10-K 1 form10k.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2002 OR [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______ Commission File Number 0-30162 ______________________ FRONTLINE CAPITAL GROUP (exact name of registrant as specified in its charter) DELAWARE 11-3383642 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 405 LEXINGTON AVENUE NEW YORK, NY 10174 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 931-8000 ______________________ Securities registered pursuant to Section 12 (b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $.01 par value NONE Securities registered pursuant to Section 12 (g) of the Act: None ______________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. | | Indicate by check mark whether the registrant is an "accelerated filer" as defined in Exchange Act 12b-2. Yes | | No | | The aggregate market value of the shares of common stock held by non-affiliates was approximately $70 thousand based on the closing price on the OTC Bulletin Board for such shares on March 18, 2003. The number of the Registrant's shares of common stock outstanding was 37,344,039 as of March 18,2003. DOCUMENTS INCORPORATED BY REFERENCE ================================================================================ TABLE OF CONTENTS

I-2 PART I ITEM 1. BUSINESS THE COMPANY FrontLine Capital Group ("FrontLine" or the "Company") was formed on July 15, 1997 and was spun off as a separate public company from Reckson Associates Realty Corp. ("Reckson Associates") in June 1998. FrontLine is a holding company with two distinct operating segments: one holds FrontLine's interest in HQ Global Workplaces, Inc., a company in the officing solutions market and its predecessor companies ("HQ" or the "HQ Global Segment"), and the other consists of FrontLine (parent company) ("FrontLine Parent") and its interests in a group of companies (the "Parent and Other Interests Segment") that provide a range of services. FrontLine was established with the purpose of identifying and acquiring interests in operating companies that engage in businesses that provide services to other businesses. The groundwork for this business was established in 1997, with investments commencing in 1998. The first investments were in executive office suites (now known as the flexible officing solutions industry) and telecommunications infrastructure. During 1999, the Company rapidly expanded its operations and ownership position within the flexible officing solutions industry by orchestrating the merger of three companies and acquiring interests in the combined company that resulted in an 84% ownership position of the combined company, then operating under the name of VANTAS Incorporated ("VANTAS"). In addition, FrontLine increased its infrastructure enabling the acquisition of ownership interests in an additional 10 companies that each had the goal of leveraging the power of the Internet to deliver services to other businesses. The ability to deliver this growth was primarily fueled by access to the public capital markets. The announcement in January 2000 of the merger of VANTAS with HQ moved FrontLine to the forefront of the flexible officing solutions industry through the creation of the world leader in this industry. With a majority common stock ownership position in the merged entity, the promising growth of the Internet sector and robust capital markets, FrontLine was well-positioned to capitalize on the potential of the resulting network of the FrontLine-owned enterprises. However, the capital markets changed dramatically in mid-2000 and caused a reassessment of FrontLine's business plan. In October 2000, FrontLine announced that, as a result of changing market conditions, it was refining its strategic plan (the "Restructuring") to highlight its holdings in HQ and to maximize the value of its other holdings. Additionally, in conjunction with the Restructuring, FrontLine announced that it would focus its resources and capital on the businesses within its existing portfolio and cease pursuing new investment activities. In conjunction with the Restructuring, and in light of market conditions, FrontLine reevaluated the carrying values of its ownership interests and as a result of this reevaluation recorded aggregate impairment charges of $57.7 million through December 31, 2002 and 2001, and $25.7 million in the fourth quarter of the year ended December 31, 2000 to reduce the carrying values of these investments to their estimated fair values. No further impairment charges were recorded or considered necessary in 2002. FRONTLINE BANKRUPTCY On June 12, 2002, Frontline filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Company remains in possession of its assets and properties, and continues to operate its business and manage its property as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the United States Bankruptcy Code. I-3 The deadline to file proofs of claims and interests expired on September 30, 2002. Frontline is currently in the process of reviewing and assessing the claims and interests that have been filed, and intends to file objections, as appropriate. On November 14, 2002, the Bankruptcy Court issued an order, which, among other things, extended the exclusive period during which only Frontline may file a plan of reorganization through and including February 7, 2003. On March 24, 2003, the Bankruptcy Court issued an order which among other things, further extended the exclusive period during which only Frontline may file a plan of reorganization through and including June 6, 2003. The Company anticipates proposing a plan of reorganization in accordance with the federal bankruptcy laws as administered by the Bankruptcy Court prior to that date. Confirmation of a Plan of reorganization could materially change the amounts currently recorded in the financial statements. The financial statements do not give effect to any adjustment to the carrying value of assets, or amounts and classifications of liabilities that might be necessary as a consequence of this matter. The Company has the exclusive right to propose a plan of reorganization through which period may be extended further by the Bankruptcy Court. By order dated March 31, 2003, the Bankruptcy Court also authorized Frontline to, among other things, (a) perform its duties as a debtor-in-possession in connection with a wholly-owned subsidiary that is a managing member of a limited liability company, by negotiating and executing definitive documents consistent with the transactions detailed in the term sheets regarding the proposed restructuring of Reckson Strategic Venture Partners, LLC and with respect to New World Realty, LLC annexed to such order (collectively, the "Transactions"), and (b) to perform such actions and take all steps necessary to implement and consummate such Transactions. HQ GLOBAL BANKRUPTCY On March 13, 2002, HQ and certain of its affiliates (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Delaware Bankruptcy Court") and received a commitment for $30.0 million in debtor-in-possession financing. The Debtors continue to operate their business and manage their properties as debtors-in-possession during the Chapter 11 proceeding. The Debtors have the exclusive right to propose a plan of reorganization until May 13, 2003, which period may be extended further by the Delaware Bankruptcy Court. The Debtors are obligated under their debtor-in-possession financing facility to file with the Delaware Bankruptcy Court, no later than April 30, 2003, a plan of reorganization in a form acceptable to the "Requisite Lenders" under the facility. The Debtors and their debtor-in-possession lenders have agreed, subject to approval by the Delaware Bankruptcy Court to an extension of this deadline to June 30, 2003. The Debtors anticipate proposing a plan of reorganization in accordance with the federal bankruptcy laws as administered by the Court. Confirmation of a plan of reorganization could materially change the amounts currently recorded in the financial statements. The financial statements do not give effect to any adjustment to the carrying value of assets, or amounts and classifications of liabilities that might be necessary as a consequence of this matter. DELISTING BY NASDAQ In March 2002, the Company's stock was delisted by Nasdaq as a direct result of the HQ bankruptcy filing. The Company's common stock currently trades on the OTC Bulletin Board under the symbol FLCGQOB. I-4 HQ HQ is a provider of flexible officing solutions. As of December 31, 2002, HQ owned, operated, or franchised 304 business centers, which are included in continuing operations and are primarily located in the United States. There were 19 business centers operating at December 31, 2002 that were held for sale and included in discontinued operations or in the process of being closed. A wholly-owned subsidiary of HQ is also the franchiser of 15 domestic and 31 international business centers for unrelated franchisees. Excluding franchised and managed centers, as of March 24, 2003, HQ owned and operated 242 business centers. HQ provides a complete outsourced office solution through furnished and equipped individual offices and multi-office suites available on short notice with flexible contracts. HQ also provides business support and information services including: telecommunications; broadband Internet access; mail room and reception services; high speed copying, faxing and printing services; secretarial, desktop publishing and IT support services and various size conference facilities, with multi-media presentation and video teleconferencing capabilities. HQ also provides similar services for those businesses and individuals that do not require offices on a full-time basis. On June 1, 2000, VANTAS Incorporated ("VANTAS"), a majority-owned subsidiary of the Company, merged with HQ Global Workplaces, Inc. ("Old HQ"), an affiliate of CarrAmerica Realty Corporation ("CarrAmerica"), in a two-step merger (the "HQ Merger"). As a result of the HQ Merger, the combined company became a wholly-owned subsidiary of a newly-formed parent corporation, HQ Global Holdings Inc. ("HQ Global"), under the name HQ Global Workplaces, Inc. See Note 3 to the financial statements included elsewhere in this Form 10-K. For the year ended December 31, 2000, the results of operations included in the financial statements in this Form 10-K are comprised of twelve months of VANTAS and the seven months of Old HQ following the HQ Merger with HQ Global. BUSINESS STRATEGY Workplace Solutions ------------------- HQ offers its clients two office solution plans based on their particular needs and preferences. These two plans are Full Office Program and Business Access Program. Details of these services are described below: The Full Office Program This program provides clients with fully furnished and equipped individual offices and suites and a full array of business support services without substantial investment of time and money, enabling companies to allocate resources more effectively. In addition to a fully furnished office and access to such business support services, clients receive the following additional amenities and benefits: Infrastructure: o Desirable business addresses in o Mail processing, courier, shipping prime locations and receiving services o High quality full service business o 24 hour per day/7 day per week access environments o Client services area with essential o Complimentary beverage service office equipment including coffee and tea o Meeting rooms with audio-visual o Office supplies equipment o Access to approximately 300 centers worldwide through operated and franchised locations I-5 People: o Professional receptionist to greet o Dedicated administrative staff guests proficient in business software o Telephone answering and call o Meeting planning and catering screening o Responsive on site management and o IT support teams support teams Technology: o High speed Internet connectivity o E-Mail o Telecommunications services o Webhosting o Video conferencing o Telephone and web conferencing o Additional technology includes: technical support, LAN and other configurations The Business Access Program This program provides value to clients that need a local presence in a particular market or access to HQ's worldwide network and utilization of the many services offered by HQ, but do not need a full-time office. As a result, HQ offers a part-time plan called the Business Access Program. HQ's clients receive a prestigious address, building directory lobby listing, personalized telephone answering, message and voice mail services, facsimile capabilities, incoming mail handling and use of conference rooms and/or offices as needed. The Business Access Program provides flexibility for HQ's clients. For example, as a client grows, it can transfer into a Full Office Program. Similarly, should a Full Office client need to downsize, it can adjust its overhead and participate as a Business Access client in a seamless manner. Additional Services HQ offers a variety of additional services to its clients on an as-needed basis and charges for these services according to a price schedule. Such services, which may be a key determinant in a client's decision to choose a business center, include word processing and secretarial services, desktop publishing/graphics design, clerical services (i.e., photocopying, filing, labeling, concierge services), and technical support services (hardware/software). Clients ------- As of December 31, 2002, HQ had approximately 22,000 clients, including both Full Office and Business Access clients, utilizing 19,000 workstations. Approximately 60% of HQ's Full Office clients are large regional or national companies, often purchasing HQ's services at multiple locations. National and regional firms generally prefer doing business with a larger, well-established business center operator, such as HQ, in order to ensure longevity and consistency of service, as well as the ability to contract for multiple locations in multiple markets with a single provider. In return, the largest business center operators typically obtain more favorable lease terms than single site operators who are unable to provide this level of service. No single client accounts for more than 1% of HQ's revenues. Suppliers --------- HQ's primary suppliers are its landlords from whom it leases office space. These landlords include primarily large real estate companies from which HQ leases space at multiple locations. HQ's landlords include Boston Properties, Inc., CarrAmerica, Duke-Weeks Realty Corporation, Equity Office Properties Trust ("EOP"), Reckson Associates and Shorenstein Properties. No single landlord accounts for more than 11% of the aggregate annual rental payments made by HQ. I-6 The initial terms of the agreements pursuant to which HQ leases office space from landlords average approximately 10 years and, in most cases, carry lease renewal options at 95% to 100% of fair market value. In any given year, a portion of the leases held in HQ's portfolio of leases will be eligible for renewal. This lease expiration diversity enables HQ to manage lease rates on a portfolio basis. In the years ending December 31, 2003, 2004 and 2005, 0.4%, 7.6% and 23.5% respectively of the continuing operations leases are scheduled to expire, respectively. Office Service Agreements ------------------------- HQ provides furnished office space to clients with flexible terms. A number of a business center's clients terminate their agreements during the course of a year and, therefore, maintaining high occupancy requires ongoing sales efforts. One risk HQ faces is the risk of non-renewals resulting in lower occupancy and reduced service revenues. Despite the short-term nature of the office service agreements, many clients elect to renew their office service agreements and remain clients for periods of time averaging approximately four times longer than the original term of their service agreement. HQ estimates that the historical average length of stay of its Full Office clients is approximately two to three years. At December 31, 2002, HQ occupancy as measured by occupied offices, for continuing operations business centers owned and operated by HQ was 69%. Although HQ's occupancy rates vary from one period to another and are not the only determinant in its ability to generate revenues and profits, HQ's continued ability to generate business center operating income is dependent upon sufficiently high occupancy rates. Franchise Centers ----------------- HQ provides its clients with an additional 46 office center locations, which are operated under franchise agreements by third party owners. These franchised centers, of which 15 are located in 7 states and Puerto Rico, and 31 are located in 10 international locations, provide HQ's clients with additional solutions to their global office needs. HQ receives a franchise royalty from these third party owners for the use of the HQ name, with royalty percentages ranging from 1.0% to 2.5% of the franchise center's gross revenue. Franchise fees aggregated $0.8 million for the year ended December 31, 2002, and are included in business services revenues. Managed and Joint Venture Centers --------------------------------- As of December 31, 2002, HQ has no managed centers in the United States. The management agreement for the one managed center operated by HQ expired on December 31, 2002. Additionally, HQ has entered into a joint venture agreement with EOP and currently manages one center pursuant to this agreement. Management fees generally include a base fee plus an incentive fee and certain profit participations. Marketing Alliance ------------------ HQ has a marketing alliance with Servcorp, a business center operator with centers primarily located in Asia, Australia and New Zealand, whereby HQ receives and provides client referrals from and to Servcorp. The Industry ------------ During 2002, the U.S. economy was stagnant, which had a negative impact on the users of flexible officing solutions, causing continued pressure on pricing and occupancy in the industry. The industry is highly fragmented with over 10% of total business centers owned by the two largest participants, including HQ. I-7 Several trends are driving the acceptance and usage of business centers, including: o the widespread use of business center facilities by national and regional corporations to support mobile employees; o small businesses nationwide requiring more flexible office space and related services; o home-based businesses and free agents utilizing part-time office facilities for meetings and support services; o the continuing trend of corporate downsizing which often results in the need for temporary office space for former employees seeking new jobs and/or starting new businesses; o the growing use and acceptance of enhanced telecommunication and computer technologies which can help businesses create "virtual offices" without fixed space requirements; and o the increased awareness by commercial real estate owners that business centers can provide amenities to existing tenants (such as conference facilities and offices for visiting executives) and act as an incubator for future tenants. Furthermore, the emergence of certain communications technologies has played an important role in the evolution of the industry. Improved telecommunication services and Internet applications have become more frequently utilized and integrated into business center service offerings. As the industry continues to evolve, office equipment and communications technology will become an increasingly competitive factor. Business center operators are likely to face pressure to invest in technology in order to offer services such as E-mail and LANs as well as video conferencing. Competition ----------- The industry is highly fragmented with approximately 10% of total business centers owned by HQ and the two largest participants, including HQ. In many markets, HQ's largest competitor may be a locally-owned operator with several centers. HQ's largest global competitor is Regus plc. Regus has a large international presence and a smaller presence in the United States. HQ may compete with these and other entities in both the search for attractive business center locations and in attracting and retaining clients in its business centers as well as skilled managers. Team Members ------------ As of December 31, 2002, HQ employed approximately 1,400 team members (employees) including 235 corporate team members. None of these team members is covered by a collective bargaining agreement and HQ believes its relationship with team members is good. HQ is continually implementing and improving its operating systems, expanding opportunities and providing training programs for its team members. Management compensation consists of base salaries and incentive compensation based upon HQ's performance and individual team member performance. In addition, certain team members participate in a stock option plan designed to motivate long-term contribution to HQ's success. GEOGRAPHIC INFORMATION ---------------------- Information by geographic area is provided in Item 2, below. As of December 31, 2002, HQ's continuing operations are primarily located in North America, except for certain franchise centers. I-8 DISCONTINUED OPERATIONS In December 2001, HQ's Board of Directors approved a plan to dispose of HQ's business in Europe. As a result of this transaction, the HQ consolidated balance sheets for the years ended December 31, 2002 and 2001 and the statements of operations and cash flows for the years ended December 31, 2002, 2001 and 2000 present the European businesses as a discontinued operation. On June 24, 2002, HQ sold certain assets of the discontinued operations in the United Kingdom for cash proceeds of $15.5 million. Of this amount, $11.5 million was repatriated to the United States. This transaction resulted in a gain of $5.4 million, representing the excess of the proceeds over the previously estimated net realizable value of the assets. There were no income taxes related to this transaction. PARENT AND OTHER INTERESTS SEGMENT The Parent and Other Interests Segment consists of FrontLine and its interests in a group of companies, which provide a range of services. As discussed above, in conjunction with the Restructuring and in light of market conditions experienced beginning in mid-2000, FrontLine reevaluated the carrying value of its ownership interests and, as a result of this re-evaluation, recorded aggregate impairment charges of $57.7 million through the year ended December 31, 2002 and 2001 and $25.7 million in the fourth quarter of the year ended December 31, 2000 to reduce the carrying values of these investments to their estimated fair values. No further impairment charges were recorded or considered necessary in 2002. FrontLine also has an interest in Reckson Strategic Venture Partners, LLC, which invests in operating companies with experienced management teams in real estate and real estate related market sectors which are in the early stages of their growth cycle or offer unique circumstances for attractive investments, as well as platforms for future growth. At December 31, 2002, FrontLine had 2 officers and no employees. See Note 4 to the accompanying Consolidated Financial Statements for financial information and further discussion and financial data related to our Parent and Other Interests Segment. I-9 ITEM 2. PROPERTIES FrontLine's principal office is located at 405 Lexington Avenue, New York, New York, 10174. Management believes that such space is sufficient to meet FrontLine's present needs and does not presently anticipate securing additional space. HQ Business Centers at December 31, 2002 ---------------------------------------- The following table sets forth the number of HQ business centers and the related number of workstations that HQ operated as of December 31, 2002. HQ centers are located in buildings where HQ leases office space from landlords. See "Suppliers" in Item 1 to this Form 10-K.

