SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
-------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 5, 1999
RECKSON ASSOCIATES REALTY CORP.
(Exact name of Registrant as specified in its Charter)
Maryland
(State of Incorporation)
1-13762 11-3233650
(Commission File Number) (IRS Employer Id. Number)
225 Broadhollow Road 11747
Melville, New York (Zip Code)
(Address of principal executive offices)
(516) 694-6900
(Registrant's telephone number, including area code)
<PAGE>
ITEM 5. Other Events
On December 8, 1998, Reckson Associates Realty Corp. ("Reckson"), Reckson
Operating Partnership, L.P. ("Reckson OP"), Metropolitan Partners LLC
("Metropolitan") and Tower Realty Trust, Inc. ("Tower") executed a merger
agreement (the "Merger Agreement"), pursuant to which Tower will be merged (the
"Merger") into Metropolitan, with Metropolitan surviving the Merger. The Merger
was described in Current Report on Form 8-K filed by Reckson on or about
December 21, 1998.
This report on Form 8-K includes the financial statements of Tower (and
related auditors' consent) and pro forma financial statements for Reckson and
Metropolitan. The pro forma financial statements of Reckson reflect the
alternative merger structures contemplated by the Merger Agreement.
Reckson is filing the financial statements and pro forma financial
statements referred to in Item 7 below at this time in order to file information
required by Item 11 of Form S-3.
ITEM 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business to be Acquired
UNAUDITED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet of Tower as of September 30, 1998
Condensed Consolidated Statements of Operations of Tower for the nine
months ended September 30, 1998 and for the period from March
27, 1997 through December 31, 1997 and Condensed Combined
Statement of Operations of Tower Predecessor for the nine
months ended September 30, 1997
Condensed Consolidated Statement of Cash Flows of Tower for the nine
months ended September 30, 1998 and for the period from March
27, 1997 through December 31,1997 and Condensed Combined
Statement of Cash Flows of Tower Predecessor for the nine
months ended September 30, 1997
Notes to Condensed Consolidated and Combined Financial Statements
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated and Combined Balance Sheets of Tower as of December 31,
1997 and Combined Balance Sheet of Tower Predecessor as of
December 31, 1996
Consolidated and Combined Statements of Income of Tower for the period
from March 27, 1997 (inception of Tower) 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
Consolidated and Combined Statements of Changes in Shareholders' Equity
of Tower for the period from March 27, 1997 (inception of
Tower) 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
Consolidated and Combined Statement of Cash Flows of Tower for the
period March 27, 1997 (inception of Tower) 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
Notes to Consolidated and Combined Financial Statements
(b) Pro Forma Financial Information
PRO FORMA COMBINED FINANCIAL STATEMENTS OF METROPOLITAN
Unaudited Pro Forma Condensed Combining Balance Sheet of Metropolitan
as of September 30, 1998
Unaudited Pro Forma Condensed Combining Statement of Operations for the
Nine Months Ended September 30, 1998
Unaudited Pro Forma Condensed Combining Statement of Operations for the
Year Ended December 31, 1997
Notes to Unaudited Pro Forma Combined Financial Statements
PRO FORMA COMBINED FINANCIAL STATEMENTS OF RECKSON - ASSUMING RECKSON
STOCKHOLDERS APPROVE SHARE ISSUANCE PROPOSAL
Unaudited Pro Forma Condensed Combining Balance Sheet as of September
30, 1998
Unaudited Pro Forma Condensed Combining Statement of Operations for the
nine months ended September 30, 1998
Unaudited Pro Forma Condensed Combining Statement of Operations for the
year ended December 31, 1997
Notes to Unaudited Pro Forma Combined Financial Statements
PRO FORMA COMBINED FINANCIAL STATEMENTS OF RECKSON - ASSUMING RECKSON
STOCKHOLDERS DO NOT APPROVE SHARE ISSUANCE PROPOSAL
Unaudited Pro Forma Condensed Combining Balance Sheet as of September
30, 1998
Unaudited Pro Forma Condensed Combining Statement of Operations for the
nine months ended September 30, 1998
Unaudited Pro Forma Condensed Combining Statement of Operations for the
year ended December 31, 1997
Notes to Unaudited Pro Forma Combined Financial Statements
<PAGE>
TOWER REALTY TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS September 30,
1998
---------------------
<S> <C>
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 169
authorized, 16,959,355 shares issued and outstanding
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.
<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 Predecessor
The Company (Consolidated) (Combined)
(Consolidated) For For the Nine For the Nine
the Nine Months Months Ended Months Ended
Ended September September September 30,
30, 1998 30, 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 557 187 85
unconsolidated subsidiaries
Net income (loss) before extraordinary gain on 11,523 (394) (4,830)
early extinguishment of debt and minority
interest
Extraordinary gain on early extinguishment of 6,475
debt - -
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.
<PAGE>
TOWER REALTY TRUST, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Tower
The Company The Company Predecessor
(Consolidated) (Consolidated) (Combined)
For the Nine Months For the Nine Months For the Nine
Ended Ended Months Ended
September 30, September 30, September 30,
1998 1997(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 (557) (187) -
subsidiaries
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.
<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.
