AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 1998
REGISTRATION NO. 333-44419
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________
RECKSON SERVICE INDUSTRIES, INC.
(formerly Reckson Services Industries Inc.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6531/9999 11-3383642
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
225 BROADHOLLOW ROAD DONALD J. RECHLER
MELVILLE, NEW YORK 11747 225 BROADHOLLOW ROAD
TELEPHONE: (516) 719-7400 TELEPHONE (516) 694-6900
(ADDRESS AND TELEPHONE NUMBER (NAME, ADDRESS AND TELEPHONE NUMBER
OF REGISTRANT'S PRINCIPAL EXECUTIVE OF AGENT FOR SERVICE)
OFFICES)
-----------------------
Copies to:
THOMAS R. SMITH, JR., ESQ.
EDWARD F. PETROSKY, ESQ.
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as possible after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933 (the "Securities Act"), check the following box. ( )
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. ( )
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ( )
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ( )
If delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box. ( )
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
TITLE OF EACH MAXIMUM PROPOSED
CLASS OF AMOUNT OFFERING MAXIMUM
SECURITIES TO BE TO BE PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$0.01 par 24,168,959
value (1) shares (2) $1.04 $25,135,717.36 (3) $7,415.04 (4)
Subscription
Rights 4,062,010 (5) -- -- (6)
=================================================================================================
</TABLE>
(1) Each share of Common Stock includes a right to purchase one share of
Preferred Stock of the Registrant which, prior to the occurrence
of certain events, will not be exercisable or evidenced separately from
such share of Common Stock.
(2) This registration statement relates to 3,858,909 shares of Common Stock
to be distributed to stockholders of Reckson Associates Realty Corp. and
limited partners of Reckson Operating Partnership, L.P. and to
20,310,050 shares of Common Stock to be delivered upon exercise of
Subscription Rights.
(3) Computed based on (i) the book value as of December 31, 1997 of the net
assets contributed to the Registrant in accordance with Rule 457 under
the Securities Act and (ii) the subscription price for shares of Common
Stock issuable upon exercise of the Subscription Rights.
(4) $1,258 previously paid.
(5) Represents rights to subscribe for an aggregate of 20,310,050 shares of
Common Stock being registered hereunder.
(6) Since the Subscription Rights and the shares of Common Stock issuable
upon exercise thereof are both being registered hereunder, no separate
registration fee is required for the Subscription Rights under Rule 457.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE AS SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
=============================================================================
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE
WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED APRIL 3, 1998
PROSPECTUS
RECKSON SERVICE INDUSTRIES, INC.
COMMON STOCK
RIGHTS TO SUBSCRIBE FOR COMMON STOCK
This Prospectus is being furnished to both the stockholders of Reckson
Associates Realty Corp., a Maryland corporation ("Reckson"), and the limited
partners of Reckson Operating Partnership, L.P., a Delaware limited
partnership ("Reckson Operating Partnership"), in connection with the
distribution by Reckson Operating Partnership and Reckson of 3,858,909 shares
of common stock, par value $.01 per share, of Reckson Service Industries,
Inc., a Delaware corporation ("RSI" or the "Company"). Each share of RSI
common stock will be accompanied by one Preferred Stock Purchase Right, the
terms of which are described herein.
Concurrently with the distribution referred to above, RSI will grant at
no cost to its stockholders (collectively, "Holders") non-transferable rights
(collectively, the "Subscription Rights") to purchase up to an aggregate of
20,310,050 shares of RSI common stock (the "Rights Offering"). Each Holder
will receive one Subscription Right for each share of RSI common stock
received in the distribution. Each Subscription Right will entitle the
Holder to purchase one share of RSI common stock at a purchase price of $1.04
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 $1.04 per share. Holders may exercise their Subscription Rights in
respect of one share or five shares of RSI common stock that they are
entitled to purchase pursuant to the Subscription Rights. Holders will not
be permitted to purchase more than one share and less than five shares in
respect of a Subscription Right. The exercise period for the Subscription
Rights will expire at 5:00 p.m., New York City time, on May __, 1998, unless
extended by RSI in its discretion (the "Expiration Date"). Once made,
subscriptions are irrevocable, and no alternative, conditional or contingent
rights will be accepted by RSI.
SEE "RISK FACTORS" BEGINNING ON PAGE 19 OF THIS PROSPECTUS FOR A
DISCUSSION OF MATERIAL RISKS RELEVANT TO THE OWNERSHIP OF RSI COMMON
STOCK.
It is expected that the distribution of RSI common stock will be made on
_______, 1998. The distribution of RSI common stock will be made on the
basis of one share of RSI common stock for (i) every 12 units of limited
partner interest in Reckson Operating Partnership held by the limited
partners on ______, 1998 (the "Record Date") and (ii) every 12 shares of
common stock, $.01 par value, of Reckson held by Reckson stockholders on the
Record Date. No certificates representing fractional shares of RSI common
stock will be issued in connection with the distribution of RSI common stock.
In lieu of such fractional shares, American Stock Transfer & Trust Company,
as Distribution Agent, will pay to any person who would be entitled to a
fractional share of RSI common stock an amount of cash (without interest)
Equal to $1.04 per share.
An entity owned by members of management of RSI (the "Standby
Purchaser") has entered into an agreement (the "Standby Agreement") pursuant
to which the Standby Purchaser has agreed to purchase, and RSI has 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 thereof (the "Standby Commitment Shares") on the Expiration Date at
the Exercise Price.
As a result of certain considerations regarding Reckson's status as a
real estate investment trust under Federal tax laws, ownership by any person
of RSI common stock is limited to 9.9% of the number of shares or value of
the RSI common stock, subject to certain exceptions.
There is currently no public market for the RSI common stock and none is
expected to develop prior to the termination of the exercise period for
Subscription Rights. Subsequent to the termination of the exercise period
for Subscription Rights, RSI anticipates that trading of the shares of RSI
common stock may occur on the OTC Bulletin Board. However, shares of RSI
common stock have not been approved for listing on any national securities
exchange or for quotation on any quotation system, and there can be no
assurance that such shares will be so approved or quoted or that a public
market will develop or, if one develops, will be sustained or provide
liquidity.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY
BE MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AND OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW.
The date of this Prospectus is , 1998.
TABLE OF CONTENTS
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SUMMARY CONDENSED PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . . . 18
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Lack of Operating History . . . . . . . . . . . . . . . . . . . . . 19
Lack of Management Experience . . . . . . . . . . . . . . . . . . . 19
No Assurance as to Ability to Manage Growth . . . . . . . . . . . . 19
Uncertainties Relating to Growth by Acquisitions, Including
Lack of Operating History, Competition and Possible
Dilution to Earnings . . . . . . . . . . . . . . . . . . . . . . . 20
Restrictions on Business and Future Opportunities . . . . . . . . . 20
Dependence Upon Reckson and Reckson Operating Partnership . . . . . 20
Potential Geographic Concentration . . . . . . . . . . . . . . . . . 20
Reliance on Key Personnel; Allocation of Management's Time . . . . . 21
Limited Financial Resources; Obligations Under Financing
Arrangements; Limited Future Funding Commitments . . . . . . . . . . 21
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . 21
Related Party Transactions . . . . . . . . . . . . . . . . . . . . . 22
No Prior Sponsorship of Venture Capital Vehicle; Investments in
Companies in Early Stage of Development or with Historical
Operating Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Ownership Through Joint Ventures, Including Limits on Ability to
Control and Inability of Joint Venturer to Perform . . . . . . . . . . 23
Student Housing Sector Undergoing Rapid Change; Dependence of
Projects on Well-being of Related Schools; Competition . . . . . . . . 24
Absence of a Public Market for RSI Common Stock; Volatile
Trading Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Absence of Dividends on RSI Common Stock Following the
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Risks of Low-priced Stock . . . . . . . . . . . . . . . . . . . . . . . . 24
Real Estate Investment Risks . . . . . . . . . . . . . . . . . . . . 25
Potential Environmental Liability Related to Real Estate . . . . . . 26
Certain Antitakeover Provisions . . . . . . . . . . . . . . . . . . 26
Federal Income Tax Risks . . . . . . . . . . . . . . . . . . . . . . 27
Risk of Default under Standby Commitment . . . . . . . . . . . . . . . . 28
Risk of Dilution in the Rights Offering; Acquisition of Stock
under Standby Commitment . . . . . . . . . . . . . . . . . . . . . . . 28
THE DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Background of, and Reasons for, the Distribution . . . . . . . . . . 28
Manner of Effecting the Distribution . . . . . . . . . . . . . . . . 29
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . 30
Listing and Trading of RSI Common Stock . . . . . . . . . . . . . . 33
Shares Available for Future Sale . . . . . . . . . . . . . . . . . . 34
THE RIGHTS OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Exercise Privilege . . . . . . . . . . . . . . . . . . . . . . . . . 35
No Fractional Rights . . . . . . . . . . . . . . . . . . . . . . . . 35
Expiration Date . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Non-Transferability of Subscription Rights . . . . . . . . . . . . . 35
Method of Exercising Subscription Rights . . . . . . . . . . . . . . 35
Standby Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 36
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . 37
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 37
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 39
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 39
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . 40
Impact of Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . 41
