SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
______________
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 27, 1998
RECKSON SERVICE INDUSTRIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
1-14183 11-3383642
(Commission File Number) (IRS Employer Id. Number)
225 Broadhollow Road 11747
Melville, New York (Zip Code)
(Address of principal executive offices)
(516) 719-7400
(Registrant's telephone number, including area code)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant hereby amends the following items, financial statements,
exhibits or other portions of its Current Report on Form 8-K, as filed with
the Securities and Exchange Commission on September 11, 1998, as set forth in
the pages attached hereto.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) and (b) Financial Statements and Pro Forma Financial Information
ACQUISITION PROPERTY
Report of Independent Public Accountants
Combined Balance Sheets for the years ended October 31, 1996 and 1997
and for the six months ended April 30, 1998 (unaudited).
Combined Statements of Income for the years ended October 31, 1996 and
1997 and the six months ended April 30, 1997 and 1998 (unaudited).
Combined Statements of Stockholders' Equity
Combined Statements of Cash Flows for the years ended October 31, 1995,
1996 and 1997 and for the six months ended April 30, 1997 and 1998
(unaudited).
Notes to Combined Financial Statements
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1998
(unaudited).
Pro Forma Condensed Consolidating Statement of Operations for the six
months ended June 30, 1998 (unaudited).
Pro Forma Condensed Consolidating Statement of Operations for the year
ended December 31, 1997 (unaudited).
Notes to Pro Forma Financial Statements
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Dominion:
We have audited the accompanying combined balance sheets of Dominion (see Note
1) as of October 31, 1996 and 1997, and the related combined statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended October 31, 1997. These combined financial statements are the
responsibility of Dominion's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Dominion as of
October 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Oklahoma City, Oklahoma,
July 2, 1998
<PAGE>
<TABLE>
DOMINION
--------
COMBINED BALANCE SHEETS
-----------------------
<CAPTION>
October 31, April 30,
------------------------------- -----------
ASSETS 1996 1997 1998
------ ------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,965,637 $ 8,230,488 $ 7,508,151
Short-term investment securities 1,240,914 633,008 966,218
Contract receivables, including retainage 7,817,014 8,630,189 3,389,185
Costs and estimated earnings in excess of billings on
uncompleted contracts 34,869 556,473 1,115,321
Due from affiliates 56,517 301,437 297,813
Other current assets 738,194 747,688 622,195
------------- ------------ ------------
Total current assets 17,853,145 19,099,283 13,898,883
LONG-TERM INVESTMENT SECURITIES 3,171,267 3,972,461 3,650,207
PROPERTY AND EQUIPMENT, net of accumulated depreciation
34,281,114 38,557,825 60,859,022
ACCRUED RENTS RECEIVABLE 2,960,062 3,177,245 3,294,942
OTHER ASSETS 1,821,378 6,041,954 2,730,370
------------- ------------- -------------
Total assets $ 60,086,966 $ 70,848,768 $ 84,433,424
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable, including retainage $ 5,779,655 $ 9,783,410 $ 7,275,628
Billings in excess of costs and estimated earnings on uncompleted
contracts 3,477,267 3,328,860 2,147,094
Accrued payroll 211,605 318,387 873,589
Current portion of long-term debt 2,740,241 3,056,157 6,936,388
Due to stockholder 580,000 487,731 525,529
------------- ------------- -------------
Total current liabilities 12,788,768 16,974,545 17,758,228
LONG-TERM DEBT, net 28,472,362 26,608,327 40,011,292
------------- ------------- -------------
STOCK WARRANT PAYABLE - 3,392,347 3,802,592
------------- ------------- -------------
Total liabilities 41,261,130 46,975,219 61,572,112
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 15) - - -
STOCKHOLDERS' EQUITY:
Common stock (Note 11) 4,663 4,805 4,805
Additional paid-in capital 45,372 4,674,998 5,445,471
Retained earnings 18,831,751 19,237,822 17,459,226
Treasury stock, at cost (18,203) (18,203) (18,203)
Unrealized loss on securities available-for-sale, net of applicable
income taxes (37,747) (25,873) (29,987)
------------- ------------- -------------
Total stockholders' equity 18,825,836 23,873,549 22,861,312
------------- ------------- -------------
Total liabilities and stockholders' equity $ 60,086,966 $ 70,848,768 $ 84,433,424
============= ============= =============
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
<TABLE>
DOMINION
--------
COMBINED STATEMENTS OF INCOME
-----------------------------
<CAPTION>
Years Ended October 31, Six Months Ended April 30,
------------------------------------------ -----------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Construction $14,445,483 $30,031,316 $61,806,322 $31,413,826 $ 6,210,569
Leasing 8,431,039 9,093,888 9,116,443 4,621,601 4,719,937
Other 1,981,111 3,719,548 4,785,020 2,304,141 876,207
----------- ----------- ----------- ---------- -----------
Total revenues 24,857,633 42,844,752 75,707,785 38,339,568 11,806,713
----------- ----------- ----------- ---------- -----------
COST OF REVENUES EARNED:
Construction 12,615,078 26,131,979 54,325,508 27,840,874 6,071,304
Leasing 1,980,753 2,365,705 2,456,120 1,173,328 1,227,711
Other 1,155,519 1,510,939 2,066,732 980,991 380,535
----------- ----------- ----------- ---------- -----------
Total cost of revenues earned 15,751,350 30,008,623 58,848,360 29,995,193 7,679,550
----------- ----------- ----------- ---------- -----------
Gross profit 9,106,283 12,836,129 16,859,425 8,344,375 4,127,163
GENERAL AND ADMINISTRATIVE EXPENSE
1,939,853 3,090,964 4,131,206 1,511,135 2,277,760
DEPRECIATION AND AMORTIZATION EXPENSE 1,399,752 1,398,722 1,258,416 707,698 896,925
----------- ----------- ----------- ---------- -----------
Operating income 5,766,678 8,346,443 11,469,803 6,125,542 952,478
----------- ----------- ----------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest expense (2,616,216) (2,673,904) (2,812,444) (1,292,822) (1,655,695)
Other, net 561,089 664,660 853,799 777,801 620,288
----------- ----------- ----------- ---------- -----------
Total other income (expense) (2,055,127) (2,009,244) (1,958,645) (515,021) (1,035,407)
----------- ----------- ----------- ---------- -----------
NET INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES
3,711,551 6,337,199 9,511,158 5,610,521 (82,929)
PROVISION (BENEFIT) FOR INCOME TAXES:
Current provision 43,426 171,098 19,348 11,400 429,732
Deferred provision (benefit) (73,649) (224,373) 289,017 246,970 -
----------- ----------- ----------- ---------- -----------
Total provision (benefit)
for income taxes (30,223) (53,275) 308,365 258,370 429,732
----------- ----------- ----------- ---------- -----------
Net income (loss) $ 3,741,774 $ 6,390,474 $ 9,202,793 $ 5,352,151 $ (512,661)
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these combined financial statements.