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 from MSAM from the conversion
of the MSAM Notes into Common Stock, as follows: (i) approximately $281.0
million for repayment of certain indebtedness (including associated prepayment
penalties) relating to the 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.
Tower Predecessor
The following 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 partnership 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).
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 for the period
from January 1, 1997 through December 31, 1997 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
("Metropolitan"), 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.
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 than 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 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:
<PAGE>
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).
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.
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" ("SOP98-1), 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 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 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.
Nine Months Ended
September 30,
------------------------------
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
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.
<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 of Tower Realty Trust, Inc. and its subsidiaries (the "Company") and
Tower Predecessor included in this Current Report on Form 8-K. These
consolidated and combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the 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.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1998.
<PAGE>
CONSOLIDATED AND COMBINED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
The Company Tower Predecessor
(Consolidated) (Combined)
December 31, 1997 December 31, 1996
------------------------ ------------------------
ASSETS
<S> <C> <C>
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 autho-
rized, 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.
<PAGE>
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
The Company Tower Predecessor
(Consolidated) (Combined)
-----------------------------------------------------------------------------
March 27 January 1, Years Ended
1997 through 1997 through December 31,
December 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 -- 6,475 -- --
extinguishment of debt................
-----------------------------------------------------------------------------
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.
<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 Tower
(Consolidated) Predecessor
---------------------------------------------- (Combined)
Additional Dist. in Excess ---------------
Common Paid-in Accumlated 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.
<PAGE>
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Tower
The Company Predecessor
(Consolidated) (Combined)
---------------- -------------
March 27, January 1, Years Ended
1997 through 1997 through December 31,
December 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.
<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.
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 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 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.
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.
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>
(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 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.
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):
Years ending December 31:
------------------------
1998 ................................ $ 100,298
1999 ................................ 319
2000 ................................ 342
2001 ................................ 366
2002 ................................ 391
Thereafter........................... 127,274
---------------------------
$ 228,990
===========================
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):
1997 1996
----------------- ---------------
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
================= ===============
Included within accounts payable is $.37 million due to an affiliated
Company.
(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:
Years ending December 31:
------------------------
1998 ............................. $ 80,388
1999 ............................. 78,116
2000 ............................. 69,705
2001 ............................. 61,476
2002 ............................. 52,622
Thereafter........................ 139,183
---------------------
$ 481,490
======================
The geographic concentration of the future minimum lease payments to be
received is detailed as follows:
Location Amount
-------- ----------------------
New York, New York.................... $ 349,811
Phoenix/Tucson, Arizona............... 51,512
Orlando, Florida...................... 80,167
----------------------
$ 481,490
======================
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.
(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.
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
--------------------------------------------
# Shares of Weighted Average
Underlying Options Exercise Price
--------------------- ---------------------
<S> <C> <C>
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.
(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.
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.
December 31, 1997 December 31, 1997
Fair Value Carrying Value
--------------------- ----------------------
(in thousands)
Term loan...................... $107,977 $107,000
(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,
-------------------------------------------------
1997 1996
-------------------------------------------------
(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.
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Financial Statements of Metropolitan Partners
The following pro forma combined 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 historical consolidated financial statements and the notes thereto
of Tower, which are included elsewhere herein. 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 September 30, 1998. The pro forma statements of operations
of Metropolitan Partners for the nine months ended September 30, 1998 and for
the year ended December 31, 1997 assume that the merger took place as of January
1, 1997 and the effect thereof was carried forward through the nine month period
ended September 30, 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, including the notes thereto,
included elsewhere herein.
<PAGE>
Metropolitan Partners LLC
Pro Forma Condensed Combining Balance Sheet