Pro Forma Capital Resources . . . . . . . . . . . . . . . . . . . . 42
Pro Forma Results of Operations . . . . . . . . . . . . . . . . . . 42
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Initial Assets of RSI . . . . . . . . . . . . . . . . . . . . . . . 44
Funding Sources for RSI . . . . . . . . . . . . . . . . . . . . . . 49
The Intercompany Agreement . . . . . . . . . . . . . . . . . . . . . 50
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 51
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Directors and Executive Officers of RSI . . . . . . . . . . . . . . 51
Committees of the Board of Directors . . . . . . . . . . . . . . . . 53
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . 54
Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . 54
Registration Rights Agreement . . . . . . . . . . . . . . . . . . . 54
Security Ownership of Certain Beneficial Owners
and Management after the Distribution . . . . . . . . . . . . . . 54
BENEFICIAL OWNERSHIP OF RSI COMMON STOCK . . . . . . . . . . . . . . . . 55
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 56
RSI Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . 56
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . 58
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Security Ownership of Management and
Certain Beneficial Owners . . . . . . . . . . . . . . . . . . . . 59
Acquisition of Assets . . . . . . . . . . . . . . . . . . . . . . . 59
Formation and Equity Capitalization of RSI;59
Ownership of RSI Common Stock . . . . . . . . . . . . . . . . . . 59
The Intercompany Agreement . . . . . . . . . . . . . . . . . . . . . 60
Standby Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 60
DESCRIPTION OF RSI CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . 60
Authorized Capital Stock . . . . . . . . . . . . . . . . . . . . . . 60
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Series A Junior Preferred Stock . . . . . . . . . . . . . . . . . . 61
Restriction on Ownership of RSI Capital Stock . . . . . . . . . . . 63
Excess Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Restrictions on Ownership . . . . . . . . . . . . . . . . . . . . . 63
CERTAIN ANTITAKEOVER PROVISIONS . . . . . . . . . . . . . . . . . . . . . 65
Staggered Board of Directors . . . . . . . . . . . . . . . . . . . . 65
Number of Directors; Removal; Filling Vacancies . . . . . . . . . . 65
No Stockholder Action by Written Consent;
Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . 66
Advance Notice Provisions for Stockholder 66
Nominations and Stockholder Proposals . . . . . . . . . . . . . . 66
Relevant Factors to be Considered by the RSI Board . . . . . . . . . 67
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Preferred Rights Plan . . . . . . . . . . . . . . . . . . . . . . . 67
Delaware Business Combination Statute . . . . . . . . . . . . . . . 70
Control Share Acquisitions . . . . . . . . . . . . . . . . . . . . . 70
Liability of Directors and Officers; Indemnification . . . . . . . . 71
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . F-1
AVAILABLE INFORMATION
RSI has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to RSI common stock. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information, reference is made
hereby to the Registration Statement, exhibits and schedules. Statements
contained herein concerning any documents are not necessarily complete and,
in each instance, reference is made to the copies of such documents filed as
exhibits to the Registration Statement. Each such statement is qualified in
its entirety by such reference. Copies of these documents may be inspected
without charge at the principal office of the Commission at 450 5th Street,
N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission
at 7 World Trade Center, Suite 1300, New York, New York 10048, at Citicorp
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661, and at
5670 Wilshire Boulevard, Suite 1100, Los Angeles, California 90036, and
copies of all or any part thereof may be obtained from the Commission upon
payment of the charges prescribed by the Commission. Copies of such
documents may also be obtained from the Commission's Web Site
(http://www.sec.gov).
Following the effectiveness of the Registration Statement, RSI will be
required to comply with the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and will file annual, quarterly
and other reports with the Commission. The Company will also be subject to
the proxy solicitation requirements of the Exchange Act and, accordingly,
will furnish audited financial statements to its stockholders in connection
with its annual meetings of stockholders.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED.
SUMMARY
This summary is qualified by the more detailed information set forth
elsewhere in this Prospectus, which should be read in its entirety, including
the discussion of certain factors set forth under "Risk Factors." Unless the
context requires otherwise, reference to "Reckson" herein includes Reckson,
its predecessors, and its direct and indirect subsidiaries, including Reckson
Operating Partnership and, unless the context otherwise requires, references
to "RSI" or the "Company" herein include RSI and its direct and indirect
subsidiaries.
The Issuer and the Distribution
Issuer Reckson Service Industries, Inc., a Delaware
corporation.
Distributing Entities Reckson Operating Partnership will distribute shares
of RSI common stock to its partners, including
Reckson Associates Realty Corp. (which owns
approximately 84% of the common units of limited
partnership interest in Reckson Operating
Partnership), whereupon Reckson Associates Realty
Corp. will distribute to its stockholders the
shares of RSI common stock received from Reckson
Operating Partnership (collectively, the
"Distribution").
Shares to be Distributed Approximately 3,858,909 shares of RSI common stock,
representing 95% of the outstanding shares of RSI
common stock (subject to reduction to the extent
that cash payments are made in lieu of the issuance
of fractional shares of RSI common stock).
Distribution Ratio One share of RSI common stock will be distributed
to (i) Reckson stockholders for every 12 shares of
Reckson common stock held on __________, 1998 and
(ii) limited partners of Reckson Operating
Partnership for every 12 units of limited
partnership interest in Reckson Operating
Partnership held on _________, 1998. No
certificates representing fractional shares of RSI
common stock will be issued in connection with the
Distribution. In lieu of fractional shares,
American Stock Transfer & Trust Company, as
Distribution Agent, will pay to any person who
would be entitled to a fractional share of RSI
common stock an amount of cash (without interest)
equal to $1.04 per share. No payment need be made
by, or will be accepted from, Reckson stockholders
or limited partners of Reckson Operating Partnership
for RSI common stock to be received by them in the
Distribution. Furthermore, Reckson stockholders
will not be required to surrender or exchange
Reckson common stock, and limited partners of
Reckson Operating Partnership will not be
required to surrender or exchange units of limited
partnership interest in Reckson Operating
Partnership, in order to receive RSI common stock.
Background of, and Reasons
for, the Distribution RSI has been formed primarily to identify and
acquire interests in operating companies that
engage in businesses that provide services for
occupants of office, industrial and other property
types that Reckson may not be permitted to provide
under Federal tax laws applicable to a real estate
investment trust ("REIT") or that have not
traditionally been performed by Reckson
(collectively, "Commercial Services"). RSI will
also pursue real estate or real estate related
investment opportunities through Reckson Strategic
Venture Partners, LLC ("RSVP"), a real estate
venture capital fund created as a "research and
development" vehicle for Reckson to explore and
invest in real estate sectors outside of its
traditional office and industrial sectors, thereby
providing the potential for Reckson to incorporate
one or more of these alternative sectors into its
core business. RSVP may make or acquire (a) real
estate or real estate-related investments other
than REIT-Qualified Investments (as defined below)
and (b) investments satisfying the Federal tax laws
applicable to REITs ("REIT-Qualified Investments")
made available to Reckson Operating Partnership
that it has chosen not to pursue.
RSI will enter into an agreement with Reckson
Operating Partnership (the "Intercompany
Agreement") pursuant to which RSI and Reckson
Operating Partnership will agree to provide each
other with first opportunity rights in respect of
certain types of transactions and activities,
thereby reducing the potential for conflicts of
interest between the parties by formalizing their
relationship at the outset. See "Business-
-The Intercompany Agreement."
Business Strategy
of RSI SERVICE SECTOR OPERATIONS. RSI's primary business
is to create and manage a system of interrelated
services to be offered to the marketplace through
a centralized infrastructure. RSI will focus on
service sectors that present opportunities to
provide Commercial Services to Reckson Operating
Partnership and its tenants and to the tenants
and customers of RSVP and RSI's other affiliates
(collectively, the "Reckson Customer Base"), as
well as to other third parties.
Management believes that there are significant
opportunities to provide Commercial Services to
the Reckson Customer Base and third parties that
are currently provided by third parties in a more
limited and fragmented manner or not provided at
all. Management also believes that RSI will
benefit from Reckson's relationships with its
tenants and from Reckson's reputation for
providing high quality service to its tenants.
See "Business--Overview."
REAL ESTATE VENTURE CAPITAL FUND. RSI, through a
subsidiary, is a managing member of RSVP.
RSVP's strategy is to identify and acquire
interests in established entrepreneurial
enterprises with experienced management teams in
market sectors which are in the early stages of
their growth cycle or offer unique circumstances
for attractive investments. RSVP has made an
investment in the area of student housing and is
targeting additional market sectors. RSVP has
retained highly experienced real estate investment
professionals that will source, structure and
execute transactions within each market sector, as
well as manage the day-to-day operations of RSVP,
subject to the overall management of RSI's executive
officers. RSI has committed to invest up to $100
million in RSVP over a period of three years. In
addition, as further described below, RSVP has
obtained a $200 million preferred equity facility
(the "PaineWebber Equity Facility") from PaineWebber
Real Estate Securities Inc. ("PWRES"), which is
expected to be partially funded by an investment
fund that is jointly sponsored by financier
George Soros and PWRES.
