, the Operating Partnership made an additional $5
million advance under the Cappelli Liquidity Loans.
In July 1998, the Company formed a joint venture, Metropolitan Partners LLC,
a Delaware limited liability company ("Metropolitan"), with Crescent Real Estate
Equities Company, a Texas real estate investment trust ("Crescent"). Pursuant to
a merger agreement executed on July 9, 1998 and amended and restated on August
11, 1998 (the "Initial Merger Agreement") between Metropolitan, the Company,
Crescent and Tower Realty Trust Inc., a Maryland corporation ("Tower"),
Metropolitan agreed, subject to the terms and conditions of the Merger
Agreement, to purchase the common stock of Tower.
Prior to the execution of the Initial Merger Agreement, Metropolitan
identified certain potential tax issues regarding Tower's operations.
Metropolitan entered into the Initial Merger Agreement only after Tower made
detailed representations and warranties purporting to address these issues. In
the course of due diligence, however, Metropolitan, the Company and Crescent
discovered that these representations and warranties may not be correct and
discussed these concerns with Tower, specifically advising Tower that they were
not terminating the Initial Merger Agreement at that time. Metropolitan, the
Company and Crescent invited Tower to respond to these concerns. However, on
November 2,
F-52
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMERCIAL REAL ESTATE INVESTMENTS (CONTINUED)
1998, Tower filed a complaint in the Supreme Court of the State of New York
alleging Metropolitan, the Company and Crescent willfully breached the Initial
Merger Agreement. Tower, in the complaint, was seeking declaratory and other
relief, including damages of not less than $75 million and specific performance
by Metropolitan, the Company and Crescent of their obligations under the Initial
Merger Agreement.
On December 8, 1998,the Company, Metropolitan and Tower executed a revised
merger agreement (the "Revised Merger Agreement"), pursuant to which Tower will
be merged (the "Merger") into Metropolitan, with Metropolitan surviving the
Merger. Concurrently with the Merger, Tower Realty Operating Partnership, L.P.
("Tower OP") will be merged with and into a subsidiary of Metropolitan. The
consideration to be issued in the mergers will be comprised of (i) 25% cash and
(ii) 75% of shares of Class B Exchangeable Common Stock, par value $.01 per
share, of the Company (the "Class B Common Stock"), or in certain circumstances
described below, shares of Class B Common Stock and unsecured notes of the
Operating Partnership. The Company controls Metropolitan and owns 100% of the
common equity; Crescent owns a preferred equity investment in Metropolitan. The
Revised Merger Agreement replaces the Initial Merger Agreement (which at that
time was a 50/50 joint venture between the Company and Crescent) relating to the
acquisition by Metropolitan of Tower for $24 per share.
Pursuant to the terms of the Revised Merger Agreement, holders of shares of
outstanding common stock of Tower ("Tower Common Stock"), and outstanding units
of limited partnership interest of Tower OP will have the option to elect to
receive cash or shares of Class B Common Stock, subject to proration. Under the
terms of the transaction, Metropolitan will effectively pay for each share of
Tower Common Stock and each unit of limited partnership interest of Tower OP the
sum of (i) $5.75 in cash, and (ii) 0.6273 of a share of Class B Common Stock.
The shares of Class B Common Stock are entitled to receive an initial annual
dividend of $2.24 per share and is subject to adjustment annually. The shares of
Class B Common Stock are exchangeable at any time, at the option of the holder,
into an equal number of shares of common stock, par value $.01 per share, of the
Company subject to customary antidilution adjustments. The Company, at its
option, may redeem any or all of the Class B Common Stock in exchange for an
equal number of shares of the Company's common stock at any time following the
four year, six-month anniversary of the issuance of the Class B Common Stock.
The Company's Board of Directors have recommended to the Company's stockholders
the approval of a proposal to issue a number of shares of Class B Common Stock
equal to 75% of the sum of (i) the number of outstanding shares of the Tower
Common Stock and (ii) the number of Tower OP limited partnership units, in each
case, at the effective time of the mergers. If the stockholders of the Company
do not approve the issuance of the Class B Common Stock as proposed, the Revised
Merger Agreement provides that approximately one-third of the consideration that
was to be paid in the form of Class B Common Stock will be replaced by senior
unsecured notes of the Operating Partnership, which notes will bear interest at
the rate of 7% per annum and have a term of ten years. In addition, if the
stockholders of the Company do not approve the issuance of Class B Common Stock
as proposed and the Board of Directors of the Company withdraws or amends or
modifies in any material respect its recommendation for, approval of such
proposal, then the total principal amount of notes to be issued and distributed
in the Merger will be increased by $15 million.
Simultaneously with the execution of the Revised Merger Agreement,
Metropolitan and Tower executed and consummated a stock purchase agreement (the
"Series A Stock Purchase Agreement") pursuant to which Metropolitan purchased
from Tower approximately 2.2 million shares of Series A Convertible Preferred
Stock, par value $.01 per share, of Tower (the "Tower Preferred Stock"), for an
F-53
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMERCIAL REAL ESTATE INVESTMENTS (CONTINUED)
aggregate purchase price of $40 million, $30 million of which was funded through
a capital contribution by the Company to Metropolitan and which is included in
prepaid expenses and other assets on the accompanying balance sheet. The Tower
Preferred Stock has a stated value of $18.44 per share and is convertible by
Metropolitan into an equal number of shares of Tower Common Stock at anytime
after the termination, if any, of the Revised Merger Agreement, subject to
customary antidilution adjustments. The Tower Preferred Stock is entitled to
receive dividends equivalent to those paid on the Tower Common Stock. If the
Revised Merger Agreement is not consummated and a court of competent
jurisdiction issues a final, non-appealable judgment determining that the
Company and Metropolitan are obligated to consummate the Merger but have failed
to do so, or determining that the Company and Metropolitan failed to use their
reasonable best efforts to take all actions necessary to cause certain closing
conditions to be satisfied, Metropolitan is obligated to return to Tower $30
million of the Series A Preferred Stock.
Immediately prior to the execution of the Revised Merger Agreement and
consummation of the Series A Stock Purchase Agreement, the Company and Crescent
executed the amended and restated operating agreement of Metropolitan (the
"Metropolitan Operating Agreement") pursuant to which Crescent agreed to
purchase a convertible preferred membership interest (the "Preferred Interest")
in Metropolitan for an aggregate purchase price of $85 million. Ten million
dollars of the purchase price was paid by Crescent to Metropolitan upon
execution of the Metropolitan Operating Agreement to acquire the Tower Preferred
Stock and the remaining portion is payable prior to the closing of the Merger
and is expected to be used to fund a portion of the cash merger consideration.
Upon closing of the Merger, Crescent's investment will accrue distributions at a
rate of 7.5% per annum for a two-year period and may be redeemed by Metropolitan
at any time during that period for $85 million, plus an amount sufficient to
provide a 9.5% internal rate of return. If Metropolitan does not redeem the
preferred interest, upon the expiration of the two-year period, Crescent must
convert its interest into either (i) a common membership interest in
Metropolitan or (ii) shares of the Company's common stock at a conversion price
of $24.61.
In connection with the revised transaction, Tower, the Company and Crescent
have exchanged mutual releases for any claims relating to the Initial Merger
Agreement.
The Company anticipates that it will dispose of the assets in the Tower
portfolio located outside of New York. In addition, the Company is also
considering the disposition of certain of the Tower properties located in New
York.
In addition, the Operating Partnership has invested approximately $61.3
million in certain mortgage indebtedness encumbering four Class A office
properties encompassing approximately 577,000 square feet, a 825,000 square foot
industrial building located in New Jersey and a 400 acre parcel of land located
in New Jersey. In addition, the Operating Partnership loaned approximately $17
million to its minority partner in Omni, its flagship Long Island office
property, and effectively increased its economic interest in the property owning
partnership.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value at December 31, 1998 were
determined by management, using available market information and appropriate
valuation methodologies. Considerable judgment is necessary to interpret market
data and develop estimated fair value. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
F-54
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1998. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and current estimates of fair
value may differ significantly from the amounts presented herein.
Cash equivalents and variable rate debt are carried at amounts which
reasonably approximate their fair values.
Mortgage notes payable have an estimated aggregate fair value which
approximates its carrying value. Estimated fair value is based on interest rates
currently available to the Operating Partnership for issuance of debt with
similar terms and remaining maturities.
10. RENTAL INCOME
The Properties are being leased to tenants under operating leases. The
minimum rental amount due under certain leases are generally either subject to
scheduled fixed increases or indexed escalations. In addition, the leases
generally also require that the tenants reimburse the Operating Partnership for
increases in certain operating costs and real estate taxes above base year
costs.
Included in base rents and tenant escalations and reimbursements in the
accompanying statements of operations are amounts from Reckson Executive
Centers, LLC, a service business of the Operating Partnership through March 31,
1998 and, a related party as follows (in thousands):
<TABLE>
<CAPTION>
TENANT
ESCALATIONS AND
FOR THE PERIODS BASE RENTS REIMBURSEMENTS
- ---------------------------------------------------------------- ----------- -----------------
<S> <C> <C>
January 1 through March 31, 1998................................ $ 597 $ 149
Year ended December 31, 1997.................................... $ 2,154 $ 441
Year ended December 31, 1996.................................... $ 1,898 $ 417
</TABLE>
Expected future minimum rents to be received over the next five years and
thereafter from leases in effect at December 31, 1998 are as follows (in
thousands):
<TABLE>
<S> <C>
1999............................................................ $ 241,071
2000............................................................ 222,112
2001............................................................ 187,503
2002............................................................ 165,730
2003............................................................ 135,441
Thereafter...................................................... 386,953
---------
1,338,810
---------
---------
</TABLE>
11. SEGMENT DISCLOSURE
The Operating Partnership's portfolio consists of Class A suburban office
and industrial properties located in the Tri-State Area of Long Island,
Westchester, Southern Connecticut and New Jersey. In addition, with the
acquisition and merger transaction with Tower, the Operating Partnership has
entered the Manhattan office market. Additionally the Operating Partnership's
portfolio includes 23 industrial properties owned by RMI. Each of the divisions
has a managing director who reports directly to the Chief Operating Officer and
Chief Financial Officer who have been identified as the Chief
F-55
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT DISCLOSURE (CONTINUED)
Operating Decision Makers ("CODM") because of their final authority over
resource allocation decisions and performance assessment.
The CODM evaluates the operating performance of these divisions based on
geographic area. In addition, as the Operating Partnership expects to meet its
short term liquidity requirements in part through the Credit Facility and Term
Loan, interest incurred on borrowings under the Credit Facility and Term Loan is
not considered as part of property operating performance. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies.
F-56
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SEGMENT DISCLOSURE (CONTINUED)
The following table sets forth the components of the Operating Partnership's
revenues and expenses and other related disclosures as required by FAS Statement
131 for the year ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
SOUTHERN CONSOLIDATED
LONG ISLAND WESTCHESTER NEW JERSEY CONNECTICUT RMI OTHER TOTALS
----------- ----------- ----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Base rents..................... $ 102,421 $ 51,983 $ 35,425 $ 22,134 $ 12,740 $ -- $ 224,703
----------- ----------- ----------- ----------- ---------- ---------- ------------
Tenant escalations and
reimbursements............... 10,721 7,433 3,746 3,242 2,397 205 27,744
Equity in earnings of service
companies.................... -- -- -- -- -- 1,233 1,233
Equity in earnings of real
estate joint ventures........ -- -- -- -- -- 603 603
Interest income on mortgage
notes and notes receivable... -- -- -- -- -- 7,739 7,739
Investment and other income.... 407 15 29 9 -- 3,830 4,290
----------- ----------- ----------- ----------- ---------- ---------- ------------
Total Revenues................... 113,549 59,431 39,200 25,385 15,137 13,610 266,312
----------- ----------- ----------- ----------- ---------- ---------- ------------
EXPENSES:
Property operating expenses.... 20,774 13,476 5,245 5,932 392 2,100 47,919
Real estate taxes.............. 20,400 7,379 4,442 1,125 2,195 -- 35,541
Ground rents................... 1,681 1 34 -- -- 45 1,761
Marketing, general and
administrative............... 6,835 1,530 1,820 1,514 456 2,875 15,030
Interest....................... 9,281 3,421 15 3,934 1,101 30,043 47,795
Depreciation and
amortization................. 20,930 10,810 7,536 4,425 3,491 5,765 52,957
----------- ----------- ----------- ----------- ---------- ---------- ------------
Total Expenses................... 79,901 36,617 19,092 16,930 7,635 40,828 201,003
----------- ----------- ----------- ----------- ---------- ---------- ------------
Income before distributions to
preferred unitholders, minority
interests' and extraordinary
items.......................... $ 33,648 $ 22,814 $ 20,108 $ 8,455 $ 7,502 $ (27,218) $ 65,309
----------- ----------- ----------- ----------- ---------- ---------- ------------
----------- ----------- ----------- ----------- ---------- ---------- ------------
Total Assets..................... $ 518,648 $ 405,836 $ 170,623 $ 329,365 $ 156,430 $ 273,618 $1,854,520
----------- ----------- ----------- ----------- ---------- ---------- ------------
----------- ----------- ----------- ----------- ---------- ---------- ------------
</TABLE>
F-57
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. NON-CASH INVESTING AND FINANCING ACTIVITIES
Additional supplemental disclosures of non-cash investing and financing
activities are as follows (in thousands):
(1) In January 1997, the Operating Partnership acquired one of the Reckson
Option Properties as follows:
<TABLE>
<S> <C>
Mortgage assumed.................................................... $ 4,667
Issuance of 203,804 common units.................................... 4,280
Cash paid........................................................... 61
---------
Total purchase price................................................ $ 9,008
---------
---------
</TABLE>
(2) In November 1997, the Operating Partnership purchased a 181,000 square
foot industrial building located in Hauppauge, New York as follows:
<TABLE>
<S> <C>
Mortgage assumed and repaid......................................... $ 3,037
Issuance of 62,905 common units..................................... 1,578
Cash paid........................................................... 10
---------
Total purchase price................................................ $ 4,625
---------
---------
</TABLE>
(3) In December 1997, the Operating Partnership purchased a 92,000 square
foot industrial building located in Elmsford, New York as follows:
<TABLE>
<S> <C>
Issuance of 183,469 common units.................................... $ 4,700
---------
---------
</TABLE>
On January 2, 1998, the Operating Partnership issued an additional 18,752
common units in connection with the acquisition of a 92,000 square foot
industrial building located in Elmsford, New York for an additional non cash
investment of approximately $.48 million.
On January 6, 1998, the Operating Partnership acquired an office property
located in Uniondale, New York which included the issuance of 513,259 common
units for a total non cash investment of $12 million. Additionally, in
connection with the Operating Partnership's investment in the Morris Companies,
the Operating Partnership assumed approximately $10.8 million of indebtedness
net of minority partners interest.
On April 21, 1998, in connection with the acquisition of the Cappelli
portfolio, the Operating Partnership assumed approximately $45.1 million of
indebtedness and issued 36,518 (approximately $36.6 million) units of limited
partnership interest for a total non cash investment of approximately $81.6
million. Additionally, in connection with the acquisition of 155 Passaic Avenue
in Fairfield, New Jersey, the Operating Partnership issued 1,979 common units
for a total non cash investment of approximately $50,000.
On June 11, 1998, the Operating Partnership distributed its 95% common stock
interest in RSI of approximately $3 million to its partners.
On July 2, 1998, in connection with the acquisition of 360 Hamilton Avenue
located in White Plains, New York, the Operating Partnership issued 6,000 Series
D preferred units for a total non cash
F-58
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
investment of $6.0 million and assumed approximately $2.0 million of
indebtedness for a total non cash investment of approximately $8.0 million.
On August 13, 1998, in connection with the acquisition of two office
properties located in Parsippany, New Jersey, the Operating Partnership issued
50,072 OP Units for a total non cash investment of approximately $1.2 million.
During 1998, in connection with the Operating Partnership's investment in
the Morris Companies, the Operating Partnership assumed approximately $23
million of indebtedness ($16.9 million net of minority partners interest). In
addition, the Morris Companies contributed net assets of approximately $36
million to the Operating Partnership in exchange for an approximate 28.2%
minority partners interest in RMI.
13. COMMITMENTS AND OTHER COMMENTS
The Operating Partnership had outstanding undrawn letters of credit against
its credit facilities of approximately $26.1 million and $4 million at December
31, 1998 and 1997, respectively
F-59
<PAGE>
RECKSON OPERATING PARTNERSHIP, L.P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summary represents the Operating Partnership's results of
operations for each quarter during 1998 and 1997 (in thousands, except unit
data):
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
Total revenues.................................... $ 55,062 $ 66,267 $ 71,595 $ 73,388
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Income before distributions to preferred
unitholders, minority interests and
extraordinary items............................. $ 12,387 $ 17,664 $ 17,348 $ 17,910
Preferred distributions........................... -- (4,168) (5,034) (5,042)
Minority partners' interest in consolidated
partnerships income............................. (561) (712) (665) (881)
Extraordinary (loss).............................. -- -- (1,993) --
------------- -------------- ------------- --------------
Net income available to common unitholders........ $ 11,826 $ 12,784 $ 9,656 $ 11,987
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Net income:
General Partner................................. $ 9,835 $ 10,022 $ 8,770 $ 10,040
Limited Partners'............................... 1,991 2,762 886 1,947
------------- -------------- ------------- --------------
Total............................................. $ 11,826 $ 12,784 $ 9,656 $ 11,987
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Net income per common unit:
General Partner................................. $ .26 $ .25 $ .22 $ .25
Limited Partners'............................... $ .26 $ .36 $ .11 $ .25
Weighted average common units outstanding:
General Partner................................. 38,182,577 39,636,815 40,011,627 40,034,781
Limited Partners'............................... 7,709,228 7,694,349 7,741,227 7,764,630
</TABLE>
F-60
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Total revenues.................................... $ 31,670 $ 36,188 $ 40,328 $ 45,162
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Income before, minority interests and
extraordinary items............................. $ 8,806 $ 12,006 $ 11,544 $ 13,353
Minority partners' interest in consolidated
partnerships income............................. (268) (228) (228) (196)
Extraordinary (loss).............................. -- (2,362) (446) --
------------- -------------- ------------- --------------
Net income........................................ $ 8,538 $ 9,416 $ 10,870 $ 13,157
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Net Income:
General Partner................................. $ 6,760 $ 7,823 $ 9,039 $ 11,120
Limited Partners'............................... 1,778 1,593 1,831 2,037
------------- -------------- ------------- --------------
Total............................................. $ 8,538 $ 9,416 $ 10,870 $ 13,157
------------- -------------- ------------- --------------
------------- -------------- ------------- --------------
Net income per unit:
General Partner................................. $ .25 $ .23 $ .26 $ .31
Limited Partners'............................... $ .26 $ .23 $ .26 $ .29
Weighted average common units outstanding:
General Partner................................. 26,569,162 34,298,137 34,477,050 35,445,213
Limited Partners'............................... 6,960,428 6,974,814 6,974,031 7,153,848
</TABLE>
F-61
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. PRO FORMA RESULTS (UNAUDITED)
The following unaudited pro forma operating results of the Operating
Partnership for the year ended December 31, 1998 have been prepared as if the
property acquisitions made during 1998 had occurred on January 1, 1998.
Unaudited pro forma financial information is presented for informational
purposes only and may not be indicative of what the actual results of operations
of the Operating Partnership would have been had the events occurred as of
January 1, 1998, nor does it purport to represent the results of operations for
future periods (in thousands):
<TABLE>
<S> <C>
Revenues.......................................................... $ 284,643
---------
---------
Income before extraordinary items................................. $ 57,480
---------
---------
Net Income........................................................ $ 55,486
---------
---------
Net Income per common unit........................................ $ 1.18
---------
---------
</TABLE>
F-62
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D COLUMN E
--------------------------- -------------------------
COLUMN C
------------------------- COST CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST ACQUISITION PERIOD
COLUMN A COLUMN B ------------------------- --------------------------- -------------------------
- ---------------------------- --------------- BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ---------------------------- --------------- --------- -------------- ----- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Vanderbilt Industrial Park,
Hauppauge, New York 27
buildings in an industrial
park)..................... B $ 1,940 $ 9,955 -- $ 9,858 $ 1,940 $ 19,813
Airport International Plaza,
Islip, New York (17
buildings in an industrial
park)..................... 2,616(C) 1,263 13,608 -- 10,133 1,263 23,741
County Line Industrial
Center,
Huntington, New York (3
buildings in an industrial
park)..................... B 628 3,686 -- 2,638 628 6,324
32 Windsor Place,
Islip, New York........... B 32 321 -- 46 32 367
42 Windsor Place,
Islip, New York........... B 48 327 -- 542 48 869
505 Walt Whitman Rd.,
Huntington, New York...... B 140 42 -- 59 140 101
1170 Northern Blvd.,
N. Great Neck, New York... B 30 99 -- 31 30 130
50 Charles Lindbergh Blvd.,
Mitchel Field, New York... 15,479 A 12,089 -- 4,179 0 16,268
200 Broadhollow Road,
Melville, New York........ 6,621 338 3,354 -- 2,994 338 6,348
48 South Service Road,
Melville, New York........ B 1,652 10,245 -- 3,760 1,652 14,005
395 North Service Road,
Melville, New York........ 21,375 A 15,551 -- 6,616 0 22,167
6800 Jericho Turnpike,
Syosset, New York......... 15,001 582 6,566 -- 7,238 582 13,804
6900 Jericho Turnpike,
Syosset, New York......... 5,279 385 4,228 -- 2,531 385 6,759
300 Motor Parkway,
Hauppauge, New York....... B 276 1,136 -- 1,489 276 2,625
88 Duryea Road,
Melville, New York........ B 200 1,565 -- 669 200 2,234
210 Blydenburgh Road,
Islandia, New York........ B 11 158 -- 155 11 313
208 Blydenburgh Road,
Islandia, New York........ B 12 192 -- 145 12 337
71 Hoffman Lane,
Islandia, New York........ B 19 260 -- 171 19 431
933 Motor Parkway,
Hauppauge, New York....... B 106 375 -- 356 106 731
<CAPTION>
COLUMN I
COLUMN F COLUMN G COLUMN H -------------
COLUMN A ------------- ------------- ----------- LIFE ON WHICH
- ---------------------------- ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------- ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Vanderbilt Industrial Park,
Hauppauge, New York 27
buildings in an industrial
park)..................... $ 21,753 $ 12,431 1961-1979 1961-1979 10-30 Years
Airport International Plaza,
Islip, New York (17
buildings in an industrial
park)..................... 25,004 13,555 1970-1988 1970-1988 10-30 Years
County Line Industrial
Center,
Huntington, New York (3
buildings in an industrial
park)..................... 6,952 4,029 1975-1979 1975-1979 10-30 Years
32 Windsor Place,
Islip, New York........... 399 315 1971 1971 10-30 Years
42 Windsor Place,
Islip, New York........... 917 666 1972 1972 10-30 Years
505 Walt Whitman Rd.,
Huntington, New York...... 241 70 1950 1968 10-30 Years
1170 Northern Blvd.,
N. Great Neck, New York... 160 121 1947 1962 10-30 Years
50 Charles Lindbergh Blvd.,
Mitchel Field, New York... 16,268 8,155 1984 1984 10-30 Years
200 Broadhollow Road,
Melville, New York........ 6,686 3,454 1981 1981 10-30 Years
48 South Service Road,
Melville, New York........ 15,657 6,566 1986 1986 10-30 Years
395 North Service Road,
Melville, New York........ 22,167 10,014 1988 1988 10-30 Years
6800 Jericho Turnpike,
Syosset, New York......... 14,386 7,918 1977 1978 10-30 Years
6900 Jericho Turnpike,
Syosset, New York......... 7,144 3,261 1982 1982 10-30 Years
300 Motor Parkway,
Hauppauge, New York....... 2,901 1,236 1979 1979 10-30 Years
88 Duryea Road,
Melville, New York........ 2,434 1,148 1980 1980 10-30 Years
210 Blydenburgh Road,
Islandia, New York........ 324 277 1969 1969 10-30 Years
208 Blydenburgh Road,
Islandia, New York........ 349 318 1969 1969 10-30 Years
71 Hoffman Lane,
Islandia, New York........ 450 379 1970 1970 10-30 Years
933 Motor Parkway,
Hauppauge, New York....... 837 540 1973 1973 10-30 Years
Continued
</TABLE>
F-63
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D COLUMN E
--------------------------- -------------------------
COLUMN C
------------------------- COST CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST ACQUISITION PERIOD
COLUMN A COLUMN B ------------------------- --------------------------- -------------------------
- ---------------------------- --------------- BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ---------------------------- --------------- --------- -------------- ----- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
65 and 85 South Service Road
Plainview, New York....... B 40 218 -- 10 40 228
333 Earl Ovington Blvd.,
Mitchel Field, New York
(Omni).................... 57,162 A 67,221 -- 16,548 0 83,769
135 Fell Court
Islip, New York........... B 462 1,265 -- 47 462 1,312
40 Cragwood Road,
South Plainfield, New
Jersey.................... B 708 7,131 -- 4,772 708 11,903
110 Marcus Drive,
Huntington, New York...... B 390 1,499 -- 97 390 1,596
333 East Shore Road,
Great Neck, New York...... B A 564 -- 176 0 740
310 East Shore Road,
Great Neck, New York...... 2,322 485 2,009 -- 304 485 2,313
70 Schmitt Blvd.,
Farmingdale, New York..... 150 727 3,408 -- 24 727 3,423
19 Nicholas Drive,
Yaphank, New York......... B 160 7,399 -- 38 160 7,437
1516 Motor Parkway,
Hauppauge, New York....... B 603 6,722 -- 13 603 6,735
125 Baylis Road,
Melville, New York........ B 1,601 8,626 -- 814 1,601 9,440
35 Pinelawn Road,
Melville, New York........ B 999 7,073 -- 1,937 999 9,010
520 Broadhollow Road,
Melville, New York........ B 457 5,572 -- 1,424 457 6,996
1660 Walt Whitman Road,
Melville, New York........ B 370 5,072 -- 429 370 5,501
70 Maxess Road,
Melville, New York........ B 367 1,859 95 2,753 462 4,612
85 Nicon Court,
Hauppauge, New York....... B 797 2,818 -- 54 797 2,872
104 Parkway Drive So.,
Hauppauge, New York....... B 54 804 -- 130 54 934
20 Melville Park Rd.,
Melville, New York........ B 391 2,650 -- 96 391 2,746
<CAPTION>
COLUMN I
COLUMN F COLUMN G COLUMN H -------------
COLUMN A ------------- ------------- ----------- LIFE ON WHICH
- ---------------------------- ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------- ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
65 and 85 South Service Road
Plainview, New York....... 268 223 1961 1961 10-30 Years
333 Earl Ovington Blvd.,
Mitchel Field, New York
(Omni).................... 83,769 15,947 1990 1995 10-30 Years
135 Fell Court
Islip, New York........... 1,774 284 1965 1992 10-30 Years
40 Cragwood Road,
South Plainfield, New
Jersey.................... 12,611 6,331 1970 1983 10-30 Years
110 Marcus Drive,
Huntington, New York...... 1,986 1,149 1980 1980 10-30 Years
333 East Shore Road,
Great Neck, New York...... 740 473 1976 1976 10-30 Years
310 East Shore Road,
Great Neck, New York...... 2,798 1,349 1981 1981 10-30 Years
70 Schmitt Blvd.,
Farmingdale, New York..... 4,159 382 1965 1995 10-30 Years
19 Nicholas Drive,
Yaphank, New York......... 7,597 845 1989 1995 10-30 Years
1516 Motor Parkway,
Hauppauge, New York....... 7,338 785 1981 1995 10-30 Years
125 Baylis Road,
Melville, New York........ 11,041 980 1980 1995 10-30 Years
35 Pinelawn Road,
Melville, New York........ 10,009 1,089 1980 1995 10-30 Years
520 Broadhollow Road,
Melville, New York........ 7,453 1,097 1978 1995 10-30 Years
1660 Walt Whitman Road,
Melville, New York........ 5,871 621 1980 1995 10-30 Years
70 Maxess Road,
Melville, New York........ 5,074 385 1967 1995 10-30 Years
85 Nicon Court,
Hauppauge, New York....... 3,669 286 1984 1995 10-30 Years
104 Parkway Drive So.,
Hauppauge, New York....... 988 89 1985 1996 10-30 Years
20 Melville Park Rd.,
Melville, New York........ 3,137 208 1965 1996 10-30 Years
Continued
</TABLE>
F-64
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D COLUMN E
--------------------------- -------------------------
COLUMN C
------------------------- COST CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST ACQUISITION PERIOD
COLUMN A COLUMN B ------------------------- --------------------------- -------------------------
- ---------------------------- --------------- BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ---------------------------- --------------- --------- -------------- ----- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
105 Price Parkway,
Hauppauge, New York....... B 2,030 6,327 -- 453 2,030 6,780
48 Harbor Park Drive,
Hauppauge, New York....... B 1,304 2,247 -- 93 1,304 2,340
125 Ricefield Lane,
Hauppauge, New York....... B 13 852 -- 330 13 1,182
110 Ricefield Lane,
Hauppauge, New York....... B 33 1,043 -- 52 33 1,095
120 Ricefield Lane,
Hauppauge, New York....... B 16 1,051 -- 30 16 1,081
135 Ricefield Lane,
Hauppauge, New York....... B 24 906 -- 473 24 1,379
30 Hub Drive,
Huntington, New York...... B 469 1,571 -- 295 469 1,866
60 Charles Lindbergh,
Mitchel Field, New York... B A 20,800 -- 1,594 0 22,394
155 White Plains Road,
Tarrytown, New York....... B 1,613 2,542 -- 876 1,613 3,418
2 Church Street,
Tarrytown, New York....... B 232 1,307 -- 375 232 1,682
235 Main Street,
Tarrytown, New York....... B 955 5,375 -- 760 955 6,135
245 Main Street,
Tarrytown, New York....... B 1,294 7,284 -- 849 1,294 8,133
505 White Plains Road,
Tarrytown, New York....... B 236 1,332 -- 318 236 1,650
555 White Plains Road,
Tarrytown, New York....... B 712 4,133 51 2,668 763 6,801
560 White Plains Road,
Tarrytown, New York....... B 1,553 8,756 -- 1,795 1,553 10,551
580 White Plains Road,
Tarrytown, New York....... 8,503 2,591 14,595 -- 2,040 2,591 16,635
660 White Plains Road,
Tarrytown, New York....... B 3,929 22,640 45 2,505 3,974 25,145
Landmark Square,
Stamford, Connecticut..... 48,579 11,603 64,466 -- 12,176 11,603 76,642
110 Bi-County Blvd.,
Farmingdale, New York..... 4,383 2,342 6,665 -- 123 2,342 6,788
<CAPTION>
COLUMN I
COLUMN F COLUMN G COLUMN H -------------
COLUMN A ------------- ------------- ----------- LIFE ON WHICH
- ---------------------------- ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------- ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
105 Price Parkway,
Hauppauge, New York....... 8,810 603 1969 1996 10-30 Years
48 Harbor Park Drive,
Hauppauge, New York....... 3,644 208 1976 1996 10-30 Years
125 Ricefield Lane,
Hauppauge, New York....... 1,195 162 1973 1996 10-30 Years
110 Ricefield Lane,
Hauppauge, New York....... 1,128 109 1980 1996 10-30 Years
120 Ricefield Lane,
Hauppauge, New York....... 1,097 84 1983 1996 10-30 Years
135 Ricefield Lane,
Hauppauge, New York....... 1,403 200 1981 1996 10-30 Years
30 Hub Drive,
Huntington, New York...... 2,335 181 1976 1996 10-30 Years
60 Charles Lindbergh,
Mitchel Field, New York... 22,394 2,143 1989 1996 10-30 Years
155 White Plains Road,
Tarrytown, New York....... 5,031 258 1963 1996 10-30 Years
2 Church Street,
Tarrytown, New York....... 1,914 166 1979 1996 10-30 Years
235 Main Street,
Tarrytown, New York....... 7,090 612 1974 1996 10-30 Years
245 Main Street,
Tarrytown, New York....... 9,427 836 1983 1996 10-30 Years
505 White Plains Road,
Tarrytown, New York....... 1,886 183 1974 1996 10-30 Years
555 White Plains Road,
Tarrytown, New York....... 7,564 1,043 1972 1996 10-30 Years
560 White Plains Road,
Tarrytown, New York....... 12,104 1,494 1980 1996 10-30 Years
580 White Plains Road,
Tarrytown, New York....... 19,226 1,786 1997 1996 10-30 Years
660 White Plains Road,
Tarrytown, New York....... 29,119 2,767 1983 1996 10-30 Years
Landmark Square,
Stamford, Connecticut..... 88,245 5,438 1973-1984 1996 10-30 Years
110 Bi-County Blvd.,
Farmingdale, New York..... 9,130 477 1984 1997 10-30 Years
Continued
</TABLE>
F-65
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D COLUMN E
--------------------------- -------------------------
COLUMN C
------------------------- COST CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST ACQUISITION PERIOD
COLUMN A COLUMN B ------------------------- --------------------------- -------------------------
- ---------------------------- --------------- BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ---------------------------- --------------- --------- -------------- ----- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
RREEF Portfolio,
Hauppauge, New York (10
additional buildings in
Vanderbuilt Industrial
Park)..................... B 930 20,619 -- 1,880 930 22,499
275 Broadhollow Road,
Melville, New York........ B 5,250 11,761 -- 514 5,250 12,275
One Eagle Rock, East
Hanover, New Jersey....... B 803 7,563 -- 1,580 803 9,143
710 Bridgeport Avenue,
Shelton, Connecticut...... B 5,405 21,620 7 533 5,412 22,153
101 JFK Expressway,
Short Hills, New Jersey... B 7,745 43,889 -- 1,019 7,745 44,908
10 Rooney Circle,
West Orange, New Jersey... B 1,302 4,615 1 418 1,303 5,033
Executive Hill Office Park,
West Orange, New Jersey... B 7,629 31,288 4 814 7,633 32,102
3 University Plaza,
Hackensack, New Jersey.... B 7,894 11,846 -- 595 7,894 12,441
400 Garden City Plaza,
Garden City, New York..... B 13,986 10,127 -- 389 13,986 10,516
425 Rabro Drive,
Hauppauge, New York....... B 665 3,489 -- 67 665 3,556
One Paragon Drive,
Montvale, New Jersey...... B 2,773 9,901 -- 463 2,773 10,364
90 Merrick Avenue,
East Meadow, New York..... B A 19,193 -- 2,152 0 21,345
150 Motor Parkway,
Hauppauge, New York....... B 1,114 20,430 -- 2,365 1,114 22,795
390 Motor Parkway,
Hauppauge, New York....... B 240 4,459 -- 237 240 4,696
Royal Executive Park,
Ryebrook, New York........ B 18,343 55,028 -- 1,191 18,343 56,219
120 White Plains Road,
Tarrytown, New York....... B 3,355 24,605 -- 89 3,355 24,694
University Square,
Princeton, New Jersey..... B 3,288 8,888 -- 70 3,288 8,958
<CAPTION>
COLUMN I
COLUMN F COLUMN G COLUMN H -------------
COLUMN A ------------- ------------- ----------- LIFE ON WHICH
- ---------------------------- ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------- ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
RREEF Portfolio,
Hauppauge, New York (10
additional buildings in
Vanderbuilt Industrial
Park)..................... 23,429 1,370 1974-1982 1997 10-30 Years
275 Broadhollow Road,
Melville, New York........ 17,525 740 1970 1997 10-30 Years
One Eagle Rock, East
Hanover, New Jersey....... 9,946 566 1986 1997 10-30 Years
710 Bridgeport Avenue,
Shelton, Connecticut...... 27,565 1,295 1971-1979 1977 10-30 Years
101 JFK Expressway,
Short Hills, New Jersey... 52,653 2,462 1981 1997 10-30 Years
10 Rooney Circle,
West Orange, New Jersey... 6,336 312 1971 1997 10-30 Years
Executive Hill Office Park,
West Orange, New Jersey... 39,735 1,619 1978-1984 1997 10-30 Years
3 University Plaza,
Hackensack, New Jersey.... 20,335 638 1985 1997 10-30 Years
400 Garden City Plaza,
Garden City, New York..... 24,502 512 1989 1997 10-30 Years
425 Rabro Drive,
Hauppauge, New York....... 4,221 176 1980 1997 10-30 Years
One Paragon Drive,
Montvale, New Jersey...... 13,137 456 1980 1997 10-30 Years
90 Merrick Avenue,
East Meadow, New York..... 21,345 892 1985 1997 10-30 Years
150 Motor Parkway,
Hauppauge, New York....... 23,909 1,028 1984 1997 10-30 Years
390 Motor Parkway,
Hauppauge, New York....... 4,936 208 1980 1997 10-30 Years
Royal Executive Park,
Ryebrook, New York........ 74,562 2,133 1983-1986 1997 10-30 Years
120 White Plains Road,
Tarrytown, New York....... 28,049 890 1984 1997 10-30 Years
University Square,
Princeton, New Jersey..... 12,246 322 1987 1997 10-30 Years
Continued
</TABLE>
F-66
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D COLUMN E
--------------------------- -------------------------
COLUMN C
------------------------- COST CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST ACQUISITION PERIOD
COLUMN A COLUMN B ------------------------- --------------------------- -------------------------
- ---------------------------- --------------- BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ---------------------------- --------------- --------- -------------- ----- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
100 Andrews Road,
Hicksville, New York...... B 2,337 1,711 151 5,697 2,488 7,408
2 Macy Road,
Harrison, New York........ B 642 2,131 -- 47 642 2,178
80 Grasslands,
Elmsford, New York........ B 1,208 6,728 -- 175 1,208 6,903
65 Marcus Drive,
Melvile, New York......... B 295 1,966 57 885 352 2,851
200 Carter Drive,
Edison, New Jersey........ B 240 2,745 -- -- 240 2,745
118 Moonachie Avenue,
Carlstadt, New Jersey..... B 6,270 12,727 -- -- 6,270 12,727
24 Abeel Road,
Monroe, New Jersey........ B 138 1,195 -- -- 138 1,195
275/285 Pierce Street,
Franklin, New Jersey...... B 277 1,414 -- 16 277 1,430
301/321 Herrod Blvd.,
South Brunswick, New
Jersey.................... B 3,833 19,342 -- -- 3,833 19,342
1 Nixon Lane,
Edison, New Jersey........ B 1,113 4,918 -- -- 1,113 4,918
18 Madison Road,
Fairfield, New Jersey..... B 76 871 -- -- 76 871
200/250 Kennedy Drive,
Sayreville, New Jersey.... B 1,018 6,851 -- -- 1,018 6,851
24 Madison Road,
Fairfield, New Jersey..... B 131 2,176 -- -- 131 2,176
243 St. Nicholas Avenue,
South Plainfield, New
Jersey.................... B 172 551 -- -- 172 551
26 Madison Road,
Fairfield, New Jersey..... B A 1,492 -- -- 0 1,492
300/350 Kennedy Drive,
Sayreville, New Jersey.... B 1,003 7,303 -- -- 1,003 7,303
309 Kennedy Drive,
Sayreville, New Jersey.... 10,345 297 9,102 -- -- 297 9,102
34 Englehard Drive,
Monroe, New Jersey........ B 1,073 6,656 -- -- 1,073 6,656
409 Kennedy Drive,
Sayreville, New Jersey.... 4,434 126 9,650 -- -- 126 9,650
<CAPTION>
COLUMN I
COLUMN F COLUMN G COLUMN H -------------
COLUMN A ------------- ------------- ----------- LIFE ON WHICH
- ---------------------------- ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------- ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
100 Andrews Road,
Hicksville, New York...... 9,896 463 1954 1996 10-30 Years
2 Macy Road,
Harrison, New York........ 2,820 83 1962 1997 10-30 Years
80 Grasslands,
Elmsford, New York........ 8,111 268 1989/1964 1997 10-30 Years
65 Marcus Drive,
Melvile, New York......... 3,203 167 1968 1996 10-30 Years
200 Carter Drive,
Edison, New Jersey........ 2,985 91 1985 1998 10-30 Years
118 Moonachie Avenue,
Carlstadt, New Jersey..... 18,997 423 1989 1998 10-30 Years
24 Abeel Road,
Monroe, New Jersey........ 1,333 40 1979 1998 10-30 Years
275/285 Pierce Street,
Franklin, New Jersey...... 1,707 48 1988 1998 10-30 Years
301/321 Herrod Blvd.,
South Brunswick, New
Jersey.................... 23,175 643 1991 1998 10-30 Years
1 Nixon Lane,
Edison, New Jersey........ 6,031 164 1988 1998 10-30 Years
18 Madison Road,
Fairfield, New Jersey..... 947 29 1979 1998 10-30 Years
200/250 Kennedy Drive,
Sayreville, New Jersey.... 7,869 228 1988 1998 10-30 Years
24 Madison Road,
Fairfield, New Jersey..... 2,307 72 1980 1998 10-30 Years
243 St. Nicholas Avenue,
South Plainfield, New
Jersey.................... 723 18 1974 1998 10-30 Years
26 Madison Road,
Fairfield, New Jersey..... 1,492 50 1980 1998 10-30 Years
300/350 Kennedy Drive,
Sayreville, New Jersey.... 8,306 223 1988 1998 10-30 Years
309 Kennedy Drive,
Sayreville, New Jersey.... 9,399 303 1996 1998 10-30 Years
34 Englehard Drive,
Monroe, New Jersey........ 7,729 221 1980 1998 10-30 Years
409 Kennedy Drive,
Sayreville, New Jersey.... 9,776 321 1996 1998 10-30 Years
Continued
</TABLE>
F-67
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D COLUMN E
--------------------------- -------------------------
COLUMN C
------------------------- COST CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST ACQUISITION PERIOD
COLUMN A COLUMN B ------------------------- --------------------------- -------------------------
- ---------------------------- --------------- BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ---------------------------- --------------- --------- -------------- ----- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
535 Secaucus Road,
Secaucus, New Jersey...... B 798 2,713 -- -- 798 2,713
55 Carter Drive,
Edison, New Jersey........ B 84 3,905 -- 30 84 3,935
Mount Ebo Corporate Park,
Brewster, New Jersey...... B 1,031 7,204 -- 16 1,031 7,220
22 Madison Road,
Fairfield, New Jersey..... B 655 1,445 -- 1 655 1,446
135 Fieldcrest Ave.,
Edison, New Jersey........ B 370 3,774 -- -- 370 3,774
400 Cabot Drive,
Hamilton, New Jersey...... B 2,068 18,614 -- 71 2,068 18,685
51 JFK Parkway,
Short Hills, New York..... B 8,732 58,437 -- 323 8,732 58,760
Triad V--1979 Marcus Ave.,
Lake Success, New York.... B 3,528 31,786 -- 2,966 3,528 34,752
100 Forge Way,
Rockaway, New Jersey...... B 315 902 -- 53 315 955
200 Forge Way,
Rockaway, New Jersey...... B 1,128 3,228 -- 168 1,128 3,396
300 Forge Way,
Rockaway, New Jersey...... B 376 1,075 -- 63 376 1,138
400 Forge Way,
Rockaway, New Jersey...... B 1,142 3,267 -- 168 1,142 3,435
51-55 Charles Lindbergh
Blvd.,
Uniondale, New York....... B A 27,975 -- 4,119 0 32,094
155 Passaic Avenue,
Fairfield, New Jersey..... B 3 3,538 -- 174 3 3,712
100 Summit Drive,
Valhalla, New York........ 23,600 3,007 41,351 -- 1,148 3,007 42,499
115/117 Stevens Avenue,
Valhalla, New York........ B 1,094 22,490 -- 407 1,094 22,897
200 Summit Lake Drive,
Valhalla, New York........ 20,764 4,343 37,305 -- 349 4,343 37,654
140 Grand Street,
Valhalla, New York........ B 1,931 18,743 -- 149 1,931 18,892
500 Summit Lake Drive,
Valhalla, New York........ B 7,052 37,309 -- 242 7,052 37,551
5 Henderson Drive,
West Caldwell, New
Jersey.................... B 2,450 6,984 -- 30 2,450 7,014
<CAPTION>
COLUMN I
COLUMN F COLUMN G COLUMN H -------------
COLUMN A ------------- ------------- ----------- LIFE ON WHICH
- ---------------------------- ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------- ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
535 Secaucus Road,
Secaucus, New Jersey...... 3,511 90 1979 1998 10-30 Years
55 Carter Drive,
Edison, New Jersey........ 4,019 131 1987 1998 10-30 Years
Mount Ebo Corporate Park,
Brewster, New Jersey...... 8,251 120 1998 10-30 Years
22 Madison Road,
Fairfield, New Jersey..... 2,101 20 1980 1998 10-30 Years
135 Fieldcrest Ave.,
Edison, New Jersey........ 4,144 10 1980 1998 10-30 Years
400 Cabot Drive,
Hamilton, New Jersey...... 20,753 624 1989 1998 10-30 Years
51 JFK Parkway,
Short Hills, New York..... 67,492 1,636 1988 1998 10-30 Years
Triad V--1979 Marcus Ave.,
Lake Success, New York.... 38,280 1,089 1987 1998 10-30 Years
100 Forge Way,
Rockaway, New Jersey...... 1,270 31 1986 1989 10-30 Years
200 Forge Way,
Rockaway, New Jersey...... 4,524 112 1989 1998 10-30 Years
300 Forge Way,
Rockaway, New Jersey...... 1,514 37 1989 1998 10-30 Years
400 Forge Way,
Rockaway, New Jersey...... 4,577 113 1989 1998 10-30 Years
51-55 Charles Lindbergh
Blvd.,
Uniondale, New York....... 32,094 1,469 1981 1998 10-30 Years
155 Passaic Avenue,
Fairfield, New Jersey..... 3,715 83 1984 1998 10-30 Years
100 Summit Drive,
Valhalla, New York........ 45,506 986 1988 1998 10-30 Years
115/117 Stevens Avenue,
Valhalla, New York........ 23,991 514 1984 1998 10-30 Years
200 Summit Lake Drive,
Valhalla, New York........ 41,997 841 1990 1998 10-30 Years
140 Grand Street,
Valhalla, New York........ 20,823 424 1991 1998 10-30 Years
500 Summit Lake Drive,
Valhalla, New York........ 44,603 632 1986 1998 10-30 Years
5 Henderson Drive,
West Caldwell, New
Jersey.................... 9,464 118 1967 1998 10-30 Years
Continued
</TABLE>
F-68
<PAGE>
RECKSON OPERATING PARTNERSHIP, L. P.
SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D COLUMN E
--------------------------- -------------------------
COLUMN C
------------------------- COST CAPITALIZED GROSS AMOUNT AT WHICH
SUBSEQUENT TO CARRIED AT CLOSE OF
INITIAL COST ACQUISITION PERIOD
COLUMN A COLUMN B ------------------------- --------------------------- -------------------------
- ---------------------------- --------------- BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ---------------------------- --------------- --------- -------------- ----- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stamford Towers,
Stamford, Connecticut..... B 13,556 47,915 -- 930 13,556 48,845
99 Cherry Hill Road,
Parsippany, New Jersey.... B 2,359 7,508 -- 42 2,359 7,550
45 Melville Park Road,
Melville, New York........ B 354 1,487 -- 1,581 354 3,068
500 Saw Mill River Road,
Elmsford, New York........ B 1,542 3,796 -- 169 1,542 3,965
2004 Orville Drive,
No. Bohemia, New York..... B 633 4,225 -- 1,208 633 5,433
Land held for development... B 69,143 -- -- -- 69,143 0
Development in progress..... 6,850 -- 82,901 -- -- -- 82,901
Other property.............. B -- -- -- 2,589 -- 2,589
------- --------- -------------- ----- -------------- --------- --------------
Total....................... 253,463 281,272 $ 1,305,937 $ 411 $ 149,513 $ 281,682 $ 1,455,450
------- --------- -------------- ----- -------------- --------- --------------
------- --------- -------------- ----- -------------- --------- --------------
<CAPTION>
COLUMN I
COLUMN F COLUMN G COLUMN H -------------
COLUMN A ------------- ------------- ----------- LIFE ON WHICH
- ---------------------------- ACCUMULATED DATE OF DATE DEPRECIATION
DESCRIPTION TOTAL DEPRECIATION CONSTRUCTION ACQUIRED IS COMPUTED
- ---------------------------- ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Stamford Towers,
Stamford, Connecticut..... 62,401 855 1989 1998 10-30 Years
99 Cherry Hill Road,
Parsippany, New Jersey.... 9,909 106 1982 1998 10-30 Years
45 Melville Park Road,
Melville, New York........ 3,422 57 1998 1998 10-30 Years
500 Saw Mill River Road,
Elmsford, New York........ 5,507 132 1968 1998 10-30 Years
2004 Orville Drive,
No. Bohemia, New York..... 6,066 128 1998 1998 10-30 Years
Land held for development... 69,143 0 N/A Various N/A
Development in progress..... 82,901 0
Other property.............. 2,589 325
---------- -------------
Total....................... $1,737,132 $ 156,231
---------- -------------
---------- -------------
</TABLE>
- ----------------------------------
A These land parcels are leased (see Note 4).
B There are no encumbrances on these properties.
C The encumbrance of $2,616 is related to one property.
The aggregate cost for Federal Income Tax purposes was approximately $1,575
million at December 31, 1998.
F-69
<PAGE>
RECKSON OPERATING PARTNERSHIP, L.P.
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997 (CONTINUED)
(IN THOUSANDS)
The changes in real estate for each of the periods in the three years ended
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
JANUARY 1, 1998 JANUARY 1, 1997 JUNE 1, 1996
TO TO TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Real estate balance at beginning of period.............. $ 1,011,228 $ 516,768 $ 288,056
Improvements............................................ 134,582 37,778 15,174
Disposal, including write-off of fully depreciated
building improvements................................. -- (154) (936)
Acquisitions............................................ 591,323 456,836 214,474
----------------- ----------------- --------
Balance at end of period................................ $ 1,737,133 $ 1,011,228 $ 516,768
----------------- ----------------- --------
----------------- ----------------- --------
</TABLE>
The changes in accumulated depreciation, exclusive of amounts relating to
equipment, autos, furniture and fixtures, for each of the periods in the three
years ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
JANUARY 1, 1998 JANUARY 1, 1997 JANUARY 1, 1996
TO TO TO
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Balance at beginning of period.......................... $ 108,652 $ 86,344 $ 72,499
Depreciation for period................................. 47,579 22,442 14,781
Disposal, including write-off of fully depreciated
building improvements................................. -- (134) (936)
-------- -------- -------
Balance at end of period................................ $ 156,231 $ 108,652 $ 86,344
-------- -------- -------
-------- -------- -------
</TABLE>
F-70
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
TOWER REALTY TRUST, INC.,
RECKSON ASSOCIATES REALTY CORP.,
RECKSON OPERATING PARTNERSHIP, L.P.
AND
METROPOLITAN PARTNERS LLC
DATED AS OF DECEMBER 8, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
ARTICLE I
THE MERGER
SECTION 1.1 The Merger............................................................................. 4
SECTION 1.2 Effect on Shares of Company Common Stock and Company OP Units.......................... 5
SECTION 1.3 Share Election......................................................................... 8
SECTION 1.4 Proration.............................................................................. 11
SECTION 1.5 Exchange of Certificates............................................................... 13
SECTION 1.6 Transfer Taxes; Withholding............................................................ 17
SECTION 1.7 No Further Ownership Rights in Shares of Company Common Stock.......................... 18
SECTION 1.8 Closing of Transfer Books and Records.................................................. 18
SECTION 1.9 Stock Options.......................................................................... 19
SECTION 1.10 Restricted Stock....................................................................... 19
SECTION 1.11 [Intentionally Omitted]................................................................ 19
SECTION 1.12 Closing................................................................................ 19
ARTICLE II
THE SURVIVING ENTITY
SECTION 2.1 Certificate of Formation............................................................... 20
SECTION 2.2 Operating Agreement.................................................................... 20
SECTION 2.3 Members and Managers................................................................... 20
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 3.1 Corporate Existence and Power.......................................................... 20
SECTION 3.2 Corporate Authorization................................................................ 21
SECTION 3.3 Consents and Approvals; No Violations.................................................. 21
SECTION 3.4 Capitalization......................................................................... 24
SECTION 3.5 Subsidiaries........................................................................... 26
SECTION 3.6 SEC Documents.......................................................................... 27
SECTION 3.7 Financial Statements................................................................... 28
SECTION 3.8 [Intentionally Omitted]................................................................ 28
SECTION 3.9 Joint Proxy Statement; Form S-4 Registration Statement; Other Information.............. 28
SECTION 3.10 Absence of Material Adverse Changes, etc............................................... 29
SECTION 3.11 Taxes.................................................................................. 30
SECTION 3.12 Material Contracts..................................................................... 31
SECTION 3.13 [Intentionally Omitted]................................................................ 32
SECTION 3.14 [Intentionally Omitted]................................................................ 32
SECTION 3.15 [Intentionally Omitted]................................................................ 32
SECTION 3.16 [Intentionally Omitted]................................................................ 32
SECTION 3.17 [Intentionally Omitted]................................................................ 32
SECTION 3.18 Finders' Fees.......................................................................... 32
SECTION 3.19 Opinion of Financial Advisors.......................................................... 32
SECTION 3.20 Board Recommendation................................................................... 32
SECTION 3.21 Vote Required; No Appraisal Rights..................................................... 33
SECTION 3.22 [Intentionally Omitted]................................................................ 33
SECTION 3.23 Investment Company Act of 1940......................................................... 33
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
SECTION 3.24 Hart-Scott-Rodino Antitrust Improvements Act of 1976................................... 33
SECTION 3.25 State Takeover Statutes................................................................ 33
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF RECKSON, RECKSON OP AND BUYER
SECTION 4.1 Corporate Existence and Power.......................................................... 34
SECTION 4.2 Authorization.......................................................................... 34
SECTION 4.3 Consents and Approvals; No Violations.................................................. 35
SECTION 4.4 Capitalization......................................................................... 37
SECTION 4.5 SEC Documents.......................................................................... 37
SECTION 4.6 Financial Statements................................................................... 38
SECTION 4.7 [Intentionally Omitted]................................................................ 38
SECTION 4.8 Joint Proxy Statement; Form S-4 Registration Statement; Other Information.............. 38
SECTION 4.9 Absence of Material Adverse Changes, etc............................................... 39
SECTION 4.10 Taxes.................................................................................. 39
SECTION 4.11 Compliance with Laws................................................................... 40
SECTION 4.12 Environmental Matters.................................................................. 40
SECTION 4.13 Real Property.......................................................................... 43
SECTION 4.14 Litigation............................................................................. 46
SECTION 4.15 Finders' Fees.......................................................................... 46
SECTION 4.16 Share Ownership; Other Ownership....................................................... 46
SECTION 4.17 Investment Company Act of 1940......................................................... 47
SECTION 4.18 Hart-Scott-Rodino Antitrust Improvements Act of 1976................................... 47
SECTION 4.19 Financing.............................................................................. 47
SECTION 4.20 Authorization for Class B Stock........................................................ 47
SECTION 4.21 Board Recommendation................................................................... 48
SECTION 4.22 Required Vote of Reckson Stockholders.................................................. 48
SECTION 4.23 Opinion of Financial Advisor........................................................... 48
SECTION 4.24 Buyer's Operations..................................................................... 48
SECTION 4.25 Surviving Entity After the Merger...................................................... 48
SECTION 4.26 Reckson and Buyer Knowledge............................................................ 49
ARTICLE V
COVENANTS
SECTION 5.1 Conduct of the Company................................................................. 49
SECTION 5.2 Conduct of Reckson..................................................................... 57
SECTION 5.3 Stockholders' Meetings; Joint Proxy Material........................................... 58
SECTION 5.4 No Solicitation of Transactions by the Company......................................... 60
SECTION 5.5 Access to Information; Confidentiality Agreement....................................... 61
SECTION 5.6 Voting of Shares of Company Preferred Stock............................................ 63
SECTION 5.7 Director and Officer Liability......................................................... 64
SECTION 5.8 Reasonable Best Efforts; Cooperation................................................... 67
SECTION 5.9 Certain Filings........................................................................ 68
SECTION 5.10 [Intentionally Omitted]................................................................ 68
SECTION 5.11 Public Announcements................................................................... 68
SECTION 5.12 Further Assurances..................................................................... 68
SECTION 5.13 Employee Matters....................................................................... 68
SECTION 5.14 Transfer Taxes......................................................................... 70
SECTION 5.15 Advice of Changes...................................................................... 70
SECTION 5.16 Guaranty............................................................................... 70
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
SECTION 5.17 Form S-4 Registration Statement........................................................ 70
SECTION 5.18 Blue Sky Permits....................................................................... 71
SECTION 5.19 Listing................................................................................ 71
SECTION 5.20 Affiliates............................................................................. 72
ARTICLE VI
CONDITIONS TO THE MERGER
SECTION 6.1 Conditions to Each Party's Obligations................................................. 72
SECTION 6.2 Conditions to the Company's Obligations................................................ 73
SECTION 6.3 Conditions to Obligations of Reckson and Buyer......................................... 74
ARTICLE VII
TERMINATION
SECTION 7.1 Termination............................................................................ 76
SECTION 7.2 Effect of Termination.................................................................. 78
SECTION 7.3 Fees and Expenses...................................................................... 79
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Notices................................................................................ 81
SECTION 8.2 Survival of Representations and Warranties............................................. 83
SECTION 8.3 Interpretation......................................................................... 83
SECTION 8.4 Amendments, Modification and Waiver.................................................... 84
SECTION 8.5 Successors and Assigns................................................................. 84
SECTION 8.6 Specific Performance................................................................... 84
SECTION 8.7 Governing Law.......................................................................... 84
SECTION 8.8 Severability........................................................................... 85
SECTION 8.9 Third Party Beneficiaries.............................................................. 85
SECTION 8.10 Entire Agreement....................................................................... 85
SECTION 8.11 Counterparts; Effectiveness............................................................ 86
SECTION 8.12 Litigation Trust; CPRs................................................................. 86
Exhibits
- ------------------
Exhibit A--Form of Reckson's Articles Supplementary
Exhibit B-1--Form of Indenture
Exhibit B-2--Form of Resolution
</TABLE>
iii
<PAGE>
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE NO.
- ------------------------------------------------------------------------------------------------------ ----------
<S> <C>
1940 Act.............................................................................................. 33
1997 Plan............................................................................................. 25
Access Limitation Date................................................................................ 62
Active Subsidiary..................................................................................... 26
Adverse Recommendation Event.......................................................................... 2
affiliate(s).......................................................................................... 83
Amended Return........................................................................................ 56
Applicable Break-Up Fee............................................................................... 79
Articles of Incorporation............................................................................. 21
Articles of Merger.................................................................................... 4
associates............................................................................................ 83
Base Amount........................................................................................... 80
Break-Up Fee Ruling................................................................................... 80
Buyer................................................................................................. 1
Buyer OP Unit......................................................................................... 7
Buyer Operating Partnership........................................................................... 2
Buying Entities....................................................................................... 21
Cash Election......................................................................................... 5
Cash Election Shares.................................................................................. 5
Cash Proration Factor................................................................................. 11
Certificate of Merger................................................................................. 4
Certificates.......................................................................................... 14
Chairman.............................................................................................. 55
Class B Stock......................................................................................... 1
Class B Stock Number.................................................................................. 11
Cleanup............................................................................................... 40
Closing............................................................................................... 19
Closing Date.......................................................................................... 20
Code.................................................................................................. 3
Commitment............................................................................................ 30
Committee............................................................................................. 56
Company............................................................................................... 1
Company Acquisition Agree ments....................................................................... 61
Company Acquisition Proposal.......................................................................... 61
Company By-laws....................................................................................... 21
Company Common Stock.................................................................................. 1
Company Disclosure Schedule........................................................................... 19
Company Joint Ventures................................................................................ 25
Company Leased Real Property.......................................................................... 24
Company Leases........................................................................................ 24
Company OP Cash Election.............................................................................. 6
Company OP Cash Election Units........................................................................ 6
Company OP Unit....................................................................................... 2
Company Operating Partnership......................................................................... 2
Company Operating Partnership Agreement............................................................... 25
Company Owned Real Property........................................................................... 24
Company Permitted Liens............................................................................... 23
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE NO.
- ------------------------------------------------------------------------------------------------------ ----------
<S> <C>
Company Preferred Stock............................................................................... 3
Company Real Property................................................................................. 24
Company SEC Documents................................................................................. 27
Company Securities.................................................................................... 25
Company Space Lease................................................................................... 24
Company Special Meeting............................................................................... 58
Company Stock Option.................................................................................. 19
Company's Representatives............................................................................. 62
Continuing Employees.................................................................................. 69
Costs................................................................................................. 64
CPR................................................................................................... 87
Crescent.............................................................................................. 4
Crescent Litigation................................................................................... 86
Deal Litigation....................................................................................... 46
Delaware Secretary of State........................................................................... 4
DLLCA................................................................................................. 1
Effective Time........................................................................................ 5
Election Date......................................................................................... 9
Environmental Claim................................................................................... 41
Environmental Laws.................................................................................... 41
ERISA................................................................................................. 53
ERISA Affiliate....................................................................................... 53
Excess Shares......................................................................................... 16
Exchange Act.......................................................................................... 23
Exchange Agent........................................................................................ 8
Exchange Fund......................................................................................... 16
Expense Amount........................................................................................ 80
Financing............................................................................................. 47
Form of Election...................................................................................... 8
Form S-4 Registration Statement....................................................................... 71
Fractional Notes...................................................................................... 7
Funding Notice........................................................................................ 58
GAAP.................................................................................................. 28
Governmental Entity................................................................................... 23
Guarantees............................................................................................ 1
Hazardous Materials................................................................................... 41
HSR Act............................................................................................... 33
include............................................................................................... 83
includes.............................................................................................. 83
including............................................................................................. 83
Indemnifiable Claim................................................................................... 64
Indemnitees........................................................................................... 64
Indenture............................................................................................. 1
Independent Counsel................................................................................... 66
Initial Sale.......................................................................................... 3
Interim Period........................................................................................ 57
Joint Proxy Statement................................................................................. 59
knowledge of the Company.............................................................................. 83
Lenders............................................................................................... 61
Licenses.............................................................................................. 20
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE NO.
- ------------------------------------------------------------------------------------------------------ ----------
<S> <C>
Lien.................................................................................................. 27
made available........................................................................................ 83
Maryland Department................................................................................... 4
Material Adverse Effect............................................................................... 21
Maximum Amount........................................................................................ 65
Merger................................................................................................ 1
Merger Consideration.................................................................................. 5
Merrill Lynch......................................................................................... 32
Metropolitan Agreement................................................................................ 57
MGCL.................................................................................................. 1
New York Courts....................................................................................... 85
Non-Cash Proration Factor............................................................................. 12
Non-Electing Securities............................................................................... 11
Non-Electing Shares................................................................................... 6
Non-Electing Units.................................................................................... 6
Notes................................................................................................. 1
NYSE.................................................................................................. 9
OP Merger............................................................................................. 2
Outside Termination Date.............................................................................. 76
Permits............................................................................................... 40
Person................................................................................................ 18
Qualifying Income..................................................................................... 80
reasonable best efforts............................................................................... 83
Reckson............................................................................................... 1
Reckson Common Stock.................................................................................. 3
Reckson Confidentiality Agreement..................................................................... 62
Reckson Disclosure Schedule........................................................................... 35
Reckson Leased Real Property.......................................................................... 43
Reckson Leases........................................................................................ 43
Reckson OP............................................................................................ 1
Reckson Owned Real Property........................................................................... 43
Reckson Permitted Liens............................................................................... 43
Reckson Preferred Stock............................................................................... 37
Reckson Real Property................................................................................. 43
Reckson Rent Roll..................................................................................... 45
Reckson SEC Documents................................................................................. 37
Reckson Space Lease................................................................................... 45
Reckson Special Meeting............................................................................... 59
REIT.................................................................................................. 3
REIT Requirements..................................................................................... 80
Release............................................................................................... 41
Representation Letter................................................................................. 3
Resolution............................................................................................ 1
Schedule.............................................................................................. 56
SEC................................................................................................... 27
Securities Act........................................................................................ 23
Share Issuance........................................................................................ 48
Share Issuance Approval............................................................................... 48
Special Dividend...................................................................................... 7
Standstill Date....................................................................................... 57
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE NO.
- ------------------------------------------------------------------------------------------------------ ----------
<S> <C>
Stock Purchase Agreement.............................................................................. 3
Subsidiary............................................................................................ 26
Surviving Entity...................................................................................... 4
Tax Return............................................................................................ 40
Taxes................................................................................................. 18
Termination Year...................................................................................... 80
TIA................................................................................................... 23
Tower Articles Supplementary.......................................................................... 3
Tower Preferred Stock................................................................................. 24
Transactions.......................................................................................... 2
Transfer Taxes........................................................................................ 70
Trust................................................................................................. 86
WARN Act.............................................................................................. 69
without limitation.................................................................................... 83
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of December 8, 1998, by and among
Tower Realty Trust, Inc., a Maryland corporation (the "COMPANY"), Metropolitan
Partners LLC, a Delaware limited liability company ("BUYER"), Reckson Operating
Partnership, L.P., a Delaware limited partnership ("RECKSON OP"), and Reckson
Associates Realty Corp., a Maryland corporation ("RECKSON").
W I T N E S S E T H
WHEREAS, the respective Boards of Directors of the Company, Buyer and
Reckson have each approved this Agreement and the merger of the Company with and
into Buyer (with Buyer being the surviving entity) (the "MERGER"), upon the
terms and subject to the conditions set forth herein, and in accordance with the
Maryland General Corporation Law (the "MGCL") and the Delaware Limited Liability
Company Act (the "DLLCA"), whereby each issued and outstanding share of common
stock, par value $.01 per share, of the Company (the "COMPANY COMMON STOCK")
(other than shares owned directly or indirectly by Buyer, Reckson OP, Reckson,
any wholly owned Subsidiary (as defined in Section 3.5(a) hereof) of Buyer,
Reckson or Reckson OP or by the Company or any wholly owned Subsidiary of the
Company immediately prior to the Effective Time (as defined in Section 1.1(b)
hereof)), will, upon the terms and subject to the conditions and limitations set
forth herein, (A) at the election of the holders thereof either (x) be converted
into either (1) .5725 of a share of class B exchangeable common stock, par value
$.01 per share, of Reckson, having substantially the terms and designations set
forth in the form of articles supplementary attached hereto as Exhibit A (the
"CLASS B STOCK") and $7.2565 principal amount of 7% senior unsecured notes due
2009 of Reckson OP (the "NOTES"), guaranteed by Reckson (such guarantees, the
"GUARANTEES"; unless the context requires otherwise, references herein to the
"Notes" shall include the Guarantees) issued under and governed by an indenture
substantially in the form attached hereto as Exhibit B-1 (the "INDENTURE") and
by the terms of the resolutions and officer's certificate, each in the form
attached as Exhibit B-2 (collectively, the "RESOLUTION") to be adopted by the
Board of Directors of Reckson, if the Share Issuance Approval (as defined in
Section 4.22 hereof) is not obtained, or (2) .8364 of a share of Class B Stock
if the Share Issuance Approval is obtained or (y) be converted into the right to
receive $23 in cash payable to the holder thereof, without interest, in each
case subject to the proration provisions set forth herein and (B) if the Share
Issuance Approval has not been obtained and there has occurred an Adverse
Recommendation Event (as defined hereafter), in addition to the consideration
set forth in (x)(1) or (y) above, be converted into an additional $.8046
principal amount of Notes. As used herein, an "ADVERSE RECOMMENDATION EVENT"
shall be deemed to have occurred if the Board of Directors of Reckson withdraws
or amends or modifies in any material respect (or publicly announces an
intention to withdraw or amend or modify in any material respect) its approval
or recommendation of the Share Issuance;
WHEREAS, in connection with the Merger, the following additional transaction
will be effected (the Merger, together with the other documents, agreements and
transactions contemplated by this Agreement, being referred to collectively as
the "TRANSACTIONS"): the parties hereto shall cause the merger (the "OP MERGER")
of Tower Realty Operating Partnership, L.P., a Delaware limited partnership (the
"COMPANY OPERATING PARTNERSHIP"), with and into a newly formed entity created by
Buyer (which shall be a direct or indirect Subsidiary of Buyer) ("BUYER
OPERATING PARTNERSHIP"), pursuant to which each limited partnership interest (a
"COMPANY OP UNIT") in the Company Operating Partnership (other than Company OP
Units owned directly or indirectly by the Company, any wholly owned Subsidiary
of the Company, Reckson OP, Buyer, Reckson or any wholly owned Subsidiary of
Buyer, Reckson or Reckson OP) immediately prior to the Effective Time, will,
upon the terms and subject to the conditions and limitations set forth herein,
(A) at the election of the holders thereof either (x) be converted into either
(1) .5725 of a share of Class B Stock and $7.2565 principal amount of Notes, if
the Share Issuance Approval is not obtained, or (2) .8364 of a share of Class B
Stock if the Share Issuance Approval is obtained or (y) be converted into the
right to receive $23 in cash payable to the holder thereof, without interest, in
each case subject to the proration provisions set forth herein and
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(B) if the Share Issuance Approval has not been obtained and there has occurred
an Adverse Recommendation Event, in addition to the consideration set forth in
(x)(1) or (y) above, be converted into an additional $.8046 principal amount of
Notes;
WHEREAS, as a condition precedent to the execution of this Agreement, (i)
Reckson, Buyer and certain stockholders of the Company have entered into certain
voting agreements whereby each of such stockholders has agreed to, subject to
the terms and conditions of this Agreement, vote (x) at the Company Special
Meeting (as defined in Section 5.3(a) hereof), the shares of Company Common
Stock owned by each in favor of this Agreement and the Merger and (y) at the
Reckson Special Meeting (as defined in Section 5.3(b) hereof), the shares of
common stock, par value $.01 per share, of Reckson ("RECKSON COMMON STOCK")
owned by each in favor of the Share Issuance (as defined in Section 4.21
hereof); and (ii) the Company and certain stockholders of Reckson have entered
into certain voting agreements whereby each of such stockholders has agreed to,
subject to the terms and conditions of this Agreement, vote (x) at the Reckson
Special Meeting, the shares of Reckson Common Stock owned by each in favor of
the Share Issuance and (y) at the Company Special Meeting, the shares of Company
Common Stock owned by each in favor of this Agreement and the Merger;
WHEREAS, concurrently with the execution and delivery of this Agreement,
Reckson and the Company are entering into the stock purchase agreement (the
"STOCK PURCHASE AGREEMENT"), providing for the issuance and sale to Reckson of
2,169,197 shares of preferred stock of the Company (the "COMPANY PREFERRED
STOCK") with the terms and designations set forth in the articles supplementary
of the Company, substantially in the form attached as Exhibit A to the Stock
Purchase Agreement (the "TOWER ARTICLES SUPPLEMENTARY") (the "INITIAL SALE")
and, in connection therewith, Reckson is executing and delivering that certain
representation letter dated the date of this Agreement (the "REPRESENTATION
LETTER");
WHEREAS, concurrently with execution and delivery of this Agreement, Battle
Fowler L.L.P. shall deliver its opinion to Reckson as to certain matters
relating to the qualification of the Company as a real estate investment trust
(a "REIT") under the Internal Revenue Code of 1986, as amended (the "CODE");
WHEREAS, concurrently with execution and delivery of this Agreement, Brown &
Wood LLP shall deliver its opinion to Reckson as to certain matters relating to
the qualification of Reckson as a REIT under the Code; and
WHEREAS, concurrently with the execution and delivery of this Agreement, the
Company and Reckson and the Company and Crescent Real Estate Equities Company
("CRESCENT") are entering into certain mutual releases; PROVIDED THAT if
Crescent fails to acquire $85 million of preferred interests in Buyer prior to
the Closing, the foregoing shall be of no force and effect.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants, agreements and conditions hereafter set forth, and intending to be
legally bound hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER.
(a) Upon the terms and subject to the conditions of this Agreement, and in
accordance with the DLLCA and the MGCL, at the Effective Time, the Company shall
be merged with and into Buyer, whereupon the separate existence of the Company
shall cease, and Buyer shall continue as the surviving entity (sometimes
referred to herein as the "SURVIVING ENTITY") and shall continue to be
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governed by the laws of the State of Delaware and shall continue under the name
"Metropolitan Partners LLC."
(b) Concurrently with the Closing (as defined in Section 1.12 hereof), the
Company and Buyer will cause (i) a certificate of merger or consolidation (the
"CERTIFICATE OF MERGER") with respect to the Merger to be executed and filed
with the Office of the Secretary of State of the State of Delaware (the
"DELAWARE SECRETARY OF STATE") pursuant to the DLLCA and (ii) articles of merger
(the "ARTICLES OF MERGER") with respect to the Merger to be executed and filed
with and accepted for record by the State Department of Assessment and Taxation
of Maryland (the "MARYLAND DEPARTMENT") pursuant to the MGCL. The Merger shall
become effective on the date and time at which both the Certificate of Merger
and the Articles of Merger have been duly filed with the Delaware Secretary of
State and accepted for record by the Maryland Department, respectively, or at
such other date and time as is agreed between the parties and specified in the
Certificate of Merger and the Articles of Merger (not to exceed 30 days after
acceptance for record of the Articles of Merger by the Maryland Department), and
such date and time is hereinafter referred to as the "EFFECTIVE TIME." The OP
Merger shall occur at, and be effective as of, the Effective Time.
(c) From and after the Effective Time, the Surviving Entity shall possess
all the rights, privileges, immunities, powers and franchises and be subject to
all of the obligations, restrictions, disabilities, liabilities, debts and
duties of the Company and Buyer.
SECTION 1.2 EFFECT ON SHARES OF COMPANY COMMON STOCK AND COMPANY OP
UNITS. At the Effective Time (and by reason of the consummation of the Merger
and the OP Merger):
(a) CONVERSION OF COMPANY COMMON STOCK AND COMPANY OP UNITS. Except as
otherwise provided herein and subject to Section 1.4 hereof, each share of
Company Common Stock and each Company OP Unit issued and outstanding immediately
prior to the Effective Time (other than shares of Company Common Stock and
Company OP Units owned directly or indirectly by the Company, any wholly owned
Subsidiary of the Company, Reckson, Reckson OP, Buyer or any wholly owned
Subsidiary of Buyer, Reckson or Reckson OP) shall be converted into (A) if the
Share Issuance Approval has not been obtained and there has been an Adverse
Recommendation Event, $.8046 principal amount of Notes and (B) the following
(collectively, the "MERGER CONSIDERATION"):
(i) for each share of Company Common Stock with respect to which an
election to receive cash has been effectively made pursuant to Section 1.3
hereof and not revoked or lost (a "CASH ELECTION"), the right to receive in
cash an amount equal to $23 (collectively, such shares in respect of which a
Cash Election shall have been made without taking into account the
provisions of Section 1.4 hereof are herein sometimes referred to as "CASH
ELECTION SHARES");
(ii) for each share of Company Common Stock other than Cash Election
Shares, either (A) if the Share Issuance Approval has not been obtained,
then $7.2565 principal amount of Notes and .5725 of a fully paid and
nonassessable share of Class B Stock or (B) if the Share Issuance Approval
has been obtained then .8364 of a fully paid and nonassessable share of
Class B Stock (collectively, "NON-ELECTING SHARES");
(iii) for each Company OP Unit with respect to which an election to
receive cash has been effectively made in accordance with Section 1.3 hereof
and not revoked or lost (a "COMPANY OP CASH ELECTION"), the right to receive
in cash an amount equal to $23 (collectively, such OP Units in respect of
which a Company OP Cash Election shall have been made without taking into
account provisions of Section 1.4 hereof are sometimes referred to as
"COMPANY OP CASH ELECTION UNITS"); and
(iv) for each Company OP Unit other than Company OP Cash Election Units,
if the Share Issuance Approval has not been obtained then either (A) $7.2565
principal amount of Notes and .5725 of a fully paid and nonassessable share
of Class B Stock or (B) if the Share Issuance
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Approval has been obtained then .8364 of a fully paid and nonassessable
share of Class B Stock (collectively, "NON-ELECTING UNITS").
(b) CANCELLATION OF SHARES OF COMPANY COMMON STOCK COMPANY PREFERRED STOCK
AND COMPANY OP UNITS. As of the Effective Time, each share of Company Common
Stock and each share of Company Preferred Stock owned by the Company or owned by
Buyer, Reckson or any wholly owned Subsidiary of Buyer, Reckson or the Company
immediately prior to the Effective Time shall automatically be cancelled and
retired and cease to exist, and no consideration or payment shall be delivered
therefor or in respect thereto. All shares of Company Common Stock to be
converted into the Merger Consideration pursuant to this Section 1.2 shall, by
virtue of the Merger and without any action on the part of the holders thereof,
cease to be outstanding, be cancelled and retired and cease to exist; and each
holder of a certificate representing prior to the Effective Time any such shares
of Company Common Stock shall thereafter cease to have any rights with respect
to such shares of Company Common Stock, except the right to receive (i) the
Merger Consideration, (ii) any dividends and other distributions in accordance
with Sections 1.2(c) and 1.5(c) hereof and interest (or other) payments on the
Notes in accordance with Section 1.5(c) hereof and (iii) any cash to be paid in
lieu of any fractional share of Class B Stock or Notes (in denominations other
than multiples of $1,000 (any such denominations being referred to herein as
"FRACTIONAL NOTES" or a "FRACTION OF A NOTE")) in accordance with Section 1.5(d)
hereof. As of the Effective Time, each Company OP Unit owned by the Company,
Reckson, Reckson OP, Buyer or any wholly owned Subsidiary of the Company,
Reckson, Reckson OP or Buyer immediately prior to the Effective Time shall
automatically be converted into a limited partnership interest in Buyer
Operating Partnership (a "BUYER OP UNIT"). All Company OP Units converted into
Merger Consideration shall, by virtue of the OP Merger and without any action on
the part of the holders thereof, cease to be outstanding, be cancelled and
retired and cease to exist; and each holder of such Company OP Units prior to
the Effective Time shall thereafter cease to have any rights with respect to
such Company OP Units, except the right to receive (i) the Merger Consideration,
(ii) any dividends and other distributions in accordance with Sections 1.2(c)
and 1.5(c) hereof and interest (or other) payments on the Notes in accordance
with Section 1.5(c) hereof and (iii) any cash to be paid in lieu of any
fractional share of Class B Stock or Fractional Notes in accordance with Section
1.5(d) hereof and in the case of Company OP Units owned by the Company, Reckson,
Reckson OP, Buyer or any wholly owned Subsidiary of the Company, Reckson,
Reckson OP or Buyer immediately prior to the Effective Time, the right to
receive Buyer OP Units. Company OP Units not converted into Merger Consideration
shall remain outstanding following the Effective Time.
(c) COMPANY SPECIAL DIVIDEND. The Company has the right to declare and pay a
dividend (the "SPECIAL DIVIDEND") to its stockholders, the record date for which
shall be the close of business on the last business day prior to the Closing.
The Special Dividend shall be equal to the Company's most recent regular
quarterly dividend rate, multiplied by the number of days elapsed since the last
dividend record date through and including the Closing and divided by ninety-one
(91); PROVIDED, HOWEVER, that the Special Dividend shall be increased to the
extent the Company reasonably determines that the amount provided in the
preceding clause may not be sufficient for the Company to qualify as a REIT for
its taxable year ended December 31, 1997, December 31, 1998 or its taxable year
ended on the Closing Date; PROVIDED, FURTHER, that the Special Dividend shall be
reduced to the extent that the Board of Directors of the Company determines to
fund the Trust (as defined in Section 8.12 hereof) pursuant to Section 8.12
hereof. The Special Dividend shall be paid in the ordinary course of business
consistent with past practices of the Company as to the manner and timing of
payment. Concurrently with the Special Dividend, an equivalent distribution
shall be made by the Company Operating Partnership.
(d) None of this Agreement, any merger agreement related to the OP Merger,
or any certificate of merger or similar instrument shall provide, or be deemed
to provide, appraisal rights (contractual or otherwise) to holders of Company
Common Stock or Company OP Units.
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SECTION 1.3 SHARE ELECTION.
(a) Each Person (as defined in Section 1.6 hereof) who, as of the Election
Date referred to in subsection (c) below, is a record holder of shares of
Company Common Stock or a record holder of Company OP Units, as the case may be,
shall have the right to submit a Form of Election (as defined in Section 1.3(c)
hereof) specifying the number of shares of Company Common Stock or Company OP
Units, as the case may be, that such Person desires to be converted into the
right to receive $23 in cash pursuant to the Cash Election or Company OP Cash
Election, as applicable.
(b) Prior to the mailing of the Joint Proxy Statement (as defined in Section
5.3(c) hereof), Buyer shall designate the Company's registrar or transfer agent,
or such other bank, trust company, Person or Persons as shall be acceptable to
the Company to act as exchange agent (the "EXCHANGE AGENT") for the payment of
the Merger Consideration.
(c) Buyer shall prepare and mail a form of election (which shall include a
letter of transmittal), which form shall be subject to the reasonable approval
of the Company (the "FORM OF ELECTION"), with or at substantially the same time
as the Joint Proxy Statement to the record holders of shares of Company Common
Stock and the record holders of Company OP Units as of the record date for the
Company Special Meeting, which Form of Election shall be used by each record
holder of shares of Company Common Stock and each record holder of Company OP
Units who wishes to elect to receive cash for any or all shares of Company
Common Stock or Company OP Units, as the case may be, held, subject to the
provisions of Section 1.4 hereof, by such holder and, in connection with such
election, to surrender its certificates representing such Company Common Stock.
The Form of Election shall specify that delivery shall be effected, and risk of
loss and title to the Certificates (as defined in Section 1.5 hereof) shall
pass, only upon proper delivery of the Certificates to the Exchange Agent and
which shall be in the form and have such other provisions as Buyer and the
Company may reasonably specify and instructions for making a Cash Election and
for delivering shares of Company Common Stock in connection with such election.