As of September 30, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Metropolitan Partners
Tower Pro Forma Metropolitan Partners
Pro Forma Adjustments(2) Pro Forma
--------------- ------------------------- -------------------------
<S> <C> <C> <C>
Assets:
Real estate, net $ 672,657 $ 76,444(a) $ 749,101
Cash and cash equivalents 5,675 -- 5,675
Tenant receivables 8,767 (6,181)(a) 2,586
Escrowed funds 7,307 -- 7,307
Other assets 6,143 (2,659)(a) 3,484
Investments in real
estate joint ventures 2,968 732(a) 3,700
Deferred charges, net 13,798 (8,570)(a)(c) 5,228
---------- ---------- -----------
Total Assets $ 717,315 $ 59,766 $ 777,081
========== ========== ===========
Liabilities and Stockholders'
Equity:
Mortgage notes payable $ 188,760 $ 158,798(b) $ 347,558
Credit facility 62,400 (62,400)(b) --
Accrued expenses and other 28,517 -- 28,517
liabilities
Deferred real estate taxes 9,713 3,204(a) 12,917
Affiliate payables 309 -- 309
--------- ---------- -----------
Total Liabilities 289,699 99,602 389,301
--------- ---------- -----------
Limited partners' interest in the
operating partnership 35,020 (35,019)(b)(d) 1
--------- ---------- -----------
Equity:
Stockholders' equity 392,596 (392,596)(b)(d) --
Common equity - Reckson -- 302,779(b) 302,779
Preferred equity - Crescent -- 85,000(b) 85,000
--------- ---------- -----------
Total Equity 392,596 (4,817) 387,779
--------- ----------- -----------
Total Liabilities and
Equity $ 717,315 $ 59,766 $ 777,081
========= =========== ===========
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
Metropolitan Partners LLC
Pro Forma Condensed Combining Statement of Operations
for Nine Months Ended September 30, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Metropolitan Partners
Tower Pro Forma Metropolitan Partners
Pro Forma Adjustments(3) Pro Forma
--------------- ------------------------- -------------------------
<S> <C> <C> <C>
Revenues:
Rental income $ 85,029 $ -- $ 85,029
Other 752 -- 752
---------- ----------- ----------
Total Revenue 85,781 -- 85,781
---------- ----------- ----------
Expenses:
Operating Expenses:
Property operating 20,391 -- 20,391
expenses 11,226 -- 11,226
Real estate taxes
Ground rents and air
rights 512 -- 512
Marketing, general
and administrative 6,601 375 6,976
Sale of the company 3,865 (3,865) --
Severance and other
compensation costs 2,454 (2,454) --
---------- ----------- ----------
Total Operating
Expenses 45,049 (5,944) 39,105
---------- ----------- ----------
Interest 15,138 5,043 20,181
Depreciation and amortization 13,439 2,479 15,918
---------- ----------- ----------
Total Expenses 73,626 1,578 75,204
---------- ----------- ----------
Operating Income 12,155 (1,578) 10,577
Equity in earnings of service
companies 557 -- 557
---------- ----------- ----------
Net income before preferred
distributions 12,712 (1,578) 11,134
---------- ----------- ----------
Preferred distribution -- (4,781) (4,781)
---------- ----------- ----------
Net income available to common
members $ 12,712 $ (6,359) $ 6,353
========= =========== ==========
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
Metropolitan Partners LLC
Pro Forma Condensed Combining Statement of Operations
Year Ended December 31, 1997
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Metropolitan Partners
Tower Pro Forma Metropolitan Partners
Pro Forma Adjustments(3) Pro Forma
--------------- ------------------------- -------------------------
<S> <C> <C> <C>
Revenues:
Rental income $ 101,613 $ -- $ 101,613
Other 1,693 -- 1,693
---------- ----------- -----------
Total Revenue 103,306 -- 103,306
---------- ----------- -----------
Expenses:
Operating Expenses:
Property operating
expenses 26,861 -- 26,861
Real estate taxes 14,643 -- 14,643
Ground rents and air
rights 599 -- 599
Marketing, general
and administrative 5,036 500 5,536
---------- ----------- -----------
Total Operating Expenses 47,139 500 47,639
---------- ----------- -----------
Interest 19,514 7,393 26,907
Depreciation and amortization 16,676 4,549 21,225
---------- ----------- -----------
Total Expenses 83,329 12,442 95,771
---------- ----------- -----------
Operating Income 19,977 (12,442) 7,535
Equity in earnings of service
companies 370 -- 370
---------- ---------- -----------
Net income before preferred
distributions 20,347 (12,442) 7,905
---------- ---------- -----------
Preferred distribution -- (6,375) (6,375)
---------- ---------- -----------
Net income available to common
members $ 20,347 $ (18,817) $ 1,530
========== ========== ===========
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
Notes to Unaudited 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. 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
September 30, 1998 and includes Tower's unaudited September 30, 1998 pro forma
balance sheet. The pro forma combined statements of operations for the nine
months ended September 30, 1998 and for the year ended December 31, 1997 assume
that the merger took place as of the beginning of the periods presented and
include Tower's pro forma unaudited statement of operations for the nine months
ended September 30, 1998 and Tower's unaudited pro forma statement of operations
for the year ended December 31, 1997.
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. 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: (i) $5.75 in cash and
(ii) 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 (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 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.
The following table summarizes the calculation of the excess of the purchase
price over the assets acquired less liabilities assumed:
(Dollars in thousands)
Merger consideration $ 409,977
Transaction costs (including the write-off
of certain intangible assets) 55,315
-----------
Total purchase price 465,292
Assets acquired less liabilities assumed 388,116
-----------
Excess purchase price to be
allocated to assets $ 77,176
-----------
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)
Historical Excess Fair
Cost Purchase Price Value
------------- ----------------- -----------
Real estate $ 672,657 $ 76,444 $ 749,101
Investment in joint ventures 2,968 732 3,700
---------- ----------- ----------
$ 675,625 $ 77,176 $ 752,801
========== =========== ==========
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
$128.8 million of existing secured debt bearing a weighted average interest
rate of 6.95% and incurring $218.8 million of new secured financing bearing
an interest rate of 8.0%. The Adjustment assumes that Metropolitan Partners
uses a portion of these proceeds to retire approximately $100 million of
Tower's existing secured debt bearing a weighted average interest rate of
6.72% and $62.4 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 $2.2 million, net 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.
