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 September 30, 1998
Commission file number: 001-14183
RECKSON SERVICE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3383642
(State other jurisdiction of incorporation (IRS. Employer
of organization) Identification Number)
225 Broadhollow Road, Melville, NY 11747
(Address of principal executive office) (zip code)
(516) 719-7400
(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) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The company has only one class of common stock, issued at $.01 par value
per share with 24,685,514 shares outstanding as of November 11, 1998.
<PAGE>
RECKSON SERVICE INDUSTRIES, INC.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets of Reckson Service Industries, Inc. as of
September 30, 1998 and December 31, 1997 ..................... 3
Statement of Operations of Reckson Service Industries, Inc. for
the three and nine months ended September 30, 1998 and for the
period July 15, 1997 (commencement of operations) to September
30, 1997 ..................................................... 4
Statement of Cash Flows of Reckson Service Industries, Inc. for
the nine months ended September 30, 1998 and for the period July
15, 1997 (commencement of operations) to September 30, 1997 .. 5
Notes to the Financial Statements of Reckson Service Industries,
Inc. ......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................ 17
PART II OTHER INFORMATION ............................................ 21
Item 1. Legal Proceedings
Item 2. Changes in Securities ........................................ 21
Item 3. Defaults Upon Senior Securities .............................. 21
Item 4. Submission of Matters to a Vote of Securities Holders ........ 21
Item 5. Other Information ............................................ 21
Item 6. Exhibits and Reports on Form 8-K ............................. 21
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Reckson Service Industries, Inc.
Balance Sheets
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 2,094,611 $ 129,704
Investment in RO Partners Management, LLC (Note 3) --- 3,868,093
Investment in ACC (Note 3) --- 1,652,165
Investment in and advances to RSVP Holdings,
LLC (Notes 3 and 5) 17,136,179 ---
Investment in and advances to Reckson Executive
Centers, LLC (Note 3) 1,106,747 ---
Investment in and convertible loans to On-Site
Ventures, LLC (Note 3) 4,736,650 325,000
Equipment (net of depreciation of $4,750) 42,659 ---
Affiliate receivables (Note 5) 2,736,439 832,854
Organization and pre-acquisition costs (net of ---
amortization of $32,056 and $8,214, respectively) 748,207 681,694
Other assets 528,526 30,185
-------------- --------------
Total Assets $ 29,130,018 $ 7,519,695
============== ==============
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses 195,578 119,384
Credit Facilities (Note 5) 6,704,207 ---
Loans payable to affiliates (Note 5) --- 3,177,857
-------------- --------------
Total Liabilities 6,899,785 3,297,241
Commitments (Note 6) --- ---
Shareholders' Equity: (Notes 1 and 4)
Common stock, $.01 par value, 24,685,514 shares
issued and outstanding 246,855 10
Additional paid in capital 24,610,951 4,480,331
---
Retained earnings (2,627,573) (257,887)
-------------- --------------
Total Shareholders' Equity 22,230,233 4,222,454
-------------- --------------
Total Liabilities and Shareholders' Equity $ 29,130,018 $ 7,519,695
============== ==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Service Industries, Inc.
Statement of Operations
(Unaudited)
<CAPTION>
Three Nine Period from
Months Ended Months Ended July 15, 1997
September 30, September 30, September 30,
1998 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Equity in (loss) of ACC $ --- $ (51,508) $ ---
Equity in earnings of RO Partners, Management, LLC --- 170,567 9,501
Equity in (loss) of RSVP Holdings, LLC (770,964) (1,389,438) ---
Equity in earnings of Reckson Executive Centers, LLC 9,250 6,739 ---
Equity in (loss) of On-Site Ventures, LLC (15,411) (20,144) ---
Other income 125,000 291,666 ---
Interest income 411,802 552,734 6,667
--------------- --------------- ---------------
Total Revenues (240,323) (439,384) 16,168
--------------- --------------- ---------------
Expenses:
General and administrative expenses 536,054 1,000,760 4,489
--------------- --------------- ---------------
Net Operating (Loss) Income (776,377) (1,440,144) 11,679
Non Operating Expenses:
Amortization and Depreciation 7,600 28,592 ---
Interest Expense 460,024 900,950 ---
--------------- --------------- ---------------
Net (Loss) Income before income taxes (1,244,001) (2,369,686) 11,679
--------------- --------------- ---------------
Income Taxes --- --- 4,671
--------------- --------------- ---------------
Net (Loss) Income. $ (1,244,001) $ (2,369,686) $ 7,008
=============== =============== ===============
Basic and diluted net loss per weighted average
common share $ (0.05) $ (0.21) $ ---
=============== =============== ===============
Basic and diluted weighted average common
shares outstanding 24,685,514 11,097,619 ---
=============== =============== ===============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Service Industries, Inc.
Statement of Cash Flows
(Unaudited)
<CAPTION>
Period from
Nine July 15, 1997
Months Ended to
September 30, September 30,
1998 1997
----------------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (Loss) Income $ (2,369,686) $ 7,008
Adjustments to reconcile net loss to net cash (used
in) provided by operating activities:
Depreciation and amortization 28,592 ---
Equity in loss of RSVP Holdings, LLC 1,389,438 ---
Equity in loss of ACC 51,508 ---
Equity in (earnings) of RO Partners Management,
LLC (170,567) (9,501)
Equity in (earnings) of Reckson Executive
Centers, LLC (6,739) ---
Equity in loss of On-Site Ventures, LLC 20,144 ---
Changes in operating assets and liabilities: ---
Other assets (498,341) (6,667)
Accounts payable and accrued expenses 76,194 107,029
----------------- -----------------
Net cash (used in) provided by operating activities (1,479,457) 97,869
----------------- -----------------
Cash Flows From Investing Activities:
Contribution to Acc (278,985) ---
Purchase of equipment (47,409) ---
Pre-acquisition costs and organization costs (90,355) (164,284)
Investment in and convertible loans to On-Site
Ventures, LLC (4,431,793) ---
Investment in and advances to Reckson Executive
Centers, LLC (1,100,009) ---
Loans and Contributions to RSVP Holdings, LLC (12,607,315) ---
----------------- -----------------
Net cash (used in) investing activities (18,555,866) (164,284)
----------------- -----------------
Cash Flows From Financing Activities:
Capital contributions --- 633,824
Net proceeds from sale of common stock 20,377,465 ---
Proceeds from affiliate loans 3,526,350 106,627
Advances to affiliates (1,903,585) (666,666)
----------------- -----------------
Net cash provided by financing activities 22,000,230 73,785
----------------- -----------------
Net increase in cash and cash equivalents 1,964,907 7,370
----------------- -----------------
Cash and cash equivalents at beginning of period 129,704 ---
----------------- -----------------
Cash and cash equivalents at end of period $ 2,094,611 $ 7,370
================= =================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 815,604 $ ---
================= =================
Non Cash Transactions:
Contribution of assets from ROP $ --- $ 3,622,500
================= =================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
Reckson Service Industries
Notes to Financial Statements
September 30, 1998
(unaudited)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Reckson Service Industries, Inc. ( "RSI" or the "Company") was formed on July
15, 1997 to engage in the business of providing commercial services to
properties owned by Reckson Operating Partnership, L.P. ("ROP"), whose general
partner is Reckson Associates Realty Corp. ("Reckson"), and its tenants and
third parties and to invest in Reckson Strategic Venture Partners, LLC and
related entities ("RSVP") a real estate venture capital fund. The Company
will operate under an agreement between the Company and ROP (the "Intercompany
Agreement"). Under the Intercompany Agreement, the Company and ROP agree,
subject to certain terms, to provide each other with first refusal rights to
participate in certain transactions.
