10-Q 1 form10q.txt FORM 10Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 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 OF ORGANIZATION) IDENTIFICATION NO.) 405 LEXINGTON AVENUE, NEW YORK, NY 10174 --------------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) (212) 931-8000 -------------- (REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE) ------------------------- 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) YES X NO __, AND (2) HAS BEEN SUBJECT TO SUCH FILINGS FOR THE PAST 90 DAYS, YES X NO __. INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN "ACCELERATED FILER" AS DEFINED IN EXCHANGE ACT 12b-2. YES |_| NO X THE REGISTRANT HAS ONLY ONE CLASS OF COMMON STOCK, ISSUED AT $.01 PAR VALUE PER SHARE WITH 37,344,039 SHARES OUTSTANDING AS OF AUGUST 19, 2003. ------------------------- ================================================================================ FRONTLINE CAPITAL GROUP AND SUBSIDIARIES QUARTERLY REPORT FOR THE THREE MONTHS ENDED JUNE 30, 2003 TABLE OF CONTENTS

2 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS FRONTLINE CAPITAL GROUP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

See accompanying notes to consolidated financial statements. 3 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) (UNAUDITED)

See accompanying notes to consolidated financial statements. 4 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

See accompanying notes to consolidated financial statements. 5 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 1. DESCRIPTION OF THE COMPANY 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 ("Restructuring"). 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. 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. By order dated July 2, 2003, the Bankruptcy Court has further extended FrontLine's exclusive period through and including August 30, 2003. 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, which period may be extended further by the Bankruptcy Court. By order dated March 31, 2003, the Bankruptcy Court authorized FrontLine to, among other things, in an attempt to resolve an ongoing dispute with the preferred members (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 ("RSVP") and with respect to New World Realty, LLC annexed to such order (collectively, the "Transactions"); and (b) perform such actions and take all steps necessary to implement and consummate such Transactions. Pursuant to such authorization, on or about April 29, 2003, the Company and RSVP entered into agreements regarding the restructuring of RSVP's capital structure. In addition, RSVP entered into an agreement regarding the restructuring of its management arrangements. In connection with the capital restructuring, RSVP agreed to redeem the preferred equity holders' interests in RSVP for an aggregate amount of cash and property of approximately $165.3 million (the "Restructuring Price"). Upon execution of the restructuring agreement with the RSVP preferred equity 6 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) holders, RSVP distributed to such holders an initial cash payment of $41 million and the assets that comprised its parking investments valued at approximately $28.5 million, as a payment against the Restructuring Price. The Restructuring is subject to a financing contingency with respect to the $95.8 million balance of the Restructuring Price. Upon closing, such balance is due and payable in cash. In the event the financing does not close, the cash and assets distributed to RSVP's preferred equity holders shall be treated as a distribution to the preferred equity holders and RSVP shall continue to operate under the capital structure in effect prior to the Transactions. RSVP also agreed to restructure its relationship with its current managing directors, conditioned upon the redemption of the preferred equity interests, whereby a management company formed by the managing directors will serve as a third party manager of RSVP. The management agreement will have a three-year term, subject to early termination in the event of the disposition of all of the assets of RSVP. The management agreement provides for an annual base management fee of $2.0 million in year one, $1.75 million in year two and $1.0 million in year three, an asset disposition fee equal to 2% of the aggregate consideration received in connection with any sale or other disposition of RSVP Holdings LLC or any RSVP investment (subject to a maximum amount over the term of the agreement, together with the base management fee, of $7.5 million, and a minimum amount of $3.5 million), and a subordinate one-third residual interest in RSVP's assets after the return to the common equity holders of $75 million. Under the restructured management arrangements, RSVP's former managing directors will have a right of first offer in respect of any proposed sales of assets by RSVP. In connection with the March 31, 2003 order and the Transactions, on August 12, 2003, the Bankruptcy Court authorized FrontLine to continue to perform its duties as a debtor in possession in connection with its wholly-owned subsidiary, RSI Fund Management, LLC ("RSIFM"), and, specifically, to enter into and cause the performance of the transaction described in a term sheet with GMAC Commercial Mortgage Corporation ("GMACCM"), pursuant to which, inter alia, RSVP and others would obtain amezzanine loan in an amount up to $60 million to partially fund the redemption of the preferred equity holders' interests in RSVP. The Bankruptcy Court's August 12, 2003 order also authorized FrontLine to, among other things, (a) amend RSIFM's operating agreement, as necessary, including to provide for (I) the restructuring of RSIFM as a bankruptcy-remote, special purpose entity, with at least one independent director, to the reasonable satisfaction of GMACCM, and/or (II) an independent manger; and (b) have two promissory notes from managing directors of RSVP Holdings, LLC, which notes aggregate approximately $2.8 million (together, the "Notes"), be hypothecated or pledged to GMACCM as collateral for the GMACCM transaction, either directly by FrontLine or after assignment of the Notes to RSIFM. There can be no assurance that any of the foregoing pending transactions will be completed. On May 12, 2003, the Bankruptcy Court approved an order which, among other things, authorizes the Company to continue to indemnify Scott H. Rechler and James Burnham as the persons expected to be the Debtor's only remaining director (Mr. Rechler) and officers (Messrs. Rechler and Burnham) after its current director and officer liability insurance policy expires on May 15, 2003, by granting them a superpriority administrative expense for certain Coverage (as defined in the motion) that would have been covered by the insurance policy had it been extended. 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 7 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 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 had the exclusive right to propose a plan of reorganization until July 13, 2003. The Debtors were obligated under their debtor-in-possession financing facility to file with the Delaware Bankruptcy Court, no later than May 31, 2003, a plan of reorganization in a form acceptable to the "Requisite Lenders" under the facility. On May 28, 2003, after extensive negotiations with their creditor constituencies, the Debtors filed a proposed plan of reorganization (as such has been amended, the "Plan") with the Delaware Bankruptcy Court. On June 13, 2003 and July 18, 2003, the Debtors filed amended versions of the Plan. On July 18, 2003, the Delaware Bankruptcy Court approved materials, including the Debtors' disclosure statement, to solicit votes to accept the Plan. Those materials have been distributed to creditors entitled to vote on the Plan. The deadline to vote on, and to object to confirmation of, the Plan is August 22, 2003. The Delaware Bankruptcy Court has scheduled a hearing to consider confirmation of the Plan for September 10, 2003. If the reorganization plan as proposed is approved, then FrontLine will no longer own an interest in HQ. Accordingly, HQ will no longer be consolidated with FrontLine and will be reflected in the financial statements as a discontinued operation. NOTES PAYABLE, CREDIT FACILITIES AND PREFERRED STOCK DEFAULTS As of June 30, 2003, the Company has not paid certain principal and interest due on the FrontLine Bank Credit Facility and both the FrontLine Bank Credit Facility (Note 5) and the Credit Facilities with Reckson Operating Partnership, L.P. ("Reckson") (Note 11) 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 6). 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 substantial doubt 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 BASIS OF PRESENTATION 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 8 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 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 unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (substantially consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K (the "Form 10-K") for the year ended December 31, 2002. The accompanying unaudited 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 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. 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. Participation of other (non-FrontLine) shareholders in the earnings or losses of a consolidated entity 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 entity. 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. 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." 9 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) Cost Method. Investees not accounted for under either 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 may, at times, 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 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. PROPERTY AND EQUIPMENT Property and equipment consists of property and equipment owned by HQ, and is stated at cost less accumulated depreciation and amortization. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets which range from three to seven years. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. As of June 30, 2003 and December 31, 2002, the related accumulated depreciation and amortization was $110.8 million and $102.4 million, respectively. DEFERRED FINANCING COSTS The Company amortizes deferred financing costs over the term of the related debt. Amortization of deferred financing costs is included as a component of interest expense in the accompanying consolidated statements of operations. Deferred financing costs totaled zero and $7.6 million at June 30, 2003 and December 31, 2002, respectively, net of accumulated amortization of zero and $11.8 million, respectively. Subsequent to the filing of HQ's Plan of Reorganization and Disclosure Statement during the second quarter of 2003, HQ recorded a $6.4 million non-cash charge to reorganization costs for the write-off of the remaining balance of deferred financing costs associated with the senior secured debt. 10 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 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. During the six months ended June 30, 2003, 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, the Company did not have any goodwill or indefinite-lived intangible assets recorded at December 31, 2001. Accordingly, adoption of FAS 142 did not have an impact on the Company's financial condition or results of operations. The Company does not have any goodwill or indefinite-lived assets recorded at March 31, 2003. 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. FAS 144 primarily impacts 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. 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 approximately $0.1 million and $4.8 million related to the closure of centers pursuant to restructurings during the three and six-month periods ended June 30, 2003, respectively. 11 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 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. 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 June 30, 2003 and December 31, 2002, all of HQ and 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. 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 June 30, 2003, 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 2003 and 2002, 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 period, 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. 12 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. For the three and six months ended June 30, 2003 and 2002 the Company's pro forma information follows (in thousands, except per share data):