Note 3. Metropolitan Partners Statement of Operations Pro Forma Adjustments
Reflects the increase in depreciation expense related to the step-up in
accounting book basis of real estate as a result of the purchase of Tower by
Metropolitan Partners and the additional interest expense related to the
acquisition financing obtained by Metropolitan Partners. Adjustment also
reflects the addback of certain costs related to the sale of Tower and severance
costs that are of a non-recurring nature and that Metropolitan Partners would
not incur on an ongoing basis for the nine months ended September 30, 1998 only
and additional costs related to hiring a managing director and other executive
personnel of Metropolitan Partners.
<PAGE>
The following table summarizes the calculation of pro forma depreciation expense
for the twelve months ended December 31, 1997 and the nine months ended
September 30, 1998:
(Dollars in thousands)
Pro forma real estate $ 749,101
Allocation to buildings 85%
-----------
Total allocated to buildings 636,736
Depreciable life 30
-----------
Pro forma depreciation expense
(twelve months) $ 21,225
===========
Proration for nine months $ 15,918
===========
The following table summarizes the calculation of pro forma interest expense for
the twelve months ended December 31, 1997 and the nine months ended September
30, 1998:
(Dollars in thousands)
Amount Rate Interest
---------------- ---------- ----------------
Debt assumed $ 128,760 6.95% $ 8,947
Acquisition Financing 218,798 8.00% $ 17,503
---------- ---------
$ 347,558 $ 26,450
Amortization of deferred
financing costs 457
---------
Pro forma interest expense
(twelve months) $ 26,907
=========
Proration for nine months $ 20,181
=========
Note 4. 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 at the execution of the Merger Agreement and the
balance of Metropolitan Partners' 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.
<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 September 30, 1998. The pro forma statements of operations of
Reckson for the nine months ended September 30, 1998 and for the year ended
December 31, 1997 assume that the merger and investment occurred as of January
1, 1997 and the effect thereof was carried forward through the nine month period
ended September 30, 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, including the notes thereto.
<PAGE>
Reckson Associates Realty Corp.
Pro Forma Condensed Combining Balance Sheet
Assuming Reckson Stockholders Approve Share Issuance Proposal
As of September 30, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1998
Historical Pro Forma Metropolitan Elimination September 30, 1998
(Unaudited) Adjustments(2) Partners LLC(3) Adjustments(4) Pro Forma
-------------------- -------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
Assets:
Real estate, net $ 1,554,632 $ -- $ 749,101 $ -- $ 2,303,733
Cash and cash equivalents 3,529 -- 5,675 -- 9,204
Tenant receivables 4,725 -- 2,586 -- 7,311
Affiliate receivables 48,536 -- -- -- 48,536
Deferred rent receivable 21,923 -- -- -- 21,923
Investment in mortgage
notes and note receivable 93,045 -- -- -- 93,045
Investment in Metropolitan
Partners -- 302,779 -- (302,779) --
Contract and land
deposits and other
pre-acquisition costs 1,208 -- -- -- 1,208
Prepaid expenses and
other assets 8,717 -- -- -- 8,717
Investments in real
estate joint ventures 15,169 -- 3,700 -- 18,869
Deferred lease and loan
costs, net 21,333 -- 5,228 -- 26,561
Other assets -- -- 10,791 -- 10,791
-------------------- -------------- --------------- -------------- -----------------
Total Assets $ 1,772,817 $302,779 $ 777,081 $(302,779) $ 2,549,898
==================== ============== =============== ============== =================
Liabilities and Stockholders' Equity:
Mortgage notes payable $ 239,989 $ -- $ 347,558 $ -- $ 587,547
Senior unsecured notes 150,000 -- -- -- 150,000
Credit facility 443,250 -- -- -- 443,250
Accrued expenses and
other liabilities 36,342 -- 28,517 -- 64,859
Affiliate payables 1,214 -- 309 -- 1,523
Deferred real estate
taxes -- -- 12,917 -- 12,917
Dividends and
distributions payable 19,636 -- -- -- 19,636
-------------------- -------------- --------------- -------------- -----------------
Total Liabilities 890,431 -- 389,301 -- 1,279,732
-------------------- -------------- --------------- -------------- -----------------
Minority interest in
consolidated partnership 35,851 -- 85,001 (1) 120,851
-------------------- -------------- --------------- -------------- -----------------
Limited partners' interest
in operating partnership 138,377 11,623 -- -- 150,000
-------------------- -------------- --------------- -------------- -----------------
174,228 11,623 85,001 (1) 270,851
Stockholders' Equity:
Preferred stock 92 -- -- -- 92
Common stock 401 -- -- -- 401
Reckson class B common stock -- 117 -- -- 117
Additional paid-in capital 707,665 291,039 302,779 (302,778) 998,705
-------------------- -------------- --------------- -------------- -----------------
Total Stockholders' Equity 708,158 291,156 302,779 (302,778) 999,315
-------------------- -------------- --------------- -------------- -----------------
Total Liabilities and
Stockholders' Equity $ 1,772,817 $ 302,779 $ 777,081 $(302,779) $ 2,549,898
==================== ============== =============== ============== =================
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
Reckson Associates Realty Corp.