In connection with the initial capitalization of RSI, ROP contributed
$4,256,324 for a 95% nonvoting equity interest and certain members of Reckson
management contributed notes of $224,017 to the Company in exchange for a 5%
voting ownership interest. On October 29, 1997 the notes were repaid.
On June 11, 1998, ROP distributed its 95% of the common stock of RSI to its
unit holders of record on May 26, 1998. Immediately prior to the Distribution,
the shares of non-voting common stock held by ROP were exchanged by RSI for
RSI common shares. Each share of the Company's common stock issued in the
Distribution was accompanied by one preferred share purchase right.
Simultaneously, Reckson distributed 100% of the RSI common shares received
from the distribution to its common shareholders of the same record date. In
addition, simultaneously with the Distribution, the Company issued rights to
its stockholders to subscribe for the purchase of additional shares of common
stock of the Company.
Immediately after the Distribution of RSI common stock, RSI granted to its
stockholders (collectively, "Holders") one subscription right for each share
of RSI common stock. Each subscription right entitled the Holder to purchase
one share of RSI common stock at a purchase price of $1.03 per share (the
"Exercise Price") and, at the election of such Holder, four additional shares
(but not less than four additional shares) at a purchase price of $1.03 per
share. Holders of subscription rights had the opportunity to acquire up to an
aggregate of approximately 20,557,130 shares of RSI common stock. RSI and
Reckson Standby, LLC (the "Standby Purchaser") (an entity owned by several
members of management), entered into a standby agreement pursuant to which the
Standby Purchaser agreed to purchase, and RSI agreed to sell, any and all
shares of RSI common stock that were the subject of subscription rights in the
rights offering but were not subscribed for by the Holders on the expiration
date at the exercise price. The proceeds from the Standby Purchaser were
approximately $7,325,000. RSI received aggregate proceeds from the rights
offering of approximately $21,153,000.
The Company owned a 33 1/3% interest in RO Partners Management, LLC ("RO"),
the remaining interest in RO is held 33 1/3% by Jon L. Halpern, a former
director of Reckson, and 33 1/3% by an independent third party investor. RO
is the general partner of Reckson Opportunity Partners, L.P. ("Opportunity
Partners") predecessor to RSVP. RSVP was formed on January 23, 1998 to
succeed to the operating activities of Opportunity Partners. On April 1,
1998, the Company transferred its equity interest in RO to RSVP. Through RSVP
Holdings, LLC the Company is a managing member and 100% owner of the common
equity of RSVP. New World Realty LLC ("New World"), an entity owned by two
individuals retained by RSVP Holdings, LLC as Managing Directors, acts as a
managing member of RSVP Holdings, LLC and has a carried interest which
provides for the Managing Directors to receive a share in the profits of
RSVP after the Company and Paine Webber Real Estate Securities, Inc. ("PWRES")
have received certain minimum returns and a return of capital. PWRES is a
non-managing member and preferred equity owner who has committed $200 million
in capital and shares 66 2/3% in profits and losses of RSVP with the Company,
subject to a maximum internal rate of return of 16% on invested capital. It
is anticipated that future investments by the Company in real estate venture
capital fund activities will be conducted through RSVP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements present the financial position of the
Company at September 30, 1998 and December 31, 1997 and the results of its
operations for the three and nine months ended September 30, 1998 and for
the period July 15, 1997 to September 30, 1997 and its cash flows for the
nine months ended September 30, 1998 and for the period July 15, 1997 to
September 30, 1997. The Company accounts for its investments of less than
controlling interests under the equity method of accounting.
The investments in RO and American Campus Communities, LLC ("ACC") through
March 31, 1998, RSVP Holdings, LLC, Reckson Executive Centers, LLC and
On-Site Ventures, LLC were reflected in the accompanying financial statements
under the equity method of accounting.
The accompanying interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in
the financial statements prepared in accordance with generally accepted
accounting principles may have been condensed or omitted pursuant to such
rules and regulations, although management believes that the disclosures are
adequate to make the information presented not misleading. The unaudited
financial statements as of September 30, 1998 and for the nine month period
ended September 30, 1998 and for the period July 15, 1997 to September 30,
1997 include, in the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the financial
information set forth herein. The results of operations for the interim
period are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998.
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. Actual results could differ from those estimates.
Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Long-Lived Assets
At inception, the Company adopted SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which
establishes methods of valuation for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used. The adoption of this statement had no material impact on the
accompanying financial statements.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," ("FAS No. 123") requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, no compensation expense was recognized because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant.
(See Note 4).
Income Taxes
At inception, the Company adopted SFAS No. 109, "Accounting for Income Taxes"
("SFAS No. 109"), which prescribes an asset and liability method of accounting
for income taxes. Under SFAS No. 109, deferred tax assets are to be recognized
unless it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
Earnings Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods
have been presented to conform to the Statement 128 requirements.