The Form of Election shall contain an undertaking by the holder of Company OP
Units executing such Form of Election that such holder agrees not to sell,
transfer or dispose of any Company OP Units without first notifying the Exchange
Agent that such holder was revoking its election with respect thereto, it being
understood that such revocation must comply with subsection (d) below. The
Company shall use its reasonable best efforts to make the Form of Election and
the Joint Proxy Statement available to all Persons who become holders of shares
of Company Common Stock during the period between such record date and the
Election Date. Any such holder's election to receive cash shall have been
properly made only if the Exchange Agent shall have received at its designated
office, by 5:00 p.m., New York City time on the business day (the "ELECTION
DATE") next preceding the date of the Company Special Meeting, a Form of
Election properly completed and signed (and not revoked) and accompanied by
certificates for the shares of Company Common Stock to which such Form of
Election relates, duly endorsed in blank or otherwise in form acceptable for
transfer on the books of the Company (or by an appropriate guarantee of delivery
of such certificates as set forth in such Form of Election from a firm which is
a member of a registered national securities exchange or of the New York Stock
Exchange (the "NYSE") or a commercial bank or trust company having an office or
correspondent in the United States, provided such certificates are in fact
delivered to the Exchange Agent within five NYSE trading days after the date of
execution of such guarantee of delivery).
(d) Any Form of Election may be revoked by the stockholder or unitholder
submitting it to the Exchange Agent only by written notice received by the
Exchange Agent prior to 5:00 p.m., New York City time on the Election Date. In
addition, all Forms of Election shall automatically be revoked if the Exchange
Agent is notified in writing by Buyer and the Company that the Merger has been
abandoned. If a Form of Election is revoked, the certificate or certificates (or
guarantees of delivery, as appropriate) for the share of Company Common Stock,
if any, to which such Form of Election relates shall promptly be returned to the
stockholder submitting the same to the Exchange Agent.
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(e) The determination of the Exchange Agent shall be binding as to whether
or not elections have been properly made or revoked pursuant to this Section 1.3
with respect to shares of Company Common Stock and Company OP Units and when
elections and revocations were received by it. If the Exchange Agent determines
that any Cash Election was not properly made with respect to shares of Company
Common Stock, then such shares of Company Common Stock shall be treated by the
Exchange Agent at the Effective Time as Non-Electing Shares and such shares
shall be exchanged in the Merger for shares of Class B Stock, or Class B Stock
and Notes, as the case may be, pursuant to Section 1.2(a)(ii) hereof. If the
Exchange Agent determines that any Company OP Cash Election was not properly
made with respect to Company OP Units, then such Company OP Units shall be
treated by the Exchange Agent at the Effective Time as Non-Electing Units, and
such units shall be exchanged for shares of Class B Stock, or for Notes and
Class B Stock, as the case may be, pursuant to 1.2(a)(iv) hereof. The Exchange
Agent shall also make all computations as to the allocation and the proration
contemplated by Section 1.4 hereof, and any such computation shall be conclusive
and binding on the holders of shares of Company Common Stock and the holders of
Company OP Units. The Exchange Agent may, with the mutual agreement of Buyer and
the Company, make such rules as are consistent with this Section 1.3 for the
implementation of the elections provided for herein as shall be necessary or
desirable to effect such elections fully.
SECTION 1.4 PRORATION.
(a) Notwithstanding anything in this Agreement to the contrary, the minimum
aggregate number of shares of Company Common Stock and number of Company OP
Units which shall be converted at the Effective Time into shares of Class B
Stock or Notes if the Share Issuance Approval is not obtained and into shares of
Class B Stock if the Share Issuance Approval is obtained shall be equal to
13,973,024 plus 75% of the number of shares of Company Common Stock issued
pursuant to outstanding Company Stock Options (as defined in Section 1.9 hereof)
after the date of this Agreement (the "CLASS B STOCK NUMBER").
(b) If the sum of (x) the number of Non-Electing Shares and (y) the number
of Non-Electing Units (such sum, the "NON-ELECTING SECURITIES") is less than or
equal to the Class B Stock Number, then:
(i) all Non-Electing Securities shall be converted into Notes and Class B
Stock (if the Share Issuance Approval is not obtained), or Class B Stock (if
the Share Issuance Approval is obtained), in accordance with the terms of
Sections 1.2(a)(ii) and 1.2(a)(iv) hereof; and
(ii) additional shares of Company Common Stock and Company OP Units, other
than Non-Electing Securities, shall be converted into Notes and Class B
Stock (if the Share Issuance Approval is not obtained), or Class B Stock (if
the Share Issuance Approval is obtained), in accordance with the terms of
Section 1.2(a) hereof in the following manner:
(1) a proration factor (the "CASH PRORATION FACTOR") shall be determined
by dividing (x) the difference between the Class B Stock Number and
the Non-Electing Securities by (y) the sum of (A) the number of Cash
Election Shares and (B) the number of Company OP Cash Election Units;
and
(2) the number of Cash Election Shares and Company OP Cash Election
Units, in addition to Non-Electing Securities, to be converted into
Class B Stock and Notes (if the Share Issuance Approval is not
obtained) or Class B Stock (if the Share Issuance Approval is
obtained) shall be determined by multiplying the Cash Proration
Factor by the total number of Cash Election Shares and Company OP
Cash Election Units; and
(iii) shares of Company Common Stock and Company OP Units shall be converted
into shares of Class B Stock and Notes (if the Share Issuance Approval is
not obtained) or Class B Stock (if the Share Issuance Approval is obtained)
in accordance with Section 1.4(b)(ii)(2) hereof on a
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consistent basis among stockholders and unitholders who held shares of
Company Common Stock or Company OP Units, as the case may be, as to which
they made the elections referred to in Sections 1.2(a)(i) and 1.2(a)(iii)
hereof, pro rata based upon the number of shares of Company Common Stock and
number of Company OP Units as to which such election was made. Holders of
Company Common Stock who made a Cash Election pursuant to Section 1.2(a)(i)
hereof and holders of Company OP Units who made a Company OP Cash Election
in accordance with Section 1.2(a)(iii) hereof, but who receive Class B Stock
and/or Notes in accordance with this Section 1.4(b), shall have the portion
of their Merger Consideration received in cash reduced proportionately to
account for the receipt of Class B Stock and/or Notes pursuant to this
Section 1.4(b).
(c) If the number of Non-Electing Securities exceeds the Class B Stock
Number, then each Non-Electing Share and each Non-Electing Unit shall either (x)
be converted into Notes and shares of Class B Stock (if the Share Issuance
Approval is not obtained), or shares of Class B Stock (if the Share Issuance
Approval is obtained), or (y) be converted into the right to receive cash in
accordance with the terms of Section 1.2(a) hereof in the following manner:
(i) A proration factor (the "NON-CASH PRORATION FACTOR") shall be
determined by dividing the Class B Stock Number by the total number
of Non-Electing Securities;
(ii) The number of Non-Electing Shares and Non-Electing Units which are
converted into Notes and Class B Stock (if the Share Issuance
Approval is not obtained) or Class B Stock (if the Share Issuance
Approval is obtained) shall be determined by multiplying the Non-Cash
Proration Factor by the number of Non-Electing Securities;
(iii) All Non-Electing Securities, other than those shares and units
which are converted into Notes and Class B Stock (if the Share
Issuance Approval is not obtained) or Class B Stock (if the Share
Issuance Approval is obtained) in accordance with clause (ii) of this
subsection (c), shall be converted into the right to receive cash on
a consistent basis among stockholders and unitholders who did not
make the elections referred to in Sections 1.2(a)(i) and 1.2(a)(iii)
hereof, pro rata based upon the number of shares of Company Common
Stock and number of Company OP Units as to which such election was
not made. Holders of Company Common Stock who did not make a Cash
Election pursuant to Section 1.2(a)(i) hereof and holders of Company
OP Units who did not make a Company OP Cash Election in accordance
with Section 1.2(a)(iii) hereof, but who receive cash in accordance
with this Section 1.4(c), shall have the portion of their Merger
Consideration received in Notes and Class B Stock (if the Share
Issuance Approval is not obtained) or Class B Stock (if the Share
Issuance Approval is obtained) reduced proportionately to account for
the receipt of cash pursuant to this Section 1.4(c).
SECTION 1.5 EXCHANGE OF CERTIFICATES.
(a) At or promptly following the Effective Time, Buyer shall deposit, or
cause to be deposited with the Exchange Agent for the benefit of holders of
shares of Company Common Stock and Company OP Units, cash and certificates
representing shares of Class B Stock or cash, Notes and certificates
representing the shares of Class B Stock, as the case may be, constituting the
Merger Consideration. For purposes of this Section 1.5, holders of Company OP
Units shall be treated in the same manner as holders of shares of Company Common
Stock, except as provided in the last sentence of Section 1.5(b) hereof.
(b) As of or promptly after, and in any event not later than five business
days following, the Effective Time, the Surviving Entity shall cause the
Exchange Agent to mail (and to make available for collection by hand) to each
holder of record of a certificate or certificates, which immediately prior to
the Effective Time represented outstanding shares of Company Common Stock (the
"CERTIFICATES"),
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(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Exchange Agent and which shall be in
the form and have such other provisions as Buyer and the Company may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for (A) a certificate or certificates representing the
number of full shares of Class B Stock and Notes, if any, into which all or a
portion of the number of shares of Company Common Stock previously represented
by such Certificate have been converted pursuant to this Agreement and (B) the
amount of cash, if any, into which all or a portion of the number of shares of
Company Common Stock previously represented by such Certificate shall have been
converted pursuant to this Agreement (which instructions shall provide that at
the election of the surrendering holder, Certificates may be surrendered, and
the Merger Consideration in exchange therefor collected, by hand delivery). Upon
surrender of a Certificate for cancellation to the Exchange Agent, together with
a letter of transmittal duly completed and validly executed in accordance with
the instructions thereto, and such other documents as may be required pursuant
to such instructions, the holder of such Certificate shall be entitled to
receive in exchange therefor the Merger Consideration for each share of Company
Common Stock formerly represented by such Certificate, to be mailed (or made
available for collection by hand if so elected by the surrendering holder)
within three business days of receipt thereof (or, in the case of any holders
that surrender Certificates with a Form of Election prior to the calculation of
the Cash Proration Factor and the Non-Cash Proration Factor, three business days
after such calculation), and the Certificate so surrendered shall be forthwith
cancelled. The Exchange Agent shall accept such Certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may impose to
effect an orderly exchange thereof in accordance with normal exchange practices.
No interest shall be paid or accrued for the benefit of holders of the
Certificates on the Merger Consideration payable upon the surrender of the
Certificates, or for the Merger Consideration deliverable to the holder of
Company OP Units pursuant to the following sentence, except for interest
accruing on the Notes in accordance with their terms. Immediately following
delivery to the Exchange Agent of the Merger Consideration contemplated by
Section 1.5(a) hereof, the Exchange Agent shall cause to be delivered to the
holders of Company OP Units the Merger Consideration that they are entitled in
accordance with this Article I.
(c) No dividends or other distributions with respect to shares of Class B
Stock or interest with respect to the Notes, as the case may be, with a record
date after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Class B Stock and Notes represented
thereby or to the holder of any Company OP Units by reason of the conversion of
shares of Company Common Stock and Company OP Units pursuant to Sections 1.2(a),
1.3 and 1.4 hereof and no cash payment in lieu of fractional shares or
Fractional Notes shall be paid to any such holder pursuant to Section 1.5(d)
hereof until the surrender of such Certificate in accordance with this Article I
or the delivery of the Merger Consideration to the holders of Company OP Units
pursuant to the last sentence of Section 1.5(b). Subject to the effect of
applicable laws, following surrender of any such Certificate or concurrently
with such delivery, there shall be paid to the Person in whose name the shares
of Class B Stock and Notes are registered (i) at the time of such surrender or
delivery or as promptly after the sale of the Excess Shares or Excess Notes (as
defined in Section 1.5(d) hereof) as practicable, the amount of any cash payable
in lieu of fractional shares of Class B Stock or Fractional Notes to which such
holder is entitled pursuant to Section 1.5(d) hereof and the amount of dividends
or other distributions or interest with a record date after the Effective Time
theretofore paid with respect to such Class B Stock or Notes issued upon
conversion of Company Common Stock and Company OP Units, and (ii) at the
appropriate payment date, the amount of dividends or other distributions or
interest with a record date after the Effective Time but prior to such surrender
and a payment date subsequent to such surrender payable with respect to such
Class B Stock or Notes.
(d) Notwithstanding any other provision of this Agreement, no fraction of a
share of Class B Stock or of a Note shall be issued in connection with the
Merger, and such fractional interest shall not entitle
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the owner thereof to vote or to any rights as a security holder of Reckson. In
lieu of any such fractional security, each holder of shares of Company Common
Stock and Company OP Units otherwise entitled to a fraction of a share of Class
B Stock or of a Note will be entitled to receive in accordance with the
provisions of this Section 1.5 from the Exchange Agent, a cash payment
representing such holder's proportionate interest in the net proceeds from the
sale by the Exchange Agent on behalf of all such holders of the aggregate of the
fractions of Class B Stock or Notes, as the case may be, which would otherwise
be issued (respectively, the "EXCESS SHARES" and the "EXCESS NOTES"). The sale
of the Excess Shares by the Exchange Agent shall be executed on the NYSE through
one or more member firms of the NYSE and shall be executed in round lots to the
extent practicable. The sale of the Excess Notes by the Exchange Agent shall be
executed in the over-the-counter market. Until the net proceeds of such sale or
sales have been distributed to the holders of shares of Company Common Stock and
Company OP Units, the Exchange Agent will, subject to Section 1.5(e) hereof,
hold such proceeds in trust for the holders of shares of Company Common Stock
and Company OP Units. Buyer shall pay all commissions, transfer taxes and other
out-of-pocket transaction costs, including the expenses and compensation of the
Exchange Agent incurred in connection with such sale of the Excess Shares. As
soon as practicable after the determination of the amount of cash, if any, to be
paid to holders of shares of Company Common Stock and Company OP Units in lieu
of any fractional Class B Stock or Fractional Notes, the Exchange Agent shall
make available such amounts to such holders of shares of Company Common Stock
and Company OP Units.
(e) Any portion of the Merger Consideration deposited with the Exchange
Agent pursuant to this Section 1.5 (the "EXCHANGE FUND") which remains
undistributed to the holders of the Certificates for one year after the
Effective Time shall be delivered to Buyer, upon demand, and any holders of
shares of Company Common Stock prior to the Merger who have not theretofore
complied with this Article I shall (to the extent permitted by applicable law)
thereafter look only to Buyer and only as general creditors thereof for payment
of their claim for (i) cash, if any, (ii) shares of Class B Stock, if any, (iii)
Notes, if any, (iv) any cash in lieu of fractional shares of Class B Stock and
Fractional Notes and (v) any dividends or distributions with respect to shares
of Class B Stock or interest with respect to Notes to which such holders may be
entitled.
(f) None of Buyer, Reckson, the Company or the Exchange Agent shall be
liable to any Person in respect of shares of Class B Stock, Notes or cash from
the Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificates shall not have
been surrendered prior to one year after the Effective Time (or immediately
prior to such earlier date on which (i) any cash, (ii) any cash in lieu of
fractional shares of Class B Stock or Fractional Notes, (iii) any shares of
Class B Stock or Notes or (iv) any dividends or distributions with respect to
shares of Class B Stock or interest with respect to Notes in respect of which
such Certificate would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.3(b) hereof)), any such shares of
Class B Stock, Notes, cash, dividends or distributions or interest in respect of
such Certificate shall, to the extent permitted by applicable law, become the
property of Buyer, free and clear of all claims or interest of any Person
previously entitled thereto.
(g) The Exchange Agent shall invest any cash included in the Exchange Fund,
as directed by Buyer on a daily basis. Any interest and other income resulting
from such investments shall be paid to Buyer. Nothing contained in this Section
1.5(g) shall relieve Buyer, Reckson or the Exchange Agent from making the
payments required by this Article I to be made to the holders of shares of
Company Common Stock and to holders of Company Stock Options.
SECTION 1.6 TRANSFER TAXES; WITHHOLDING. If the Merger Consideration is to
be paid to a Person other than a Person in whose name the Certificate
surrendered in exchange therefor is registered, it shall be a condition of such
exchange that the Certificate so surrendered in exchange therefor shall be
properly endorsed and otherwise in proper form for transfer and that the Person
requesting such exchange shall pay to the Exchange Agent any transfer or other
Taxes (as defined hereafter) required
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by reason of the payment of the Merger Consideration to a Person other than the
registered holder of the Certificate so surrendered, or shall establish to the
satisfaction of the Exchange Agent that such Tax has been paid or is not
applicable. "PERSON" means any natural person, firm, individual, corporation,
limited liability company, partnership, association, joint venture, company,
business trust, trust or any other entity or organization, whether incorporated
or unincorporated, including a government or political subdivision or any agency
or instrumentality thereof. For purposes of this Agreement, "TAXES" means all
taxes, levies or other like assessments, charges or fees (including estimated
taxes, charges and fees), including, without limitation, income, corporation,
advance corporation, gross receipts, transfer, excise, property, sales, use,
value-added, license, payroll, withholding, social security and franchise or
other governmental taxes or charges, imposed by the United States or any state,
county, local or foreign government or subdivision or agency thereof, and such
term shall include any interest, penalties or additions to tax attributable to
such taxes.
SECTION 1.7 NO FURTHER OWNERSHIP RIGHTS IN SHARES OF COMPANY COMMON STOCK.
The Merger Consideration delivered upon the surrender for exchange of any
Certificate in accordance with the terms hereof or delivered in accordance with
the last sentence of Section 1.5(b) hereof shall be deemed to have been
delivered (and paid) in full satisfaction of all rights pertaining to the shares
of Company Common Stock previously represented by such Certificate or pertaining
to Company OP Units, as the case may be.
SECTION 1.8 CLOSING OF TRANSFER BOOKS AND RECORDS. At the Effective Time,
the stock transfer books of the Company and corresponding records of the Company
Operating Partnership shall be closed, and no transfer of shares of Company
Common Stock or of Company OP Units, as the case may be, shall thereafter be
made. Subject to the last sentence of Section 1.5(f) hereof, if after the
Effective Time Certificates are presented to the Surviving Entity or the
Exchange Agent, they shall be cancelled and exchanged as provided in this
Article I.
SECTION 1.9 STOCK OPTIONS. Each option to acquire shares of Company Common
Stock ("COMPANY STOCK OPTION") set forth in Schedule 1.9 of the disclosure
schedule of the Company attached hereto (the "COMPANY DISCLOSURE SCHEDULE") that
is outstanding immediately prior to the Effective Time, whether or not then
vested or exercisable, shall, effective as of the Effective Time, become fully
exercisable and vested and each such Company Stock Option shall, subject to
obtaining the required consent, if any, of each holder of Company Stock Options,
be cancelled. In consideration of such cancellation, the Company shall, subject
to reduction for required withholding taxes, pay to each such holder of Company
Stock Options an amount in cash in respect thereof equal to the product of (1)
the excess, if any, of $23 over the exercise price of such Common Stock Option
and (2) the number of shares of Company Common Stock subject thereto. The
Company's obligations to make such payment to any holder of Company Stock
Options shall be subject to having received the required consent, if any, of
such holder to the cancellation of such Options and the Company shall use its
reasonable best effort to obtain such consents prior to the Effective Time.
SECTION 1.10 RESTRICTED STOCK. All unvested shares of restricted stock of
the Company, set forth in Schedule 1.10 of the Company Disclosure Schedule,
shall, by virtue of this Agreement and without further action of the Company,
Buyer or the holder of such restricted shares, to the extent required in the
plan, agreement or instrument pursuant to which such restricted stock was
granted, vest and become free of all restrictions immediately prior to the
Effective Time and shall be converted into the Merger Consideration pursuant to
Section 1.2 hereof.
SECTION 1.11 [Intentionally Omitted]
SECTION 1.12 CLOSING. Subject to the satisfaction or waiver of the
conditions set forth in Article VI hereof, the closing of the Merger (the
"CLOSING") will take place at 10:00 a.m., New York City time, on a date to be
specified by the parties hereto, which shall be no later than the second
business day after the satisfaction of the conditions set forth in Section 6.1
hereof, at the offices of
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Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York,
unless another time, date or place is agreed to in writing by the parties hereto
(such date, the "CLOSING DATE").
ARTICLE II
THE SURVIVING ENTITY
SECTION 2.1 CERTIFICATE OF FORMATION. The Certificate of Formation of Buyer
shall be the certificate of formation of the Surviving Entity until thereafter
amended in accordance with applicable law.
SECTION 2.2 OPERATING AGREEMENT. The operating agreement of Buyer in effect
at the Effective Time shall be the operating agreement of the Surviving Entity
until thereafter amended in accordance with applicable law, the certificate of
formation of the Surviving Entity and the operating agreement of the Surviving
Entity.
SECTION 2.3 MEMBERS AND MANAGERS. From and after the Effective Time, the
members and managers of Buyer at the Effective Time shall be the initial members
and managers of the Surviving Entity, in each case until their respective
successors are duly elected or appointed and qualified in accordance with
applicable law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as otherwise provided in the letter referred to in Section 5.1(u)
hereof, the Company represents and warrants to Buyer as follows:
SECTION 3.1 CORPORATE EXISTENCE AND POWER. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Maryland, and except as set forth in Schedule 3.1 of the Company Disclosure
Schedule, has all corporate powers and all governmental licenses,
authorizations, consents and approvals (collectively, "LICENSES") required to
carry on its business as now conducted except for failures to have any such
License which would not, individually or in the aggregate, have a Material
Adverse Effect (as defined hereafter). The Company is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the character of the property owned, leased or operated by it or the
nature of its activities makes such qualification necessary, except for those
jurisdictions where failures to be so qualified would not, in the aggregate,
have a Material Adverse Effect. As used herein, the term "MATERIAL ADVERSE
EFFECT" means a material adverse effect on the condition (financial or
otherwise), business, assets or results of operations of the Company and its
Subsidiaries or Reckson and its Subsidiaries, as the case may be, in each case
taken as a whole, that is not a result of a decline or deterioration in the
economy in general or the real estate markets in which such entities operate.
The Company has heretofore made available to Reckson, Reckson OP and Buyer
(collectively, the "BUYING ENTITIES") complete and correct copies of its charter
and the by-laws of the Company (the "ARTICLES OF INCORPORATION" and "COMPANY
BY-LAWS," respectively) as currently in effect.
SECTION 3.2 CORPORATE AUTHORIZATION. The Company has the requisite corporate
power and authority to execute and deliver this Agreement and, subject to
approval of the Company's stockholders as contemplated by Section 5.3 hereof, to
perform its obligations hereunder. The execution and delivery of this Agreement
and the performance of its obligations hereunder have been duly and validly
authorized by the Board of Directors of the Company and, other than the approval
and adoption of this Agreement by the requisite vote of the Company's
stockholders, no other corporate proceedings on the part of the Company are
necessary to authorize the execution, delivery and performance of this
Agreement. This Agreement has been duly executed and delivered by the Company
and constitutes, assuming due authorization, execution and delivery of this
Agreement by each of the Buying Entities, a valid and binding obligation of the
Company, enforceable against the Company in accordance with its
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terms, subject to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of equity.
SECTION 3.3 CONSENTS AND APPROVALS; NO VIOLATIONS.
(a) Except as set forth in Schedule 3.3(a) of the Company Disclosure
Schedule and assuming the delivery and accuracy of the Representation Letter,
neither the execution and delivery of this Agreement nor the performance by the
Company of its obligations hereunder will (i) conflict with or result in any
breach of any provision of the Articles of Incorporation or the Company By-laws;
(ii) result in a breach or violation of, a default under, or the triggering of
any payment or other material obligations pursuant to, or except as otherwise
contemplated by Sections 1.9 and 1.10 hereof, accelerate vesting under, any of
the Company stock option or other benefit plans, or any grant or award made
under any of the foregoing; (iii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration or
obligation to repurchase, repay, redeem or acquire or any similar right or
obligation) or result in the creation of any Lien (as defined in Section 3.5(b)
hereof) upon any properties of the Company or any of its Subsidiaries (other
than Company Permitted Liens) under any of the terms, conditions or provisions
of, any note, mortgage, indenture, letter of credit, other evidence of
indebtedness, franchise, permit, guarantee, license, lease or agreement or
similar instrument or obligation to which the Company or any of its Subsidiaries
is a party or by which any of them or any of their assets may be bound or (iv)
assuming that the filings, registrations, notifications, authorizations,
consents and approvals referred to in subsection (b) below have been obtained or
made, as the case may be, violate any order, injunction, decree, statute, rule
or regulation of any Governmental Entity to which the Company or any of its
Subsidiaries is subject, excluding from the foregoing clauses (ii), (iii) and
(iv) such requirements, defaults, breaches, rights, violations or creations of
such liens, security interests, charges or encumbrances (A) that would not, in
the aggregate, reasonably be expected to have a Material Adverse Effect and
would not reasonably be expected to have a material adverse effect on the
ability of the Company to perform its obligations hereunder or (B) that become
applicable as a result of the business or activities in which any of the Buying
Entities or any of their respective affiliates is or proposes to be engaged or
any acts or omissions by, or facts pertaining to, any of the Buying Entities.
(b) Except as set forth in Schedule 3.3(b) of the Company Disclosure
Schedule, no filing or registration with, notification to, or authorization,
consent or approval of, any government or any agency, court, tribunal,
commission, board bureau, department, political subdivision or other
instrumentality of any government (including any regulatory or administrative
agency), whether federal, state, multinational (including, but not limited to,
the European Community), provincial, municipal, domestic or foreign (each, a
"GOVERNMENTAL ENTITY"), is required in connection with the execution and
delivery of this Agreement by the Company or the performance by the Company of
its obligations hereunder, except (i) the filing of the Certificate of Merger in
accordance with the DLLCA and the Articles of Merger in accordance with the MGCL
and filings to maintain the good standing of the Surviving Entity; (ii)
compliance with any applicable requirements of (A) the Securities Act of 1933
and the rules and regulations thereunder (the "SECURITIES ACT") and the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "EXCHANGE ACT") and (B) the Trust Indenture Act of 1939, as
amended, and the rules and regulations thereunder (the "TIA"); (iii) compliance
with any applicable requirements of state takeover laws; (iv) any Tax Returns
(as defined in Section 4.10 hereof) that may be required in connection with the
Merger and (v) such other consents, approvals, orders, authorizations,
notifications, registrations, declarations and filings (A) the failure of which
to be obtained or made would not, in the aggregate, reasonably be expected to
have a Material Adverse Effect and would not have a material adverse effect on
the ability of the Company to perform its obligations hereunder or (B) that
become applicable as a result of the business or activities in which
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any of the Buying Entities or any of their respective affiliates is or proposes
to be engaged or any acts or omissions by, or facts pertaining to, any of the
Buying Entities.
(c) For purposes of this Agreement, "COMPANY PERMITTED LIENS" means (i)
mechanics', carriers', workers', repairers', materialmen's, warehousemen's and
other similar Liens arising or incurred in the ordinary course of business for
sums not yet due and payable and such Liens as are being contested by the
Company in good faith, (ii) Liens arising or resulting from any action taken by
any of the Buying Entities, (iii) matters that would be disclosed by an accurate
survey or inspection of the Company Real Property (as defined hereafter), (iv)
Liens for current Taxes not yet due or payable, (v) any covenants, conditions,
restrictions, reservations, rights, Liens, easements, encumbrances,
encroachments and other matters affecting title which are shown as exceptions on
the Company's title insurance policies and/or title commitments or reports which
have been made available to the Buying Entities, (vi) any other covenants,
conditions, restrictions, reservations, rights, non-monetary Liens, easements,
encumbrances, encroachments and other matters affecting title which do not
individually or in the aggregate materially adversely affect the value or use of
any of the Company Real Property as it is presently used, (vii) Company Space
Leases (as defined hereafter) and (viii) matters set forth in Schedule 3.3(c) of
the Company Disclosure Schedule and/or permitted pursuant to Sections 5.1(n),
5.1(r), 5.1(s) or 5.4 hereof. "COMPANY LEASES" means the real property leases,
subleases, licenses and use or occupancy agreements pursuant to which the
Company or any of its Active Subsidiaries is the lessee, sublessee, licensee,
user or occupant of Company Real Property, or interests therein. "COMPANY LEASED
REAL PROPERTY" means all interests in real property pursuant to the Company
Leases. "COMPANY OWNED REAL PROPERTY" means the real property owned in fee by
the Company and its Subsidiaries necessary for the conduct of, or otherwise
material to, the business of the Company and its Subsidiaries as it is currently
conducted. "COMPANY REAL PROPERTY" means the Company Owned Real Property and the
Company Leased Real Property. "COMPANY SPACE LEASE" means each lease or other
right of occupancy affecting or relating to a property in which the Company or
its Subsidiaries (or an entity in which it directly or indirectly has an
interest) is the landlord, either pursuant to the terms of a lease agreement or
as successor to any prior landlord.
SECTION 3.4 CAPITALIZATION.
(a) The authorized stock of the Company consists of 150,000,000 shares of
Company Common Stock and 50,000,000 shares of preferred stock, par value $.01
per share, of the Company (the "TOWER PREFERRED STOCK"). As of October 31, 1998,
there were (i) 16,958,355 shares of Company Common Stock, (ii) no shares of
Tower Preferred Stock and (iii) 18,643,127 Company OP Units issued and
outstanding. Except for the Company Preferred Stock, all shares of stock of the
Company and all Company OP Units have been duly authorized and validly issued
and are fully paid and nonassessable and are free of pre-emptive rights. As of
October 31, 1998, there were (i) outstanding Company Stock Options in respect of
1,269,275 shares of Company Common Stock at an option price, in each case, equal
to $26 per share, which Options were granted pursuant to the Company's 1997
Incentive Plan (the "1997 Plan") and an additional 338,846 shares of Company
Common Stock available for future grants pursuant to the 1997 Plan through
December 31, 1998, (ii) up to 200,000 shares of Company Common Stock authorized
for possible issuance pursuant to the Company's 1997 Directors' Plan, (iii) no
agreements with respect to stock bonuses for shares of Company Common Stock and
(iv) 2,000,000 shares of Company Common Stock reserved for issuance upon
exchange of Company OP Units.
(b) Except (i) as set forth in this Section 3.4, (ii) for Company OP Units
(which, subject to certain restrictions, may be exchanged by holders thereof for
shares of Company Common Stock), (iii) as required under the Second Amendment
and Restatement of Agreement of Limited Partnership of the Company Operating
Partnership, as amended (the "COMPANY OPERATING PARTNERSHIP AGREEMENT"), (iv)
for changes since October 31, 1998 resulting from the exercise of Options
outstanding on such date, (v) the Company Preferred Stock issued to Reckson in
the Initial Sale and (vi) as set forth in Schedule 3.4 of the Company Disclosure
Schedule, there are outstanding (A) no shares of stock or other voting
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securities or partnership interests of the Company, (B) no securities of the
Company or any Subsidiary of the Company convertible into or exchangeable for
shares of stock or voting securities or partnership interests of the Company and
(C) no options or other rights to acquire from the Company, and no obligation of
the Company to issue, any stock, voting securities or partnership interests or
securities convertible into or exchangeable for stock or voting securities of
the Company (the items in clauses (A), (B) and (C) being referred to
collectively as the "COMPANY SECURITIES"). Except (x) as required pursuant to
rights of first refusal or rights of first offer, "buy-sell" provisions,
anti-dilution provisions or pro-rata funding obligations set forth in the terms
of any partnership or joint venture agreement governing any of the partnerships,
joint ventures or business trusts in which the Company Operating Partnership
owns an interest (collectively, the "COMPANY JOINT VENTURES") existing on the
date of this Agreement, a list of which is set forth in Schedule 3.4 of the
Company Disclosure Schedule, (y) as set forth in Schedule 3.4 of the Company
Disclosure Schedule and (z) as required under the Company Operating Partnership
Agreement, there are no outstanding obligations of the Company or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any Company Securities
or any stock, voting securities or other ownership interests in any Subsidiary
of the Company or make any material investment (in the form of a loan,
contribution or otherwise) in any Person (other than a Subsidiary of the Company
or a wholly owned Company Joint Venture).
SECTION 3.5 SUBSIDIARIES.
(a) Each Subsidiary of the Company that is actively engaged in any business
or owns any material assets (each, an "ACTIVE SUBSIDIARY") (i) that is a
corporation is duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation, (ii) that is a partnership,
limited liability company or trust is duly organized and validly existing under
the laws of its jurisdiction of organization, (iii) except as set forth in
Schedule 3.5(a) of the Company Disclosure Schedule, has all corporate power and
authority to, and all governmental licenses, authorizations, consents and
approvals required to, carry on its business as now conducted and (iv) is duly
qualified or licensed to do business and is in good standing in each
jurisdiction where the character of the property owned or leased by it or the
nature of its activities makes such qualification or licensing necessary, except
for failures of this representation and warranty to be true which would not, in
the aggregate, have a Material Adverse Effect. For purposes of this Agreement,
"SUBSIDIARY" means with respect to any Person, any corporation, limited
partnership or other entity of which such Person owns, directly or indirectly,
more than 50% of the outstanding voting stock or other equity interests. All
Subsidiaries and their respective jurisdictions of incorporation are identified
in Schedule 3.5(a) of the Company Disclosure Schedule.
(b) Except as set forth in Schedule 3.5(b) of the Company Disclosure
Schedule, (i) all of the outstanding shares of stock of each Subsidiary of the
Company that is a corporation are duly authorized, validly issued, fully paid
and nonassessable, and such shares are owned by the Company or by a Subsidiary
of the Company (other than directors' qualifying shares and nominal shares held
by other Persons as may be required by local law) free and clear of any Liens or
limitations on voting rights and (ii) all equity interests in each Subsidiary of
the Company that is a partnership, joint venture, limited liability company or
trust are owned by the Company or by a Subsidiary of the Company, free and clear
of any Liens or limitations on voting rights; PROVIDED THAT no representation is
made as to any shares of stock or other equity interests owned by any Persons
other than the Company. Except as set forth in Schedule 3.5(b) of the Company
Disclosure Schedule, there are no subscriptions, options, warrants, calls,
rights, convertible securities or other agreements or commitments of any
character relating to the issuance, transfer, sale, delivery, voting or
redemption (including any rights of conversion or exchange under any outstanding
security or other instrument) for, any of the stock or other equity interests of
any of such Subsidiaries. Except as set forth in Schedule 3.5(b) of the Company
Disclosure Schedule, there are no agreements requiring the Company or any of its
Subsidiaries to make contributions to the capital of, or lend or advance funds
to, any Subsidiaries of the Company. For
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purposes of this Agreement, "LIEN" means, with respect to any asset, any
mortgage, deed of trust, lien, pledge, charge, security interest or encumbrance
of any kind in respect of such asset.
(c) Except for interests in the Subsidiaries and except as set forth in
Schedule 3.5(c) of the Company Disclosure Schedule, neither the Company nor any
of its Subsidiaries owns directly or indirectly any interest or investment
(whether equity or debt) in any corporation, partnership, joint venture,
business, trust or entity (other than investments in short-term investment
securities).
SECTION 3.6 SEC DOCUMENTS. The Company has timely filed all required
reports, proxy statements, forms and other documents with the Securities and
Exchange Commission (the "SEC") since October 16, 1997 (the "COMPANY SEC
DOCUMENTS"). As of their respective dates, and giving effect to any amendments
thereto, (i) the Company SEC Documents complied in all material respects with
the requirements of the Securities Act or the Exchange Act, as the case may be,
and the applicable rules and regulations of the SEC promulgated thereunder and
(ii) none of the Company SEC Documents (except as to the financial statements
contained therein, which are dealt with in Section 3.7 hereof) contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
SECTION 3.7 FINANCIAL STATEMENTS. The financial statements of the Company
(including, in each case, any notes and schedules thereto) included in the
Company SEC Documents (a) comply as to form in all material respects with all
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, (b) are in conformity with generally accepted
accounting principles ("GAAP"), applied on a consistent basis (except in the
case of unaudited statements, as permitted by Form 10-Q as filed with the SEC
under the Exchange Act) during the periods involved (except as may be indicated
in the related notes and schedules thereto) and (c) fairly present, in all
material respects, the consolidated financial position of the Company and its
consolidated Subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).
SECTION 3.8 [Intentionally Omitted]
SECTION 3.9 JOINT PROXY STATEMENT; FORM S-4 REGISTRATION STATEMENT; OTHER
INFORMATION. None of the information with respect to the Company or its
Subsidiaries to be included in the Joint Proxy Statement or any amendments
thereof or supplements thereto or the Form S-4 Registration Statement (as
defined in Section 5.17 hereof) will, in the case of the Joint Proxy Statement
or any amendments thereof or supplements thereto, at the time of the mailing of
the Joint Proxy Statement or such amendments or supplements thereto, and at the
time of the Company Special Meeting and, if different, the Reckson Special
Meeting, or, in the case of the Form S-4 Registration Statement, at the time it
becomes effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except that no representation is made by the Company with
respect to information related to any of the Buying Entities or any of their
respective affiliates included in the Joint Proxy Statement or the Form S-4
Registration Statement, as the case may be. The Joint Proxy Statement and the
Form S-4 Registration Statement will each comply as to form in all material
respects with the provisions of the Exchange Act and the Securities Act,
respectively, and the rules and regulations promulgated under each of such
statutes.
SECTION 3.10 ABSENCE OF MATERIAL ADVERSE CHANGES, ETC. Except as disclosed
in the Company SEC Documents filed by the Company and as set forth in Schedule
3.10 of the Company Disclosure Schedule, (i) since September 30, 1998, the
Company and its Subsidiaries have conducted their business
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in the ordinary course of business consistent with past practice and there has
not been a Material Adverse Effect and (ii) since September 30, 1998, there has
not been:
(a) any declaration, setting aside or payment of any dividend or other
distribution (other than regular quarterly dividends or regular distributions
pursuant to the Company Operating Partnership Agreement (or as necessary to
maintain REIT status)) with respect to the shares of Company Common Stock or the
Company OP Units, or any repurchase, redemption or other acquisition by the
Company or any Subsidiary of the Company of (x) any outstanding shares of stock
or other equity securities of, or other ownership interests in, the Company or
(y) the Company OP Units;
(b) any amendment of any material term of any outstanding security issued by
the Company or any Subsidiary of the Company;
(c) any incurrence, assumption or guarantee by the Company or any Subsidiary
of the Company of any indebtedness for borrowed money other than in the ordinary
course of business which, in any event, does not exceed $301,960,000 in the
aggregate outstanding as of the date of this Agreement and, of which, no more
than $8,000,000 represents an increase in aggregate outstanding indebtedness as
of the date of this Agreement from that owed or guaranteed by the Company on
September 30, 1998;
(d) any creation or assumption by the Company or any Subsidiary of the
Company of any Lien on any asset other than in the ordinary course of business
and other than Liens which, in the aggregate, do not have and could not
reasonably be expected to have a Material Adverse Effect;
(e) any damage, destruction or other casualty loss (whether or not covered
by insurance) affecting the business or assets of the Company or any Subsidiary
of the Company which has had a Material Adverse Effect;
(f) any change in any method of accounting or accounting practice by the
Company or any Subsidiary of the Company, except for any such change required by
reason of a change in GAAP;
(g) except as a result of increases permitted by clause (iv) below, any (i)
grant of any severance or termination pay to any director, officer or employee
of the Company or any Subsidiary of the Company, (ii) employment, deferred
compensation or other similar agreement (or any amendment to any such existing
agreement) with any director, officer or employee of the Company or any
Subsidiary of the Company entered into, (iii) increase in benefits payable under
any existing severance or termination pay policies or employment agreements or
(iv) increase in compensation, bonus or other benefits payable to directors,
officers or employees of the Company or any Subsidiary of the Company, in each
case, other than in the ordinary course of business, including year-end bonuses
and salary adjustments to the extent set forth in Schedule 5.1(q) of the Company
Disclosure Schedule;
(h) any commitment or contractual obligation relating to any capital
expenditure (each, a "COMMITMENT") entered into by the Company or any of its
Subsidiaries, other than immaterial Commitments in the ordinary course of
business; or
(i) any authorization of, or commitment or agreement to take any of, the
foregoing actions except as otherwise permitted by this Agreement.
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SECTION 3.11 TAXES.
(a) The Company has exercised ordinary business care and prudence (within
the meaning of Treasury Regulation section 1.856-7(c)) in attempting to satisfy
the requirements of sections 856(c)(2) and (3) of the Code to the date hereof,
and will continue to exercise such ordinary business care and prudence, to meet
the requirements of sections 856(c)(2) and (3) of the Code, and if there is any
failure of the Company to meet the requirements of sections 856(c)(2) or (3) of
the Code, or of both such sections, all such failures would be with reasonable
cause and none would be the result of willful neglect (within the meaning of
section 856(c)(6)(C) of the Code).
(b) Any incorrect information that is included by the Company in the
schedule referred to in clause (ii) of the last paragraph of Section 5.1 hereof
will not be due to fraud with intent to evade Tax.
(c) The Company has delivered to Reckson copies of the federal and state
income tax returns of the Company for its taxable year ending December 31, 1997
and, if previously filed, its taxable year ending December 31, 1998, all of
which were timely filed with the applicable taxing authority. Such copies are
complete copies of such tax returns as filed.
(d) The Company has elected to be taxed as a REIT within the meaning of the
Code for its taxable year ending December 31, 1997, and has not revoked such
election.
(e) As of the date of this Agreement, the Company and its Subsidiaries have
not received any written notices of deficiency or assessment from any taxing
authority with respect to Taxes of the Company or its Subsidiaries for any
amount of Taxes that would be material to any of the Company or its Subsidiaries
individually or in the aggregate that have not been fully paid or finally
settled or are being contested in good faith.