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, the Company adopted this new rule on January 1, 2003 and did 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. 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, accounts receivable and accounts payable because 13 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) of the short maturity of those instruments. Other than as disclosed in Notes 5 and 11, the estimated fair values of the Company's long-term debt approximate the recorded balances. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant assumptions and estimates relate to the lives and recoverability of long-lived assets. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior period amounts and segment disclosures have been reclassified to conform to the current period presentation. 14 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 3. INTEREST IN HQ GLOBAL AND PREDECESSOR ENTITIES OVERVIEW HQ is a provider of flexible officing solutions. 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, in certain cases, video teleconferencing capabilities. HQ also provides similar services for those businesses and individuals that do not require offices on a full-time basis. As of June 30, 2003 HQ owned, operated, or franchised 288 business centers, which are included in continuing operations and are primarily located in the United States. There were 6 business centers operating at June 30, 2003 that were held for sale and included in discontinued operations or in the process of being closed. HQ's wholly-owned subsidiary is the franchisor of 19 domestic and 53 international business centers for unrelated franchisees. Excluding franchised centers, HQ owned and operated 216 business centers as of June 30, 2003. OWNERSHIP BY FRONTLINE As of June 30 2003, FrontLine's ownership interest in HQ was approximately 56%. 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 until January 8, 2005, at the then determined fair value of the interest. If the reorganization plan as proposed (Note 1) is approved, then FrontLine will no longer own an interest in HQ. Accordingly, HQ will no longer be consolidated with FrontLine and will be reflected in the financial statements as a discontinued operation. 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 at June 30, 2003 and December 31, 2002 and the statements of operations for the three and six-month periods ended June 30, 2003 and 2002, and statements of cash flows for the six-month periods ended June 30, 2003 and 2002 present the European businesses as a discontinued operation. On May 8, 2003 the Delaware Bankruptcy Court approved the sale of certain assets of HQ's United Kingdom assets free and clear of all liens, claims, encumbrances and other interests. Upon closing of the sale, HQ will have no substantial assets in the United Kingdom. The asset sale took the form of a sale by a duly appointed receiver with authority under the laws of the United Kingdom. The sale is contingent upon completion of certain conditions, including landlord consent, release of landlord guarantees and the release of certain finance agreements. Because of the uncertainty related to the sale proceeds if any, the Company has not recorded a gain on the sale of these assets and continues to value these assets at zero. 15 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 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. 16 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) HQ GLOBAL AND PREDECESSOR ENTITIES BALANCE SHEETS (IN THOUSANDS)