Initial Assets of
RSI RSI's initial investments are comprised of (i)
convertible loans made to OnSite Ventures, L.L.C.,
a company providing advanced telecommunication
systems and services within commercial and
residential buildings, (ii) a 9.9% equity interest
in Reckson Executive Centers LLC, an executive
office suites business operated at Reckson
properties that was acquired from Reckson Operating
Partnership for an aggregate purchase price of
$200,000, and an option to acquire a majority
equity interest in InterOffice Superholdings
Corporation, a privately-held national executive
office suites business (the "Office Suites
Company"), and (iii) its indirect interests in
the assets of RSVP (currently interests in
American Campus Lifestyles Companies, LLC, a
student housing enterprise that develops,
constructs, manages and acquires on-and
off-campus student housing projects, and the Dobie
Center, a student housing facility). See
"Business--Initial Assets of RSI."
Funding Sources for RSI RSI expects to establish a credit facility with
Reckson Operating Partnership (the "RSI Facility")
in the amount of $100 million for RSI's service
sector operations and other general corporate
purposes. In addition, Reckson Operating
Partnership has approved the funding of investments
of up to $100 million with or in RSVP, 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 under a credit
facility (the "RSVP-ROP Facility", and together with
the RSI Facility, the "Credit Facilities") with
terms similar to those of the RSI Facility.
RSVP has obtained the PaineWebber Equity Facility
which provides for PWRES to invest up to $200
million in RSVP in the form of a preferred
equity interest, subject to certain conditions.
Such investment by PWRES is expected to be partially
funded by an investment fund that is jointly
sponsored by financier George Soros and PWRES. See
"Business Funding Sources for RSI."
Management of RSI Donald J. Rechler, Scott H. Rechler and Michael
Maturo will serve as executive officers of RSI in
the capacities of Chairman of the Board, President
and Chief Executive Officer and Executive Vice
President, Treasurer and Chief Financial Officer,
respectively. Each RSI executive officer currently
serves as an executive officer of Reckson. Mr.
Daniel A. DiSano and Mr. Jeffrey D. Neumann will
serve as Senior Vice Presidents of RSI and will be
primarily responsible for executing the business
strategy of RSI. In addition, RSI will establish a
management advisory committee that will serve to
assist RSI's executive officers in developing
investment strategies and evaluating investment
opportunities. This committee will consist of
Roger Rechler, Mitchell D. Rechler and Gregg M.
Rechler, all of whom are executive officers of
Reckson. It is anticipated that RSI's executive
officers and members of the management advisory
committee that are also officers of Reckson
initially will not receive base salaries from
RSI. However, they have received stock options
under RSI's stock option plan and may receive
additional options, bonuses or other incentive-based
compensation in the future. See "Management."
Interests of Certain
Officers and Directors
and Affiliates In addition to each RSI executive officer serving
as an executive officer of Reckson, Donald J.
Rechler, Scott H. Rechler, Roger Rechler and
Mitchell D. Rechler will serve as directors of
both Reckson and RSI and Michael Maturo and Gregg
M. Rechler will serve as directors of RSI. RSI's
executive officers and the members of the
management advisory committee also have a
significant interest in Reckson and RSI through
beneficial ownership of common stock of each of
these entities and ownership of units of limited
partnership interest in Reckson Operating
Partnership. As of March 15, 1998, RSI's
executive officers and the members of the
management advisory committee beneficially owned
approximately 9.3% of the common equity interests
of Reckson and, as of the Distribution of RSI
common stock and consummation of the Rights Offering
(assuming the full exercise of Rights by the
Holders), are expected to beneficially own ( )%
of RSI.
Due to considerations relating to the Reckson's
status as a REIT under Federal tax laws, RSI was
initially formed as a subsidiary in which Reckson
Operating Partnership owned 95% of the outstanding
capital stock of RSI in the form of non-voting
common stock and Reckson officers owned the
remaining 5% of the outstanding capital stock of
RSI in the form of common stock. The shares of
capital stock owned by Reckson Operating Partnership
and Reckson officers were acquired at the same per
share price. Immediately prior to the Distribution,
the shares of non-voting common stock owned by
Reckson Operating Partnership will be exchanged
by RSI for RSI common stock.
RSI expects to obtain the Credit Facilities from
Reckson Operating Partnership and borrowings
thereunder are expected to bear interest at
the rate equal to the greater of (i) the prime rate
plus 2% and (ii) 12% per annum, with the rate
referred to in clause (ii) increasing annually
at a rate of 4% of the prior year's rate. The
Credit Facilities are expected to be payable on an
interest-only basis from net cash flow during its
five-year term. Advances under the Credit
Facilities will be recourse obligations of RSI.
See "Business Funding Sources for RSI."
Jon L. Halpern, a director of Reckson, and
affiliated parties own a 39.13% interest in OnSite
Ventures L.L.C., a 33-1/3% interest in a joint
venture that owns 76.09% of American Campus
Lifestyles Companies, LLC, a 33-1/3% interest in a
joint venture that owns a 70% interest in the Dobie
Center and a 22.75% interest in the Office Suites
Company, and may participate in the management and
operation of these companies. Management believes
that RSI's participation in such investments, or, in
the Office Suites Company's case, possible
participation, with Mr. Halpern has been the
subject of arm's-length negotiations. See "Certain
Transactions."
In addition, an entity owned by members of
management of RSI will enter into the Standby
Agreement relating to the Rights Offering as
described below under "Rights Offering."
[Description of Organizational Diagram]
The organizational diagram shows that Reckson
Service Industries, Inc. (the "Company" or "RSI")
is the 100% owner of RSI Fund Management LLC.
RSI Fund Management LLC acts as the managing
member of, and owns a 100% stake in RSVP Holdings
LLC. RSVP Holdings LLC acts as managing member
of, and owns 100% of the common ownership interest
of Reckson Strategic Venture Partners, LLC ("RSVP").
The diagram also shows that RSI is the parent to
RSI Commercial Service Holding Companies that are
parents to Commercial Service Operating Companies.
Federal Income Tax
Consequences of the
Distribution The Distribution of RSI common stock by Reckson will
be treated as a taxable dividend to Reckson
stockholders to the extent that it is treated as
made out of Reckson's current or accumulated
earnings and profits (as determined for federal
income tax purposes). To the extent that the value
of the RSI common stock distributed to a Reckson
stockholder exceeds the earnings and profits of
Reckson allocated to such distribution, such
excess will be treated first as a nontaxable return
of capital to the extent of such stockholder's
basis in its Reckson common stock and thereafter
as gain from a deemed disposition of its Reckson
common stock. Reckson will recognize gain in
connection with the Distribution if and to the
extent that the value of the RSI common stock
distributed by Reckson exceeds Reckson's basis in
the RSI common stock, which will equal Reckson
Operating Partnership's basis therein. Any such
gain will give rise to additional taxable income
for Reckson stockholders because such gain will
result in an increase in Reckson's earnings and
profits. Reckson stockholders will receive a basis
in the RSI common stock equal to the value thereof
at the time of the Distribution. The Distribution
of RSI common stock will generally be taxable to
limited partners of Reckson Operating Partnership
only if and to the extent that the value of the
RSI common stock plus any cash in lieu of fractional
shares distributed to them exceeds their respective
bases in their units of limited partnership
interest in Reckson Operating Partnership, but
certain limited partners may not be required
to recognize gain equal to the full amount of
such excess. Reckson will make a determination of
the fair market value of the RSI common stock as
of the date of the Distribution. There can be no
assurance, however, that the Internal Revenue
Service (the "Service") or the courts will agree
with the fair market value determined by Reckson.
Preferred Stock Purchase
Rights Plan of RSI RSI will adopt a Preferred Stock Purchase Rights
Plan (the "Preferred Rights Plan") prior to the
Distribution. As a result, shares of RSI common
stock issued in the Distribution will also
initially represent an equivalent number of
Preferred Stock Purchase Rights of RSI.
Additional Antitakeover
Provisions Certain provisions of RSI's charter and bylaws,
as each will be in effect on the date of the
Distribution of the RSI common stock, and of the
Delaware General Corporation Law (the "DGCL"),
will have the effect of making more difficult a
change of control of RSI in a transaction not
approved by the RSI Board of Directors. These
provisions include (i) a provision for a
classified Board, with only approximately
one-third of the Board to be elected in any year,
to serve for three-year terms, (ii) a requirement
that directors be removed only for cause upon the
affirmative vote of holders of at least 80% of
the total voting power, (iii) a prohibition on
the stockholders' ability to call a special meeting,
(iv) a requirement that actions of stockholders be
taken at a meeting of stockholders, rather than by
written consent, (v) an advance notice requirement
for stockholders to make nominations of candidates
for directors or to bring other business before an
annual meeting of stockholders, (vi) a requirement
that two-thirds of RSI common stock approve any
merger or similar business combination involving
RSI, (vii) a provision that the holder of "control
shares" of RSI acquired in a control share
acquisition have no voting rights with respect to
such control shares except to the extent approved
by the vote of the holders of two-thirds of the RSI
common stock (for an explanation of "control shares"
and a control share acquisition, see "Certain
Antitakeover Provisions--Control Share Acquisi-
tions"), (viii) a limitation on the ownership of
RSI common stock by any person or entity of 9.9%
of the number of shares or value of the RSI common
stock, and (ix) a requirement that amendments to the
foregoing provisions be approved by the affirmative
vote of at least 80% of the total voting power.