Comprehensive Income
In 1997, the FASB issued Statement No. 130, ("SFAS 130") "Reporting
Comprehensive Income" which is effective for fiscal years beginning after
December 15, 1997. SFAS 130 established standards for reporting comprehensive
income and its components in a full set of general-purpose financial
statements. SFAS 130 requires that all components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. The adoption of this standard had no impact on
the Company's financial position or results of operations.
Disclosures about Segments of an Enterprise and Related Information
In 1997, the FASB issued Statement No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes standards for
reporting information about operating segments in annual financial statements
and in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of this standard had no impact on the Company's financial
position or results of operations.
3. INVESTMENTS
Summarized financial information and a summary of the Company's investment in,
advances and share of loss from RSVP Holdings, LLC is as follows:
Balance Sheet
September 30,
1998
--------------
Investment in RO $ (1,108,009)
Investment in ACC 1,656,196
Investment in Assisted Living Investments, LLC 6,561,316
Investment in Gateway Development Group, LLC 377,269
Investment in Dominion Venture Group, LLC 8,760,738
Deferred compensation expense 5,232,889
Other assets 5,030,327
--------------
Total Assets $ 26,510,726
==============
Due to affiliates $ 1,397,763
Other liabilities 857,507
--------------
Total Liabilities 2,255,270
--------------
Preferred capital offering costs (5,000,000)
Preferred member's equity 12,119,277
Net RSI investment in and advances to RSVP Holdings, LLC 17,136,179
--------------
Total Capital 24,255,456
--------------
Total Liabilities and Capital $ 26,510,726
==============
In connection with the PWRES preferred equity financing, RSVP paid a
commitment fee of 2.5% of the total preferred equity commitment of which
$1,400,000 was paid to an entity owned by a former employee of PWRES who is
one of RSVP's managing directors.
<TABLE>
Statements of Operations
<CAPTION>
For the period
For the three January 23,
months ended 1998 to
September 30, September 30,
1998 1998
----------------- -----------------
<S> <C> <C>
Revenues:
Equity in (loss) of ACC $ (95,001) $ (223,446)
Equity in earnings of RO 98,823 110,120
Equity in (loss) of Gateway Development Group, LLC (32,159) (32,159)
Equity in (loss) of Assisted Living Investments, LLC (938,711) (938,711)
Equity in earnings of Dominion Venture Group, LLC ---- ----
Other income ---- 254,746
Interest income 71,469 124,016
----------------- -----------------
Total Income (895,579) (705,434)
----------------- -----------------
Expenses:
Operating expenses 181,390 581,586
General and administrative expenses 973,120 2,265,769
Interest expense 44,647 323,171
Depreciation and amortization 31,637 105,838
----------------- -----------------
Total Expenses 1,230,794 3,276,364
----------------- -----------------
Net Loss (2,126,373) (3,981,798)
Less: Other member's share (1,355,409) (2,592,360)
----------------- -----------------
RSI's share of net loss $ (770,964) $ (1,389,438)
================= =================
</TABLE>
In 1997, the Company invested $3.62 million in RO, which contributed such
amount to Opportunity Partners. Opportunity Partners invested approximately
$10.8 million to acquire a 70% interest in Dobie Center, L.P., which owns 100%
in Dobie Center, a mixed use student housing and retail property located in
Austin, Texas. On April 1, 1998, the Company transferred its interest in RO
to RSVP.
On August 4, 1998, Dobie Center Properties, Ltd. issued $46,560,000 principal
amount of AAA series 1998 taxable insured notes in connection with the
property's refinancing. The net proceeds of $45.1 million were utilized to
repay $20.4 million of secured debt and for reserves related to renovations to
the project. In connection with this transaction, RSVP received approximately
$4.79 million, net of reserves.
Substantially all of RO's assets, liabilities, revenues and expenses relate to
its investment in Dobie Center. Summarized financial information and a
summary of RSVP's and RSI's investment/(deficit) in and share of income
from RO at September 30, 1998 and December 31, 1997, respectively, is as
follows:
<TABLE>
Balance Sheets
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Property and equipment, less accumulated
depreciation $ 36,488,959 $ 35,345,013
Other assets 15,140,310 6,700,605
----------------- -----------------
Total Assets $ 51,629,269 $ 42,045,618
================= =================
Mortgage notes payable $ 46,560,000 $ 20,280,500
Other liabilities 10,010,079 5,195,624
----------------- -----------------
Total Liabilities 56,570,079 25,476,124
----------------- -----------------
Minority interest - (deficit)/equity, respectively (1,482,243) 4,915,462
----------------- -----------------
Non-RSVP interest (deficit)/equity, respectively (2,350,558) 7,785,939
Net RSVP investment/(deficit) in RO, respectively (1,108,009) 3,868,093
----------------- -----------------
Total Capital (3,458,567) 11,654,032
----------------- -----------------
Total Liabilities and Capital $ 51,629,269 $ 42,045,618
================= =================
</TABLE>
<TABLE>
Statement of Operations
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
1998 1998
----------------- -----------------
<S> <C> <C>
Rental income $ 2,272,511 6,622,953
Interest income 139,040 $ 298,173
Other income 407,661 725,399
----------------- -----------------
Total Income 2,819,212 7,646,525
----------------- -----------------
Property operating expenses 506,987 1,526,124
General and administrative expenses 970,809 2,773,040
Interest expense 645,367 1,388,005
Depreciation and amortization 228,981 652,156
Non-recurring expense 43,540 103,780
----------------- -----------------
Total Expenses 2,395,684 6,443,105
----------------- -----------------
Minority interest 127,058 361,026
----------------- -----------------
Net income 296,470 842,394
Less: Non-RSVP share (197,647) (561,707)
Less: RSI's share prior to April 1, 1998 ---- (170,567)
----------------- -----------------
RSVP's share of net income $ 98,823 $ 110,120
================= =================
</TABLE>
On August 27, 1998, the Company announced the formation of a joint venture
between RSVP and Dominion, an Oklahoma-based, privately-owned group
of companies that focuses on the development, acquisition and ownership of
government occupied office buildings and correctional facilities. The new
venture, Dominion Venture Group LLC (the "Venture"), is owned by RSVP-Dominion
LLC, a subsidiary of RSVP, and by Burgess Services LLC, an entity owned and
controlled by Calvin Burgess, President and Chief Executive Officer of
Dominion. The Venture will engage primarily in acquiring, developing
and/or owning government-occupied office buildings and privately-operated
correctional facilities and related activities. Under the Operating Agreement,
RSVP is to invest up to $100 million, some of which may be invested by ROP
(together, the "RSVP Capital"), for capital requirements approved by RSVP.