17 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) HQ GLOBAL AND PREDECESSOR ENTITIES STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

18 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) HQ GLOBAL AND PREDECESSOR STATEMENTS OF CASH FLOWS (IN THOUSANDS)

19 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 4. OTHER OWNERSHIP INTERESTS The Company's ownership interests in its investees are classified according to the applicable accounting method utilized at June 30, 2003 and December 31, 2002. The carrying value of equity method investments represents the Company's acquisition costs 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 June 30, 2003, are as follows (in thousands):

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

RECKSON STRATEGIC Reckson Strategic Venture Partners, LLC ("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 has a carried interest which provides for the RSVP Managing Directors to receive a share in the profits of Reckson Strategic after the Company, UBS Real Estate Securities, Inc. ("UBS Real Estate"), formerly Paine Webber Real Estate Securities, Inc., and Stratum Realty Fund, L.P. ("Stratum") have received certain minimum returns and a return of capital. UBS Real Estate 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, which is accounted for under the equity method, were $12.4 million and $12.3 million as of June 30, 2003 and December 31, 2002, respectively. See Note 1 for current developments. 20 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 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. 21 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) FRONTLINE PARENT AND OTHER INTERESTS BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

22 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) FRONTLINE PARENT AND OTHER INTERESTS STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

23 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) FRONTLINE PARENT AND OTHER INTERESTS STATEMENTS OF CASH FLOWS (IN THOUSANDS)

24 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 5. NOTES PAYABLE HQ DEBTOR-IN-POSSESSION FACILITY In connection with HQ's bankruptcy filing (See 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 through June 30, 2003, will incur interest at prime plus 3%. HQ and its lenders have agreed to extend this facility through and including September 30, 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 June 30, 2003, there was $188.6 million in outstanding borrowings under the Term Loans and $40.0 million in borrowings outstanding under the Revolver Loans. As of June 30, 2003, HQ had letters of credit outstanding in the aggregate amount of $14.8 million for landlord security deposits. Such letters of credit are collateralized by $0.2 million in cash and $14.6 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 1.12% at June 30, 2003) plus 3.25% to 4.0% for one, three or nine-month periods at the election of HQ or prime (4.22% at June 30, 2003) plus 2.25% to 3.00%. The weighted average interest rate on borrowings under the Term Loans and the Revolver Loans at June 30, 2003, 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. The stated maturities of borrowings outstanding under the HQ Credit Facility subsequent to June 30, 2003 are as follows (in thousands): TWELVE MONTHS ENDED AMOUNT JUNE 30, --------------------------- -------- 2003 and arrears........... $ 69,619 2004....................... 58,976 2005....................... 100,012 -------- Total...................... $228,607 ======== 25 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 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 June 30, 2003 and December 31, 2002. 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 principal 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 June 30, 2003 and December 31, 2002. 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 June 30, 2003 and December 31, 2002. HQ is in compliance with its financial covenants for 2003 as set forth in the subsequent amendments to the Debtor-in-Possession facility. FRONTLINE BANK CREDIT FACILITY 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 election of FrontLine, at the Prime rate plus 5%. 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. Since the entire outstanding balance of $25.0 million and accrued interest was not repaid at this time, FrontLine became in default. Such amount is classified as a current liability in the accompanying Consolidated Balance Sheet. The weighted average interest rate of the outstanding borrowings at such date was 7.66%. Any 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. 26 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 6. 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 June 30, 2003. 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 June 30, 2003, 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. 7. SHAREHOLDERS' DEFICIENCY 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 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. In connection with the HQ Merger, the Company entered into a stockholders agreement (the "HQ Stockholders Agreement") with certain of the stockholders of HQ Global which provide 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 did not complete an initial public offering of its shares. On February 25, 2002, such stockholders irrevocably waived their Put Rights. 27 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 8. LONG-TERM INCENTIVE PLAN In March 2000, the Compensation Committee of the Board of Directors adopted a long-term incentive plan (the "LTIP"). The terms of the LTIP are described in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. In April 2000, FrontLine paid advances aggregating $2.8 million on future payments under the long-term incentive plan to its four executive officers at that date. 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. 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 the three and six months ended June 30, 2003 and 2002, $0.1 million of amortization related to the LTIP was recorded. 9. 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. In 2003, HQ has recorded an additional $7.7 million of professional services costs associated with the Chapter 11 proceeding and a $6.4 million non-cash charge for the write-off of the remaining balance of deferred financing costs associated with the senior secured debt. The following table summarizes the accrued charges related to reorganization (in thousands): Write off of Deferred Professional Financing Costs Costs non-cash Total ------------ -------------- --------- 2002 charges $ 8,464 $ 24,722 $ 33,186 Non-cash reduction -- (24,722) (24,722) Cash expenditures (5,024) -- (5,024) -------- -------- -------- Balance at December 31, 2002 3,440 -- 3,440 First quarter 2003 charges 3,126 -- 3,126 Cash expenditures (3,048) -- (3,048) -------- -------- -------- Balance at March 31, 2003 3,518 -- 3,518 Second quarter 2003 charges 4,558 6,400 10,958 Non-cash reduction -- (6,400) (6,400) Cash expenditures (3,681) -- (3,681) -------- -------- -------- Balance at June 30, 2003 $ 4,395 $ -- $ 4,395 ======== ======== ======== 28 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) FRONTLINE FrontLine has incurred approximately $0.1 million of reorganization costs, during each of the six-month periods ended June 30, 2003 and 2002. 10. RESTRUCTURING HQ In 2002, HQ recorded a restructuring charge 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. In 2003, HQ recorded $1.2 million in severance costs and $12.4 million related to additional center closures. The non-cash credits in lease costs for the second quarter of 2003 relate to the assumption of renegotiated leases. The following table summarizes the accrued charges related to restructuring (in thousands):