The Preferred Rights Plan will also make more
difficult a change of control of RSI in a
transaction not approved by the RSI Board of
Directors. The Preferred Rights Plan and the
business combination and control shares provisions
do not apply to Reckson and its affiliates.
Distribution Agent American Stock Transfer & Trust Company will be the
Distribution Agent for the Distribution of the RSI
common stock.
Record Date ( ), 1998.
Distribution Effective
Date ( ), 1998. Commencing on or about the
date of the Distribution of the RSI common
stock, the Distribution Agent will begin
mailing account statements reflecting ownership
of RSI common stock to holders of Reckson
common stock and units of limited partnership
interest in Reckson Operating Partnership as of
the Record Date. Reckson stockholders and
Limited Partners will not be required to make
any payment or to take any other action in
order to receive the RSI common stock to which
they are entitled in the Distribution.
Trading Market There is currently no public market for the RSI
common stock and none is expected to develop prior
to the termination of the Rights Offering.
Subsequent to the termination of the Rights
Offering, RSI anticipates that trading of the
shares of RSI common stock may occur on the OTC
Bulletin Board.
Post-Distribution
Dividend Policy Following the Distribution, RSI intends to use
its available funds to pursue investment and
business opportunities and, therefore, does not
anticipate the payment of any dividends on RSI
common stock in the foreseeable future. Any
declaration of dividends will be subject to the
discretion of the RSI Board of Directors. In
addition, payment of dividends on RSI common stock
will be prohibited under the Credit Facilities
until all amounts outstanding thereunder are paid
in full and will also be subject to such limitations
as may be imposed by any other credit facilities
or debt securities that RSI may obtain or issue, as
the case may be, from time to time.
Transfer Agent and
Registrar American Stock Transfer & Trust Company will be the
Transfer Agent and Registrar for the RSI common
stock after the Distribution.
THE RIGHTS OFFERING
Purpose of the Rights
Offering RSI is commencing a rights offering for purposes
of (i) funding certain organizational and start-up
costs and short-term losses of the Company,
(ii) providing RSI sufficient initial equity
capital in order to pursue its business
objectives, (iii) providing capital towards
meeting minimum capital requirements to commence
trading in the future on an organized trading
system and (iv) maintaining an appropriate capital
structure.
Grant of Subscription
Rights Concurrently with the Distribution of RSI common
stock, RSI will grant to its stockholders
(collectively, "Holders") one Subscription Right
for each share owned by a stockholder. Each
Subscription Right will entitle the Holder to
purchase one share of RSI common stock at a
purchase price of $1.04 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 $1.04 per share.
Holders may exercise their Subscription Rights in
respect of one or five shares of RSI common stock
that they are entitled to purchase pursuant to each
Subscription Right. Holders will not be permitted
to purchase more than one share and less than five
shares in respect of a Subscription Right. Holders
of Subscription Rights will have the opportunity to
acquire up to an aggregate of approximately
20,310,050 shares of RSI common stock.
Expiration Date May __, 1998 at 5:00 p.m., New York City time.
Non-transferability Subscription Rights will be evidenced by non-
transferable certificates that will be exercisable
by the Holder until the Expiration Date, at which
time unexercised Subscription Rights will become
null and void and subject to the Standby Agreement.
Standby Agreement RSI and the Standby Purchaser have entered into the
Standby Agreement pursuant to which the Standby
Purchaser has agreed to purchase, and RSI has 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 thereof (the "Standby Commitment
Shares") on the Expiration Date at the Exercise
Price.
Number of shares of RSI
common stock to be
outstanding after
the Rights Offering 24,372,060 shares
RISK FACTORS
Reckson stockholders and Limited Partners of Reckson Operating
Partnership should consider certain factors discussed under "Risk Factors,"
including risks associated with the limited assets that RSI owns, RSI's lack
of operating history, management's lack of experience in certain sectors in
which RSI is expected to operate, potential conflicts of interest between
Reckson and its affiliates and RSI and its affiliates, RSI's dependence on
Reckson Operating Partnership, RSI's current limited access to the capital
markets and other funding sources, the existence of certain antitakeover
provisions applicable to RSI, the limited trading of the RSI common stock and
RSI's intention not to pay any dividends in the foreseeable future.
SUMMARY CONDENSED PRO FORMA FINANCIAL INFORMATION
The following table sets forth certain unaudited summary pro forma
condensed combined financial information for RSI after giving effect to the
acquisition of (i) through its interest in RSVP, a 33-1/3% interest in a joint
venture that owns a 76.09% interest in American Campus Lifestyles Companies,
LLC ("ACLC"), (ii) through its interest in RSVP, a 33-1/3% interest in a joint
venture that owns a 70% interest in the Dobie Center and (iii) convertible
loans to OnSite Ventures L.L.C. ("OnSite") (collectively the "Acquired
Investments"), as if they had been consummated, with respect to statement of
operations data for the year ended December 31, 1997, as of January 1, 1997,
or, with respect to balance sheet data as of December 31, 1997. The
information presented is derived from, should be read in conjunction with,
and is qualified in its entirety by reference to, the historical financial
statements and the notes thereto and the unaudited pro forma condensed
combined financial data and the notes thereto appearing elsewhere in this
Prospectus. The unaudited summary pro forma condensed combined financial
information has been included for comparative purposes only and does not
purport to be indicative of the results of operations or financial position
which would have been obtained if the acquisition of the Acquired Investments
had been effected at the dates indicated or of the financial position or
results of operations which may be obtained in the future. See "RSI Pro
Forma Financial Statements."
<TABLE>
<CAPTION>
PRO FORMA Historical
----------------------- -----------------
PERIOD FROM
YEAR ENDED INCEPTION TO
DECEMBER 31, 1997/(1)/ DECEMBER 31, 1997
----------------------- -----------------
<S> <C> <C>
OPERATIONS SUMMARY:
Equity in earnings of RO Partners
Management, LLC $ 361,196 $ 245,593
Equity in earnings (loss) of ACLC 63,546 (22,156)
Interest income 147,498 30,383
Total revenues 572,240 253,820
Interest expense 248,814 24,380
Corporate operating expenses 579,113 479,113
Net income (loss) (263,901) (257,887)
PRO FORMA HISTORICAL
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------------- -----------------
FINANCIAL POSITION:
Investment in RO Partners Management,
LLC $ 3,868,093 $ 3,868,093
Investment in ACLC 1,652,165 1,652,165
Investment in Reckson Executive Centers,
LLC 200,000 --
Loans receivable 975,000 325,000
Organization and pre-acquisition costs 681,694 681,694
Total assets 8,369,695 7,519,695
Loans payable to Affiliates 4,027,857 3,177,857
Total liabilities 4,147,241 3,297,241
Shareholders' equity 4,222,454 4,222,454
</TABLE>
_______________
(1) The above historical information is presented from the date of
inception of RSI, July 15, 1997.
RISK FACTORS
Reckson stockholders and limited partners of Reckson Operating
Partnership ("Limited Partners") should carefully consider and evaluate all
of the information set forth in this Prospectus, including the risk factors
listed below. All statements, other than statements of historical facts,
included in this Prospectus that address activities, events or developments
that RSI expects, believes or anticipates will or may occur in the future,
including such matters as future capital expenditures, dividends,
acquisitions (including the amount and nature thereof), expansion and other
development trends of the real estate or other industries, business
strategies, expansion and growth of the operations of RSI and its affiliates
and other such matters, are forward-looking statements. These statements are
based on certain assumptions and analyses made by RSI in light of its
experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate.
Such statements are subject to a number of assumptions, risks and
uncertainties, including the risk factors discussed below, general economic
and business conditions, the business opportunities that may be presented to
and pursued by RSI and its affiliates, changes in laws or regulations and
other factors, many of which are beyond the control of RSI and its
affiliates. Reckson stockholders and Limited Partners are cautioned that any
such statements are not guarantees of future performance and that actual
results or developments may differ materially from those anticipated in the
forward-looking statements.
LACK OF OPERATING HISTORY
RSI was formed in July 1997 and, accordingly, has a limited operating
history. The financial information relating to RSI and its subsidiaries and
their respective assets presented elsewhere in this Prospectus is not
necessarily indicative of the future consolidated financial condition or
results of operations of RSI and its subsidiaries.
LACK OF MANAGEMENT EXPERIENCE
RSI is likely to pursue investments in sectors, either directly or
through RSVP, in which RSI's management has little or no experience.
Although RSI's acquisitions of businesses may include retaining management of
such businesses, it is anticipated that in most cases RSI's management will
be actively involved in overall management and control of the strategic
direction of such businesses. However, with the exception of certain
officers retained by RSI that are not officers of Reckson and management
retained from acquired businesses in the future, if applicable, RSI's
management is comprised primarily of officers of Reckson whose primary
experience, unlike that of RSI, is acquiring, developing, and re-developing
suburban office and industrial properties in the New York "Tri-State" area.
NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH
RSI intends to expand its operations through the acquisition of
Commercial Services businesses. In addition, RSVP may also expand rapidly
through the acquisition of real estate and real estate operating companies.
