EXHIBIT 99.4
1290 Partners, L.P.
Independent Auditors' Report
Financial Statements
Years Ended December 31, 2001 and 2000
1290 Partners, L.P.
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000:
Balance Sheets 2
Statements of Income and Comprehensive (Loss) Income 3
Statements of Partners' Capital 4
Statements of Cash Flows 5
Notes to Financial Statements 6-9
INDEPENDENT AUDITORS' REPORT
To the Partners of 1290 Partners, L.P.
We have audited the accompanying balance sheets of 1290 Partners, L.P. as of
December 31, 2001 and 2000, and the related statements of income and
comprehensive (loss) income, partners' capital and of cash flows for the years
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of 1290 Partners, L.P. as of December 31, 2001
and 2000, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
New York, New York
January 18, 2002
1290 PARTNERS, L.P.
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
ASSETS
2001 2000
RENTAL PROPERTY - Land, building and improvements -
Less accumulated depreciation of $48,077,289 and $37,600,712,
respectively $358,708,446 $368,152,011
CASH AND CASH EQUIVALENTS 10,562,475 14,242,834
ESCROW DEPOSITS AND RESTRICTED CASH 7,505,979 5,669,748
PREPAID REAL ESTATE TAXES 8,985,874 8,720,870
TENANTS' SECURETY DEPOSITS 203,447 227,809
DUE FROM TENANTS - Less allowance for doubtful accounts
of $0 and $2,744,530, respectively 2,138,064 4,873,533
DEFERRED FiNANCING COSTS - Less accumulated
amortization of $8,830,494 and $4,514,506, respectively 4,101,038 8,401,352
DEFERRED LEASING COSTS - Less accumulated amortization
of $4,131,985 and $2,627,143, respectively 17,015,931 16,451,437
DEFERRED RENT RECEIVABLE 50,119,142 48,828,209
NOTE RECEIVABLE 275,163 288,769
OTHER ASSETS 289,537 335,473
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TOTAL ASSETS $459,905,096 $476,192,045
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Secured notes $425,000,000 $425,000,000
Accounts payable and accrued expenses 7,854,179 8,113,226
Unrealized loss on derivatives 17,896,642 --
Due to tenants 1,184,868 3,211,483
Tenants' security deposits 203,447 227,809
Unearned revenue 748,535 2,023,675
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Total liabilities 452,887,671 438,576,193
PARTNERS' CAPITAL 7,017,425 37,615,852
------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $459,905,096 $476,192,045
============ ============
See notes to financial statements.
2
1290 PARTNERS, L.P.
STATEMENTS OF INCOME AND COMPREHENSIVE (LOSS) INCOME
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
REVENUES:
Base rental income $ 86,165,224 $ 85,129,022
Escalation income 4,864,673 4,944,015
Miscellaneous income 2,935,961 6,848,134
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Total revenues 93,965,858 96,921,171
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OPERATING EXPENSES:
Real estate taxes 17,820,971 18,265,508
Utilities 9,450,322 8,186,134
Payroll 3,480,195 3,090,876
Cleaning 2,580,750 2,498,503
Repairs and maintenance 2,363,178 2,150,744
Management fees 1,383,052 1,333,305
Insurance 300,546 283,822
Professional fees 137,335 217,727
Building supplies and office expenses 184,040 148,980
General and administrative 320,275 246,685
Bad debt expense 1,301,173 --
Depreciation and amortization 11,981,417 11,679,737
Total expenses 51,303,254 48,102,021
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NET OPERATING INCOME 42,662,604 48,819,150
------------ ------------
OTHER INCOME (EXPENSES):
Interest expense (41,400,150) (41,464,470)
Interest income 958,846 1,155,683
------------ ------------
Total other expenses (40,441,304) (40,308,787)
NET INCOME 2,221,300 8,510,363
OTHER COMPREHENSIVE LOSS (17,896,642) --
------------ ------------
COMPREHENSIVE (LOSS) INCOME $(15,675,342) $ 8,510,363
============ ============
See notes to financial statements.
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1290 PARTNERS, L.P.