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 first quarter of 2002. As a result of this Restructuring, FrontLine has recognized cash and non-cash restructuring charges of $0.1 million during the three and six months ended June 30, 2003, and $0.1 and $0.3 million during the three-month and six-month periods ended June 30, 2002, respectively. 29 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) The restructuring costs recognized during 2003 consist entirely of LTIP amortization for the remaining officer. The restructuring costs recognized during the first and second quarters of 2002 consist principally of professional fees and other expenses. 11. 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. HQ is a tenant under several leases with Reckson Associates and affiliates. For the six months ended June 30, 2003, HQ made payments of $1.9 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 six months ended June 30, 2003, HQ made payments of $8.9 million 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 six months ended June 30, 2003, HQ made payments of $0.6 million for rent and other charges under such leases. FRONTLINE The Company has a credit facility with Reckson Operating Partnership, L.P. ("Reckson") in the amount of $100 million (the "FrontLine Facility"). Reckson has advanced the Company $93.4 million at June 30, 2003 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 June 30, 2003, Reckson has advanced FrontLine $49.3 million under the Reckson Strategic Facility. The aggregate principal amount outstanding and due Reckson at June 30, 2003 under both credit facilities was $142.7 million. Interest accrued on these facilities at June 30, 2003, was $46.7 million. Both of the FrontLine and Reckson Strategic Facilities expired in June 2003. 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 30 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) Strategic-controlled joint ventures through June 30, 2003. There is no remaining availability under the Credit Facilities. At June 30, 2003, 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 each of the three months ended June 30, 2003 and 2002 was approximately $0.1 million. 12. CONTINGENCIES Reference is made to the lawsuit captioned OmniOffices, Inc. et al. v. Joseph Kaidanow et al. set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In connection with such litigation, 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 filing. 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. Reference is made to the lawsuit captioned Joseph Kaidanow and Robert Arcoro v. CarrAmerica Realty Corporation, HQ Global Workplaces, Inc., Thomas A. Carr, Philip L. Hawkins, C. Ronald Blankenship, Oliver T. Carr, and Gary Kusin set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In connection with such litigation, 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 (the "Delaware Bankruptcy Court"). HQ informed the Court that the consolidated action was 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. This adversary proceeding remains pending before the Delaware Bankruptcy Court. 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 31 FRONTLINE CAPITAL GROUP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 (UNAUDITED) 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 June 30, 2003, 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 June 30, 2003, 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, FrontLine agreed to indemnify CarrAmerica for its guarantees of certain HQ leases. As of June 30, 2003, the remaining lease commitments in excess of the existing letter of credit were $26.3 million. Subsequent to June 30, 2003, HQ assumed one lease with a provision in that assumption to reduce the guaranty by $10.6 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. ITEM 2. 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 Quarterly Report Form 10-Q 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, 32 results of any recapitalization of HQ and its bankruptcy, 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 Property and equipment consists of property and equipment owned by HQ, and is stated at cost less accumulated depreciation and amortization. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets which range from three to seven years. Leasehold improvements are amortized over the lesser of the term of the related lease or the estimated useful lives of the assets. 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 33 discussion. As of June 30, 2003, 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 March 31, 2003 or December 31, 2002. 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. 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 $4.7 million and zero related to the closure of centers pursuant to restructurings during the three and six-month periods ended June 30, 2003 and 2002, respectively. 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 Workplaces, 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") to highlight its holdings in HQ 34 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 years 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 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 "HQ Merger") of VANTAS with HQ Global Workplaces, Inc. ("Old HQ"), HQ Global. The entity representative of Old HQ and its 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. 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. 