The success of RSI's and RSVP's growth strategies will depend, in large part,
on their ability to identify attractive business opportunities and
effectively operate and integrate any newly acquired businesses, as to which
there can be no assurance. The growth plans of RSI and RSVP will require the
participation of, and place demands upon, their management and operating
personnel. The ability to manage future growth effectively will require the
development of operational, financial and management information systems. If
RSI or RSVP is unable to manage its growth effectively, RSI's business,
results of operations and financial condition may be adversely affected.
UNCERTAINTIES RELATING TO GROWTH BY ACQUISITIONS, INCLUDING LACK OF OPERATING
HISTORY, COMPETITION AND POSSIBLE DILUTION TO EARNINGS
A significant source of RSI's growth will be through acquisition. There
can be no assurance that suitable acquisition opportunities will be available
to RSI or its affiliates or that RSI or its affiliates will not overpay for
acquisitions or that such acquisitions will be efficiently and adequately
integrated. There may be significant competition for targeted acquisitions.
Some of the companies in which RSI or its affiliates acquire an interest may
have little or no operating histories, may have historical operating losses,
and have competitors that are larger and more well capitalized. Certain of
the acquisitions of RSI or its affiliates may be involved in sectors that are
subject to increasing competition. As a result, the costs incurred to
acquire or reposition companies may be significant and may not be recovered.
Furthermore, there can be no assurance that acquisitions will not be dilutive
to RSI's earnings.
RESTRICTIONS ON BUSINESS AND FUTURE OPPORTUNITIES
RSI will be prohibited under the Intercompany Agreement from making
REIT-Qualified Investments unless Reckson Operating Partnership has been
given the right of first opportunity in respect thereof and has failed to
pursue such investments. In addition, in the event that any such investment
becomes available to an affiliate of RSI, including RSVP, such affiliate will
be required to allow Reckson Operating Partnership to participate in such
investment to the extent of RSI's interest, if any, therein. RSI's charter
provides that one of the corporate purposes of RSI is to perform its
obligations under the Intercompany Agreement. See "Business--The
Intercompany Agreement." RSI also will be required to assist Reckson
Operating Partnership in structuring and consummating any REIT-Qualified
Investment presented to Reckson Operating Partnership which Reckson Operating
Partnership has elected to pursue, on terms determined by Reckson Operating
Partnership. As a result, the business and future opportunities of RSI and
its affiliates are significantly restricted.
DEPENDENCE UPON RECKSON AND RECKSON OPERATING PARTNERSHIP
RSI will rely significantly on Reckson for the provision of management
expertise and for the financing of its operations. As a result, if Reckson
is unable to access the financial markets, RSI's ability to finance its
operations may be severely restricted. The Credit Facilities will prohibit
advances thereunder to the extent such advances would, in the determination
of Reckson, endanger Reckson's status as a REIT. In addition, if in the
future Reckson should fail to qualify as a REIT or have a decline in its
condition (financial or other) or earnings, affairs or prospects, there is
likely to be a substantial adverse effect on RSI's business opportunities,
financial condition and results of operations.
POTENTIAL GEOGRAPHIC CONCENTRATION
RSI will seek to provide various Commercial Services to the Reckson
Customer Base and third parties. In light of the geographic concentration of
Reckson's properties in the New York tri-state metropolitan area, in
providing services to the Reckson Customer Base, RSI will be subject to
economic factors impacting such area. The New York tri-state metropolitan
area has experienced periodic economic fluctuations and a future decline in
its economy may adversely impact the results of operations and financial
condition of RSI. To the extent RSI acquires interests in companies that are
concentrated geographically, it will be subject to similar risks in respect
of such acquisitions.
RELIANCE ON KEY PERSONNEL; ALLOCATION OF MANAGEMENT'S TIME
The success of RSI and its affiliates depends to a significant degree
upon the contribution of its executive officers and senior management
referred to under "Management", its management advisory committee and other
key personnel that they retain, including the investment professionals
employed by RSVP. None of RSI's executive officers or members of its
management advisory committee has an employment agreement with RSI; two of
the investment professionals of RSVP (the "RSVP Managing Directors") have
entered into employment contracts with RSVP. See "Business--Overview--Real
Estate Venture Capital Fund." Conversely, each of RSI's executive officers
have employment agreements with Reckson pursuant to which they have agreed to
spend such time as may be necessary in carrying out their duties thereunder.
These executive officers will not have similar obligations to RSI.
Furthermore, there can be no assurance that RSI and its affiliates will be
able to retain their key managerial and other personnel or to attract
suitable replacements or additional personnel if required. Neither RSI nor
any of its affiliates has obtained key-man insurance for any of its executive
officers, members of its management advisory committee or other key
personnel.
LIMITED FINANCIAL RESOURCES; OBLIGATIONS UNDER FINANCING ARRANGEMENTS;
LIMITED FUTURE FUNDING COMMITMENTS
RSI initially will rely primarily on funds raised in the Rights Offering
and amounts to be provided to it by Reckson Operating Partnership in
connection with the formation and capitalization of RSI, including the Credit
Facilities, in order to finance its operations. In connection with the
formation and capitalization of RSI, RSI anticipates that under the Credit
Facilities it will have the right, subject to certain conditions, to borrow
from Reckson Operating Partnership up to an aggregate of $100 million in
respect of the RSVP-ROP Facility and $100 million in respect of the RSI
Facility. The Credit Facilities will have a term of five years and advances
thereunder will be recourse obligations of RSI. Interest will accrue 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 interest rate
referred to in clause (ii) increasing annually at a rate of 4% of the prior
year's rate. Prior to maturity, interest will be payable quarterly but only
to the extent of available net cash flow and on an interest-only basis and
will be prepayable without penalty at the option of RSI. As long as there
are outstanding advances under either of the Credit Facilities, RSI will be
prohibited from paying dividends on any shares of its capital stock. The
Credit Facilities will be 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. There can be
no assurance that RSI will be able to satisfy all of its obligations under
the Credit Facilities. RSI has obtained the PaineWebber Equity Facility
which provides for PWRES to invest $200 million in RSVP in the form of a
preferred equity interest, subject to certain conditions. RSI has not
received any commitment with respect to any additional borrowings. Other
than under the Credit Facilities, Reckson Operating Partnership is not
currently obligated to provide any additional funds to RSI or to assist it in
obtaining additional financing.
CONFLICTS OF INTEREST
Donald J. Rechler will serve as Chairman of the Board and Chief
Executive Officer of Reckson and Chairman of the Board of RSI, Scott H.
Rechler will serve as the President and Chief Operating Officer of Reckson
and President and Chief Executive Officer of RSI and a director of Reckson
and RSI and Michael Maturo will serve as Executive Vice President, Treasurer
and Chief Financial Officer of Reckson and RSI and a director of RSI.
Although each of them is committed to the success of RSI, they are also
committed to the success of Reckson. None of Donald J. Rechler, Scott H.
Rechler or Michael Maturo is committed to spending a particular amount of
time on RSI's affairs, nor will any of them devote his full time to RSI. As
a result, such officers may spend more time acting in their positions with
Reckson, particularly if Reckson encounters operating difficulties or is
engaged in significant transactions. Donald Rechler, Roger Rechler, Scott
Rechler, Michael Maturo, Gregg M. Rechler and Mitchell D. Rechler are members
of the RSI Board of Directors and will also be either insiders of RSI or
members of the Reckson board of directors. In addition, the RSI Board
includes only one member who is unaffiliated with RSI and Reckson. As noted
below in "--Related Party Transactions," Jon L. Halpern, a director of
Reckson, has an interest in certain entities in which RSI has made an
investment.
Officers and directors of a corporation owe fiduciary duties to the
stockholders of that corporation. There is a risk that the common membership
of management and members of the Boards of Directors of RSI and Reckson will
lead to conflicts of interest in the fiduciary duties owed to stockholders by
common directors and officers in connection with transactions between the two
companies. However, RSI was formed with the specific purpose of entering
into and performing the Intercompany Agreement with Reckson Operating
Partnership in an effort to avoid conflict of interest issues by identifying
at the outset which types of opportunities will be pursued by each company.
See "Management--Conflicts of Interest."
In respect of services to be provided to Reckson Operating Partnership
by RSI, management will have a conflict of interest in determining the market
rates that Reckson Operating Partnership may be charged for such services.
In addition, management will have a conflict of interest in determining
whether a REIT-Qualified Investment opportunity outside of Reckson's core
business strategy should be pursued by RSI or Reckson.
In addition, RSVP has been formed as a "research and development"
vehicle for Reckson to identify and invest in operating companies in real
estate sectors outside of its traditional office and industrial sectors.
Under the terms of the PaineWebber Equity Facility, it is contemplated that
Reckson Operating Partnership and RSVP will form a joint venture in respect
of any such investments and that Reckson Operating Partnership would fund the
common equity component of such investment in lieu of RSI. RSVP Holdings,
however, will continue to be entitled to the carried interest component of
its interest in RSVP. Furthermore, Reckson will be entitled to integrate
such investments into its core business if such investment's platform reaches
the maximum investment allocation of RSVP (i.e. 25% of RSVP's initial
capital).