HQ operates 99 of these centers and approximately 11,000 workstations in the top five markets of New York City, Los Angeles, Chicago, Washington D.C. and San Francisco. Additionally, HQ has 46 franchised centers of which 15 are located in 10 states and 31 are located in 10 international locations. HQ also manages one business center under a joint venture agreement. Overall, as of December 31, 2002, HQ provided its clients officing solutions in 304 centers, with 32,731 workstations in 12 countries. HQ's corporate headquarters is located at 15305 North Dallas Parkway, Dallas, Texas. I-10 ITEM 3. LEGAL PROCEEDINGS On February 4, 1999, a lawsuit captioned OmniOffices, Inc. et al. v. Joseph Kaidanow, et al., (Civil Action No. 99-0260) was filed in the United States District Court for the District of Columbia. This litigation (the "D.C. Action"), is with two stockholders of Old HQ (f/k/a OmniOffices, Inc.) and involves the conversion of approximately $111 million of debt previously loaned to Old HQ by CarrAmerica, into HQ's non-voting common stock. CarrAmerica and Old HQ initiated the action by filing a complaint seeking a declaratory judgment that the conversion price was fair, following threats by Messrs. Kaidanow and Arcoro ("Defendants") to challenge the conversion price. Defendants filed counterclaims against CarrAmerica, Old HQ and the then current directors of Old HQ, seeking a judgment declaring the conversion void or voidable, or in the alternative, compensatory and punitive damages. The stockholders' counterclaim makes no allegations against HQ. By January 2000, discovery was complete, the case was fully briefed, and the parties were awaiting a court ruling on HQ and CarrAmerica's ("Plaintiffs") motion for summary judgment and Defendants' motion to modify the scheduling order and motion to seal. The case was reassigned twice, and the two motions were then dismissed without prejudice on September 19, 2000 and September 26, 2000. On November 13, 2000, Plaintiffs filed a motion to reinstate their summary judgment motion. Defendants filed a cross-motion for leave to file a cross-motion for summary judgment. The Court permitted the refiling and took the motion and cross-motion for summary judgment under advisement. On September 12, 2001, without holding oral argument, the Court denied Plaintiffs' motion for summary judgment, but granted the Defendants' cross-motion for summary judgment. Plaintiffs and the directors of old HQ filed a Notice of Appeal in October, 2001. On February 15, 2002, the D.C. Circuit announced that oral argument was scheduled for January 16, 2003. On March 17, 2002, the D.C. Circuit referred the appeal to its Appellate Mediation Program. On April 24, 2002, HQ filed a notice of bankruptcy stay in respect of its March 13, 2002 Chapter 11 proceeding. HQ informed the D.C. Circuit that the appeal was stayed as to HQ pursuant to the automatic stay provisions of the U.S. Bankruptcy Code. The D.C. Circuit reversed the District Court in an opinion dated March 7, 2003. In re HQ Global Workplaces, Inc. Shareholder Litigation, No. 17996-NC. The original lawsuit (the "Fiduciary Action"), was brought in Delaware State Chancery Court on April 17, 2000 by Kaidanow and Arcoro ("Plaintiffs") but was removed to the Federal District Court for the District of Delaware and then remanded on Plaintiffs' motion back to Delaware Chancery Court. The action alleges a breach of fiduciary duty by CarrAmerica Realty Corporation and Old HQ's directors in approving the HQ Merger transaction. The complaint alleges among other things that allocation of the purchase price between the UK and U.S. companies failed to meet the standard of entire fairness, and that CarrAmerica breached its obligations under the Tag-Along Rights Agreement between Plaintiffs and CarrAmerica. The lawsuit also alleges an aiding and abetting claim against the Company as well as a tortuous interference claim against HQ and the Company. The Plaintiffs in the Fiduciary Action have also brought an appraisal action in the Chancery Court requesting appraisal of 100,000 of their shares sold in the HQ Merger. Modest discovery has occurred in the Appraisal Action. The Appraisal Action and the Fiduciary Action have now been consolidated into one action. On March 8, 2002, Plaintiffs filed a motion for leave to amend their complaint to add, inter alia, a breach of warrant agreements claim against HQ and other claims against FrontLine. On March 15, 2002, HQ filed a notice of bankruptcy stay, stemming from its March 13, 2002 voluntary petition for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. HQ informed the Court that the consolidated action should be stayed as to HQ pursuant to the automatic stay provisions of the Bankruptcy Code. At a status conference held on March 25, 2002, the Vice Chancellor ordered the parties to work out a scheduling order for the briefing of the motion regarding the stay of the proceedings. At a hearing on this motion on September 9, 2002, the Vice Chancellor stayed the proceedings until November 13, 2002. The former director co-defendants in the consolidated action separately filed an adversary proceeding in the Delaware Bankruptcy Court seeking to stay the consolidated action as to the former directors. After a hearing on June 25, 2002, the Delaware Bankruptcy Court denied the requested relief. I-11 On September 9, 2002, HQ Global Workplaces, Inc. filed an adversary proceeding in the Delaware Bankruptcy Court seeking to subordinate, pursuant to Section 510(b) of the Bankruptcy Code, the claims of Messrs. Kaidanow and Arcoro on the basis that the claims arose from the purchase or sale of an equity security. On or about October 3, 2001, Burgess Services, LLC ("Burgess Services"), Dominion Venture Group, LLC ("Dominion Venture Group") and certain affiliated parties commenced an action in Oklahoma State Court against Reckson Strategic Venture Partners, LLC ("RSVP"), Reckson Associates Realty Corp. ("Reckson"), and RAP-Dominion LLC ("RAP-Dominion"), a joint venture through which RSVP and Reckson invested in a venture with certain of the plaintiffs. On April 10, 2002, the litigation was settled without liability on the part of the Company or the defendant. In connection with the settlement, the joint venture will be terminated. As a result of this settlement, the Company determined that no further impairment was necessary on its carrying value in its investment in Reckson Strategic. In April 2000, the Company entered into an office lease which expires in December 2010. In January 2001, the Company assigned the lease to HQ. The lease assignment did not relieve the Company of any of its obligations under the terms of this lease. At December 31, 2002, HQ was past due on $0.9 million of rent. The landlord has drawn the full letter on credit of $2.8 million. Of the $57.6 million HQ restructuring charge recorded in 2001, a $4.8 million accrual applicable to this lease was recorded as an estimate for the cost of terminating this lease. If the ultimate cost of terminating this lease exceeds the outstanding letter of credit, then additional cash may need to be paid by either HQ or the Company. Since HQ is currently in bankruptcy, the landlord is likely to seek to recover any further damages from FrontLine. As of December 31, 2002, the remaining lease commitment was $23.4 million. The Company also has potential liability under its indemnification of CarrAmerica for liabilities of Carr America under its guarantees relating to four HQ leases. In conjunction with the HQ Merger pursuant to the terms of a stockholders agreement, FrontLine agreed to indemnify CarrAmerica for its guarantees of certain HQ leases. As of December 31, 2002, the remaining lease commitments in excess of the existing letter of credit was $27.4 million. The Equal Employment Opportunity Commission has filed a suit (N.D. 111., Cause No. 02 C 6623, on September 1, 2002), on behalf of a former employee alleging discrimination under the Americans with Disability Act and Title 1 of the Civil Rights Act of 1991. HQ is currently evaluating the information and has not yet filed a response. In addition to the cases set forth above, the Company and its investee entities are party to claims and administrative proceedings arising in the ordinary course of business or which are otherwise subject to indemnification, some of which are expected to be covered by liability insurance (subject to policy deductibles and limitations of liability) and all of which, including the cases discussed above, collectively are not expected to have a material adverse effect on the Company's financial position or results of operations. Management does not anticipate that these litigations will negatively impact future operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of shareholders during the fourth quarter of the year ended December 31, 2002. I-12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock traded over the counter ("OTC") under the symbol "RSII" through August 1999 when it began trading on the NASDAQ National Market ("NASDAQ"). In April 2000, the Company's symbol was changed to "FLCG." As a direct result of the HQ bankruptcy filing in March 2002, the symbol was changed by NASDAQ to FLCGQ. In March 2002, the Company's common stock was delisted by NASDAQ and currently trades on the OTC Bulletin Board. The following table sets forth the quarterly high and low closing bid prices per share of the Company's common stock reported for each respective quarter. These OTC and NASDAQ market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Since inception, the Company has not paid any dividends to its shareholders. Under the terms of the Company's credit facilities, as long as there are outstanding advances under such facilities, the Company is prohibited from paying dividends on any share of its common stock. In addition, the payment of dividends on the Company's common stock is prohibited unless full distributions have been paid on both of the Company's Series A and Series B Preferred Stock. The Company is in arrears with regard to the payment of dividends on its Series A and Series B Preferred Stock. FLCG STOCK PRICE ----------------

The number of registered shareholders of the Company's common stock as of March 18, 2002 was 6,805. UNREGISTERED SALES OF SECURITIES As distributions on its Series A 8.875% Convertible Cumulative Preferred Stock (the "Series A Preferred Stock") which were payable in February 2001, May 2001 and August 2001, FrontLine issued 43,227, 63,895 and 484,973 shares of its common stock, respectively, to the institutional investor that holds the Series A Preferred Stock in transactions exempt from registration under Section 4(2). The Company did not declare or pay the quarterly dividend due on these shares on November 6, 2001 or February 6, 2002. On December 13, 2000, FrontLine obtained a $25.0 million preferred equity facility, initially issuing 15,000 shares of Series B Convertible Cumulative Preferred Stock (the "Series B Preferred Stock") for net proceeds of $13.9 million. On February 1, 2001, FrontLine drew the remaining $10.0 million of the facility, issuing 10,000 shares of Series B Preferred Stock for net proceeds of $10.0 million. These transactions were exempt from registration under Section 4(2). As noted above, the Company is in arrears with regard to the payment of dividends on its Series A and Series B Preferred Stock. For information concerning the failure to pay such dividends, please see Item 7 below. II-1 ITEM 6. SELECTED FINANCIAL DATA