35 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 All of FrontLine's operating revenues and operating expenses for the three and six months ended June 30, 2003 and 2002 were attributable to HQ. The following is a discussion of HQ's results of operations for such periods. RESULTS OF CONTINUING OPERATIONS THREE MONTHS ENDED JUNE 30, 2003 AND 2002 Revenues. Total business center revenues for the three-month period ended June 30, 2003 were $70.3 million, representing a decrease in 2003 of $13.2 million, or 15.8%, compared to 2002. Business centers with three months of activity for both periods under comparison ("Same Centers") had revenues for the three-month period ended June 30, 2003 and 2002 of $69.4 million and $66.3 million, respectively, representing an increase in 2003 of $3.1 million, or 4.7%, compared with 2002. The increase in revenues in 2003 is attributable to an increase in utilization of services per occupant. Business centers that were closed subsequent to April 1, 2002 ("Closed Centers") had revenues for the three-month period ended June 30, 2003 and 2002 of $0.8 million and $17.3 million, respectively. Subsequent to April 1, 2002, the Company has ceased operations in approximately 70 business centers. Business centers opened subsequent to April 1, 2002 ("Development Centers") had revenues for the three months ended June 30, 2003 and 2002 of $0.2 million and zero, respectively. Expenses. Total business center expenses for the three-month period ended June 30, 2003 were $58.0 million, representing a decrease of $16.4 million, or 22.0%, from the three-month period ended June 30, 2002. Business centers with three months of activity for both periods under comparison ("Same Centers") had expenses for the three-month period ended June 30, 2003 and 2002 of $57.0 million and $56.8 million, respectively, representing an increase in 2003 of $0.2 million, or 0.3%, compared with 2002. The increase is attributable to an increase in center general and administrative costs offset by favorable lease renegotiations. Business centers that were closed subsequent to April 1, 2002 ("Closed Centers") had expenses for the three-month period ended June 30, 2003 and 2002 of $1.0 million and $17.6 million, respectively. Business centers opened subsequent to April 1, 2002 ("Development Centers") had expenses for the three months ended June 30, 2003 and 2002 of $72 thousand and zero, respectively. Business Center Operating Income ("BCOI"). For the three-month period ended June 30, 2003, BCOI was $12.3 million as compared with $8.8 million for three-month period ended June 30, 2002. The BCOI 36 as a percentage of total revenues ("BCOI Margin") was 17.5% for the three months ended June 30, 2003 as compared to 10.5% for 2002. The increase in BCOI Margin is primarily attributable to the closure of unprofitable centers and assumption of existing leases at more favorable terms. Same Center BCOI was $12.4 million and $9.4 million for the three-month periods ended June 30, 2003 and 2002, respectively, representing an increase in 2003 of $3.0 million from 2002. The BCOI Margin from Same Centers for the three-month period ended June 30, 2003 was 17.9% as compared with 14.2% in the corresponding period in 2002. Closed Center BCOI was negative $0.2 million and negative $0.3 million for the three-month periods ended June 30, 2003 and 2002, respectively. Development Center BCOI was a $0.1 million and zero, for the three months ended June 30, 2003 and 2002, respectively. Corporate General and Administrative Expenses. For the three- month periods ended June 30, 2003 and 2002, corporate general and administrative expenses were $7.7 million and $9.5 million, respectively. Such expenses were 10.9% and 11.4%, respectively, of total revenue. Reorganization Charges. For the three-month periods ended June 30, 2003 and 2002, reorganization charges associated with HQ's bankruptcy filing were $11.0 million and $4.4 million, respectively. For the period ended June 30, 2003, reorganization charges consisted of $4.6 million of professional fees and a $6.4 million non-cash charge for the write-off of the remaining balance of deferred financing costs associated with the senior secured debt. For the period ended June 30, 2002, reorganization charges consisted of professional fees. Restructuring Charges. For the three months ended June 30, 2003 and 2002, restructuring charges were a negative $4.7 million and $7.2 million, respectively. For the periods ended June 30, 2003 and 2002, restructuring charges consist of center closure and employee severance costs. The non-cash reduction in Lease Costs for the second quarter of 2003 relates to the assumption of renegotiated leases. Depreciation and Amortization. For the three-month periods ended June 30, 2003 and 2002, depreciation and amortization expenses were $9.2 million and $10.6 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. Interest Expense. For the three-month periods ended June 30, 2003 and 2002, net interest expense was $3.5 million and $5.1 million, respectively. The decrease in interest expense is due to ceasing to accrue interest on the senior secured debt after May 28, 2003, the date of filing of HQ's Plan of Reorganization and Disclosure Statement, and lower interest rates. DISCONTINUED OPERATIONS Income From Discontinued Operations. For the three-month period ended June 30, 2003, income from discontinued operations was zero, as compared to a gain of $2.9 million for the three-month period ended June 30, 2002. The period ended June 30, 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 $2.5 million for the three month ended June 30, 2002. 37 As indicated in Note 3 to the financial statements, the Company has entered into an agreement to sell substantially all of the assets in the United Kingdom. RESULTS OF CONTINUING OPERATIONS SIX MONTHS ENDED JUNE 30, 2003, COMPARED WITH SIX MONTHS ENDED JUNE 30, 2002 REVENUES. Total business center revenues for the six months ended June 30, 2003 were $144.1 million, representing a decrease of $27.9 million, or 16.2%, from the six months ended June 30, 2002. Business centers with six months of activity for both periods under comparison ("Same Centers") had revenues for the six months ended June 30, 2003 and 2002 of $135.6 million and $135.2 million, respectively, representing an increase in 2003 of $0.4 million, or 0.3%, compared with 2002. Business centers that were closed subsequent to January 1, 2002 ("Closed Centers") had revenues for the six months ended June 30, 2003 and 2002 of $8.1 million and $36.8 million, respectively. Subsequent to January 1, 2002, the Company has ceased operations in approximately 80 business centers. Business centers opened subsequent to January 1, 2002 ("Development Centers") had revenues for the six months ended June 30, 2003 and 2002 of $0.4 million and zero, respectively. EXPENSES. Total business center expenses for the six months ended June 30, 2003 were $122.3 million, representing a decrease of $30.9 million, or 20.2%, from the six months ended June 30, 2002. Business centers with six months of activity for both