STATEMENTS OF PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 2001 AND 2000
237/1290 Metropolis
Upper Tier Realty
Associates, L.P. Trust, Inc. 1290 GP Corp. Total
PARTNERS' CAPITAL,
JANUARY 1, 2000 $ 1,400,000 $ 36,800,652 $ 672,220 $ 38,872,872
Cash distribution -- (9,767,383) (9,767,383)
Net income -- 8,425,259 85,104 8,510,363
PARTNERS' CAPITAL,
DECEMBER 31, 2000 1,400,000 35,458,528 757,324 37,615,852
Cash distribution (1,400,000) (13,523,085) -- (14,923,085)
Cumulative effect transition adjustment -- (6,783,480) (68,520) (6,852,000)
Change in fair market value of
interest rate swap -- (10,934,196) (110,446) (11,044,642)
Net income -- 2,199,087 22,213 2,221,300
------------ ------------ ------------ ------------
PARTNERS' CAPITAL,
DECEMBER 31, 2001 $ -- $ 6,416,854 $ 600,571 $ 7,017,425
============ ============ ============ ============
See notes to financial statements.
4
1290 PARTNERS, L.P.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,221,300 $ 8,510,363
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 16,297,407 15,987,423
Bad debt expense 1,301,173 --
Changes in:
Increase in escrow deposits and restricted cash (1,836,231) (2,491,188)
Decrease in due from tenants 1,434,296 (2,467,273)
Increase in deferred rent receivable (1,290,933) (2,718,646)
Increase in prepaid real estate taxes (265,004) (62,667)
Decrease in other assets 45,936 3,092,122
Decrease in accounts payable, accrued expenses and due to tenants (1,997,730) 2,951,756
(Decrease) Increase in unearned revenue (1,275,140) 786,635
------------ ------------
Net cash provided by operating activities 14,635,074 23,588,525
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to building and improvements (1,033,012) (4,154,637)
Increase in deferred leasing costs (2,357,268) (2,982,139)
Collections on note receivable 13,606 (288,769)
------------ ------------
Net cash used in investing activities (3,376,674) (7,425,545)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Partners (14,923,085) (9,767,383)
Financing costs (15,674) (93,009)
------------ ------------
Net cash used in financing activities (14,938,759) (9,860,392)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,680,359) 6,302,588
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,242,834 7,940,246
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,562,475 $ 14,242,834
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -
Interest paid during year $ 37,282,667 $ 34,046,241
============ ============
See notes to financial statements.
5
1290 PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - 1290 Partners, L.P. (the "Partnership") was formed on
October 10, 1996 as a Delaware limited partnership pursuant to the Second
Amended Joint Plan of Reorganization of 237 Park Avenue Associates, L.L.C.
and 1290 Associates L.L.C. ("Predecessors"). The Partnership was formed
between 237/1290 Lower Tier Associates L.P., a Delaware limited
partnership and 1290 GP Corp., a Delaware corporation (the "Original
Agreement"), to own the property at 1290 Avenue of the Americas (the
"Property").
Initially, the Partnership was owned by 237/1290 Lower Tier Associates
L.P. ("Lower Tier"), which held a 99% partnership interest as a limited
partner, and 1290 GP Corp., which held a 1% interest as general partner.
Metropolis Realty Trust Inc. ("Metropolis") had a 95% general partnership
interest and a .05% limited partnership interest in Lower Tier.
On November 22, 1999, the Original Agreement was amended by the Amended
and Restated Partnership Agreement, as follows:
*237/1290 Upper Tier Associates, L.P. ("Upper Tier LP"), a Delaware
limited partnership, was admitted as Limited Partner.
*Lower Tier was liquidated. Lower Tier's 99% limited partnership
interest in the Partnership was distributed. The distribution was
allocated based upon the intentions of management of the Partnership
to exercise their right to call the "Upper Tier" interest for
$1,400,000. The remainder was distributed to Metropolis.
*1290 GP Corp. continues to hold a 1% interest in the Partnership as
general partner.
*On March 23, 2001, Metropolis acquired the limited partnership
interest held by the Upper Tier LP for $1,400,000 in accordance with
the Agreement of Limited Partnership of the Partnership. Upon
consummation of such transaction, as of March 31, 2001, Metropolis
owns a 99% partnership interest, as limited partner, in the
Partnership.