</TABLE>
<PAGE>
<TABLE>
DOMINION
--------
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
------------------------------------------
<CAPTION>
Unrealized Loss
Additional on Securities
Common Paid-in Retained Treasury Available-
Stock Capital Earnings Stock For-Sale
----------- ----------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1994 $ 4,663 $ 45,372 $ 12,123,289 $ (18,203) $ -
Dividends - - (1,395,393) - -
Unrealized losses during the
year - - - - (52,869)
Net income - - 3,741,774 - -
---------- ----------- -------------- ----------- ---------
BALANCE, OCTOBER 31, 1995 4,663 45,372 14,469,670 (18,203) (52,869)
Dividends - - (2,028,393) - -
Decrease in unrealized losses
during the year - - - - 15,122
Net income - - 6,390,474 - -
---------- ----------- ------------- ----------- ---------
BALANCE, OCTOBER 31, 1996 4,663 45,372 18,831,751 (18,203) (37,747)
Cancellation of common stock (100) - - - -
Issuance of common stock 242 - - - -
Dividends - - (8,340,767) - -
Contributed capital - 4,629,626 - - -
Decrease in unrealized losses
during the year - - - - 11,874
Change in year-end - - (455,955) - -
Net income - - 9,202,793 - -
----------- ----------- ------------ ---------- ---------
BALANCE, OCTOBER 31, 1997 4,805 4,674,998 19,237,822 (18,203) (25,873)
Contributed capital - 770,473 - -
Dividends - - (1,265,935) -
Increase in unrealized losses
during the period - - - - (4,114)
Net loss - - (512,661) -
----------- ------------ -------------- ----------- ----------
BALANCE, APRIL 30, 1998 (UNAUDITED)
$ 4,805 $ 5,445,471 $ 17,459,226 $ (18,203) $ (29,987)
=========== ============ =============== ========== ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
<TABLE>
DOMINION
--------
COMBINED STATEMENTS OF CASH FLOWS
----------------------------------
<CAPTION>
Six Months Ended
Years Ended October 31, April 30,
----------------------------------------- -------------------
1995 1996 1997 1997 1998
----- ----- ---- ---- ----
(Unaudited)
---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
Net income (loss) $ 3,741,774 $ 6,390,474 $ 9,202,793 $ 5,352,151 $(512,661)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities-
Depreciation and amortization 1,399,752 1,398,722 1,258,416 707,698 683,212
Accretion of debt discount and warrant
payable - - 279,877 - 1,067,998
Change in year-end - - (455,955) (455,956) -
Deferred income tax provision (benefit) (73,649) (224,373) 289,017 289,017 140,323
Accrued rents receivable (806,370) (484,087) (217,183) (92,561) -
Provision for bad debt - 540,000 - - -
Loss on sale of investments 44 90,159 31,467 - -
Deferred relocation fees - 152,500 - - -
Changes in assets and liabilities-
Increase in contract receivables (721,552) (5,398,460) (813,175) (2,115,989) 5,241,004
(Increase) decrease in costs and estimated
earnings in excess of billings on uncompleted
contracts (62,274) 27,405 (521,604) (610,972) (558,848)
(Increase) decrease in due from affiliates
72,437 (45,432) (244,920) (211,624) 125,493
(Increase) decrease in other current assets
92,620 345,092 (249,248) 43,504 3,624
Decrease (increase) in other assets (72,556) (142,792) 185,726 (83,659) 836,211
Increase in accounts payable 872,656 3,298,541 4,003,755 2,557,416 (2,507,782)
(Decrease) increase in billings in excess of
costs and estimated earnings on uncompleted
contracts 466,588 2,711,686 (148,407) 1,955,498 (1,181,766)
Increase (decrease) in accrued payroll (113,272) 59,485 106,782 59,073 555,202
(Decrease) increase in due to stockholder
- 580,000 (92,269) (54,432) 37,798
--------- ---------- ----------- ---------- ----------
Net cash provided by operating activities 4,796,198 9,298,920 12,615,072 7,339,164 3,929,808
---------- ---------- ----------- ---------- ----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Proceeds from the sale of investments 315,000 1,041,153 521,450 45,689 318,140
Purchase of investments (498,222) (1,270,486) (671,396) (1,194,962) (333,210)
Proceeds from sale of property and equipment
34,260 950 - - -
Purchase of property and equipment (3,934,329) (463,145) (5,598,061) (598,991) (22,925,767)
Debt issuance costs (25,188) - (1,470,827) - -
----------- ---------- ----------- ---------- -----------
Net cash used in investing activities (4,108,479) (691,528) (7,218,834) (1,748,264) (22,940,837)
</TABLE>
<PAGE>
<TABLE>
DOMINION
--------
COMBINED STATEMENTS OF CASH FLOWS
---------------------------------
<CAPTION>
Six Months Ended
Years Ended October 31, April 30,
-------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
--------------- ----------- -------------- ------------ ---------------
(Unaudited)
---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
Proceeds from long-term debt $ 3,279,200 $ - $ 1,293,792 $ - $ 19,388,285
Principal payments on long-term debt (2,239,477) (1,783,016) (2,714,180) (1,303,767) (604,131)
Issuance of common stock and capital
contribution - - 2,829,426 - 770,473
Cash dividends paid (1,395,393) (2,028,393) (6,540,425) (3,678,247) (1,265,935)
--------------- ----------- --------------- ----------- ---------------
Net cash used in financing activities (355,670) (3,811,409) (5,131,387) (4,982,014) 18,288,692
--------------- ----------- --------------- ----------- ---------------
Net increase in cash 332,049 4,795,983 264,851 608,886 (722,337)
CASH AND CASH EQUIVALENTS, beginning of
period 2,837,605 3,169,654 7,965,637 7,965,637 8,230,488
--------------- ----------- --------------- ----------- ---------------
CASH AND CASH EQUIVALENTS, end of period
$ 3,169,654 $7,965,637 $ 8,230,488 $8,574,523 $ 7,508,151
=============== =========== =============== =========== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 2,625,103 $2,716,163 $ 2,593,211 $1,294,251 $ 1,243,528
Income taxes 32,316 179,027 166,761 83,794 13,599
Noncash financing activities-
Issuance of warrants $ - $ - $ 3,118,850 $ - $ 3,118,850
Dividends - - (1,800,342) (3,678,247) (1,265,935)
Capital contributions - - 1,800,342 - 770,473
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
<PAGE>
DOMINION
--------
Notes to combined Financial Statements
--------------------------------------
OCTOBER 31, 1996 AND 1997
-------------------------
(INFORMATION FOR THE SIX-MONTH PERIODS ENDED APRIL 30, 1997
AND 1998 IS UNAUDITED)
-----------------------------------------------------------
1. ORGANIZATION AND BASIS OF COMBINATION:
-------------------------------------
The accompanying combined financial statements include the accounts of the
following:
'C' Corporations-
----------------
Canam Construction Co., Inc. ("Canam")
Dominion Management Services, Inc. ("DMSI")
'S' Corporations-
-----------------
Dominion Leasing, Inc. ("DLI")
Dominion Management, Inc. ("DMI")
Temple Design & Construction Consultants, Inc. ("Temple")
Del Rio Parking ("Del Rio")
The above-listed corporations (referred to collectively as the "Company") are
involved in the privatization of traditional governmental activities and
functions via the related disciplines of development, design, construction,
financing, maintenance, operations, marketing and transportation.