SECTION 3.12 MATERIAL CONTRACTS. As of the date of this Agreement, (i)
except as set forth in Schedule 3.12 of the Company Disclosure Schedule and
except for the Revolving Credit Agreement referred to in clause (ii) below,
neither the Company nor any of its Subsidiaries is in default (nor with notice
or lapse of time or both would the Company or any of its Subsidiaries be in
default) under any contract or agreement, commitment and instrument which is
required to be filed as an exhibit to the Company SEC Documents except for such
defaults which, if not cured, would not in the aggregate reasonably be expected
to have a Material Adverse Effect and (ii) assuming that Reckson has paid the
purchase price payable under the Stock Purchase Agreement and that the Company
applies the proceeds from the Initial Sale as provided in the Stock Purchase
Agreement, there is not currently in existence any Default (as such term is
defined in the Revolving Credit Agreement, dated as of October 20, 1997, among
the Company Operating Partnership, Merrill Lynch and the Banks named therein).
SECTION 3.13 [Intentionally Omitted]
SECTION 3.14 [Intentionally Omitted]
SECTION 3.15 [Intentionally Omitted]
SECTION 3.16 [Intentionally Omitted]
SECTION 3.17 [Intentionally Omitted]
SECTION 3.18 FINDERS' FEES. Except for Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MERRILL LYNCH"), there is no investment banker, broker, finder or
other intermediary which has been retained by, or is authorized to act on behalf
of, the Company or any Subsidiary of the Company that would be entitled to any
fee or commission from the Company, any Subsidiary of the Company, any Buying
Entity or any affiliate of any of the Buying Entities upon consummation of the
Transactions.
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SECTION 3.19 OPINION OF FINANCIAL ADVISORS. The Company has received the
opinion or advice of Merrill Lynch to the effect that, as of such date, the
consideration to be received by holders of shares of Company Common Stock (other
than any Buying Entity or any affiliate of any of the Buying Entities) pursuant
to the Merger is fair from a financial point of view to such holders. A copy of
the written opinion of Merrill Lynch will be delivered to Reckson as soon as
practicable after the date of this Agreement.
SECTION 3.20 BOARD RECOMMENDATION. The Board of Directors of the Company, at
a meeting duly called and held, has (a) determined that this Agreement and the
Transactions, taken together, are advisable, fair to and in the best interests
of the stockholders of the Company; (b) taken all actions necessary on the part
of the Company to render the restrictions on business combinations contained in
Section 3-602 of the MGCL inapplicable to this Agreement and the Merger; and (c)
resolved to recommend that the stockholders of the Company approve this
Agreement and the Transactions.
SECTION 3.21 VOTE REQUIRED; NO APPRAISAL RIGHTS.
(a) The affirmative vote of a majority of all of the votes of Company Common
Stock entitled to be cast is the only vote of the holders of any class or series
of the Company's stock necessary or required under this Agreement or under
applicable law to approve the Merger, this Agreement and the Transactions.
(b) No holder of Company Common Stock or Company OP Units is entitled to
dissenters' rights, appraisal rights or similar rights to "fair value" in
connection with the Merger or the OP Merger, whether under the MGCL, the DLLCA,
or otherwise.
SECTION 3.22 [Intentionally Omitted]
SECTION 3.23 INVESTMENT COMPANY ACT OF 1940. Neither the Company nor any of
its Subsidiaries is, or at the Effective Time will be, required to be registered
under the Investment Company Act of 1940, as amended (the "1940 ACT").
SECTION 3.24 HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976. For
purposes of determining compliance with the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the Company confirms that
the conduct of its business consists solely of investing in, owning and
operating real estate for the benefit of its stockholders.
SECTION 3.25 STATE TAKEOVER STATUTES. The Company has taken all action
necessary to exempt the transactions contemplated by this Agreement from the
operation of any applicable "fair price," "moratorium," "control share
acquisition" or any other applicable anti-takeover statute enacted under the
state or federal laws of the United States or similar statute or regulation.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF RECKSON,
RECKSON OP AND BUYER
Each of Reckson, Reckson OP and Buyer, jointly and severally, represents and
warrants to the Company as follows:
SECTION 4.1 CORPORATE EXISTENCE AND POWER. Reckson is a corporation, Buyer
is a limited liability company and Reckson OP is a limited partnership and each
is duly organized, validly existing and in good standing under the laws of the
state of Maryland, as to Reckson, and Delaware, as to Buyer and Reckson OP, and
has all power and authority and Licenses to carry on its business as now
conducted except for failures to have any such License which would not,
individually or in the aggregate, have a Material Adverse Effect. Buyer is a
direct or indirect Subsidiary of Reckson. Each of Reckson, Buyer
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and Reckson OP has heretofore delivered to the Company complete and correct
copies of its governing documents or other organizational documents of like
import, as currently in effect.
SECTION 4.2 AUTHORIZATION. Each of Reckson, Reckson OP and Buyer has the
requisite power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and, as the general partner of Reckson OP, to
adopt the Resolution. Reckson OP has the requisite power and authority to
execute and deliver the Notes and the Indenture and to perform its obligations
thereunder. Reckson has the requisite power and authority to execute, deliver
and perform the Guarantees. The execution and delivery of this Agreement, and
the performance of their obligations hereunder have been duly and validly
authorized by all requisite action by Reckson, Reckson OP and Buyer, the
execution and delivery of the Notes and the Indenture and the performance of its
obligations thereunder have been duly and validly authorized by all requisite
action by Reckson OP, the execution and delivery of the Guarantees and the
performance of its obligations thereunder have been (and the Resolution will,
prior to the filing with the SEC of the Form S-4 Registration Statement and the
filing of the preliminary Joint Proxy Statement, be) duly and validly authorized
by all requisite action by Reckson, and no other corporate, limited liability
company or partnership proceedings on the part of (and no approval of any
stockholders or partners of) Reckson, Reckson OP or any other Subsidiary of
Reckson are necessary to authorize the execution, delivery and performance of
this Agreement, the Notes, the Guarantees and the Indenture; PROVIDED, HOWEVER,
the Share Issuance is subject to the approval of the stockholders of Reckson in
accordance with Section 4.22 hereof. This Agreement has been duly executed and
delivered by Reckson, Reckson OP and Buyer. The Notes, the Guarantees and the
Indenture, assuming that the Share Issuance Approval is not obtained, will prior
to the Effective Time be duly executed and delivered by Reckson OP. This
Agreement constitutes, and the Indenture and Notes when executed and delivered
by Reckson OP (and, in the case of the Notes and Guarantees, when authenticated
by the trustee under the Indenture), and the Guarantees when executed by
Reckson, will constitute (assuming due authorization, execution and delivery of
this Agreement by the Company), valid and binding obligations of Reckson,
Reckson OP and Buyer (in the case of this Agreement) and of Reckson OP (in the
case of the Notes and the Indenture) and Reckson (in the case of the Guarantees)
enforceable against such respective companies in accordance with their terms,
subject to applicable bankruptcy, insolvency, moratorium or other similar laws
relating to creditors' rights and general principles of equity. The Notes,
Indenture and Guarantees when executed, delivered and authenticated as aforesaid
will reflect and, in the case of the Notes and Guarantees, be subject to the
terms of the Resolution.
SECTION 4.3 CONSENTS AND APPROVALS; NO VIOLATIONS.
(a) Except as set forth in Schedule 4.3(a) of the disclosure schedule of
Reckson, Reckson OP and Buyer attached hereto (the "RECKSON DISCLOSURE
SCHEDULE"), neither the execution and delivery of this Agreement, the Indenture,
the Notes and the Guarantees, nor the performance by each of Reckson, Buyer and
Reckson OP of their obligations hereunder and thereunder, including the adoption
of the Resolution, will (i) conflict with or result in any breach of any
provision of the articles of incorporation, by-laws or similar constituent
documents of each of Reckson, Buyer and Reckson OP or (ii) result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration or obligation to repurchase, repay, redeem or acquire or any
similar right or obligation) under any of the terms, conditions or provisions
of, any note, mortgage, letter of credit, other evidence of indebtedness,
guarantee, license, lease or agreement or similar instrument or obligation to
which Reckson or any of its Subsidiaries, including Reckson OP, is a party or by
which any of them or any of their assets may be bound or (iii) assuming that the
filings, registrations, notifications, authorizations, consents and approvals
referred to in subsection (b) below have been obtained or made, as the case may
be, violate any order, injunction, decree, statute, rule or regulation of any
Governmental Entity to which Reckson, Buyer or any of their Subsidiaries,
including Reckson OP, is subject, excluding from the foregoing clauses (ii) and
(iii) such
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requirements, defaults, breaches, rights or violations (A) that would not, in
the aggregate, reasonably be expected to have a Material Adverse Effect and
would not reasonably be expected to have a material adverse effect on the
ability of Reckson, Reckson OP or Buyer to perform their obligations hereunder
or under the Notes or the Indenture or (B) that become applicable as a result of
the business or activities in which the Company or any of its affiliates is or
proposes to be engaged or any acts or omissions by, or facts pertaining to, the
Company.
(b) Except as set forth in Schedule 4.3(b) of the Reckson Disclosure
Schedule, no filing or registration with, notification to, or authorization,
consent or approval of, any Governmental Entity is required in connection with
the execution and delivery of this Agreement by Reckson, Reckson OP or Buyer or
of the Notes, the Guarantees and the Indenture by Reckson OP or the performance
by Reckson, Reckson OP or Buyer of their obligations hereunder, including the
adoption of the Resolution, or by Reckson OP of its obligations under the Notes
and the Indenture, except (i) the filing of the Certificate of Merger in
accordance with the DLLCA and the Articles of Merger in accordance with the MGCL
and filings to maintain the good standing of the Surviving Entity; (ii)
compliance with any applicable requirements of (A) the Securities Act, the
Exchange Act and the TIA; (iii) compliance with any applicable requirements of
state takeover laws; (iv) any Tax Returns that may be required in connection
with the Merger and (v) such other consents, approvals, orders, authorizations,
notifications, registrations, declarations and filings (A) the failure of which
to be obtained or made would not, in the aggregate, reasonably be expected to
have a Material Adverse Effect and would not have a material adverse effect on
the ability of Reckson or Buyer to perform its obligations hereunder or (B) that
become applicable as a result of the business or activities in which the Company
or any of its affiliates is or proposes to be engaged or any acts or omissions
by, or facts pertaining to, the Company.
SECTION 4.4 CAPITALIZATION. The authorized stock of Reckson consists of
100,000,000 shares of Reckson Common Stock and 25,000,000 shares of preferred
stock, par value $.01 per share, of Reckson (the "RECKSON PREFERRED STOCK"). As
of December 3, 1998, there were (i) 40,035,419 shares of Reckson Common Stock
and (ii) 9,192,000 shares of Reckson Preferred Stock issued and outstanding. All
shares of capital stock of Reckson and all general and limited partnership
interests in Reckson OP have been duly authorized and validly issued and are
fully paid and, except with respect to the general partnership interest in
Reckson OP, nonassessable. As of December 3, 1998, there were outstanding
Options in respect of 4,733,144 shares of Reckson Common Stock at option prices
ranging from $12.041 to $27.041 per share. Upon conversion of all existing units
of limited partnership interest in the Reckson OP, there would be 47,800,047
(49,166,985 shares including the conversion of convertible preferred units)
shares of Reckson Common Stock outstanding. Except as set forth in Schedule 4.4
of the Reckson Disclosure Schedule, there are outstanding (A) no shares of stock
or other voting securities or partnership interests of Reckson or Reckson OP,
(B) no securities of Reckson or any Subsidiary of Reckson convertible into or
exchangeable for shares of stock or voting securities or partnership interests
of Reckson or Reckson OP and (C) no options or other rights to acquire from
Reckson or any Subsidiary of Reckson, and no obligation of Reckson or Reckson OP
to issue, any stock, voting securities or partnership interests or securities
convertible into or exchangeable for stock or voting securities or partnership
interests of Reckson or Reckson OP.
SECTION 4.5 SEC DOCUMENTS. Reckson has timely filed all required reports,
proxy statements, forms and other documents required to be filed by it with the
SEC since January 1, 1997 (collectively, the "RECKSON SEC DOCUMENTS"). As of
their respective dates, and giving effect to any amendments thereto, (a) the
Reckson SEC Documents complied in all material respects with the requirements of
the Securities Act or the Exchange Act, as the case may be, and the applicable
rules and regulations of the SEC promulgated thereunder and (b) none of the
Reckson SEC Documents (except as to the financial statements contained therein,
which are dealt with in Section 4.6 hereof) contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or
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necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
SECTION 4.6 FINANCIAL STATEMENTS. The financial statements of Reckson
(including, in each case, any notes and schedules thereto) included in the
Reckson SEC Documents (a) comply as to form in all material respects with all
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, (b) are in conformity with GAAP, applied on a
consistent basis (except in the case of unaudited statements, as permitted by
Form 10-Q as filed with the SEC under the Exchange Act) during the periods
involved (except as may be indicated in the related notes and schedules thereto)
and (c) fairly present, in all material respects, the consolidated financial
position of Reckson and its consolidated Subsidiaries as of the dates thereof
and the consolidated results of their operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments).
SECTION 4.7 [Intentionally Omitted]
SECTION 4.8 JOINT PROXY STATEMENT; FORM S-4 REGISTRATION STATEMENT; OTHER
INFORMATION. None of the information with respect to Reckson or its Subsidiaries
supplied by Reckson in writing specifically for inclusion in the Joint Proxy
Statement or any amendments thereof or supplements thereto or in the Form S-4
Registration Statement will, in the case of the Joint Proxy Statement or any
amendments thereof or supplements thereto, at the time of the mailing of the
Joint Proxy Statement or any amendments or supplements thereto and at the time
of the Company Special Meeting and, if different, the Reckson Special Meeting,
or, in the case of the Form S-4 Registration Statement, at the time it becomes
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representation is made by Reckson with respect to
information related to the Company or any affiliate of the Company included in
the Joint Proxy Statement or the Form S-4 Registration Statement, as the case
may be. The Joint Proxy Statement and the Form S-4 Registration Statement will
each comply as to form in all material respects with the provisions of the
Exchange Act and the Securities Act, respectively, and the rules and regulations
promulgated under each of such statutes.
SECTION 4.9 ABSENCE OF MATERIAL ADVERSE CHANGES, ETC. Except as disclosed in
the Reckson SEC Documents filed by Reckson and as set forth in Schedule 4.9 of
the Reckson Disclosure Schedule, since September 30, 1998, Reckson and its
Subsidiaries have conducted their business in the ordinary course of business
and there has not been a Material Adverse Effect.
SECTION 4.10 TAXES.
(a) Except as set forth in Schedule 4.10 of the Reckson Disclosure Schedule,
(i) all Tax Returns required to be filed by or with respect to Taxes of Reckson
and its Subsidiaries have been filed in a timely manner (taking into account all
lawful extensions of due dates), other than those Tax Returns as to which the
failure to file would not reasonably be expected to have a Material Adverse
Effect and all such Tax Returns are true, complete and correct in all material
respects, (ii) all Taxes due and payable have been paid or adequate provision in
accordance with GAAP with respect to the matters covered by such Tax Returns has
been made for the payment therefor, (iii) Reckson and its Subsidiaries have not
received any written notice of deficiency or assessment from any taxing
authority with respect to liabilities for material Taxes of Reckson or its
Subsidiaries that have not been fully paid, finally settled or contested in good
faith and (iv) there are no Liens with respect to Taxes upon any of the
properties or assets of Reckson or its Subsidiaries other than Liens for Taxes
not yet due or payable or that are being contested in good faith and other than
Liens that would not, individually or in the aggregate, reasonably be expected
to have a Material Adverse Effect. For purposes of this Agreement, "TAX RETURN"
means any report, return, statement or other written information required to be
supplied to a taxing authority in connection with Taxes.
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(b) Reckson (i) for all taxable years commencing with its taxable year
ending December 31, 1996 has been subject to taxation as a REIT within the
meaning of the Code and its proposed method of operation, taking into account
the Merger and assuming the accuracy of the opinion of Battle Fowler L.L.P.
referred to in Section 6.3(d) hereof, will enable it to continue to qualify as a
REIT for each taxable year ending after the Closing and (ii) has not taken or
omitted to take any action which would result in a successful challenge to its
status as a REIT.
SECTION 4.11 COMPLIANCE WITH LAWS. Except as set forth in Schedule 4.11 of
the Reckson Disclosure Schedule, Reckson and its Subsidiaries are in compliance
with all applicable laws, ordinances, rules and regulations of any Governmental
Entity applicable to their respective businesses and operations, except for such
violations, if any, which, in the aggregate, would not reasonably be expected to
have a Material Adverse Effect. All governmental approvals, permits and licenses
(collectively, "PERMITS") required to conduct the business of Reckson and its
Subsidiaries have been obtained, are in full force and effect and are being
complied with except for such violations and failures to have Permits in full
force and effect, if any, which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect.
SECTION 4.12 ENVIRONMENTAL MATTERS.
(a) (i) "CLEANUP" means all actions required to: (A) cleanup, remove,
treat or remediate Hazardous Materials (as defined hereafter) in the indoor
or outdoor environment; (B) prevent the Release (as defined hereafter) of
Hazardous Materials so that they do not migrate, endanger or threaten to
endanger public health or welfare or the indoor or outdoor environment; (C)
perform pre-remedial studies and investigations and post-remedial monitoring
and care; or (D) respond to any government requests for information or
documents in any way relating to cleanup, removal, treatment or remediation
or potential cleanup, removal, treatment or remediation of Hazardous
Materials in the indoor or outdoor environment.
(ii) "ENVIRONMENTAL CLAIM" means any claim, action, cause of action,
investigation or written notice by any Person alleging potential liability
(including, without limitation, potential liability for investigatory costs,
Cleanup costs, governmental response costs, natural resources damages,
property damages, personal injuries, or penalties) arising out of, based on
or resulting from (A) the presence or Release of any Hazardous Materials at
any location, whether or not owned or operated by the Company or any of its
Subsidiaries or (B) circumstances forming the basis of any violation of any
Environmental Law (as defined hereafter).
(iii) "ENVIRONMENTAL LAWS" means all federal, state, local and foreign
laws and regulations relating to pollution or protection of the environment,
including, without limitation, laws relating to Releases or threatened
Releases of Hazardous Materials or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, transport or handling of
Hazardous Materials.
(iv) "HAZARDOUS MATERIALS" means all substances defined as Hazardous
Substances, Oils, Pollutants or Contaminants in the National Oil and
Hazardous Substances Pollution Contingency Plan, 40 C.F.R. Section 300.5, or
defined as such by, or regulated as such under, any Environmental Law.
(v) "RELEASE" means any release, spill, emission, discharge, leaking,
pumping, injection, deposit, disposal, dispersal, leaching or migration into
the environment (including, without limitation, ambient air, surface water,
groundwater and surface or subsurface strata) or into or out of any
property, including the movement of Hazardous Materials through or in the
air, soil, surface water, groundwater or property.
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(b) (i) Except as set forth in Schedule 4.12(b)(i) of the Reckson
Disclosure Schedule, to the knowledge of Reckson, Reckson and its
Subsidiaries are in compliance with all applicable Environmental Laws (which
compliance includes, but is not limited to, the possession by Reckson and
its Subsidiaries of all permits and other governmental authorizations
required under applicable Environmental Laws, and compliance with the terms
and conditions thereof), except where failures to be in compliance would
not, in the aggregate, reasonably be expected to have a Material Adverse
Effect. Except as set forth in Schedule 4.12(b)(i) of the Reckson Disclosure
Schedule, since January 1, 1996 and prior to the date of this Agreement,
neither Reckson nor any of its Subsidiaries has received any communication
(written or oral), whether from a Governmental Entity, citizens' group,
employee or otherwise, alleging that Reckson or any of its Subsidiaries is
not in such compliance, except where failures to be in compliance would not,
in the aggregate, reasonably be expected to have a Material Adverse Effect.
(ii) Except as set forth in Schedule 4.12(b)(ii) of the Reckson
Disclosure Schedule, there is no Environmental Claim pending or, to the
knowledge of Reckson, threatened against Reckson or any of its Subsidiaries
or, to the knowledge of Reckson, against any Person whose liability for any
Environmental Claim Reckson or any of its Subsidiaries has or may have
retained or assumed either contractually or by operation of law that would
reasonably be expected to have a Material Adverse Effect.
(iii) Except as set forth in Schedule 4.12(b)(iii) of the Reckson
Disclosure Schedule, there are no present or, to the knowledge of Reckson,
past, actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the Release or presence of any Hazardous
Material that could form the basis of any Environmental Claim against
Reckson or any of its Subsidiaries or, to the knowledge of Reckson, against
any Person whose liability for any Environmental Claim Reckson or any of its
Subsidiaries has or may have retained or assumed either contractually or by
operation of law that would, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
SECTION 4.13 REAL PROPERTY.
(a) For purposes of this Agreement, "RECKSON PERMITTED LIENS" means (i)
mechanics', carriers', workers', repairers', materialmen's, warehousemen's and
other similar Liens arising or incurred in the ordinary course of business for
sums not yet due and payable and such Liens as are being contested by Reckson in
good faith, (ii) Liens arising or resulting from any action taken by the
Company, (iii) matters that would be disclosed by an accurate survey or
inspection of the Reckson Real Property, (iv) Liens for current Taxes not yet
due or payable, (v) any covenants, conditions, restrictions, reservations,
rights, Liens, easements, encumbrances, encroachments and other matters
affecting title which are shown as exceptions on Reckson's title insurance
policies and/or title commitments or reports which have been made available to
the Company, (vi) any other covenants, conditions, restrictions, reservations,
rights, non-monetary Liens, easements, encumbrances, encroachments and other
matters affecting title which would not individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect and (vii) matters set
forth in Schedule 4.13(a) of the Reckson Disclosure Schedule. "RECKSON LEASES"
means the real property leases, subleases, licenses and use or occupancy
agreements pursuant to which Reckson or any of its Active Subsidiaries is the
lessee, sublessee, licensee, user or occupant of real property other than
Reckson Owned Real Property, or interests therein necessary for the conduct of,
or otherwise material to, the business of Reckson and its Subsidiaries as it is
currently conducted. "RECKSON LEASED REAL PROPERTY" means all interests in real
property pursuant to the Reckson Leases. "RECKSON OWNED REAL PROPERTY" means the
real property owned in fee by Reckson and its Subsidiaries necessary for the
conduct of, or otherwise material to, the business of Reckson and its
Subsidiaries as it is currently conducted. "RECKSON REAL PROPERTY" means Reckson
Owned Real Property and Reckson Leased Real Property.
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(b) Schedule 4.13(b) of the Reckson Disclosure Schedule contains a complete
and correct list of all Reckson Owned Real Property setting forth information
sufficient to identify specifically such Reckson Owned Real Property. Reckson
and its Subsidiaries have good, valid and insurable (at commercially reasonable
rates) title to the Reckson Owned Real Property, free and clear of any Liens
other than Reckson Permitted Liens.
(c) Schedule 4.13(c) of the Reckson Disclosure Schedule contains a complete
and correct list of all the Reckson Leased Real Property and Reckson Leases.
Except for such exceptions as would not, in the aggregate, have a Material
Adverse Effect (i) each Reckson Lease is valid and binding upon Reckson and its
Subsidiaries and in full force and effect and grants the lessee under the Lease
the exclusive right to use and occupy the premises and (ii) either Reckson or
its Subsidiaries has good and valid title to the leasehold estate or other
interest created under the Reckson Leases. To the knowledge of Reckson, no
non-monetary defaults exist under the Reckson Leases which, individually or in
the aggregate, would have a Material Adverse Effect.
(d) The use and operation of the Reckson Real Property in the conduct of the
business of Reckson and its Subsidiaries does not violate any instrument of
record or agreement affecting the Reckson Real Property, except for such
violations that, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect.
(e) To the best knowledge of Reckson, valid policies of title insurance have
been issued insuring the applicable Reckson's or its Subsidiary's fee simple
title to the Reckson Owned Real Property owned by it, subject only to Reckson
Permitted Liens, except where the failure of such policies to be in full force
and effect would not reasonably be expected, in the aggregate, to have a
Material Adverse Effect. To the best knowledge of Reckson, such policies are, at
the date hereof, in full force and effect, except where the failure to have such
valid policies of title insurance would not reasonably be expected, in the
aggregate, to have a Material Adverse Effect. To the best knowledge of Reckson,
no material claim has been made against any such policy.
(f) Except as provided in Schedule 4.13(f) of the Reckson Disclosure
Schedule, Reckson and its Subsidiaries have no knowledge (i) that any
certificate, permit or license from any Governmental Entity having jurisdiction
over any of the Reckson Real Property or any agreement, easement or other right
which is necessary to permit the lawful use and operation of the buildings and
improvements on any of the Reckson Real Property or which is necessary to permit
the lawful use and operation of all driveways, roads and other means of egress
and ingress to and from any of the Reckson Real Property has not been obtained
and is not in full force and effect, or of any pending threat of modification or
cancellation of any of same which would have a Material Adverse Effect, (ii) of
any written notice of any violation of any federal, state or municipal law,
ordinance, order, regulation or requirement having a Material Adverse Effect
issued by any Governmental Entity, (iii) of any structural defects relating to
any Reckson Real Property which would have a Material Adverse Effect, (iv) of
any Reckson Real Property whose building systems are not in working order so as
to have a Material Adverse Effect, or (v) of any physical damage to any Reckson
Real Property which would have a Material Adverse Effect for which there is no
insurance in effect covering the cost of the restoration.
(g) Neither Reckson nor any of its Subsidiaries has received any written or
published notice that is required to be disclosed in the Reckson SEC Documents
and is not disclosed therein to the effect that (i) any condemnation proceedings
are pending or threatened with respect to any Reckson Real Property or (ii) any
zoning, building or similar law, code, ordinance, order or regulation is or will
be violated by the continued maintenance, operation or use of any buildings or
other improvements on any Reckson Real Property or by the continued maintenance,
operation or use of the parking areas, except for such notices that,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect.
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(h) The rent roll set forth in Schedule 4.13(h) of the Reckson Disclosure
Schedule (the "RECKSON RENT ROLL") lists each Reckson Space Lease (including the
square footage of the leased premises (if set forth in the subject Reckson Space
Lease)) in effect as of the date hereof. "RECKSON SPACE LEASE" means each lease
or other right of occupancy affecting or relating to a property in which Reckson
or its Subsidiaries (or an entity in which it directly or indirectly has an
interest) is the landlord, either pursuant to the terms of a lease agreement or
as successor to any prior landlord. Except for discrepancies that, either
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect, all information set forth in Reckson Rent Roll is true,
correct and complete as of the date of this Agreement.
(i) No default exists by Reckson or its Subsidiaries under any Reckson Space
Lease, except for such defaults as would, individually or in the aggregate, not
reasonably be expected to have a Material Adverse Effect. Except as set forth in
Schedule 4.13(i) of the Reckson Disclosure Schedule, to Reckson's knowledge, no
tenant is in material default, and no condition or event exists which with the
giving of notice or the passage of time, or both would constitute a material
default by any tenant under any Reckson Space Lease, except for such defaults
that would not, individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect.
SECTION 4.14 LITIGATION. Except as set forth in either Reckson SEC Documents
or in Schedule 4.14 of the Reckson Disclosure Schedule or otherwise fully
covered by insurance, there is no action, suit or proceeding pending against, or
to the knowledge of Reckson threatened against, Reckson or any Subsidiary of
Reckson or any of their respective properties before any court or arbitrator or
any Governmental Entity which (i) is pending on the date of this Agreement and
seeks to prevent or delay the Transactions or challenges any of the terms or
provisions of this Agreement or seeks material damages in connection therewith
("DEAL LITIGATION") or (ii) would reasonably be expected to have a Material
Adverse Effect.
SECTION 4.15 FINDERS' FEES. Except for Salomon Smith Barney, Inc., whose fee
will be paid by Reckson, there is no investment banker, broker, finder or other
intermediary that might be entitled to any fee or commission in connection with
or upon consummation of the Transactions based upon arrangements made by or on
behalf of Reckson or Buyer.
SECTION 4.16 SHARE OWNERSHIP; OTHER OWNERSHIP. Other than the shares of
Company Preferred Stock acquired in the Initial Sale, neither Reckson nor Buyer
beneficially owns any shares of capital stock of the Company. Since January 1,
1997, Reckson and Buyer have not acquired any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business trust
or other entity which is, or will be, required to be reported by Reckson in a
report to the SEC and which has not been so reported.
SECTION 4.17 INVESTMENT COMPANY ACT OF 1940. Neither Reckson, Buyer nor any
of their Subsidiaries is, or at the Effective Time will be, required to be
registered under the 1940 Act.
SECTION 4.18 HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976. For
purposes of determining compliance with the HSR Act, Reckson confirms that the
conduct of its business consists solely of investing in, owning and operating
real estate for the benefit of its stockholders.
SECTION 4.19 FINANCING. Reckson has provided, or will provide to Buyer at
the Effective Time, the funds necessary, when taken together with cash of the
Company available on the date hereof and on the Closing Date, to (i) pay the
cash portion of the Merger Consideration, (ii) pay all fees and expenses
required to be paid by the Buying Entities and the Company in connection with
the Merger and the financing of the Transactions, (iii) perform Reckson's
obligations hereunder and the obligations of the Surviving Entity hereunder and
(iv) provide the Surviving Entity with adequate working capital following the
Effective Time (the "FINANCING").
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SECTION 4.20 AUTHORIZATION FOR CLASS B STOCK. Reckson has taken all
necessary action to permit it to issue the shares of Class B Stock required to
be issued by it pursuant to this Agreement and the shares of Reckson Common
Stock issuable upon conversion thereof. Shares of Class B Stock to be issued
pursuant to this Agreement, and the shares of Reckson Common Stock issuable upon
conversion thereof, will, when issued, be validly issued, fully paid and
nonassessable, and no Person will have any preemptive right of subscription or
purchase in respect thereof. Shares of Class B Stock to be issued pursuant to
this Agreement, and the shares of Reckson Common Stock issuable upon conversion
thereof, will, when issued, be registered under the Securities Act and the
Exchange Act and registered or exempt from registration under any applicable
state securities laws and will, when issued, be listed on the NYSE, subject to
official notice of issuance.
SECTION 4.21 BOARD RECOMMENDATION. The Board of Directors of Reckson, at a
meeting duly called and held, has (a) determined that this Agreement and the
Transactions, taken together, including both assuming that the Share Issuance
occurs and assuming that it does not occur, are advisable and in the best
interests of the stockholders of Reckson; and (b) resolved to recommend that the
stockholders of Reckson approve, in connection with the Merger, the issuance of
only Class B Stock as the non-cash portion of the Merger Consideration (the
"SHARE ISSUANCE").
SECTION 4.22 REQUIRED VOTE OF RECKSON STOCKHOLDERS. The approval by a
majority of votes cast at the Reckson Special Meeting is required under the
rules of the NYSE to approve the Share Issuance; PROVIDED THAT, the total vote
cast on the Share Issuance represents over 50% in interest of all securities of
Reckson entitled to vote on the Share Issuance (the "SHARE ISSUANCE APPROVAL").
No other vote of the stockholders of Reckson or holders of Reckson OP Units is
required by law, the rules of the NYSE, the charter or by-laws of Reckson, the
Amended and Restated Agreement of Limited Partnership of Reckson OP, as amended
and supplemented or otherwise in order for Reckson to consummate the Merger and
the transactions contemplated hereby.
SECTION 4.23 OPINION OF FINANCIAL ADVISOR. The Board of Directors of Reckson
has received the opinion of Salomon Smith Barney, Inc., dated the date of this
Agreement, to the effect that, as of such date, the Merger Consideration is fair
to Reckson from a financial point of view. A copy of the written opinion of
Salomon Smith Barney, Inc. will be delivered to the Company as soon as
practicable after the date of this Agreement.
SECTION 4.24 BUYER'S OPERATIONS. Buyer has been formed by Reckson solely to
enter into this Agreement and consummate the Transactions and has not engaged in
any business activities or conducted any operations other than in connection
with this Agreement and the Transactions.
SECTION 4.25 SURVIVING ENTITY AFTER THE MERGER. At and immediately after the
Effective Time, and after giving effect to the Merger, the Financing and the
other Transactions (and any changes in Reckson's, Reckson OP's and the Surviving
Entity's assets and liabilities as a result thereof), each of Reckson, the
Surviving Entity and Reckson OP will not (i) be insolvent (either because its
financial condition is such that the sum of its debts is greater than the fair
value of its assets or because the present fair saleable value of its assets
will be less than the amount required to pay its probable liabilities on its
debts as they mature), (ii) have unreasonably small capital with which to engage
in its business or (iii) have incurred or plan to incur debts beyond its ability
to pay as they mature.
SECTION 4.26 RECKSON AND BUYER KNOWLEDGE. Without limiting the provisions of
the letter referred to in Section 5.1(u) hereof, Reckson, Reckson OP and Buyer
represent that they are aware of the information and planned actions set forth
on Schedule 5.1 of the Company Disclosure Schedule and consent thereto.
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ARTICLE V
COVENANTS
SECTION 5.1 CONDUCT OF THE COMPANY. From the date hereof until the Effective
Time, the Company and its Subsidiaries shall conduct their business in the
ordinary course and in substantially the same manner as heretofore conducted and
shall use their reasonable best efforts, consistent with the constraints set
forth below, to preserve intact their business organizations and relationships
with third parties and to keep available the services of their present officers
and employees. Without limiting the generality of the foregoing, other than (i)
as set forth in Schedule 5.1 of the Company Disclosure Schedule, (ii) as
specifically contemplated by this Agreement and (iii) with the written consent
of Reckson (provided that Reckson shall be deemed to have given its written
consent to any transaction as to which the Company has given Reckson written
notice and as to which Reckson does not object in writing within five (5)
business days after receipt of such notice), from the date of hereof until the
Effective Time, the Company shall, and shall cause each of its Subsidiaries to:
(a) confer on a regular basis with one or more representatives of Reckson to
report operational matters of materiality and any proposals to engage in
material transactions;
(b) promptly notify Reckson after becoming aware of any material change in
the condition (financial or otherwise), business, properties, assets,
liabilities or the normal course of its business or in the operation of its
properties, or of any material governmental complaints, investigations or
hearings (or communications indicating that the same may be contemplated);
(c) promptly deliver to Reckson true and correct copies of any report,
statement or schedule filed with the SEC subsequent to the date of this
Agreement;
(d) duly and timely file, after Reckson's prior review (so long as such
review does not interfere with such timely filing, assuming that the Company
used its reasonable best efforts to give Reckson at least 5 business days prior
review time), in the case of Material Tax Returns (as defined hereafter), all
reports, tax returns and other documents required to be filed with federal,
state, local and other authorities, subject to extensions permitted by law,
provided the Company notifies Reckson that it is availing itself of such
extensions and provided such extensions do not adversely affect the Company's
status as a qualified REIT under the Code; PROVIDED, HOWEVER, that in no event
shall the Company or any of its Subsidiaries file any such report, tax return or
other document that takes or asserts a position inconsistent with the Company's
qualification as a REIT. As used herein, "MATERIAL TAX RETURNS" shall mean all
federal, state and local income tax returns and, the Maryland Personal Property
Tax Return and the New York State and City Real Estate Property Tax Returns;
(e) not make or rescind any express or deemed election relative to Taxes
(unless required by law or necessary to preserve the Company's status as a REIT
or the status of any noncorporate Subsidiary of the Company as a partnership for
federal income Tax purposes or as a Qualified REIT Subsidiary under section
856(i) of the Code, as the case may be);
(f) not declare, set aside or pay any dividend (other than regular quarterly
dividends, the Special Dividend or regular distributions pursuant to the Company
Operating Partnership Agreement (or as necessary to maintain REIT status)) or
other distribution with respect to any shares of stock of the Company or Company
OP Units, or any repurchase, redemption or other acquisition by the Company or
any Subsidiary of the Company of any outstanding shares of stock or other equity
securities of, or other ownership interests in, the Company;
(g) not issue or sell shares of Company Common Stock or any securities
convertible into or exchangeable or exercisable for, or any rights, warrants or
options to acquire any such shares of Company Common Stock except for the
issuance of (i) shares of Company Common Stock issued pursuant to Company
stock-based benefits and options plans in accordance with their terms as of the
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date of this Agreement and (ii) shares of stock upon the exercise, exchange or
conversion of securities, rights, warrants and options outstanding on the date
of this Agreement or referred to in clause (i) above;
(h) not amend any material term of any outstanding security issued by the
Company or any Subsidiary of the Company;
(i) not acquire, enter into any option to acquire, or exercise an option or
other right or election or enter into any Commitment (including any lease or
amendment thereto), for the acquisition of, any real property or other
transaction (but excluding Commitments referred to in the budget attached as
Schedule 5.1(i) of the Company Disclosure Schedule) involving payments to or by
the Company in excess of $75,000 or which is not included in such budget,
encumber assets or commence construction of, or enter into any Commitment to
develop or construct, other real estate projects;
(j) not amend the Articles of Incorporation, or the Company By-Laws, or the
articles or certificate of incorporation, bylaws, code of regulations,
partnership agreement, operating agreement or joint venture agreement or
comparable charter or organization document of any Active Subsidiary of the
Company;
(k) grant no options or other right or commitment relating to any Company
Securities, or any other security the value of which is measured by shares of
Company Common Stock, or any security subordinated to the claim of its general
creditors;
(l) not pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business consistent with
past practice or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent consolidated financial
statements (or the notes thereto) of the Company included in the Company SEC
Documents;
(m) not settle any tax certiorari proceeding with respect to the Company
without the written consent of Reckson and Buyer (which consent shall not be
unreasonably withheld or delayed);
(n) except (1) in order to pay dividends permitted pursuant to this
Agreement and to pay transaction expenses related to the Transactions or (2) to
finance an acquisition permitted by clause (r) below (which is in accordance
with the budget attached hereto as Schedule 5.1(i) of the Company Disclosure
Schedule), not incur, assume or guarantee by the Company or any Subsidiary of
the Company any indebtedness for borrowed money;
(o) except in connection with a transaction that is permitted by the budget
attached as Schedule 5.1(i) to the Company Disclosure Schedule, not create or
assume by the Company or any Subsidiary of the Company any Lien on any asset
other than Company Permitted Liens and Liens which, in the aggregate, do not
have and could not reasonably be expected to have a Material Adverse Effect;
(p) maintain its books and records in accordance with GAAP consistently
applied and not change any method of accounting or accounting practice by the
Company or any Subsidiary of the Company, except for any such change required by
reason of a change in GAAP;
(q) except as set forth in Schedule 5.1(q) of the Company Disclosure
Schedule, not (i) grant any severance or termination pay to any director,
officer or employee of the Company or any Subsidiary of the Company, (ii) enter
into any employment, deferred compensation or other similar agreement (or any
amendment to any such existing agreement) with any director, officer or employee
of the Company or any Subsidiary of the Company, (iii) increase the benefits
payable under any existing severance or termination pay policies or employment
agreement, (iv) increase the compensation, bonus or other benefits payable to
any director, officer or employee of the Company or any Subsidiary of the
Company or (v) adopt any new plan, program or arrangement that would constitute
a deferred
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compensation, incentive compensation and equity compensation plan; "welfare"
plan, fund or program (within the meaning of section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")); "pension" plan,
fund or program (within the meaning of section 3(2) of ERISA); each employment,
termination or severance agreement; and each other employee benefit plan, fund,
program, agreement or arrangement, in each case, that is sponsored, maintained
or contributed to or required to be contributed to by the Company or by any
trade or business, whether or not incorporated (each, an "ERISA AFFILIATE"),
that together with the company would be deemed a "single employer" within the
meaning of section 4001(b) of ERISA, or to which the Company or an ERISA
Affiliate is party, whether written or oral, for the benefit of any employee or
former employee of the company or any United States Subsidiary of the Company;
(r) except as permitted by Section 5.4 hereof, not consummate (or enter into
any agreement or agreement in principle with respect to or take any steps to
facilitate) any acquisition of stock or assets or operations of another entity,
other than any acquisition by the Company in respect of which the cash
consideration paid by the Company is less than $100,000 individually and for all
such transactions taken together, the aggregate cash consideration paid by the
Company is less than $1,000,000;
(s) not sell, lease (or amend any existing lease), mortgage, subject to Lien
or otherwise dispose of any Company Real Property, except in connection with
transactions as contemplated by the budget that is attached as Schedule 5.1(i)
of the Company Disclosure Schedule or that does not involve any sale, lease,
mortgage, Lien or disposition in excess of 7,500 square feet;
(t) not make any loans, advances or capital contributions to, or investments
in, any other Person, other than loans, advances and capital contributions to
Subsidiaries of the Company in existence on the date hereof;
(u) conduct its operations on or after the date hereof in conformity with
the requirements for taxation as a REIT within the meaning of Section 856 of the
Code; PROVIDED, HOWEVER, that this covenant shall be deemed satisfied if the
Company conducts its operations as described in the letter dated as of the date
hereof as signed by the Company and Reckson;
(v) not acquire or enter into any option or agreement to acquire, any real
property or other transaction involving in excess of $100,000 which is not
included in the budget that is attached as Schedule 5.1(i) of the Company
Disclosure Schedule;
(w) not make any expenditure (capital or otherwise) in excess of $100,000 or
enter into any Commitment for any such expenditure, whether or not set forth in
Schedule 5.1(i) of the Company Disclosure Schedule, except in connection with
the following (all of which are permitted): (I) the commitment fee for the
extension of the currently existing mortgage on 810 Seventh Avenue by Credit
Suisse First Boston (not to exceed $1.5 million), (II) the development of Phase
I of Deer Valley Corporate Center (a/k/a Loopland) (in accordance with the
development budget prepared by the Company in connection with such project set
forth in Schedule 5.1(w) of the Company Disclosure Schedule and not to exceed
$11.3 million in the aggregate), (III) expenses of the Merger, the Initial Sale
and the related transactions or the defense or prosecution of any action,
proceeding or litigation, (IV) the annual employee bonuses for 1998 (not to
exceed $1.4 million in the aggregate) and certain severance payments as
disclosed in Schedule 3.3(a) of the Company Disclosure Schedule, and (V) such
expenditures or Commitments which are of an emergency nature and to which prompt
response is necessary in the proper performance, operation and maintenance of a
building of its type (and the Company shall give prompt written notice to
Reckson of any action taken pursuant to this clause (V));
(x) comply with Section 3.1 of the Stock Purchase Agreement; or
(y) not authorize any of, or commit or agree to take any of, the foregoing
actions except as otherwise permitted by this Agreement.