Finally, in respect of the Rights Offering, to the extent the Standby
Purchaser fails to perform under the Standby Agreement, management will have
a conflict of interest in enforcing such arrangement.
RELATED PARTY TRANSACTIONS
Jon L. Halpern, a former executive officer and current director of
Reckson, beneficially owned substantially all of the OnSite business prior to
RSI's acquisition of an interest therein (and will own beneficially a 25.97%
interest in OnSite after giving effect to RSI's acquisition of the OnSite
business, assuming RSI converts its subordinated convertible note into a
58.69% interest), and owns a 33-1/3% interest in a joint venture that owns a
70% interest in the Dobie Center, a 33-1/3% interest in joint venture that
owns a 76.09%% interest in ACLC, and a 22.75% interest in the Office Suites
Company, and may participate in the operation of such entities. Based upon
its understanding of the market generally and discussions with third parties
specifically, management believes that RSI's participation in such
investments, or, in the Office Suites Company's case, possible participation,
with Mr. Halpern has been the subject of arm's-length negotiations.
Related party transactions involve the risk that the related party is in
a position to obtain transaction terms, including price and other terms, that
are more favorable than the terms that an unrelated party would obtain in an
arm's-length negotiation. It had been anticipated previously that Mr.
Halpern would have an ongoing role with respect to RSI's real estate venture
capital fund. However, it was subsequently determined that the two
individuals retained as managing directors for RSVP would serve in such
capacity. As a result, RSI and Mr. Halpern entered into an arrangement
regarding the projects that the real estate venture capital fund pursued
during the time Mr. Halpern was involved with such fund. RSI and Mr. Halpern
were represented by separate counsel in determining the arrangement between
the parties regarding such projects. Mr. Halpern has also agreed that he
will discontinue serving as a member of the Board of Directors of Reckson at
the request of the Board of Directors of Reckson at any time after July 1998.
In addition, an entity owned by members of management of RSI have
entered into the Standby Agreement relating to the Rights Offering as
described below under "Rights Offering."
NO PRIOR SPONSORSHIP OF VENTURE CAPITAL VEHICLE; INVESTMENTS IN COMPANIES IN
EARLY STAGE OF DEVELOPMENT OR WITH HISTORICAL OPERATING LOSSES
RSVP is a real estate venture capital fund formed to invest in real
estate and real estate-related operating companies. RSI has committed to
invest up to $100 million in RSVP, and a subsidiary of RSI will serve as the
managing member of RSVP. Neither Reckson nor RSI has previously sponsored a
real estate venture capital fund. Investments of RSVP may include, among
other things, investments in companies in an early stage of development that
have historical operating losses. In addition, decreases in values in the
property markets, volatility in the securities markets, interest rate
increases and unfavorable conditions in the economy generally, and in the
real estate industry in particular, may have a negative impact on the
performance of RSVP.
RSVP has obtained the $200 million PaineWebber Equity Facility from
PWRES, which may be partially funded by an investment fund that is jointly
sponsored by financier George Soros and PWRES. Under the terms of the
PaineWebber 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. In
addition, PWRES and such investment fund, if applicable, will receive a
priority or preferred distribution from the operations of RSVP prior to the
distribution of cash to the subsidiary of RSI serving as the managing member
of RSVP. The RSVP Managing Directors will be entitled to a portion of the
profits of the managing member of RSVP after RSI has obtained a return of its
capital plus a minimum return thereon. As a result, no assurance can be
given that the RSVP Managing Directors will not pursue investments involving
greater risk in seeking higher profits. Any investments identified by the
RSVP Managing Directors are subject to the approval of RSI.
OWNERSHIP THROUGH JOINT VENTURES, INCLUDING LIMITS ON ABILITY TO CONTROL AND
INABILITY OF JOINT VENTURER TO PERFORM
It is anticipated that RSI and RSVP may hold a significant portion of
their assets through joint ventures. Joint venture investments may, under
certain circumstances, involve risks not otherwise present, including the
possibility that the partners or co-venturer might become bankrupt, that such
partners or co-venturer might at any time have economic or other business
interests or goals which are inconsistent with the business interests or
goals of RSI and its affiliates, and that such partners or co-venturer may be
in a position to take action contrary to their instructions or their requests
and contrary to their policies or objectives. Such investments may also have
the potential risk of impasse on decisions, such as a sale, because neither
RSI or its affiliates nor the partner or co-venturer would have full control
over the partnership or joint venture. Consequently, actions by such partner
or co-venturer might result in subjecting properties owned by the partnership
or joint venture to additional risk. RSI and its affiliates will, however,
seek to maintain sufficient control of such partnerships or joint ventures to
permit their business objectives to be achieved. There is no limitation
under RSI's organizational documents as to the amount of available funds that
may be invested in partnerships or joint ventures.
STUDENT HOUSING SECTOR UNDERGOING RAPID CHANGE; DEPENDENCE OF PROJECTS ON
WELL-BEING OF RELATED SCHOOLS; COMPETITION
The student housing business is a fragmented sector undergoing rapid
development and change. In addition to traditional real estate risks, risks
in respect of student housing include economic, social, governmental and
demographic factors as they relate to the number of students attending
colleges and universities in need of student housing. Student housing
facilities are to a large extent reliant upon the well-being of the colleges
or universities to which such facilities relate and may be subject to
competition from such colleges and universities as well as other providers of
student housing. In addition, the maintenance and insurance costs of student
housing may exceed the costs typical of multifamily housing. Furthermore,
due to the nature of student housing, turnover of tenants is significant and
such housing is less utilized during summer months.
ABSENCE OF A PUBLIC MARKET FOR RSI COMMON STOCK; VOLATILE TRADING PRICES
There is currently no public market for the RSI common stock and none is
expected to develop prior to the termination of the Rights Offering.
Subsequent to the termination of the Rights Offering, RSI anticipates that
trading of the shares of common stock of RSI may occur on the OTC Bulletin
Board. However, shares of RSI common stock have not been approved for
listing on any national securities exchange or for quotation on any quotation
system, and there can be no assurance that such shares will be so approved or
quoted, or that a public market will develop, or, if a public market
develops, will be sustained or provide liquidity. Furthermore, there can be
no assurance as to the prices at which trading in RSI common stock will occur
after the Distribution. Until the RSI common stock is fully distributed and
if and until a regular trading market develops, the prices at which trading
in the RSI common stock occurs may fluctuate significantly. In the event a
regular trading market fails to develop for the RSI common stock, holders of
the RSI common stock may not be able to sell their shares promptly at a
desired price. Accordingly, holders of the RSI common stock should consider
an investment therein to be long-term.
ABSENCE OF DIVIDENDS ON RSI COMMON STOCK FOLLOWING THE
DISTRIBUTION
Following the Distribution of RSI common stock, RSI intends to use its
available funds to pursue investment and business opportunities and,
therefore, does not anticipate the payment of any dividends on RSI common
stock in the foreseeable future.
Payment of dividends on RSI common stock will be prohibited under the
Credit Facilities until all amounts outstanding thereunder have been paid in
full and will also be subject to such limitations as may be imposed by any
other credit facilities and debt securities that RSI may obtain or issue, as
the case may be, from time to time. See "Dividend Policy."
RISKS OF LOW-PRICED STOCK
Since RSI's common stock is not expected to be listed on any national
securities exchange or quoted on any quotation system, such stock could
become subject to Rule 15g-9 under the Exchange Act, which imposes additional
sales practice requirements on broker-dealers which sell such securities to
persons other than established customers and "accredited investors"
(generally, individuals with net worth in excess of $1,000,000 or annual
incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule
may adversely affect the ability of broker-dealers to sell RSI's common stock
and may adversely affect the ability of purchasers to sell such stock in the
secondary market.
Commission regulations define a "penny stock" to be any non-Nasdaq
equity security that has a market price (as therein defined) of less than
$5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain rules require delivery, prior to any transaction in a
penny stock, of a disclosure schedule prepared by the Commission relating to
the penny stock market. Disclosure is also required to be made about
commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities. Finally, monthly
statements are required to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in
penny stocks.
The foregoing penny stock restrictions will not apply to RSI's common
stock if such securities are eventually listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or
meet certain minimum net tangible assets or average revenue criteria. There
can be no assurance that the RSI Common Stock will qualify for exemption from
these restrictions. In any event, even if the RSI common stock were exempt
from such restrictions, such stock would remain subject to Section 15(b)(6)
of the Exchange Act, which gives the Commission the authority to prohibit any
person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds
that such a restriction would be in the public interest. If the RSI common
stock were subject to the rules on penny stocks, the market liquidity for the
RSI common stock could be severely adversely affected.