Pro Forma Condensed Combining Statement of Operations
Assuming Reckson Stockholders Approve Share Issuance Proposal
Nine Months Ended September 30, 1998
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma Metropolitan Elimination September 30, 1998
(Unaudited) Adjustments Partners LLC(5) Adjustments Pro Forma
------------------ --------------- ------------------ --------------- ---------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Base rents $ 162,846 $ -- $ 85,029 $ -- $ 247,875
Tenants escalations
and reimbursements 20,776 -- -- -- 20,776
Equity in earnings of
real estate joint ventures 578 -- -- -- 578
Equity in earnings of
service companies 623 -- 557 -- 1,180
Interest income on mortgage
notes and notes receivable 5,536 -- -- -- 5,536
Other 2,624 -- 752 -- 3,376
------------------ --------------- ------------------ --------------- ---------------------
Total Revenues 192,983 -- 86,338 -- 279,321
================== =============== ================== =============== =====================
Expenses:
Operating Expenses:
Property operating expenses 35,506 -- 20,391 -- 55,897
Real estate taxes 25,626 -- 11,226 -- 36,852
Ground rents 1,279 -- 512 -- 1,791
Marketing, general
and administrative 11,170 -- 6,976 -- 18,146
------------------ --------------- ------------------ --------------- ---------------------
Total Operating Expenses 73,581 -- 39,105 -- 112,686
================== =============== ================== =============== =====================
Interest 34,537 -- 20,181 -- 54,718
Depreciation and
amortization 38,098 -- 15,918 -- 54,016
------------------ --------------- ------------------ --------------- ---------------------
Total Expenses 146,216 75,204 -- 221,420
------------------ --------------- ------------------ --------------- ---------------------
Income before minority
interest and extraordinary
items 46,767 -- 11,134 -- 57,901
Minority partners' interest
in consolidated (1,882) -- (4,781) -- (6,663)
partnership (income)
Preferred distribution (9,202) -- -- -- (9,202)
------------------ --------------- ------------------ --------------- ---------------------
Income before limited
partners' minority interest in
operating partnership income
and extraordinary items $ 35,683 $ -- $ 6,353 $ -- $ 42,036
================== =============== ================== =============== =====================
Limited partners' minority interests in operating partnership income (4,884)
=====================
Income before extraordinary item $ 37,152
=====================
Basic income per share of common stock before extraordinary item $ 0.63
=====================
Basic weighted average number of shares of common stock outstanding 39,284
=====================
Diluted income per share of common stock before extraordinary item $ 0.62
=====================
Diluted weighted average number of shares of common stock outstanding 39,833
=====================
Basic income per share of class B common stock before extraordinary item $ 1.05
=====================
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 $ 0.71
=====================
Diluted weighted average number of shares of class B common stock outstanding 11,695
=====================
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
Reckson Associates Realty Corp.
Pro Forma Condensed Combining Statement of Operations
Assuming Reckson Stockholders Approve Share Issuance Proposal
Year Ended December 31, 1997
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma Metropolitan Elimination December 31, 1997
(Unaudited) Adjustments Partners LLC(8) Adjustments Pro Forma
=============== =============== =================== =============== =====================
<S> <C> <C> <C> <C> <C>
Revenues:
Base rents $ 128,778 $ -- $ 101,613 $ -- $ 230,391
Tenants escalations
and reimbursements 14,981 -- -- -- 14,981
Equity in earnings of
real estate joint ventures 459 -- -- -- 459
Equity in earnings of
service companies 55 -- 370 -- 425
Interest income on mortgage
notes and notes receivable 5,437 -- -- -- 5,437
Other 3,685 -- 1,693 -- 5,378
--------------- --------------- ------------------- --------------- ---------------------
Total Revenues 153,395 -- 103,676 -- 257,071
=============== =============== =================== =============== =====================
Expenses:
Operating Expenses:
Property operating
expenses 28,943 -- 26,861 -- 55,804
Real estate taxes 20,579 -- 14,643 -- 35,222
Ground rents 1,269 -- 599 -- 1,868
Marketing, general
and administrative 8,292 -- 5,536 -- 13,828
--------------- --------------- ------------------- --------------- ---------------------
Total Operating Expenses 59,083 -- 47,639 -- 106,722
=============== =============== =================== =============== =====================
Interest 21,585 -- 26,907 -- 48,492
Depreciation and 27,237 -- 21,225 -- 48,462
amortization
--------------- --------------- ------------------- --------------- ---------------------
Total Expenses 107,905 95,771 -- 203,676
--------------- --------------- ------------------- --------------- ---------------------
Income before minority
interest and extraordinary
items 45,490 -- 7,905 -- 53,395
Minority partners'
interest in consolidated
partnership (income) (807) -- (6,375) -- (7,182)
Preferred distribution -- -- -- -- --
--------------- --------------- ------------------- --------------- ---------------------
Income before limited
partners' minority interest in
operating partnership income
and extraordinary items $ 44,683 $ -- $ 1,530 $ -- $ 46,213
=============== =============== =================== =============== =====================
Limited partners' minority interests in operating partnership income (5,482)
=====================
Income before extraordinary item $ 40,731
=====================
Basic income per share of common stock before extraordinary item $ 0.78
=====================
Basic weighted average number of shares of common stock outstanding 32,727
=====================
Diluted income per share of common stock before extraordinary item $ 0.77
=====================
Diluted weighted average number of shares of common stock outstanding 33,260
=====================
Basic income per share of class B common stock before extraordinary item $ 1.30
=====================
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 $ 0.89
=====================
Diluted weighted average number of shares of class B common stock outstanding 11,695
=====================
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
Notes to Unaudited 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
September 30, 1998 and Reckson made its investment in Metropolitan Partners on
the same date and includes Reckson's unaudited September 30, 1998 consolidated
balance sheet. The pro forma combined statements of operations for the nine
months ended September 30, 1998 and for the year ended December 31, 1997 assume
that the merger took place as of the beginning of the periods presented and
include Reckson's unaudited statement of operations for the nine months ended
September 30, 1998 and statement of operations for the year ended December 31,
1997.