The consolidated financial statements of DLI include the accounts of Dominion
Cipe Partnership ("Cipe"), a wholly owned subsidiary. The consolidated
financial statements of DMI include the accounts of its wholly owned
subsidiaries, Dominion Management III, Inc., Dominion Management - Colorado,
Inc. and Dominion Management - Oklahoma, Inc. The accompanying combined
financial statements have been presented on a combined basis because the
corporations have certain common stockholders. All significant intercompany
balances and transactions have been eliminated in the combined financial
statements.
Since 1986, the Company has designed, built and financed over 2.4 million square
feet of commercial and public properties. Recently, the Company has specialized
in two areas: (1) privately developed correctional facilities and (2) office
buildings for state and Federal Government entities. The Company currently owns,
manages, operates, and leases two correctional facilities and seven office
buildings leased to the General Services Administration ("GSA"). In addition to
numerous commercial properties, the Company has constructed six correctional
facilities for unrelated parties.
DLI, incorporated in 1986, owns, manages, operates and leases the office
buildings. DLI also serves as the turnkey developer providing site acquisition,
public approval, design, engineering, construction and financing. Del Rio and
Cipe, incorporated in 1991, own a parking lot and an office building,
respectively, which are leased to the GSA. Canam and Temple, incorporated in
1977 and 1985, respectively, are the general contractors. Though DLI is their
largest customer, they regularly contract with unrelated parties. DMI,
incorporated in 1993, serves as an independent representative to state and
county correctional authorities for the marketing of surplus correctional
facility capacity to jurisdictions needing temporary beds or placement of part
of the jurisdiction's overpopulation of inmates. DMI has arranged transportation
services and housing contracts with facilities throughout the Country for over
6,000 inmates from several state jurisdictions and the Commonwealth of Puerto
Rico. Dominion Management-Oklahoma, Inc. and Dominion Management-Colorado, Inc.
are the owners of correctional facilities. DMSI, incorporated in 1995, provides
contract services to the United States Government for the maintenance,
operation, support and training for military and governmental organizations. All
of the entities in the Company were incorporated or formed in the State of
Oklahoma, except for Temple and Del Rio, which were incorporated in the State of
Texas.
Fiscal Periods
- --------------
The financial statements combine the accounts of the Company as of October 31,
except for the accounts of Cipe, DMI and Del Rio, which are included in the
combined financial statements on the basis of a fiscal year ending December 31
for the years 1995 and 1996. In 1997, the Company elected to change Cipe, DMI
and Del Rio's year-end to October 31 to conform with the remaining entities in
the Company. During the two months ended December 31, 1996, CIPE, DMI and Del
Rio reported revenues of approximately $788,000, and net income of approximately
$456,000. In order to reflect this change in fiscal year-end, retained earnings
at October 31, 1997, has been decreased by their reported net income for the
two-month period ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Revenue and Cost Recognition
- ----------------------------
Profits on contracts are recorded on the percentage of completion method,
whereby recognition of earnings on contracts in progress is calculated based
on the ratio of cost incurred to date to total expected cost to be incurred on
each contract. Contract costs include all direct material and supplies, labor
and related payroll taxes, subcontracts, equipment costs, travel and per diem,
and insurance and bonding expense. Changes in job performance, job conditions,
and estimated profitability, including those arising from contract penalty
provisions and final contract settlements, may result in revisions to costs
and income. Any required adjustments are recognized in the period in which the
revisions become known. At the time a loss on a contract becomes known, the
entire amount of the estimated ultimate loss on the contract is accrued.
Profit incentives are included in revenues when their realization is
reasonably assured. An amount equal to contract costs attributable to claims
is included in revenues when realization is probable and the amount can be
reliably estimated.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on uncompleted
contracts," represents billings in excess of revenues recognized.
Leasing revenue is recognized on a straight-line basis over the period of the
lease.
Cash and Cash Equivalents
- -------------------------
For purposes of the combined statements of cash flows, the Company considers all
investments with an original maturity of three months or less and certificates
of deposit to be cash equivalents. Included in cash and cash equivalents at
October 31, 1996 and 1997, are certificates of deposit totaling $2,065,000 and
$3,075,000, respectively, of which $2,065,000 and $2,329,000, respectively, were
pledged to secure borrowings of an affiliated company. The certificates of
deposit have maturities ranging from one to twenty-two months as of October 31,
1997.
<PAGE>
Investment Securities
- ---------------------
Investment securities are classified as available-for-sale securities and are
carried at estimated market value. Unrealized holding gains and losses are
reflected as a separate component of stockholders' equity, net of applicable
income taxes, until realized. For the purpose of computing realized gains and
losses, cost is identified on a specific identification basis.
Contract Receivables
- --------------------
The Company considers contract receivables to be fully collectible; accordingly,
no allowance for doubtful accounts is required. If amounts become uncollectible,
they are charged to operations when that determination is made. The Company
grants credit to its customers, consisting primarily of correctional facility
corporations and municipalities, under customary trade terms.
Precontract Expenditures
- ------------------------
Bid and other expenses incurred in anticipation of a contract that will result
in benefits only if the contract is obtained is expensed as incurred. During
1995, 1996 and 1997, approximately $163,000, $31,000, and $83,000,
respectively of precontract costs were expensed.
Property and Equipment
- ----------------------
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the assets. Amortization of leased equipment
under capital leases is included in depreciation and amortization. Estimated
useful lives are as follows:
Useful Lives in Years
Land improvements 15
Buildings and improvements 5-39
Construction equipment 5-7
Automobiles and trucks 3-5
Furniture and fixtures 3-5
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as a part of the asset that
it relates to and is amortized over the asset's estimated useful life.
Interest capitalized during 1995, 1996 and 1997, totaled approximately
$103,000, $54,000 and $1,000, respectively.
Income Taxes
- ------------
The stockholders of DLI, DMI, Temple and Del Rio have elected under Subchapter
S of the Internal Revenue Code not to be taxed as a corporation. Therefore,
all income and losses of the corporations flow-through to the shareholders.
Accordingly, no provision has been made for Federal or state income taxes for
these entities in the accompanying combined statements of income.
A deferred tax asset or liability is recognized for Canam and DMSI for the
estimated future tax effects of differences between the tax bases of assets
and liabilities and their reported amounts in the combined financial
statements, and for loss carryforwards. The measurement of current and
deferred tax assets and liabilities is based on the provisions of the enacted
tax laws.
Stock-Based Compensation
- ------------------------
Stock-based compensation is recognized using the intrinsic value method. For
disclosure purposes, pro forma net income is provided, if material, as if the
fair value method had been applied.
<PAGE>
Use of Estimates
- ----------------
The combined financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the combined financial
statements, management is required to make estimates and assumptions. Those
estimates and assumptions relate primarily to the determination of revenues
earned, fair value of stock warrants payable and provision for income taxes.
Actual results could differ from those estimates.
Accounting Pronouncements
- -------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." Adoption of SFAS No. 130 is required for fiscal years beginning after
December 15, 1997. The Company will adopt this new standard effective for the
year ended October 31, 1999. Adoption of this new standard will change the
presentation of the combined financial statements, but will not affect
reported net income.
Unaudited Financial Statements
- ------------------------------
The accompanying unaudited financial statements include all adjustments,
consisting of normal, recurring accruals, which the Company considers
necessary for a fair presentation of the financial position and the results of
operations for the indicated periods. The results of operations for the six
months ended April 30, 1997 and 1998, are not necessarily indicative of the
results to be expected for the full year ending October 31, 1998.