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PROVIDED THAT as soon as reasonably practicable, the Buying Entities shall
appoint an individual as the representative of the Buying Entities for all
purposes of this Section 5.1; PROVIDED FURTHER THAT the Buying Entities shall be
entitled to change the identity of such representative upon notice to the
Company of such change.
In connection with Reckson's monitoring of the Company's operations and
planning for an orderly transition of the business after the date hereof and
Reckson's granting consents to Company action, the Company shall provide to
Reckson information concerning the Company's current operations, reasonably
requested by Reckson so long as doing so does not disrupt or interfere with the
conduct of the Company's normal operations; PROVIDED THAT any such request for
information shall be made in writing to the chief financial officer of the
Company, shall be limited to information available without undue hardship; and
PROVIDED FURTHER that without the consent of the chief financial officer of the
Company no employee or representative of Reckson (including any of its
accountants and advisors) shall be physically present at any of the Company's
properties or executive offices. Notwithstanding the foregoing, the Company will
deliver to Reckson (i) all monthly operating and executive summary reports
(including budget vs. actual analyses and, to the extent available, accompanying
commentary) prepared consistent with the Company's past practice, such reports
to be delivered to Reckson no later than 45 days after the end of the month
covered by such report, (ii) all financial data and reports provided to lenders
by the Company or its Subsidiaries, such data and reports to be delivered to
Reckson no later than provided to such lenders, (iii) and such other management
reports and financial information that is requested by Reckson and is available
without undue hardship through the Company's existing accounting and financial
reporting system (including, without limitation, leases, lease amendments or
supplements, and occupancy ledger, aged accounts receivable and related
reports), and (iv) those documents solely relating to the Company Real Property
located in Arizona and Florida which had been placed in the Company's diligence
room located at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919
Third Avenue, New York, New York; with respect to subclauses (iii) and (iv) of
this paragraph, such information and reports to be delivered no more than 5
business days after requested.
If any information requested by Reckson from the Company in accordance with
the preceding paragraph is not provided within the time periods specified
therein, Reckson may send notice of such failure to the chairman of the Board of
Directors of the Company (the "CHAIRMAN") specifying the information requested.
The Chairman shall use his reasonable best efforts to arrange for such
information to be provided within five business days of his receipt of such
notice unless he determines in his good faith judgment that a request is not in
accordance with the preceding paragraph. If for any reason the Chairman does not
arrange for such information to be provided within five business days of his
receipt of such notice, Reckson may send notice to the Board of Directors of the
Company requesting the formation of an independent committee of directors (the
"COMMITTEE") to oversee all responses to further requests for information. If
the Committee determines in its good faith judgment that a request is not in
accordance with the foregoing paragraph, the Company will not be obligated to
provide the information. If Reckson delivers more than three notices to the
Chairman pursuant to this Section 5.1, the Chairman shall thereafter be
responsible for arranging the Company's response to all further requests by
Reckson for information in accordance with the procedures and time periods
specified in the preceding paragraph. If the Chairman fails to timely arrange
for such information to be provided in accordance with the preceding paragraph,
Reckson may request the formation of the Committee as set forth above (if not
previously formed) and that the Committee provide such information subject to
the procedures and time periods specified in the immediately preceding sentence.
The Company acknowledges that Reckson intends to use information provided to
it in accordance with the foregoing to prepare to manage the assets of the
Company, including by installing certain property operational information on
Reckson's management system; PROVIDED, HOWEVER, it is expressly
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agreed and understood that Tower shall provide such information only in the form
in which it currently prepares that information and shall have no obligation to
provide or to assist in preparing information in the form used or desired to be
used by Reckson that would require undue effort.
On or before December 23, 1998, the Company shall deliver to Reckson (i) an
amended federal income tax return for its taxable year ending December 31, 1997
(the "AMENDED RETURN") and (ii) the schedule required by Section 856(c)(6)(A) of
the Code (the "SCHEDULE") for such taxable year. Reckson shall have the right to
review the Amended Return, and to review the Schedule. On or before December 30,
1998, Reckson shall notify the Company, in writing, as to whether or not it
approves the Schedule. If Reckson approves the Schedule, the Company shall file
the Amended Return with the Schedule attached on or before December 31, 1998. If
Reckson does not approve the Schedule, then Reckson and the Company shall work
in good faith to resolve any differences pertaining to the Schedule through
January 18, 1999 (the "INTERIM PERIOD"). If such differences cannot be resolved
during the Interim Period, the Amended Return, with the Schedule attached, shall
be filed no later than January 25, 1999. The Schedule attached to the Amended
Return shall be the Schedule prepared by the Company, with any modifications
agreed to by the Company during the Interim Period.
SECTION 5.2 CONDUCT OF RECKSON.
(a) Reckson covenants and agrees that it will not establish a record date
for voting at a meeting of its stockholders or written consent of its
stockholders in lieu of a meeting, a purpose of which meeting or consent in lieu
of meeting is to approve a transaction (other than the Share Issuance) or
recapitalization requiring the affirmative vote of Reckson's stockholders unless
such record date is after the Standstill Date (as defined hereafter). Reckson
shall not commence, or be a party to an agreement providing for, or recommend
acceptance of, a tender or exchange offer for shares of Reckson Common Stock if
the earliest date on which such offer can no longer be accepted by a Reckson
stockholder is prior to the Standstill Date. Notwithstanding the foregoing,
Reckson may, prior to the Standstill Date, (a) execute an agreement requiring it
to convene a Special Meeting of its stockholders or (b) commence, or be a party
to an agreement providing for, or recommend acceptance of, a tender or exchange
offer for shares of Reckson Common Stock, so long as the foregoing requirements,
to the extent applicable, are satisfied. As used herein, "STANDSTILL DATE" shall
be the earlier of (i) tenth business day after the Exchange Agent has commenced
delivering the Merger Consideration to holders of each of shares of Company
Common Stock and Company OP Units or (ii) 30 days after the Outside Termination
Date.
(b) Reckson will comply with Section 3.1 of the Amended and Restated
Operating Agreement (the "METROPOLITAN AGREEMENT") of Metropolitan Partners LLC
(a copy of which has been delivered to the Company). In addition, Reckson will
not deliver a written notice to Crescent pursuant to such Section 3.1, requiring
it to fund into escrow its $75 million (the "FUNDING NOTICE"), unless (i) at the
time of delivery of the Funding Notice the conditions set forth in Sections
6.1(b), (c), (d) and (e) hereof and Section 6.3(f) hereof shall have been
satisfied (PROVIDED, THAT, Reckson's first such failure to comply with this
subclause (i) shall not be deemed to be a breach of this covenant) and (ii) with
respect to the fourth such Funding Notice (if there is a fourth such Notice),
Reckson shall not deliver such Notice without the prior written consent of the
Company, which consent shall not be unreasonably withheld. Reckson shall not
agree to any amendment of the Metropolitan Agreement that adversely affects its
rights under the aforesaid Section 3.1 with respect to such $75 million
contribution and such Funding Notices without the written consent of the
Company. Reckson shall deliver Funding Notices to Crescent at times intended, in
its good faith judgment, to provide for the $75 million contribution to be made
at or prior to the Closing.
(c) Prior to the earlier of (i) the initial filing with the SEC of the Form
S-4 Registration Statement and (ii) the initial filing with the SEC of the Joint
Proxy Statement, the Board of Directors of Reckson shall adopt the Resolution.
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SECTION 5.3 STOCKHOLDERS' MEETINGS; JOINT PROXY MATERIAL.
(a) The Company shall, in accordance with applicable law and the Articles of
Incorporation and the Company By-laws, duly call, give notice of, convene and
hold a special meeting of its stockholders (the "COMPANY SPECIAL MEETING") as
promptly as practicable after the date hereof for the purpose of considering and
taking action upon this Agreement and the Merger and such other matters as may
in the reasonable judgment of the Company be appropriate for consideration at
the Company Special Meeting. The Joint Proxy Statement shall, subject to the
proviso set forth below, include the recommendation of the Board of Directors of
the Company that the stockholders of the Company vote in favor of approval and
adoption of this Agreement and the Merger; PROVIDED THAT the Board of Directors
of the Company may withdraw, modify or change such recommendation if it has
determined in good faith, after consultation with outside legal counsel, that
the failure to withdraw, modify or change such recommendation would present a
reasonable risk of a breach of the duties of the Board of Directors of the
Company under applicable law.
(b) Reckson shall, in accordance with applicable law and the charter and
by-laws of Reckson, duly call, give notice of, convene and hold a special
meeting of its stockholders (the "RECKSON SPECIAL MEETING") as promptly as
practicable after the date hereof for the purpose of considering and taking
action upon the Share Issuance in connection with the Merger and such other
matters as may in the reasonable judgment of Reckson be appropriate for
consideration at the Reckson Special Meeting. The Joint Proxy Statement shall
include the recommendation of the Board of Directors of Reckson that the
stockholders of Reckson vote in favor of approval and adoption of the Share
Issuance in connection with the Merger; PROVIDED, HOWEVER, that the sole remedy
in the event that the Joint Proxy Statement does not include such recommendation
shall be the issuance of the Notes in accordance with Article I hereof if the
Share Issuance Approval is not obtained. At Closing, the president and chief
financial officer of Reckson will certify to the Company the results of the
Reckson Special Meeting so as to enable the Company to determine whether the
Share Issuance has been obtained.
(c) (i) The Company and Reckson shall, as soon as practicable following the
date of this Agreement, prepare and file with the SEC, shall use reasonable best
efforts to have cleared by the SEC and shall thereafter mail to stockholders of
the Company on the one hand, and to the stockholders of Reckson, on the other
hand, as promptly as practicable, a joint proxy statement and a form of joint
proxy, in connection with the vote of the Company's stockholders, on the one
hand, and Reckson's stockholders on the other hand, with respect to, in the case
of the Company, this Agreement and the Merger, and, in the case of Reckson, the
Share Issuance (such joint proxy statement, together with any amendments thereof
or supplements thereto, in each case in the form or forms mailed to the
Company's stockholders and Reckson's stockholders is herein called the "JOINT
PROXY STATEMENT") and (ii) otherwise comply in all material respects with all
legal requirements applicable to the Company Special Meeting and the Reckson
Special Meeting. The Company and Reckson shall coordinate and cooperate with one
another with respect to the timing of the Company Special Meeting and the
Reckson Special Meeting and shall endeavor to hold such Meetings on the same
day, unless the SEC objects thereto.
(d) The Company and Reckson shall notify one another promptly of the receipt
of any comments from the SEC or its staff and or any government officials for
amendments or supplements to the Joint Proxy Statement or for additional
information and will supply the other with copies of all correspondence between
the Company or any of its representatives, or Reckson or any of its
representatives, as the case may be, on the one hand, and the SEC, or its staff
or any other government official, on the other hand, with respect to the Joint
Proxy Statement. The Joint Proxy Statement shall comply in all material respects
with all applicable requirements of law. Whenever any event occurs which is
required to be set forth in an amendment or supplement to the Joint Proxy
Statement, the Company and Reckson shall promptly inform one another of such
occurrence and
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cooperate in filing with the SEC or its staff or any other governmental
officials, and/or mailing to stockholders of the Company and Reckson, such
amendment or supplement.
SECTION 5.4 NO SOLICITATION OF TRANSACTIONS BY THE COMPANY.
(a) From the date hereof until the termination of this Agreement, the
Company shall not (whether directly or indirectly through advisors, agents or
other intermediaries), and the Company shall use its reasonable best efforts to
ensure that the respective officers, directors, advisors, representatives or
other agents of the Company will not, directly or indirectly, (i) solicit,
initiate or encourage any Company Acquisition Proposal (as defined hereafter) or
(ii) engage in discussions (other than to disclose the provisions of this
Agreement) or negotiations with, or disclose any non-public information relating
to the Company or its Subsidiaries or afford access to the properties, books or
records of the Company or its Subsidiaries to, any Person that has made, or has
indicated its interest in making, a Company Acquisition Proposal; PROVIDED THAT,
if the Company's Board of Directors determines in good faith, after consultation
with outside legal counsel, that the failure to engage in such negotiations or
discussions or provide such information would present a reasonable risk of a
breach of the duties of the Board of Directors of the Company under applicable
law, the Company may furnish information with respect to the Company and its
Subsidiaries and participate in negotiations and discussions and enter into
agreements regarding such Company Acquisition Proposal with a third party
("COMPANY ACQUISITION AGREEMENTS"); PROVIDED FURTHER THAT prior to approving or
recommending such a Company Acquisition Proposal or entering into a Company
Acquisition Agreement or withdrawing, amending or modifying its recommendation
of this Agreement and the Transactions, the Company shall (A) notify Reckson in
writing that it intends to approve, recommend or accept such a Company
Acquisition Proposal or enter into such a Company Acquisition Agreement or
withdraw, amend or modify its recommendation, and (B) attach the most current
version of any such Company Acquisition Proposal or Company Acquisition
Agreement to such notice. For purposes of this Agreement, "COMPANY ACQUISITION
PROPOSAL" means any offer or proposal for a merger, consolidation,
recapitalization, liquidation or other business combination involving the
Company or any of its Subsidiaries or the acquisition or purchase of 50% or more
of any class of equity securities of the Company or any of its Subsidiaries, or
any tender offer (including self-tenders) or exchange offer that if consummated
would result in any Person beneficially owning 50% or more of any class of
equity securities of the Company or any of its Subsidiaries, or all or
substantially all of the assets of, the Company and its Subsidiaries, other than
the Transactions. Furthermore, nothing contained in this Section 5.4 shall
prohibit the Company or the Company's Board of Directors from taking and
disclosing to the Company's stockholders a position with respect to a tender or
exchange offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated
under the Exchange Act if failure to so disclose would be inconsistent with its
obligations under applicable law or to make any other disclosures required in
its judgment by applicable law. On the date of this Agreement, the Company shall
immediately terminate discussions, if any, with all third parties relating to a
Company Acquisition Proposal.
SECTION 5.5 ACCESS TO INFORMATION; CONFIDENTIALITY AGREEMENT.
(a) Upon reasonable advance notice, between the date hereof and the
Effective Time, the Company shall (i) provide to Reckson's prospective lenders,
and such lenders' accountants and counsel (collectively, the "LENDERS"), for the
sole purposes of conducting customary diligence in connection with their
obtaining the Financing, reasonable access during normal business hours to the
offices, properties, books and records of the Company and its Subsidiaries, (ii)
furnish to the Lenders such financial and operating data and other information
as such Persons may reasonably request and (iii) instruct the Company's
employees, counsel and financial advisors to fully cooperate with the Lenders in
their investigation of the business of the Company and its Subsidiaries;
PROVIDED THAT all requests for information, to visit properties or facilities or
to interview the Company's employees or agents should be in writing and directed
to and coordinated with the chief financial officer of the Company or such
person or persons as he shall designate; and PROVIDED FURTHER that any
information and documents
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received by Reckson or the Lenders (whether furnished before or after the date
of this Agreement) shall be held in strict confidence in accordance with the
Confidentiality Agreement dated April 20, 1998 between Reckson and the Company
(the "RECKSON CONFIDENTIALITY AGREEMENT"), which shall remain in full force and
effect pursuant to the terms thereof, notwithstanding the execution and delivery
of this Agreement or the termination hereof. Notwithstanding anything to the
contrary in this Agreement, neither the Company nor any of its Subsidiaries
shall be required to disclose any information to Reckson or the Lenders if doing
so would violate any agreement, law, rule or regulation to which the Company or
any of its Subsidiaries is a party or to which the Company or any of its
Subsidiaries is subject.
(b) Upon reasonable advance notice, between the date hereof and the 45(th)
day from the date hereof (except that with respect to specific inquiries and
specific areas of inquiry as to which Reckson has not reasonably cooperated in
responding, until Reckson has reasonably responded to such inquiries) (the
"ACCESS LIMITATION DATE"), the Buying Entities shall (i) give the Company, and
its counsel, financial advisors, auditors and other authorized representatives
(collectively, the "COMPANY'S REPRESENTATIVES"), reasonable access during normal
business hours to the offices, properties, books and records of Reckson and its
Subsidiaries, (ii) furnish to the Company's Representatives such financial and
operating data and other information as such Persons may reasonably request and
(iii) instruct Reckson's employees, counsel and financial advisors to fully
cooperate with the Company in its investigation of the business of Reckson and
its Subsidiaries; PROVIDED THAT (i) all requests for information, to visit
plants or facilities or to interview Reckson employees or agents should be in
writing and directed to and coordinated with the chief financial officer of
Reckson or such person or persons as he shall designate and (ii) that any
request for such information shall be limited to information available without
undue hardship; and PROVIDED FURTHER that any information and documents received
by the Company or the Company's Representatives (whether furnished before or
after the date of this Agreement) shall be held in strict confidence to the same
extent as Reckson is obligated to hold such information relating to the Company
under the Reckson Confidentiality Agreement. Following the Access Limitation
Date and until the Effective Time, the Buying Entities shall provide to the
Company information concerning the Buying Entities' aggregate operations and any
matters which might have a Material Adverse Effect on Reckson, reasonably
requested by the Company so long as doing so does not disrupt or interfere with
the conduct of the Buying Entities' normal operations; PROVIDED, THAT, any such
request for information shall be made in writing to the chief financial officer
of Reckson and shall be limited to information available without undue hardship;
and PROVIDED FURTHER that without the consent of the chief financial officer of
Reckson no employee or representative of the Company (including any of its
accountants and advisors) shall be physically present at any of Reckson's
properties or executive offices. Notwithstanding anything to the contrary
herein, Reckson shall provide after the Access Limitation Date any material
requested by the Company or the Company's Representatives that is reasonably
related to the material supplied before the Access Limitation Date as is
reasonably requested by the Company or the Company's Representatives.
Notwithstanding anything to the contrary in this Agreement, neither Reckson nor
any of its Subsidiaries shall be required to disclose any information to this
Company or the Company's Representatives if doing so would violate any
agreement, law, rule or regulation to which Reckson or any of its Subsidiaries
is a party or to which Reckson or any of its Subsidiaries is subject.
SECTION 5.6 VOTING OF SHARES OF COMPANY PREFERRED STOCK. Each of the Buying
Entities shall vote all shares of securities of the Company entitled to vote,
beneficially owned by it or its affiliates in favor of adoption and approval of
the Merger and this Agreement at the Company Special Meeting.
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SECTION 5.7 DIRECTOR AND OFFICER LIABILITY.
(a) From and after the Effective Time, Buyer shall provide exculpation and
indemnification (including advance of expenses) for each Indemnitee (as defined
hereafter) which is the same as the exculpation and indemnification (including
advance of expenses) provided to such parties by the Company immediately prior
to the Effective Time in the Articles of Incorporation, Company By-Laws or in
its partnership, operating or similar agreement or an agreement between an
Indemnitee and the Company or a Subsidiary of the Company, in each case as in
effect on the date hereof and all of such rights shall survive the Merger and
continue in full force and effect. To the extent permitted by the DLLCA,
advancement of expenses pursuant to this Section 5.7 shall be mandatory rather
than permissive and the Surviving Entity shall advance Costs (as defined in
Section 5.7(b) hereof) in connection with such indemnification.
(b) In addition to the other rights provided for in this Section 5.7 and not
in limitation thereof, for a period of six years and ninety days after the
Effective Time, Buyer shall, and shall cause the Surviving Entity to the fullest
extent permitted by law to, (i) indemnify and hold harmless the individuals who
on or prior to the Effective Time were officers, directors, employees or agents
of the Company and any of its Subsidiaries (the "INDEMNITEES") against all
losses, expenses (including, without limitation, attorneys' fees and the cost of
any investigation or preparation incurred in connection thereof), claims,
damages, liabilities, judgments, or amounts paid in settlement (collectively,
"COSTS") in respect to any threatened, pending or contemplated claim, action,
suit or proceeding, whether criminal, civil, administrative or investigative
arising out of acts or omissions occurring on or prior to the Effective Time
(including, without limitation, in respect of acts or omissions in connection
with this Agreement and the Transactions) (an "INDEMNIFIABLE CLAIM") and (ii)
advance promptly to such Indemnitees all Costs incurred in connection with any
Indemnifiable Claim. In the event any Indemnifiable Claim is asserted or made
within such six-year-and-ninety-day period, all rights to indemnification and
advancement of costs in respect of any such Indemnifiable Claim shall continue
until such Indemnifiable Claim is disposed of or all judgments, orders, decrees
or other rulings in connection with such Indemnifiable Claim are fully
satisfied. The Indemnitees as a group shall be entitled to one counsel of their
choice with respect to each related matter except to the extent there is, in the
opinion of counsel to an Indemnitee, under applicable standards of professional
conduct, a conflict on any significant issue between positions of any two or
more Indemnitees, in which case such Indemnitee shall be entitled to separate
counsel; PROVIDED THAT in all cases, Mr. Feldman shall be entitled to separate
counsel from all other Indemnitees. The fees of such separate counsel shall be
Costs, paid for by the Surviving Entity.
(c) Buyer shall, and shall cause the Surviving Entity to, expressly assume
and honor in accordance with their terms all indemnity agreements listed in
Schedule 5.7 of the Company Disclosure Schedule. For a period of three years and
ninety days after the Effective Time, Buyer shall, and shall cause the Surviving
Entity to, provide officers' and directors' liability insurance in respect of
acts or omissions occurring prior to the Effective Time covering each such
Person currently covered by the Company's officers' and directors' liability
insurance policy on terms with respect to coverage and amount no less favorable
than those of such policy in effect on the date hereof; PROVIDED, HOWEVER, that
in no event shall Buyer or Surviving Entity be required to expend more than an
amount per year equal to 200% of current annual premiums paid by the Company for
such insurance (the "MAXIMUM AMOUNT") to maintain or procure insurance coverage
pursuant hereto (which the Company represents and warrants aggregates currently
to $133,000 per annum); PROVIDED, FURTHER, that if the amount of the annual
premiums necessary to maintain or procure such insurance coverage exceeds the
Maximum Amount, Buyer and Surviving Entity shall maintain or procure, for such
three-year-and-ninety-day period, the most advantageous policies of directors'
and officers' insurance obtainable for an annual premium equal to the Maximum
Amount. In the event that any Indemnitee is entitled to coverage under an
officers' and directors' liability insurance policy pursuant to this Section
5.7(c) and such policy has lapsed, terminated, been repudiated or is otherwise
in breach or default as a result of Buyer's failure to
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maintain and fulfill its obligations pursuant to such policy to the extent
required by as provided in this Section 5.7(c); Buyer shall, and shall cause the
Surviving Entity to, pay to the Indemnitee such amounts and provide any other
coverage or benefits as the Indemnitee shall have received pursuant to such
policy. Buyer agrees that, should the Surviving Entity fail to comply with the
obligations of this Section 5.7, Buyer shall be responsible therefor.
(d) To the fullest extent permitted by applicable law, to the extent Buyer
fails to provide the indemnification contemplated by, or seeks to recover
payments pursuant to, this Section 5.7, the following shall apply: Indemnitee's
entitlement to indemnification and advancement of expenses shall be determined
in a written opinion by Independent Counsel (as defined hereafter) agreed upon
by the Surviving Entity and the Indemnitee. If the Surviving Entity and the
Indemnitee cannot agree, the Independent Counsel shall be appointed by the
American Arbitration Association. If Independent Counsel does not make any
determination respecting Indemnitee's entitlement to indemnification or advance
of expenses hereunder within 90 days after receipt by the Company of a written
request therefor, Independent Counsel shall be discharged and relieved of any
further responsibility in such capacity (subject to the applicable standards of
professional conduct then prevailing) and shall be replaced by a successor, in
the same manner as if originally appointed. As used hereunder "INDEPENDENT
COUNSEL" means a law firm, or a member of a law firm, that is experienced in
matters of corporate law and neither currently is, nor in the five years
previous to its selection or appointment has been, retained to represent (i) the
Company or Indemnitee in any matter material to either such party (other than
with respect to matters concerning the rights of Indemnitee under this Agreement
or of other indemnitees under similar indemnification agreements) or (ii) any
other party to the action or proceeding giving rise to a claim for
indemnification hereunder. Reckson or Buyer shall pay any and all reasonable
fees and expenses of Independent Counsel incurred acting pursuant to this
Section and in any action or proceeding to which it is a party or witness in
respect of its investigation and written report and shall pay all reasonable
fees and expenses incident to the procedures in which such Independent Counsel
was selected or appointed.
(e) Notwithstanding any other provisions hereof, the obligations of the
Company and Buyer contained in this Section 5.7 shall be binding upon the
successors and assigns of Buyer. In the event the Company or Buyer or any of
their respective successors or assigns (i) consolidates with or merges into any
other Person or (ii) transfers all or substantially all of its properties or
assets to any Person, then, and in each case, proper provision shall be made so
that successors and assigns of the Company or the Surviving Entity, as the case
may be, honor the indemnification and expense advance obligations set forth in
this Section 5.7.
(f) The obligations of the Company and Buyer under this Section 5.7 shall
not be terminated or modified in such a manner as to adversely affect any
Indemnitee to whom this Section 5.7 applies without the consent of such affected
Indemnitee (it being expressly agreed that the Indemnitees to whom this Section
5.7 applies shall be third party beneficiaries of this Section 5.7).
(g) Buyer shall, and shall cause the Surviving Entity to, advance promptly
all Costs to any Indemnitee incurred by enforcing the indemnity or other
obligations provided for in this Section 5.7.
(h) Reckson unconditionally and irrevocably guarantees the obligations of
Buyer under this Section 5.7.
SECTION 5.8 REASONABLE BEST EFFORTS; COOPERATION. Upon the terms and subject
to the conditions of this Agreement, each party hereto shall use its reasonable
best efforts (including with respect to the consents set forth in Schedule 5.8
of the Company Disclosure Schedule) to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate the Transactions. The Company
shall use its reasonable best efforts to obtain the consent of The Carlyle Group
to the transfer of the Company's interest in 2800 Associates, L.P. Reckson and
the Company shall meet on a weekly basis (or, more frequently, as
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appropriate) for the purpose of coordinating the Company's operations prior to
Closing. At the Effective Time, Reckson shall, at its expense, cause the
satisfactory repayment and discharge of all indebtedness outstanding (including
accrued interest, premiums, if any, and expense reimbursement, if required)
under the Company's line of credit with Fleet Bank.
SECTION 5.9 CERTAIN FILINGS. The Company and Buyer shall cooperate with one
another (a) in connection with the preparation of the Joint Proxy Statement, (b)
in determining whether any action by or in respect of, or filing with, any
Governmental Entity is required, or any actions, consents, approvals or waivers
are required to be obtained from parties to any material contracts, in
connection with the consummation of the Transactions and (c) in seeking any such
actions, consents, approvals or waivers or making any such filings, furnishing
information required in connection therewith or with the Joint Proxy Statement
and seeking timely to obtain any such actions, consents, approvals or waivers.
SECTION 5.10 [Intentionally Omitted]
SECTION 5.11 PUBLIC ANNOUNCEMENTS. None of the Company, Reckson or Buyer nor
any of their respective affiliates shall issue or cause the publication of any
press release or other public announcement with respect to the Merger, this
Agreement or the other Transactions without the prior consultation with the
other party, except as may be required by law or by any listing agreement with,
or the policies of, a national securities exchange.
SECTION 5.12 FURTHER ASSURANCES. At and after the Effective Time, the
officers and directors of the Surviving Entity will be authorized to execute and
deliver, in the name and on behalf of the Company or Buyer, any deeds, bills of
sale, assignments or assurances and to take and do, in the name and on behalf of
the Company or Buyer, any other actions to vest, perfect or confirm of record or
otherwise in the Surviving Entity any and all right, title and interest in, to
and under any of the rights, properties or assets of the Company acquired or to
be acquired by the Surviving Entity as a result of, or in connection with, the
Merger.
SECTION 5.13 EMPLOYEE MATTERS.
(a) The Buying Entities shall, and shall cause their Subsidiaries to, honor
in accordance with their terms all agreements, contracts, arrangements,
commitments and understandings described in Schedule 5.13 of the Company
Disclosure Schedule.
(b) Except with respect to accruals under any defined benefit pension plans,
Reckson will, or will cause the Surviving Entity and its Subsidiaries to, give
all active employees of the Company who continue to be employed by the Company
as of the Effective Time ("CONTINUING EMPLOYEES") full credit for purposes of
eligibility, vesting and determination of the level of benefits under any
employee benefit plans or arrangements maintained by Buyer, the Surviving Entity
or any Subsidiary of Buyer or the Surviving Entity for such Continuing
Employees' service with the Company or any Subsidiary of the Company to the same
extent recognized by the Company immediately prior to the Effective Time.
Reckson will, or will cause the Surviving Entity and its Subsidiaries to, (i)
waive all limitations as to preexisting conditions exclusions and waiting
periods with respect to participation and coverage requirements applicable to
the Continuing Employees under any welfare plan that such employees may be
eligible to participate in after the Effective Time, other than limitations or
waiting periods that are already in effect with respect to such employees and
that have not been satisfied as of the Effective Time under any welfare plan
maintained for the Continuing Employees immediately prior to the Effective Time,
and (ii) provide each Continuing Employee with credit for any co-payments and
deductibles paid prior to the Effective Time in satisfying any applicable
deductible or out-of-pocket requirements under any welfare plans that such
employees are eligible to participate in after the Effective Time.
(c) Reckson shall not, and shall not permit the Surviving Entity or any of
its Subsidiaries to, at any time prior to 90 days following the date of the
Closing, without complying fully with the notice and
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other requirements of the Worker Adjustment Retraining and Notification Act of
1988 (the "WARN ACT"), effectuate (i) a "plant closing" as defined in the WARN
Act affecting any single site of employment or one or more facilities or
operating units within any single site of employment of the Surviving Entity or
any of its Subsidiaries; or (ii) a "mass layoff" as defined in the WARN Act
affecting any single site of employment of the Surviving Entity or any of its
Subsidiaries; or any similar action under applicable state, local or foreign law
requiring notice to employees in the event of a plant closing or layoff.
(d) At or prior to the Closing, Reckson shall fully and unconditionally
guaranty in accordance with their terms the severance agreements, contracts,
arrangements and commitments and understandings described in Schedule 5.13 of
the Company Disclosure Schedule.
SECTION 5.14 TRANSFER TAXES. The Buying Entities and the Company shall
cooperate in the preparation, execution and filing of all Tax Returns,
questionnaires, applications, or other documents regarding any real property
transfer or gains, sales, use, transfer, value added, stock transfer and stamp
taxes, any transfer, recording, registration and other fees, and any similar
Taxes which become payable in connection with the Transactions (together with
any related interest, penalties or additions thereto, "TRANSFER TAXES"). The
Company or its successor shall pay all Transfer Taxes.
SECTION 5.15 ADVICE OF CHANGES. Each party hereto shall promptly advise the
other parties hereto orally and in writing to the extent it has knowledge of (i)
any representation or warranty made by it contained in this Agreement that is
qualified as to materiality becoming untrue or inaccurate in any respect or any
such representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect, (ii) the failure by it to comply in any
material respect with or satisfy in any material respect any covenant, condition
or agreement to be complied with or satisfied by it under this Agreement, and
(iii) any change or event having a Material Adverse Effect on the Company or on
the truth of its representations and warranties or the ability of the conditions
set forth in Article 7 to be satisfied; PROVIDED, HOWEVER, that no such
notification shall affect the representations, warranties, covenants or
agreements of the parties (or remedies with respect thereto) or the conditions
to the obligations of the parties under this Agreement.
SECTION 5.16 GUARANTY. Reckson hereby agrees to take all actions within
their respective powers to cause Buyer to perform its obligations under this
Agreement.
SECTION 5.17 FORM S-4 REGISTRATION STATEMENT. The Buying Entities shall, as
promptly as practicable following the date of this Agreement, prepare and file
with the SEC a registration statement on Form S-4 (the "FORM S-4 REGISTRATION
STATEMENT"), containing the Joint Proxy Statement and prospectus, in connection
with the registration under the Securities Act, of (i) shares of Class B Stock
to be issued in the Merger assuming that the Share Issuance Approval is obtained
and (ii) shares of Class B Stock, Notes and Guarantees to be issued in the
Merger, assuming that the Share Issuance Approval is not obtained (and with
respect to both clauses (i) and (ii) the shares of Reckson Common Stock issuable
upon conversion of the Class B Stock). The Buying Entities and the Company
shall, and shall cause their accountants and attorneys to, use their reasonable
best efforts to have or cause the Form S-4 Registration Statement declared
effective and the Indenture qualified under the TIA, as promptly as practicable,
including, without limitation, causing their accountants to deliver necessary or
required instruments such as opinions and certificates, and will take any other
action reasonably required or necessary to be taken under federal or state
securities laws or otherwise in connection with the registration process. Prior
to the Closing, Reckson will (i) provide a CUSIP number for the Notes, (ii)
cause the Notes and Guarantees to be rated with the appropriate nationally
recognized rating agencies and (iii) take such other steps required to permit
the Notes to be deposited with the Depository Trust Company.
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SECTION 5.18 BLUE SKY PERMITS. The Buying Entities shall use their
reasonable best efforts to obtain, prior to the effective date of the Form S-4
Registration Statement, all necessary state securities laws or "blue sky"
permits and approvals required to carry out the transactions contemplated by
this Agreement and the Merger and the issuance of the Class B Stock and the
Notes, and will pay all expenses incident thereto.
SECTION 5.19 LISTING. Reckson and Reckson OP shall use their respective
reasonable best efforts (i) to cause the shares of Class B Stock to be issued in
the Merger (and the shares of Reckson Common Stock issuable upon conversion of
the Class B Stock) to be listed on the NYSE, subject to notice of official
issuance thereof, prior to the Closing Date and (ii) to cause the Notes to be
issued in the Merger in the event the Share Issuance Approval is not obtained to
be listed on the American Stock Exchange, Inc., subject to notice of official
issuance thereof, prior to the Closing Date; PROVIDED THAT in connection with
the listing of the Notes, Reckson shall not be obligated to comply with any
requirements for listing on such exchange if such requirements (i) are not
already obligations of Reckson or Reckson OP and (ii) fulfilling or maintaining
such compliance requirements would require materially onerous efforts by Reckson
or Reckson OP.
SECTION 5.20 AFFILIATES. Prior to the Closing, the Company shall deliver to
Buyer a list identifying all Persons who are, at the time this Agreement is
submitted for approval to the stockholders of the Company, "affiliates" of the
Company for purposes of Rule 145 under the Securities Act.
ARTICLE VI
CONDITIONS TO THE MERGER
SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligations of the Company and the Buying Entities to consummate the Merger are
subject to the satisfaction or, to the extent permitted by applicable law, the
waiver on or prior to the Effective Time of each of the following conditions:
(a) this Agreement shall have been adopted by the stockholders of the
Company in accordance with applicable law;
(b) no provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the Merger;
(c) no action or proceeding by any Governmental Entity shall have been
commenced (and be pending), or, to the knowledge of the parties hereto,
threatened, against the Company, Reckson, Reckson OP or Buyer or any of their
respective affiliates, partners, associates, officers or directors, or any
officers or directors of such partners, seeking to prevent or delay the
Transactions or challenging any of the terms or provisions of this Agreement or
seeking material damages in connection therewith;
(d) (i) the Form S-4 Registration Statement shall have become effective
under the Securities Act, and shall not be the subject of any stop order or
proceedings seeking a stop order, and any material "blue sky" and other state
securities laws applicable to the registration and qualification of (A) the
shares of Class B Stock to be issued in the Merger assuming that the Share
Issuance Approval is obtained and (B) the shares of Class B Stock, Notes and
Guarantees to be issued in the Merger assuming that the Share Issuance Approval
is not obtained (and with respect to clauses (A) and (B) the shares of Reckson
Common Stock issuable upon conversion of the Class B Stock) shall have been
complied with and (ii) the Indenture shall have been qualified under the TIA;
and
(e) the shares of Class B Stock to be issued in the Merger (and the shares
of Reckson Common Stock issuable upon conversion of such Class B Stock) shall
have been approved for listing on the NYSE, subject to official notice of
issuance.
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SECTION 6.2 CONDITIONS TO THE COMPANY'S OBLIGATIONS. The obligation of the
Company to consummate the Merger shall be further subject to the satisfaction
or, to the extent permitted by applicable law, the waiver on or prior to the
Effective Time of each of the following conditions:
(a) Reckson, Reckson OP and Buyer shall have performed in all material
respects each of their respective agreements and covenants contained in or
contemplated by this Agreement (other than Section 5.15 hereof) that are
required to be performed by it at or prior to the Effective Time pursuant to the
terms hereof, except for such failures of performance as would not impair in any
non DE MINIMIS respect the value of the Buying Entities, taken together;
(b) the representations and warranties of Reckson, Reckson OP and Buyer
contained in Article IV hereof shall be true and correct in all respects on and
as of the Closing Date (it being understood that, for purposes of this Section
6.2(b), all representations and warranties shall be interpreted without giving
effect to the words "materially" or "material" individually or as it appears in
the term "Material Adverse Effect" or qualifications or exceptions based on such
words), except (i) to the extent such representations and warranties speak as of
an earlier date, in which case they shall be true in all respects as of such
earlier date, (ii) as otherwise contemplated by this Agreement, (iii) as may
result from any actions or transactions by or involving the Company or any of
its affiliates and (iv) to the extent the failure of such representations and
warranties to be true in all respects, individually or in the aggregate, would
not have a Material Adverse Effect. The Company and Reckson agree that,
notwithstanding anything to the contrary in this Agreement, an aggregate effect
or impact involving $40 million or more will be deemed to have or constitute a
Material Adverse Effect and an aggregate effect or impact will not be deemed to
have or constitute a Material Adverse Effect unless it involves $40 million or
more;
(c) the Company shall have received a certificate signed by the chief
operating officer, general partner or managing member, as the case may be, of
each of Reckson, Reckson OP and Buyer, dated the Closing Date, to the effect
that, to such officer's knowledge, the conditions set forth in Sections 6.2(a),
6.2(b) and 6.2(d) hereof have been satisfied or waived;
(d) the Company shall have received a bring-down opinion of Brown & Wood
LLP, counsel to Reckson, dated as of the Closing Date, also covering the period
through the Closing and otherwise substantially in the form of its opinion
referred to in the penultimate recital to this Agreement and previously
delivered to the Company; and
(e) the Tower Articles Supplementary shall have been duly and validly filed
with the Maryland Department.
SECTION 6.3 CONDITIONS TO OBLIGATIONS OF RECKSON AND BUYER. The obligations
of Reckson and Buyer to effect the Merger shall be further subject to the
satisfaction, or to the extent permitted by applicable law, the waiver on or
prior to the Effective Time of each of the following conditions:
(a) the Company shall have performed in all material respects each of its
agreements and covenants contained in or contemplated by this Agreement (other
than Section 5.15 hereof) that are required to be performed by it at or prior to
the Effective Time pursuant to the terms hereof, except for such failures of
performance as would not impair in any non DE MINIMIS respect the value of the
Company to Reckson;
(b) the representations and warranties of the Company contained in Article
III hereof shall be true and correct in all respects on and as of the Closing
Date (it being understood that, for purposes of this Section 6.3(b), all
representations and warranties shall be interpreted without giving effect to the
words "materially" or "material" individually or as it appears in the term
"Material Adverse Effect" or qualifications or exceptions based on such words),
except (i) to the extent such representations and warranties speak as of an
earlier date, they shall be true in all respects as of such earlier date, (ii)
as otherwise contemplated by this Agreement, (iii) as may result from any
actions or transactions by or
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involving either Reckson or Buyer or any of their respective affiliates and (iv)
to the extent the failure of such representations and warranties to be true in
all respects, individually or in the aggregate, would not have a Material
Adverse Effect. The Company and Reckson agree that, notwithstanding anything to
the contrary in this Agreement, an aggregate effect or impact involving $40
million or more will be deemed to have or constitute a Material Adverse Effect
and an aggregate effect or impact will not be deemed to have or constitute a
Material Adverse Effect unless it involves $40 million or more;
(c) Reckson shall have received a certificate signed by the chief executive
officer of the Company, dated the Closing Date, to the effect that, to such
officer's knowledge, the conditions set forth in Sections 6.3(a) and 6.3(b)
hereof have been satisfied or waived;
(d) the Company shall have delivered to Reckson a certificate of Battle
Fowler L.L.P. stating that nothing has come to the attention of Battle Fowler
L.L.P. which would cause it to revoke, rescind or modify in any material respect
its opinion as to certain matters relating to the qualification of the Company
as a REIT, delivered to Reckson and its counsel concurrently with the execution
and delivery of this Agreement, as provided in the forepart of this Agreement;
PROVIDED, HOWEVER, that the foregoing condition shall be deemed satisfied if the
only reason that it would not otherwise be satisfied is the failure of the
Representation Letter to be true and correct at all times since the execution
hereof. Battle Fowler L.L.P. shall have no duty to conduct due diligence between
the date of signing this Agreement and the date of the Closing in delivering the
certification referred to in the preceding sentence;
(e) [Intentionally Omitted;]
(f) those consents, authorizations, orders and approvals of (or filings or
registration with) any governmental commission, board, other regulatory body or
third parties required in connection with the execution, delivery and
performance of this Agreement by the Company set forth in Schedule 6.3(f) of the
Company Disclosure Schedule (which shall not include the financing agreements
related to the properties located at or known as Corporate Center and 2800 North
Central) shall have been obtained.