Rental Property - Rental property is carried at cost, net of accumulated
depreciation and amortization, and includes land, building, tenant
improvements and building improvements. Land is carried at $63,500,182 as
of December 31, 2001 and 2000. Impairment of property is determined to
exist when estimated amounts recoverable through future operations and
sale of property on an undiscounted basis are below that property's
carrying value. If a property is determined to be impaired, it must be
written down to its estimated fair value. Fair value is defined as the
amount for which the asset could be bought or sold in a current
transaction, that is, other than a forced or liquidation sale. No
impairment of the Property exists as of December 31, 2001 and 2000.
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
liquid investments with an original maturity of three months or less.
Escrow Deposits and Restricted Cash - Escrow deposits and restricted cash
as of December 31, 2001 and 2000 includes reserves for tenant
improvements, leasing commissions, insurance, real estate taxes and real
estate tax refunds.
6
Rental Income - Rental income is recognized on a straight-line basis over
the terms of the related leases. Differences between actual base amounts
due from tenant leases and the straight-line basis are included in
deferred rent receivable.
Deferred Charges - Deferred financing costs are amortized over the term of
the related loan. Direct costs related to leasing are amortized over the
related lease term on a straight-line basis.
Depreciation and Amortization - Building and improvements are depreciated
over their useful lives of 40 years using the straight-line method.
Furniture and fixtures are depreciated over their useful lives, ranging
from 5 to 7 years. Tenant improvements are amortized on a straight-line
basis over the terms of the related leases.
Use of Estimates - The presentation of the financial statements requires
estimates and assumptions that affect the reported amounts of assets and
liabilities at December 31, 2001 and 2000 and the reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
Fair Value of Financial Instruments - The carrying amount of cash and cash
equivalents, escrow deposits and restricted cash, tenants' security
deposits, accounts receivable and accounts payable are a reasonable
estimate of their fair value due to their short-term nature. Management
believes the fair market value of the secured notes approximates the
carrying value at December 31, 2001 and 2000. The fair value estimates
presented herein are based on pertinent information available to
management as of December 31, 2001 and 2000.
Income Taxes - The Partnership is not a taxable entity; therefore, no
provision has been made for income taxes.
Recent Pronouncement - Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, was implemented by the Partnership on January 1, 2001. SFAS
133, as amended and interpreted, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All
derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair-value hedge, the changes in the fair
value of the derivative and the hedged item will be recognized in
earnings. If the derivative is designated as a cash-flow hedge, the
effective portion of changes in the fair value of the derivative is
recorded in other comprehensive (loss) income and will be recognized in
the income statement when the hedged item affects earnings. The
ineffective portion of changes in the fair value of the derivative
designated as a cash flow hedge is recognized in the income statement.
SFAS 133 defines new requirements for designation and documentation of
hedging relationships as well as ongoing effectiveness assessments in
order to use hedge accounting. For a derivative that does not qualify as a
hedge, changes in fair value will be recognized in earnings.
At January 1, 2001, the Partnership recorded approximately $6,852,000 in
other comprehensive loss as a cumulative transition adjustment, to record
its interest rate swap agreement (See Note 4) at its estimated fair value
as of that date.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long Lived Assets (effective January 1, 2002).
SFAS No. 144 supercedes existing accounting literature dealing with
impairment and disposal of long-lived assets, including discontinued
operations. It addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed
of, and expands current reporting for discontinued operations to include
disposals of a "component" of an entity that has been disposed of or is
classified as held for sale. The Partnership is in the process of
evaluating the financial statement impact of the adoption of this
standard.
7
Reclassifications - Certain prior year amounts have been reclassified to
conform with current year presentation.
2. REAL ESTATE TAX REFUNDS
Tax certiorari proceedings have been settled with the City of New York for
over-assessment of property taxes for the tax years ending June 30, 1991
through June 30, 1996 with respect to the Property. The Partnership
received net proceeds of approximately $6,519,000 in December, 2000 after
payment of approximately $876,000 of fees and expenses incurred in
connection with such proceedings. Of this amount, approximately $3,211,000
had to be reimbursed to tenants and was included in escrow deposits and
restricted cash at December 31, 2000. During 2001, approximately
$2,027,000 was reimbursed to tenants. The remaining balance to be
reimbursed of approximately $1,184,000 is included in escrow deposits and
restricted cash as of December 31, 2001. The net proceeds in excess of the
estimated amount due to tenants are $3,800,000 and were included in
miscellaneous income in 2000.