REAL ESTATE INVESTMENT RISKS
RSI may invest in real estate, particularly through its holdings in
RSVP. Investments in real estate are subject to the risks incident to the
ownership and operation of real estate. The yields available from equity
investments in real estate depend on the amount of income generated and
expenses incurred. RSI, through RSVP, has made an initial investment in the
area of student housing. RSVP will likely make additional investments in
commercial real estate, although it has not yet determined the types of real
estate that RSVP will pursue. A commercial property's revenues and value may
be adversely affected by the national, state and local economic climate and
real estate conditions (such as oversupply of or reduced demand for space and
changes in market rental rates); the perceptions of prospective tenants of
the safety, convenience and attractiveness of the properties; the ability of
the owner to provide adequate management, maintenance and insurance; the
ability to collect on a timely basis all rent from tenants; the expense of
periodically renovating, repairing and reletting spaces; and increasing
operating costs (including real estate taxes and utilities) which may not be
passed through to tenants. Each of the foregoing factors may result in
losses for RSI's real estate investments, or may cause such investments to be
less profitable than they otherwise would be. Certain significant
expenditures associated with investments in real estate (such as mortgage
payments, real estate taxes, insurance and maintenance costs) are generally
not reduced when circumstances cause a reduction in rental revenues from the
property. If a property is mortgaged to secure the payment of indebtedness
and if the owner is unable to meet its mortgage payments, a loss could be
sustained as a result of foreclosure on the property or the exercise of other
remedies by the mortgagee. In addition, real estate values and income from
properties are also affected by such factors as compliance with laws,
including tax laws, interest rate levels and the availability of financing.
Also, the rentable square feet of commercial property is often affected by
market conditions and may therefore fluctuate over time. In addition, equity
real estate investments are relatively illiquid.
RSI and its affiliates, including RSVP, may engage in the selective
development and construction of real estate properties. Risks associated
with development and construction activities are that development
opportunities may be abandoned after expending resources to determine
feasibility; construction costs of a project may exceed original estimates;
occupancy rates and rents at a newly completed property may not be sufficient
to make the property profitable; financing may not be available on favorable
terms for development of a property; and construction and lease-up may not be
completed on schedule, resulting in increased debt service expense and
construction costs. Development activities are also subject to risks
relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy and other required governmental permits
and authorizations. In addition, new development activities, regardless of
whether or not they are ultimately successful, typically require a
substantial portion of management's time and attention.
POTENTIAL ENVIRONMENTAL LIABILITY RELATED TO REAL ESTATE
Under various federal, state and local laws, ordinances and regulations
(including, but not limited to, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Occupational Safety and Health
Act, the Resource Conservation and Recovery Act and federal, state and local
laws governing the management of asbestos abatement), an owner of real estate
is liable for the costs of removal or remediation of certain hazardous or
toxic substances on or in such property. These laws often impose such
liability without regard to whether the owner knew of, or was responsible
for, the presence of such hazardous or toxic substances. The cost of any
required remediation and the owner's liability therefor as to any property is
generally not limited under such enactments and could exceed the value of the
property and/or the aggregate assets of the owner. The presence of such
substances, or the failure to properly remediate such substances, may
adversely affect the owner's ability to sell or rent such property or to
borrow, using such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of removal or remediation of such substances at a disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Certain environmental laws govern the removal, encapsulation or
disturbance of asbestos-containing materials ("ACMs") when such materials are
in poor condition, or in the event of renovation or demolition. Such laws
impose liability for release of ACMs into the air and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with ACMs. In connection with the ownership (direct or indirect),
operation, management and development of real properties, RSI and its
affiliates may be considered an owner or operator of such properties or as
having arranged for the disposal or treatment of hazardous or toxic
substances and, therefore, potentially liable for removal or remediation
costs, as well as certain other related costs, including governmental fines
and injuries to persons and property.
CERTAIN ANTITAKEOVER PROVISIONS
RSI's charter and bylaws, the Preferred Rights Plan and applicable
sections of the DGCL may make more difficult the acquisition of control of
RSI without the approval of the RSI Board of Directors. Certain provisions
of RSI's charter and bylaws, among other things: (i) classify the RSI Board
of Directors into three classes, each of which serves for staggered
three-year terms; (ii) provide that a director of RSI may be removed by the
affirmative vote of stockholders having at least 80% of the total voting
power only for cause; (iii) provide that only the Chairman of the Board,
President or the RSI Board of Directors may call special meetings of the
stockholders; (iv) provide that the stockholders may take action only at a
meeting of RSI stockholders, not by written consent; (v) provide that
stockholders must comply with certain advance notice procedures in order to
nominate candidates for election to the RSI Board of Directors or to place
stockholders' proposals on the agenda for consideration at meetings of the
stockholders; (vi) provide that, under certain circumstances, the affirmative
vote of the holders of two-thirds of the RSI common stock is required to
approve any merger or similar business combination involving RSI; (vii)
provide that the holder of "control shares" of RSI acquired in a control
share acquisition have no voting rights with respect to such control shares
except to the extent approved by the vote of the holders of two-thirds of the
RSI common stock (the "control shares provision"); (viii) limit the ownership
by any person of RSI common stock to 9.9% of the number of shares or value of
the RSI common stock; and (ix) provide that the stockholders may amend or
repeal any of the foregoing provisions of the charter or bylaws only by a
vote of at least 80% of the stock entitled to vote generally in the election
of directors. With certain exceptions, Section 203 of the DGCL ("Section
203") imposes certain restrictions on mergers and other business combinations
between RSI and any holder of 15% or more of the RSI common stock. The
charter provides that the control shares provision, the Preferred Rights Plan
and Section 203 do not apply to Reckson and its affiliates. Accordingly,
Reckson and its affiliates will be in a position to effect a business
combination or other transaction with RSI in situations where others would be
restricted from effecting a similar transaction. RSI's charter authorizes
the Board of Directors to issue up to 25 million shares of preferred stock,
par value $.01 per share, in series, and to establish the rights and
preferences (including the exchange of such shares of preferred stock into
shares of RSI common stock) of any series of preferred stock so issued. The
issuance of certain types of preferred stock could have the effect of
delaying or preventing a change in control of RSI, even if such a change in
control were in the best interests of some, or a majority, of RSI's
stockholders. See "Description of RSI Capital Stock" and "Certain
Antitakeover Provisions."
The Preferred Rights Plan would cause substantial dilution to a person
or group that attempts to acquire RSI on terms not approved in advance by the
RSI Board of Directors. Under the Preferred Rights Plan, until 10 business
days following such time as a person or group has acquired beneficial
ownership of, or has proposed a tender offer or exchange offer that would
result in such person or group owning, 10% or more of the outstanding shares
of RSI Common Stock (the "Preferred Rights Distribution Effective Date"), the
Preferred Rights will be transferred only with the RSI common stock.
Following the Preferred Rights Distribution Effective Date, separate
certificates evidencing the Preferred Rights will be mailed to each holder of
record on the Preferred Rights Distribution Effective Date. Thereafter, each
holder of a Preferred Right (other than the person or group) will thereafter
have the right to receive, upon exercise of such Preferred Right, that number
of shares of RSI common stock having a market value equal to two times the
exercise price of the Preferred Right. Similar provisions apply in the event
of a merger or other business combination as a result of which an acquiring
person or group will own 10% or more of the outstanding shares of RSI common
stock. Prior to the time that any such person or group acquires 10% or more
of the outstanding shares of RSI common stock, the RSI Board of Directors may
redeem the Preferred Rights in whole for $.01 per Preferred Right. After the
time that any such acquiring person or group acquires 10% or more, but less
than 50%, of the outstanding shares of RSI common stock, the RSI Board of
Directors may exchange the Preferred Rights, in whole or in part, at an
exchange ratio of one share of RSI common stock, or one-hundredth of a share
of Series A Junior Preferred Stock, per Preferred Right. See "Description of
RSI Capital Stock--Series A Junior Preferred Stock."
FEDERAL INCOME TAX RISKS
On the Distribution Effective Date, in the opinion of Brown & Wood LLP,
counsel to RSI and Reckson ("Tax Counsel"), Reckson will recognize gain
measured by the excess, if any, of the value of the RSI common stock
distributed by Reckson over the basis of Reckson in such stock, which will
depend in turn on the basis of Reckson Operating Partnership in such stock.
Any such gain will give rise to additional taxable income for Reckson
stockholders because such gain will result in an increase in Reckson's
earnings and profits. In addition, the Distribution will be taxable to a
Limited Partner if and to the extent that the value of the RSI common stock
and any cash received in lieu of fractional shares exceeds the Limited
Partner's basis in his unit of limited partner interest in Reckson Operating
Partnership, but certain Limited Partners may not be required to recognize
gain equal to the amount of such excess. Because of its factual nature, Tax
Counsel is unable to render an opinion with respect to the value of the RSI
common stock to be distributed by Reckson. Reckson will make a determination
of the fair market value of the RSI common stock as of the date of the
Distribution. There can be no assurance, however, that the Service or the
courts will agree with the amount determined by Reckson. See "The
Distribution--Federal Income Tax Consequences."
RISK OF DEFAULT UNDER STANDBY COMMITMENT
Under the terms of the Standby Agreement, the Standby Purchaser will be
obligated to purchase 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 Holders thereof. However, the obligations of the Standby Purchaser
under the Standby Agreement are not secured by any collateral or letters of
credit. As a result, there can be no assurance that the Standby Purchaser
will perform its obligations under the Standby Agreement.
RISK OF DILUTION IN THE RIGHTS OFFERING; ACQUISITION OF STOCK UNDER STANDBY
COMMITMENT
Holders not subscribing for shares pursuant to Subscription Rights will
be subject to dilution of their ownership interest in RSI. Such dilution may
be significant.