ARTICLE VII
TERMINATION
SECTION 7.1 TERMINATION. Notwithstanding anything herein to the contrary,
this Agreement may be terminated and the Merger may be abandoned at any time
prior to the Effective Time, whether before or after the parties hereto have
obtained stockholder approval:
(a) by the mutual written consent of the Company and the Buying Entities;
(b) by either the Company, on the one hand, or Reckson and Buyer, on the
other hand, if the Merger has not been consummated by May 31, 1999, or such
other date, if any, as the Company, on the one hand, and the Buying Entities, on
the other hand, shall agree upon (the "OUTSIDE TERMINATION DATE"); PROVIDED THAT
the right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Merger to
occur on or before such date;
(c) by either the Company, on the one hand, or the Buying Entities, on the
other hand, if there shall be any law or regulation that makes consummation of
the Merger illegal or if any judgment, injunction, order or decree enjoining the
Buying Entities or the Company from consummating the Merger is entered and such
judgment, injunction, order or decree shall become final and nonappealable;
(d) by the Buying Entities, (i) upon a material breach of any covenant or
agreement of the Company set forth in this Agreement (other than clauses (i) and
(ii) of the last paragraph of Section 5.1 hereof, which is dealt with in
subsection (j) below) which remains uncured for twenty
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(20) business days after notice of such breach has been delivered by the Buying
Entities to the Company, or (ii) if any representation or warranty of the
Company shall become untrue, in either case such that the conditions set forth
in Section 6.3(a) hereof or Section 6.3(b) hereof, as the case may be, would be
incapable of being satisfied;
(e) by the Company, (i) upon a material breach of any covenant or agreement
of any of the Buying Entities set forth in this Agreement which remains uncured
for twenty (20) business days after notice of such breach has been delivered by
the Company to the Buying Entities, or (ii) if any representation or warranty of
Reckson or Buyer shall become untrue, in either case such that the conditions
set forth in Section 6.2(a) hereof or Section 6.2(b) hereof, as the case may be,
would be incapable of being satisfied;
(f) by the Company, if the Board of Directors of the Company determines to
accept a Company Acquisition Proposal; PROVIDED, HOWEVER, that in order for the
termination of this Agreement pursuant to this Section 7.1(f) to be deemed
effective, the Company shall have complied with the provisions contained in
Section 5.4 hereof, and shall simultaneously make payment of all amounts due
under Section 7.3 hereof;
(g) by Buyer, if prior to the Company Special Meeting, the Board of
Directors of the Company (i) shall have withdrawn or modified or amended (or
publicly announced an intention to withdraw) in any manner adverse to Buyer its
approval or recommendation of the Merger; (ii) makes any recommendation with
respect to any Company Acquisition Proposal other than a recommendation to
reject such Company Acquisition Proposal; (iii) enters into any agreement which
would result in consummation of a Company Acquisition Proposal other than this
Agreement; or (iv) resolves to do any of the foregoing;
(h) by the Company, if Reckson breaches Section 5.2(b) hereof;
(i) by the Company or Buyer, if the stockholders of the Company fail to
approve and adopt this Agreement and the Merger at the Company Special Meeting
or any postponement thereof; and
(j) by Buyer (X) if, pursuant to Section 5.1 hereof, Reckson shall have
notified the Company in writing on or before December 30, 1998 that it approved
the Schedule, and the Company shall have failed to file the Amended Return and
the Schedule on or before December 31, 1998 in accordance with Section 5.1
hereof, PROVIDED, HOWEVER, that the termination right described in this clause
(X) can be exercised by Buyer only on or before January 31, 1999 or (Y) if,
pursuant to Section 5.1 hereof, Reckson shall have notified the Company in
writing on or before December 30, 1998 that it did not approve the Schedule, and
either (i) the Company shall have failed to file the Amended Return and the
Schedule on or before January 25, 1999 in accordance with Section 5.1 hereof or
(ii) the Company shall have filed the Amended Return and the Schedule on or
before January 25, 1999 in accordance with Section 5.1 hereof, but the Schedule
as filed was prepared in a fraudulent manner; PROVIDED, HOWEVER, that the
termination right described in this clause (Y) can be exercised by Buyer only on
or before February 24, 1999.
The party desiring to terminate this Agreement shall give written notice of
such termination to the other party.
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SECTION 7.2 EFFECT OF TERMINATION.
(a) Except for any breach of this Agreement by any party hereto (which
breach and liability therefor shall not be affected by the termination of this
Agreement), if this Agreement is terminated pursuant to Section 7.1 hereof, then
this Agreement shall become void and of no effect with no liability on the part
of any party hereto; PROVIDED THAT the agreements contained in Sections 7.2, 7.3
and 8.2 hereof, the second proviso to the first sentence of Section 5.5(a)
hereof, the second proviso to the first sentence of Section 5.5(b) hereof and
the letter referred to in Section 5.1(u) hereof shall survive the termination
hereof; and PROVIDED FURTHER that the Confidentiality Agreements shall remain in
full force and effect.
(b) Buyer agrees that neither the Company nor its directors, officers,
employees, representatives or agents, nor any Person who shall make a Company
Acquisition Proposal shall be deemed, by reason of the making of such proposal
or any actions taken in connection with it not otherwise in violation of this
Agreement, to have tortiously or otherwise wrongfully interfered with or caused
a breach of this Agreement, or other agreements, instruments and documents
executed in connection herewith, or the rights of Buyer or any of its affiliates
hereunder.
SECTION 7.3 FEES AND EXPENSES.
(a) If this Agreement shall have been terminated (i) pursuant to Section
7.1(f) or 7.1(g) hereof or (ii) pursuant to Section 7.1(i) hereof and, at the
time of such stockholder vote, a Company Acquisition Proposal shall have been
publicly announced and not withdrawn, terminated or lapsed, which provides for
consideration per share of Common Stock for all such shares which is greater
than $23 per share and which is reasonably capable of being financed by the
Person making such proposal or (iii) pursuant to Section 7.1(i) hereof in
circumstances where clause (ii) above does not apply, then the Company shall,
promptly, but in no event later than one business day after the termination of
this Agreement (or in the case of clause (i) above by reason of a termination
pursuant to Section 7.1(f) hereof, simultaneously with such termination), pay
Reckson an amount equal to the Applicable Break-Up Fee (as defined hereafter);
PROVIDED THAT neither Reckson nor Buyer was in material breach of any of its
representations, warranties, covenants or agreements hereunder at the time of
termination. Only one fee in an amount not to exceed the amount of the
Applicable Break-up Fee shall be payable to Reckson pursuant to Section 7.3(a)
hereof. Payment of the Applicable Break-Up Fee shall be made, as directed by
Reckson, by wire transfer in immediately available funds promptly, but in no
event later than two (2) business days following such termination.
(b) The "APPLICABLE BREAK-UP FEE" shall be an amount equal to the lesser of
(x) $15 million in the case of clause (i) of Section 7.3(a), $7.5 million in the
case of clause (ii) of Section 7.3(a) and $3.5 million in the case of clause
(iii) of Section 7.3(a), plus, in the case of a Break-Up Fee payable pursuant to
clauses (i) or (ii) above, the Expense Amount (as defined hereafter) (the "BASE
AMOUNT") and (y) the maximum amount that can be paid to the party entitled to
the Applicable Breakup Fee in the year in which this Agreement is terminated
(the "TERMINATION YEAR") and in all relevant taxable years thereafter without
causing it to fail to meet the requirements of sections 856(c)(2) and (3) of the
Code (the "REIT REQUIREMENTS") for such year, determined as if the payment of
such amount did not constitute income described in sections 856(c)(2)(A)-(H) and
856(c)(3)(A)-(I) of the Code ("QUALIFYING INCOME"), as determined by independent
accountants to the party entitled to the Applicable Breakup Fee. Notwithstanding
the foregoing, in the event the party entitled to the Applicable Breakup Fee
receives a ruling from the Internal Revenue Service (a "BREAK-UP FEE RULING")
holding that such party's receipt of the Base Amount would either constitute
Qualifying Income or would be excluded from gross income within the meaning of
the REIT Requirements, such party's Applicable Break-Up Fee shall be an amount
equal to the Base Amount. If the amount payable for the Termination Year to the
party entitled to the Applicable Break-up Fee under the preceding sentence is
less than the Base Amount, the Company shall place the remaining portion of the
Base Amount in escrow and shall not
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release any portion thereof to such party unless and until the Company receives
either of the following: (i) a letter from such party's independent accountants
indicating that additional amounts can be paid at that time to such party
without causing such party to fail to meet the REIT Requirements for any
relevant taxable year, in which event the Company shall pay to such party such
amount, or (ii) a Break-Up Fee Ruling, in which event the Company shall pay to
such party the unpaid Base Amount. The Company's obligation to pay any unpaid
portion of the Applicable Break-Up Fee shall terminate three years from the date
of this Agreement and the Company shall have no obligation to make any further
payments notwithstanding that the entire Base Amount relating to such Applicable
Break-Up Fee has not been paid as of such date. The "EXPENSE AMOUNT" relating to
each Applicable Break-Up Fee shall be the amount of actual, direct out-of-pocket
expenses incurred by the party entitled to the Applicable Break-Up Fee in
connection with the transactions contemplated by this Agreement (but in any
case, excluding any expenses relating to the existing litigation between the
parties hereto and Crescent); PROVIDED, HOWEVER, in no event shall the Expense
Amount relating to any Applicable Break-Up Fee exceed $1.75 million in the
aggregate.
(c) Except as provided otherwise in this Section 7.3, all costs and expenses
incurred in connection with this Agreement and the Transactions shall be paid by
the party incurring such expenses.
(d) In the event of a suit by any party hereto for a breach of this
Agreement, the prevailing party shall be entitled to actual, out-of-pocket
litigation expenses incurred by such prevailing party in such action.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement to any
party hereunder shall be in writing and deemed given upon (a) personal delivery,
(b) transmitter's confirmation of a receipt of a facsimile transmission, (c)
confirmed delivery by a standard overnight carrier or when delivered by hand or
(d) when received in the United States by certified or registered mail, postage
prepaid, addressed at the following addresses (or at such other address for a
party as shall be specified by notice given hereunder):
If to Reckson or Reckson OP, to:
Reckson Associates Realty Corp.
225 Broadhollow Road
Melville, New York 11747
Fax: (516) 622-6788
Attention: Jason M. Barnett, Esq.
General Counsel
with a copy to:
Brown & Wood LLP
One World Trade Center
New York, New York 10048
Fax: (212) 839-5599
Attention: Joseph W. Armbrust Jr., Esq.
Peter T. Simor, Esq.
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and with a copy to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Fax: (212) 859-4000
Attention: Stephen Fraidin, P.C.
Lee Parks, Esq.
If to Buyer, to:
Metropolitan Partners LLC
c/o Reckson Associates Realty Corp.
225 Broadhollow Road
Melville, NY 11747
Fax: (516) 622-6786
Attention: Jason M. Barnett, Esq.
If to the Company, to:
Tower Realty Trust, Inc.
292 Madison Avenue
New York, New York
Fax: (212) 448-1865
Attention: Lester S. Garfinkel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-9931
Fax: (212) 735-2000
Attention: Lou R. Kling, Esq.
Howard L. Ellin, Esq.
and with a copy to:
Battle Fowler L.L.P.
Park Avenue Tower
75 East 55th Street
New York, New York 10022
Fax: (212) 339-9150
Attention: Steven L. Lichtenfeld, Esq.
SECTION 8.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties contained herein and in any certificate or other writing
delivered pursuant hereto shall not survive the Effective Time. All other
representations, warranties and covenants contained herein which by their terms
are to be performed in whole or in part, or which prohibit actions, subsequent
to the Effective Time, shall survive the Merger in accordance with their terms.
SECTION 8.3 INTERPRETATION. References in this Agreement to "reasonable best
efforts" shall not require a Person obligated to use its reasonable best efforts
to incur other than de minimis out-of-pocket expenses or indebtedness in
connection with such obligation under this Agreement, including to obtain any
consent of a third party or, except as expressly provided herein, to institute
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litigation. References herein to the "knowledge of the Company" shall mean the
actual knowledge of the officers (as such term is defined in Rule 3b-2
promulgated under the Exchange Act) of the Company or its Subsidiaries, or such
knowledge that such officers would have had but for the gross negligence or bad
faith of such officers. Whenever the words "include," "includes" or "including"
are used in this Agreement they shall be deemed to be followed by the words
"without limitation." The phrase "made available" when used in this Agreement
shall mean that the information referred to has been made available if requested
by the party to whom such information is to be made available. As used in this
Agreement, the terms "affiliate(s)" and "associates" shall have the meaning set
forth in Rule 12b-2 promulgated under the Exchange Act. References herein to
this Agreement shall be deemed to include the letter referred to in Section
5.1(u) hereof.
The article and section headings contained in this Agreement are solely for
the purpose of reference, are not part of the agreement of the parties hereto
and shall not in any way affect the meaning or interpretation of this Agreement.
Any matter disclosed pursuant to any Schedule of the Company Disclosure Schedule
or the Reckson Disclosure Schedule shall not be deemed to be an admission or
representation as to the materiality of the item so disclosed.
SECTION 8.4 AMENDMENTS, MODIFICATION AND WAIVER.
(a) Except as may otherwise be provided herein, any provision of this
Agreement may be amended, modified or waived by the parties hereto, by action
taken by or authorized by their respective Board of Directors, prior to the
Effective Time if, and only if, such amendment or waiver is in writing and
signed, in the case of an amendment, by the Company and the Buying Entities or,
in the case of a waiver, by the party against whom the waiver is to be
effective; PROVIDED THAT after the adoption of this Agreement by the
stockholders of the Company, no such amendment shall be made except as allowed
under applicable law.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
SECTION 8.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; PROVIDED THAT no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto.
SECTION 8.6 SPECIFIC PERFORMANCE. The parties acknowledge and agree that any
breach of the terms of this Agreement would give rise to irreparable harm for
which money damages would not be an adequate remedy and accordingly the parties
agree that, in addition to any other remedies, each shall be entitled to enforce
the terms of this Agreement by a decree of specific performance without the
necessity of proving the inadequacy of money damages as a remedy.
SECTION 8.7 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York (regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof and except to the extent that the validity and effectiveness of the
Merger are required to be governed by the laws of the State of Maryland or the
State of Delaware) as to all matters, including, but not limited to, matters of
validity, construction, effect, performance and remedies. Each of the Company
and the Buying Entities hereby irrevocably and unconditionally consents to
submit to the exclusive jurisdiction of the courts of the State of New York and
of the United States of America located in the State of New York (the "NEW YORK
COURTS") for any litigation arising out of or relating to this Agreement or the
Transactions (and agrees not to commence litigation relating thereto except in
such courts), waives any objection to the laying of venue
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of any such litigation in the New York Courts and agrees not to plead or claim
in any New York Court that such litigation brought therein has been brought in
any inconvenient forum.
SECTION 8.8 SEVERABILITY. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the Transactions are not affected in any manner materially adverse to any party
hereto. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner.
SECTION 8.9 THIRD PARTY BENEFICIARIES. This Agreement is solely for the
benefit of the Company and its successors and permitted assigns, with respect to
the obligations of Buyer under this Agreement, and for the benefit of the Buying
Entities, and their respective successors and permitted assigns, with respect to
the obligations of the Company under this Agreement, and this Agreement shall
not, except to the extent necessary to enforce the provisions of Section 5.7
hereof be deemed to confer upon or give to any other third party any remedy,
claim, liability, reimbursement, cause of action or other right.
SECTION 8.10 ENTIRE AGREEMENT. This Agreement, including any exhibits or
schedules hereto, the Confidentiality Agreement, the Stock Purchase Agreement,
the Representation Letter and the letter referred to in Section 5.1(u) hereof
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and supersedes all other prior agreements or
understandings, both written and oral, between the parties or any of them with
respect to the subject matter hereof.
SECTION 8.11 COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in
any number of counterparts, each of which shall be deemed an original, with the
same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received counterparts hereof signed by all of the other parties hereto.
SECTION 8.12 LITIGATION TRUST; CPRS.
(a) The Company, Reckson, Reckson OP and Buyer hereby agree that if the
Company believes that all of the conditions set forth in Section 3.1 of the
Metropolitan Agreement for the funding of the $75 million capital contribution
of Crescent have been met, but Crescent fails to fully fund the $75 million
capital contribution to Buyer, the following shall occur (it being agreed that
such belief shall not affect the rights of Crescent and the Company under the
Release delivered by the Company to Crescent):
(i) the Board of Directors of the Company shall have the right,
immediately preceding the Effective Time, to assign to a litigation trust
(the "TRUST") formed by the Company for the purpose of pursuing the
litigation (and related matters) which is the subject of the Release, dated
as of December 8, 1998, entered into by the Company with Crescent (the
"CRESCENT LITIGATION"), all of the Company's right, title and interest in
and to such Crescent Litigation;
(ii) holders of Company Common Stock and Company OP Units as in
existence at the Effective Time will hold interests in the Trust entitling
such holders to their pro rata portion of any amounts received by the Trust
or otherwise in the Trust, net of expenses. As such, each share of Company
Common Stock or Company OP Units outstanding at the Effective Time will, in
addition to the consideration otherwise payable under this Agreement,
receive one contingent payment right in the Trust ("CPR") representing the
right to receive its pro rata portion of all Trust assets;
(iii) the Trust shall be initially funded by: (A) reducing the Special
Dividend by up to $4,000,000 (the exact amount to be determined by the Board
of Directors of the Company) and (B) contributing such amount to the Trust;
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(iv) the Trust shall be managed by Trustees (the number and identity of
which shall be designated by the Board of Directors of the Company prior to
the Effective Time); and
(v) the Surviving Corporation, Reckson, Reckson OP and Buyer and their
respective affiliates shall fully cooperate with the Trust and its
representatives in pursuing all related litigation against Crescent;
PROVIDED THAT none of the Surviving Entity, Reckson or Reckson OP shall have
any obligation to take any action under this clause requiring it to incur
non DE MINIMIS out-of-pocket expenses.
(b) The foregoing paragraph (a) represents the general intent of the parties
with respect to the matters set forth therein. From the date hereof until the
Effective Time, the parties shall take such actions, prepare such actions and
otherwise endeavor to do those things necessary to provide to the holders of
Company Common Stock and Common OP Units the full benefit of the foregoing.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
<TABLE>
<S> <C> <C> <C>
TOWER REALTY TRUST, INC.
By: /s/ LESTER S. GARFINKEL
---------------------------------------
Name: Lester S. Garfinkel
Title: Executive Vice President,
Finance and Administration
and Chief Financial Officer
RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp.,
its general partner
By: /s/ SCOTT H. RECHLER
---------------------------------------
Name: Scott H. Rechler
Title: President &
Chief Operating Officer
METROPOLITAN PARTNERS LLC
By: /s/ SCOTT H. RECHLER
---------------------------------------
Name: Scott H. Rechler
Title: President
RECKSON ASSOCIATES REALTY CORP.
By: /s/ SCOTT H. RECHLER
---------------------------------------
Name: Scott H. Rechler
Title: President & Chief Operating
Officer
</TABLE>
<PAGE>
ANNEX B
[MERRILL LYNCH & CO. LETTERHEAD]
Investment Banking
Corporate and
Institutional
Client Group
World Financial Center
North Tower
New York, New York
10281-1326
212 449 1000
December 8, 1998
Board of Directors
Tower Realty Trust, Inc.
292 Madison Avenue, 3(rd) Floor
New York, New York 10017
Gentlemen:
Tower Realty Trust, Inc. (the "Company"), Metropolitan Partners LLC
("Buyer"), Reckson Associates Realty Corp. ("Reckson") and Reckson Operating
Partnership, L.P. ("Reckson Partnership") propose to enter into that certain
Agreement and Plan of Merger dated as of December 8, 1998 (the "Agreement")
pursuant to which the Company would be merged with and into Buyer in a merger
(the "Merger") in which each share of the Company's common stock, par value $.01
per share (the "Company Shares"), other than Company Shares held in treasury or
owned directly or indirectly by Buyer, Reckson or Reckson Partnership, would be
converted into the right to receive the Merger Consideration (as defined below).
In connection with the Merger, Tower Realty Operating Partnership, L.P. (the
"Operating Partnership") will be merged with and into a newly formed entity
created by Buyer pursuant to which each limited partnership interest in the
Operating Partnership (a "Unit"), other than Units owned directly or indirectly
by the Company, Buyer, Reckson or Reckson Partnership, will be converted into
the right to receive the Merger Consideration. "Merger Consideration" means (A)
at the election of the holders of Company Shares and Operating Partnership Units
either (x) either (1) 0.5725 of a share of Reckson's shares of class B
exchangeable common stock, par value $.01 per share (the "Class B Stock"), and
$7.2565 principal amount of 7% senior unsecured notes due 2009 of Reckson
Partnership, guaranteed by Reckson (the "Notes"), if the Reckson shareholders
fail to approve the issuance of Class B Stock in the Merger, or (2) 0.8364 of a
share of Class B Stock, if the Reckson shareholders approve the issuance of the
Class B Stock in the Merger (the "Share Issuance Approval") or (y) $23.00 in
cash, in each case subject to the proration provisions of the Agreement and (B)
if the Share Issuance Approval has not been obtained and there has occurred an
Adverse Recommendation Event (as defined below), in addition to the
consideration set forth in (a)(1) or (y) above, an additional $.8046 principal
amount of Notes. An "Adverse Recommendation Event" shall be deemed to have
occurred if the Board of Directors of Reckson withdraws or amends or modifies in
any material respect (or publicly announces an intention to withdraw or amend or
modify in any material respect) its approval or recommendation of the issuance
of the Class B Stock in the Merger. The value of the cash portion of the Merger
Consideration may not exceed 25% of the total Merger Consideration. To the
extent the demand for cash exceeds the 25% limitation that is available to
Company stockholders and Operating Partnership Unitholders, Company stockholders
and Operating Partnership Unitholders electing cash generally will receive a pro
rata portion of the amount of available cash with the remainder of the Merger
Consideration payable in shares of Class B Stock and Notes (if the Share
Issuance Approval is not obtained) or shares of Class B Stock (if the Share
Issuance Approval is obtained). In accordance with the Merger Agreement, the
Company and Buyer will enter into a Stock
<PAGE>
Board of Directors Tower Realy Trust, Inc.
December 8, 1998
Page 2
Purchase Agreement pursuant to which Buyer will agree to purchase 2,169,197
shares of Company Series A Preferred Stock (the "Stock Purchase Agreement").
We understand the financial terms of the Class B Stock to be as set forth in
the draft dated December 5, 1998 of Articles Supplementary establishing and
fixing the rights and preferences of the Class B Stock ("Reckson Articles
Supplementary"). We understand the financial terms of the Notes, if any, to be
as set forth in the draft dated December 5, 1998 of the 7% Note due 2009 of
Reckson Partnership.
You have asked us whether, in our opinion, the Merger Consideration to be
received by the holders of the Company Shares pursuant to the Merger is fair
from a financial point of view to such holders.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Company's Annual Report, Form 10-K and related financial
information for the fiscal year ended December 31, 1997, and the Company's
Reports on Form 10-Q and the related unaudited financial information for the
quarterly periods ended March 31, 1998, June 30, 1998 and September 30, 1998;
(2) Reviewed Reckson's Annual Report, Form 10-K and related information for
the fiscal year ended December 31, 1997, and Reckson's Reports on Form 10-Q and
the related unaudited financial information for the quarterly periods ended
March 31, 1998, June 30, 1998 and September 30, 1998;
(3) Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, funds from operations, adjusted funds from
operations, assets, liabilities and prospects of the Company furnished to us by
the Company;
(4) Reviewed Reckson's management's internal financial projections for the
year ending December 31, 1999, furnished to us by Reckson;
(5) Conducted discussions with members of senior management and
representatives of the Company and Reckson concerning the matters described in
clauses 1, 2, 3 and 4 above, as applicable, as well as their respective
businesses and prospects before and after giving effect to the Merger;
(6) Reviewed the market prices and valuation multiples for the Company
Shares and compared them with those of certain publicly traded companies that we
deemed to be reasonably similar to the Company, respectively;
(7) Reviewed the proposed financial terms of the Class B Stock and compared
them with the terms of convertible preferred issues of certain publicly traded
companies that we deemed to be reasonably similar to the Class B Stock;
(8) Reviewed the proposed financial terms of the Notes;
(9) Reviewed the results of operations of the Company and Reckson and
compared them with those of certain publicly traded companies that we deemed to
be reasonably similar to the Company and Reckson, respectively;
(10) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;
(11) Reviewed a pro forma analysis of the consequences of the Merger on funds
from operations growth per share of Reckson common stock;
(12) Participated in certain discussions and negotiations among
representatives of the Company and Reckson and their financial and legal
advisors;
<PAGE>
Board of Directors Tower Realy Trust, Inc.
December 8, 1998
Page 3
(13) Reviewed a draft dated December 5, 1998 of the Agreement;
(14) Reviewed a draft dated December 5, 1998 of the Reckson Articles
Supplementary;
(15) Reviewed a draft dated December 5, 1998 of the form of Notes;
(16) Reviewed a draft dated December 5, 1998 of the Stock Purchase Agreement;
and
(17) Reviewed such other financial studies and analyses and took into account
such other matters as we deemed necessary, including our assessment of general
economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Buyer, the Company, Reckson or Reckson Partnership or been
furnished with any such evaluation or appraisal. In addition, we have not
assumed any obligation to conduct any physical inspection of the properties or
facilities of the Company or Reckson. With respect to the financial forecast
information furnished to or discussed with us by the Company or Reckson, we have
assumed that such information has been reasonably prepared and reflects the best
currently available estimates and judgment of the Company's or Reckson's
management as to the expected future financial performance of the Company or
Reckson, as the case may be. We have also assumed that the final forms of the
Agreement, the Reckson Articles Supplementary, the Notes and the Stock Purchase
Agreement will be substantially similar to the last drafts reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of the date hereof. In connection with the preparation of our opinion for
the current transaction, we have not been asked by the Company or the Board of
Directors to solicit, nor have we solicited, third-party indications of interest
for the acquisition of all or any part of the Company. We have assumed that in
the course of obtaining the necessary regulatory or other consents or approvals
(contractual or otherwise) for the Merger, no restrictions, including any
divestiture requirements or amendments or modifications, will be imposed that
will have a material adverse effect on the contemplated benefits of the Merger.
We have assumed that, concurrently with the execution and delivery of the
Agreement, the Company and Reckson and the Company and Crescent Real Estate
Equities Company ("Crescent") will enter into mutual releases regarding certain
litigation between them, and we did not value, or evaluate the merits of, such
litigation for purposes of our opinion.
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Company has agreed to indemnify us for certain liabilities arising out of
our engagement. We are currently providing to Crescent and have, in the past,
provided financial advisory and financial services to the Company, Reckson and
Crescent and/or their affiliates and may continue to do so, and have received,
and may receive, fees for the rendering of such services. In addition, in the
ordinary course of our business, we have actively traded the Company Shares, as
well as securities of Reckson or Crescent, for our own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
We express no opinion as to the prices at which the Class B Stock will trade
following consummation of the Merger or the prices at which the Company Shares
or the Reckson common stock will trade between the announcement and consummation
of the Merger. Our opinion does not
<PAGE>
Board of Directors Tower Realy Trust, Inc.
December 8, 1998
Page 4
address the relative merits of the Merger and alternative business combinations
with third parties. We did not consider any tax consequences of the Merger or
other transactions in connection therewith.
This opinion is for the use and benefit of the Board of the Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger and does not constitute a recommendation to
any shareholder as to how such shareholder should vote on the proposed Merger,
whether a shareholder should elect to receive Reckson securities or cash in the
Merger or any matter related thereto. We express no opinion as to the
consequences to the Company or any Operating Partnership Unitholder of the
Merger of the Operating Partnership into the entity to be created by the Buyer.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the proposed Merger Consideration to be received by the
holders of the Company Shares pursuant to the Merger is fair from a financial
point of view to the holders of such shares.
Very truly yours,
/s/MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
<PAGE>
ANNEX C
[LETTERHEAD OF SALOMON SMITH BARNEY INC.]
December 8, 1998
The Board of Directors
Reckson Associates Realty Corp.
225 Broadhollow Road
Melville, New York 11747
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to Reckson Associates Realty Corp. ("Reckson Associates") of the
consideration to be paid pursuant to the terms and subject to the conditions set
forth in the Agreement and Plan of Merger, dated as of December 8, 1998 (the
"Merger Agreement"), by and among Tower Realty Trust, Inc. ("Tower Realty"),
Metropolitan Partners LLC ("Metropolitan"), Reckson Operating Partnership, L.P.
("Reckson OP" and, together with Reckson Associates, "Reckson"), and Reckson
Associates. As more fully described in the Merger Agreement, (i) Tower Realty
will be merged with and into Metropolitan (the "Tower Merger") and Tower Realty
Operating Partnership, L.P. ("Tower OP" and, together with Tower Realty,
"Tower") will be merged with and into a newly formed subsidiary of Reckson OP
(the "Tower OP Merger" and, together with the Tower Merger, the "Merger") and
(ii) each outstanding share of the common stock, par value $0.01 per share, of
Tower Realty (the "Tower Realty Common Stock"), and each outstanding limited
partnership interest in Tower OP (the "Tower OP Unit"), will be converted, at
the election of the holder thereof and subject to certain proration procedures
specified in the Merger Agreement, into the right to receive either (A) $23.00
in cash (the "Cash Consideration") or (B) (x) subject to approval of the
stockholders of Reckson Associates (the "Reckson Share Issuance Approval"),
0.8364 of a share of Class B Exchangeable Common Stock, par value $0.01 per
share, of Reckson Associates (the "Reckson Class B Common Stock" and, such
consideration, the "Stock Consideration") or (y) in the absence of the Reckson
Share Issuance Approval, 0.5725 of a share of Reckson Class B Common Stock and
$7.2565 principal amount of 7% senior unsecured notes due 2009 of Reckson OP
(the "Reckson OP Notes" and, together with the Cash Consideration and the Stock
Consideration, the "Merger Consideration").
In arriving at our opinion, we reviewed the Merger Agreement, the terms of
the Reckson Class B Common Stock as set forth in the proposed form of the
Articles Supplementary of Reckson Associates and the terms of the Reckson OP
Notes as set forth in the proposed form of Indenture attached as exhibits to the
Merger Agreement, and held discussions with certain senior officers, directors
and other representatives and advisors of Reckson and certain representatives
and advisors of Tower concerning the businesses, operations and prospects of
Reckson and Tower. We examined certain publicly available business and financial
information relating to Reckson and Tower as well as certain financial forecasts
and other information and data for Reckson and Tower which were provided to or
otherwise discussed with us by the management of Reckson and representatives and
advisors of Tower, including information relating to certain strategic
implications and operational benefits anticipated to result from the Merger. We
reviewed the financial terms of the Merger as set forth in the Merger Agreement
in relation to, among other things: current and historical market prices and
trading volumes of the common stock, par value $0.01 per share, of Reckson
Associates and Tower Realty Common Stock; the historical and projected earnings
and other operating data of Reckson and Tower; and the capitalization and
financial condition of Reckson and Tower. We considered, to the extent publicly
available, the financial terms of other transactions recently effected which we
considered relevant in evaluating the Merger and analyzed certain financial,
stock market and other publicly available information relating to the businesses
of other companies whose operations we considered relevant in evaluating those
of Reckson and Tower. We also evaluated the potential pro forma financial impact
of the Merger on Reckson. In addition to the foregoing, we conducted such other
analyses and
<PAGE>
The Board of Directors
Reckson Associates Realty Corp.
December 8, 1998
Page 2
examinations and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed by
or discussed with us. With respect to financial forecasts and other information
and data provided to or otherwise reviewed by or discussed with us, we have been
advised by the management of Reckson and representatives and advisors of Tower
that such forecasts and other information and data were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
managements of Reckson and Tower as to the future financial performance of
Reckson and Tower, respectively, and the strategic implications and operational
benefits anticipated to result from the Merger. We have assumed, with your
consent, that Tower was organized and has operated in conformity with the
requirements for qualification as a real estate investment trust (a "REIT") for
federal income tax purposes and that the Merger and the transactions
contemplated thereby will not adversely affect the REIT status of Reckson. We
are not expressing any opinion as to what the value of the Reckson Class B
Common Stock or the Reckson OP Notes will be when issued pursuant to the Merger
or the prices at which the Reckson Class B Common Stock or the Reckson OP Notes
will trade or otherwise be transferable subsequent to the Merger. We have not
made or been provided with an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of Reckson or Tower nor have we made
any physical inspection of the properties or assets of Reckson or Tower. We were
not requested to consider, and our opinion does not address, the relative merits
of the Merger as compared to any alternative business strategies that might
exist for Reckson or the effect of any other transaction in which Reckson might
engage. Our opinion is necessarily based upon information available to us, and
financial, stock market and other conditions and circumstances existing and
disclosed to us, as of the date hereof.
Salomon Smith Barney Inc. has acted as financial advisor to Reckson in
connection with the proposed Merger and will receive a fee for such services, a
significant portion of which is contingent upon the consummation of the Merger.
In the ordinary course of our business, we and our affiliates may actively trade
or hold the securities of Reckson Associates and Tower Realty for our own
account or for the account of our customers and, accordingly, may at any time
hold a long or short position in such securities. We have in the past provided
investment banking services to Reckson and Tower unrelated to the proposed
Merger, for which services we have received compensation. In addition, we and
our affiliates (including Citigroup Inc. and its affiliates) may maintain
relationships with Reckson, Tower and their respective affiliates.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of Reckson Associates in its evaluation of
the proposed Merger, and our opinion is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote with respect to any matter relating to the proposed Merger. Our opinion may
not be published or otherwise used or referred to, nor shall any public
reference to Salomon Smith Barney Inc. be made, without our prior written
consent.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Merger Consideration is
fair, from a financial point of view, to Reckson.
Very truly yours,
/s/ Salomon Smith Barney Inc.
SALOMON SMITH BARNEY INC.
<PAGE>
ANNEX D
RECKSON ASSOCIATES REALTY CORP.
ARTICLES SUPPLEMENTARY
ESTABLISHING AND FIXING THE RIGHTS AND
PREFERENCES OF A CLASS OF SHARES OF COMMON STOCK
Reckson Associates Realty Corp., a Maryland corporation (the "Corporation"),
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority expressly vested in the board of directors
of the Corporation (the "Board of Directors") by Article VI of its charter, as
heretofore amended and restated (which, as hereafter restated or amended from
time to time, are together with these Articles Supplementary herein called the
"Articles"), the Board of Directors has, by resolution, duly designated and
reclassified 12,000,000 shares of the common stock of the Corporation into a
class designated Class B Exchangeable Common Stock and has provided for the
issuance of such class.
SECOND: The preferences, rights, voting powers, restrictions, limitations
as to distributions, qualifications and terms and conditions of redemption of
the shares of such class of common stock, which upon any restatement of the
Articles shall be included as part of Article VI of the Articles, are as
follows:
CLASS B EXCHANGEABLE COMMON STOCK
1. DESIGNATION AND NUMBER. A class of Common Stock of the Corporation,
designated the "Class B Exchangeable Common Stock" (the "Class B Common"), is
hereby established. The number of shares of the Class B Common shall be
12,000,000.
2. DISTRIBUTIONS.
(a) For any quarterly period, holders of the shares of Class B Common
shall be entitled to receive, if, when and as authorized by the Board of
Directors out of funds legally available for the payment of distributions,
cash distributions in an amount per share equal to the Class B Dividend
Amount. Distributions on the Class B Common, if authorized, shall be payable
quarterly in arrears on January 31, April 30, July 31 and October 31 of each
year or, if not a Business Day, the next succeeding Business Day, commencing
, 1999 (each, a "Distribution Payment Date"). Distributions will
be payable to holders of record as they appear in the stock transfer records
of the Corporation at the close of business on the applicable record date,
which shall be such date designated by the Board of Directors of the
Corporation for the payment of distributions that is not more than 30 nor
less than 10 days prior to such Distribution Payment Date (each, a
"Distribution Payment Record Date").
(b) No distributions on the Class B Common shall be authorized by the
Board of Directors of the Corporation or be paid or set apart for payment by
the Corporation at such time as the terms and provisions of any agreement of
the Corporation, including any agreement relating to its indebtedness,
prohibits such authorization, payment or setting apart for payment or
provides that such authorization, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such
authorization or payment shall be restricted or prohibited by law.
(c) Distributions on the Class B Common will be noncumulative. If the
Board of Directors of the Corporation does not authorize a dividend on the
Class B Common payable on any Distribution Payment Date while any Class B
Common is outstanding, then holders of the Class B
2
<PAGE>
Common will have no right to receive a distribution for that Distribution
Payment Date, and the Corporation will have no obligation to pay a
distribution for that Distribution Payment Date, whether or not
distributions are declared and paid for any future Distribution Payment Date
with respect to either the Common Stock, the preferred stock, par value
$0.01 per share, of the Corporation or any other Capital Stock.
(d) No distributions, whether in cash, securities or property, will be
authorized or paid or set apart for payment to holders of Common Stock for
any quarterly period unless for each share of Class B Common outstanding, a
distribution equal to the Class B Dividend Amount with respect to such
period has been or contemporaneously is authorized and paid or authorized
and a sum sufficient for the payment thereof is set apart for such payment
to holders of the Class B Common for the then current distribution period.
No interest, or sum of money in lieu of interest, shall be payable in
respect of any distribution payment or payments on Class B Common which may
be in arrears.
(e) Subject to the rights and preferences of other classes or series of
Capital Stock, the Corporation, at its election and as determined in the
sole discretion of the Board of Directors of the Corporation, may authorize
and pay a distribution to holders of Class B Common in excess of the Class B
Dividend Amount.
(f) Shares of Class B Common shall not entitle the holders thereof to
receive any distribution made in respect of Common Stock.
3. LIQUIDATION.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation (referred to herein as a "liquidation"), the
holders of the Class B Common will have no liquidation preference, but will be
entitled to share ratably (treating each Class B Common share as the equivalent
of that number of shares of Common Stock into which it may then be exchanged) in
any distribution or payment made to holders of Common Stock.
4. REDEMPTION.
Shares of Class B Common will not be redeemable; provided, however, that the
foregoing shall not prohibit the Corporation from repurchasing shares of Class B
Common from any holder if and to the extent such holder agrees to sell such
shares.
5. VOTING RIGHTS.
Holders of Class B Common shall have the right to vote on all matters
submitted to a vote of the holders of Common Stock; holders of Class B Common
and Common Stock shall vote together as a single class. In addition, the
affirmative vote or consent of the Holders of at least two-thirds of the
outstanding shares of Class B Common, given in person or by proxy, either in
writing or at a meeting, voting separately as a class, shall be required to
amend, alter or repeal these Articles Supplementary, whether by merger,
consolidation or otherwise (an "Event"), so as to materially and adversely
affect any right, preference, privilege or voting power of the Class B Common or
the Holders thereof; provided, however, with respect to the occurrence of any of
the Events referred to above, so long as the Class B Common remains outstanding
with the terms thereof materially unchanged, taking into account that upon the
occurrence of an Event, the Corporation may not be the surviving entity, the
occurrence of any such Event shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting power of Holders of Class
B Common. In any such vote, each holder of Class B Common shall be entitled to
one vote with respect to each share of Class B Common held by such holder.
3
<PAGE>
6. EXCHANGE AT HOLDER'S ELECTION.
(a) Subject to Section 10, shares of Class B Common will be exchangeable
at any time, at the option of the holders thereof, into Common Stock at a
rate of one share of Common Stock per share of Class B Common, subject to
adjustment as described below (the "Exchange Rate"); provided, however, that
the right of a holder to exchange shares of Class B Common for which the
Corporation has mailed an Exchange Notice (as defined below) will terminate
at the close of business on the fifth Business Day prior to the Exchange
Date (as defined below).
(b) To exercise the exchange right, the holder of Class B Common to be
exchanged shall surrender the certificate representing such Class B Common,
duly endorsed or assigned to the Corporation or in blank, at the principal
office of the Transfer Agent accompanied by written notice to the
Corporation that such holder elects to exchange such Class B Common. Unless
the shares issuable on exchange are to be issued in the same name as the
name in which such Class B Common is registered, in which case the
Corporation shall bear the related taxes, each share surrendered for
exchange shall be accompanied by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the holder or such
holder's duly authorized attorney and an amount sufficient to pay any
transfer or similar tax (or evidence reasonably satisfactory to the
Corporation demonstrating that such taxes have been paid).