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 OP, 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 investment in Metropolitan Partners. Reckson will fund its
investment 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 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 estimated 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 consolidation of the pro forma balance sheet of Metropolitan
Partners as of September 30, 1998.
Note 4. Elimination Adjustments
Reflects the elimination of Reckson's investment in Metropolitan Partners in
consolidation.
Note 5. Metropolitan Partners Statement of Operations Pro Forma Adjustments
Reflects Reckson's consolidation of the pro forma statement of operations of
Metropolitan Partners for the nine months ended September 30, 1998.
Note 6. Minority Interests
Represents the minority interest of the limited partners in Reckson OP at an
effective pro forma rate of approximately 11.6% for nine months ended September
30, 1998 and 11.86% for year ended December 31, 1997.
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 nine
months ended September 30, 1998 and the year ended December 31, 1997 of
39,284,000 and 32,727,000, respectively, and the 11,694,385 shares of Reckson
class B common stock issued in the merger.
Diluted pro forma income per share of Reckson common stock before extraordinary
items is based upon the diluted weighted average number of shares of Reckson
common stock outstanding during the nine months ended September 30, 1998 and the
year ended December 31, 1997 of 39,833,000 and 33,260,000, respectively.
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 nine months ended September 30, 1998 and
the year ended December 31, 1997 of 59,243,000 and 51,971,000, respectively, net
of the add-back of the dividend payable on the Reckson class B common stock of
approximately $13,443 and $17,925 for the nine months ended September 30, 1998
and the year ended December 31, 1997, respectively.
Note 8. Metropolitan Partners Statement of Operations Pro Forma Adjustments
Reflects Reckson's consolidation of the pro forma statement of operations of
Metropolitan Partners for the year ended December 31, 1997.
<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 merger of Tower
into Metropolitan Partners and Reckson's investment in Metropolitan Partners
took place on September 30, 1998. The pro forma statements of operations of
Reckson for the nine months ended September 30, 1998 and for the year ended
December 31, 1997 assume that the merger and investment occurred as of January
1, 1997 and the effect thereof was carried forward through the nine month period
ended September 30, 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, including the notes thereto.
<PAGE>
Reckson Associates Realty Corp.
Pro Forma Condensed Combining Balance Sheet
Assuming Reckson Stockholders Do Not Approve Share Issuance Proposal
As of September 30, 1998
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1998
Historical Pro Forma Metropolitan Elimination September 30, 1998
(Unaudited) Adjustments(2) Partners LLC(3) Adjustments(4) Pro Forma
---------------------- ------------------ ------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Assets:
Real estate, net $ 1,554,632 $ -- $ 749,101 $ -- $ 2,303,733
Cash and cash 3,529 -- 5,675 -- 9,204
equivalents
Tenant receivables 4,725 -- 2,586 -- 7,311
Affiliate receivables 48,536 -- -- -- 48,536
Deferred rent receivable 21,923 -- -- -- 21,923
Investment in mortgage
notes and note receivable 93,045 -- -- -- 93,045
Investment in
Metropolitan Partners -- 302,779 -- (302,779) --
Contract and land
deposits and other
pre-acquisition costs 1,208 -- -- -- 1,208
Prepaid expenses and
other assets 8,717 -- -- -- 8,717
Investments in real
estate joint ventures 15,169 -- 3,700 -- 18,869
Deferred lease and
loan costs, net 21,333 -- 5,228 -- 26,561
Other Assets -- -- 10,791 -- 10,791
---------------------- ------------------ ------------------- ----------------- -------------------
Total Assets $ 1,772,817 $ 302,779 $ 777,081 $ (302,779) $ 2,549,898
====================== ================== =================== ================= ===================
Liabilities and Stockholders'
Equity:
Mortgage notes payable $ 239,989 $ -- $ 347,558 $ -- $ 587,547
Senior unsecured notes 150,000 95,713 -- -- 245,713
Credit facility 443,250 -- -- -- 443,250
Accrued expenses and
other liabilities 36,342 -- 28,517 -- 64,859
Affiliate payables 1,214 -- 309 -- 1,523
Deferred real estate taxes -- -- 12,917 -- 12,917
Dividends and
distributions payable 19,636 -- -- -- 19,636
---------------------- ------------------ ------------------- ----------------- -------------------
Total Liabilities 890,431 95,713 389,301 -- 1,375,445
---------------------- ------------------ ------------------- ----------------- -------------------
Minority interest in
consolidated partnership 35,851 -- 85,001 (1) 120,851
Limited partners' interest
in operating partnership 138,377 8,242 -- -- 146,619
---------------------- ------------------ ------------------- ----------------- -------------------
174,228 8,242 85,001 (1) 267,470
---------------------- ------------------ ------------------- ----------------- -------------------
Stockholders' Equity:
Preferred stock 92 -- -- -- 92
Common stock 401 -- -- -- 401
Reckson class B common
stock -- 80 -- -- 80
Additional paid-in
capital 707,665 198,744 302,779 (302,778) 906,410
---------------------- ------------------ ------------------- ----------------- -------------------
Total Stockholders'
Equity 708,158 198,824 302,779 (302,778) 906,983
---------------------- ------------------ ------------------- ----------------- -------------------
Total Liabilities and
Stockholders' Equity $ 1,772,817 $ 302,779 $ 777,081 $ (302,779) $ 2,549,898
====================== ================== =================== ================= ===================
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
Reckson Associates Realty Corp.