(1) Based on 37,344,039, 37,009,891, 34,880,709, 25,600,985 and 14,522,513 weighted average shares of common stock outstanding for the years ended December 31, 2002 2001, 2000, 1999 and 1998, respectively. (2) Reflects the operating results of HQ Global Workplaces, Inc. ("Old HQ") for the period subsequent to June 1, 2000, the date of the merger of Old HQ with VANTAS Incorporated ("VANTAS"). See Note 3 to the accompanying consolidated financial statements for further discussion. (3) Reflects the Company's acquisition and consolidation of a majority ownership interest in VANTAS as of January 1, 1999. (4) Includes the carrying value of investments in Reckson Strategic Venture Partners, LLC of $12,322,000, $13,396,000, $28,969,000, $36,626,000 and $15,561,000 as of December 31, 2002, 2001, 2000, 1999 and 1998 respectively. (5) No dividends on the common stock were paid in any of the periods presented. During the years ended December 31, 2002, 2001 and 2000, the Company recognized $2,195,000, $5,582,000 and $2,119,000, respectively of dividends on and accretion of preferred stock. NOTE: Certain prior period amounts have been reclassified to conform to the current year presentation. II-2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the accompanying financial statements of FrontLine Capital Group (the "Company" or "FrontLine") and related notes thereto. The Company considers certain statements set forth in this Annual Report Form 10-K herein to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, with respect to the Company's expectations for future periods. Certain forward-looking statements involve certain risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, the actual results may differ materially from those set forth in the forward-looking statements and the Company can give no assurance that such expectations will be achieved. Certain factors that might cause the results of the Company to differ materially from those indicated by such forward-looking statements include, among other factors, an inability to extend and/or amend the terms of the Company's outstanding indebtedness and HQ Global Holdings Inc. ("HQ" or the "HQ Global Segment") indebtedness on terms that are favorable to the Company and its common stockholders, results of the bankruptcy of Frontline and HQ, negative changes in the officing solutions industry or the Internet-related businesses in which the unconsolidated companies in which we invest operate, a continued downturn in general economic conditions, increases in interest rates, a lack of capital availability, ability to satisfy financial covenants, competition, reduced demand or decreases in rental rates for executive office suites and other real estate-related risks such as the timely completion of projects under development, our inability to complete future strategic transactions, costs incurred in connection with strategic transactions and our dependence upon our key personnel and the key personnel of HQ and other risks detailed in FrontLine's reports and other filings made with the Securities and Exchange Commission. Consequently, such forward-looking statements should be regarded solely as reflections of the Company's current operating and development plans and estimates. These plans and estimates are subject to revision from time to time as additional information becomes available, and actual results may differ from those indicated in the referenced statements. CRITICAL ACCOUNTING POLICIES The consolidated financial statements of the Company include accounts of the Company and its majority-owned subsidiary. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the Company's consolidated financial statements and related notes. In preparing these financial statements, management has utilized information available including its past history, industry standards and the current economic environment among other factors in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements may not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of the Company's results of operations to those of companies in similar businesses. PROPERTY AND EQUIPMENT Office equipment, furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. The cost of HQ's enterprise resource system is being amortized over seven years. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. II-3 IMPAIRMENTS OF OWNERSHIP INTERESTS AND ADVANCES TO UNCONSOLIDATED COMPANIES The Company continually evaluates the carrying value of its ownership interests in and advances to each of its investments in unconsolidated companies for possible impairment based on achievement of business plan objectives and milestones, the value of each ownership interest in the unconsolidated company relative to carrying value, the financial condition and prospects of the company and other relevant factors. The fair value of the Company's ownership interests in and advances to privately held companies is generally determined based on the value at which independent third parties have invested or have committed to invest in the companies. The Company recorded a $25.7 million charge during the year ended December 31, 2000 to recognize impairment charges to reduce the carrying value of its investments in certain unconsolidated companies. In recognition of continuing difficult capital market conditions and operating performance of these ownership interests, the Company recorded an additional $32.9 million during the year ended December 31, 2001. Of the $32.9 million recorded, $20.0 million related to Reckson Strategic Venture Partners, LLC ("Reckson Strategic")(see Note 4 for further discussion). During the twelve months ended December 31, 2002, the Company determined that no additional impairment was necessary. These charges are included in "Equity in net loss and impairment of unconsolidated companies" in the accompanying consolidated statements of operations. IMPAIRMENTS OF LONG-LIVED ASSETS Impairment charges are recorded as a permanent reduction in the carrying amount of the related asset. Effective January 1, 2002, the Company adopted Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, ("FAS 142"). As a result, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives. As a result of impairment charges recorded in the third and fourth quarters of 2001, discussed below, the Company does not have any goodwill or indefinite-lived intangible assets recorded at December 31, 2002 or 2001. Accordingly, adoption of FAS 142 did not have an impact on the Company's financial condition or results of operations. Effective January 1, 2002, the Company also adopted FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"). The FASB's new rules on asset impairment supersede FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121"). FAS 144 retains the requirements of FAS 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows, and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset, but removes goodwill from its scope. FAS 144 will primarily impact the accounting for intangible assets subject to amortization, property and equipment, and certain other long-lived assets. The adoption of FAS 144 did not have a significant impact on the Company's financial condition or results of operations. Prior to January 1, 2002, the Company reviewed long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated fair value of the asset or business center. In preparing these estimates, HQ must make a number of assumptions concerning occupancy rates, rates which will be charged to clients for workstations and services, and rates of growth of rent expense and other operating expenses. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Based on the trend of operating losses as well as HQ's inability to remain in compliance with its debt arrangements, HQ determined that the carrying value of its intangible assets was impaired at September 30, 2001. Therefore, in the third quarter of 2001, the Company recognized an impairment charge of approximately $294.1 million, representing the amount by which the carrying amount of the intangible assets exceeded their estimated fair value. As a result II-4 of continuing operating losses, the Company further revised its projected cash flows during the fourth quarter of 2001, resulting in an additional impairment charge of $241.4 million. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell. Accordingly, the Company recorded impairment charges of $0.8 million and $25.7 million related to restructurings in 2002 and 2001, respectively. Management believes that assumptions made in estimating fair values were reasonable, but actual fair values may differ from these estimates. RISK AND UNCERTAINTIES The future results of operations and financial condition of HQ will be impacted by the following factors, among others: the competition in the office solutions business with respect to, among other things, price, service, and location; dependence on leases and changes in lease costs; the availability of capital for expansion; the ability to obtain and retain qualified employees; the level of difficulty experienced in the integration of acquired businesses; the competition for future acquisitions; and the ability of HQ to secure adequate capital. OVERVIEW AND BACKGROUND FrontLine is a holding company, with two distinct operating segments: one holds FrontLine's interest in HQ Global Holdings, Inc., a company in the officing solutions market, and its predecessor companies ("HQ" or the "HQ Global Segment"), the other consists of FrontLine (parent company) ("FrontLine Parent") and its interests in a group of companies (the "Parent and Other Interests Segment") that provided a range of services. In October 2000, FrontLine announced that, as a result of changing capital market conditions, it was refining its strategic plan (the "Restructuring"- see Note 14 to the accompanying consolidated financial statements for further discussion) to highlight its holdings in HQ and to maximize the value of its other holdings. Additionally, in conjunction with the Restructuring, FrontLine announced that it would focus its resources and capital on the businesses within its existing portfolio and cease pursuing new investment activities. In conjunction with the Restructuring, FrontLine re-evaluated the carrying values of its investments and recorded aggregate impairment charges of $57.7 million through the year ended December 31, 2002 and 2001 and $25.7 million in the fourth quarter of the year ended December 31, 2000, in order to reduce the carrying value of these investments to fair value. The presentation and content of the Company's financial statements is largely a function of the presentation and content of the financial statements of HQ and its predecessor companies and the other investee entities. EFFECT OF VARIOUS ACCOUNTING METHODS ON RESULTS OF OPERATIONS The interests that FrontLine owns in its investee entities and Reckson Strategic Venture Partners, LLC (the "Reckson Strategic") have historically been accounted for under one of three methods: consolidation, equity method and cost method. The applicable accounting method is generally determined based on the Company's voting interest and rights in each investee. Consolidation. Where the Company directly or indirectly owns more than 50% of the outstanding voting securities of an entity or controls the board of directors, the consolidation method of accounting is applied. Under this method, an entity's results of operations are reflected within the Company's Consolidated Statements of Operations. The entities whose results are consolidated by the Company are comprised of VANTAS Incorporated ("VANTAS") and effective with the June 1, 2000 merger (the "Merger") of VANTAS with HQ Global Workplaces, Inc. ("Old HQ"). The entity representative of Old HQ and its II-5 predecessors, such as VANTAS, is referred to herein as HQ. (See Note 3 to the accompanying consolidated financial statements for further discussion). Participation of other shareholders in the earnings or losses of the consolidated entities is reflected in the caption "Minority interest" in the Consolidated Statements of Operations. Minority interest adjusts the consolidated net results of operations to reflect only the Company's share of the earnings or losses of the consolidated entities. To understand the Company's results of operations and financial position without the effect of the consolidation of HQ, Note 4 to the accompanying consolidated financial statements presents the balance sheets, statements of operations and cash flows of the Company without the consolidation of FrontLine's ownership interest in HQ. Equity Method. Investees whose results are not consolidated, but over whom the Company exercises significant influence, have been accounted for under the equity method of accounting. Investments which were accounted for under the equity method of accounting included: EmployeeMatters, Inc. ("EmployeeMatters"- sold in December 2000), OnSite Access, Inc., RealtyIQ Corp. ("RealtyIQ" - sold in April 2001), UpShot.com and Reckson Strategic. Cost Method. Investees not accounted for under either the consolidation or the equity method of accounting are accounted for under the cost method of accounting. Under this method, the Company's share of the earnings or losses of these companies is not included in the Consolidated Statements of Operations. Impairment charges recognized on cost method investments are included in "Equity in net loss and impairment of unconsolidated companies" in the accompanying Consolidated Statements of Operations. RESULTS OF OPERATIONS The reportable segments in FrontLine's financial statements are the HQ Segment and the Parent and Other Interests Segment. The following discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto. HQ OVERVIEW OF 2002 DEVELOPMENTS For the fiscal year ended December 31, 2002, HQ's business centers continued the economic decline that has been reflected in the overall US economy. As previously noted, On March 13, 2002 HQ and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code. The resulting business center closings and corporate headcount reduction are indicative of the company's efforts to stabilize the operations and emerge from bankruptcy as soon as possible. In the second quarter of 2002, HQ sold certain assets of the discontinued operations in the United Kingdom for cash proceeds of $15.5 million. Of this amount, $11.5 million was repatriated to the United States. This transaction resulted in a gain of $5.4 million, representing the excess of the proceeds over the previously estimated net realizable value of the assets. The gain of $5.4 million was recorded in the second quarter of 2002 and is included in income from discontinued operations for the twelve months ended December 31, 2002. As part of the restructuring plan, management has actively pursued renegotiation of HQ's lease agreements with its landlords throughout 2002. Many agreements will not become effective until the lease is assumed by HQ, with approval by the Delaware Bankruptcy Court. Consequently HQ's rent expense reflects the current expense and does not reflect these anticipated savings. This process will continue into 2003 as HQ develops the plan of reorganization. II-6 RESULTS OF CONTINUING OPERATIONS YEARS ENDED DECEMBER 31, 2002 AND 2001 Revenues. Total business center revenues for the year ended December 31, 2002 were $328.0 million, representing a decrease of $142.7 million, or 30.3%, from the year ended December 31, 2001. This decline in revenue reflects a fewer number of business centers which have been closed as part of the company's reorganization process. Pricing pressure has stabilized; however demand continued to fall throughout 2002. Business centers with twelve months of activity for both periods under comparison ("Same Centers") had revenues for the twelve-month period ended December 31, 2002 and 2001 of $304.8 million and $375.1 million, respectively, representing a decrease in 2002 of $70.4 million, or 18.8%, compared with 2001. The decrease in revenues in 2002 is attributable to a general decline in business performance. Reflective of the challenging macro-economic environment experienced throughout 2001 and into 2002, business centers experienced reduced demand and downward pricing pressure. Business centers that were closed during the period of comparison ("Closed Centers") had revenues for the twelve-month period ended December 31, 2002 and 2001 of $17.6 million and $91.9 million, respectively. In 2002, HQ closed 45 centers in the United States. Business centers opened subsequent to in 2001 ("Development Centers") had revenues for the twelve-month period ended December 31, 2002 and 2001 of $5.6 million and $3.7 million respectively. This increase is reflective of 12 months of operations in 2002 vs. less than 12 months of operations in 2001. Expenses. Total business center expenses for the year ended December 31, 2002 were $289.1 million, representing a decrease of $96.4 million, or 25.0%, from the year ended December 31, 2001. This decrease reflects the reduced number of centers in operation in 2002 vs. 2001. Same Center expenses for the years ended December 31, 2002 and 2001 were $261.7 million and $289.8 million, respectively, representing a decrease in 2002 of $28.1 million, or 9.7%, compared with 2001. The decrease is attributable to reduced center general and administrative costs, a reduction in bad debt expense, as well as lower technology and business service expenses associated with the decline in related revenue. Development Center expenses for the years ended December 31, 2002 and 2001 were $5.5 million and $4.4 million, respectively, representing an increase of $1.1 million, compared with 2001 attributable to twelve-month results in 2002. Closing Center expenses for the years ended December 31, 2002 and 2001 were $21.9 million and $91.3 million, respectively with the decrease in expense attributable to the termination of operations in those centers. Business Center Operating Income ("BCOI"). For the year ended December 31, 2002, BCOI was $38.9 million as compared with $85.1 million for 2001. The BCOI as a percentage of total revenues ("BCOI Margin") was 11.9% for the year ended December 31, 2002 as compared to 18.1% for 2001. The decrease in BCOI Margin can be attributed to a combination of reduced demand reflective of the challenging macro-economic environment experienced throughout 2002. Same Center BCOI for the years ended December 31, 2002 and 2001 was $43.0 million and $85.3 million respectively, representing a decrease of $42.3 million or 49.5%, from 2001. The BCOI Margin from Same Centers for the year ended December 31, 2002 was 13.1% as compared with 18.1% in the corresponding period in 2001. II-7 Development Center BCOI for the years ended December 31, 2002 and 2001 was $0.2 million and negative $0.7 million respectively representing an increase in 2002 of $0.9 million from the corresponding period in 2001. The increase is attributable to the maturity of Development Centers operating in the year ended December 31, 2002 compared to the year ended December 31, 2001. Closing Center BCOI for the years ended December 31, 2002 and 2001 was negative $4.3 million and $0.6 million respectively. Corporate General And Administrative Expenses. For the years ended December 31, 2002 and 2001, corporate general and administrative expenses were $36.8 million and $60.8 million, respectively. Corporate overhead as a percentage of revenue was 11.2% in 2002 vs. 12.9% in 2001. Restructuring Charges. For the years ended December 31, 2002 and 2001, restructuring charges were $29.4 million and $57.6 million respectively. For fiscal 2002, restructuring charges related to a reduction in the number of business centers, the reduction in the associated workforce and professional fees incurred in conjunction with HQ's restructuring efforts. The charges consisted of $1.1 million of severance and retention charges for terminated/retained employees and $28.3 million in estimated costs associated with the closing of business centers. Reorganization Charges. For the years ended December 31, 2002 and 2001, reorganization charges were $33.2 million and zero respectively. The 2002 charges consisted of $8.5 million of professional services costs associated with the Chapter 11 proceeding and a $24.7 million non-cash charge associated with the write-off of deferred financing costs associated with the Mezzanine Loan. Asset Impairments. For the years ended December 31, 2002 and 2001, impairment of intangible assets was $0.8 million and $561.2 million, respectively. Based on the trend of operating losses as well as HQ's inability to remain in compliance with its debt arrangements, HQ determined that the value of its intangible assets were impaired in 2001 and additional impairment charges related to long lived assets were recorded in 2002 as a result of HQ's bankruptcy filing. Depreciation And Amortization. For the years ended December 31, 2002 and 2001, depreciation and amortization expenses were $40.1 million and $70.1 million, respectively. The decrease in depreciation and amortization is attributable to the reduced carrying value of intangible and fixed assets due to impairment charges recorded in the second half of fiscal 2001. Interest Expense. For the years ended December 31, 2002 and 2001, net interest expense was $27.2 million and $44.4 million, respectively. The decrease in interest expense is due to suspension of the interest accrual related to interest on the Mezzanine Loan after March 13, 2002, the date of HQ's bankruptcy filing, and lower interest rates. Provision For Income Taxes. For the years ended December 31, 2002 and 2001, the provision for income taxes, which is comprised entirely of certain minimum state taxes, was zero and $0.8 million, respectively. Minority Interest. Minority interest was zero and a loss of $306.0 million in the years ended December 31, 2002 and 2001, respectively. YEARS ENDED DECEMBER 31, 2001 AND 2000 Revenues. Total business center revenues for the year ended December 31, 2001 were $470.7 million, representing an increase of $15.2 million, or 3.3%, from the year ended December 31, 2000. The increase is primarily attributable to the inclusion of a full year of revenue from business centers acquired in the HQ Merger on June 1, 2000, offset by a general decline in business performance. Reflective of the challenging macro-economic environment experienced throughout 2001, business centers experienced reduced demand and downward pricing pressure. II-8 Business centers with twelve months of activity for both periods under comparison ("Same Center") had revenues for the year ended December 31, 2001 and 2000 of $201.0 million and $241.3 million, respectively, representing a decrease in 2001 of $40.3 million, or 16.7%, compared with 2000. Business centers that were acquired during the periods under comparison ("Acquired Center") had revenues for the years ended December 31, 2001 and 2000 of $216.3 million and $156.9 million, respectively, representing an increase of $59.4 million, or 37.9%, compared with 2000. The increase is attributable to the inclusion of a full year of revenue from business centers acquired in the HQ Merger on June 1, 2000. Business centers with less than twelve months of activity during one of the periods under comparison ("Development Center") had revenues for the years ended December 31, 2001 and 2000 of $21.2 million and $11.1 million, respectively, representing an increase of $10.1 million compared with 2000. At December 31, 2001 and 2000, there were 15 and 12 Development Centers, respectively, excluding acquired centers open for less than 12 months. Business centers that were closed, or were in the process of closing, during the period under comparison ("Closing Center") had revenues for the years ended December 31, 2001 and 2000 of $32.2 million and $46.2 million, respectively. Expenses. Total business center expenses for the year ended December 31, 2001 were $385.5 million, representing an increase of $68.3 million, or 21.5%, from the year ended December 31, 2000. The increase is primarily attributable to the inclusion of a full year of expenses from business centers acquired in the HQ Merger on June 1, 2000. Same Center expenses for the years ended December 31, 2001 and 2000 were $159.6 million and $167.6 million, respectively, representing a decrease in 2001 of $8.0 million, or 4.8%, compared with 2000. The decrease is attributable to reduced center general and administrative costs, as well as lower technology and business service expenses associated with the decline in related revenue, offset by certain lease increases and higher bad debt expense. Acquired Center expenses for the years ended December 31, 2001 and 2000 were $169.9 million and $101.4 million, respectively. The increase is primarily attributable to the inclusion of a full year of expenses for business centers acquired in the HQ Merger. Development Center expenses for the years ended December 31, 2001 and 2000 were $18.7 million and $9.9 million, respectively, representing an increase of $8.8 million, compared with 2000. Closing Center expenses for the years ended December 31, 2001 and 2000 were $37.3 million and $38.3 million, respectively. Business Center Operating Income ("BCOI"). For the year ended December 31, 2001, BCOI was $85.2 million as compared with $138.3 million for 2000. The BCOI as a percentage of total revenues ("BCOI Margin") was 18.1% for the year ended December 31, 2001 as compared to 30.4% for 2000. The decrease in BCOI Margin can be attributed to a combination of reduced demand and downward pricing pressure, reflective of the challenging macro-economic environment experienced throughout 2001. Same Center BCOI was $41.4 million and $73.7 million for the years ended December 31, 2001 and 2000, respectively, representing a decrease in 2001 of $32.3 million or 43.8%, from 2000. The BCOI Margin from Same Centers for the year ended December 31, 2001 was 20.6% as compared with 30.5% in the corresponding period in 2000. Acquired Center BCOI was $46.4 million and $55.5 million for the years ended December 31, 2001 and 2000, respectively, representing a decrease of $9.1 million, or 16.4%, from 2000. The BCOI Margin for Acquired Centers for the year ended December 31, 2001 was 21.5% as compared with 35.4% in the corresponding period in 2000. II-9 Development Center BCOI was $2.5 million and $1.2 million for the years ended December 31, 2001 and 2000, respectively, representing an increase in 2001 of $1.3 million from the corresponding period in 2000. The increase is attributable to the number and maturity of Development Centers operating in the year ended December 31, 2001 compared to the year ended December 31, 2000. Closing Center BCOI was negative $5.1 million and positive $7.9 million for the years ended December 31, 2001 and 2000, respectively. Corporate General And Administrative Expenses. For the years ended December 31, 2001 and 2000, corporate general and administrative expenses were $60.8 million and $50.4 million, respectively. In the year ended December 31, 2001, expenses include $2.8 million of professional expenses associated with an abandoned merger and $0.5 million associated with amending loan covenants. By the fourth quarter of 2001, corporate general and administrative expenses had been decreased to 8.4% of revenue, compared with 12.9% for the full year of 2001 and 11.1% in 2000. Merger And Integration Charges. For the years ended December 31, 2001 and 2000, merger and integration charges were zero and $24.7 million, respectively. For fiscal 2000, merger and integration charges related to the HQ Merger completed June 1, 2000 and consisted of $11.4 million of payments to cancel options to purchase common stock held by officers and employees, $9.4 million of charges related to severance, retention incentives and other benefits, and $3.9 million of professional fees and other expenses. Restructuring Charges. For the years ended December 31, 2001 and 2000, restructuring charges were $57.6 million and zero, respectively. For fiscal 2001, restructuring charges related to a reduction in the number of business centers, the reduction in the associated workforce and professional fees incurred in conjunction with HQ's restructuring efforts. The charges consisted of $4.9 million of severance payments for terminated employees, $47.0 million in estimated costs associated with the closing of business centers and $5.7 million in professional fees. Asset Impairments. For the years ended December 31, 2001 and 2000, impairment of intangible assets was $561.2 million and zero, respectively. Based on the trend of operating losses as well as HQ's inability to remain in compliance with its debt arrangements, HQ determined that the value of its intangible assets was impaired. Depreciation And Amortization. For the years ended December 31, 2001 and 2000, depreciation and amortization expenses were $70.1 million and $51.4 million, respectively. The increase in depreciation and amortization expense primarily relates to the inclusion of a full year of depreciation and amortization expense from assets acquired in the HQ Merger. Interest Expense. For the years ended December 31, 2001 and 2000, net interest expense was $44.4 million and $32.3 million, respectively. The increase in expense is attributable to an increase in borrowing as a result of the HQ Merger. Provision For Income Taxes. For the years ended December 31, 2001 and 2000, the provision for income taxes, which is comprised entirely of certain minimum state taxes, was $0.8 million and $3.4 million respectively. Minority Interest. Minority interest was allocated a loss of $306.0 million and income of $7.7 million in the years ended December 31, 2001 and 2000, respectively. II-10 DISCONTINUED OPERATIONS YEARS ENDED DECEMBER 31, 2002 AND 2001 Income (Loss) from Discontinued Operations. For the year ended December 31, 2002, income from discontinued operations was $3.4 million, as compared to a loss of $144.6 million for the year ended December 31, 2001. The period ended December 31, 2002 includes a gain of $5.4 million, resulting from the sale of certain assets of the discontinued operation in the United Kingdom for an amount in excess of their previously estimated net realizable values. Excluding this gain, loss from discontinued operations was $2.0 million for the year ended December 31, 2002. YEARS ENDED DECEMBER 31, 2001 AND 2000 Income (Loss) From Discontinued Operations. For the year ended December 31, 2001, loss from discontinued operations was $144.6 million, as compared to income for the year ended December 31, 2000 of $1.1 million. The loss from discontinued operations for the year ended December 31, 2001 contains an asset impairment charge of $141.2 million, to reduce the carrying vale to its estimated net realizable value. PARENT AND OTHER INTERESTS YEARS ENDED DECEMBER 31, 2002 AND 2001 As a result of the Restructuring discussed above, FrontLine changed from a company which invested in early stage companies which leveraged the Internet into one which focused on maximizing the value of HQ. Parent expenses decreased $24.5 million to $15.6 million in the year ended December 31, 2002 as compared to 2001, principally due to a $11.1 million decrease in restructuring costs, a $2.3 million decrease in the amortization of stock compensation and related awards, a $9.7 million decrease in net interest expense due to ceasing to accrue further interest on outstanding borrowings subsequent to the filing of a voluntary petition for relief under Chapter 11 of the Untied States Bankruptcy Code, and a $1.7 million decrease in general and administrative expenses. These decreases were partially offset by $0.2 million of reorganization costs incurred in 2002. The reorganization costs in 2002 relate to professional fees, and the restructuring costs in 2002 pertain to compensation related charges. The restructuring costs recognized in 2001 consist of (1) $5.3 million of professional fees and other expenses, (2) $2.8 million of the long term incentive plan ("LTIP") costs related to three executive officers who were terminated in 2001, (3) $1.9 million of severance and related payments made to employees who were terminated in 2001 and (4) $1.5 million of accelerated amortization of stock compensation and related awards that resulted from the termination of certain employees in connection with the Restructuring. FrontLine's general and administrative expenses were $2.2 million in 2002 compared to $3.9 million in 2001, reflecting the planned continued reduction in workforce and the resulting lower recurring general and administrative expenses from the restructured operations. A significant portion of FrontLine's net loss has historically been derived from companies in which it held minority ownership interests. The equity in net loss and impairment of unconsolidated companies decreased $35.0 million to $1.4 million in 2002 as compared to 2001. The loss for the year ended December 31, 2002 was entirely comprised of equity in the net losses of unconsolidated companies. The equity in net loss and impairment of unconsolidated companies in 2001 consisted of $5.1 million of equity in net losses and $32.9 million of impairment charges reflecting estimated decreases in the fair value of certain of the Company's investments, partially offset by a $1.6 million gain on the August 2001 sale of the investment in NeoCarta and the December 2001 sale of the investment in Intuit. The impairment charges in 2001 were determined in recognition of both the lack of continuing support FrontLine planned to provide to certain investee entities following the Restructuring and the difficult market conditions experienced beginning in mid-2000. Of the $32.9 million of impairment charges recorded, $20.0 million relates to Reckson Strategic. During the three months ended September 30, 2001, the Company recognized a $20.0 million valuation impairment based on its assessment of value, recoverability II-11 and probability that this investment would not ultimately be realized at its otherwise carrying value. Equity losses fluctuate with the number of investee entities accounted for under the equity method, FrontLine's voting ownership percentage in these companies, the amortization of goodwill related to newly acquired equity method entities, and the results of operations of these companies. In 2001, FrontLine had either sold or written down all of its interest in its equity method investees. The results of operations of these entities are not consolidated within the Consolidated Statements of Operations; however, FrontLine's share of these companies' losses, as well as all estimated impairment charges, are reflected in the caption "Equity in net loss and impairment of unconsolidated companies" in the Consolidated Statements of Operations. (See Note 4 to the accompanying consolidated financial statements). Dividends on, and accretion of, preferred stock of $2.2 million in 2002 and $5.6 million in 2001 represents dividends on FrontLine's 8.875% Series A Convertible Cumulative Preferred Stock, which was issued in the first quarter of 2000 and accretion of FrontLine's Series B Convertible Cumulative Preferred Stock which was issued in the fourth quarter of 2000. At December 31, 2001, $0.7 million represents dividends on the Series A Preferred Stock. The Company did not declare or pay the dividend on the Series A Preferred Stock that was payable on November 6, 2001 or for any subsequent period. Accrual of dividends and accretion of Preferred Stock ceased in June 2002 when the Company filed a voluntary petition for relief under Chapter 11 of the Untied States Bankruptcy Code. YEARS ENDED DECEMBER 31, 2001 AND 2000 As a result of the Restructuring discussed above, FrontLine changed from a company which invested in early stage companies which leveraged the Internet into one which focused on maximizing the value of HQ. Parent expenses decreased $33.6 million to $40.1 million in the year ended December 31, 2001 as compared to 2000, principally due to a $12.6 million decrease in general and administrative expenses, a $12.1 million decrease in the amortization of stock compensation and related awards, $10.0 million of costs in 2000 attributable to a development stage company, a $3.5 million increase in net interest expense reflecting higher average borrowings, a $1.3 million decrease in restructuring costs and $1.1 million of depreciation and amortization associated with equipment the Company owned in 2000. The restructuring costs recognized in 2001 consist of (1) $5.3 million of professional fees and other expenses, (2) $2.8 million of the long term incentive plan ("LTIP") costs related to three executive officers who were terminated in 2001, (3) $1.9 million of severance and related payments made to employees who were terminated in 2001 and (4) $1.5 million of accelerated amortization of stock compensation and related awards that resulted from the termination of certain employees in connection with the Restructuring. FrontLine's general and administrative expenses were $3.9 million in 2001 compared to $16.5 million in 2000, reflecting the planned reduction in workforce and the resulting lower recurring general and administrative expenses from the restructured operations. A significant portion of FrontLine's net loss is derived from companies in which it held minority ownership interests. The equity in net loss and impairment of unconsolidated companies decreased $89.5 million to $36.4 million in 2001 as compared to 2000. The equity in net loss and impairment of unconsolidated companies in 2001 consisted of $5.1 million of equity in net losses and $32.9 million of impairment charges reflecting estimated decreases in the fair value of certain of the Company's investments, partially offset by a $1.6 million gain on the August 2001 sale of the investment in NeoCarta and the December 2001 sale of the investment in Intuit. The impairment charges in 2001 were determined in recognition of both the lack of continuing support FrontLine planned to provide to certain investee entities following the Restructuring and the difficult market conditions experienced beginning in mid-2000. Of the $32.9 million of impairment charges recorded, $20.0 million relates to Reckson Strategic. During the three months ended September 30, 2001, the Company recognized a $20.0 million valuation impairment based on its assessment of value, recoverability and probability that this investment would not ultimately be realized at its II-12 otherwise carrying value. The loss for the year ended December 31, 2000 was entirely comprised of equity in the net losses of unconsolidated companies. Equity losses fluctuate with the number of investee entities accounted for under the equity method, FrontLine's voting ownership percentage in these companies, the amortization of goodwill related to newly acquired equity method entities, and the results of operations of these companies. In 2001, FrontLine had either sold or written down all of its interest in its equity method investees. The results of operations of these entities are not consolidated within the Consolidated Statements of Operations; however, FrontLine's share of these companies' losses, as well as all estimated impairment charges, are reflected in the caption "Equity in net loss and impairment of unconsolidated companies" in the Consolidated Statements of Operations. (See Note 4 to the accompanying consolidated financial statements). The extraordinary item of $2.6 million in 2000 resulted from the write-off of deferred financing costs relating to the early extinguishment of a $60.0 million credit facility in March 2000. Dividends on, and accretion of, preferred stock of $5.6 million in 2001 represents dividends on FrontLine's 8.875% Series A Convertible Cumulative Preferred Stock, which was issued in the first quarter of 2000 and accretion of FrontLine's Series B Convertible Cumulative Preferred Stock which was issued in the fourth quarter of 2000. At December 31, 2001, $0.7 million represents dividends on the Series A Preferred Stock. The Company did not declare or pay the dividend on the Series A Preferred Stock that was payable on November 6, 2001 and February 6, 2002. LIQUIDITY AND CAPITAL RESOURCES HQ On March 13, 2002, HQ filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Court"). HQ will continue to operate and manage properties in the ordinary course of business during the Chapter 11 proceeding. HQ anticipates proposing a plan of reorganization in accordance with the federal bankruptcy laws as administered by the Court. In connection with HQ's bankruptcy proceeding, HQ received a commitment for a $30.0 million credit facility ("Debtor-in-Possession Facility"), with borrowings permitted through December 31, 2002 in accordance with certain operating and liquidity covenants. HQ and its lenders have agreed to extend the Debtor-in-Possession Facility through and including July 31, 2003. Any borrowings, of which there have been none, will incur interest at Prime plus 3.0%. There can be no assurance as to HQ's ability to execute its business plan and meet its obligations with respect to its Debtor-in-Possession Facility. The ability of HQ to obtain confirmation of a plan of reorganization and emerge from bankruptcy protection is subject to numerous factors, including some that are beyond HQ's control. In the event HQ is unable to secure a confirmed plan of reorganization, no assurance can be given that HQ will be able to meet its future cash requirements. FRONTLINE On June 12, 2002, FrontLine filed a voluntary petition for relief under Chapter 11 of the Untied states Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Company remains in possession of its assets and properties, and continues to operate its business and manage its property as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the United States Bankruptcy Code. The deadline to file proofs of claims and interests expired on September 30, 2002. Frontline is currently in the process of reviewing and assessing the claims and interests that have been filed, and intends to file objections, as appropriate. II-13 On November 14, 2002, the Bankruptcy Court issued an order, which, among other things, extended the exclusive period during which only Frontline may file a plan of reorganization through and including February 7, 2003. On March 24, 2003, the Bankruptcy Court issued an order which among other things, further extended the exclusive period during which only Frontline may file a plan of reorganization through and including June 6, 2003. The Company anticipates proposing a plan of reorganization in accordance with the federal bankruptcy laws as administered by the Bankruptcy Court prior to that date. Confirmation of a Plan of reorganization could materially change the amounts currently recorded in the financial statements. The financial statements do not give effect to any adjustment to the carrying value of assets, or amounts and classifications of liabilities that might be necessary as a consequence of this matter. The Company has the exclusive right to propose a plan of reorganization through which period may be extended further by the Bankruptcy Court. By order dated March 31, 2003, the Bankruptcy Court also authorized Frontline to, among other things, (a) perform its duties as a debtor-in-possession in connection with a wholly-owned subsidiary that is a managing member of a limited liability company, by negotiating and executing definitive documents consistent with the transactions detailed in the term sheets regarding the proposed restructuring of Reckson Strategic Venture Partners, LLC and with respect to New World Realty, LLC annexed to such order (collectively, the "Transactions"), and (b) to perform such actions and take all steps necessary to implement and consummate such Transactions. Historically, FrontLine has funded operations and investing activities through a combination of borrowings under various credit facilities, issuances of the Company's equity securities and sales of assets. Since the Restructuring, FrontLine's cash requirements have been substantially reduced. As of December 31, 2002, there is no remaining availability under any FrontLine credit facility. The Company has a credit facility with Reckson in the amount of $100 million (the "FrontLine Facility"). Additionally, Reckson Strategic has a $100 million facility (the "Reckson Strategic Facility") with Reckson to fund Reckson Strategic investments. Note 15 to the consolidated financial statements summarizes the terms of the FrontLine Facility and Reckson Strategic Facility (collectively, the "Credit Facilities"). The Company had $93.4 million outstanding under the FrontLine Facility at December 31, 2002, and due to outstanding letters of credit and accrued interest, has no remaining availability. The Company had $49.3 million outstanding under the Reckson Strategic Facility at December 31, 2002. These borrowings were utilized to fund Reckson Strategic investments and its general operations. As long as there are outstanding amounts under the Credit Facilities, the Company is prohibited from paying dividends on shares of its common stock or, subject to certain exceptions, incurring additional debt. The Credit Facilities are subject to certain other covenants and prohibit advances thereunder to the extent the advances could, in Reckson's determination, endanger the status of Reckson Associates as a REIT. Under the Credit Facilities, additional indebtedness may be incurred by the Company's subsidiaries. The Credit Facilities also contain covenants prohibiting the Company from entering into any merger, consolidation or similar transaction and from selling all or any substantial part of its assets, or allowing any subsidiary to do so, unless approved by the lender. The Credit Facilities also provide for defaults thereunder in the event debt is accelerated under another of FrontLine's financing agreements. On March 28, 2001, the Company's Board of Directors approved amendments to the Credit Facilities pursuant to which (i) interest is payable only at maturity and (ii) Reckson may transfer all or any portion of its rights or obligations under the Credit Facilities to its affiliates. These changes were requested by Reckson as a result of changes in REIT tax laws. In addition, the Reckson Strategic Facility was amended to increase the amount available thereunder to up to $110 million (from $100 million). On September 11, 2000, FrontLine amended its $25.0 million credit agreement (the "FrontLine Bank Credit Facility"). Borrowings under the FrontLine Bank Credit Facility are secured by a 20.51% common ownership interest in HQ and bear interest at the Prime rate plus 2%. Any outstanding borrowings under the FrontLine Bank Credit Facility were due on October 25, 2001, as a result of various extensions exercised by FrontLine in May 2001. At September 30, 2001, FrontLine had fully borrowed the FrontLine Bank Credit Facility. The FrontLine Bank Credit Facility provides for a default thereunder in the event debt is accelerated under another of FrontLine's financing agreements or if there is a default under certain HQ financing agreements. The FrontLine Bank Credit II-14 Facility contains, among others, covenants relating to the financial ratios of HQ and covenants prohibiting the Company from (i) transferring, conveying, disposing of, pledging or granting a security interest in any of the collateral previously pledged under the FrontLine Bank Credit Facility, (ii) terminating, amending or modifying any organizational or other governing documents of the Company or HQ without first obtaining the lender's prior written consent, (iii) violating certain specified financial ratios, (iv) exceeding $25,000,000 of new indebtedness, and (v) declaring or paying cash dividends on any class of the Company's stock. Subsequent to December 31, 2002, the Company has not repaid the principal or paid any interest applicable to this period and accordingly is at the forbearance of the bank. There is no remaining availability under the Credit Facilities. As a result of the Company's failure to pay the principal and interest upon maturity on the FrontLine Bank Credit Facility, an event of default has occurred under the credit facilities with Reckson. During the three months ended March 31, 2000, the Company completed preferred stock offerings of 26,000 shares of Series A Preferred Stock at a price of $1,000 per share with net proceeds of $24.6 million. These shares are convertible into the Company's common stock at a price of $70.48. The Company did not declare or pay the quarterly dividend due on these shares commencing with the payment that was due on November 6, 2001. Accordingly, future dividends will accrue at a higher rate of 10.875%. Since dividend distributions are in arrears for more than two quarterly periods, then the holders of such shares are entitled to elect two additional members to the Company's Board of Directors. While the Company's $25 million of Series B Preferred Stock is outstanding, the holders have consent rights for certain significant transactions, including the incurrence of additional debt by the Company or HQ, the issuance of equity securities senior to, or on a parity with, the Series B Preferred Stock or the issuance by HQ of preferred stock. These securities also contain certain covenants relating to HQ. In addition, the securities include a redemption premium of 27.5%. Since securities were not redeemed prior to December 13, 2001, the securities (including the amount of the redemption premium) have become convertible at the holder's option into FrontLine common stock at the initial rate of $13.3875 per share, the preferred stock has become a voting security on an "as-converted" basis, and quarterly dividends have become payable from the date of initial issuance at the annual rate of 9.25%. In addition, since the Company did not pay the dividend on the Series B Preferred Stock in December 2001, the holders of such stock have the right to vote on an "as converted" basis on any matters that holders of common stock are permitted to vote upon and to elect two members to the Company's Board of Directors. Securities have a mandatory redemption requirement at a 27.5% premium, which has been triggered as a result of uncured events of default. In addition, the consent of two-thirds of the holders of the Company's Series A Preferred Stock is necessary in order to issue any equity securities ranking senior to the Series A Preferred Stock. The Company is also prohibited from paying dividends on its common stock unless full distributions have been paid on both the Series A Preferred Stock and Series B Preferred Stock. The Company is in arrears with regard to the payment of dividends on its Series A and Series B Preferred Stock. Currently, the Company has a short-term letter of credit in the amount of $0.2 million, which is being utilized as a security deposit. The Company has entered into a stockholders agreement (the "HQ Stockholders Agreement") with certain of the stockholders of HQ Global which provides them with rights to put up to approximately 3.1 million shares of HQ Global (the "HQ Shares") to the Company during the two years subsequent to the HQ Merger if HQ Global has not completed an initial public offering of its shares. On February 25, 2002, such stockholders irrevocably waived their Put Rights. FrontLine's operations do not require significant capital expenditures. There were no significant capital expenditure commitments as of December 31, 2002. There can be no assurance as to the Company's ability to execute its business plan and to meet its obligations with respect to its credit facilities. If additional funds are raised through the issuance of equity securities, existing shareholders may experience significant dilution. The availability of additional capital is subject to numerous factors including some that are beyond the Company's control. In the event the company is unable to access additional capital, no assurance can be given that it will be able to meet its future cash requirements. II-15 The Company has formed a committee of its Board of Directors, comprised solely of the independent directors of the Board, in order to address conflicts that may arise in connection with the Company's credit facilities with Reckson Operating Partnership. The committee has retained legal counsel in connection with its responsibilities. In March 2002, the Company's stock was delisted by Nasdaq as a direct result of the HQ bankruptcy filing. The Company's common stock currently trades on the OTC Bulletin Board under the symbol FLCGQOB. INFLATION HQ Certain of HQ's leases include increases in annual rent based on changes in the consumer price index or similar inflation indices. HQ's contracts with clients generally range from six to twelve months in duration. Accordingly, HQ may have the ability to pass on any inflation related increased costs at the time of renewal of such contracts. FRONTLINE Management believes that inflation did not have a significant effect on its results of operations during any of the periods presented. II-16 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK HQ Historically, the primary market risk facing HQ was interest rate risk on the HQ Credit Facility. The HQ Credit Facility bears interest ranging from 2.25% to 3.00% over prime. Following the HQ Merger, HQ is conducting more of its operations in foreign currencies, primarily the British Pound. Due to the nature of foreign currency markets, there is potential risk for foreign currency losses as well as gains. Currently, HQ has not hedged its foreign currency risk. HQ has not, and does not plan to, enter into any derivative financial instruments for trading or speculative purposes. As of December 31, 2002, HQ had no other material exposure to market risk. FRONTLINE Interest Rate Risk FrontLine faces interest rate risk on its Credit Facilities and the FrontLine Bank Credit Facility. The Company has not hedged interest rate risk using financial instruments. The Credit Facilities bear interest at the greater of the prime rate plus 2% or 12% (with interest on balances outstanding more than one year increasing by 4% of the previous year's rate). The FrontLine Bank Credit Facility bears interest at LIBOR plus 5% for one, two, three or six-month interest periods, as elected by FrontLine. The rates of interest on the Credit Facilities and the FrontLine Bank Credit Facility will be influenced by changes in the prime rate and LIBOR. A significant increase in interest rates may have a negative impact on the financial results of the Company due to the variable interest rate (in excess of 12%) under the Credit Facilities. The following table sets forth FrontLine's obligations with respect to the Credit Facilities and the FrontLine Bank Credit Facility, principal cash flows by scheduled maturity, weighted average interest rates and estimated fair market valued at December 31, 2002 (in thousands, except rates).