(c) Each exchange consummated pursuant to this Section 6 shall be deemed
to have been effected immediately prior to the close of business on the date
on which the certificates representing shares of Class B Common shall have
been surrendered and such notice (and if applicable, payment of an amount
equal to the distribution payable on such shares) received by the
Corporation as aforesaid, and the person or persons in whose name or names
any certificate or certificates representing shares of Common Stock shall be
issuable upon such exchange shall be deemed to have become the holder or
holders of record of the shares represented thereby at such time on such
date, and such exchange shall be at the Exchange Rate in effect at such time
and on such date unless the stock transfer records of the Corporation shall
be closed on that date, in which event such person or persons shall be
deemed to have become such holder or holders of record at the close of
business on the next succeeding day on which such stock transfer records are
open, but such exchange shall be at the Exchange Rate in effect on the date
on which such shares have been surrendered and such notice received by the
Corporation.
(d) Holders of shares of Class B Common at the close of business on a
Distribution Payment Record Date shall be entitled to receive and retain the
distribution payable on such shares on the corresponding Distribution
Payment Date notwithstanding the exchange of such shares following such
Distribution Payment Record Date and on or prior to such Distribution
Payment Date. Except as provided above, the Corporation shall make no
payment or allowance for unpaid distributions, whether or not in arrears, on
exchanged shares or for distribution on the Common Stock that is issued upon
such exchange.
As promptly as practicable after the surrender of certificates representing
Class B Common as aforesaid, the Corporation shall issue and shall deliver at
such office to such holder, or on his written order, a certificate or
certificates for the number of full shares of Common Stock issuable upon the
exchange of such shares in accordance with the provisions of this Section 6, and
any fractional interest in respect of a share of Common Stock arising upon such
conversion shall be settled as provided in Section 8.
7. EXCHANGE AT CORPORATION'S OPTION.
(a) The Class B Common shall not be exchangeable by the Corporation
prior to the end of the 54-month period commencing with the Class B Issue
Date. Subject to Section 10, each share of Class B Common (and each share of
Class B Excess Common (as defined below)) will be
4
<PAGE>
exchangeable at any time after the fifty-four (54) month period immediately
following the Class B Issue Date, at the option of the Corporation, into
Common Stock at the Exchange Rate, plus the amounts indicated in Section
7(e). If fewer than all of the outstanding shares of Class B Common are to
be exchanged, the shares to be exchanged shall be determined pro rata or by
lot or in such other manner as prescribed by the Board of Directors of the
Corporation to be equitable. If fewer than all the shares of Class B Common
represented by any certificate are exchanged, then new certificates
representing the unredeemed shares shall be issued without cost to the
holder thereof.
(b) At least 30 days, but no more than 60 days, prior to a date fixed
for exchange of some or all of the Class B Common (the "Exchange Date") in
accordance with this Section 7, written notice (the "Exchange Notice") shall
be given by first class mail, to each holder of record on a date no more
than three business days prior to the mailing date of such notice at such
holder's address as it appears in the stock transfer records of the
Corporation; provided, however, neither failure to give such notice nor any
deficiency therein shall affect the validity of the procedure for the
exchange of any share of Class B Common to be exchanged. The Exchange Notice
shall include the following information:
(i) the Exchange Rate;
(ii) the number of shares of Class B Common to be exchanged and, if
fewer than all the shares held by such holders are to be exchanged, the
number of such shares to be exchanged from such holder;
(iii) the Exchange Date;
(iv) the manner in which the holder is to surrender to the
Corporation or the Transfer Agent, the certificate or certificates
representing the shares of Class B Common to be exchanged;
(v) that the holder's right to elect to exchange such holder's Class
B Common for Common Stock will terminate on the fifth Business Day prior
to the Exchange Date; and
(vi) that dividends on the shares of Class B Common to be exchanged
shall cease on the Exchange Date unless the Corporation defaults in the
issuance of the Common Stock issuable upon exchange of such Class B
Common.
(c) Each holder shall surrender the certificate or certificates
representing such shares of Class B Common so exchanged to the Corporation
or the Transfer Agent, duly endorsed (or otherwise in proper form for
transfer, as determined by the Corporation), in the manner and at the place
designated in the Exchange Notice, and on the Exchange Date the number of
full shares of Common Stock issuable upon the exchange of such shares of
Class B Common shall be payable to the holder whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired.
(d) On or after the Exchange Date, unless the Corporation defaults in
the issuance of the shares of Common Stock as described above and except as
provided in Section 7(e), (i) all distributions on any Class B Common so
called for exchange shall cease on the Exchange Date, and all rights of the
holders of such shares of Class B Common as holders of Class B Common shall
terminate with respect thereto on the Exchange Date, other than the right to
receive the shares of Common Stock issuable upon exchange thereof, (ii) the
shares of Class B Common called for exchange will not be transferred (except
with the consent of the Corporation) on the Corporation's stock transfer
records, and (iii) such shares shall no longer be deemed outstanding for any
purpose whatsoever. Until shares of Class B Common Stock called for exchange
are surrendered in the manner described in the Exchange Notice, no shares of
Common Stock will be
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issued in respect thereof. No provision will be made in respect of
distributions payable on such Common Stock prior to the Exchange Date.
(e) If the Exchange Date falls after a Distribution Payment Record Date
and on or prior to the corresponding Distribution Payment Date, then each
holder of Class B Common at the close of business on such Distribution
Payment Record Date shall be entitled to the distribution payable on such
shares on the corresponding Distribution Payment Date notwithstanding the
exchange of such shares prior to such Distribution Payment Date.
(f) Following the Exchange Date, the Corporation shall pay all
distributions payable on the Common Stock to be exchanged for the Class B
Common with a record date for such distribution following the Exchange Date
notwithstanding the exchange of certificates representing such shares after
such the Distribution Payment Record Date.
8. NO FRACTIONAL SHARES.
No fractional shares of Common Stock shall be issued upon exchange of Class
B Common. Instead of any fractional share of Common Stock that would otherwise
be deliverable upon the exchange of a share of Class B Common, the Corporation
shall pay to the holder of such share an amount in cash in respect of such
fractional interest based upon the Current Market Price of a share of Common
Stock on the Trading Day immediately preceding the date of exchange. If more
than one share of Class B Common shall be surrendered for exchange at one time
by the same holder, the number of full shares of Common Stock issuable upon
exchange thereof shall be computed on the basis of the aggregate number of
shares of Class B Common so surrendered.
9. EXCHANGE RATE ADJUSTMENTS.
(a) The Exchange Rate shall be adjusted from time to time as follows:
(i) If the Corporation shall after the date on which shares of Class
B Common are first issued (the "Class B Issue Date") (A) pay or make a
distribution to holders of Common Stock in the form of Common Stock, (B)
subdivide its outstanding Common Stock into a greater number of shares,
(C) combine its outstanding Common Stock into a smaller number of shares
or (D) issue any equity securities by reclassification of its Common
Stock (other than any reclassification by way of merger or binding share
exchange that is subject to Section 9(b)), then the Exchange Rate in
effect at the opening of business on the day following the record date
for the determination of stockholders entitled to receive such
distribution or at the opening of business on the day following the day
on which such subdivision, combination or reclassification becomes
effective, as the case may be, shall be adjusted so that the holder of
any share of Class B Common thereafter surrendered for exchange shall be
entitled to receive the number of shares of Common Stock and other equity
securities issued by reclassification of Common Stock that such holder
would have owned or have been entitled to receive after the happening of
any of the events described above had such shares been exchanged
immediately prior to the record date in the case of a distribution or the
effective date in the case of a subdivision, combination or
reclassification. An adjustment made pursuant to this subparagraph (i)
shall become effective immediately after the opening of business on the
day following such record date (except as provided in Section 9(e)) in
the case of a distribution and shall become effective immediately after
the opening of business on the day next following the effective date in
the case of a subdivision, combination or reclassification.
(ii) If the Corporation shall issue after the Class B Issue Date
rights, options or warrants to all holders of Common Stock entitling them
(for a period expiring within 45 days after the record date for
determination of stockholders entitled to receive such rights, options or
warrants) to subscribe for or purchase shares of Common Stock (or
securities convertible into
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or exchangeable for Common Stock) at a price per share less than the Fair
Market Value per share of Common Stock on the record date for the
determination of stockholders entitled to receive such rights, options or
warrants, then the Exchange Rate in effect at the opening of business on
the day following such record date shall be adjusted to equal the amount
determined by multiplying (I) the Exchange Rate in effect immediately
prior to the opening of business on the day following the record date
fixed for such determination by (II) a fraction, the numerator of which
shall be the sum of (A) the number of shares of Common Stock outstanding
on the close of business on the record date fixed for such determination
and (B) the number of additional shares of Common Stock offered for
subscription or purchase pursuant to such rights, options or warrants and
the denominator of which shall be the sum of (A) the number of shares of
Common Stock outstanding on the close of business on the record date
fixed for such determination and (B) the number of shares that the
aggregate proceeds to the Corporation from the exercise of such rights,
options or warrants for Common Stock would purchase at such Fair Market
Value. Such adjustment shall become effective immediately after the
opening of business on the day following such record date (except as
provided in Section 9(e)). In determining whether any rights, options or
warrants entitle the holders of Common Stock to subscribe for or purchase
Common Stock at less than the Fair Market Value, there shall be taken
into account any consideration received by the Corporation upon issuance
and upon exercise of such rights, options or warrants, with the value of
such consideration, if other than cash, to be determined by the Board of
Directors of the Corporation.
(iii) If the Corporation shall distribute to all holders of its
Common Stock any equity securities of the Corporation (other than Common
Stock) or evidences of its indebtedness or assets (excluding
cash distributions and those rights, options and warrants referred to in
and treated under subparagraph (ii) above), then the Exchange Rate shall
be adjusted so that it shall equal the amount determined by multiplying
(I) the Exchange Rate in effect immediately prior to the close of
business on the record date fixed for the determination of stockholders
entitled to receive such distribution by (II) a fraction, the numerator
of which shall be the Fair Market Value per share of Common Stock on the
record date for such determination and the denominator of which shall be
the Fair Market Value per share of Common Stock on the record date for
such determination less the then fair market value (as determined by the
Board of Directors of the Corporation, whose determination shall be
conclusive) of the portion of the equity securities, evidences of
indebtedness or assets so distributed applicable to one share of Common
Stock. Such adjustment shall become effective immediately at the opening
of business on the day following such record date (except as provided in
Section 9(e)). For the purposes of this subparagraph (iii), the
distribution of equity securities, evidences of indebtedness or assets
which are distributed not only to the holders of Common Stock on the
record date fixed for the determination of stockholders entitled to such
distribution, but also are distributed with each share of Common Stock
delivered to a person exchanging a share of Class B Common at any time
after such record date, shall not require an adjustment of the Exchange
Rate pursuant to this subparagraph (iii), provided that on the date, if
any, on which a person exchanging a share of Class B Common would no
longer be entitled to receive such equity securities, evidences of
indebtedness or assets with a share of Common Stock (other than as a
result of the termination of all such equity securities, evidences of
indebtedness or assets), a distribution of such equity securities,
evidences of indebtedness or assets shall be deemed to have occurred, and
the Exchange Rate shall be adjusted as provided in this subparagraph
(iii) (and such day shall be deemed to be "the record date fixed for the
determination of the stockholders entitled to receive such distribution"
and the "record date" within the meaning of the two preceding sentences).
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(iv) The Exchange Rate may be further adjusted from time to time as
described in this subparagraph (iv); provided, however, that the Exchange
Rate as so adjusted shall only be applicable in the event that the
exchange of Class B Common is effected pursuant to Section 6 and then,
only to shares of Class B Common surrendered for exchange in accordance
with Section 6(b); and all adjustments described in this subparagraph
(iv) shall be disregarded in the event of any exchange pursuant to
Section 7. If during any two consecutive quarters, the total
distributions paid on a share of Class B Common for each such quarter and
the immediately prior quarter is less than the sum of (x) 1/4th of the
Unadjusted Class B Dividend Amount applicable to the current quarter plus
(y) 1/4th of the Unadjusted Class B Dividend Amount applicable to the
immediately prior quarter, then the Exchange Rate thereafter shall be
subject to adjustment as follows. If at the time the exchange option is
exercised pursuant to Section 6:
(A) the Exchange Consideration Amount is equal to or greater than
$27.50, then no additional adjustment is required;
(B) the Exchange Consideration Amount is less than $27.50, but
equal to or greater than $22.00, then the Exchange Rate will be
multiplied by the quotient of (I) $27.50 divided by (II) the Exchange
Consideration Amount; and
(C) the Exchange Consideration Amount is less than $22.00, then
the Exchange Rate will be multiplied by 1.25.
(v) No adjustment in the Exchange Rate shall be required other than
by reason of Section 9(a)(iv) unless such adjustment would require a
cumulative increase or decrease of at least 1% in the Exchange Rate;
provided, however, that any adjustments that by reason of this
subparagraph (v) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment until made; and provided,
further, that any adjustment shall be required and made in accordance
with the provisions of this Section 9 (other than this subparagraph (v))
not later than such time as may be required in order to preserve the
tax-free nature of a distribution to the holders of Common Stock.
Notwithstanding any other provisions of this Section 9, the Corporation
shall not be required to make any adjustment of the Exchange Rate for the
issuance of any Common Stock pursuant to any plan providing for the
reinvestment of distributions or interest payable on securities of the
Corporation and the investment of additional optional amounts in Common
Stock under such plan. All calculations under this Section 9 shall be
made to the nearest cent (with $.005 being rounded upward) or to the
nearest one-tenth of a share (with .05 of a share being rounded upward),
as the case may be. Anything in this subsection (a) to the contrary
notwithstanding, the Corporation shall be entitled, to the extent
permitted by law, to make such increases in the Exchange Rate, in
addition to those required by this subsection (a), as it in its
discretion shall determine to be advisable in order that any share
distributions, subdivision, reclassification or combination of shares,
distribution of rights, options or warrants to purchase shares or
securities, or a distribution of other assets (other than cash
distributions) hereafter made by the Corporation to its stockholders
shall not be taxable.
(b) Except as otherwise provided for in Section 9(a)(i), if the
Corporation shall be a party to any transaction (including, without
limitation, a merger, consolidation, statutory share exchange, tender offer
for all or substantially all of the Common Stock, sale or transfer of all or
substantially all of the Corporation's assets or recapitalization of the
Common Stock) (each of the foregoing being referred to herein as a
"Transaction"), in each case as a result of which Common Stock shall be
converted into the right to receive shares, stock, securities or other
property (including cash or any combination thereof), the Corporation (or
its successor in such Transaction) shall make appropriate provision so that
each share of Class B Common, if not converted into the right to
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receive shares, stock, securities or other property in connection with such
Transaction in accordance with the third to last sentence of this subsection
(b) shall thereafter be exchangeable into the kind and amount of shares,
stock, securities and other property (including cash or any combination
thereof) receivable upon the consummation of such Transaction by a holder of
that number of shares of Common Stock into which one share of Class B Common
was convertible immediately prior to such Transaction, assuming such holder
of Common Stock (i) is not a Person with which the Corporation consolidated
or into which the Corporation merged or which merged into the Corporation or
to which such sale or transfer was made, as the case may be (a "Constituent
Person"), or an affiliate of a Constituent Person and (ii) failed to
exercise his rights of the election, if any, as to the kind or amount of
shares, stock, securities and other property (including cash or any
combination thereof) receivable upon such Transaction (each, a "Non-Electing
Share") (provided that if the kind and amount of shares, stock, securities
and other property (including cash or any combination thereof) receivable
upon consummation of such Transaction is not the same for each Non-Electing
Share, the kind and amount of shares, stock, securities and other property
(including cash or any combination thereof) receivable upon such Transaction
by each Non-Electing Share shall be deemed to be the kind and amount so
receivable per share by a plurality of the Non-Electing Shares). The
Corporation shall not be a party to any Transaction in which any share of
Class B Common is converted into the right to receive shares, stock,
securities or other property (including cash or any combination thereof)
with an aggregate value (as determined by the Board of Directors in good
faith, whose determination shall be conclusive) less than that receivable by
the number of shares of Common Stock into which shares of Class B Common
were exchangeable immediately prior to such Transaction. The Corporation
shall not be a party to any Transaction unless the terms of such Transaction
are consistent with the provisions of this subsection (b), and it shall not
consent or agree to the occurrence of any Transaction until the Corporation
has entered into an agreement with the successor or purchasing entity, as
the case may be, for the benefit of the holders of the Class B Common that
will contain provisions enabling holders of Class B Common that remains
outstanding after such Transaction to exchange their Class B Common into the
consideration received by holders of Common Stock at the Exchange Rate in
effect immediately prior to such Transaction. The provisions of this
subsection (b) shall similarly apply to successive Transactions.
(c) If:
(i) the Corporation shall declare a distribution on the Common Stock
(other than cash distributions which do not constitute extraordinary
dividends) or there shall be a reclassification, subdivision or
combination of the Common Stock; or
(ii) the Corporation shall grant to the holders of the Common Stock
of rights, options or warrants to subscribe for or purchase Common Stock
at less than Fair Market Value; or
(iii) the Corporation shall enter into a Transaction; or
(iv) there shall occur the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; or
(v) there shall occur the circumstances described in clause (a)(iv)
of Section 9 that would cause the Exchange Rate to be adjusted,
then the Corporation shall cause to be filed with the Transfer Agent and
shall cause to be mailed to the holders of the Class B Common at their
addresses as shown on the stock transfer records of the Corporation, as
promptly as possible, but at least 15 days prior to the applicable date
hereinafter specified, a notice stating (i) the date on which a record is to
be taken for the purpose of such distribution or rights, options or
warrants, or, if a record is not to be taken, the date as of which the
holders of Common Stock of record to be entitled to such distribution or
rights, options
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or warrants are to be determined or (ii) the date on which such
reclassification, subdivision, combination, Transaction or liquidation,
dissolution or winding up is expected to become effective, and the date as
of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property, if
any, deliverable upon such reclassification, subdivision, combination,
Transaction or liquidation, dissolution or winding up. Failure to give or
receive such notice or any defect therein shall not affect the legality or
validity of the proceedings described in this Section 9.
(d) Whenever the Exchange Rate is adjusted as herein provided, the
Corporation shall promptly file with the Transfer Agent an officer's
certificate setting forth the Exchange Rate after such adjustment and
setting forth a brief statement of the facts requiring such adjustment,
which certificate shall be conclusive evidence of the correctness of such
adjustment absent manifest error. Promptly after delivery of such
certificate, the Corporation shall prepare a notice of such adjustment of
the Exchange Rate setting forth the adjusted Exchange Rate and the effective
date such adjustment becomes effective and shall mail such notice of such
adjustment of the Exchange Rate to the holder of each share of Class B
Common at such holder's last address as shown on the stock transfer records
of the Corporation.
(e) In any case in which Section 9(a) provides that an adjustment shall
become effective on the day following the record date for an event, the
Corporation may defer until the occurrence of such event (i) issuing to the
holder of any share of Class B Common converted after such record date and
before the occurrence of such event the additional shares of Common Stock
issuable upon such conversion by reason of the adjustment required by such
event over and above the shares of Common Stock issuable upon such
conversion before giving effect to such adjustment and (ii) fractionalizing
any share of Class B Common and/or paying to such holder any amount of cash
in lieu of any fraction pursuant to Section 8.
(f) There shall be no adjustment of the Exchange Rate in case of the
issuance of any equity securities of the Corporation in a reorganization,
acquisition or other similar transaction except as specifically set forth in
this Section 9. If any action or transaction would require adjustment of the
Exchange Rate pursuant to more than one subsection of Section 9(a), only one
adjustment shall be made, and such adjustment shall be the amount of
adjustment that has the highest absolute value.
(g) If the Corporation shall take any action affecting the Common Stock,
other than action described in this Section 9, that in the opinion of the
Board of Directors of the Corporation would materially adversely affect the
exchange rights of the holders of the Class B Common, the Exchange Rate for
the Class B Common shall be adjusted, to the extent permitted by law, in
such manner, if any, and at such time, as the Board of Directors of the
Corporation, in its sole discretion, determines to be equitable in the
circumstances.
(h) The Corporation shall at all times reserve and keep available, free
from preemptive rights, out of the aggregate of its authorized but unissued
Common Stock, for the purpose of effecting any exchange of the Class B
Common, the full number of shares of Common Stock deliverable upon the
exchange of all outstanding shares of Class B Common not theretofore
exchanged. For purposes of this subsection (h), the number of shares of
Common Stock that shall be deliverable upon the exchange of all outstanding
shares of Class B Common shall be computed as if at the time of computation
all such outstanding shares were held by a single holder.
The Corporation covenants that any shares of Common Stock issued upon
exchange of the Class B Common shall be validly issued, fully paid and
non-assessable.
The Corporation shall list the Common Stock required to be delivered
upon exchange of the Class B Common, prior to such delivery, upon each
national securities exchange, if any, upon which the outstanding Common
Stock is listed at the time of such delivery.
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Prior to the delivery of any securities that the Corporation shall be
obligated to deliver upon exchange of the Class B Common, the Corporation
shall comply with all federal and state laws and regulations thereunder
requiring the registration of such securities with, or any approval of or
consent to the delivery thereof, by any governmental authority.
(i) The Corporation shall pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of
Common Stock or other securities or property on exchange of the Class B
Common pursuant hereto; provided, however, that the Corporation shall not be
required to pay any tax that may be payable in respect of any transfer
involved in the issue or delivery of Common Stock or other securities or
property in a name other than that of the record holder of the Class B
Common to be exchanged, and no such issue or delivery shall be made unless
and until the person requesting such issue or delivery has paid to the
Corporation the amount of any such tax or established, to the reasonable
satisfaction of the Corporation, that such tax has been paid.
10. OWNERSHIP LIMITATIONS. Notwithstanding Article VII of the Articles,
the provisions of this Section 10 shall apply with respect to the limitations on
the ownership and acquisition of shares of Class B Common.
(a) RESTRICTION ON OWNERSHIP AND TRANSFER.
(i) Except as provided in Section 10(h), no Person shall
Beneficially Own or Constructively Own any shares of Class B Common such
that such Person would Beneficially Own or Constructively Own Capital
Stock in excess of the Ownership Limit;
(ii) Except as provided in Section 10(h), any Transfer (whether or
not such Transfer is the result of a transaction entered into through the
facilities of the New York Stock Exchange, Inc. (the "NYSE")) that, if
effective, would result in any Person Beneficially Owning Class B Common
in excess of the Ownership Limit shall be void ab initio as to the
Transfer of such Class B Common which would be otherwise Beneficially
Owned by such Person in excess of the Ownership Limit; and the intended
transferee shall acquire no rights in such Class B Common;
(iii) Except as provided in Section 10(h), any Transfer (whether or
not such Transfer is the result of a transaction entered into through the
facilities of the NYSE) that, if effective, would result in any Person
Constructively Owning Class B Common in excess of the Ownership Limit
shall be void ab initio as to the Transfer of such Class B Common which
would be otherwise Constructively Owned by such Person in excess of the
Ownership Limit; and the intended transferee shall acquire no rights in
such Class B Common; and
(iv) Notwithstanding any other provisions contained in this Section
10, any Transfer (whether or not such Transfer is the result of a
transaction entered into through the facilities of the NYSE) or other
event that, if effective, would result in the Corporation being "closely
held" within the meaning of Section 856(h) of the Code, or would
otherwise result in the Corporation failing to qualify as a REIT
(including, but not limited to, a Transfer or other event that would
result in the Corporation owning (directly or Constructively) an interest
in a tenant that is described in Section 856(d)(2)(B) of the Code if the
income derived by the Corporation from such tenant would cause the
Corporation to fail to satisfy any of the gross income requirements of
Section 856(c) of the Code) shall be void ab initio as to the Transfer of
the Class B Common or other event which would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code or would
otherwise result in the Corporation failing to qualify as a REIT; and the
intended transferee or owner or Constructive or Beneficial Owner shall
acquire or retain no rights in such Class B Common.
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(b) CONVERSION INTO AND EXCHANGE FOR CLASS B EXCESS COMMON. If,
notwithstanding the other provisions contained in this Section 10, at any
time after the date of the Class B Issue Date, there is a purported Transfer
(whether or not such Transfer is the result of a transaction entered into
through the facilities of the NYSE), change in the capital structure of the
Corporation or other event such that one or more of the restrictions on
ownership and transfers described in Section 10(a), above, has been
violated, then the Class B Common being Transferred (or in the case of an
event other than a Transfer, the Class B Common owned or Constructively
Owned or Beneficially Owned or, if the next sentence applies, the Class B
Common identified in the next sentence) which would cause the restriction on
ownership or transfer to be violated (rounded up to the nearest whole share)
shall be automatically converted into an equal number of shares of Class B
Common Excess Stock ("Class B Excess Common"). If at any time of such
purported Transfer any of the shares of the Class B Common are then owned by
a depositary to permit the trading of beneficial interests in fractional
shares of Class B Common, then shares of Class B Common that shall be
converted to Class B Excess Common shall be first taken from any Class B
Common that is not in such depositary that is Beneficially Owned or
Constructively Owned by the Person whose Beneficial Ownership or
Constructive Ownership would otherwise violate the restrictions of Section
10(a) prior to converting any shares in such depositary. Any conversion
pursuant to this subparagraph shall be effective as of the close of business
on the Business Day prior to the date of such Transfer or other event.
(c) REMEDIES FOR BREACH. If the Board of Directors of the Corporation
or its designee shall at any time determine in good faith that a Transfer or
other event has taken place in violation of Section 10(a) or that a Person
intends to Transfer or acquire, has attempted to Transfer or acquire or may
Transfer or acquire direct ownership, beneficial ownership (determined
without reference to any rules of attribution), Beneficial Ownership or
Constructive Ownership of any shares of the Corporation in violation of
Section 10(a), the Board of Directors of the Corporation or its designee
shall take such action as it deems advisable to refuse to give effect to or
to prevent such Transfer, acquisition or other event, including, but not
limited to, causing the Corporation to purchase such shares for Fair Market
Value upon the terms and conditions specified by the Board of Directors of
the Corporation in its sole discretion, refusing to give effect to such
Transfer, acquisition or other event on the books of the Corporation or
instituting proceedings to enjoin such Transfer, acquisition or other event;
provided, however, that any Transfer or acquisition (or, in the case of
events other than a Transfer or acquisition, ownership or Constructive
Ownership or Beneficial Ownership) in violation of Section 10(a) shall
automatically result in the conversion described in Section 10(b),
irrespective of any action (or non-action) by the Board of Directors of the
Corporation.
(d) NOTICE OF RESTRICTED TRANSFER. Any Person who acquires or attempts
to acquire or Beneficially Owns or Constructively Owns shares of Class B
Common in excess of the aforementioned limitations, or any Person who is or
attempts to become a transferee such that Class B Excess Common results
under the provisions of these Articles, shall immediately give written
notice or, in the event of a proposed or attempted Transfer, give at least
15 days prior written notice to the Corporation of such event and shall
provide to the Corporation such other information as it may request in order
to determine the effect of any such Transfer on the Corporation's status as
a REIT.
(e) OWNERS REQUIRED TO PROVIDE INFORMATION. From and after the Class B
Issue Date, each Person who is a Beneficial Owner or Constructive Owner of
Class B Common and each Person (including the stockholder of record) who is
holding Class B Common for a Beneficial Owner or Constructive Owner shall
provide to the Corporation such information with respect to the direct,
indirect and constructive ownership of Class B Common as the Corporation may
request, in good
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faith, in order to comply with the provisions of the Code applicable to
REITs, to comply with the requirements of any taxing authority or
governmental agency or to determine such compliance.
(f) REMEDIES NOT LIMITED. Nothing contained in this Section 10 (but
subject to Section 10(l)) shall limit the authority of the Board of
Directors of the Corporation to take such other action as it deems necessary
or advisable to protect the Corporation and the interests of its
stockholders by preservation of the Corporation's status as a REIT.
(g) AMBIGUITY. In the case of an ambiguity in the application of any
of the provisions of this Section 10, including any definition contained in
Section 11, the Board of Directors of the Corporation shall have the power
to determine the application of the provisions of this Section 10 with
respect to any situation based on the facts known to it (subject, however,
to the provisions of Section 10(l)).
(h) EXCEPTIONS.
(i) Subject to Section 10(a)(iv), the Board of Directors of the
Corporation, in its sole and absolute discretion, with the advice of the
Corporation's tax counsel, may exempt a Person from the limitation on a
Person Beneficially Owning Class B Common in excess of the Ownership
Limit if such Person is not an individual for purposes of Section
542(a)(2) of the Code and the Board of Directors obtains such
representations and undertakings from such Person as are reasonably
necessary to ascertain that no individual's Beneficially Owning Class B
Common will violate the Ownership Limit and such Person agrees that any
violation of such representations or undertaking (or other action which
is contrary to the restrictions contained in this Section 10) or
attempted violation will result in such Class B Common Beneficially Owned
in excess of the Ownership Limit being exchanged for Class B Excess
Common in accordance with Section 10(b).
(ii) Subject to Section 10(a)(iv), the Board of Directors of the
Corporation, in its sole and absolute discretion, with advice of the
Corporation's tax counsel, may exempt a Person from the limitation on a
Person Constructively Owning Class B Common in excess of the Ownership
Limit if such Person does not and represents that it will not own,
directly or constructively (by virtue of the application of Section 318
of the Code, as modified by Section 856(d)(5) of the Code), more than a
9% interest (as set forth in Section 856(d)(2)(B) of the Code) in a
tenant of the Corporation and the Board of Directors obtains such
representations and undertakings from such Person as are reasonably
necessary to ascertain this fact and such Person agrees that any
violation or attempted violation will result in such Class B Common
Constructively Owned in excess of the Ownership Limit being exchanged for
Excess Stock in accordance with Section 10(b).
(iii) Prior to granting any exception pursuant to Section 10(h)(i) or
10(h)(ii), the Board of Directors of this Corporation may require a
ruling from the IRS, or an opinion of counsel, in either case in form and
substance satisfactory to the Board of Directors, in its sole discretion
as it may deem necessary or advisable in order to determine or ensure the
Corporation's organization and operation in conformity with the
requirements for qualification as a REIT under the Code; provided,
however, that obtaining a favorable ruling or opinion shall not be
required for the Board of Directors to grant an exception hereunder.
(i) INCREASE IN OWNERSHIP LIMIT. Notwithstanding anything herein to
the contrary, Article VII, Section 9 of the charter of the Corporation shall
apply to this Section 10.
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(j) LEGEND. Each certificate for Class B Common shall bear
substantially the following legend:
The Corporation will furnish to any stockholder, on request and
without charge, a full statement of the information required by
Section 2-211(d) of the Corporations and Associations Article of the
Annotated Code of Maryland with respect to the designations and any
preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications, and terms and conditions of redemption of the shares
of each class of stock which the Corporation has authority to issue
and, if the Corporation is authorized to issue any preferred or
special class in series, (i) the differences in the relative rights
and preferences between the shares of each series to the extent set,
and (ii) the authority of the Board of Directors to set such rights
and preferences of subsequent series. The following summary does not
purport to be complete and is subject to and qualified in its
entirety by reference to the charter of the Corporation including all
amendments and supplements thereto (the "Charter"), a copy of which,
including restrictions on transfer, will be sent without charge to
each stockholder who so requests. Such request must be made to the
Secretary of the Corporation at its principal office or to the
Transfer Agent. All capitalized terms in this legend have the
meanings defined in the Charter.
The securities represented by this certificate are subject to
restrictions on ownership and transfer for the purpose of the
Corporation's maintenance of its status as a real estate investment
trust under the Internal Revenue Code of 1986, as amended. Except as
otherwise provided pursuant to the Charter of the Corporation, no
Person may Beneficially Own or Constructively Own any shares of Class
B Common such that such Person would Beneficially Own or
Constructively Own Common Equity in excess of 9% in value of the
aggregate of the outstanding shares of Common Equity of the
Corporation. Any Person who acquires or attempts to acquire or
Beneficially Owns or Constructively Owns shares of Class B Common in
excess of the aforementioned limitation, or any Person who is or
attempts to become a transferee such that Class B Excess Common would
result under the provisions of the Charter, shall immediately give
written notice or, in the event of a proposed or attempted Transfer,
give at least 15 days prior written notice to the Corporation of such
event and shall provide to the Corporation such other information as
it may request in order to determine the effect of any such Transfer
on the corporation's status as a REIT. Transfers in violation of the
restrictions described above shall be void ab initio. If the
restrictions on ownership and transfer are violated, the securities
represented hereby will be designated and treated as shares of Class
B Excess Common which will be transferred, by operation of law, to
the trustee of a trust for the exclusive benefit of one or more
charitable organizations.
(k) SEVERABILITY. If any provision of this Section 10 or any
application of any such provision is determined to be invalid by any federal
or state court having jurisdiction, the validity of the remaining provisions
shall not be affected and other applications of such provision shall be
affected only to the extent necessary to comply with the determination of
such court.
(l) CLASS B EXCESS COMMON.
(i) OWNERSHIP IN TRUST. Upon any purported Transfer (whether or
not such Transfer is the result of a transaction entered into through the
facilities of the NYSE) that results in the issuance of Class B Excess
Common pursuant to Section 10(b), such Class B Excess Common shall be
deemed to have been transferred to the Trustee of a Trust for the
exclusive benefit of one or more Charitable Beneficiaries. The Trustee
shall be appointed by the Corporation, and shall be a person unaffiliated
with the Corporation, any Purported Beneficial Transferee or
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any Purported Record Transferee. By written notice to the Trustee, the
Corporation shall designate one or more non-profit organizations to be
the Charitable Beneficiary(ies) of the interest in the Trust representing
the Class B Excess Common such that (a) the shares of Class B Common from
which the shares of Class B Excess Common held in the Trust were so
converted would not violate the restrictions set forth in paragraph (a)
of this Section 10 in the hands of such Charitable Beneficiary and (b)
each Charitable Beneficiary is an organization described in Sections
170(b)(1)(a), 170(c)(2) and 501(c)(3) of the Code. The Trustee of the
Trust will be deemed to own the Class B Excess Common for the benefit of
the Charitable Beneficiary on the date of the purported Transfer or other
event that results in Class B Excess Common pursuant to paragraph (b) of
this Section 10. Class B Excess Common so held in trust shall be issued
and outstanding shares of stock of the Corporation. The Purported Record
Transferee shall have no rights in such Class B Excess Common except the
right to designate a transferee of such Class B Excess Common upon the
terms specified in Section 10(l)(v). The Purported Beneficial Transferee
shall have no rights in such Class B Excess Common except as provided in
this Section 10.
(ii) DIVIDEND RIGHTS. Class B Excess Common will be entitled to
dividends and distributions authorized and declared with respect to the
Class B Common from which the Class B Excess Common was converted and
will be payable to the Trustee of the Trust in which such Class B Excess
Common is held, for the benefit of the Charitable Beneficiary. Dividends
and distributions will be authorized and declared with respect to each
share of Class B Excess Common in an amount equal to the dividends and
distributions authorized and declared on each share of Class B Common
from which the Class B Excess Common was converted. Any dividend or
distribution paid to a Purported Record Transferee prior to the discovery
by the Corporation that Class B Common has been transferred in violation
of the provisions of this Section 10 shall be repaid by the Purported
Record Transferee to the Trustee upon demand. The Corporation shall
rescind any dividend or distribution authorized and declared but unpaid
as void ab initio with respect to the Purported Record Transferee, and
the Corporation shall pay such dividend or distribution when due to the
Trustee of the Trust for the benefit of the Charitable Beneficiary.
(iii) CONVERSION RIGHTS. Holders of shares of Class B Excess Common
shall not be entitled to exchange any shares of Class B Excess Common
into shares of Common Stock. Any exchange of shares of Class B Common for
shares of Common Stock made prior to the discovery by the Corporation
that such shares of Class B Common have been converted into Class B
Excess Common shall be void ab initio and the Purported Record Transferee
shall return the shares of Common Stock into which the Class B Common was
exchanged upon demand to the Corporation which shares of Common Stock
shall be exchanged back into Class B Excess Common and deposited into the
Trust. Notwithstanding the foregoing, at any time on or after the Class B
Issue Date, the Corporation may elect to exchange Class B Excess Common
for Common Stock in accordance with Section 7.
(iv) RIGHTS UPON LIQUIDATION. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any other
distribution of all or substantially all of the assets of the
Corporation, each holder of shares of Class B Excess Common shall be
entitled to receive, ratably (treating each Class B Excess Common share
as the equivalent of that number of shares of Common Stock into which it
may then be exchanged by the Corporation pursuant to Section 7) with each
other holder of Class B Common and Class B Excess Common converted from
Class B Common, any distribution or payment made to all holders of Common
Stock.
Any liquidation distributions to be distributed with respect to Class
B Excess Common shall be distributed in the same manner as proceeds from
the sale of Class B Excess Common are distributed as set forth in Section
10(l)(v).
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(v) NON-TRANSFERABILITY OF EXCESS STOCK. Class B Excess Common
shall not be transferable. In its sole discretion, the Trustee of the
Trust may transfer the interest in the Trust representing shares of Class
B Excess Common to any Person if the shares of Class B Excess Common
would not be Class B Excess Common in the hands of such Person. If such
transfer is made, the interest of the Charitable Beneficiary in the Class
B Excess Common shall terminate and the proceeds of the sale shall be
payable by the Trustee to the Purported Record Transferee and to the
Charitable Beneficiary as herein set forth. The Purported Record
Transferee shall receive from the Trustee the lesser of (i) the price
paid by the Purported Record Transferee for its shares of Class B Common
that were converted into Class B Excess Common or, if the Purported
Record Transferee did not give value for such shares (e.g. the stock was
received through a gift, devise or other transaction), the average
closing price for the class of shares from which such shares of Class B
Excess Common were converted for the ten trading days immediately
preceding such sale or gift, and (ii) the price received by the Trustee
from the sale or other disposition of the Class B Excess Common held in
trust. The Trustee may reduce the amount payable to the Purported Record
Transferee by the amount of dividends and distributions which have been
paid to the Purported Record Transferee and are owed by the Purported
Record Transferee to the Trustee pursuant to Section 10(l)(ii). Any
proceeds in excess of the amount payable to the Purported Record
Transferee shall be paid by the Trustee to the Charitable Beneficiary.
Upon such transfer of an interest in the Trust, the corresponding shares
of Class B Excess Common in the Trust shall be automatically exchanged
for an equal number of shares of Class B Common and such shares of Class
B Common shall be transferred of record to the transferee of the interest
in the Trust if such shares of Class B Common would not be Class B Excess
Common in the hands of such transferee. Prior to any transfer of any
interest in the Trust, the Corporation must have waived in writing its
purchase rights under Section 10(l)(vii).
(vi) VOTING RIGHTS FOR CLASS B EXCESS COMMON. Any vote cast by a
Purported Record Transferee of Class B Excess Common prior to the
discovery by the Corporation that Class B Common has been transferred in
violation of the provisions of this Section 10 shall be void ab initio.
While the Class B Excess Common is held in trust, the Purported Record
Transferee will be deemed to have given an irrevocable proxy to the
Trustee to vote the shares of Class B Common which have been converted
into shares of Class B Excess Common for the benefit of the Charitable
Beneficiary.
(vii) PURCHASE RIGHTS IN CLASS B EXCESS COMMON. Notwithstanding the
provisions of Section 10(l)(v), shares of Class B Excess Common shall be
deemed to have been offered for sale to the Corporation, or its designee,
at a price per share equal to the lesser of (i) the price per share in
the transaction that required the issuance of such Class B Excess Common
(or, if the Transfer or other event that resulted in the issuance of
Class B Excess Common was not a transaction in which the Purported
Beneficial Transferee gave full value for such Class B Excess Common, a
price per share equal to the Market Price on the date of the purported
Transfer or other event that resulted in the issuance of Class B Excess
Common) and (ii) the Market Price on the date the Corporation, or its
designee, accepts such offer. The Corporation shall have the right to
accept such offer for a period of ninety (90) days after the later of (i)
the date of the Transfer or other event which resulted in the issuance of
such shares of Class B Excess Common and (ii) the date the Board of
Directors determines in good faith that a Transfer or other event
resulting in the issuance of shares of Class B Excess Common has
occurred, if the Corporation does not receive a notice of such Transfer
or other event pursuant to Section 10(d). The Corporation may appoint a
special trustee of the Trust for the purpose of consummating the purchase
of Class B Excess Common by the Corporation. In the event that the
Corporation's actions cause a reduction in the number of shares of Class
B Common outstanding and such reduction results in the issuance of Class
B
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Excess Common, the Corporation is required to exercise its option to
repurchase such shares of Class B Excess Common if the Beneficial Owner
notifies the Corporation that it is unable to sell its rights to such
Class B Excess Common.
(m) SETTLEMENT. Nothing in this Section 10 shall preclude the
settlement of any transaction entered into through the facilities of the
NYSE.
11. DEFINITIONS. For purposes of the provisions included in Article VII of
the Articles as a result of the Articles Supplementary adopted and filed in
connection with the designation and reclassification of the Class B Common:
"Aggregate FFO Growth" shall mean, with respect to any Class B Year, the
fraction (expressed as a percentage), the numerator of which is the excess, if
any, of FFO per share of Common Stock in such Class B Year over the FFO per
share of Common Stock in the Base Year ("Base Year FFO"), in each case,
calculated on a fully diluted basis and the denominator of which is the Base
Year FFO, calculated on a fully diluted basis. For purposes of dilution
calculation, the diluted weighted average number of shares shall be calculated
in accordance with GAAP, except that all Class B Common Stock and Class B Excess
Common will be deemed converted into Common Stock at then applicable Exchange
Rate for an exchange at the election of a holder pursuant to Section 6.