Pro Forma Condensed Combining Statement of Operations
Assuming Reckson Stockholders Do Not Approve Share Issuance Proposal
Nine Months Ended September 30, 1998
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma Metropolitan Elimination September 30, 1998
(Unaudited) Adjustments(5) Partners LLC(6) Adjustments Pro Forma
---------------------- ------------------ ------------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Base rents $ 162,846 $ -- $ 85,029 $ -- $ 247,875
Tenants escalations
and reimbursements 20,776 -- -- -- 20,776
Equity in earnings of
real estate joint ventures 578 -- -- -- 578
Equity in earnings of
service companies 623 -- 557 -- 1,180
Interest income on
mortgage notes and notes
receivable 5,536 -- -- -- 5,536
Other 2,624 -- 752 -- 3,376
---------------------- ------------------ ------------------- ----------------- ------------------
Total Revenues 192,983 -- 86,338 -- 279,321
====================== ================== =================== ================= ==================
Expenses:
Operating Expenses:
Property
operating expenses 35,506 -- 20,391 -- 55,897
Real estate taxes 25,626 -- 11,226 -- 36,852
Ground rents 1,279 -- 512 -- 1,791
Marketing, general
and administrative 11,170 -- 6,976 -- 18,146
---------------------- ------------------ ------------------- ----------------- ------------------
Total Operating
Expenses 73,581 -- 39,105 -- 112,686
====================== ================== =================== ================= ==================
Interest 34,537 5,644 20,181 -- 60,362
Depreciation and
amortization 38,098 -- 15,918 -- 54,016
---------------------- ------------------ ------------------- ----------------- ------------------
Total Expenses 146,216 5,644 75,204 -- 227,064
====================== ================== =================== ================= ==================
Income before
minority interest and
extraordinary items 46,767 (5,644) 11,134 -- 52,257
Minority partners'
interest in consolidated
partnership (income) (1,882) -- (4,781) -- (6,663)
Preferred distribution (9,202) -- -- -- (9,202)
---------------------- ------------------ ------------------- ----------------- ------------------
Income before limited
partners' minority interest in
operating partnership income
and extraordinary items $ 35,683 $ (5,644) $ 6,353 $ -- $ 36,392
====================== ================== =================== ================= ==================
Limited partners' minority interests in operating partnership income (4,658)
=================
Income before extraordinary item $ 31,734
=================
Basic income per share of common stock before extraordinary item $ 0.60
=================
Basic weighted average number of shares of common stock outstanding 39,284
=================
Diluted income per share of common stock before extraordinary item $ 0.60
=================
Diluted weighted average number of shares of common stock outstanding 39,883
=================
Basic income per share of Reckson class B common stock before extraordinary item $ 1.00
=================
Basic weighted average number of shares of Reckson class B common stock outstanding 8,005
=================
Diluted income per share of Reckson class B common stock before extraordinary item $ 0.66
=================
Diluted weighted average number of shares of Reckson class B common stock outstanding 8,005
=================
</TABLE>
See accompanying notes to pro forma financial statements.
<PAGE>
Reckson Associates Realty Corp.