3. INVESTMENT SECURITIES:
---------------------
Investment securities have been classified as available-for-sale securities
and are summarized as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Market
October 31, 1996 Cost Gain Loss Value
---------------- ----------- ----- ---- --------
<S> <C> <C> <C> <C>
Short-term investment securities:
Debt securities $ 1,267,385 $ - $ 26,471 $ 1,240,914
============ ========== ========= ============
Long-term investment securities:
Debt securities $ 1,947,792 $ - $ 22,379 $ 1,925,413
Equity securities 1,247,182 - 1,328 1,245,854
------------- ---------- ---------- ------------
$ 3,194,974 $ - $ 23,707 $ 3,171,267
============= ========== ========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Market
October 31, 1997 Cost Gain Loss Value
---------------- ----------- ----- ---- --------
<S> <C> <C> <C> <C>
Short-term investment securities:
Debt securities $ 632,157 $ 851 $ - $ 633,008
============ ========= ======== ============
Long-term investment securities:
Debt securities $2,221,545 $ - $ 35,471 $2,186,074
Equity securities 1,785,383 1,004 - 1,786,387
------------ -------- --------- ------------
$4,006,928 $ 1,004 $ 35,471 $3,972,461
============ ========== ========== ============
</TABLE>
Debt securities consist of securities issued by various state and local
municipalities and agencies. As of October 31, 1997, the contractual maturities
of debt securities held by the Company ranged from one to nine years, with the
majority being five years or less. As of October 31, 1996 and 1997, debt
securities totaling approximately $1,451,000 and $815,000, respectively, were
pledged to secure borrowings of an affiliated company.
Equity securities consist of an investment in a mutual fund which invests in
fully secured, variable rate senior bank loans of various corporations. Shares
of the mutual fund may be sold on a quarterly basis. A diminishing surrender
charge for early withdrawal is in effect for the first four years of the
Company's holding. Shares of the mutual fund were purchased in February, June
and November of 1996.
Proceeds from the sale of investment securities for the years ended October
31, 1995, 1996 and 1997, were approximately $315,000, $1,041,000 and $521,000,
respectively. Gross losses on sales amounted to approximately $0, $90,000 and
$31,000 for the years ended October 31, 1995, 1996 and 1997, respectively.
No gains were realized during 1995, 1996 and 1997.
4. CONTRACT RECEIVABLES:
--------------------
Contract receivables consist of the following:
<TABLE>
<CAPTION>
October 31, April 30,
1996 1997 1998
------ ---- --------
<S> <C> <C> <C>
Completed contracts $ 198,200 $ 1,723 $ 1,000
Contracts in progress 3,900,412 5,221,340 2,300,684
Retainage 2,751,402 2,460,340 149,999
---------------- --------------- -------------
6,850,014 7,683,403 2,451,683
Other receivables 967,000 946,786 937,502
---------------- -------------- -------------
$ 7,817,014 $ 8,630,189 $ 3,389,185
</TABLE>
5. COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
----------------------------------------------------
Costs and estimated earnings on uncompleted contracts consist of the
following:
<TABLE>
<CAPTION>
October 31, April 30,
1996 1997 1998
------ ---- --------
<S> <C> <C> <C>
Costs incurred on uncompleted contracts $ 28,011,019 $ 81,938,609 $ 87,643,027
Estimated earnings 4,141,416 11,245,027 9,506,428
------------------ ----------------- --------------
32,152,435 93,183,636 97,149,455
Less- Billings to date 35,594,833 95,956,023 98,181,228
------------------ ------------------ --------------
$ (3,442,398) $ (2,772,387) $ (1,031,773)
================== ================== ==============
Included in accompanying combined balance
sheets under the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 34,869 $ 556,473 $ 1,115,321
Billings in excess of costs and estimated earnings on
uncompleted contracts (3,477,267) (3,328,860) (2,147,094)
----------------- ------------------ ---------------
$ (3,442,398) $ (2,772,387) $ (1,031,773)
================= ================== ===============
</TABLE>
6. RELATED PARTIES:
---------------
The Company leases aircraft services from an affiliate. For the years ended
October 31, 1995, 1996 and 1997, the Company paid approximately $170,200,
$655,000 and $765,000, respectively to the affiliate for aircraft services.
The Company also leases its corporate office space from an affiliate. For the
years ended October 31, 1995, 1996, and 1997, the Company paid approximately
$43,000 each year in rent to the affiliate.
The Company has pledged $3,144,000 of certificates of deposits and investment
securities for the stockholders who have guaranteed certain obligations of an
affiliate. As of October 31, 1997, approximately $9,180,000 was outstanding on
these obligations.
The Company provides certain management, accounting and supervisory services to
certain affiliates. For the years ended October 31, 1996 and 1997, the Company
charged $126,000 and $143,000, respectively, for such services.
DMSI has an unsecured note payable to a stockholder as of October 31, 1996 and
1997. The note bears interest at 10% and is due on demand. This payable is
reflected as due to stockholder in the accompanying combined balance sheets.
7. INCOME TAXES:
------------
The differences between the provision for income taxes at the expected Federal
statutory rates and the provision for income taxes recorded in the combined
statements of income are summarized as follows:
Year Ended October 31,
----------------------
1995 1996 1997
------ ---- ----
Expected tax at graduated statutory rate $(2,281) $(10,004) $221,924
State income taxes, net of Federal
income tax provision (benefit) (8,033) (158) 29,280
Tax-exempt interest income (10,892) (30,338) (29,531)
Expired contribution carryover - - 49,264
Other (9,017) (12,775) 37,428
-------- --------- --------
Provision (benefit) for income
taxes $(30,223) $(53,275) $308,365
======== ========= ========
The tax effect of significant temporary differences giving rise to the Company's
combined current and noncurrent deferred tax asset is as follows:
October 31,
-----------
1996 1997
---- ----
Current deferred tax assets (liabilities):
Contract receivables $ (34,437) $(47,563)
Accounts payable and accrued
liabilities 27,548 27,397
Note receivable 214,166 -
Net operating loss carryforward 84,705 82,089
Other 29,284 14,903
---------- ---------
Current deferred tax asset, net $ 321,266 $ 76,826
========== =========
Noncurrent deferred tax assets (liabilities):
Contribution carryover $ 49,264 $ -
========== =========
At October 31, 1997, DMSI had Federal net operating loss carryforwards ("NOL")
of approximately $375,000. The NOL is available to offset future Federal
taxable income. The NOL expires in years 2010 to 2012. Management of DMSI is
of the opinion it is more likely than not that the NOL will be utilized in
fiscal year 1998.
The current and noncurrent deferred tax asset is included in other current
assets and other assets, respectively, in the accompanying combined balance
sheet.
8. PROPERTY AND EQUIPMENT:
----------------------
Property and equipment consist of the following:
<TABLE>
<CAPTION>
October 31, April 30,
1996 1997 1998
------- ------ ----------
<S> <C> <C> <C>
Land $ 3,981,406 $ 4,374,639 $ 4,838,192
Land improvements 2,442,182 2,442,182 2,495,656
Buildings and improvements 31,252,032 31,760,561 35,186,066
Construction equipment 466,473 577,448 582,231
Automobiles and trucks 390,570 533,184 526,184
Furniture and fixtures 222,206 278,464 296,878
Construction in progress - 4,201,774 23,172,947
--------------- ----------------- ---------------
38,754,869 44,168,252 67,098,154
Accumulated depreciation and amortization (4,473,755) (5,610,427) (6,239,132)
--------------- ----------------- ---------------
Net property and equipment $ 34,281,114 $ 38,557,825 $ 60,859,022
=============== ================= ===============
</TABLE>
9. LINES OF CREDIT:
---------------
DMI has a credit facility from a bank to fund land acquisition, construction and
operation of two medium security correctional facilities totaling $24,062,000.