"Base Year" shall mean the twelve month period ending on the last day of the
calendar quarter in which the Class B Issue Date occurs.
"Base Year Quarterly Dividend" shall mean $.3375 per share.
"Beneficial Ownership" shall mean ownership of Class B Common or Class B
Excess Common by a Person who is or would be treated as an owner of such Class B
Common or Class B Excess Common either directly or constructively through the
application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of
the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially
Owned" shall have the correlative meanings.
"Business Day" shall mean any day, other than a Saturday or Sunday, that is
neither a legal holiday nor a day on which banking institutions in The City of
New York are authorized or required by law, regulation or executive order to
close.
"Capital Stock" shall mean all classes of series of stock of the
Corporation, including, without limitation, Common Stock, Class B Common,
preferred stock, par value $0.01 per share and excess stock, par value $0.01 per
share.
"Charitable Beneficiary" shall mean a beneficiary of the Trust as determined
pursuant to Section 10(l).
"Class B Dividend Amount" shall mean, with respect to any quarterly period,
an amount equal to 1/4th of the product of (a) the Unadjusted Class B Dividend
Amount for the Class B Year in which such quarterly period occurs, multiplied by
(b) the Dividend Payment Percentage for such quarterly period; provided, however
that if during any Class B Year after the second Class B Year, the Unadjusted
Class B Dividend Amount for the then current Class B Year is less than the
Unadjusted Class B Dividend Amount for the prior Class B Year, then for each
quarter during such year having a Dividend Payment Percentage of 100%, the Class
B Dividend Amount for such quarter shall not be less than the sum of (i) the
dividends paid on a share of Common Stock plus (ii) $0.2225. Notwithstanding the
foregoing, the Class B Dividend Amount for the quarter in which the Class B
Issue Date occurs shall be equal to the product of (a) $.006222, multiplied by
(b) the number of days elapsed from the Class B Issue Date to the last day of
the calendar quarter in which the Class B Issue Date occurs and multiplied by
(c) the Dividend Payment Percentage for such quarterly period.
"Class B Year" shall mean the Base Year and each consecutive twelve-month
period thereafter.
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"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Equity" shall mean all shares now or hereafter authorized of any
class of common stock of the Corporation, including the Common Stock and the
Class B Common Stock, and any other stock of the Corporation, howsoever
designated, authorized after the Class B Issue Date, which has the right
(subject always to prior rights of any class or series of preferred stock) to
participate in the distribution of the assets and earnings of the Corporation
without limit as to per share amount.
"Constructive Ownership" shall mean ownership of Class B Common or Class B
Excess Common by a Person who is or would be treated as an owner of such Class B
Common or Class B Excess Common either directly or constructively through the
application of Section 318 of the Code, as modified by Section 856(d)(5) of the
Code. The terms "Constructive Owner," "Constructively Owns" and "Constructively
Owned" shall have the correlative meanings.
"Current Market Price" of publicly traded Common Stock or any other equity
security of the Corporation or any other issuer for any day shall mean the last
reported sales price, regular way, on such day, or, if no sale takes place on
such day, the average of the reported closing bid and asked prices on such day,
regular way, in either case as reported on the NYSE or, if such security is not
listed or admitted for trading on the NYSE, on the principal national securities
exchange on which such security is listed or admitted for trading or, if not
listed or admitted for trading on any national securities exchange, on the
Nasdaq National Market or, if such security is not quoted on the Nasdaq National
Market, the average of the closing bid and asked prices on such day in the
over-the-counter market as reported by Nasdaq or, if bid and asked prices for
such security on such day shall not have been reported through Nasdaq the
average of the bid and asked prices on such day as furnished by any NYSE member
firm regularly making a market in such security selected for such purpose by the
Corporation's Chief Executive Officer or the Board of Directors of the
Corporation.
"Dividend Payment Percentage" shall mean, with respect to any quarterly
period, the lesser of (a) 1 and (b) the fraction (expressed as a percentage)
equal to (i) the dividend paid per share on the Common Stock in such quarter
over (ii) the Base Year Quarterly Dividend.
"Exchange Consideration Amount" shall mean, on any date of determination,
the product of (a) the Market Price of the Common Stock on such date multiplied
by (b) the Exchange Rate on such date, without giving effect to the adjustment
described in Section 9(a)(iv).
"Fair Market Value" shall mean the average of the daily Current Market
Prices per share of Common Stock during the ten consecutive Trading Days
selected by the Corporation commencing not more than 20 Trading Days before, and
ending not later than, the earlier of the day in question and the day before the
"ex-date" with respect to the issuance or distribution requiring such
computation. The term "ex-date", when used with respect to any issuance or
distribution, means the first day on which the shares of Common Stock trade
regular way, without the right to receive such issuance or distribution, on the
exchange or in the market, as the case may be, for purposes of determining that
day's Current Market Price.
"FFO" shall mean "funds from operations" as defined by the National
Association of Real Estate Investment Trusts from time to time and determined in
good faith by the Corporation and set forth in its filings with the Securities
and Exchange Commission.
"GAAP" shall mean generally accepted accounting principles.
"IRS" shall mean the United States Internal Revenue Service.
"Market Price" as to any date shall mean the average of the last sales price
reported on the NYSE of the Common Stock, on the ten trading days immediately
preceding the relevant date, or if not then traded on the NYSE, the average of
the last reported sales price of the Class B Common on the ten trading days
immediately preceding the relevant date as reported on any exchange or quotation
system
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over which the Common Stock may be traded, or if not then traded over any
exchange or quotation system, then the market price of the Common Stock on the
relevant date as determined in good faith by the Board of Directors.
"Ownership Limit" shall mean 9% in value of the aggregate of the outstanding
shares of Common Equity. The value of shares of the outstanding shares of Common
Equity shall be determined by the Board of Directors of the Corporation in good
faith, which determination shall be conclusive for all purposes hereof.
"Person" shall mean an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the Code), a
portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock company
or other entity, and also includes a group as that term is used for purposes of
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended; but does
not include an underwriter which participates in a public offering of the Class
B Common or any interest therein, provided that such ownership by such
underwriter would not result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code, or otherwise result in the Corporation
failing to qualify as a REIT.
"Purported Beneficial Transferee" shall mean, with respect to any purported
Transfer which results in Class B Excess Common, the purported beneficial
transferee or owner for whom the Purported Record Transferee would have acquired
or owned shares of Class B Common if such Transfer had been valid under Section
10(a) below.
"Purported Record Transferee" shall mean, with respect to any purported
Transfer which results in Class B Excess Common Stock, the record holder of the
Class B Common if such Transfer had been valid under Section 10(a).
"Set apart for payment" shall be deemed to include, without any further
action, the following: the recording by the Corporation in its accounting
ledgers of any accounting or bookkeeping entry which indicates, pursuant to an
authorization of a dividend or other distribution by the Board of Directors of
the Corporation, the allocation of funds to be so paid on any series or class of
shares of the Corporation.
"Trading Day" shall mean any day on which the securities in question are
traded on the NYSE or, if such securities are not listed or admitted for trading
on the NYSE, on the principal national securities exchange on which such
securities are listed or admitted or, if not listed or admitted for trading on
any national securities exchange, on the Nasdaq National Market or, if such
securities are not quoted on the Nasdaq National Market, on the applicable
securities market in which the securities are traded.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or other
disposition of Class B Common, including (i) the granting of any option or
entering into any agreement for the sale, transfer or other disposition of Class
B Common or (ii) the sale, transfer, assignment or other disposition of any
securities (or rights convertible into or exchangeable for Class B Common),
whether voluntary or involuntary, whether of record or beneficially or
Beneficially or Constructively Owned (including but not limited to Transfers of
interests in other entities which result in changes in Beneficial or
Constructive Ownership of Class B Common), and whether by operation of law or
otherwise. The term "Transferring" and "Transferred" shall have the correlative
meanings.
"Transfer Agent" shall mean American Stock Transfer & Trust Company, or such
other agent or agents of the Corporation as may be designated by the Board of
Directors of the Corporation or its designee as the transfer agent for the Class
B Common.
"Trust" shall mean the trust created pursuant to Section 10(l).
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"Trustee" shall mean the Person that is appointed by the Corporation
pursuant to Section 10(l) to serve as trustee of the Trust, and any successor
thereto.
"Unadjusted Class B Dividend Amount" shall mean (a) $2.24 per share for the
first Class B Year after the Base Year and (b) with respect to any Class B Year
thereafter, an amount equal to $2.24 multiplied by the sum of (i) one plus (ii)
70% of Aggregate FFO Growth for the prior Class B Year, but in no event shall
the Unadjusted Class B Dividend Amount be less than $2.24 per share.
12. DETERMINATION BY BOARD. Any determination by the Board of Directors
pursuant to the terms of the Class B Common shall be final and binding upon the
holders thereof and shall be conclusive for all purposes.
THIRD: The Class B Common shares have been classified and designated by the
Board of Directors under the authority contained in the Charter.
FOURTH: These Articles Supplementary have been approved by the Board of
Directors in the manner and by the vote required by law.
FIFTH: These Articles Supplementary shall be effective at the time the
State Department of Assessments and Taxation of Maryland accepts these Articles
Supplementary for record.
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IN WITNESS WHEREOF, Reckson Associates Realty Corp. has caused these
presents to be signed in its name and on its behalf by its President and Chief
Operating Officer and its corporate seal to be hereunto affixed and attested by
its Secretary, and the said officers of the Corporation further acknowledge said
instrument to be the corporate act of the Corporation, and state under the
penalties of perjury that, to the best of their knowledge, information and
belief, the matters and facts therein set forth with respect to approval are
true in all material respects.
<TABLE>
<S> <C> <C>
RECKSON ASSOCIATES REALTY CORP.
By:
----------------------------------------
Scott H. Rechler,
President and Chief Operating Officer
(SEAL)
ATTEST:
- -------------------------------------------
Gregg Rechler, Secretary
</TABLE>
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Maryland General Corporation Law, as amended from time to time (the
"MGCL"), permits a Maryland corporation to include its charter a provision
limiting the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. Reckson's charter contains such a provision
which eliminates such liability to the maximum extent permitted by Maryland law.
Reckson's charter authorizes Reckson, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer or (b) any individual who, while a director of
Reckson and at the request of Reckson, serves or has served another corporation,
real estate investment trust, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or trustee
of such corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. Reckson's bylaws obligate
it, to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director or officer who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual who,
while a director of Reckson and at the request of Reckson, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
Reckson's charter and bylaws also permit Reckson to indemnify and advance
expenses to any person who served a predecessor of Reckson in any of the
capacities described above and to any employee or agent of Reckson or a
predecessor of Reckson.
The MGCL requires a corporation (unless its charter provides otherwise,
which Reckson's charter does not) to indemnify a present of former director or
officer or other individual serving in a capacity described above who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (1) was
committed in bad faith or (2) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify a director or officer for an adverse judgment in a suit by or in
the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to its present and former directors
and officers, among others, upon the corporation's receipt of (a) a written
affirmation by such individual of his good faith belief that he has met the
standard of conduct necessary for indemnification by the corporation and (b) a
written statement by him or on his behalf to repay the amount paid or reimbursed
by the corporation if it shall ultimately be determined that the standard of
conduct was not met.
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Reckson has entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require, among
other matters, that Reckson indemnify its executive officers and directors to
the fullest extent permitted by law and advance to the executive officers and
directors all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted. Under these agreements,
Reckson must also indemnify and advance all expenses incurred by executive
officers and directors seeking to enforce their rights under the indemnification
agreements and may cover executive officers and directors under Reckson's
directors' and officers' liability insurance. Although indemnification
agreements offer substantially the same scope of coverage afforded by the
Reckson bylaws, they provide greater assurance to directors and executive
officers that indemnification will be available, because, as contracts, they
cannot be modified unilaterally in the future by Reckson's board of directors or
the stockholders to eliminate the rights they provide.
Reckson OP's Partnership Agreement contains provisions indemnifying its
partners and their officers and directors to the fullest extent permitted by the
Delaware Revised Uniform Limited Partnership Act.
In the Merger Agreement, Reckson and Metropolitan Partners have agreed that
all rights to exculpation and indemnification existing in favor of the current
or former directors, officers or employees of Tower or any of its subsidiaries
as provided in Tower's charter or bylaws or in any agreement will survive the
merger and continue in full force and effect. For six years and ninety days
after the merger, Metropolitan Partners will indemnify such persons to the
fullest extent permitted by applicable law. For three years and ninety days
after the merger, Metropolitan Partners is obligated to maintain in effect
directors' and officers' liability insurance covering those persons who were
covered by Tower's insurance policy on the date the Merger Agreement was
executed, with coverage no less favorable than the coverage in effect under
Tower's directors' and officers' liability insurance on such date; provided that
Metropolitan Partners will not be required to pay an annual premium for such
insurance in excess of 200% of the annual premiums paid by Tower in 1998, but in
that case must purchase as much coverage as possible for that amount. Reckson
has unconditionally guaranteed the obligations of Metropolitan Partners
described in this paragraph.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Set forth below is a list of the exhibits included as part of this
Registration Statement. The exhibits listed below are listed according to the
number assigned in the table in Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of December 8, 1998, by and among Tower Realty Trust, Inc.,
Reckson Associates Realty Corp. ("Reckson"), Reckson Operating Partnership, L.P. and Metropolitan
Partners LLC previously filed as Exhibit 10.1 to Reckson's 8-K report filed with the SEC on December 22,
1998 and incorporated herein by reference.
3.1 Amended and Restated Articles of Incorporation previously filed as Exhibit 3.3 to Reckson's Registration
Statement on Form S-11 (No. 33-84324) and incorporated herein by reference.
3.2 By-Laws of Reckson previously filed as Exhibit 3.2 to Reckson's Registration Statement on Form S-11 (No.
333-1280) and incorporated herein by reference.
3.3 Reckson Associates Realty Corp. Articles Supplementary Establishing and Fixing the Rights and
Preferences of a Class of Shares of Preferred Stock designating 7 5/8% series A convertible cumulative
preferred stock previously filed as Exhibit 3.1 to Reckson's Form 8-K report filed with the SEC on March
1, 1999 and incorporated herein by reference.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.4 Form of Reckson Associates Realty Corp. Articles Supplementary Establishing and Fixing the Rights and
Preferences of a Class of Shares of Common Stock designating class B common stock (included as Annex B
to the Joint Proxy Statement/Prospectus contained in this registration statement).*
4.1 Specimen share certificate for Reckson common stock previously filed as Exhibit 4.1 to Reckson's
Registration Statement on Form S-11 (No. 33-84324) and incorporated herein by reference.
4.2 Specimen share certificate for Reckson 7 5/8% series A convertible cumulative preferred stock previously
filed as Exhibit 4.1 to Reckson's Form 8-K report filed with the SEC on March 1, 1999 and incorporated
herein by reference
4.3 Form of share certificate for Reckson class B common stock.**
4.4 Form of Indenture for Reckson OP 7% guaranteed notes due 2009 to be entered into by Reckson Operating
Partnership, L.P., as issuer, Reckson, as guarantor, and The Bank of New York, as trustee, previously
filed as Exhibit B to the Agreement and Plan of Merger described in Exhibit 2.1.
4.5 Form of Reckson OP 7% guaranteed note due 2009.**
4.6 Guarantee of Reckson (included in article 16 of the Indenture described in Exhibit 4.4).
5.1 Opinion of Brown & Wood LLP re legality of the shares of Reckson class B common stock and enforceability
of the Reckson OP 7% notes being offered.**
8.1 Opinion of Brown & Wood LLP re tax matters and consequences.**
10.1 Amended and Restated Agreement of Limited Partnership of Reckson Operating Partnership, L.P. previously
filed as Exhibit 10.1 to Reckson's Registration Statement on Form S-11 (No. 333-1280) and incorporated
herein by reference.
10.2 Third Amended and Restated Agreement of Limited Partnership of Omni Partners, L.P. previously filed as
Exhibit 10.2 to Reckson's Form 10-K report filed with the SEC on March 26, 1998 and incorporated herein
by reference.
10.3 Amendment and Restatement of Employment and Non-Competition Agreement between Reckson and Donald
Rechler.**
10.4 Amendment and Restatement of Employment and Non-Competition Agreement between Reckson and Scott
Rechler.**
10.5 Amendment and Restatement of Employment and Non-Competition Agreement between Reckson and Mitchell
Rechler.**
10.6 Amendment and Restatement of Employment and Non-Competition Agreement between Reckson and Gregg
Rechler.**
10.7 Amendment and Restatement of Employment and Non-Competition Agreement between Reckson and Roger
Rechler.**
10.8 Amendment and Restatement of Employment and Non-Competition Agreement between Reckson and J. Michael
Maturo.**
10.9 Purchase Option Agreements relating to the Reckson Option Properties previously filed as Exhibit 10.14
to Reckson's Registration Statement on Form S-11 (No. 333-1280) and incorporated herein by reference.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.10 Purchase Option Agreements relating to the Other Option Properties previously filed as Exhibit 10.15 to
Reckson's Registration Statement on Form S-11 (No. 333-1280) and incorporated herein by reference.
10.11 Amended 1995 Stock Option Plan previously filed as Exhibit 10.1 to Reckson's Form 8-K report filed with
the SEC on November 25, 1996 and incorporated herein by reference.
10.12 Unsecured Credit Agreement, dated as of July 23, 1998 among Reckson Operating Partnership, L.P., Reckson
Morris Operating Partnership, L.P., The Chase Manhattan Bank, as Arranger, Book Manager and
Administrative Agent, UBS AG, New York Branch, as Arranger, Book Manager and Syndication Agent, and PNC
Bank, National Association, as Documentation Agent previously filed as Exhibit 1.1 to Reckson's Form 8-K
report filed with the SEC on August 14, 1998 and incorporated herein by reference.
10.13 1996 Employee Stock Option Plan previously filed as Exhibit 10.2 to Reckson's Form 8-K report filed with
the SEC on November 25, 1996 and incorporated herein by reference.
10.14 Ground leases for properties previously filed as Exhibit 10.17 to Reckson's Registration Statement on
Form S-11 (No. 33-84324) and incorporated herein by reference.
10.15 Third Amended and Restated Agreement of Limited Partnership of Reckson FS Limited Partnership.**
10.16 Indemnity Agreement relating to 100 Oser Avenue previously filed as Exhibit 10.23 to Reckson's
Registration Statement on Form S-11 (No. 333-1280) and incorporated herein by reference.
10.17 Contribution Agreement by and among Reckson, Reckson Operating Partnership, L.P. and Tarrytown Corporate
Center, Tarrytown Corporate Center IV, L.P., Tarrytown Corporate Center II, Crest Realties, 2 Church
Street Associates, JAH Realties, and Jon Halpern previously filed as Exhibit 10.24 to Reckson's
Registration Statement on Form S-11 (No. 333-1280) and incorporated herein by reference.
10.18 Amended and Restated 1997 Stock Option Plan previously filed as Exhibit 10.19 to Reckson's Form 10-K
report filed with the SEC on March 26, 1998 and incorporated herein by reference.
10.19 1998 Stock Option Plan previously filed as Exhibit 10.20 to Reckson's Form 10-K report filed with the
SEC on March 26, 1998 and incorporated herein by reference
10.20 Amended and Restated Agreement of Limited Partnership of Reckson Morris Operating Partnership, L.P.
previously filed as Exhibit 10.21 to Reckson's Form 10-K report filed with the SEC on March 26, 1998 and
incorporated herein by reference.
10.21 Note Purchase Agreement for Reckson Operating Partnership, L.P.'s 7.2% senior unsecured notes due 2007
previously filed as Exhibit 10.23 to Reckson's Form 10-K report filed with the SEC on March 26, 1998 and
incorporated herein by reference.
10.22 Intercompany Agreement with Reckson Service Industries, Inc.**
10.23 Credit Agreement with Reckson Service Industries, Inc. relating to the operations of Reckson Service
Industries, Inc.**
10.24 Credit Agreement with Reckson Service Industries, Inc. relating to Reckson Strategic Venture Partners,
LLC.**
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.25 Stock Purchase Agreement, dated as of December 8, 1998, by and between Tower Realty Trust, Inc. and
Metropolitan Partners LLC previously filed as Exhibit 10.2 to Reckson's 8-K report filed with the SEC on
December 22, 1998 and incorporated herein by reference.
10.26 Registration Rights Agreement, dated as of December 8, 1998, by and among Tower Realty Trust, Inc.,
Metropolitan Partners LLC and Reckson previously filed as Exhibit 10.10 to Tower Realty Trust, Inc.'s
Form 8-K filed with the SEC on December 18, 1998 and incorporated herein by reference.
10.27 Amended and Restated Operating Agreement of Metropolitan Partners LLC, dated as of December 8, 1998, by
and between Reckson Operating Partnership, L.P. and Crescent Real Estate Equities Limited Partnership
previously filed as Exhibit 10.3 to Reckson's 8-K report filed with the SEC on December 22, 1998 and
incorporated herein by reference.
10.28 Amended and Restated Credit Agreement, dated as of January 12, 1999, among Reckson Operating
Partnership, L.P. and Reckson Morris Operating Partnership, L.P. and ING (U.S.) Capital, LLC, as
Documentation Agent and The Chase Manhattan Bank, as Arranger, Book Manager and Administrative Agent
previously filed as Exhibit 1.1 to Reckson's 8-K report filed with the SEC on February 5, 1999 and
incorporated herein by reference.
10.29 Amended and Restated Unconditional Guaranty of Payment by Reckson Operating Partnership, L.P., Reckson
Associates Realty Corp., Reckson FS Limited Partnership, Reckson Morris Industrial Interim GP LLC and
Reckson Morris Industrial Trust in favor of The Chase Manhattan Bank, as Arranger, Book Manager and
Administrative Agent for the benefit of the lenders under the credit agreement described in Exhibit
10.28 previously filed as Exhibit 1.2 to Reckson's 8-K report filed with the SEC on February 5, 1999 and
incorporated herein by reference.
10.30 Supplement to the Amended and Restated Agreement of Limited Partnership of Reckson Operating
Partnership, L.P. establishing Series A Preferred Units of Limited Partnership Interest previously filed
as Exhibit 10.1 to Reckson's Form 8-K report filed with the SEC on March 1, 1999 and incorporated herein
by reference.
10.31 Supplement to the Amended and Restated Agreement of Limited Partnership of Reckson Operating
Partnership, L.P. establishing Series B Preferred Units of Limited Partnership Interest previously filed
as Exhibit 10.2 to Reckson's Form 8-K report filed with the SEC on March 1, 1999 and incorporated herein
by reference.
10.32 Supplement to the Amended and Restated Agreement of Limited Partnership of Reckson Operating
Partnership, L.P. establishing Series C Preferred Units of Limited Partnership Interest previously filed
as Exhibit 10.3 to Reckson's Form 8-K report filed with the SEC on March 1, 1999 and incorporated herein
by reference.
10.33 Supplement to the Amended and Restated Agreement of Limited Partnership of Reckson Operating
Partnership, L.P. establishing Series D Preferred Units of Limited Partnership Interest previously filed
as Exhibit 10.4 to Reckson's Form 8-K report filed with the SEC on March 1, 1999 and incorporated herein
by reference.
10.34 Severance Agreement between Reckson and Donald Rechler.**
10.35 Severance Agreement between Reckson and Scott Rechler.**
10.36 Severance Agreement between Reckson and Mitchell Rechler.**
10.37 Severance Agreement between Reckson and Gregg Rechler.**
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.38 Severance Agreement between Reckson and Roger Rechler.**
10.39 Severance Agreement between Reckson and J. Michael Maturo.**
12.1 Statement re computation of Reckson ratios of earnings to fixed charges.*
12.2 Statement re computation of Reckson Operating Partnership, L.P. ratios of earnings to fixed charges.*
21.1 Subsidiaries of the registrants.*
23.1 Consent of PricewaterhouseCoopers LLP independent auditors.*
23.2 Consent of Ernst & Young LLP independent auditors.*
23.3 Consent of Brown & Wood LLP (included in Exhibit 5.1).**
24.1 Powers of Attorney (included in signature pages of this registration statement).*
25.1 Statement of Eligibility of Trustee on Form T-1.**
99.1 Form of proxy card of Reckson.*
99.2 Form of proxy card of Tower Realty Trust, Inc.*
99.3 Form of Election (for holders of Tower securities to make cash election).**
99.4 Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.*
99.5 Consent of Salomon Smith Barney Inc.*
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules
All the schedules are omitted because they are not required or the
information is included in the consolidated financial statements or notes
thereto contained in the Joint Proxy Statement/Prospectus.
II-6
<PAGE>
ITEM 22. UNDERTAKINGS
Reckson hereby undertakes and Reckson OP, except for paragraphs 4, 5 and 8
undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
PROVIDED, HOWEVER, that the undertakings set forth in paragraphs (1)(i) and (ii)
do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(4) That, for the purpose of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) To deliver or cause to be delivered with the prospectus, to each person to
whom the prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and furnished
pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under
the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X is not
set forth in the prospectus, to deliver, or cause to be delivered to each
person to whom the prospectus is sent or given, the latest quarterly report
that is specifically incorporated by reference to provide such interim
financial information.
(6) That prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the meaning
of Rule 145(c), the issuer undertakes that such reoffering
II-7
<PAGE>
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(7) That every prospectus (i) that is filed pursuant to the immediately
preceding paragraph, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(8) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the registration statement through the date of responding to the request.
(9) To supply by means of a post-effective amendment all information concerning
a transaction, and the company being acquired involved therein, that was not
the subject of and included in the registration statement when it became
effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by a registrant of expenses incurred by
a director, officer or controlling person of a registrant of expenses incurred
by a director, officer or controlling person of a registrant in the successful
defense of any action, suit or proceeding) is asserted by a director, officer or
controlling person of a registrant in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, each
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this registration statement and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the Township of Huntington, State of New York, on
March 10, 1999.
<TABLE>
<S> <C> <C>
RECKSON ASSOCIATES REALTY CORP.
By: /s/ DONALD J. RECHLER
-----------------------------------------
Donald J. Rechler
CHAIRMAN
RECKSON OPERATING PARTNERSHIP, L.P.
By: RECKSON ASSOCIATES REALTY CORP.
By: /s/ DONALD J. RECHLER
-----------------------------------------
Donald J. Rechler
CHAIRMAN
</TABLE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Reckson Associates Realty Corp. hereby severally constitute Scott
H. Rechler, Mitchell D. Rechler and J. Michael Maturo and each of them singly,
our true and lawful attorneys with full power to them, and each of them singly,
to sign for us and in our names in the capacities indicated below and in their
capacities as directors of the general partner of Reckson Operating Partnership,
L.P., the registration statement filed herewith and any and all amendments to
said registration statement, and generally to do all such things in our names
and in our capacities as officers and directors of Reckson Associates Realty
Corp. to enable Reckson Associates Realty Corp. and Reckson Operating
Partnership, L.P. to comply with the provisions of the Securities Act of 1933,
and all requirements of the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorneys, or
any of them, to said registration statement and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities indicated on the dates indicated.
II-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -----------------
<C> <S> <C>
Chairman, of the Board,
/s/ DONALD J. RECHLER Chief Executive Officer
- ------------------------------ and Director (Principal
Donald J. Rechler Executive Officer) March 10, 1999
/s/ SCOTT H. RECHLER
- ------------------------------ President, Chief Operating
Scott H. Rechler Officer and Director March 10, 1999
Executive Vice President,
Treasurer and Chief
/s/ J. MICHAEL MATURO Financial Officer
- ------------------------------ (Principal Financial
J. Michael Maturo Officer and Principal
Accounting Officer) March 10, 1999
/s/ ROGER M. RECHLER
- ------------------------------ Vice-Chairman of the Board
Roger M. Rechler and Director March 10, 1999
/s/ MITCHELL D. RECHLER
- ------------------------------ Executive Vice President
Mitchell D. Rechler and Director March 10, 1999
/s/ HARVEY R. BLAU
- ------------------------------ Director
Harvey R. Blau March 10, 1999
/s/ HERVE A. KEVENIDES
- ------------------------------ Director
Herve A. Kevenides March 10, 1999
/s/ JOHN V.N. KLEIN
- ------------------------------ Director
John V.N. Klein March 10, 1999
/s/ LEWIS S. RANIERI
- ------------------------------ Director
Lewis S. Ranieri March 10, 1999
/s/ CONRAD D. STEPHENSON
- ------------------------------ Director
Conrad D. Stephenson March 10, 1999
/s/ LEONARD FEINSTEIN
- ------------------------------ Director
Leonard Feinstein March 10, 1999
</TABLE>
II-10
<PAGE>
Exhibit 12.1
Reckson Associates Realty Corp.
Ratios of Earnings to Combined Fixed Charges
The following table sets forth the calculation of the Company's consolidated
ratios of earnings to fixed charges for the periods shown (in Thousands):
<TABLE>
<CAPTION>
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
For the Period from For the Period from
June 3, 1995 January 1, 1995
To to
Description 1998 1997 1996 December 31, 1995 June 2, 1995 1994
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest $ 55,139 $23,936 $13,331 $5,331 $7,622 $17,426
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
Rent Expense 1,321 952 830 434 176 375
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
Amortization of Debt Issuance
Costs 1,600 797 525 400 195 564
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
58,060 25,685 14,686 6,165 7,993 18,365
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
Income from Continuing Operations
before Minority Interest and
Fixed Charges $122,541 $71,175 $39,876 $16,719 $8,187 $17,872
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
Ratio of Earnings to Fixed Charges 2.11 2.77 2.72 2.71 1.02 0.97
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
</TABLE>
<PAGE>
Exhibit 12.2
Reckson Operating Partnership, L.P.
Ratios of Earnings to Combined Fixed Charges
The following table sets forth the calculation of the Operating Partnership's
consolidated ratios of earnings to fixed charges for the periods shown (in
Thousands):
<TABLE>
<CAPTION>
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
For the Period from For the Period from
June 3, 1995 January 1, 1995
To to
Description 1998 1997 1996 December 31, 1995 June 2, 1995 1994
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest $ 55,139 $23,936 $13,331 $5,331 $7,622 $17,426
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
Rent Expense 1,321 952 830 434 176 375
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
Amortization of Debt Issuance
Costs 1,600 797 525 400 195 564
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
58,060 25,685 14,686 6,165 7,993 18,365
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
Income from Continuing Operations
before Minority Interest and
Fixed Charges $123,369 $71,394 $39,781 $16,728 $8,187 $17,872
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
Ratio of Earnings to Fixed Charges 2.12 2.78 2.71 2.71 1.02 0.97
- ----------------------------------- -------- ------- ------- ------------------- ------------------- -------
</TABLE>
<PAGE>
Exhibit 21.1
RECKSON ASSOCIATES REALTY CORP.
STATEMENT OF SUBSIDIARIES
NAME STATE OF ORGANIZATION
- --------------------------------------------------------------------------------
Reckson Operating Partnership, L.P. Maryland
Omni Partners, L.P. Delaware
Reckson FS Limited Partnership Delaware
Reckson Morris Industrial Trust Maryland
Reckson Management Group, Inc. New York
Reckson Construction Group, Inc. New York
Reckson Short Hills, LLC Delaware
Reckson/Stamford Towers, LLC Delaware
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this joint proxy registration statement on Form
S-4 of our report dated February 26, 1998, on our audits of the financial
statements and financial statement schedules of Tower Realty Trust, Inc. as of
December 31, 1997 and for the period from March 27, 1997 through December 31,
1997 and Tower Predecessor for the period from January 1, 1997 through October
15, 1997 and as of and for the years ended December 31, 1996 and 1995. We also
consent to the reference to our firm under the caption "Experts".
PricewaterhouseCoopers LLP
New York, New York
March 10, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the Proxy
Statement of Reckson Associates Realty Corp. (the "Company") and Reckson
Operating Partnership, L.P. (the "Operating Partnership") that is made a part of
the Registration Statement (Form S-4) and Prospectus of the Company and the
Operating Partnership for the registration of 11,694,834 shares of class B
exchangeable common stock of the Company and $116,463,000 of 7% senior unsecured
notes of the Operating Partnership. We also consent to the inclusion of our
report herein dated February 11, 1999, with respect to the consolidated
financial statements and schedule of the Operating Partnership for each of the
years in the three year period ended December 31, 1998 and to the incorporation
by reference of our reports dated (i) February 13, 1998, except for Note 14, as
to which the date is February 18, 1998, with respect to the consolidated
financial statements and schedule of the Company included in its Annual Report
(Form 10-K) for the years ended December 31, 1997 and 1996 and for the period
June 3, 1995 to December 31, 1995 and the combined financial statements of the
Reckson Group for the period January 1, 1995 to June 2, 1995 filed with the
Securities and Exchange Commission, (ii) February 11, 1999, with respect to the
consolidated financial statements and schedule of the Company for each of the
years in the three year period ended December 31, 1998 included in its Form 8-K
filed with the Securities and Exchange Commission on March 1, 1999, (iii)
February 4, 1997, with respect to the combined statement of revenues and certain
expenses of the New Jersey Portfolio for the year ended December 31, 1996,
included in the Company's Form 8-K filed with the Securities and Exchange
Commission on February 19, 1997, (iv) January 16, 1997, with respect to the
statement of revenues and certain expenses of the Uniondale Office Property for
the year ended December 31, 1996, included in the Company's Form 8-K filed with
the Securities and Exchange Commission on February 19, 1997, (v) January 17,
1997, with respect to the combined statement of revenues and certain expenses of
the Hauppage Portfolio for the year ended December 31, 1996, included in the
Company's Form 8-K filed with the Securities and Exchange Commission on February
19, 1997, (vi) May 23, 1997 with respect to the statement of revenues and
certain expenses of 710 Bridgeport Avenue for the year ended December 31, 1996,
included in the Company's Form 8-K filed with the Securities and Exchange
Commission on June 12, 1997, (vii) May 16, 1997 with respect to the statement of
revenues and certain expenses of the Shorthills Office Center for the year ended
December 31, 1996, included in the Company's form 8-K filed with the Securities
and Exchange Commission on June 12, 1997, (viii) July 22, 1997 with respect to
the statement of revenues and certain expenses of Garden City Plaza for the year
ended December 31, 1996, included in the Company's Form 8-K filed with the
Securities and Exchange Commission on September 9, 1997, (ix) February 17, 1998
with respect to the statement of revenues and certain expenses of the Stamford
Office Property for the year ended December 31, 1997, included in the Company's
Form 8-K filed with the Securities and Exchange Commission on March 24, 1998,
(x) December 17, 1997, with respect to the statement of revenues and certain
expenses of the Christiana Office Property, for the year ended June 30, 1997,
included in the Company's Form 8-K filed with the Securities and Exchange
Commission on February 10, 1998, and (xi) March 27, 1998, with respect to the
combined statement of revenues and certain expenses of the Cappelli Portfolio,
for the year ended December 31, 1997, included in the Company's Form 8-K filed
with the Securities and Exchange Commission on April 6, 1998.
Ernst & Young LLP
New York, New York
March 8, 1999
<PAGE>
EXHIBIT 99.1
RECKSON ASSOCIATES REALTY CORP.
225 BROADHOLLOW ROAD
MELVILLE, NEW YORK 11747
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1999
THIS PROXY IS SOLICITED BY THE RECKSON BOARD OF DIRECTORS.
The undersigned stockholder of Reckson Associates Realty Corp., a Maryland
corporation, hereby constitutes and appoints Donald H. Rechler and John V. N.
Klein, or either one of them, as proxies and attorneys-in-fact of the
undersigned, with full power of substitution, to vote all the shares of common
stock, par value $0.01 per share, of Reckson that the undersigned is entitled to
vote at the special meeting of Reckson stockholders to be held on ,
1999, at 10:00 a.m. (Eastern time), at The Omni, 333 Earl Ovington Boulevard,
Mitchel Field, New York, and at any adjournments or postponements thereof as
directed below.
When properly executed, this proxy will be voted in the manner directed
herein by the undersigned stockholder and in the discretion of the proxy holder
as to any other matter that may come before the special meeting of stockholders
and at an adjournment or postponement thereof. IF NO DIRECTION IS GIVEN, THIS
PROXY WILL BE VOTED "FOR" THE SHARE ISSUANCE PROPOSAL AND IN THE DISCRETION OF
THE PROXY HOLDER AS TO ANY OTHER MATTER THAT MAY COME BEFORE THE SPECIAL MEETING
OF STOCKHOLDERS OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF. Any proxy
heretofore given to vote said shares is hereby revoked.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE SHARE
ISSUANCE PROPOSAL.
1. Proposal to approve, for the purposes of complying with the requirements of
the New York Stock Exchange, Inc., the issuance of only Reckson class B
common stock (instead of a combination of Reckson class B common stock and
Reckson Operating Partnership notes) as the non-cash portion of the merger
consideration in the merger of Tower Realty Trust, Inc. with and into
Metropolitan Partners LLC,
<PAGE>
a subsidiary of Reckson, in accordance with the Agreement and Plan of
Merger, dated as of December 8, 1998, by and among Reckson, Reckson
Operating Partnership, L.P., Tower and Metropolitan Partners.
/ / FOR / / AGAINST / / ABSTAIN
<PAGE>
Please sign your name exactly as it appears below. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
The undersigned acknowledges
receipt of the notice of the
Reckson special meeting and the
Joint Proxy Statement/Prospectus
relating to the Reckson special
meeting.
Dated: _____________________, 1999
__________________________________
Number of Shares
__________________________________
Signature (and title if
applicable)
__________________________________
Signature (if held jointly)
<PAGE>
EXHIBIT 99.2
TOWER REALTY TRUST, INC.
292 MADISON AVENUE
NEW YORK, NY 10017
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned stockholder of Tower Realty Trust, Inc., a Maryland
corporation, hereby appoints and , and each of them as proxies of
the undersigned, with full power of substitution in each of them, to attend the
Special Meeting of the stockholders of Tower Realty Trust, Inc. to be held on
, 1999 at , New York, New York at : a.m. (Eastern time)
and any adjournment or postponement thereof, to cast on behalf of the
undersigned all votes which the undersigned is entitled to cast at such meeting
and otherwise to represent the undersigned at the meeting with all the powers
possessed by the undersigned if personally present at the meeting. The
undersigned hereby acknowledges receipt of Notice of the Special Meeting and the
accompanying Joint Proxy Statement/Prospectus and revokes any proxy heretofore
given with respect to such meeting. The foregoing proxies are authorized to
vote, in their discretion, upon such other business as may properly come before
the Special Meeting or any adjournment or postponement thereof.
THE VOTES ENTITLED TO BE CAST BY THE UNDERSIGNED WILL BE CAST AS INSTRUCTED
BELOW. IF THIS PROXY IS EXECUTED BUT NO INSTRUCTION IS GIVEN, THE VOTES ENTITLED
TO BE CAST BY THE UNDERSIGNED WILL BE CAST "FOR" THE APPROVAL OF THE MERGER.
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE MERGER.
To approve and adopt the merger of Tower Realty Trust, Inc., a Maryland
corporation ("Tower"), with and into Metropolitan Partners LLC, a Delaware
limited liability company ("Metropolitan Partners"), pursuant to the Agreement
and Plan of Merger and the transactions contemplated thereby, dated as of
December 8, 1998, by and among Tower, Reckson Associates Realty Corp., a
Maryland corporation, Reckson Operating Partnership, L.P., a Delaware limited
partnership, and Metropolitan Partners.
/ / FOR / / AGAINST / / ABSTAIN
Signature(s): ____________________
__________________________________
Date: _____________________ , 1999
NOTE: Signature(s) should agree
with name(s) as printed on this
proxy. If the shares are held
jointly, each holder must sign. If
signing as attorney, executor,
administrator, trustee, guardian
or officer signing for a
corporation or other entity,
please give your full title as
such. Please sign exactly as the
name appears on the records of
Tower, date and return promptly in
the enclosed envelope.
<PAGE>
Exhibit 99.4
We hereby consent to the inclusion of our opinion letter, dated
December 8, 1998, to the Board of Directors of Tower Realty Trust, Inc. as Annex
B to the Proxy Statement/Prospectus which forms a part of the Registration
Statement on Form S-4 relating to the proposed merger of Tower Realty Trust,
Inc. with and into Metropolitan Partners LLC, a subsidiary of Reckson Associates
Realty Corp., and to the references to such opinion in such Proxy
Statement/Prospectus. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder, nor do we thereby admit that we
are experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
/s/ Merrill Lynch, Pierce, Fenner & Smith Incorporated
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
March 10, 1999
<PAGE>
Exhibit 99.5
[LETTERHEAD OF SALOMON SMITH BARNEY INC.]
CONFIDENTIAL
March 10, 1999
The Board of Directors
Reckson Associates Realty Corp.
225 Broadhollow Road
Melville, New York 11747
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of Reckson Associates Realty Corp. ("Reckson") as Annex C to the Joint
Proxy Statement/Prospectus of Reckson and Tower Realty Trust, Inc. ("Tower")
relating to the proposed merger transaction involving Reckson and Tower. In
giving such consent, we do not admit that we come within the category of persons
whose consent is required under, and we do not admit that we are "experts" for
purposes of, the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
Very truly yours,
/s/ SALOMON SMITH BARNEY INC.
SALOMON SMITH BARNEY INC.