periods under comparison ("Same Centers") had expenses for the six months ended June 30, 2003 and 2002 of $113.4 million and $115.7 million, respectively, representing a decrease in 2003 of $2.3 million, or 2.0%, compared with 2002. The decrease is attributable to an increase in center general and administrative costs offset by favorable lease renegotiations. Business centers that were closed subsequent to January 1, 2002 ("Closed Centers") had expenses for the six months ended June 30, 2003 and 2002 of $8.5 million and $37.5 million, respectively. Subsequent to January 1, 2002, the Company has ceased operations in approximately 80 business locations. Business centers opened subsequent to January 1, 2002 ("Development Centers") had expenses for the six months ended June 30, 2003 and 2002 of $0.4 million and zero, respectively. Business Center Operating Income ("BCOI"). For the six months ended June 30, 2003, BCOI was $21.8 million as compared with $18.8 million for 2002. The BCOI as a percentage of total revenues ("BCOI Margin") was 15.1% for the six months ended June 30, 2003 as compared to 10.9% for 2002. The increase in BCOI Margin can be primarily attributed to the closure of unprofitable centers and assumption of existing leases at more favorable terms. Same Center BCOI was $22.2 million and $19.6 million for the six months ended June 30, 2003 and 2002, respectively, representing an increase in 2003 of $2.6 million from 2002. The BCOI Margin from Same Centers for the six months ended June 30, 2003 was 15.4% as compared with 11.4% in the corresponding six months in 2002. Development Center BCOI was a negative 52 thousand and zero, for the six months ended June 30, 2003 and 2002, respectively. 38 Closed Center BCOI was negative $0.4 million and negative $0.7 million for the six months ended June 30, 2003 and 2002, respectively. Corporate General and Administrative Expenses. For the six months ended June 30, 2003 and 2002, corporate general and administrative expenses were $16.5 million and $20.5 million, respectively. Corporate general and administrative expenses were 11.5% and 11.9%, respectively, of total revenue. Reorganization Charges. For the six months ended June 30, 2003 and 2002, reorganization charges associated with HQ's bankruptcy filing were $14.1 million and $14.2 million, respectively. For the six months ended June 30, 2003, reorganization charges consisted of professional fees of $7.7 million and a $6.4 million non-cash charge for the write-off of the remaining balance of deferred financing costs associated with the senior secured debt. For the six months ended June 30, 2002, reorganization charges consisted of professional fees of $8.1 million and a write-off of $6.1 million of deferred financing costs associated with the Company's Mezzanine Loan. Restructuring Charges. For the six months ended June 30, 2003 and 2002, restructuring charges were $13.5 million and $7.2 million, respectively. The charges related to center closure and employee severance costs. Depreciation and Amortization. For the six months ended June 30, 2003 and 2002, depreciation and amortization expenses were $18.6 million and $21.3 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. Interest Expense. For the six months ended June 30, 2003 and 2002, net interest expense was $8.5 million and $13.9 million, respectively. The decrease in interest expense is due to ceasing to accrue interest on the Mezzanine Loan after March 13, 2002, the date of HQ's bankruptcy filing, ceasing to accrue interest on the senior secured debt after May 28, 2003, the date of filing of HQ's Plan of Reorganization and Disclosure Statement, and lower interest rates. DISCONTINUED OPERATIONS Income (Loss) from Discontinued Operations. For the six months ended June 30, 2003, income from discontinued operations was a loss of $27 thousand, as compared to $3.0 million gain for the six months ended June 30, 2002. The period ended June 30, 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 $2.4 million for the six months ended June 30, 2002. As indicated in Note 3 to the financial statements, the Company has entered into an agreement to sell substantially all of the assets in the United Kingdom. PARENT AND OTHER INTERESTS THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 As a result of the Restructuring discussed in Note 10 of the Consolidated Financial Statements, FrontLine changed from a company that invested in early stage companies which leveraged the Internet, into one focused on highlighting the value of HQ. The restructuring costs incurred in the three and six month periods ended June 30, 2003 and 2002, consisted principally of professional fees and other expenses. The reorganization costs incurred in the 39 three and six month periods ended June 30, 2003 and 2002, consisted principally of legal fees. The amount of restructuring and reorganization costs have changed significantly between the periods. FrontLine's general and administrative expenses were $0.4 million and $1.0 million during the three and six months periods ended June 30, 2003, respectively, consistent with the corresponding periods in 2002. These expense levels reflect the consistent reduced operations subsequent to the Restructuring and primarily relate to insurance expense. Previous to 2003, a significant portion of FrontLine's net loss had been derived from companies in which it held minority ownership interests. The equity in net loss and impairment of unconsolidated companies was $1.0 million and $1.3 million for the three and six month periods ended June 30, 2002, respectively, all attributable to the equity in net loss of unconsolidated companies. In the 2003 periods, FrontLine has earned a $0.1 million management fee in each quarter and has not incurred any further equity in net loss of unconsolidated companies. 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 September 30, 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 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. 40 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. By order dated July 2, 2003, the Bankruptcy Court has further extended FrontLine's exclusive period through and including August 30, 2003. 