As of October 31, 1996 and 1997, no funding had occurred under this credit
facility. The loan is secured by the common stock, contract receivables,
contracts, equipment and inventory of DMI and is guaranteed by DMI's
stockholders. The loan agreement contains certain restrictive financial and
performance covenants including, among others, maintaining minimum current,
debt-to-equity, and debt service coverage ratios; maintaining minimum net worth
amounts that increase over time; restrictions on capital expenditures and
distributions; and restrictions on additional borrowings. The loan bears
interest at prime plus 1.5% and matures on November 30, 2004. At July 2, 1998,
DMI was not in compliance with certain of the performance covenants. Subsequent
to July 2, 1998, the Company was in compliance with the performance covenants.
DLI has a revolving line of credit from a bank in the amount of $5,000,000. As
of October 31, 1996 and 1997 no amount had been drawn on this line of credit.
The line of credit is secured by DLI's common stock and bears interest at Chase
Manhattan's prime rate. The line of credit agreement contains certain
restrictive financial and performance covenants, including among others,
maintaining a minimum net worth. The line of credit agreement matures on
November 15, 1998.
<PAGE>
10. LONG-TERM DEBT:
--------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 31,
--------------------------
1996 1997
--------- ---------
<S> <C> <C>
Note payable to an insurance company, monthly principal and interest payments
at 9.625% of $24,489, due in 2002, secured by real estate
$ 856,830 $ 671,469
Note payable to an insurance company, monthly principal and interest payments
at 9.75% of varying installments ranging from $36,430 to $37,883, due in
2007, secured by real estate 2,524,448 2,324,650
Note payable to an insurance company, monthly principal and interest payments
at 9.375% of $149,308, due in 2003, secured by real estate
8,595,643 7,566,151
Note payable to an insurance company, monthly principal and interest payments
at 7.51% of $67,048, due in 2004, secured by real estate
4,255,452 3,796,480
Note payable to an insurance company, monthly principal and interest payments
at 7.51% of $63,581, due in 2004, secured by real estate
4,640,985 4,168,912
Note payable to an insurance company, monthly principal and interest payments
at 7.83% of $68,575, due in 2008, secured by real estate
6,363,180 6,084,542
Note payable to a bank, monthly principal and interest payments in varying
installments - variable interest payable, adjusted based on the prime rate
not to exceed 9.5% (8.5% at October 31, 1997), due in 2016, secured by real
estate
3,976,065 3,886,218
Senior subordinated debt, interest at 11.00%, secured by common stock of DMI
and real estate, less unamortized discount of $127,730
- 1,166,062
-------------- ----------
Total 31,212,603 29,664,484
Less- Current portion 2,740,241 3,056,157
--------------- ------------
Long-term debt, net of current portion $ 28,472,362 $ 26,608,327
================ ============
</TABLE>
Principal may be prepaid on the above note payables, subject to a prepayment
premium.
The following summarizes future principal reduction of long-term debt:
Year ending October 31:
1998 $ 3,056,157
1999 3,330,575
2000 3,506,735
2001 3,636,139
2002 3,936,418
Thereafter 12,326,190
--------------
29,792,214
Less- Unamortized discount (127,730)
--------------
$ 29,664,484
===============
In July 1997, DMI entered into a senior subordinated note agreement in the
amount of $18 million and a junior subordinated note agreement in the amount
of $12 million. Proceeds from the issuance of the notes are to be used to
design, develop, construct, own, operate and maintain certain private
correctional facilities.
Funding under issuance of the notes will occur, as set forth in the note
agreements, as construction progresses. As of April 30, 1998, the Company had
outstanding borrowings under the senior subordinated note agreement and junior
subordinated note agreement of $8,446,126 and $9,337,177, respectively.
The senior subordinated notes bear interest at a fixed rate of 11% per annum
payable quarterly. The junior subordinated notes bear interest at a fixed rate
of 8% per annum payable quarterly, however, such interest may be deferred at
the option of the note holder until the earlier of December 31, 1999, or the
termination date of each note, as defined.
Principal on the senior subordinated and junior subordinated notes is due in
four quarterly installments beginning in 2004 and 2005, respectively.
Principal may be prepaid subject to a prepayment premium computed based on a
percentage of the principal outstanding; 4% in year one, 3% in year two, 2% in
year three and 1% in year four. Costs incurred in connection with the note
agreements totaled approximately $1,215,000. Such costs are included in other
assets in the accompanying combined balance sheets and are being amortized on
a straight-line basis, which approximates the effective interest method, over
the average life of the note agreements.
In connection with the note agreements discussed above, DMI authorized the
issuance and sale of warrants for the purchase of 23,275 shares of DMI's
common stock at a nominal price. The warrants are exercisable at any time
during a ten-year period. The holders of the warrants have the option to have
the warrants redeemed by DMI beginning on April 1, 1999, which under certain
circumstances, may be delayed until July 2002, at a redemption price equal to
the greater of fair market value or eight times DMI's earnings per share, as
defined.
The fair value of the warrants at the date of issuance was estimated to be
$3,119,000 and has been recorded as a stock warrant payable in the
accompanying combined balance sheets. Debt discount has been recorded in the
amount of approximately $134,000 based on the percentage of proceeds received
from the note agreement as of October 31, 1997, to the total proceeds
committed which is being amortized over the term of the note agreements, using
the effective interest method. For the year ended October 31, 1997,
approximately $6,000 of debt discount had been amortized. The difference in
the fair value of the warrants and the debt discount has been recorded as a
deferred commitment fee in other assets and totaled approximately $2,985,000.
The deferred commitment fee is reduced, with debt discount increasing, as the
funding under the notes occurs.
To the extent the redemption price for the warrants exceeds the fair value of
the warrants, such amount is accrued as interest expense over the redemption
period. At October 31, 1997, such excess amount was estimated to be
approximately $1,436,000. For the year ended October 31, 1997, approximately
$273,000 of interest expense had been recorded attributable to the redemption
feature.
The senior and junior subordinated note agreements contain certain restrictive
financial and performance covenants including, among others, maintaining
minimum net worth; maintaining debt-to-equity and debt service coverage
ratios; restrictions on capital expenditures and distributions; and
restrictions on additional borrowings. Additionally, the stockholder of DMI
was required to contribute $2,137,602 and $3,262,398 in capital to Dominion
Management - Colorado, Inc. and Dominion Management - Oklahoma, Inc,
respectively, prior to the first funding under the notes. A cash contribution
of approximately $2,800,000 and a contribution of approximately $1,800,00 in
the form of withheld dividends was made during fiscal year 1997.
11. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL:
A summary of common stock and additional paid-in capital for the Company is as
follows:
Amount of
Shares Shares Amount of Additional
October 31, 1996 Authorized Issued Common Stock Paid-in Capital
- ---------------- ---------- ------ ------------ ---------------
DMI 5,000 10 $ 100 $ 400
DLI 5,000 50 500 -
Canam 10,000 1,963 1,963 44,972
Temple 1,000 1,000 1,000 -
Del Rio 1,000,000 1,000 1,000 -
DMSI 5,000,000 10,000 100 -
$ 4,663 $ 45,372
======= ==========
======= ==========
Amount of
Shares Shares Amount of Additional
October 31, 1997 Authorized Issued Common Stock Paid-in Capital
- ---------------- ---------- ------ ------------ ---------------
DMI - Series A
(Voting)
47,500 24,225 $ 242 $4,630,026
DMI - Series B
(Non-voting) 2,500
5,000 - - -
DLI 10,000 50 500 -
Canam 1,000 1,963 1,963 44,972
Temple 1,000,000 1,000 1,000 -
Del Rio 5,000,000 1,000 1,000 -
DMSI 10,000 100 -
$ 4,805 $4,674,998
======= ==========
======= ==========
Amount of
Shares Shares Amount of Additional
April 30, 1998 Authorized Issued Common Stock Paid-in Capital
- ---------------- ---------- ------ ------------ ---------------
DMI - Series A
(Voting)
47,500 24,225 $ 242 $5,400,499
DMI - Series B
(Non-voting) 2,500 - - -
5,000 50 500 -
DLI 10,000 1,963 1,963 44,972
Canam 1,000 1,000 1,000 -
Temple 1,000,000 1,000 1,000 -
Del Rio 5,000,000 10,000 100 -
DMSI
$ 4,805 $5,445,471
======= ==========
======= ==========
<PAGE>
12. EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) plan covering substantially all full-time
employees. All employer contributions to the plan are determined by the Board
of Directors of each company. Employees determine the amount of their own
contributions to the plan. For the years ended October 31, 1995, 1996 and
1997, the Company contributed to the plan approximately $15,000, $19,000 and
$29,000, respectively.
13. STOCK BASED COMPENSATION PLAN:
During 1997, DMI adopted a stock option plan and reserved 2,500 shares of
common stock for issuance to key employees. Options are to be issued at an
exercise price of no less than fair market value at the date of grant. As of
October 31, 1997, options for issuance for all of the shares had been granted
at an exercise price of $134 per share. The options are exercisable over a
ten-year period with such options vesting at varying percentages over a
five-year period.
The option holder may exercise his option through the payment of cash equal to
the exercise price or, based on authorization of DMI, have shares retained by
DMI from the total shares of the option, an amount of shares with a fair
market value equal to the exercise price. In addition, the option holder has
the option, after the fifth anniversary of the option grant date, to be paid,
in lieu of exercising their option, an amount equal to the fair market value
at the date of exercise, of the shares under option in excess of the exercise
price. At October 31, 1997, no options were exercisable.
14. LEASING ARRANGEMENTS:
DLI is the lessor of certain buildings under the terms of various operating
leases expiring in various years through 2016.
Total future rentals remaining on noncancellable operating leases as of
October 31, 1995, 1996 and 1997, were approximately $81,171,000, $86,638,000
and $77,773,000, respectively. The total future rentals as of October 31,
1997, is approximately $9,129,000 each year from 1998 through 2002, and
$32,128,000 in total for the years thereafter.
The following is a schedule of investment in property on operating leases and
property held for lease by major class categories as of October 31, 1997:
Land $ 3,903,654
Land improvements 2,442,182
Buildings 31,760,561
38,106,397
Less- Accumulated depreciation (4,955,435)
Net investment $ 33,150,962
15. COMMITMENTS AND CONTINGENCIES:
At October 31, 1997, the Company had certain uncompleted contracts in
progress, as well as contracts in which work had not yet begun. The amount of
unearned revenue associated with these contracts totaled approximately
$11,365,000.
In addition, between November 1, 1997 and July 2, 1998, the Company had
entered into additional construction contracts with revenues of approximately
$425,000.
The Company has purchased four leased facilities since October 31, 1997, for a
total purchase price of approximately $4,028,000. Three of the facilities are
leased to the State of Oklahoma with leases renewing every year with
anniversary dates of July 1 and September 1. The fourth facility is leased to
the GSA for a lease term until April 30, 2003, with an option to extend
through April 30, 2005. Two of the buildings are encumbered by a mortgage of
approximately $2,700,000, due August 1, 1998. The other two buildings were
purchased with the Company's $5 million line of credit, on which $1,038,000
has been drawn for the purchase. These leased properties have projected annual
revenues of $621,500 and operating expenses of $234,000. The Company in
December 1997, also entered into a 15-year lease with the GSA for a new office
building to be constructed and owned by the Company in Lakewood, Colorado for
Western Area Power Authority. Construction cost of the new building is
estimated to be $16.8 million with annual lease revenues of $2 million and
operating expenses of $600,000.
The Company entered into a five-year contract with the State of Oklahoma
Department of Corrections ("OK DOC") to house 500 inmates at the Central
Oklahoma Correctional Facility beginning August 1998. Concurrent with this
contract, the Company entered into a five-year management contract with
Correctional Services Corporation ("CSC") to manage the Central Oklahoma
Correctional Facility.
The Company entered into a one-year contract with the State of Colorado
Department of Corrections ("CO DOC") to house 600 inmates at the Crowley
County Correctional Facility beginning August 1998. Concurrent with this
contract, the Company entered into a forty-five day management contract with
Correctional Services Corporation ("CSC") to manage the Crowley County
Correctional Facility.
From time to time the Company is subject to claims and litigation in
connection with the normal operations of its business. While it is not
possible to determine the ultimate disposition of these matters, management,
after consultation with legal counsel, is of the opinion the final resolution
of these matters is not likely to have a material adverse effect on the
financial position or results of operations of the Company.
16. CONCENTRATION OF CREDIT RISK:
The Company grants credit to customers for commercial and industrial
construction work performed. Credit is extended based on an evaluation of each
customer's financial condition. Credit losses, if any, have been provided for
in the combined financial statements and have been generally within
management's expectations.
17. SUBSEQUENT EVENT (UNAUDITED):
On August 27, 1998, the Company entered into a joint venture with Reckson
Strategic Venture Partners, LLC ("RSVP"), a real estate venture capital
company managed by a subsidiary of Reckson Services Industries, Inc. ("RSI").
The Company contributed substantially all its properties and long-term debt
for capital in the joint venture. RSI, through various subsidiaries and
holdings will contribute up to $100 million, approximately $39 million of
which it contributed to the joint venture at closing.
The joint venture will initially have a bifurcated structure consisting of two
divisions. The first division, Dominion Properties L.L.C. will directly or
indirectly own real estate (private correctional facilities and state and
federal office buildings) and other REIT-qualified investments. The second
division, Dominion Asset Services L.L.C. will own companies which engage in
business that create non-REIT qualifying income and will be engaged in the
construction and management of private correctional facilities and state and
federal office buildings for its own use and that of third parties.
Concurrent with the formation of the joint venture, the senior and junior
subordinated notes and stock purchase warrants outstanding in the accompanying
combined balance sheets were retired with capital contributions aggregating
approximately $35 million, from the third party joint venturer and an
affiliate of the Company. Had the retirement of the notes and warrant
agreements occurred at October 31, 1997, an extraordinary loss of
approximately $14 million would have been incurred.