RSVP funded its total capital contribution of $8,597,453 through draws under
its PWRES preferred equity facility and RSI's credit facility with ROP. ROP
contributed $10,065,338 in connection with the joint venture.
As of September 30, 1998, the excess of the Company's investment over its
share of the equity in the underlying net assets of the Venture ("Excess
Investment") was $163,285. This Excess Investment is being amortized over the
life of the investment estimated at 25 years.
Summarized financial information and a summary of RSVP's investment in and
share of income of the Venture is as follows:
Balance Sheet
September 30,
1998
----------------
Property and equipment, less accumulated
depreciation $ 118,986,856
Goodwill 14,417,542
Other assets 9,992,669
----------------
Total Assets $ 143,397,067
================
Current liabilities $ 30,042,458
Mortgage payable 29,879,626
----------------
Total Liabilities 59,922,084
----------------
Minority interest 30,305,593
----------------
Non-RSVP equity 44,571,937
Net RSVP investment in Venture 8,760,738
Less: Excess investment (163,285)
----------------
Total Capital 53,169,390
----------------
Total Liabilities and Capital $ 143,397,067
================
Statement of Operations
For the period
from August 27,
1998 to
September 30,
1998
----------------
Construction revenue $ 2,192,638
Other revenue 1,674,322
----------------
Total Revenue 3,866,960
----------------
Cost of sales 2,796,587
General & administrative expense 354,655
Depreciation expense 322,157
Interest expense 263,811
----------------
Total Expenses 3,737,210
----------------
Minority interest 109,577
----------------
Net income 20,173
Less: Non-RSVP share (20,173)
----------------
RSVP's share $ ---
================
On August 12, 1998, RSVP acquired through a wholly owned subsidiary a 45%
interest in Assisted Living Investments, LLC ("ALI") for approximately $3.25
million. ALI is a joint venture that develops, leases, operates and finances
Assisted Living Facilities. In addition, RSVP has agreed to contribute 80% of
the equity of ALI, up to a maximum $16.0 million for a total maximum
commitment of $19.25 million. RSVP has a priority on distributions from ALI.
RSVP funded $7.5 million of its $19.25 million commitment upon the closing of
the transaction. RSVP funded 50% of its capital contribution through draws
under RSVP's preferred equity facility with PWRES. The remaining 50% capital
contribution was funded through a draw under the RSVP facility (see note 5).
As of September 30, 1998, the excess of the Company's investment over its
share of the equity in the underlying net assets of ALI ("Excess Investment")
was $2,318,027. The Excess Investment is being amortized over the life of the
investment estimated at 25 years.
Summarized financial information and a summary of RSVP's investment in and
share of loss is as follows:
Balance Sheet
September 30,
1998
----------------
Property and equipment, less accumulated
depreciation $ 69,820,388
Other assets 5,245,610
----------------
Total Assets $ 75,065,998
================
Note Payable $ 70,619,720
Other Liabilities 6,295,449
----------------
Total Liabilities 76,915,169
----------------
Minority interest (6,092,460)
----------------
Net RSVP investment in ALI 6,561,316
Less: Excess investment (2,318,027)
----------------
Total Capital 4,243,289
----------------
Total Liabilities and Capital $ 75,065,998
================
Statement of Operations
For the period
from August 12,
1998 to
September 30,
1998
----------------
Total Operating Revenue $ 686,380
----------------
Operating expense 1,044,269
Other expense 131,067
Depreciation and amortization 426,003
Interest expense 586,979
----------------
Total Expenses 2,188,318
----------------
Net loss (1,501,938)
Less: Non-RSVP share (563,227)
----------------
RSVP share of net loss $ (938,711)
================
The Company contributed $1.51 million to and acquired a 33 1/3% interest in
RFG Capital Management Partners ("RFG Capital") whose sole net investment is a
76.09% interest in ACC, a student housing enterprise which owns, develops,
constructs, manages and acquires, on-and off campus student housing projects.
As of September 30, 1998, the excess of the Company's investment over its
share of the equity in the underlying net assets of ACC ("Excess Investment")
was $187,102. This Excess Investment is being amortized over the life of the
investment estimated at 25 years. On April 1, 1998, the Company transferred
its equity interest in ACC to RSVP.
Summarized financial information and a summary of RSVP's and the Company's
investment in and share of loss from ACC at September 30, 1998 and December
31, 1997 respectively, is as follows:
<TABLE>
Balance Sheets
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Investment in leasehold estates, less accumulated
depreciation $ 41,250,792 $ 30,042,101
Other assets 8,193,500 4,035,570
----------------- -----------------
Total Assets $ 49,444,292 $ 34,077,671
----------------- -----------------
Note payable $ 37,822,557 $ 25,635,208
Other liabilities 6,781,788 3,633,473
----------------- -----------------
Total Liabilities 44,604,345 29,268,681
----------------- -----------------
Minority interest 432,665 425,254
----------------- -----------------
Non-RSVP equity 2,938,188 2,922,491
Net investment in ACC 1,656,196 1,652,165
Less: Excess investment (187,102) (190,920)
----------------- -----------------
Total Capital 4,407,282 4,383,736
----------------- -----------------
Total Liabilities and Capital $ 49,444,292 $ 34,077,671
================= =================
</TABLE>
<TABLE>
Statement of Operations
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
1998 1998
----------------- -----------------
<S> <C> <C>
Rental income $ 1,249,278 $ 3,252,910
Other income 324,329 770,037
----------------- -----------------
Total Income 1,573,607 4,022,947
----------------- -----------------
General and administrative expenses 888,305 1,722,362
Property operating expenses 231,362 1,146,479
Interest expense 628,287 1,705,061
Depreciation 192,685 518,053
----------------- -----------------
Total Expense 1,940,639 5,091,955
----------------- -----------------
Minority interest (87,757) (255,600)
----------------- -----------------
Net loss (279,275) (813,408)
Less: Other non-RSVP share (186,183) (542,272)
Less: RSI's share prior to April 1, 1998 ---- (51,508)
Less: RSVP's amortization of excess
investment in ACC (1,909) (3,818)
----------------- -----------------
RSVP's share of net loss $ (95,001) $ (223,446)
================= =================
</TABLE>
RSI has contracted to acquire a 58.69% equity interest in On-Site Ventures,
LLC ("On-Site"), a company that provides advanced telecommunications systems
and services within commercial and residential buildings and/or building
complexes. Under the terms of the contract, the Company has also committed to
contribute $6.5 million to On-Site to fund certain capital costs of installing
telecommunication systems and for working capital. Jon L. Halpern, a former
director of Reckson, beneficially owns substantially all of the On-Site
business prior to RSI's acquisition of an interest therein (and will own
beneficially a 25.97% interest in On-Site assuming the Company acquires its
58.69% interest). The Company has advanced On-Site $4,125,000 through
September 30, 1998 to fund certain operating costs. The advances are
evidenced by loans convertible into equity interests in On-Site which bear
interest at a rate of 12% per annum and mature on March 1, 1999. On May 18,
1998, the Company purchased a membership interest in On-Site equal to 1% of
the aggregate membership interests.