II-17 Equity Market Risk FrontLine faces equity market risk in its ownership interests in its unconsolidated companies. During the year ended December 31, 2001, FrontLine recognized impairment charges to reflect decreased valuations for certain of its investments as a result of unfavorable market conditions and other factors (see Note 4 to the accompanying consolidated financial statements for further discussion). As a result of such impairment charges, along with the recognition of FrontLine's equity in the net losses of certain ownership interests, the carrying value of FrontLine's ownership interests in and advances to unconsolidated companies, at December 31, 2002 and 2001 was $12.3 million and $13.4 million respectively, which represents approximately 6.4% and 4.8% of total assets respectively, thereby mitigating FrontLine's future equity market risk related to these interests. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this item is included in Item 15 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. II-18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following biographical descriptions set forth certain information with respect to the directors and the executive officers of FrontLine Capital Group (the "Company" or "FrontLine"), based upon information furnished to the Company by each director and executive officer. Scott H. Rechler serves as the President and Chief Executive Officer of FrontLine and is also Chairman of its Board of Directors. Mr. Rechler has served as a Director of the Company since 1998 and his term as a Director expires in 2003. Mr. Rechler is also Co-Chief Executive Officer and a Director of Reckson Associates Realty Corp. ("Reckson Associates") and has been a member of senior management since 1989. Mr. Rechler also serves as the non-executive Chairman of the Board of Directors and a former interim executive officer of HQ Global Workplaces, Inc. ("HQ"), which filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in March, 2002. Mr. Rechler is a graduate of Clark University and received a Masters Degree in Finance from New York University. He is the son of Roger M. Rechler. Mr. Rechler is 35 years old. Paul Amoruso has served as a Director of FrontLine since 1998. Mr. Amoruso's term as Director expires in 2003. Since 1983, Mr. Amoruso has been the Managing Director of Oxford & Simpson Realty, Inc. of Jericho, New York. Prior to that time, he was President of Lanstar International Realty, Inc., a real estate advisory services firm. Mr. Amoruso is President of Island Hospitality Associates and is a member of the Board of Directors of the Nature Conservancy. He is a co-founder of the Long Island Commercial Industrial Brokers Society and is a licensed real estate broker in New York and Connecticut. Mr. Amoruso is 42 years old. Sidney Braginsky has served as a Director of FrontLine since 2000. Mr. Braginsky's term as Director expires in 2004. Mr. Braginsky has a long history of leadership in science and technology. Mr. Braginsky was a senior executive for 30 years with Olympus America, Inc., a global leader in the development and application of sophisticated optical technology and solutions for consumers, health care and industry. From 1994 to 2000, Mr. Braginsky was President of Olympus America. Prior to being President, Mr. Braginsky was Executive Vice President of the Scientific Products Group. Mr. Braginsky serves on a number of corporate and academic boards, including serving as Chairman of the Robert Chambers Laboratory, City College of New York, as a Board Member of the Long Island Museum of Science and Technology and as Chairman of the Executive Board of Advisors for the College of Management, C.W. Post College. Mr. Braginsky is 65 years old. Ronald S. Cooper has served as a Director of FrontLine since 1999. Mr. Cooper's term as Director expires in 2004. Mr. Cooper was the Managing Partner of the Long Island office of Ernst & Young LLP. A partner in that firm and its predecessors from 1973 through 1998, he held several positions including Partner-in-charge of the New York office's Privately Owned Business Group. Mr. Cooper is well known in the Long Island business community having served on numerous civic and charitable boards, including the Long Island Association where he was Treasurer for eight years. He has a significant contact base among the investment and banking communities and spent much of his career working with growth-oriented companies. In 1999, Mr. Cooper co-founded LARC Strategic Concepts LLC, a consulting firm serving emerging and early-stage companies. Mr. Cooper is a Director of Concord Camera Corp., a public corporation engaged in the manufacture of cameras and related products. Mr. Cooper is 64 years old. Douglas Sgarro has served as a Director of FrontLine since 2000. Mr. Sgarro's term as Director expires in 2004. Mr. Sgarro has been Senior Vice President--Administration and Chief Legal Officer of CVS Corporation, the largest retail drug store chain in the country, and President of CVS Realty Co., the real estate and construction division of CVS Corporation, since September 1997. Mr. Sgarro is responsible for overseeing all legal, real estate and property management matters for CVS. He also oversees a newly-formed organization responsible for procurement of all not-for-resale items and III-1 strategic sourcing matters. Mr. Sgarro currently serves on the Board of Directors of the Rhode Island Economic Development Corporation, and previously served as a member of the Board of Directors of the Providence Children's Museum. He also serves on the Business Advisory Council of the University of Virginia Law School and is a member of the Corporate Executive Board--General Counsel Roundtable, the American Bar Association--Business Law Section and the International Council of Shopping Centers. Prior to joining CVS, Mr. Sgarro was a partner at the Manhattan offices of the international law firm of Brown & Wood LLP from January 1993 to August 1997. Mr. Sgarro is a graduate of Hamilton College and the University of Virginia School of Law. Mr. Sgarro is 44 years old. James D. Burnham has served as Chief Financial Officer and Treasurer of FrontLine since August 2001. Mr. Burnham joined the Company in May 1999 as Senior Vice President of Finance. Mr. Burnham is also President of New York Metropolitan Area for HQ and serves on HQ's Board of Directors. In addition, from October 2001 through December 2002, Mr. Burnham was Treasurer and Acting Chief Financial Officer of HQ. From 1996 to 1999, Mr. Burnham was the Chief Financial Officer at Cybersmith, a company that declared bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in 1999. Mr. Burnham is a graduate of Bentley College and received his Masters Degree in Business Administration from the Franklin W. Olin Graduate School of Business at Babson College. Mr. Burnham is 44 years old. Section 16 Beneficial Ownership Reporting Compliance. Section 16(a) of the Securities Exchange Act of 934, as amended (the "Exchange Act"), requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities ("10% Holders"), to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission"). Officers, directors and 10% holders are required by Commission regulation to furnish the Company with copies of all Section 16(a) forms that they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, all Section 16(a) filing requirements applicable to its executive officers, directors and 10% Holders were satisfied during 2002. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth information regarding the compensation awarded for the past three fiscal years to Scott H. Rechler, the President and Chief Executive Officer of the Company, James D. Burnham, the only other executive officer of the Company, and two former executive officers of the Company whose total base salary and bonus exceeded $100,000 for the fiscal year ended December 31, 2001 (collectively, the "Named Executive Officers").

III-2 1. Mr. Neumann ceased to be employed by the Company on June 29, 2001. Salary for 2001 represents the pro rata portion of his annual salary of $300,000. 2. Ms. Serra joined the Company in September 2000 and ceased to be employed by the Company on April 6, 2001. Salary for 2001 and 2000 represents the pro rata portion of her annual salary of $300,000. 3. Through December 31, 2001, the aggregate number of shares of restricted common stock granted to the Named Executive Officers totaled 305,000 shares for an aggregate dollar value of $33,550, based on the closing price of the common stock on December 31, 2001. 4. Represents an award of 50,000 shares (with respect to Mr. Rechler) and 30,000 shares (with respect to Mr. Neumann) of restricted common stock of the Company at a price of $24.875 per share, the closing price on the date of grant. 5. Excludes (i) loan forgiveness in fiscal 2000 to Mr. Rechler in the amount of $537,542, pursuant to the terms of tax loans issued to Mr. Rechler pursuant to the terms of restricted common stock awards granted for fiscal 1998; (ii) tax gross-up payments in fiscal 2001 to Mr. Neumann in the amount of $1,109,673 relating to the forgiveness of a loan under the Company's long-term incentive plan; and (iii) tax gross-up payments in fiscal 2000 to Mr. Rechler in the amount of $1,511,496 pursuant to the terms of restricted stock awards granted for fiscal 1998 and 1999. 6. Represents a payment pursuant to the terms of a severance agreement with the Company. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND AGGREGATED FISCAL YEAR-END 2001 OPTION VALUES The following table sets forth the value of options held at the end of 2001 by the Named Executive Officers and information concerning each exercise of stock options by the Named Executive Officers during the 2001 fiscal year.

Director Compensation. Each of the independent directors of the Company receives an annual director's fee of $7,500. Each independent director also receives $500 for each regular quarterly meeting of the Board of directors attended, $500 for each special meeting of the Board of Directors attended, $500 for each special telephonic meeting of the Board of Directors participated in and $500 for each committee meeting attended. Each independent director appointed or elected for the first time receives an initial option to purchase 20,000 shares of common stock at the market price of the common stock on the date of grant. In addition, following his or her first year of appointment, each of the Company's independent directors who is serving as a director of the Company in the fifth business day following each annual meeting of stockholders receives an option to purchase 10,000 shares of common stock at the market price of the common stock on the date of grant. All options granted to independent directors vest on the date of grant. In February 2001, the Board of Directors approved the grant of 10,000 shares of common stock to each of the Company's independent directors; these grants were later rescinded. During 2001, the Company formed a Special Committee of the Board of Directors comprised solely of the independent directors to monitor conflicts with Reckson Associates. In September 2001, each independent director received a fee of $25,000 for his service on the Special Committee. III-3 REPORT ON EXECUTIVE COMPENSATION Since the Company's restructuring in October 2000, the full Board of Directors has maintained oversight for compensation at the Company in lieu of the Company's Compensation Committee. Executive Compensation. The Company's executive compensation consists primarily of an annual salary and cash bonuses. Long-term equity-based compensation was formerly part of executive compensation. The annual base salaries of the Company's executive officers are set at levels designed to retain the limited number of individuals who are currently employed by the Company. Mr. Burnham received no salary from the Company in 2002. Mr. Rechler has not received an annual salary from the Company since the inception of the Company. In determining compensation levels for 2002, the Board of Directors took into consideration the Company's need to retain its two executive officers and the financial condition of the Company. Chief Executive Officer. The Board of Directors determined the 2002 compensation of Mr. Rechler in accordance with the above discussion. For fiscal 2002, Mr. Rechler did not receive any salary or bonus from the Company. Tax Deductibility of Executive Compensation. Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), limits the deductibility on the Company's federal tax return of compensation over $1 million to any of the Named Executive Officers of the Company unless, in general, the compensation is paid pursuant to a plan which is performance-related and non-discretionary and has been approved by the Company's stockholders. The Compensation Committee's policy with respect to section 162(m) is to make every reasonable effort to ensure that compensation is deductible to the extent permitted while simultaneously providing Company executives with appropriate compensation for their performance. The Company did not pay any compensation during 2001 that it believes will be subject to the limitations set forth in section 162(m). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of the Company's common stock for (i) the Named Executive Officers and directors of the Company, (ii) each stockholder of the Company holding more than a 5% beneficial interest in the Company and (iii) directors and executive officers of the Company as a group.