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, which period may be extended further by the Bankruptcy Court. By order dated March 31, 2003, the Bankruptcy Court authorized FrontLine to, among other things, in an attempt to resolve an ongoing dispute with the preferred members (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 ("RSVP") and with respect to New World Realty, LLC annexed to such order (collectively, the "Transactions"); and (b) perform such actions and take all steps necessary to implement and consummate such Transactions. Pursuant to such authorization, on or about April 29, 2003, the Company and RSVP entered into agreements regarding the restructuring of RSVP's capital structure. In addition, RSVP entered into an agreement regarding the restructuring of its management arrangements. In connection with the capital restructuring, RSVP agreed to redeem the preferred equity holders' interests in RSVP for an aggregate amount of cash and property of approximately $165.3 million (the "Restructuring Price"). Upon execution of the restructuring agreement with the RSVP preferred equity holders, RSVP distributed to such holders an initial cash payment of $41 million and the assets that comprised its parking investments valued at approximately $28.5 million, as a payment against the Restructuring Price. The Restructuring is subject to a financing contingency with respect to the $95.8 million balance of the Restructuring Price. Upon closing, such balance is due and payable in cash. In the event the financing does not close, the cash and assets distributed to RSVP's preferred equity holders shall be treated as a distribution to the preferred equity holders and RSVP shall continue to operate under the capital structure in effect prior to the Transactions. RSVP also agreed to restructure its relationship with its current managing directors, conditioned upon the redemption of the preferred equity interests, whereby a management company formed by the managing directors will serve as a third party manager of RSVP. The management agreement will have a three-year term, subject to early termination in the event of the disposition of all of the assets of RSVP. The management agreement provides for an annual base management fee of $2.0 million in year one, $1.75 million in year two and $1.0 million in year three, an asset disposition fee equal to 2% of the aggregate consideration received in connection with any sale or other disposition of RSVP Holdings LLC or any RSVP investment (subject to a maximum amount over the term of the agreement, together with the base management fee, of $7.5 million, and a minimum amount of $3.5 million), and a subordinate one-third residual interest in RSVP's assets after the return to the common equity holders of $75 million. Under the restructured management arrangements, RSVP's former managing directors will have a right of first offer in respect of any proposed sales of assets by RSVP. In connection with the March 31, 2003 order and the Transactions, on August 12, 2003, the Bankruptcy Court authorized FrontLine to continue to perform its duties as a debtor in possession in connection with its wholly-owned subsidiary, RSI Fund Management, LLC ("RSIFM") and, specifically, to enter into and cause the performance of the transaction described in a term sheet with GMAC Commercial Mortgage Corporation ("GMACCM"), 41 pursuant to which, inter alia, RSVP and others would obtain a mezzanine loan in an amount up to $60 million to partially fund the redemption of the preferred equity holders' interests in RSVP. The Bankruptcy Court's August 12, 2003 order also authorized FrontLine to, among other things, (a) amend RSIFM's operating agreement, as necessary, including to provide for (I) the restructuring of RSIFM as a bankruptcy-remote, special purpose entity, with at least one independent director, to the reasonable satisfaction of GMACCM, and/or (II) an independent manger; and (b) have two promissory notes from managing directors of RSVP Holdings, LLC, which notes aggregate approximately $2.8 million (together, the "Notes"), be hypothecated or pledged to GMACCM as collateral for the GMACCM transaction, either directly by FrontLine or after assignment of the Notes to RSIFM. There can be no assurance that any of the foregoing pending transactions will be completed. On May 12, 2003, the Bankruptcy Court approved an order which, among other things, authorizes the Company to continue to indemnify Scott H. Rechler and James Burnham as the persons expected to be the Debtor's only remaining director (Mr. Rechler) and officers (Messrs. Rechler and Burnham) after its current director and officer liability insurance policy expires on May 15, 2003, by granting them a superpriority administrative expense for certain Coverage (as defined in the motion) that would have been covered by the insurance policy had it been extended. 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 June 30, 2003, 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 11 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 June 30, 2003, and due to accrued interest, has no remaining availability. The Company had $49.3 million outstanding under the Reckson Strategic Facility at June 30, 2003. 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 42 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 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. 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. 43 FrontLine's operations do not require significant capital expenditures. There were no significant capital expenditure commitments as of June 30, 2003. 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. The Company had 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 had retained legal counsel in connection with its responsibilities. However, during the second quarter of 2003, all independent directors resigned from the Board and therefore this committee no longer exists. In March 2002 Nasdaq, as a direct result of the HQ bankruptcy filing, delisted the Company's stock. 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. ITEM 3. 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. 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 44 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 June 30, 2003 (in thousands, except rates).