In May 1998, the Company made an initial capital contribution of $300,000 for
a 58.69% interest in On-Site Commerce and Content, LLC ("OCC"), a Company
established to acquire and develop software products. As of September 30,
1998 OCC had no operations.
On April 1, 1998 the Company purchased Reckson's 9.9% equity interest in
Reckson Executive Centers, LLC ("REC") for $200,000 and assumed debt of
approximately $322,000. REC owns and operates executive office suite business
in the New York tri-state area. All of REC's centers are located within
buildings owned and operated by ROP. The Company has also loaned REC
approximately $623,000 to fund purchases of certain business assets in
connection with the operation of the executive centers. The loans accrue
interest at 12%.
On August 11, 1998, RSVP acquired through a wholly owned subsidiary an
interest in Gateway Development Group, LLC ("Gateway") with Gateway
Management for approximately $377,000. Gateway is a start up entity that
pursues opportunities in privatized military housing. Under the Operating
Agreement, RSVP is to fund up to $650,000 entirely after which funding will be
allocated 90% to RSVP and 10% to Gateway Management. At September 30, 1998,
RSVP recognized a loss of $(32,159), based upon capital invested in
proportion to total capital.
4. SHAREHOLDERS' EQUITY
The Company has established the 1998 stock option plan (the "Plan") for the
purpose of attracting and retaining executive officers, directors and other
key employees. Pursuant to the Plan 3,700,376 of the Company's authorized
shares have been reserved for issuance under the Plan. On January 10, 1998
and March 30, 1998, the Company granted options to purchase 542,890 and
2,755,468, respectively of the Company's common shares at an exercise price of
$1.10 and $1.04 respectively per share based on the fair value on each date of
grant, which the board of directors of the Company has concluded to be book
value on each date of grant.
On August 4, 1998, the Board adopted a "broad based" stock option plan for the
purpose of awarding options to non-executive officers and new hires. Pursuant
to such plan, 100,000 of the Company's authorized shares have been reserved
for issuance.
On August 4, 1998, the Company granted options to purchase 455,564 shares at
an exercise price of $2 per share, which approximates market value at the time
of the grant. Therefore, no compensation expense was recognized.
The following is the Company's reconciliation of the numerators and
denominators of the basic and diluted net loss per weighted average common
share computations and other related disclosures required by FAS Statement
128:
The following table set forth the computation of basic and diluted earnings
per share:
Three Nine
Months Months
Ended Ended
September September
30, 1998 30, 1998
------------ -------------
Numerator:
Net loss $(1,244,001) $ (2,369,686)
------------ -------------
Numerator for basic and diluted
earnings per share (1,244,001) (2,369,686)
------------ -------------
Denominator:
Denominator for basic earnings per
share - weighted average shares 24,685,514 11,097,619
------------ -------------
Basic and diluted earnings per common share:
Basic and diluted net loss per common share $ (0.05) $ (0.21)
------------ -------------
5. TRANSACTIONS WITH RELATED PARTIES
Included in affiliate receivables on the accompanying balance sheet is an
unsecured loan of $666,666 to RFG Capital, an entity which is owned evenly at
33 1/3% by the Company, Jon L. Halpern, and an independent third party
investor. The note bears interest at 12% per annum.
On June 15, 1998, RSI established a credit facility (the "RSI Facility") with
ROP in the amount of $100 million for RSI's service sector operations and
other general corporate purposes. ROP has advanced the Company $109,889 at
September 30, 1998. These advances bear interest at 12% per annum.
On June 15, 1998, RSI established a credit facility of $100 million ("RSVP
Facility") with ROP for funding RSVP investments. The amount available under
RSVP Facility is reduced by any amount invested by ROP in joint ventures with
RSVP. As of September 30, 1998, ROP has advanced RSI $6,594,318 under the
RSVP Facility and has invested $10,065,338 in joint ventures with RSVP.
RSI has obtained an option from Reckson Management Group, Inc. ("RMG"), a
company in which ROP owns a 97% non-voting equity interest to acquire a
majority equity interest in a privately held national executive office suites
business. The Company's option to acquire this equity interest has a five
year term.
In February 1998, RSVP Holdings, LLC, entered into employment agreements with
the two managing directors of RSVP. The agreements provide for a base salary
of $500,000 and have a seven-year term. In addition to the base salary each
managing director has received from the Company a $3.0 million grant of common
stock of Reckson (the "Reckson Stock") which will vest equally over five
years. The Reckson Stock was purchased by the Company and contributed to RSVP
Holdings, LLC. In addition, in April 1998, the Company advanced each managing
director a tax loan of $1.44 million in connection with the grant of Reckson
stock. These loans bear interest at 8% per annum and are due in April, 2003
and are secured by the Reckson stock. Additionally, it is anticipated that New
World will receive transaction fees of up to $1 million per year related to
identifying RSVP investment opportunities. In August of 1998, $1 million of
such fees were paid to New World by third parties.
RSI and Reckson Standby, LLC (the "Standby Purchaser") (an entity owned by
several members of management), entered into a Standby Agreement pursuant to
which the Standby Purchaser agreed to purchase, and RSI agreed to sell, any
and all shares of RSI common stock that were the subject of Subscription
Rights in the Rights Offering but were not subscribed for by the Holders on
the Expiration Date at the Exercise Price. Pursuant to the Standby Agreement,
in July 1998, the Standby Purchaser acquired 7,111,650 shares of RSI common
stock for an aggregate purchase price of approximately $7,325,000.