Unaudited Pro Forma Consolidated Financial Statements
The following unaudited pro forma financial statements are presented for
illustrative purposes only and are not indicative of the financial position or
results of operations of future periods or the results that actually would
have been realized had the Dominion Venture Group LLC ("Dominion Joint
Venture") been formed and RSI through RSVP had made an investment in the
Dominion Joint Venture during the specified periods. The pro forma financial
statements, including the notes thereto, are qualified in their entirety by
reference to, and should be read in conjunction with, the historical financial
statements of RSI as filed in Form S-1 for the period from July 15, 1997
(commencement of operations) to December 31, 1997, the historical financial
statements of RSI as filed on Form 10-Q for the six months ended June 30,
1998, the unaudited pro forma financial statements of RSI as filed on Form
8-K/A on November 9, 1998 and the historical financial statements of Dominion
included elsewhere herein.
The following pro forma financial statements of RSI give effect to the
proposed joint venture of Dominion using the purchase method of accounting.
The pro forma financial statements are based on the historical financial
statements and the notes thereto of RSI and Dominion. The pro forma
adjustments are preliminary and based on management's estimates of the fair
value of the tangible and intangible assets contributed.
The pro forma balance sheet of RSI assumes that the joint venture commenced on
June 30,1998. The pro forma statements of operations of RSI for the six months
ended June 30,1998 and for the year ended December 31, 1997 assume that the
joint venture commenced as of January 1, 1997.
<PAGE>
<TABLE>
Reckson Service Industries, Inc.
Pro Forma Condensed Consolidated Balance Sheet
As of June 30, 1998
(Unaudited)
<CAPTION>
RSI Pro Forma
Previously Adjustments
Reported Dominion
Pro Forma(1) Joint Venture Pro Forma
---------- ------------- ---------
<S> <C> <C> <C>
Assets
Cash $ 48,398 $ - $ 48,398
Investment in and advances to RSVP Holdings, LLC 18,670,328 2,865,818 (2) 21,536,146
Investment in and advances to Reckson Executive
Centers, LLC 1,066,816 - 1,066,816
Equipment 35,281 - 35,281
Affiliate receivable 1,616,283 - 1,616,283
Investment and advances to On-Site Ventures, LLC 3,429,599 - 3,429,599
Receivable from Transfer Agent 13,828,244 - 13,828,244
Organization and pre-acquisition costs 996,620 - 996,620
Other assets 284,687 - 284,687
============ =========== ===========
Total Assets $39,976,256 $2,865,818 $42,842,074
============ =========== ===========
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 558,900 $ - 558,900
Loan payable to affiliates 23,193,389 2,865,818 (2) 26,059,207
------------ ----------- -----------
Total Liabilities 23,752,289 2,865,818 26,618,107
------------ ----------- -----------
Shareholders' Equity
Common stock 246,855 - 246,855
Additional paid-in capital 24,685,843 - 24,685,843
Common stock subscription (7,325,159) - (7,325,159)
Retained earnings (1,383,572) - (1,383,572)
------------ ----------- -----------
Total Shareholders' Equity 16,223,967 - 16,223,967
============ =========== ============
Total Liabilities and Shareholders' Equity $ 39,976,256 $ 2,865,818 $42,842,074
============ =========== ============
See accompanying notes to unaudited pro forma financial statements.
</TABLE>
<PAGE>
<TABLE>
Reckson Services Industries, Inc.
Pro Forma Condensed Consolidating Statement of Operations
Six Months Ended June 30, 1998
(Unaudited)
<CAPTION>
RSI Pro Forma
Previously Adjustments
Reported Dominion Pro Forma
Pro Forma(1) Joint Venture Adjustments Pro Forma
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Equity in loss of ACC $ (51,508) $ - $ - $ (51,508)
Equity in earnings of RO Partners Management LLC 170,567 - - 170,567
Equity in loss of RSVP Holdings, LLC (1,893,082) (5,374) (2) - (1,898,456)
Equity in loss of Reckson Executive Centers LLC (2,511) - - (2,511)
Equity in loss of On-Site Venture LLC (4,733) - - (4,733)
Other income 166,666 - - 166,666
Interest income 140,932 - - 140,932
------------ ----------- ----------- -----------
Total Revenues (1,473,669) (5,374) - (1,479,043)
------------ ----------- ----------- -----------
Expenses:
General and administrative expenses 464,706 - - 464,706
------------ ----------- ----------- -----------
Total Operating Expenses 464,706 - - 464,706
------------ ----------- ----------- -----------
Interest 244,702 - 171,949 (3) 416,651
Depreciation and amortization 440,926 - - 440,926
------------ ----------- ----------- -----------
Total Expenses 1,150,334 - 171,949 1,322,283
------------ ----------- ----------- -----------
Net Loss $ (2,624,003) $ (5,374) $(171,949) $(2,801,326)
============ =========== =========== ===========
Basic and diluted net loss per share $ (0.54) $ (0.58)
============ ===========
Basic and diluted weighted average common shares
outstanding 4,834,240 4,834,240
============ ===========
See accompanying notes to unaudited pro forma financial statements.
</TABLE>
<PAGE>
<TABLE>
Reckson Service Industries, Inc.
Pro Forma Condensed Consolidating Statement of Operations
Year Ended December 31, 1997
(Unaudited)
<CAPTION>
RSI Pro Forma
Previously Adjustments December
Reported Dominion Pro Forma 31, 1997
Pro Forma(1) Joint Venture Adjustments Pro Forma
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Equity in earnings of RO Partners Management, LLC $ 245,593 $ - $ - $ 245,593
Equity in loss of ACLC (22,156) - - (22,156)
Interest income 30,383 - - 30,383
Equity in earnings of RSVP Holding, LLC (707,566) 2,681,372 (2) 1,973,806
------------ ----------- ----------- -----------
Total Revenues (453,746) 2,681,372 - 2,227,626
------------ ----------- ----------- -----------
Expenses:
General and administrative expenses 479,113 - - 479,113
------------ ----------- ----------- ----------
Total Operating Expenses 479,113 - - 479,113
------------ ----------- ----------- -----------
Interest 471,800 - 343,898 (3) 815,698
Amortization 8,214 - - 8,214
------------ ----------- ----------- -----------
Total Expenses 959,127 - 343,898 1,303,025
------------ ----------- ----------- -----------
Net income (loss) before taxes (1,412,873) 2,681,372 (343,898) 924,601
Income tax expense - - (369,840) (4) (369,840)
------------ ----------- ----------- -----------
Net income (loss) $(1,412,873) $2,681,372 $ (713,738) $ 554,761
============ =========== =========== ===========
Basic and diluted net loss (income) per share $ (0.34) $ 0.13
============ ===========
Basic and diluted weighted average common shares
outstanding 4,111,426 4,111,426
============ ===========
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
Reckson Service Industries, Inc.
Notes to pro-forma financial statements
(unaudited)
(1) RSI Previously Reported Pro Forma results represent actual results
for the six months ended June 30, 1998 adjusted for the pro forma impact of
RSI's investment through RSVP in Assisted Living Investments LLC. Such pro
forma impact was included in Form 8-K/A filed by the Company on November 9,
1998.