Pro Forma Condensed Combining Statement of Operations
Assuming Reckson Stockholders Do Note Approve Share Issuance Proposal
Year Ended December 31, 1997
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Historical Pro Forma Metropolitan Elimination September 30, 1998
(Unaudited) Adjustments(9) Partners LLC(10) Adjustments Pro Forma
--------------------- ------------------- ------------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Base rents $ 128,778 $ -- $ 101,613 $ -- $ 230,391
Tenants escalations
and reimbursements 14,981 -- -- -- 14,981
Equity in earnings of
real estate joint ventures 459 -- -- -- 459
Equity in earnings of
service companies 55 -- 370 -- 425
Interest income on mortgage
notes and notes receivable 5,437 -- -- -- 5,437
Other 3,685 -- 1,693 -- 5,378
--------------------- ------------------- ------------------- ---------------- --------------------
Total Revenues 153,395 -- 103,676 -- 257,071
===================== =================== =================== ================ ====================
Expenses:
Operating Expenses:
Property
operating expenses 28,943 -- 26,861 -- 55,804
Real estate taxes 20,579 -- 14,643 -- 35,222
Ground rents 1,269 -- 599 -- 1,868
Marketing, general
and administrative 8,292 -- 5,536 -- 13,828
--------------------- ------------------- ------------------- ---------------- --------------------
Total Operating Expenses 59,083 -- 47,639 -- 106,722
===================== =================== =================== ================ ====================
Interest 21,585 7,526 26,907 -- 56,018
Depreciation and
amortization 27,237 -- 21,225 -- 48,462
--------------------- ------------------- ------------------- ---------------- --------------------
Total Expenses 107,905 7,526 95,771 -- 211,202
===================== =================== =================== ================ ====================
Income before
minority interest and
extraordinary items 45,490 (7,526) 7,905 -- 45,869
Minority partners'
interest in consolidated
partnership (income) (807) -- (6,375) -- (7,182)
Preferred distribution -- -- -- -- --
--------------------- ------------------- ------------------- ---------------- --------------------
Income before limited
partners' minority interest
in operating partnership
income and extraordinary
items $ 44,683 $ (7,526) $ 1,530 $ -- $ 38,687
===================== =================== =================== ================ ====================
Limited partners' minority interests in operating partnership income (5,120)
--------------------
Income before extraordinary item $ 33,567
====================
Basic income per share of Reckson common stock before extraordinary item $ 0.73
====================
Basic weighted average number of shares of Reckson common stock outstanding 32,727
====================
Diluted income per share of Reckson common stock before extraordinary item $ 0.72
====================
Diluted weighted average number of shares of Reckson common stock outstanding 33,260
====================
Basic income per share of Reckson class B common stock before extraordinary item $ 1.21
====================
Basic weighted average number of shares of Reckson class B common stock outstanding 8,005
====================
Diluted income per share of Reckson class B common stock before extraordinary item $ 0.80
====================
Diluted weighted average number of shares of Reckson class B common stock outstanding 8,005
====================
</TABLE>
See accompanying notes to pro forma financial statements.
<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 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
September 30, 1998 and Reckson made its investment in Metropolitan Partners on
the same date and includes Reckson's unaudited September 30, 1998 consolidated
balance sheet. The pro forma combined statements of operations for the nine
months ended September 30, 1998 and for the year ended December 31, 1997 assume
that the merger took place as of the beginning of the periods presented and
include Reckson's unaudited statement of operations for the nine months ended
September 30, 1998 and statement of operations for the year ended December 31,
1997.
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 $207.1
million of Reckson class B common stock and the issuance of approximately $95.7
million of senior unsecured notes (par value $101.5 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 and (ii) 0.4294 of a share of Reckson
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 estimated 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 consolidation of the pro forma balance sheet of Metropolitan
Partners as of September 30, 1998.
Note 4. Elimination Adjustments
Reflects the elimination of Reckson's investment in Metropolitan Partners in
consolidation.
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 Reckson's consolidation of the pro forma statement of operations of
Metropolitan Partners for the nine months ended September 30, 1998.
Note 7. Minority Interests
Represents the minority interest of the limited partners in Reckson OP at an
effective pro forma rate of approximately 13.91% for nine months ended September
30, 1998 and 13.29% for year ended December 31, 1997.
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 nine
months ended September 30, 1998 and the year ended December 31, 1997 of
39,284,000 and 32,727,000, respectively, and the 8,004,894 shares of Reckson
class B common stock issued in the merger.
Diluted pro forma income per share of Reckson common stock before extraordinary
items is based upon the diluted weighted average number of shares of Reckson
common stock outstanding during the nine months ended September 30, 1998 and the
year ended December 31, 1997 of 39,833,000 and 33,260,000, respectively.
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 nine months ended September 30, 1998 and
the year ended December 31, 1997 of 55,546,000, and 48,274,000, respectively,
net of the add-back of the dividend payable on the Reckson class B common stock
of approximately $13,443 and $17,925 for the nine months ended September 30,
1998 and the year ended December 31, 1997, respectively.
Note 9. Pro Forma Adjustments
Reflects the increase in interest costs related to the issuance of the Reckson
OP 7% notes.
Note 10. Metropolitan Partners Statement Of Operations Pro Forma Adjustments
Reflects Reckson's consolidation of the pro forma statement of operations of
Metropolitan Partners for the year ended December 31, 1997.
<PAGE>
(c) Exhibits
23.1 Consent of PricewaterhouseCoopers LLP
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RECKSON ASSOCIATES REALTY CORP.
By: /s/ Michael Maturo
Michael Maturo
Executive Vice President and
Chief Financial Officer
Date: February 5, 1999
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the joint registration statement
of Reckson Associates Realty Corporation and Reckson Operating Partnership, L.P.
on Form S-3 (File No. 333-67129), and in the registration statements of Reckson
Associates Realty Corporation (File Nos. 333-28015 and 333-46883), of our report
dated February 26, 1998, on our audits of the consolidated financial statements
of Tower Realty Trust, Inc. as of December 31, 1997 and for the period from
March 27, 1997 through December 31, 1997 and the combined financial statements
of 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, which report
is included in Form 8-K.
PricewaterhouseCoopers LLP
New York, New York
February 5, 1999