The Company is entitled to an annual asset management fee of $2 million with
respect to RSVP, of which $1.5 million is subordinate to PWRES receiving an
annual minimum rate of return of 16% and a return of its capital. The
unsubordinated amount for the period March 5, 1998 to September 30, 1998 of
$291,666 is included in affiliate receivables on the accompanying balance
sheet.
6. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires RSI to disclose the estimated fair
values of its financial instrument assets and liabilities. The carrying
amounts approximate fair value for cash and cash equivalents because of the
short maturity of those instruments. For the loans payable to affiliates the
estimated fair value approximates the recorded balance.
7. SUBSEQUENT EVENTS
On October 5, 1998, the interests in Reckson Executive Centers, LLC were
reorganized. As part of this reorganization the 9.9% membership interest held
by the Company in Reckson Executive Centers LLC was contributed to Reckson
Executive Centers Inc., in exchange for 75% of the common stock of such
corporation.
On November 9, 1998, the Company exercised its option to acquire a majority
interest in Interoffice Superholdings Corporation (the "Interoffice Interest"),
a holding company which owns and operates approximately 36 nationally located
executive office suites centers. The Interoffice Interest was formerly held by
RMG. The purchase price paid by the Company to RMG was approximately $14.9
million.
On November 9, 1998, each of Interoffice Superholdings Corporation and Reckson
Executive Centers, Inc. executed a definitive merger agreement with Alliance
National Incorporated ("Alliance"), a holding company which owns and operate
approximately 90 national located executive office suites centers. The
stockholders of Interoffice Superholdings Corporation and Reckson Executive
Centers Inc. will receive shares of the Series C Preferred Stock of Alliance
which will represent approximately 40% of the equity interest in Alliance.
The Company will own approximately 56% of such securities or approximately
22.4% of Alliance. The holders of the Series C Preferred Stock will have the
right to appoint four of the ten members of the Board of Directors and specified
preemptive rights. In connection with such mergers, the holders of the Series
C Preferred Stock will enter into a Stockholders Agreement between Alliance
and the other securityholders named therein providing specified rights and
obligations with respect to the securities of Alliance, including without
limitation, the right of first refusal with respect to proposed transfers,
prohibitions of transfers to competitors and the right to require Alliance to
purchase such securities at the fair market value upon certain circumstances.
The closing of the mergers is subject to certain third-party consents and
approval under the Hart-Scott-Antitrust Improvements Act of 1976, as amended.
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 Reckson Service Industries, Inc. (the "Company" or
"RSI") and related notes thereto.
The Company considers certain statements set forth 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, including, without limitation, statements relating to the ability
to identify and acquire interests in commercial services companies, the
financing of the Company's operations, the timing and success of such
acquisitions and the ability to integrate and manage effectively its various
acquisitions, involve certain risks and uncertainties. Although the Company
believes that the expectation 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 its 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, general economic
conditions, a lack of attractive business opportunities or suitable
acquisitions, the Company's dependence upon financing from Reckson Operating
Partnership, L.P.("ROP"), conflicts of interest of management, competition for
targeted acquisitions and the ability to otherwise finance business
opportunities. 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.
OVERVIEW AND BACKGROUND
The Company's primary business is to create and manage a system of
interrelated services to be offered to ROP, ROP's tenants and tenants of the
Company's executive suite businesses (the "Reckson Customer Base") and third
parties in the general marketplace through a centralized infrastructure. The
Company's growth strategy is to acquire primarily established businesses
within each of its targeted service sectors, and, where appropriate, to
retain the existing management of such businesses ("Service Platforms").
Specifically, the Company seeks opportunities for which there is broad
demand in the Reckson Customer Base, strong entrepreneurial management, a
reputation for high quality services and growth potential. Such Service
Platform investment will serve as a basis for future acquisitions in such
sectors. The Company will establish Service Platforms that present
significant opportunities to provide commercial services to the Reckson
Customer Base and other third parties. Currently, the Reckson Customer Base
retains third parties to provide many services for their day-to-day
operations. Of these services, the Company may seek to provide the Reckson
Customer Base with telecommunications, document storage, document
reproduction and logistics services (i.e., inventory services, messenger
services and delivery services), as well as with other services that the
Company determines may be utilized by the Reckson Customer Base. The Company
will seek growth in each Service Platform by (i) accessing the Reckson
Customer Base as an anchor for growth opportunities in ROP's markets, (ii)
integrating each Service Platform into RSI's centralized infrastructure and
(iii) acquiring similar businesses or making additional investments within
such Service Platform.
ROP and RSI have entered into an intercompany agreement (the "Reckson
Intercompany Agreement") to formalize their relationship and to limit
conflicts of interest. Under the Reckson Intercompany Agreement, RSI granted
ROP a right of first opportunity to make any Real Estate Investment Trust
("REIT") -qualified investment that becomes available to RSI. In addition, if
a REIT-qualified investment opportunity becomes available to an affiliate of
RSI, including RSVP, the Reckson Intercompany Agreement requires such
affiliate to allow ROP to participate in such opportunity to the extent of
RSI's interest.
Under the Reckson Intercompany Agreement, ROP granted RSI a right of first
opportunity to provide commercial services to ROP and its tenants. RSI will
provide services to ROP at rates and on terms as attractive as either the best
available for comparable services in the market or those offered by RSI to
third parties. In addition, ROP will give RSI access to its tenants with
respect to commercial services that may be provided to such tenants and, under
the Reckson Intercompany Agreement, subject to certain conditions, ROP granted
RSI a right of first refusal to become the lessee of any real property
acquired by ROP if ROP determines that, consistent with Reckson's status as a
REIT, it is required to enter into a "master" lease agreement.
In February 1998, RSVP Holdings, LLC, the managing member of Reckson Strategic
Venture Partners ("RSVP") entered into employment agreements with two highly
experienced real estate professionals (the "Managing Directors"). The
agreements provide for a base salary of $500,000 and have a seven-year term.