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 June 30, 2003 was $12.4 million, approximately 8.4% of total assets, thereby mitigating FrontLine's future equity market risk related to these interests. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by 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-15 and 15d-15 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. PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to the lawsuit captioned OmniOffices, Inc. et al. v. Joseph Kaidanow et al. set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In connection with such litigation, 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 45 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 filing. 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. Reference is made to the lawsuit captioned Joseph Kaidanow and Robert Arcoro v. CarrAmerica Realty Corporation, HQ Global Workplaces, Inc., Thomas A. Carr, Philip L. Hawkins, C. Ronald Blankenship, Oliver T. Carr, and Gary Kusin set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In connection with such litigation, 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 (the "Delaware Bankruptcy Court"). HQ informed the Court that the consolidated action was 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. This adversary proceeding remains pending before the Delaware Bankruptcy Court. 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 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 46 the terms of a stockholders agreement, FrontLine agreed to indemnify CarrAmerica for its guarantees of certain HQ leases. As of June 30, 2003, the remaining lease commitments in excess of the existing letter of credit was $26.3 million. Item 2. Changes in Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities (i) HQ. HQ has received notice from the lenders under its senior credit agreement (the "Credit Agreement") that it is in default with respect to certain of its covenant and payment obligations under such agreement. On September 30, 2001, HQ elected not to make the principal amortization payment of $4.1 million due and payable under the Credit Agreement. On November 1, 2001, HQ entered into a forbearance agreement (the "Agreement"), effective as of October 1, 2001, with the lenders party to the Credit Agreement, wherein the lenders have agreed for a certain period of time to forbear from the enforcement of their remedies under the Credit Agreement with respect to HQ's default. For additional information regarding this matter, see "Note 5 -Notes Payable" to the Company's financial statements included elsewhere in this report, which note is incorporated by reference into this item. On September 30, 2001, HQ elected not to make the interest payment due and payable with respect to its $125 million senior subordinated credit facility (the "Mezzanine Loan") in the amount of $4.2 million. For additional information regarding this matter, see "Note 5 - Notes Payable" to the Company's financial statements included elsewhere in this report, which note is incorporated by reference into this item. (ii) FrontLine. The Company failed to repay the $25 million of principal and $0.2 million of interest due under the Company's $25 million secured credit facility, which matured on October 25, 2001. The Company is currently in negotiations to further extend the maturity of this facility. For additional information regarding this matter see "Note 5 - Notes Payable" to the Company's financial statements included elsewhere in this report, which note is incorporated by reference into this item. As a result of the Company's failure to pay the principal and interest under the senior facility when due, an event of default has occurred under the Company's credit facilities with Reckson Operating Partnership, L.P. For additional information regarding this matter, see "Note 11 - Transactions with Related Parties" to the Company's financial statements included elsewhere in this report, which note is incorporated by reference into this item. On February 6, 2002, the Company elected not to make the dividend payment due on the Company's Series A convertible cumulative preferred stock in the aggregate amount of $0.6 million. As a result of the failure to make the dividend payment, dividends on the Series A preferred stock will accrue quarterly at the rate of 10.875%. If dividends are in arrears for more than two quarterly periods, the holders of the Series A preferred stock will be entitled to elect two additional members to the Company's Board of Directors. Dividends on the Company's Series A preferred stock are cumulative, and therefore, all accrued and unpaid dividends on the Company's Series A preferred stock must be paid in full prior to commencing the payment of cash dividends on the Company's common stock. Item 4. Submission of Matters to a Vote of Securities Holders--None Item 5. Other Information--None Item 6. Exhibits and Reports on Form 8-K 47 (a) Exhibits 31.1 Certification of Scott H. Rechler, President and Chief Executive Officer of the Registrant, pursuant to Rule 13a-14(a)/15(d)-14(a) 31.2 Certification of James D. Burnham, Chief Financial Officer and Treasurer of the Registrant, pursuant to Rule 13a-14(a)/15(d)-14(a) 32.1 Certification of Scott H. Rechler, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of James D. Burnham, Chief Financial Officer and Treasurer, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) During the three months ended June 30, 2003, the Registrant filed the following reports: On April 15, 2003, the Registrant submitted an Annual Report on Form 10-K to report financial results for the year ended December 31, 2002. On May 20, 2003, the Registrant submitted a Quarterly Report on Form 10-Q to report financial results for the quarter ended March 31, 2003. 48 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRONTLINE CAPITAL GROUP By: \s\ Scott H. Rechler ------------------------------------------------------- Scott H. Rechler, President and Chief Executive Officer (Principal Executive Officer) By: \s\ James D. Burnham ------------------------------------------------------- James D. Burnham, Chief Financial Officer and Treasurer (Chief Accounting Officer) Date: August 19, 2003 49

FRONTLINE CAPITAL GROUP 10-Q