* Less than one percent. III-4 1) All information has been determined as of March 18, 2003. For purposes of this table a person is deemed to have "beneficial ownership" of the number of shares of common stock that person has the right to acquire pursuant to the exercise of stock options within 60 days. (2) For purposes of computing the percentage of outstanding shares of common stock held by each person, any shares of common stock which such person has the right to acquire pursuant to the exercise of a stock option exercisable within 60 days is deemed to be outstanding, but is not deemed to be outstanding for the purposes of computing the percent ownership of any other person. (3) Represents (a) 1,376,789 shares of common stock owned directly, (b) 4,715 shares of common stock owned through trusts, (c) 22,895 shares of common stock owned through corporations and partnerships and (d) options to purchase 924,484 shares of common stock. (4) Represents (a) 6,480 shares of common stock owned directly and (b) options to purchase 35,500 shares of common stock. (5) Represents options to purchase 35,000 shares of common stock. (6) Represents (a) 10,000 shares of common stock owned directly and (b) options to purchase 35,000 shares of common stock. (7) This information is based upon information reported by the stockholder in filings made with the Commission. The address of Cohen & Steers Capital Management, Inc. is 757 Third Avenue, New York, New York 10017. (8) This information is based upon information reported by the stockholder in filings with the Commission. JAH Realties, L.P. ("JAH L.P.") beneficially owns 2,671,093 shares of common stock of the Company, JLH Realty Management Service, Inc. ("JLH Inc.") beneficially owns 2,671,335 shares of common stock of the Company, Veritech Ventures LLC ("Veritech") beneficially owns 1,731,597 shares of common stock of the Company and Jon L. Halpern beneficially owns 2,672,295 shares of common stock of the Company. Mr. Halpern is the sole stockholder of JLH Inc. JLH Inc. is the general partner of JAH L.P. JAH L.P. is the managing member of Veritech. The address of each of Mr. Halpern, JLH Inc., JAH L.P. and Veritech is c/o JAH Realties, L.P., 2 Manhattanville Road, Suite 205, Purchase, New York 10577. (9) This information is based upon information reported by the stockholder in filings made with the Commission. Morgan Stanley Dean Witter & Co. ("MSDW") beneficially owns 4,408,695 shares of common stock of the Company, of which Morgan Stanley Investment Management Inc. ("MSIM") beneficially owns 4,405,100 shares of common stock of the Company. The address of MSDW is 1585 Broadway, New York, New York 10036. The address of MSIM is 1221 Avenue of the Americas, New York, New York 10020. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Scott H. Rechler, a Director and Officer of FrontLine, serves as an officer and Director of Reckson Associates, and owns approximately 1.52% of Reckson Associates' outstanding shares of common stock (assuming the exercise of vested stock options and the exchange of partnership units in Reckson Operating Partnership, L.P. ("Reckson Operating Partnership") for shares of common stock of Reckson Associates) as of March 25, 2002. The Company has a credit facility with Reckson in the amount of $100 million (the "FrontLine Facility"). Additionally, Reckson Strategic Venture Partners, LLC ("Reckson Strategic") has a $100 million facility (the "Reckson Strategic Facility") with Reckson to fund Reckson Strategic investments. Note 15 to the consolidated financial statements summarizes the terms of the FrontLine Facility and Reckson Strategic Facility (collectively, the "Credit Facilities"). The Company had $93.4 million outstanding under the FrontLine Facility at December 31, 2002, and due to outstanding letters of credit and accrued interest, has no III-5 remaining availability. The Company had $49.3 million outstanding under the Reckson Strategic Facility at December 31, 2002. These borrowings were utilized to fund Reckson Strategic investments and its general operations. As long as there are outstanding amounts under the Credit Facilities, the Company is prohibited from paying dividends on shares of its common stock or, subject to certain exceptions, incurring additional debt. The Credit Facilities are subject to certain other covenants and prohibit advances thereunder to the extent the advances could, in Reckson's determination, endanger the status of Reckson Associates as a REIT. Under the Credit Facilities, additional indebtedness may be incurred by the Company's subsidiaries. The Credit Facilities also contain covenants prohibiting the Company from entering into any merger, consolidation or similar transaction and from selling all or any substantial part of its assets, or allowing any subsidiary to do so, unless approved by the lender. The Credit Facilities also provide for defaults thereunder in the event debt is accelerated under another of FrontLine's financing agreements. On March 28, 2001, the Company's Board of Directors approved amendments to the Credit Facilities pursuant to which (i) interest is payable only at maturity and (ii) Reckson Associates may transfer all or any portion of its rights or obligations under the Credit Facilities to its affiliates. These changes were requested by Reckson as a result of changes in REIT tax laws. In addition, the Reckson Strategic Facility was amended to increase the amount available thereunder to up to $110 million (from $100 million). FrontLine and Reckson Operating Partnership entered into an intercompany agreement (the "Reckson Intercompany Agreement") to formalize their relationship at the time of the spin-off of FrontLine and to limit conflicts of interest. Under the Reckson Intercompany Agreement, among other provisions, (i) FrontLine granted Reckson Operating Partnership a right of first opportunity to make any REIT-qualified investment that becomes available to FrontLine and (ii) Reckson Operating Partnership granted FrontLine a right to (a) provide Reckson Operating Partnership and its tenants with commercial services for occupants of office, industrial and other property types and (b) become the lessee of any real property acquired by Reckson Operating Partnership if Reckson Operating Partnership determines that, consistent with the Company's status as a REIT, it is required to enter into a "master" lease agreement. In order to provide some liquidity in respect of the interests granted under the Company's long-term incentive plan ("LTIP"), in April 2000 the Company made advances in the amount of $1 million to Scott H. Rechler (the "Loan"). The Loan bears interest at a rate of 6.6% per year and has a seven year maturity. The principal amount of the Loan, together with accrued interest, is forgiven upon maturity, provided Mr. Rechler is still employed by the Company. In addition, the Loan is forgiven upon a change-in-control of the Company, the death or permanent disability of Mr. Rechler or a reduction in the nature or scope of his duties. Mr. Rechler is also entitled to a payment upon forgiveness of the Loan in an amount equal to his tax liability resulting from such forgiveness. The Company leases its office space from HQ for its executive office located at 405 Lexington Avenue, New York, New York. for less than $1,000 per month. FrontLine and Reckson Strategic reimburse Reckson Operating Partnership for certain general and administrative expenses (including payroll expenses) incurred by Reckson Operating Partnership for their benefit. During 2001, FrontLine and Reckson Strategic reimbursed Reckson Operating Partnership approximately $100,000 for such expenses, but none in 2002. HQ believes that the terms and pricing of each of the following transactions with related parties are similar to those negotiated at arms length. Certain officers and members of HQ's Board of Directors are also officers and/or on the board of directors of FrontLine, Reckson Associates Realty Corp. ("Reckson Associates"), Equity Office Properties ("EOP") or CarrAmerica. HQ is a tenant under several leases with Reckson Associates and affiliates. For the twelve months ended December 31, 2002, HQ made payments of $3.4 million for rent, construction and other charges under such leases. HQ is a tenant under several leases with EOP and affiliates of EOP, which are affiliated with EOP Operating Limited Partnership, a purchaser of HQ's Series A Preferred Stock in conjunction with the HQ Merger. For the twelve months ended December 31, 2002, HQ made payments of $18.3 million for rent and other charges under such leases. III-6 HQ is a tenant under several leases with CarrAmerica and affiliates of CarrAmerica, who received shares of HQ's Voting Common Stock and Nonvoting Common Stock in conjunction with the HQ Merger. For the twelve months ended December 31, 2002, HQ made payments of $2.7 million for rent and other charges under such leases. In April 2000, the Company entered into an office lease which expires in December 2010. In January 2001, the Company assigned the lease to HQ. The lease assignment did not relieve the Company of any of its obligations under the terms of this lease. At December 31, 2002, HQ was past due on $3.2 million of rent. The landlord has drawn the full letter on credit of $2.8 million. Of the $57.6 million HQ restructuring charge recorded in 2001, a $4.8 million accrual applicable to this lease was recorded as an estimate for the cost of terminating this lease. If the ultimate cost of terminating this lease exceeds the outstanding letter of credit, then additional cash may need to be paid by either HQ or the Company. Since HQ is currently in bankruptcy, the landlord is likely to seek to recover any further damages from FrontLine. As of December 31, 2002, the remaining lease commitment was $24.0 million. ITEM 14. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Registrant's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures (as defined in Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures were adequate to ensure that information required to be disclosed by the Registrant in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. There were no significant changes in the Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. III-7 PART IV ITEM 15. FINANCIAL STATEMENTS AND SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (a) (1 and 2) Financial Statements and Schedules The following consolidated financial information is included as a separate section of this annual report on Form 10-K:

All schedules are omitted since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto. IV-1 (a) (3) Exhibits

IV-2 10.24 2 Operating Agreement of Dominion Venture Group LLC 10.25 5 Investor Rights Agreement, by and among OnSite Access, Inc. and certain investors and individuals within management 10.26 5 Voting Agreement, by and among OnSite Access, Inc. and certain investors 10.27 5 Purchase Agreement regarding Series B, Series C and Series D Preferred Stock of OnSite Access, Inc. 10.28 5 Certificate of Designation of Series A, Series B, Series C and Series D Preferred Stock of OnSite Access, Inc. 10.29 14 Letter Agreement, dated as of September 29, 1999, among the Company, RSI I/O Holdings, Inc., RSI-OnSite Holdings LLC, RSI-OSA Holdings, Inc., JAH Realties, L.P., Veritech Ventures LLC and JAH I/O LLC 10.30 14 Letter of Amendment to Letter Agreement, dated as of September 23, 1999, among the Company, RSI I/O Holdings, Inc., RSI-OnSite Holdings LLC, RSI-OSA Holdings, Inc., JAH Realties, L.P., Veritech Ventures LLC and JAH I/O LLC 10.31 15 Agreement and Plan of Merger by and among HQ Global Workplaces, Inc. and CarrAmerica Realty Corporation and VANTAS Incorporated and the Company, dated as of January 20, 2000 10.32 15 Stock Purchase Agreement between CarrAmerica Realty Corporation and the Company, dated as of January 20, 2000 10.33 15 Stock Purchase Agreement among CarrAmerica Realty Corporation, OmniOffices (UK) Limited and OmniOffices (Lux) 1929 Holding Company S.A. and VANTAS Incorporated and the Company, dated as of January 20, 2000 10.34 8 Subscription Agreement, dated as of February 7, 2000 between the Company and VANTAS Incorporated 10.35 16 First Amendment to Agreement and Plan of Merger by and among VANTAS Incorporated and the Company, on the one hand, and HQ Global Workplaces, Inc. and CarrAmerica Realty Corporation, on the other hand. 10.36 16 First Amendment to the Stock Purchase Agreement by and between CarrAmerica Realty Corporation and the Company 10.37 16 First Amendment to the Stock Purchase Agreement by and between CarrAmerica Realty Corporation, OmniOffices (UK) Limited, OmniOffices (Lux) 1929 Holding Company S.A., VANTAS Incorporated and the Company 10.38 11 Second Amendment to the Agreement and Plan of Merger by and among VANTAS Incorporated and the Company, on the one hand, and HQ Global Workplaces, Inc. and CarrAmerica Realty Corporation, on the other hand, dated as of May 31, 2000 10.39 11 Stockholders Agreement by and among the Company, HQ Global Workplaces, Inc., CarrAmerica Realty Corporation and the other parties named therein, dated as of June 1, 2000 10.40 11 Registration Rights Agreement by and among the Company and CarrAmerica Realty Corporation, dated as of June 1, 2000 10.41 11 Agreement and Plan of Merger by and among HQ Global Workplaces, Inc., HQ Global Holdings, Inc. and HQ Merger Subsidiary, Inc., dated as of June 1, 2000 10.42 11 Exchange Agreement by and between the Company and HQ Global Holdings, Inc., dated as of May 31, 2000 10.43 11 Indemnification and Escrow Agreement by and among the Company, CarrAmerica Realty Corporation and the other parties named therein, dated as of June 1, 2000 10.44 11 Purchase Agreement by and among the Company, HQ Global Holdings, Inc. and EOP Operating Limited Partnership, dated as of May 31, 2000 10.45 11 Purchase Agreement by and among the Company and Fortress HQ LLC, dated as of May 31, 2000 10.46 11 Purchase Agreement by and among the Company and Stichting Pensioenfonds ABP, dated as of May 31, 2000 10.47 11 Purchase Agreement by and among the Company and First Union Real Estate Equity and Mortgage Investments, dated as of May 31, 2000 10.48 11 Purchase Agreement by and among the Company and CIBC WMC Inc., dated as of May 31, 2000 10.49 11 Purchase Agreement by and among the Company and CIBC Employee Private Equity Fund Partners, dated as of May 31, 2000 10.50 11 Purchase Agreement by and among the Company and AEW Targeted Securities Fund, L.P., dated as of May 31, 2000

IV-3 10.51 11 Purchase Agreement by and among the Company and AEW Targeted Securities Fund II, L.P., dated as of May 31, 2000 10.52 11 Purchase Agreement by and among the Company and Blackacre Capital Partners, L.P., dated as of May 31, 2000 10.53 11 Purchase Agreement by and among the Company and Paribas North America, Inc., dated as of May 31, 2000 10.54 11 Stockholders Agreement by and among the Company, HQ Global Holdings, Inc. and certain holders of Series A Preferred Stock of HQ Global Holdings, Inc. named therein, dated as of May 31, 2000 10.55 11 Registration Rights Agreement by and between HQ Global Holdings, Inc. and the investors named therein, dated as of May 31, 2000 10.56 8 Amended and Restated Credit Agreement among VANTAS, Various Banks, and Paribas, as agent, dated as of January 16, 1997, as amended and restated as of November 6, 1998 and August 3, 1999 10.57 18 Amended and Restated Credit Agreement, dated May 31, 2000, among HQ Global Holdings, Inc., VANTAS Incorporated, Various Banks, ING Capital (U.S.) LLC, Bankers Trust Company, Citicorp Real Estate, Inc. and BNP Paribas. 10.58 18 Second Amendment and Waiver, dated as of March 26, 2001, among HQ Global Holdings, Inc., HQ Global Workplaces, Inc., Various Banks, ING Capital (U.S.) LLC, Bankers Trust Company, Citicorp Real Estate, Inc. and BNP Paribas. 10.59 18 Third Amendment and Agreement, dated as of June 29, 2001, among HQ Global Holdings, Inc., HQ Global Workplaces, Inc., Various Banks, ING Capital (U.S.) LLC, Bankers Trust Company, Citicorp Real Estate, Inc. and BNP Paribas. 10.60 19 Forbearance Agreement, dated as of October 1, 2001, among HQ Global Holdings, Inc., a Delaware corporation, HQ Global Workplaces, Inc., a Delaware corporation, the Subsidiary Guarantors party thereto, certain Banks party to the Credit Agreement referred to therein, ING (U.S.) Capital LLC, as managing agent, Bankers Trust Company, as syndication agent and co-arranger, Citicorp Real Estate, Inc., as documentation agent and co-arranger, and BNP Paribas, as administrative agent, collateral agent and arranger 10.61 20 Second Amendment to Forbearance Agreement by and among HQ Global Holdings, Inc., HQ Global Workplaces, Inc., the Subsidiary Guarantors party thereto, certain Banks party to the Credit Agreement referred to therein, BNP Paribas, Bankers Trust Company, Citicorp Real Estate, Inc. and ING (U.S.) Capital LLC 10.62 18 Note and Warrant Purchase Agreement, dated as of August 11, 2000, between HQ Global Workplaces, Inc., HQ Global Holdings, Inc. and Chase Equity Associates, L.P., CT Mezzanine Partners I LLC, ARES Leveraged Investment Fund, L.P., Ares Leveraged Investment Fund II, L.P., Highbridge International LLC, Blackstone Mezzanine Partners L.P. and Blackstone Mezzanine Holdings. 10.63 18 Second Amendment, Agreement and Waiver to Note and Warrant Purchase Agreement, dated as of June 29, 2001, by and among HQ Global Holdings, Inc., HQ Global Workplaces, Inc., J.P. Morgan Partners (BHCA) , L.P. (formerly Chase Equity Associates, L.P.), CT Mezzanine Partners I LLC, Ares Leveraged Investment Fund, L.P., Ares Leveraged Investment Fund II, L.P., Highbridge International LLC, Blackstone Mezzanine Partners L.P. and Blackstone Mezzanine Holdings L.P. 10.64 20 Forbearance Agreement and Waiver by and among HQ Global Workplaces, Inc., HQ Global Holdings, Inc., J.P. Morgan Partners (BHCA), L.P., CT Mezzanine Partners I LLC, Ares Leveraged Investment Fund, L.P., Ares Leveraged Investment Fund II, L.P., Highbridge International LLC, Blackstone Mezzanine Partners L.P. and Blackstone Mezzanine Holdings L.P. 10.65 7 Warrant Registration Rights Agreement, dated December 7, 1999, by and among Reckson Service Industries, Inc., Elliot S. Cooperstone and H. Thach Pham 10.66 18 Certificate of Designations establishing the rights and preferences of Series A Preferred Stock of HQ Global Holdings, Inc. 10.67 18 Certificate of Designations establishing the rights and preferences of Series B Preferred Stock of HQ Global Holdings, Inc. 21.0 Statement of Subsidiaries 24.0 Powers of Attorney (included in Part IV of this Form 10-K) -----------------

IV-4 (1) Previously filed as an exhibit to Registration Statement on Form S-1 (No.333-44419) and incorporated herein by reference. (2) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on September 11, 1998 and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on January 25, 1999 and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 31, 1999 and incorporated herein by reference. (5) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on July 16, 1999 and incorporated herein by reference. (6) Previously filed as an exhibit to Registration Statement on Form S-8 filed with the SEC on July 29, 1999 and incorporated herein by reference. (7) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on March 28, 2000 and incorporated herein by reference. (8) Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on March 29, 2000 and incorporated herein by reference. (9) Previously filed as an exhibit to Registration Statement on Form S-3 (No.333-34246) and incorporated herein by reference. (10) Previously filed as an exhibit to the Company's Form 10-Q filed with the SEC on May 15, 2000 and incorporated herein by reference. (11) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on June 16, 2000 and incorporated herein by reference. (12) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on October 24, 2000 and incorporated herein by reference. (13) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on December 15, 2000 and incorporated herein by reference. (14) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on September 1, 1999 and incorporated herein by reference. (15) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on December 13, 1999 and incorporated herein by reference. (16) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on May 12, 2000 and incorporated herein by reference. (17) Previously filed as an exhibit to the Company's Form 10-K filed with the SEC on April 2, 2001 and incorporated herein by reference. (18) Previously filed as an exhibit to the Company's Form 10-Q filed with the SEC on August 14, 2001 and incorporated herein by reference. (19) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on November 5, 2001 and incorporated herein by reference. (20) Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on January 30, 2002 and incorporated herein by reference. IV-5 (B) REPORTS ON FORM 8-K During the three months ended December 31, 2002, the Registrant filed the following reports: (i) On November 19, 2002, the Registrant submitted a Quarterly Report on Form 10-Q to report financial results for the quarter ended September 30, 2002. IV-6 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders FrontLine Capital Group We have audited the accompanying consolidated balance sheets of FrontLine Capital Group and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' (deficiency) equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 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 FrontLine Capital Group and Subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements have been prepared assuming that FrontLine Capital Group will continue as a going concern. As more fully described in Note 1, on June 12, 2002 and March 13, 2002, respectively, the Company and its principal subsidiary HQ Global Holdings, Inc. and certain of its affiliates filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Bankruptcy code. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG LLP New York, New York February 28, 2003, except for the information related to the proposed restructuring included in Note 1 as to which the date is March 31, 2003 IV-7 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes to consolidated financial statements. IV-8 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes to consolidated financial statements. IV-9 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY (IN THOUSANDS)

See accompanying notes to consolidated financial statements. IV-10 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)