In addition to the base salary each Managing Director has received from the
Company a $3.0 million grant of common stock of Reckson Associates Realty
Corp. ("Reckson"), (the "Reckson Stock") which will vest equally over five
years. The Reckson Stock was purchased by the Company and contributed to RSVP
Holdings, LLC. In addition, in April 1998, the Company advanced each Managing
Director a tax loan of $1.44 million in connection with the grant of Reckson
stock. These loans bear interest at 8% per annum and are due in April, 2003.
The Company is a managing member and 100% owner of the common equity of RSVP
Holdings, LLC. New World Realty LLC ("New World"), an entity owned by the
Managing Directors, acts as a managing member of RSVP Holdings, LLC and owns a
carried interest which provides for the Managing Directors to receive a share
in the profits of RSVP after the Company and Paine Webber Real Estate
Securities ("PWRES"), the preferred equity investor, have received certain
minimum returns and a return of capital. In addition, New World will receive
transaction fees of up to $1 million a year related to identifying RSVP
investment opportunities. In August of 1998, $1 million of such fees were paid
to New World by third parties.
On November 9, 1998, the Company executed a definitive agreement for the
merger of its executive suites businesses, Reckson Executive Centers, Inc.
("REC") and Interoffice Superholdings Corporation ("Interoffice"), with
Alliance National, Incorporated ("Alliance"). The stockholders of REC and
Interoffice will receive shares of Series C preferred stock of Alliance
representing approximately 40% of the aggregate equity interest in Alliance.
The holders of Series C preferred stock will be entitled to appoint four of
the ten members of the Board of Directors and have specified voting and
preemptive rights. Consummation of the mergers are subject to approval of
Hart-Scott-Rodino Antitrust Improvement Act.
RESULTS OF OPERATIONS
The Company commenced operations on July 15, 1997 and had minimal start up
activity through September 30, 1997.
For the three months ended September 30, 1998 the Company reported a net loss
of ($1,244,001). Total revenues include (i) equity in loss of RSVP Holdings,
LLC of ($770,964) and, (ii) equity in loss of On-Site of ($15,411), (iii)
equity in earnings of REC of $9,250, (iv) management fee income of $125,000
and (v) interest income of $411,802 relating to loans made to certain
affiliates. The Company also reported total expenses of $1,003,678 which
substantially represents interest, payroll and office costs.
For the nine months ended September 30, 1998 the Company reported a net loss
of $(2,369,686). Total revenues include (i) equity in earnings of RO of
$170,567 and represented the Company's 33 1/3 % interest in a joint venture
that own a 70% interest in Dobie Center, L.P. an entity which owns the Dobie
Center Student Housing Facility located in Austin, Texas, through March 31,
1998, (ii) equity in loss of American Campus Communities, a student housing
company ("ACC") of $(51,508) through March 31, 1998, (iii) equity in loss of
RSVP Holdings, LLC of ($1,389,438) and (iv) equity in loss of On-Site of
($20,144), (v) equity in earnings of REC of $6,739, (vi) management fee income
of $291,666 and (vii) interest income of $552,734 relating to loans made to
certain affiliates. The Company also reported total expenses of $1,930,302
which substantially represents interest, payroll and office costs.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of RSI, ROP contributed
$4,256,324 to RSI for a 95% non-voting equity interest. Simultaneously,
certain officers of Reckson contributed $224,017 of subscription notes to RSI
in exchange for a 5% voting equity interest, which subscription notes were
repaid. On June 11, 1998, ROP distributed its 95% of the common stock of RSI
(the "Distribution") to its unit holders of record on May 26, 1998.
Immediately prior to the Distribution, the shares of non-voting common stock
held by ROP were exchanged by RSI for RSI common shares. Each share of the
Company's Common Stock issued in the Distribution was accompanied by one
Preferred Share Purchase Right. Simultaneously, Reckson distributed 100% of
the RSI common shares received from the distribution to its common
stockholders of the same record date. In addition, simultaneously with the
Distribution, the Company issued rights to its stockholders to subscribe for
the purchase of 20,557,130 additional shares of common stock of the Company at
a purchase price of $1.03.
Immediately after the Distribution of RSI common stock, RSI granted to its
stockholders (collectively, "Holders") one Subscription Right for each share
of RSI common stock. Each Subscription Right entitled the Holder to purchase
one share of RSI common stock at a purchase price of $1.03 per share (the
"Exercise Price") and, at the election of such Holder, four additional shares
(but not less than four additional shares) at a purchase price of $1.03 per
share. Holders of Subscription Rights had the opportunity to acquire up to an
aggregate of approximately 20,557,130 shares of RSI common stock. RSI and
Reckson Standby, LLC (the "Standby Purchaser") (an entity owned by several
members of management), entered into a Standby Agreement pursuant to which the
Standby Purchaser agreed to purchase, and RSI agreed to sell, any and all
shares of RSI common stock that are the subject of Subscription Rights in the
Rights Offering but are not subscribed for by the Holders on the Expiration
Date at the Exercise Price. The proceeds from the stand-by purchaser were
approximately $7,325,000. RSI received aggregate proceeds from the rights
offering of approximately $21,153,000. RSI has utilized funds raised in the
rights offering for the financing of its operations.
On June 15, 1998, RSI established a credit facility (the "RSI Facility") with
ROP in the amount of $100 million for RSI's service sector operations and
other general corporate purposes. On the same date, RSI established a separate
credit facility with ROP for funding of investments of up to $100 million with
or in RSVP (the "RSVP Facility"), through (i) loans for the funding of RSVP
investments prior to the Distribution, (ii) RSVP-controlled joint venture
REIT-Qualified Investments, or (iii) advances made to RSI subsequent to the
Distribution. Advances under the RSVP Facility in excess of $25 million in
respect of any single platform are subject to approval by Reckson's board of
directors, while advances under the RSI Facility in excess of $10 million in
respect of any single investment in a Service Platform, as well as advances
for investments in opportunities in non-commercial services, are subject to
approval by Reckson's board of directors, or a committee thereof. The RSI and
RSVP Facilities (the "Credit Facilities") each have a term of five years and
advances thereunder are recourse obligations of RSI. Interest accrues on
advances made under the Credit Facilities at a rate equal to the greater of
(i) the prime rate plus 2% and (ii) 12% per annum, with the rate referred to
in clause (iii) increasing annually at a rate of 4% of the prior year's rate.