(2) The unaudited pro forma condensed consolidated balance sheet has been
prepared as if the Dominion Joint Venture commenced June 30, 1998. The
unaudited pro forma results of operations of the Dominion Joint Venture and
RSI are as if the Dominion Joint Venture was formed on January 1, 1997 through
initial cash contributions of approximately $30.2 million from a subsidiary of
the Reckson Operating Partnership, L.P. ("ROP") and $8.6 million from RSVP,
and contribution of certain assets and liabilities by Dominion. The RSVP
investment was funded by an investment by RSI of approximately $2.9 million
for which RSI obtained a loan from ROP and a capital contribution from the
preferred equity member, Paine Webber Real Estate Securities, Inc., of $5.7
million. The loan from ROP bears interest at a fixed rate of 12% per annum.
RSI's pro forma equity in earnings in RSVP Holdings represents their equity in
earnings of the pro forma results of the Dominion Joint Venture and its
historical equity interest in other investments. Explanations of pro forma
adjustments for the Dominion Joint Venture are outlined as follows:
<TABLE>
Dominion Venture Group LLC
Unaudited Pro Forma Statement of Operations
Six Months Ended June 30, 1998
<CAPTION>
Dominion Pro Forma
Combined Historical Pro Forma Dominion Venture
June 30, 1998 Adjustments Group LLC
------------------- ----------- ----------------
<S> <C> <C> <C>
REVENUES:
Construction $ 6,210,569 - $ 6,210,569
Leasing 4,719,937 - 4,719,937
Management fee earned from affiliate - 235,997 a 235,997
Other 876,207 (876,207)b -
-------------- ------------- --------------
Total revenues 11,806,713 (640,210) 11,166,503
-------------- ------------- --------------
COST OF REVENUES EARNED:
Construction 6,071,304 - 6,071,304
Leasing 1,227,711 - 1,227,711
Other 380,535 (380,535)b -
-------------- ------------- --------------
Total cost of revenues earned 7,679,550 (380,535) 7,299,015
Gross profit 4,127,163 (259,675) 3,867,488
GENERAL AND ADMINISTRATIVE EXPENSE 2,277,760 (589,363)b 1,688,397
MANAGEMENT FEE - 235,997 a 235,997
DEPRECIATION AND AMORTIZATION EXPENSE 896,925 (217,514)b 1,488,833
809,422 c
-------------- ------------- --------------
Operating income 952,478 (498,217) 454,261
-------------- ------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (1,655,695) 410,245 b (1,245,450)
Other, net 620,288 (12,702)b 607,586
-------------- ------------- --------------
(1,035,407) 397,543 (637,864)
-------------- ------------- --------------
Income (expense) before minority interest (82,929) (100,674) (183,603)
-------------- ------------- --------------
MINORITY INTEREST - RAP DOMINION LLC - (71,118)d (71,118)
-------------- ------------- --------------
Net loss $ (82,929) $ (171,792) $ (254,721)
=============== ============= ==============
Allocation of pro forma net loss:
Burgess Services LLC $ (238,599)
==============
Other third party investors $ (10,748)
==============
Reckson Services Industries, Inc. $ (5,374)
==============
</TABLE>
<PAGE>
<TABLE>
Dominion Venture Group LLC
Unaudited Pro Forma Statement of Operations
Year ended December 31, 1997
<CAPTION>
Dominion Pro Forma
Combined Historical Pro Forma Dominion Venture
December 31, 1997 Adjustments Group LLC
------------------- ------------- -----------------
<S> <C> <C> <C>
REVENUES:
Construction $ 61,806,322 - $ 61,806,322
Leasing 9,116,443 - 9,116,443
Management fee earned from affiliate - 455,822 a 455,822
Other 4,785,020 (4,785,020)b -
-------------- ------------- --------------
Total revenues 75,707,785 (4,329,198) 71,378,587
-------------- ------------- --------------
COST OF REVENUES EARNED:
Construction 54,325,508 - 54,325,508
Leasing 2,456,120 - 2,456,120
Other 2,066,732 (2,066,732)b -
-------------- ------------- --------------
Total cost of revenues earned 58,848,360 (2,066,732) 56,781,628
-------------- ------------- --------------
Gross profit 16,859,425 (2,262,466) 14,596,959
GENERAL AND ADMINISTRATIVE EXPENSE 4,131,206 (1,152,729)b 2,978,477
MANAGEMENT FEE - 455,822 a 455,822
DEPRECIATION and AMORTIZATION EXPENSE 1,258,416 (2,248)b 2,875,011
1,618,843 c
-------------- ------------- --------------
Operating income 11,469,803 (3,182,154) 8,287,649
-------------- ------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (2,812,444) 279,877 b (2,532,567)
Other, net 853,799 16,531 b 870,330
-------------- ------------- --------------
(1,958,645) 296,408 (1,662,237)
-------------- ------------- --------------
Income (expense) before minority 9,511,158 (2,885,746) 6,625,412
interest and taxes -------------- ------------- --------------
MINORITY INTEREST - RAP DOMINION LLC - (108,715)d (108,715)
-------------- ------------- --------------
NET INCOME BEFORE PROVISION
FOR INCOME TAXES 9,511,158 (2,994,461) 6,516,697
PROVISION FOR INCOME TAXES:
Current provision 19,348 (19,348)e -
Deferred provision 289,017 (289,017)e -
-------------- --------------- --------------
Total provision 308,365 (308,365) -
for income taxes -------------- --------------- --------------
-
Pro forma net income $ 9,202,793 $(2,686,096) $ 6,516,697
============== =============== ==============
Allocation of pro forma net income:
Burgess Services LLC $ 2,918,263
==============
Other third party investors $ 917,062
==============
Reckson Services Industries, Inc. $ 2,681,372
==============
</TABLE>
Pro forma adjustments to the historical results of Dominion Venture Group
LLC are:
a) To record management fee to the Dominion Joint Venture paid by
Dominion Properties LLC. Such fee is estimated as 5% of pro forma
revenues from leasing operations.
b) To eliminate certain operations of Dominion not contributed to the
Dominion Joint Venture. The historical operations of Dominion are for the
year ended October 31, 1997 and for the six month period ended April 30,
1998.
c) To record amortization expense on goodwill and depreciation associated
with the step-up in accounting basis of real estate as a result of the
formation of the Dominion Joint Venture. The goodwill is being amortized
over a 25 year life and the real estate, other than land, over a 30 year
life. Amortization expense is $578,308 and $289,154 for the year and six
months ended, respectively, and depreciation expense is $1,040,535 and
$520,268 for the year and six months ended, respectively.
d) To record minority interest in Dominion Venture Group LLC, of a
subsidiary of the Reckson Operating Partnership, RAP Dominion LLC.
e) To eliminate tax provision as a result of the Dominion Joint Venture
being a pass-through entity not subject to taxation.
(3) To record interest expense for RSI borrowings from ROP, which borrowings
bear interest at a fixed rate of 12% per annum, of $171,949 and $343,898 for
the six months ended June 30, 1998 and the year ended December 31, 1997,
respectively.
(4) To record pro forma income tax expense at an effective rate of 40%.
(c) Exhibits
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RECKSON SERVICE INDUSTRIES, INC.
/s/ Scott H. Rechler
-------------------------------------
Scott H. Rechler
President and Chief Executive Officer
Date: November 10, 1998