See accompanying notes to consolidated financial statements. IV-11 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 1. BASIS OF PRESENTATION ORGANIZATION AND BUSINESS FrontLine Capital Group ("FrontLine" or the "Company") is a holding company, with two distinct operating segments: one holds FrontLine's interest in HQ Global Workplaces, Inc., a company in the officing solutions market (see Note 3 for further discussion) and its predecessor companies ("HQ" or the "HQ Global Segment"), and the other consists of FrontLine (parent company) ("FrontLine Parent") and its interests in a group of companies (the "Parent and Other Interests Segment") that provide a range of services. In October 2000, FrontLine announced that it would focus its resources and capital on the businesses within its existing portfolio and cease pursuing new investment activities. FRONTLINE BANKRUPTCY PROCEEDING On June 12, 2002, Frontline filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Company remains in possession of its assets and properties, and continues to operate its business and manage its property as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the United States Bankruptcy Code. The deadline to file proofs of claims and interests expired on September 30, 2002. Frontline is currently in the process of reviewing and assessing the claims and interests that have been filed, and intends to file objections, as appropriate. On November 14, 2002, the Bankruptcy Court issued an order, which, among other things, extended the exclusive period during which only Frontline may file a plan of reorganization through and including February 7, 2003. On March 24, 2003, the Bankruptcy Court issued an order which among other things, further extended the exclusive period during which only Frontline may file a plan of reorganization through and including June 6, 2003. The Company anticipates proposing a plan of reorganization in accordance with the federal bankruptcy laws as administered by the Bankruptcy Court prior to that date. Confirmation of a Plan of reorganization could materially change the amounts currently recorded in the financial statements. The financial statements do not give effect to any adjustment to the carrying value of assets, or amounts and classifications of liabilities that might be necessary as a consequence of this matter. The Company has the exclusive right to propose a plan of reorganization through which period may be extended further by the Bankruptcy Court. By order dated March 31, 2003, the Bankruptcy Court also authorized Frontline to, among other things, (a) perform its duties as a debtor-in-possession in connection with a wholly-owned subsidiary that is a managing member of a limited liability company, by negotiating and executing definitive documents consistent with the transactions detailed in the term sheets regarding the proposed restructuring of Reckson Strategic Venture Partners, LLC and with respect to New World Realty, LLC annexed to such order (collectively, the "Transactions"), and (b) to perform such actions and take all steps necessary to implement and consummate such Transactions. HQ GLOBAL BANKRUPTCY PROCEEDING On March 13, 2002, HQ filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware and received a commitment for $30 million in debtor-in-possession financing. See Note 3. IV-12 NOTES PAYABLE, CREDIT FACILITIES AND PREFERRED STOCK DEFAULTS As of December 31, 2002, the Company has not paid certain principal and interest due on the FrontLine Bank Credit Facility and both the FrontLine Bank Credit Facility (Note 8) and the Credit Facilities with Reckson Operating Partnership, L.P. ("Reckson") (Note 15) are in default. Additionally, the Company did not pay the dividend that became payable on December 31, 2001 or any subsequent dividend for the Redeemable Preferred Stock, and is in default under that agreement (Note 9). The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect any adjustments that might result should the Company be unable to continue as a going concern. The Company's inability to repay or refinance its indebtedness when due, and pay dividends on its redeemable preferred stock, its recent losses from operations and the related Chapter 11 proceedings of FrontLine and HQ raise concern about its ability to continue as a going concern. The appropriateness of using the going concern basis is dependent upon, among other things (i) confirmation of plans of reorganization for FrontLine and HQ under the Bankruptcy Code, (ii) the ability to achieve profitable operations after such confirmations and (iii) the ability to generate sufficient cash from operations and through asset sales to meet its obligations. DELISTING BY NASDAQ In March 2002, the Company's stock was delisted by Nasdaq as a direct result of the HQ bankruptcy filing. The Company's common stock currently trades on the OTC Bulletin Board under the symbol FLCGQOB. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements present the consolidated financial position of the Company and its majority-owned subsidiaries. The financial position, results of operations and cash flows of the HQ Global Segment are presented in Note 3. The financial position, results of operations and cash flows of the Parent and Other Interests Segment are summarized in Note 4. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. The accompanying consolidated financial statements have been presented in accordance with statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code ("SOP 90-7"). In accordance with SOP 90-7, no interest has been accrued on unsecured debt, no dividends on preferred stock have been accrued, unamortized premiums and debt issuance costs relating to unsecured debt have been expensed, costs relating to the bankruptcy proceeding and interest earned on accumulating cash resulting from the bankruptcy proceeding and interest earned on accumulating cash resulting from the bankruptcy proceeding have been reported as reorganization items in the accompanying statement of operations, and liabilities subject to compromise have been separately reported in the accompanying balance sheet. ACCOUNTING FOR OWNERSHIP INTERESTS The interests that FrontLine owns are accounted for under one of three methods: consolidation, equity method and cost method. The applicable accounting method is generally determined based on the Company's voting interest and rights in each investee. Consolidation. Entities in which the Company directly or indirectly owns more than 50% of the outstanding voting securities or controls the board of directors are generally accounted for under the consolidation method of accounting. Under this method, an investee's results of operations are reflected within the Company's Consolidated Statements of Operations. Participation of other (non-FrontLine) shareholders in the earnings or losses of a consolidated company is reflected in the caption "Minority interest" in the Company's Consolidated Statements of Operations. Minority interest adjusts the Company's consolidated results of operations to reflect only the Company's share of the earnings or losses of the consolidated company. IV-13 Equity Method. Investees whose results are not consolidated, but over whom the Company exercises significant influence, are accounted for under the equity method of accounting. Under the equity method of accounting, an investee's accounts are not reflected within the Company's Consolidated Statements of Operations; however, FrontLine's share of the earnings or losses of the investee is reflected in the caption "Equity in net loss and impairment of unconsolidated companies" in the accompanying Consolidated Statements of Operations. Cost Method. Investees not accounted for under the consolidation or the equity method of accounting, which are generally those in which the Company has less than a 20% interest in the voting securities of the investee, are accounted for under the cost method of accounting. Under this method, the Company's share of the earnings or losses of such companies is not included in the Consolidated Statements of Operations. CASH AND CASH EQUIVALENTS The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. HQ's and FrontLine's cash balances are each held primarily at one financial institution and exceed insurable amounts. The Company believes it mitigates its risk by investing in or through a major financial institution. MARKETABLE EQUITY SECURITIES Available-for-sale marketable equity securities are reported at fair market value, with the resulting net unrealized gain or loss reported within shareholders' equity. RECEIVABLES HQ licenses office space and provides support services to clients in various industries, ranging in size from small entrepreneurial entities to local offices of international corporations. HQ's facilities included in continuing operations are primarily located in the United States, which limits its exposure to certain economic risks based upon local economic conditions. HQ performs credit evaluations of its clients and generally requires approximately two months' charges as a service retainer. HQ records an allowance for doubtful accounts which reflects management's estimate of the risk of uncollectible accounts receivable. The following represents the activity in HQ's allowance for doubtful accounts for the years ended December 31, 2002, 2001 and 2000 (in thousands):

IV-14 PROPERTY AND EQUIPMENT Property and equipment consists primarily of property and equipment owned by HQ, and is stated at cost less accumulated depreciation and amortization. Effective January 1, 1999, the Company adopted Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. During 2001 and 2000, HQ capitalized $1.5 million and $5.7 million, respectively, related to the development of its enterprise resource system. No amounts were capitalized in 2002. Office equipment, furniture and fixtures are depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. The cost of HQ's enterprise resource system is being amortized over seven years. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. DEFERRED FINANCING COSTS The Company amortizes deferred financing costs over the term of the related debt. Deferred financing costs totaled $7.6 million and $40.3 million at December 31, 2002 and 2001, respectively, net of accumulated amortization of $11.8 million and $16.2 million, respectively. Amortization of deferred financing costs is included as a component of interest expense in the accompanying consolidated statement of operations. IMPAIRMENTS OF OWNERSHIP INTERESTS AND ADVANCES TO UNCONSOLIDATED COMPANIES The Company continually evaluates the carrying value of its ownership interests in and advances to each of its investments in unconsolidated companies for possible impairment based on achievement of business plan objectives and milestones, the value of each ownership interest in the unconsolidated company relative to carrying value, the financial condition and prospects of the company and other relevant factors. The fair value of the Company's ownership interests in and advances to privately held companies is generally determined based on the value at which independent third parties have invested or have committed to invest in the companies. The Company recorded a $25.7 million charge during the year ended December 31, 2000 to recognize impairment charges to reduce the carrying value of its investments in certain unconsolidated companies. In recognition of continuing difficult capital market conditions and operating performance of these ownership interests, the Company recorded an additional impairment charge of $32.9 million during the year ended December 31, 2001. Of the $32.9 million charge, $20.0 million related to Reckson Strategic Venture Partners, LLC ("Reckson Strategic"). See Note 4 for further discussion. These charges are included in "Equity in net loss and impairment of unconsolidated companies" in the accompanying Consolidated Statements of Operations. During the year ended December 31, 2002, the Company determined that no additional impairment charge was necessary. IMPAIRMENTS OF LONG-LIVED ASSETS Impairment charges are recorded as a permanent reduction in the carrying amount of the related asset. Effective January 1, 2002, the Company adopted Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, ("FAS 142"). As a result, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Other intangible assets continue to be amortized over their useful lives. As a result of impairment charges recorded in the third and fourth quarters of 2001, discussed below, the Company does not have any goodwill or indefinite-lived intangible assets recorded at December 31, 2002 or 2001. Accordingly, adoption of FAS 142 did not have an impact on the Company's financial condition or results of operations. IV-15 Effective January 1, 2002, the Company also adopted FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"). The FASB's new rules on asset impairment supersede FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121"). FAS 144 retains the requirements of FAS 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows, and (b) measure an impairment loss as the difference between the carrying amount and fair value of the asset, but removes goodwill from its scope. FAS 144 will primarily impact the accounting for intangible assets subject to amortization, property and equipment, and certain other long-lived assets. The adoption of FAS 144 did not have a significant impact on the Company's financial condition or results of operations. Prior to January 1, 2002, the Company reviewed long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used was measured by a comparison of the carrying amount of an asset to the estimated fair value of the asset or business center. In preparing these estimates, HQ made a number of assumptions concerning occupancy rates, rates which will be charged to clients for workstations and services, and rates of growth of rent expense and other operating expenses. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Based on the trend of operating losses as well as HQ's inability to remain in compliance with its debt arrangements, HQ determined that the carrying value of its intangible assets was impaired at September 30, 2001. Therefore, in the third quarter of 2001, the Company recognized an impairment charge of approximately $294.1 million, representing the amount by which the carrying amount of the intangible assets exceeded their estimated fair value. As a result of continuing operating losses, the Company further revised its projected cash flows during the fourth quarter of 2001, resulting in an additional impairment charge of $241.4 million. Assets to be disposed of are reported at the lower of the carrying amount or estimated fair value less costs to sell. Accordingly, the Company recorded impairment charges of $0.8 million and $25.7 million related to restructurings in 2002 and 2001, respectively (Note 14). RECENT PRONOUNCEMENTS In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This new rule requires companies to recognize costs associated with exit or disposal activities when the liability is incurred rather than at the date of commitment to exit from or dispose of an activity as required by current generally accepted accounting principles. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Accordingly, adoption of this new rule will not have a material affect on the Company's financial statements. However, the Company's accounting for exit and disposal activities, including restructurings, after that date will be impacted. REVENUE RECOGNITION The Company's operating revenues for all periods presented were attributable to HQ. Revenues from workstations and business services are recognized as the related services are provided. Workstation revenues consist of office and related furniture rental, parking and storage. Business services consist of (1) technology services comprised of Internet, videoconferencing and telecommunications services and (2) other business services which include charges to clients that do not require offices on a full-time basis, conference and training room usage, catering, copies, management and franchise fees. IV-16 FRANCHISE FEES At December 31, 2002, HQ is a franchiser of 15 domestic and 31 international business centers operated by unrelated franchisees. The financial results of franchised locations are not included in the consolidated results of the Company. HQ charges a franchise fee for use of its brand name and marketing support, which is recorded in the period earned. Franchise fees aggregated $0.8 million, $1.5 million, and $1.8 million for the years ended December 31, 2002, 2001 and 2000, respectively and are included in business service revenues. RENT EXPENSE Payments under operating leases are recognized as rent expense on a straight-line basis over the term of the related lease. The difference between the rent expense recognized for financial reporting purposes and the actual payments made in accordance with the lease agreements is recognized as a deferred rent liability. Rent expense charged to operations for the years ended December 31, 2002, 2001 and 2000, exceeded actual rental payments by $6.2 million, $9.0 million and $9.2 million, respectively. During the years ended December 31, 2002, 2001 and 2000, the Company recorded deferred credits relating to tenant improvements, which are reimbursed or paid by landlords and amortized against rent expense over the life of the leases, of $2.8 million, $3.9 million and $8.9 million, respectively. As of December 31, 2002 and 2001, the deferred rent liability includes approximately $17.2 million and $26.0 million, respectively, representing the unamortized balances of such deferred credits. The estimated fair value of favorable lease rates on business centers acquired in the HQ Merger is being amortized over the terms of the respective leases acquired (Note 3). At December 31, 2002 and 2001, the remaining unamortized balances of favorable leases included in "Other assets and deferred charges, net" totaled $14.6 million and $16.8 million, respectively. At December 31, 2002, the weighted average remaining term of these leases was 7.5 years. HQ DEPRECIATION AND AMORTIZATION Depreciation and amortization of the HQ Segment consists of the following (in thousands): YEAR ENDED DECEMBER 31, ------------------------------- 2002 2001 2000 ------- ------- ------- Property and equipment .................. $37,655 $42,538 $28,279 Goodwill ................................ -- 25,164 21,359 Favorable acquired business center leases 2,400 2,400 1,400 Other intangible assets ................. -- -- 330 ------- ------- ------- $40,055 $70,102 $51,368 ======= ======= ======= STOCK-BASED COMPENSATION The Company follows Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options. The Company accounts for stock-based compensation for non-employees under the fair value method prescribed by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"). Through December 31, 2002, there have been no significant grants to non-employees. Pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by FAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2002, 2001 and 2000, risk-free interest rate of 5%, no expected dividend yield, a volatility factor of the expected market price of the Company's common stock of .600 for each year, and a weighted-average expected life of the option of 7 years. The volatility assumption reflects the estimated volatility that has occurred and is expected to continue to occur as a result of FrontLine's revised business plan following the Restructuring. IV-17 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. For the years ended December 31, 2002, 2001 and 2000 the Company's pro forma information follows (in thousands, except per share data):

COMPREHENSIVE LOSS Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions, events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. During the year ended December 31, 2001, the difference between net loss ($624,826,000) and total comprehensive loss ($624,235,000) was due to realized gains on "available-for-sale" marketable securities. There were no differences between net loss and comprehensive loss in 2002. SEGMENT REPORTING The segment information required by SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," relating to the HQ Segment and the Parent and Other Interests Segment is presented in Notes 3 and 4, respectively. Each of the segments has a FrontLine senior professional assigned for purposes of monitoring performance and carrying out operating activity. These professionals report directly to the Chief Executive Officer and Treasurer, who along with the Board of Directors have been identified as the Chief Operating Decision Makers ("CODM") because of their final authority over resource allocation decisions and performance assessment. FrontLine's governance and control rights are generally exercised through Board of Directors seats and through representation on the executive committees of its investee entities. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires the Company to disclose the estimated fair values of its financial instrument assets and liabilities. The carrying amounts approximate fair value for cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses because of the short maturity of those instruments. Other than as disclosed in Notes 9 and 15, the estimated fair values of the Company's long-term debt approximate the recorded balances. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company adopted the provision of SFAS No. 133 ("SFAS 133") "Accounting for Derivatives and Hedging Activities," as amended, effective January 1, 2001. SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. IV-18 HQ enters into contracts that establish a cap and a floor interest rate on notional amounts to hedge the interest rate risk on its floating-rate debt. The Company's policy is that it will not speculate in hedging activities. The effect of adopting FAS 133 as of January 2001 was not material to the Company's results of operations. There were no derivatives outstanding at December 31, 2002. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant assumptions and estimates relate to the lives and recoverability of long-lived assets. Actual results could differ from those estimates. RISK AND UNCERTAINTIES The future results of operations and financial condition of HQ will be impacted by the following factors, among others: the competition in the office solutions business with respect to, among other things, price, service, and location; dependence on leases and changes in lease costs; the availability of capital for expansion; the ability to obtain and retain qualified employees; the competition for future acquisitions; and the ability of HQ to secure adequate capital. RECLASSIFICATIONS Certain prior period amounts and segment disclosures have been reclassified to conform to the current year presentation. 3. INTEREST IN HQ GLOBAL On June 1, 2000, VANTAS Incorporated ("VANTAS") merged with HQ Global Workplaces, Inc. ("Old HQ"), in a two-step merger, and HQ Global also acquired two other entities involved in the executive office suites business outside the United States (the "HQ Merger"). As a result of the HQ Merger, the combined company, under the name HQ Global Workplaces, Inc., became a wholly-owned subsidiary of a newly-formed parent corporation, HQ Global. The HQ Merger was financed through a combination of debt and HQ Global preferred stock and warrants. As of December 31, 2000, FrontLine's ownership interest was 56.5% on a basic basis. Although FrontLine's percentage ownership may vary depending on the actual preferred stock conversion price, on a fully-diluted basis, assuming the outstanding preferred stock converted at the HQ Merger conversion price, and including certain warrants to purchase HQ Global stock, FrontLine would own approximately 38% of the common stock of HQ Global. To effectuate the HQ Merger, FrontLine contributed approximately $17 million in cash and its ownership interest in VANTAS. The costs of the HQ Merger have been allocated to the respective assets acquired and liabilities assumed, with the remainder recorded as goodwill, based on estimates of fair values as follows (dollars in thousands): Working capital ..................................... $ 7,840 Property and equipment .............................. 107,047 Goodwill ............................................ 407,441 Favorable acquired business center operating leases . 25,690 Other assets ........................................ 32,504 Other liabilities ................................... (45,080) Notes payable ....................................... (138,693) --------- Total ............................................... $ 396,749 ========= IV-19 The estimates of fair value were determined by HQ's management based on information provided by the management of the acquired entities. The above purchase price allocation has been revised from the original allocation as estimated amounts have been finalized. HQ is a provider of flexible officing solutions. As of December 31, 2002, HQ owned, operated, or franchised 304 business centers which are included in continuing operations and are primarily located in the United States. There were 19 business centers operating at December 31, 2002 that were held for sale and are included in discontinued operations or in the process of being closed. A wholly-owned subsidiary of HQ is also the franchiser of 15 domestic and 31 international business centers for unrelated franchisees. HQ provides a complete outsourced office solution through furnished and equipped individual offices and multi-office suites available on short notice with flexible contracts. HQ also provides business support and information services including: telecommunications; broadband Internet access; mail room and reception services; high speed copying, faxing and printing services; secretarial, desktop publishing and IT support services and various size conference facilities, with multi-media presentation and video teleconferencing capabilities. HQ also provides similar services for those businesses and individuals that do not require offices on a full-time basis. UNAUDITED PRO FORMA INFORMATION The unaudited pro forma financial information set forth below is based upon the historical statements of operations of FrontLine for the year ended December 31, 2000, adjusted to give effect to the HQ Merger as of January 1, 2000. The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the HQ Merger occurred as presented, nor does it purport to represent the results of operations for future periods (in millions, except per share amounts). YEAR ENDED DECEMBER 31, 2000 (UNAUDITED) ----------- Revenues ....................................... $ 612.3 Net loss ....................................... (222.9) Net loss applicable to common shareholders...... (225.0) Basic and diluted net loss per common share..... $ (6.45) OWNERSHIP BY FRONTLINE To facilitate HQ Global obtaining amendments to certain debt covenants, on June 29, 2001, FrontLine invested an additional $15 million into HQ Global via the acquisition of a new subordinated series of preferred stock and common stock warrants. As of December 31, 2002, FrontLine's ownership interest was approximately 56% on a basic basis. Although FrontLine's percentage ownership may vary depending on the actual preferred stock conversion price, on a fully-diluted basis, assuming the outstanding preferred stock converted at the HQ Merger conversion price, and including certain warrants to purchase HQ Global stock, FrontLine would own approximately 39.9% of the common stock of HQ Global. An HQ Global shareholder has a put option ("Put Option") to require the Company to purchase all of its interest any time between January 8, 2002 and January 8, 2005, at the then determined fair value of the interest. The Company entered into a shareholders agreement (the "HQ Stockholders Agreement") with certain of the stockholders of HQ Global which provides such stockholders with rights to put up to approximately 3.1 million shares of HQ Global (the "HQ Shares") to the Company during the two years subsequent to the HQ Merger if HQ Global has not completed an initial public offering of its shares. On February 25, 2002, such stockholders irrevocably waived their Put Rights. IV-20 HQ GLOBAL BANKRUPTCY On March 13, 2002, HQ Global and certain of its affiliates (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Court"). The Debtors continue to operate their business and manage their properties as debtors-in-possession during the Chapter 11 proceeding. The Debtors have the exclusive right to propose a plan of reorganization until May 13, 2003, which period may be extended further by the Court. The Debtors are obligated under their debtor-in-possession financing facility to file with the Delaware Bankruptcy Court, no later than April 30, 2003, a plan of reorganization in a form acceptable to the "Requisite Lenders" under the facility. The Debtors and their debtor-in-possession lenders have agreed, subject to approval by the Delaware Bankruptcy Court to an extension of this deadline to June 30, 2003. The Debtors anticipate proposing a plan of reorganization in accordance with the federal bankruptcy laws as administered by the Court. Confirmation of a plan of reorganization could materially change the amounts currently recorded in the financial statements. The financial statements do not give effect to any adjustment to the carrying value of assets, or amounts and classifications of liabilities that might be necessary as a consequence of this matter. DISCONTINUED OPERATIONS In December 2001, HQ's Board of Directors approved a plan to dispose of HQ's business in Europe. As a result of this transaction, the HQ consolidated balance sheets for the years ended December 31, 2002 and 2001 and the statements of operations and cash flows for the years ended December 31, 2002, 2001 and 2000 present the European businesses as a discontinued operation. On June 24, 2002, HQ sold certain assets of the discontinued operations in the United Kingdom for cash proceeds of $15.5 million. Of this amount, $11.5 million was repatriated to the United States. This transaction resulted in a gain of $5.4 million, representing the excess of the proceeds over the previously estimated net realizable value of the assets. The gain of $5.4 million was recorded in the second quarter of 2002 and is included in income from discontinued operations for the twelve months ended December 31, 2002. There were no income taxes related to this transaction. Excluding this transaction, the loss from discontinued operations was $2.0 million for the year ended December 31, 2002. Summarized financial information for the discontinued operations is as follows (in thousands):