Tax certiorari proceedings have been commenced which remain outstanding
against the City of New York for over-assessment of property taxes for the
tax years ending June 30, 1997 through June 30, 2001 with respect to the
Property. The outcome of these proceedings cannot presently be estimated.
3. NOTE RECEIVABLE
On May 1, 2000, the Partnership entered into an agreement with Morrison &
Foerster (the "Tenant"). The Partnership contributed to the Tenant the sum
of $297,115 in connection with the tenant improvements with respect to the
8th floor space. Per the lease agreement with the Tenant, the amount of
contribution provided by the Partnership shall be amortized over the term
of the amended lease, and shall be repaid by the Tenant to the Partnership
as additional rent, payable in equal monthly installments, which
installments include 10% interest on the unpaid balance.
4. SECURED NOTES
On December 13, 1999, the Partnership refinanced the Property with a
$425,000,000 mortgage loan (the "Mortgage Loan") secured by the Property.
Interest on the Mortgage Loan is based on LIBOR plus 2% and requires
interest only payments through maturity on January 2, 2003. The
Partnership has a one time right (subject to achieving certain conditions,
including a debt service coverage ratio, loan to value ratio and the
payment of a 25 basis point extension fee) to extend the maturity for a
period of twelve months. The Mortgage Loan may be repaid in whole after
December 31, 2000, without penalty. The costs associated with securing the
Mortgage Loan of approximately $12,900,000 are included in deferred
financing costs and are amortized over the term of the Mortgage Loan as a
component of interest expense.
The Partnership and Morgan Stanley Derivative Products entered into an
Interest Rate Exchange Agreement dated as of December 13, 1999 (the "Swap
Agreement"). The Swap Agreement provides that the Partnership will pay
interest at an effective rate of 8.4995% per annum of the notional amount
of $425,000,000 and receives interest based on LIBOR. Management believes
the risk of incurring losses related to the credit risk is remote and any
losses would be immaterial.
The Swap Agreement has been designated as a cash flow hedge and was deemed
to be perfectly effective during 2001. As such, changes in the fair value
of the Swap Agreement during the year ended December 31, 2001 have been
reflected as other comprehensive loss in the accompanying statement of
income and comprehensive (loss) income. The difference between accrued
interest expense calculated at the effective rate under the Swap Agreement
and accrued interest expense calculated at the interest rate under the
Mortgage Loan is recognized currently in earnings as interest.
8
The maturity date of the Mortgage Loan and the termination date of the
Swap Agreement are identical. The estimated cost to unwind the Swap
Agreement was approximately $19,439,000 at December 31, 2001. The
Partnership has no intention of unwinding the Swap Agreement. The
Partnership estimates that $18,254,076 of net derivatives loss included in
accumulated other comprehensive loss will be reclassified into earnings
within the next 12 months.
5. RELATED PARTY TRANSACTIONS
The Partnership has entered into a Management and Leasing Agreement with a
company ("Property Manager/Leasing Agent") that is an affiliate of a
stockholder of Metropolis. The Property Manager/Leasing Agent manages and
operates the Property and provides all supervisory, management and leasing
services. The Management and Leasing Agreement provide for a fee of 1.5%
of gross revenues, payable monthly, and reimbursement for overhead and all
reasonable out-of-pocket-expenses incurred. The Management and Leasing
Agreement also provides for leasing commissions to be calculated on a
sliding scale percentage of a lease's base rent. Fees incurred under the
Management and Leasing Agreement for the years ended December 31, 2001 and
2000 aggregated approximately $2,071,000 and $2,295,000, respectively.
An affiliate of the Property Manager/Leasing Agent provided cleaning
services for the Property through February 2001. Fees paid for cleaning
services for the years ended December 31, 2001 and 2000 totaled
approximately $405,000 and $2,499,000, respectively.
6. TENANT LEASES
The approximate annual base rentals (excluding escalation income) from
existing noncancelable operating leases from tenants as of December 31,
2001 are as follows:
December 31, Amount
2002 $ 82,256,000
2003 84,260,000
2004 77,837,000
2005 72,567,000
2006 69,135,000
Thereafter 360,736,000
------------
Total $746,791,000
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