Prior to maturity, interest is be payable quarterly but only to the extent of
net cash flow and on an interest-only basis and is prepayable without penalty
at the option of RSI. As long as there are outstanding advances under the
Credit Facilities, RSI is prohibited from paying dividends on any shares of
its capital stock. The Credit Facilities are subject to certain other
covenants and will prohibit advances thereunder to the extent such advances
could, in the determination of Reckson, endanger Reckson's status as a REIT.
Additional indebtedness may be incurred by subsidiaries of RSI. As of
September 30, 1998, $109,889 was outstanding under RSI Facility, and
approximately $16.7 million was advanced by ROP under the RSVP Facility of
which approximately $10.1 million represents an investment by ROP in RSVP
joint ventures and approximately $6.6 million represents outstanding
borrowings.
Additionally, RSVP has obtained the Paine Webber Equity Facility from PWRES
which provides for the investment by PWRES of up to $200 million in RSVP in
the form of preferred equity, subject to certain conditions. Amounts
available under the Paine Webber Equity Facility have been used by RSVP to
make investments consistent with its business objectives and to fund working
capital. Under the terms of the Paine Webber Equity Facility, RSVP is subject
to various covenants and events of default and related remedies. Such
remedies include increased control rights of PWRES over the operation of RSVP
under certain circumstances. Advances under the Paine Webber Equity Facility
will be partially funded by an investment fund that is jointly sponsored by
financier George Soros and PWRES. In addition, PWRES and such investment fund
will receive a priority or preferred distribution from RSVP prior to the
distribution of cash to RSI. As of September 30, 1998, PWRES has contributed
$34,840,312.
The Company utilizes the advances under the RSI Facility primarily to make
investments in operating companies that provide services directed towards
occupants of office, industrial and other property types. The Company may make
additional investments in these operating companies to accommodate their
respective growth plans. The Company's investments in interests in operating
companies are anticipated to produce net cash flow as a result of their
operating activities although the level and timing of net cash flow for each
investment in the short term and long term may vary based upon the stage of
the respective operating companies growth cycle. The Company targets
investments in operating companies that will produce net cash flow in the long
term. Net cash flow produced by the Company's investments will be used for
debt service under the RSI Facility and for the Company's operating costs.
The Company expects to meet its short term liquidity requirements generally
through its net cash flow produced by its operations along with the remaining
proceeds from the rights offering and advances under the RSI Facility. The
Company expects that it will refinance indebtedness under the RSI Facility at
maturity or retire such debt through the issuance of debt securities or equity
securities, although there can be no assurance that the Company will be able
to refinance or retire such indebtedness. The Company anticipates that cash
on hand, from remaining proceeds of the rights offering and net cash flows
from operating activities, together with cash available from borrowings under
the RSI Facility, will be adequate to meet the capital and liquidity
requirements of the Company in both the short and long term.
The Credit Facilities bear interest at the greater of the Prime Rate plus 2%
or 12% (increasing 4% per year, as described above). The rate of interest on
the Credit Facilities will be influenced by changes in short term rates and is
sensitive to inflation and other economic factors. A significant increase in
interest rates may have a negative impact on the earnings of the Company due
to the variable interest rate under the Credit Facilities.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognizes a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculation causing disruptions of operations, including, among other
things, a temporary inability to process transactions, or engage in similar
normal business activities.
The Company has completed an assessment to modify or replace portions of its
software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. Currently, the entire property
management system is year 2000 compliant and has been thoroughly tested.
Since the Company's accounting software is maintained and supported by a third
party, the total year 2000 project cost is estimated to be minimal.
The year 2000 project is estimated to be completed not later than July 31,
1999, which is prior to any anticipated impact on its operating systems.
Additionally, the Company has received assurances from its contractors that
all of the Company's building management and mechanical systems are currently
year 2000 compliant or will be made compliant prior to any impact on those
systems. However, the Company cannot guarantee that all contractors will
comply with their assurances and therefore, the Company may not be able to
determine year 2000 compliance of those contractors. At that time, the
Company will determine the extent to which the Company will be able to replace
non compliant contractors. The Company believes that with modifications to
existing software and conversions to new software, the year 2000 issue will
not pose significant operational problems for its computer systems. However,
if such modifications and conversions are not made, or are not complete
timely, the year 2000 issue could have a material impact on the operations on
the Company.
The costs of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantees that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and costs of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
If the Company is not successful in implementing their year 2000 compliance
plan, the Company may suffer a material adverse impact on their results of
operations and financial condition. Because of the importance of addressing
the year 2000 issue, the Company expects to develop contingency plans if they
determine that the compliance plans will not be implemented by July 31, 1999.
INFLATION
The privatization, assisted living and student housing sectors are subject to
incremental rent increases each year. The Company believes that inflationary
increases will be offset by these rent increases.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and uses of Proceeds
The Company's Registration Statement on Form S-1 (File No. 333-
44419) with respect to the spin-off distribution of its shares
and the registration of 20,557,130 shares of the Company's common
stock in connection with the Rights Offering, was declared
effective by the Securities and Exchange Commission on May 13,
1998. In connection with the Rights Offering, which expired on
June 29, 1998, the Company sold 20,557,130 shares of common stock
for aggregate proceeds of $21.1 million. The estimated net proceeds
of the Rights Offering totaled approximately $20.4 million after
deducting estimated expenses of approximately $.8 million As of
September 30, 1998, the Company had used approximately $17.7 million
of the net proceeds of the Rights Offering to repay indebtedness
(and related interest) to ROP, approximately $1 million to acquire
its interest in On-Site as described in this Quarterly Report on Form
10-Q and approximately $.5 million to pay operating and other
expenses.
Item 3. Defaults Upon Senior Securities - None
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
a) Exhibits and Reports on Form 8-k
b) During the three months ended September 30, 1998, the
registrant filed the following reports:
Form 8-k, dated August 21, 1998. Relating to RSVP's purchase of a
45% membership interest in Assisted Living Investments, LLC.
Form 8-k, dated August 27, 1998. Relating to the formation of a
joint venture (Dominion Venture Group, LLC) between RSVP and
Dominion.
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.
RECKSON SERVICE INDUSTRIES, INC.
Registrant
November 11, 1998 /s/ Scott H. Rechler
Date Scott H. Rechler, President,
Chief Operating Officer and Director
(Principal Executive Officer)
November 11, 1998 /s/ Michael Maturo
Date Michael Maturo, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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<NAME> RECKSON SERVICE INDUSTRIES, INC.
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