The loss from discontinued operations for the year ended December 31, 2001 contains an asset impairment charge of $141.2 million. The net assets of discontinued operations are not significant to the HQ consolidated balance sheets as of December 31, 2002 and 2001. FINANCIAL STATEMENTS The following statements present the portion of the Company's financial position, results of operations and cash flows represented by HQ Global and predecessor entities as of and for the periods indicated. IV-21 3. INTEREST IN HQ GLOBAL AND PREDECESSOR ENTITIES (CONTINUED) HQ GLOBAL AND PREDECESSOR ENTITIES BALANCE SHEETS (IN THOUSANDS)

IV-22 3. INTEREST IN HQ GLOBAL AND PREDECESSOR ENTITIES (CONTINUED) HQ GLOBAL AND PREDECESSOR ENTITIES STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

IV-23 3. INTEREST IN HQ GLOBAL AND PREDECESSOR ENTITIES (CONTINUED) HQ GLOBAL AND PREDECESSOR STATEMENTS OF CASH FLOWS (IN THOUSANDS)

IV-24 4. OTHER OWNERSHIP INTERESTS The Company's ownership interests in its investees are classified according to the applicable accounting method utilized at December 31, 2002, 2001 and 2000. The carrying value of equity method investments represents the Company's acquisition cost less any impairment charges and the Company's share of such investees' losses. The carrying value of cost method investments represents the Company's acquisition costs less any impairment charges in such investees. The Company's ownership interests in and advances to investees as of December 31, 2002, are as follows (in thousands):

The following details the Company's equity in net loss and impairment of unconsolidated companies (in thousands):

EMPLOYEEMATTERS On December 20, 2000, the Company sold its interest in EmployeeMatters, Inc. ("EmployeeMatters") to Intuit, Inc. ("Intuit") for 556,027 shares of Intuit common stock. The fair value of such stock on the closing date of the sale was $21.3 million. As a result of the sale, the Company recorded a gain of $8.3 million, net of $0.7 million of expenses and other related charges, in the fourth quarter of the year ended December 31, 2000. Included in the above Intuit shares are 23,072 shares that were held in escrow in order to collateralize certain contingent indemnification obligations of the Company. On December 31, 2001, Intuit shares were released from escrow. SALE OF INTUIT During the three months ended March 31, 2001, the Company sold all shares of Intuit not held in escrow at a realized gain of $0.5 million. On January 9, 2002, the Company sold all 23,072 shares of Intuit, which were released from escrow at December 31, 2001. As a result of this sale, the Company recorded a gain of $0.1 million. IV-25 RECKSON STRATEGIC Reckson Strategic invests in operating companies with experienced management teams in real estate and real estate related market sectors which are in the early stages of their growth cycle or offer unique circumstances for attractive investments, as well as platforms for future growth. Through RSVP Holdings, LLC ("Holdings"), the Company is a managing member and 100% owner of the common equity of Reckson Strategic. New World Realty, LLC, an entity owned by two individuals (the "RSVP Managing Directors") retained by Holdings, acts as a managing member of Holdings, and have a carried interest which provides for the RSVP Managing Directors to receive a share in the profits of Reckson Strategic after the Company, Paine Webber Real Estate Securities, Inc., ("Paine Webber") and Stratum Realty Fund, L.P. ("Stratum") have received certain minimum returns and a return of capital. Paine Webber and Stratum are non-managing members and preferred equity owners who have committed $150 million and $50 million, respectively, in capital and share in profits and losses of Reckson Strategic with the Company, subject to a maximum internal rate of return of 16% of invested capital. The carrying values of the Company's investment in Reckson Strategic were $12.3 million and $13.4 million as of December 31, 2002 and 2001, respectively. During 2001, the Company recognized a $20.0 million valuation impairment based on its assessment of value, recoverability and probability that this investment would not ultimately be realized at its otherwise carrying value. FINANCIAL STATEMENTS The following statements present the portion of the Company's financial position, results of operations and cash flows represented by FrontLine Parent and other interests as of and for the periods indicated. IV-26 4. OTHER OWNERSHIP INTERESTS (CONTINUED) FRONTLINE PARENT AND OTHER INTERESTS BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

IV-27 4. OTHER OWNERSHIP INTERESTS (CONTINUED) FRONTLINE PARENT AND OTHER INTERESTS STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

IV-28 4. OTHER OWNERSHIP INTERESTS (CONTINUED) FRONTLINE PARENT AND OTHER INTERESTS STATEMENTS OF CASH FLOWS (IN THOUSANDS)

IV-29 5. PROPERTY AND EQUIPMENT Property and equipment consists of (in thousands):

Office equipment, furniture and fixtures include approximately $3.7 million and $6.7 million of office equipment under capital leases, net of accumulated depreciation of $2.5 million and $3.6 million as of December 31, 2002 and 2001, respectively. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of (in thousands):

7. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carry forwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion of the deferred asset will not be recognized. At December 31, 2002, all of FrontLine Parent's deferred tax assets have been fully reserved due to the uncertainty as to whether these assets will provide benefit in future years. IV-30 The following represents HQ's, the Company's principal subsidiary (i) provision (benefit) for income taxes (ii) reconciliation of income tax expense (benefit) computed using the U.S. federal statutory income tax rate to the provision (benefit) for income taxes and (iii) the deferred tax effects of temporary difference as of December 31, 2002 and 2001. HQ's provision (benefit) for income taxes related to continuing operations consists of the following (in thousands):

The following is HQ's reconciliation of the income tax expense (benefit) computed using the U.S. federal statutory income tax rate to the provision (benefit) for income taxes (in thousands):

HQ's deferred tax effects of temporary differences as of December 31, 2002 and 2001 are as follows (in thousands):

IV-31 At December 31, 2002 and 2001, HQ had established valuation allowances of $204.5 million and $150.9 million, respectively, to reduce certain deferred tax assets to amounts that are more likely than not to be realized. At December 31, 2002, Frontline has approximately in excess of $304.4 million of available unused net operating loss carryforwards, which expire beginning in 2017. A change in ownership, as defined for purposes of the Internal Revenue Code, may have occurred with respect to some or all of these losses and may limit the annual utilization of a portion of the U.S. Federal net operating loss carryforward under the applicable Internal Revenue Service regulations. At December 31, 2002 HQ has available unused net operating loss carryforwards for U.S. federal income tax purposes of approximately $223.8 million, which expire beginning in 2017. A change in ownership, as defined for purposes of the Internal Revenue Code, occurred in 2000 and will limit the annual utilization of a portion of the U.S. Federal net operating loss carryforward under the applicable Internal Revenue Service regulations. 8. NOTES PAYABLE HQ DEBTOR-IN-POSSESSION FACILITY In connection with HQ's bankruptcy filing (Note 1), HQ received a commitment for a $30.0 million facility, with borrowings permitted through December 31, 2002 in accordance with certain operating and liquidity covenants. Any borrowings, of which there have been none, will incur interest at prime plus 3%. HQ and its lenders have agreed to extend this facility through and including July 31, 2003. HQ CREDIT FACILITY HQ has a pre-petition credit facility (the "HQ Credit Facility") with certain lending institutions, which, as amended and restated as of June 29, 2001, provides for borrowings of up to $219.4 million under four term loans (the "Term Loans") and for borrowings or letters of credit of up to an additional $55.6 million under two revolving loan commitments (the "Revolver Loans"). Availabilities under the Revolver Loans are formula based. As of December 31, 2002, there was $188.7 million in outstanding borrowings under the Term Loans and $38.8 million in borrowings outstanding under the Revolver Loans. As of December 31, 2002, HQ had letters of credit outstanding in the aggregate amount of $16.6 million for landlord security deposits. Such letters of credit are collateralized by $0.1 million in cash and $16.5 million of Revolver Loans. The Term Loans are repayable in various quarterly installments through November 2005. Additional annual principal payments of 75% of excess cash flow as defined are required. Pursuant to such requirement, HQ made an accelerated principal payment of $15.1 million during the twelve-month period ended December 31, 2001, based on cash flows for the year ended December 31, 2000. Any outstanding borrowings under the two Revolver Loans are due on November 6, 2003 and May 31, 2005, respectively. Borrowings under the HQ Credit Facility bear interest ranging from LIBOR (one-month LIBOR was approximately 4.04% at December 31, 2002) plus 3.25% to 4.0% for one, three or nine-month periods at the election of HQ or prime (4.25% at December 31, 2002) plus 2.25% to 3.00%. The weighted average interest rate on borrowings under the Term Loans and the Revolver Loans at December 31, 2002, were approximately 5.9% and 6.0%, respectively. A commitment fee of 1/2 of 1.0% per annum is payable on the unused portion of the HQ Credit Facility. HQ's lending institutions have an assignment of leases and rents associated with HQ's business centers and certain preferred security interests to collateralize the borrowings under the HQ Credit Facility. During 2001, interest on borrowings under the Credit Facility ranged from LIBOR (one month LIBOR was approximately 4.15% at December 31, 2001) plus 3.25% to 4.0% for a one, three or six month period, at the election of the Company or Prime (4.75% at December 31, 2001). During 2000, interest on borrowings under the Credit Facility ranged from LIBOR (one month LIBOR was approximately 6.8% at December 31, 2000) plus 3.00% to 3.5% for a one, three or six month period, at the election of the Company or Prime (9.5% at December 31, 2000). IV-32 The stated maturities of borrowings outstanding under the HQ Credit Facility subsequent to December 31, 2002 are as follows (in thousands): TWELVE MONTHS ENDED DECEMBER 31, AMOUNT ---------------------------------------- 2003 and arrears........... $ 68,445 2004....................... 58,976 2005....................... 100,012 -------- Total...................... $227,433 ======== MEZZANINE LOAN/UNSECURED DEBT On May 31, 2000, HQ entered into a Senior Subordinated Credit Facility (the "Bridge Loan") in the amount of $125.0 million. The Bridge Loan carried an interest rate of LIBOR plus 6.5% and was to mature on May 31, 2007. On August 11, 2000, HQ replaced the Bridge Loan with a $125.0 million Note and Warrant Purchase Agreement (the "Mezzanine Loan"). The Mezzanine Loan bears interest at 13.5% per annum and matures on May 31, 2007. The entire balance was outstanding at December 31, 2002 and 2001. In connection with the Mezzanine Loan, the Mezzanine Loan lenders received 503,545 Series A Warrants and 227,163 Series B Warrants to purchase common stock. The fair value of the Series A Warrants to purchase Common Stock issued to the lenders was recorded as debt issuance costs and is being amortized over the terms of the related loan resulting in an effective interest rate of 15.6%. No value was assigned to the Series B Warrants. EVENTS OF DEFAULT AND COMPLIANCE WITH COVENANTS The HQ Credit Facility and Mezzanine Loan contain certain covenants, including a defined maximum ratio of consolidated indebtedness to consolidated earnings before interest, income taxes, depreciation and amortization. In addition, there are other covenants pertaining to financial ratios and limitations on capital expenditures. Also, the HQ Credit Facility and Mezzanine Loan prohibit the declaration or payment of dividends by HQ Global or any of its subsidiaries, except for the payment of dividends in kind on its preferred stock. In addition to not complying with certain financial covenants, in September 2001, HQ defaulted on its principle payments due under the HQ Credit Facility and, in February 2002, commenced defaulting on interest payments. As a result of entering into forbearance agreements, additional borrowings under the HQ Credit Facility were permitted from September 30, 2001 to February 14, 2002. Due to these defaults, outstanding borrowings are reflected as a current liability as of December 31, 2002 and 2001. HQ also has defaulted on the interest payments on the Mezzanine Loan beginning September 30, 2001. As a result of these defaults and non-compliance with financial covenants, the Mezzanine Loan has been classified as a current liability as of December 31, 2002 and 2001. HQ was not in compliance with certain financial covenants set forth in the Debtor-in-Possession facility as of December 31, 2002. However, HQ has received a waiver for these financial covenants from its lenders through March 31, 2003 that was also approved by the Bankruptcy court. IV-33 FRONTLINE BANK CREDIT FACILITY/NOTES PAYABLE On September 11, 2000, FrontLine entered into a $25.0 million line of credit agreement (the "FrontLine Bank Credit Facility"). Borrowings under the FrontLine Bank Credit Facility are secured by a 20.51% common ownership interest in shares of HQ Global and bear interest at the Prime rate plus 2%. Any outstanding borrowings under the FrontLine Bank Credit Facility were originally due on March 11, 2001. In January 2001, FrontLine exercised its option to extend the maturity date until June 11, 2001. In May 2001, the Company further extended the maturity date to September 11, 2001. In September 2001, the Company further extended the maturity date to October 25, 2001. At December 31, 2001, FrontLine had borrowed $25.0 million under the amended FrontLine Bank Credit Facility. Since the entire outstanding balance of $25 million and accrued interest was not repaid at that time, FrontLine became in default. Such amount is classified as current in the accompanying Consolidated Balance Sheet. The weighted average interest rate of the outstanding borrowings at such date was 7.66%. The restructuring of the Company's indebtedness may result in significant dilution to holders of the Company's common stock or the elimination of their interest. 9. REDEEMABLE PREFERRED STOCK On December 13, 2000, FrontLine obtained a $25.0 million preferred equity facility (the "Preferred Equity Facility") with a major financial institution. At the inception of the Preferred Equity Facility, the Company drew $15.0 million, for net proceeds of $13.9 million; the remaining amount was drawn by FrontLine during the three months ended March 31, 2001, for net proceeds of $10.0 million. The Preferred Equity Facility is comprised of a series of redeemable convertible preferred securities (the "Series B Preferred Stock"). The holders have consent rights for certain significant transactions, including the incurrence of additional debt by the Company or HQ, the issuance of equity securities senior to, or on a parity with, the Series B Preferred Stock or the issuance by HQ of preferred stock. These securities also contain certain covenants relating to HQ. In addition, the securities include a redemption premium of 27.5%. Since the securities were not redeemed prior to December 13, 2001, the securities (including the amount of the redemption premium) have become convertible at the holder's option into FrontLine common stock at the initial rate of $13.3875 per share, the preferred stock has become a voting security on an "as-converted" basis, and quarterly dividends have become payable from the date of initial issuance at the annual rate of 9.25%. Securities have a mandatory redemption requirement at a 27.5% premium, which has been triggered as a result of uncured events of default. Accordingly, the securities are classified as "Redeemable convertible preferred stock" in the accompanying consolidated balance sheet at December 31, 2002. The initial net proceeds of the securities are being accreted to the mandatory redemption price of 127.5% of face value over the five-year period through the mandatory redemption date. At December 31, 2002, the Company did not pay the dividend that was payable at that time and accordingly is in default. The Company is in arrears with regard to the payment of dividends on its Series A and Series B Preferred Stock. 10. SHAREHOLDERS' DEFICIENCY The Company has established the 1998 stock option plan, the 1998 employee stock option plan, the 1999 stock option plan and the 2000 employee stock option plan (the "Plans") for the purpose of attracting and retaining directors, executive officers, other key employees and advisory board members. As of December 31, 2002, 3,700,376, 100,000, 1,750,000 and 2,500,000 of the Company's authorized shares have been reserved for issuance under the 1998 stock option plan, the 1998 employee stock option plan, the 1999 stock option plan and the 2000 employee stock option plan, respectively. IV-34 The following table sets forth the outstanding options by plan and their corresponding exercise price ranges:

A summary of the Company's stock option activity and related information is as follows:

(a) The weighted average grant date fair value per option (see discussion of valuation below) was $13.23 and $13.15 for the years ended December 31, 1999 and 2000 respectively. The following table sets forth information relating to stock options outstanding and exercisable at December 31, 2002:

Options granted to officers under the 1998 stock option plan were fully vested on January 1, 1999. Options granted to new employees generally vest in three equal installments on the first, second and third anniversaries of the date of the grant. Options granted under the Plans are generally exercisable at the market price on the date of the grant and, subject to termination of employment, expire ten years from date of the grant, are not transferable other than on death. In December 1999, the Company formed an advisory board to provide strategic guidance and be actively involved in the development of the Company's investee companies. As of December 31, 2000, the advisory board consists of seven members. These members were granted a total of 140,000 options under the 1999 stock option plan with exercise prices ranging from $26.72 to $58.00 (weighted average $32.58). These options vest in three equal installments on the first, IV-35 second and third anniversaries of the date of the grant. In accordance with FAS 123, the Company was amortizing to compensation expense over three years the fair values of these options determined by the Black-Scholes option valuation model. As a result of the Company's new strategic objectives in connection with the Restructuring, the Company will not require substantial assistance from the advisory board subsequent to 2000. Accordingly, the remaining value of the related options was recognized in the fourth quarter of 2000. In connection with the 1999 stock grants the Company made loans to employees to cover the associated tax liabilities. Such loans were forgiven over the one-year period following the date of grant. In connection with 200,000 of the shares granted in 2000, the Company made payments on behalf of its employees to cover the associated tax liabilities. On December 16, 1999, the Company issued 1,437,500 shares of its common stock in a public offering at $47.25 per share for an aggregate consideration of $63.9 million. During the three months ended March 31, 2000, the Company completed preferred stock offerings of 26,000 shares of 8.875% Convertible Cumulative Preferred Stock (the "Series A Preferred Stock") at a price of $1,000 per share with net proceeds of $24.6 million. These shares are convertible into the Company's common stock at a price of $70.48. The Company did not declare or pay the quarterly dividend due on these shares on November 6, 2001 or February 6, 2002. Accordingly, future dividends will accrue at a higher rate of 10.875%. If dividend distributions are in arrears for more than two quarterly periods, then the holders of such shares will be entitled to elect two additional members to the Company's Board of Directors. On March 7, 2000, an investment partnership invested $30 million to purchase 1.5 million warrants to acquire FrontLine's common stock at an exercise price of $70 per share. The warrants have a term of 3.25 years. On June 29, 2000, the investment partnership invested an additional $3.0 million to obtain a reduction in the warrant exercise price to $47.25 per share and to extend the expiration of the warrant to March 2005. Simultaneously with this transaction, the Company issued 1,075,000 shares of its common stock for an additional 2.5% ownership interest in HQ Global in connection with an agreement with the investment partnership, which had originally owned preferred stock of VANTAS. As a result of the Series B Preferred Stock sold in December 2000, the exercise price for the March 7, 2000 warrants was automatically decreased to $45.01 per share. On March 31, 2000, the Company sold approximately 2.6 million shares of its common stock at a price of $47.25 per share for an aggregate consideration of $122.6 million. Proceeds from the sale were utilized to repay the remaining portion of a then-existing credit facility. As a result, certain deferred financing costs of $2.6 million incurred in connection with the establishment of such credit facility were expensed as an extraordinary loss in the accompanying Consolidated Statements of Operations. As a part of this transaction, the Company issued 128,750 warrants to purchase the Company's common stock with an exercise price of $47.25 per share for three years. On September 20, 2000, the Company issued 331,400 shares of its common stock at a price of $15.0875 per share for gross proceeds of $5.0 million. On October 17, 2000, the Company's Board of Directors announced that it adopted a Shareholder Rights Plan (the "Rights Plan") designed to protect shareholders from various abusive takeover tactics, including attempts to acquire control of the Company at an inadequate price, depriving shareholders of the full value of their investment. The Rights Plan is designed to allow the Board of Directors to secure the best available transaction for all the Company's shareholders. The Rights Plan was not adopted in response to any known effort to acquire control of the Company. Under the Rights Plan, each shareholder received a dividend of one Right for each share of the Company's outstanding common stock owned. The Rights are exercisable only if a person or group acquires, or announces their intent to acquire, 15% or more of the Company's common stock, or announces a tender offer the consummation of which would result in beneficial ownership by a person or IV-36 group of 15% or more of the common stock. Each Right entitles the holder to purchase one one-hundreth of a share of a new series of junior participating preferred stock of the Company at an initial exercise price of $60.00. If any person acquires beneficial ownership of 15% or more of the outstanding shares of common stock, then all Rights holders except the acquiring person will be entitled to purchase the Company's common stock at a price discounted from the then market price. If the Company is acquired in a merger after such an acquisition, all Rights holders except the acquiring person will also be entitled to purchase stock in the buyer at a discount in accordance with the Rights Plan. The distribution of Rights was made to all common stockholders of record at the close of business on November 3, 2000 and shares of common stock that are newly-issued after that date will also carry Rights until the Rights become detached from the common stock. The Rights expire at the close of business on October 15, 2010, unless earlier redeemed by the Company. The Rights distribution was not taxable to stockholders. 11. MERGER AND INTEGRATION COSTS Merger and integration costs from continuing operations related to the HQ Merger incurred and charged to expense during the year ended December 31, 2000 were comprised of the following (in thousands):

Of the total merger and integration costs incurred through December 31, 2000 of $24.7 million, approximately $23.4 million required cash outlays. In connection with the HQ Merger, HQ consolidated and relocated the former headquarters of VANTAS and Old HQ in New York, New York and Atlanta, Georgia, respectively, into a new corporate headquarters in Dallas, Texas. Due to the HQ Merger and relocations, VANTAS and Old HQ entered into incentive bonus agreements with certain key executives and employees, which bonuses will be earned as long as such executives and employees remain with HQ through a specified date. Relocation costs and retention incentives are being charged to expense as incurred. 12. LONG-TERM INCENTIVE PLAN In March 2000, the Compensation Committee of the Board of Directors adopted a long-term incentive plan (the "LTIP"). Under the long-term incentive plan, participants may purchase or be granted interests in limited partnerships established by the Company to hold a profit participation interest in the investments made by the Company. The plan contemplates the allocation to such partnerships of up to a 12.5% profits interest in each investment made by the Company. FrontLine, through a wholly-owned subsidiary, will act as the general partner of each partnership and will retain an 87.5% or greater interest in each partnership depending upon the vesting and type of interest participants receive. FrontLine generally must receive a minimum return on its holdings in a particular partnership, typically 100% of the cost of its investment, before participants receive distributions from such partnership. A partnership will generally distribute the securities or cash it holds to its partners after five to ten years, but may distribute securities or cash earlier if the company has completed an initial public offering or been sold. The plan also permits the award of equivalent grants without the use of a limited partnership. In April 2000, FrontLine paid advances aggregating $2.8 million on future payments under the long-term incentive plan to its four executive officers. During the three months ended September 30, 2001, $1.8 million of these advances were forgiven as a result of the termination of three of these executives. Including related income tax accruals, the resulting expenses relating to the forgiveness of the advances to these three executives was $2.8 million in the twelve months ended December 31, 2001, respectively. IV-37 The Company is continuing to amortize the remaining $1.0 million and related tax payments through April 2007, the end of the required service period, for the remaining executive officer who is still employed with the Company. During each of the twelve months ended December 31, 2002 and 2001, $0.2 million of amortization related to the LTIP was recorded. 13. REORGANIZATION COSTS HQ In 2002, HQ recorded $8.5 million of professional services costs associated with the Chapter 11 proceeding and a $24.7 million non-cash charge associated with the write-off of deferred financing costs associated with the Mezzanine Loan. The following table summarizes the accrued charges related to reorganization (in thousands):

14. RESTRUCTURING HQ In the second quarter of 2001, HQ initiated a restructuring program to close certain of its business centers and eliminate certain other business center and corporate positions. This restructuring program resulted in a charge of $11.3 million in the third quarter of 2001 consisting of employee severance and its estimate of future lease payments it would be required to make following closure of the centers. Subsequent to the initiation of the plan, HQ has filed bankruptcy and has revised its estimates of severance and lease costs based on the expected costs of buying out its lease obligations resulting in a reduction of accrued restructuring costs of $3.2 million in the fourth quarter of 2001. In the fourth quarter of 2001, HQ expanded its restructuring program to include the closure of additional business centers resulting in an additional restructuring charge of $49.4 million consisting primarily of HQ's estimate of the future lease payments, it will be required to make following closure of these centers. Restructuring costs in 2001 also included $5.7 million of professional costs associated with this restructuring and HQ's Chapter 11 proceeding (Note 1). In 2002, HQ recorded restructuring charges of $29.4 million related to additional planned center closures and employee severance. During the twelve months ended December 31, 2002, various landlords drew down $10.9 million of letters of credit, which reduced the estimated liability related to center closures. IV-38 The following table summarizes the accrued charges related to restructuring (in thousands):

At December 31, 2001, the program had resulted in a reduction of 363 employees. This restructuring also resulted in an impairment of related fixed assets of $20.9 million and impairment of favorable leases of $4.8 million included in the Company's fourth quarter 2001 impairment charge. During 2002, the restructuring program resulted in an additional reduction of approximately 350 employees. Severance costs include management retention which is expected to be paid in 2003, while lease costs are expected to be paid in 2003 and future years. Subsequent to December 31, 2002, the Company made the determination to close approximately twenty additional centers as part of the Company's restructuring plan. Until the Bankruptcy Court approves a plan of reorganization, the Company will continue to assess the need for additional center closures based on profitability, landlord rent concessions and other operational factors. FRONTLINE On October 18, 2000, FrontLine announced a restructuring of its strategic plan, the steps under which are collectively referred to herein as the Restructuring (see Note 1). In connection with the Restructuring, FrontLine terminated approximately 90% of its headquarters personnel, which has occurred during a transition period through the fourth quarter of 2001. As a result of this Restructuring, FrontLine has recognized cash and non-cash restructuring charges of $0.4 million, $13.6 million and $12.8 million during the twelve months ended December 31, 2002, 2001 and 2000, respectively. The restructuring costs recognized during 2002 consist principally of (1) $0.2 million of severance and related payments made to employees who were terminated in 2002 and (2) $0.2 million of LTIP amortization for the remaining officer. Approximately $0.2 million of these costs have not been paid as of December 31, 2002. The restructuring costs recognized during 2001 consist principally of (1) $5.3 million of professional fees and other expenses, (2) $2.8 million of LTIP costs related to three executives who were terminated in 2001, (3) $1.9 million of severance and related payments made to employees who were terminated in 2001 and (4) $1.5 million of accelerated amortization of stock compensation and related awards that resulted from the termination of certain employees. Approximately $2.1 million of these costs had not been paid as of December 31, 2001. In conjunction with the Restructuring, FrontLine re-evaluated the carrying values of its investments and recorded aggregate impairment charges of $57.7 million through December 31, 2002 and 2001 and $25.7 million in the fourth quarter of the year ended December 31, 2000, in order to reduce the carrying value of these investments to fair value. Such writedowns were determined in recognition of both the lack of continuing financial support FrontLine planned to provide to certain investees following the Restructuring and the difficult market conditions experienced in mid-2000 and 2001. Such charges are included in "Equity in net loss and impairment of unconsolidated companies" in the accompanying Consolidated Statements of Operations. IV-39 15. TRANSACTIONS WITH RELATED PARTIES HQ HQ believes that the terms and pricing of each of the following transactions with related parties are similar to those negotiated at arms length. Certain officers and members of HQ's Board of Directors are also officers and/or on the board of directors of FrontLine, Reckson Associates Realty Corp. ("Reckson Associates"), Equity Office Properties ("EOP") or CarrAmerica. During the year ended December 31, 2001, in connection with the June 29, 2001 Series B Preferred Stock issuance, the Company contributed approximately $15 million in capital to HQ which has been recorded as a capital contribution. HQ is a tenant under several leases with Reckson Associates and affiliates. For the years ended December 31, 2002, 2001 and 2000, HQ made payments aggregating approximately $3.4 million, $4.7 million and $5.2 million for rent, construction and other charges under such leases. HQ is a tenant under several leases with EOP and affiliates of EOP, which are affiliated with EOP Operating Limited Partnership, a purchaser of HQ's Series A Preferred Stock in conjunction with the HQ Merger. For the years ended December 31, 2002, 2001 and 2000, HQ made payments aggregating approximately $18.3 million, $18.6 million and $6.7 million, respectively, for rent and other charges under such leases. HQ is a tenant under several leases with CarrAmerica and affiliates of CarrAmerica, who received shares of HQ's Voting Common Stock and Nonvoting Common Stock in conjunction with the HQ Merger. For the years ended December 31, 2002, 2001 and 2000, HQ made payments aggregating approximately $2.7 million, $3.6 million and $2.8 million, respectively, for rent and other charges under such leases. FRONTLINE On June 15, 1998, the Company established a credit facility with Reckson Operating Partnership, L.P. ("Reckson"), a subsidiary of Reckson Associates, in the amount of $100 million (the "FrontLine Facility") for their service sector operations and other general corporate purposes. Reckson has advanced the Company $93.4 million at December 31, 2002 under the FrontLine Facility. Additionally, Reckson Strategic has a $100 million commitment from Reckson to fund its investment activities (the "Reckson Strategic Facility"). Draws on the Reckson Strategic Facility occur either in the form of loans to FrontLine (the "Reckson Strategic Facility" and, collectively with the FrontLine Facility, the "Credit Facilities") under terms similar to the FrontLine Facility or whereby Reckson makes direct investments with Reckson Strategic in joint ventures. As of December 31, 2002, Reckson has advanced FrontLine $49.3 million under the Reckson Strategic Facility. The aggregate principal amount outstanding and due Reckson at December 31, 2002 under both credit facilities was $142.7 million. Interest accrued on these facilities at December 31, 2002, was $46.7 million. Both of the FrontLine and Reckson Strategic Facilities expire in June 2003. Currently, the Company has an outstanding letter of credit in the amount of $0.2 million. In November 1999, the Boards of Directors of FrontLine and Reckson approved amendments to the FrontLine Facility and Reckson Strategic Credit Facility necessary in order for FrontLine to proceed with certain short-term financings for proposed acquisitions. As consideration for such approvals, FrontLine paid a fee to Reckson in the form of 176,186 shares of FrontLine common stock which were valued at $20.31 per share. The fee of approximately $3.6 million was included in deferred financing costs and was amortized over the estimated nine-month benefit period. IV-40 On March 28, 2001, the Company's Board of Directors approved amendments to the Credit Facilities pursuant to which (i) interest is payable only at maturity and (ii) Reckson may transfer all or any portion of its rights or obligations under the Credit Facilities to its affiliates. In addition, the Reckson Strategic Facility was amended to increase the amount available thereunder to up to $110 million. Reckson has advanced approximately $59.8 million under the Reckson Strategic Facility to fund additional Reckson Strategic-controlled joint ventures through December 31, 2002. There is no remaining availability under the Credit Facilities. At December 31, 2002, as a result of the Company's failure to pay the principal and interest due upon maturity on the FrontLine Bank Credit Facility, an event of default has occurred upon the Credit Facilities with Reckson. As a result of the default under the Credit Facilities, interest borrowings currently bear interest at 14.62% per annum. The Company is entitled to a cumulative annual management fee of $2 million with respect to Reckson Strategic, of which $1.5 million is subordinate to UBS Real Estate receiving an annual minimum rate of return of 16% and a return of its capital. The non-subordinated portion of the fee for the years ended December 31, 2002, 2001 and 2000 were $0.1 million, $0.1 million and $0.5 million, respectively. The Company reimburses Reckson with respect to general and administrative expenses (including payroll expenses) incurred by Reckson for the benefit of the Company. These services include payroll, human resources, accounting and other advisory services. The Company did not incur such costs during 2002. In 2001 and 2000, the Company incurred $0.1 million and $1.3 million, respectively, for such activities. 16. BENEFIT PLAN HQ has a 401(k) voluntary savings and investment plan (the "Plan") open to all employees who meet certain minimum requirements. HQ can make voluntary contributions to the Plan not to exceed 6% of eligible participant compensation. Participants vest 100% in its contributions after 3 years of service. HQ contributed approximately $0.9 million and $0.3 million to the Plan for the years ended December 31, 2001 and 2000. HQ ceased contributions to the plan on November 1, 2001. 17. COMMITMENTS AND CONTINGENCIES OPERATING LEASES HQ and its subsidiaries lease certain business center facilities related to continuing operations and their corporate offices under non-cancelable operating leases expiring at various dates through 2011. Certain of these operating leases provide for renewal options. HQ is also generally obligated to reimburse the lessor for its proportionate share of operating expenses, which are not included in the minimum lease commitments below. HQ also leases equipment under operating and capital leases which expire at various dates through 2003. Minimum future rental payments for continuing operations under theses non-cancelable leases for each of the next five years and in the aggregate as of December 31, 2002 are as follows (in thousands):

IV-41 Total rent expense for the years ended December 31, 2002, 2001 and 2000 was $184.1 million, $223.1 million and $172.5 million, respectively. Future rental payments for office rent expense are typically subject to adjustments for operating expenses and inflation increases as measured by the Consumer Price Index. As of December 31, 2002, HQ had incurred $11.7 million of rent obligations which were overdue by 30 days or more, representing pre-petition rent for certain leases. CUSTODIAL ACCOUNTS HQ acts as a trustee in connection with business centers that it manages for unrelated property owners. The cash held in trust and not reflected on the accompanying consolidated balance sheets approximated $0.6 million and $0.8 million as of December 31, 2002 and 2001, respectively. LITIGATION On February 4, 1999, a lawsuit captioned OmniOffices, Inc. et al. v. Joseph Kaidanow, et al., (Civil Action No. 99-0260) was filed in the United States District Court for the District of Columbia. This litigation (the "D.C. Action"), is with two stockholders of Old HQ (f/k/a OmniOffices, Inc.) and involves the conversion of approximately $111 million of debt previously loaned to Old HQ by CarrAmerica, into HQ's non-voting common stock. CarrAmerica and Old HQ initiated the action by filing a complaint seeking a declaratory judgment that the conversion price was fair, following threats by Messrs. Kaidanow and Arcoro ("Defendants") to challenge the conversion price. Defendants filed counterclaims against CarrAmerica, Old HQ and the then current directors of Old HQ, seeking a judgment declaring the conversion void or voidable, or in the alternative, compensatory and punitive damages. The stockholders' counterclaim makes no allegations against HQ. By January 2000, discovery was complete, the case was fully briefed, and the parties were awaiting a court ruling on HQ and CarrAmerica's ("Plaintiffs") motion for summary judgment and Defendants' motion to modify the scheduling order and motion to seal. The case was reassigned twice, and the two motions were then dismissed without prejudice on September 19, 2000 and September 26, 2000. On November 13, 2000, Plaintiffs filed a motion to reinstate their summary judgment motion. Defendants filed a cross-motion for leave to file a cross-motion for summary judgment. The Court permitted the refiling and took the motion and cross-motion for summary judgment under advisement. On September 12, 2001, without holding oral argument, the Court denied Plaintiffs' motion for summary judgment, but granted the Defendants' cross-motion for summary judgment. Plaintiffs and the directors of old HQ filed a Notice of Appeal in October 2001. On February 15, 2002, the D.C. Circuit announced that oral argument was scheduled for January 16, 2003. In March 2002, the D.C. Circuit referred the appeal to its Appellate Mediation Program. On April 24, 2002, HQ filed a notice of bankruptcy stay in respect of its March 13, 2002 Chapter 11 proceeding. HQ informed the D.C. Circuit that the appeal was stayed as to HQ pursuant to the automatic stay provisions of the U.S. Bankruptcy Code. The D.C. Circuit reversed the District Court in an opinion dated March 7, 2003. In re HQ Global Workplaces, Inc. Shareholder Litigation, No. 17996-NC. The original lawsuit (the "Fiduciary Action"), was brought in Delaware State Chancery Court on April 17, 2000 by Kaidanow and Arcoro ("Plaintiffs") but was removed to the Federal District Court for the District of Delaware and then remanded on Plaintiffs' motion back to Delaware Chancery Court. The action alleges a breach of fiduciary duty by CarrAmerica Realty Corporation and Old HQ's directors in approving the HQ Merger transaction. The complaint alleges among other things that allocation of the purchase price between the UK and U.S. companies failed to meet the standard of entire fairness, and that CarrAmerica breached its obligations under the Tag-Along Rights Agreement between Plaintiffs and CarrAmerica. The lawsuit also alleges an aiding and abetting claim against the Company as well as a tortuous interference claim against HQ and the Company. The Plaintiffs in the Fiduciary Action have also brought an appraisal action in the Chancery Court requesting appraisal of 100,000 of their shares sold in the HQ Merger. Modest discovery has occurred in the Appraisal Action. The Appraisal Action and the Fiduciary Action have now been consolidated into one action. On March 8, 2002, Plaintiffs filed a motion for leave to amend their complaint to add, inter alia, a breach of warrant agreements claim against HQ and other IV-42 claims against FrontLine. On March 15, 2002, HQ filed a notice of bankruptcy stay, stemming from its March 13, 2002 voluntary petition for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware. HQ informed the Court that the consolidated action should be stayed as to HQ pursuant to the automatic stay provisions of the Bankruptcy Code. Co-defendant CarrAmerica Realty Corporation filed a motion requesting that, in light of HQ's bankruptcy, the consolidated litigation be stayed as to all defendants. At a status conference held on March 25, 2002, the Vice Chancellor ordered the parties to work out a scheduling order for the briefing of the motion regarding the stay of the proceedings. At a hearing on this motion on September 9, 2002, the Vice Chancellor stayed the proceedings until November 13, 2002. The former director co-defendants in the consolidated action separately filed an adversary proceeding in the Delaware Bankruptcy Court seeking to stay the consolidated action as to the former directors. After a hearing on June 25, 2002, the Delaware Bankruptcy Court denied the requested relief. On September 9, 2002, HQ Global Workplaces, Inc. filed an adversary proceeding in the Delaware Bankruptcy Court seeking to subordinate, pursuant to Section 510(b) of the Bankruptcy Code, the claims of Messrs. Kaidanow and Arcoro on the basis that the claims arose from the purchase or sale of an equity security. On or about October 3, 2001, Burgess Services, LLC ("Burgess Services"), Dominion Venture Group, LLC ("Dominion Venture Group") and certain affiliated parties commenced an action in Oklahoma State Court against Reckson Strategic Venture Partners, LLP ("RSVP"), Reckson Associates Realty Corp. ("Reckson"), and RAP-Dominion LLC ("RAP-Dominion"), a joint venture through which RSVP and Reckson invested in a venture with certain of the plaintiffs. On April 10, 2002, the litigation was settled without liability on the part of the Company or the defendant. In connection with the settlement, the joint venture will be terminated. As a result of this settlement, the Company determined that no further impairment was necessary on its carrying value in its investment in Reckson Strategic. In April 2000, the Company entered into an office lease which expires in December 2010. In January 2001, the Company assigned the lease to HQ. The lease assignment did not relieve the Company of any of its obligations under the terms of this lease. At December 31, 2002, HQ was past due on $0.9 million of rent. The landlord has drawn the full letter on credit of $2.8 million. Of the $57.6 million HQ restructuring charge recorded in 2001, a $4.8 million accrual applicable to this lease was recorded as an estimate for the cost of terminating this lease. If the ultimate cost of terminating this lease exceeds the outstanding letter of credit, then additional cash may need to be paid by either HQ or the Company. Since HQ is currently in bankruptcy, the landlord is likely to seek to recover any further damages from FrontLine. As of December 31, 2002, the remaining lease commitment was $23.4 million. The Equal Employment Opportunity Commission has filed a suit (N.D. 111., Cause No. 02 C 6623, on September 1, 2002), on behalf of a former employee alleging discrimination under the Americans with Disability Act and Title 1 of the Civil Rights Act of 1991. HQ is currently evaluating the information and has not yet filed a response. The Company also has potential liability under its indemnification of CarrAmerica for liabilities of Carr America under its guarantees relating to four HQ leases. In conjunction with the HQ Merger, FrontLine agreed to indemnify CarrAmerica for its guarantees of certain HQ leases. As of December 31, 2002, the remaining lease commitments in excess of the existing letter of credit was $27.4 million. In addition to the cases set forth above, the Company and its investee entities are party to claims and administrative proceedings arising in the ordinary course of business or which are otherwise subject to indemnification, some of which are expected to be covered by liability insurance (subject to policy deductibles and limitations of liability) and all of which, including the cases discussed above, collectively are not expected to have a material adverse effect on the Company's financial position or results of operations. Management does not anticipate that these legal litigations will negatively impact future operations of the Company. IV-43 18. QUARTERLY FINANCIAL DATA (UNAUDITED) The following summary represents the Company's results of operations for each quarter during 2002 and 2001 (in thousands, except share amounts):

IV-44 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 14, 2003. FRONTLINE CAPITAL GROUP By: /s/ Scott H. Rechler ------------------------------------ (Scott H. Rechler) President, Chief Executive Officer and Director KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors of FrontLine Capital Group, hereby severally constitute Scott H. Rechler and James D. Burnham, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names in the capacities indicated below, the Form 10-K filed herewith and any and all amendments to said Form 10-K, and generally to do all such things in our names and in our capacities as officers and directors to enable FrontLine Capital Group to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, to said Form 10-K and any and all amendments thereto. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

IV-45 CERTIFICATIONS I, Scott H. Rechler, certify that: 1. I have reviewed this quarterly report on Form 10-K of Frontline Capital Group; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) Presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2003. /S/ SCOTT H. RECHLER ------------------------------------- Scott H. Rechler President and Chief Executive Officer (Principal Executive Officer) IV-46 I, James D. Burnham, certify that: 1. I have reviewed this quarterly report on Form 10-K of Frontline Capital Group; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and c) Presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 14, 2003. /s/ JAMES D. BURNHAM ------------------------------------- James D. Burnham Chief Financial Officer and Treasurer (Chief Accounting Officer) IV-47

FRONTLINE CAPITAL GROUP 10-K