The Rights Offering involves the offering of 20,310,050 shares (or
approximately 83%) of the 24,372,060 shares of RSI that will be issued and
outstanding after the Distribution and the Rights Offering. As a result of
the Standby Agreement, to the extent a large number of Holders do not
exercise their Subscription Rights, the Standby Purchaser may acquire a
significant portion of the issued and outstanding shares of RSI Common Stock.
THE DISTRIBUTION
BACKGROUND OF, AND REASONS FOR, THE DISTRIBUTION
RSI has been formed primarily to identify and acquire interests in
operating companies that engage in businesses that provide Commercial
Services. RSI will also pursue real estate and real estate related investment
opportunities through RSVP, a real estate venture capital fund created as a
"research and development" vehicle for Reckson to explore and invest in real
estate sectors outside of its traditional office and industrial sectors,
thereby providing the potential for Reckson to incorporate one or more of
these alternative sectors into its core business. RSI will enter into the
Intercompany Agreement pursuant to which RSI and Reckson Operating
Partnership have agreed to provide each other with first opportunity rights
in respect of certain types of transactions and activities thereby reducing
the potential for conflicts of interest between the parties by formalizing
their relationship at the outset. In this regard, management believes that
by identifying the opportunities to be offered to the other party and
establishing the process by which such opportunities will be offered, the
potential conflicts of interest are reduced. For information regarding the
types of such transactions and activities, see "Business--The Intercompany
Agreement."
RSI intends to (i) provide various Commercial Services to the Reckson
Customer Base and third parties, (ii) invest in and manage RSVP and (iii)
make or acquire (a) real estate or real estate-related investments other than
REIT-Qualified Investments and (b) REIT-Qualified Investments made available
to Reckson Operating Partnership that it has chosen not to pursue. RSI,
directly or through its affiliates, may also act as a lessee and operator of
real estate owned by Reckson Operating Partnership and others.
Due to considerations relating to Reckson's status as a REIT under
Federal tax laws, RSI was initially formed as a subsidiary in which Reckson
Operating Partnership owned 95% of the outstanding capital stock in the form
of non-voting common stock and certain Reckson officers owned the remaining
5% of the outstanding capital stock of RSI in the form of voting common
stock. The shares of capital stock owned by Reckson Operating Partnership
and Reckson officers were acquired on the same dates and at the same per
share price. Immediately prior to the Distribution, the shares of non-voting
common stock of RSI owned by Reckson Operating Partnership were exchanged by
RSI for RSI Common Stock.
The Distribution will afford investors who own both common stock of
Reckson, par value $0.01 ("Reckson Common Stock") and RSI Common Stock the
opportunity to participate in the benefits of the REIT operations of Reckson
(including ownership of real property) and the non-REIT operations of the
Company. A small number of REITs, operating under tax provisions that no
longer are available to other REITs, have shares that are "paired" or
"stapled" with shares of an operating company that is liable for regular
corporate income tax. The shares of RSI Common Stock and the Reckson Common
Stock are not, and will not be, paired or stapled in any manner and may be
owned and transferred separately and independently of each other. However,
investors who choose to own both shares of RSI Common Stock and Reckson
common stock will, in effect, have the economic equivalent of a "stapled"
investment in the Company and Reckson.
MANNER OF EFFECTING THE DISTRIBUTION
It is expected that the date of the Distribution will be (_____), 1998
(the "Distribution Effective Date"). At the time of the Distribution, share
certificates for RSI Common Stock will be delivered to the Distribution
Agent. Commencing on or about the date of the Distribution, the Distribution
Agent will begin mailing account statements reflecting ownership of RSI
Common Stock to holders of Reckson Common Stock and Units as of the Record
Date. The Distribution will be made on the basis of one share of RSI Common
Stock for every 12 shares of Reckson Common Stock held by Reckson
stockholders on the Record Date and one share of RSI Common Stock for every
12 Units held by Limited Partners on the Record Date. No certificates
representing fractional shares of RSI Common Stock will be issued in
connection with the Distribution. In lieu of fractional shares, the
Distribution Agent will pay to any person who would be entitled to a
fractional share of RSI Common Stock an amount of cash (without interest)
equal to $1.04 per share. All shares of RSI Common Stock will be fully paid
and nonassessable. See "Description of RSI Capital Stock."
Prior to the Distribution Effective Date, inquiries relating to the
Distribution should be directed to the Distribution Agent at ( ),
or by telephone at ( ), Monday through Friday, 9:00 a.m. to
5:00 p.m. (New York City time). After the Distribution Effective Date,
inquiries may be directed to the Distribution Agent or RSI Investor
Relations, at 225 Broadhollow Road, Melville, New York 11747, or by telephone
at (516) ( ), Monday through Friday, 9:00 a.m. to 5:00 p.m. (New York City
time).
NO HOLDER OF SHARES OF RECKSON COMMON STOCK OR UNITS WILL BE REQUIRED TO
MAKE ANY PAYMENT FOR THE SHARES OF RSI COMMON STOCK TO BE RECEIVED IN THE
DISTRIBUTION OR TO SURRENDER OR EXCHANGE SHARES OF RECKSON COMMON STOCK OR
UNITS OR TO TAKE ANY OTHER ACTION IN ORDER TO RECEIVE RSI COMMON STOCK TO
WHICH SUCH HOLDER IS ENTITLED IN THE DISTRIBUTION.
FEDERAL INCOME TAX CONSEQUENCES
Introduction. The following is a summary of the material federal income
tax considerations associated with the Distribution. This discussion is
based upon the laws, regulations and reported rulings and decisions in effect
as of the date of this Prospectus, all of which are subject to change,
retroactively or prospectively, and to possibly differing interpretations.
This discussion does not purport to deal with the federal income or other tax
consequences applicable to all investors in light of their particular
investment circumstances or to all categories of investors, some of whom may
be subject to special rules (including, for example, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). No ruling on the federal, state or local tax considerations
relevant to the operation of Reckson or RSI or to the Distribution is being
requested from the Service or from any other tax authority. Brown & Wood LLP
("Tax Counsel") has rendered certain opinions discussed herein, which Tax
Counsel believes address the material issues with respect to the Distribution
and with respect to the qualification of Reckson as a REIT which are raised
by the structure and currently anticipated activities of RSI. Such opinion
is filed as an exhibit to the Registration Statement. Tax Counsel believes
that if the Service were to challenge the conclusions of Tax Counsel, such
conclusions would prevail in court. However, opinions of counsel are not
binding on the Service or on the courts, and no assurance can be given that
the conclusions reached by Tax Counsel would be sustained in court.
ALL RECKSON STOCKHOLDERS AND RECKSON OPERATING PARTNERSHIP LIMITED PARTNERS
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE APPLICATION OF STATE,
LOCAL AND FOREIGN TAX LAWS.
Taxation of Reckson in General. Reckson has made an election to be
treated as a real estate investment trust under Sections 856 through 860 of
the Code (as used in this section, a "REIT"), commencing with its taxable
year ended December 31, 1995. Reckson believes that it was organized and has
operated in such a manner so as to qualify as a REIT, and Reckson intends to
continue to operate in such a manner, but no assurance can be given that it
has operated in a manner so as to qualify, or will operate in a manner so as
to continue to qualify as a REIT.
The sections of the Code relating to qualification and operation as a
REIT are highly technical and complex. In the opinion of Tax Counsel,
Reckson qualified as a REIT under the Code with respect to its taxable years
ending on or before December 31, 1996, and is organized in conformity with
the requirements for qualification as a REIT, and its proposed manner of
operation will enable it to meet the requirements for qualification as a REIT
in the future. It must be emphasized that this opinion is based on various
assumptions relating to the organization and operation of Reckson and Reckson
Operating Partnership and is conditioned upon certain representations made by
Reckson as to certain relevant factual matters, including matters related to
the organization, expected operation, and assets of Reckson and Reckson
Operating Partnership. Moreover, continued qualification as a REIT will
depend upon Reckson's ability to meet, through actual annual operating
results, the distribution levels, stock ownership requirements and various
qualification tests and other requirements imposed under the Code, as
discussed below. Tax Counsel will not review Reckson's operations.
Accordingly, no assurance can be given that the actual stock ownership of
Reckson, the mix of its assets, or the results of its operations for any
particular taxable year will satisfy such requirements.
Taxation of the Company. The Company will not seek to qualify for
taxation as a real estate investment trust. Accordingly, the Company will be
taxed as a C corporation, subject to regular corporate income tax rates.
Income Recognition by Reckson as a Result of the Distribution. On the
Distribution Effective Date, Reckson will, in the opinion of Tax Counsel,
recognize gain on the Distribution if and to the extent that the value of the
RSI Common Stock distributed by Reckson exceeds the basis of Reckson in such
stock, which will equal Reckson Operating Partnership's basis therein.
Because of the factual nature of the valuation issue, Tax Counsel is unable
to render an opinion on it. Reckson will make a determination of the fair
market value of the RSI Common Stock as of the Distribution Effective Date.
There can be no assurance, however, that the Service or the courts will agree
with the amount determined by Reckson. The amount of gain, if any, will
increase Reckson's earnings and profits.
Taxation of Taxable Domestic Stockholders of Reckson as a Result of the
Distribution. The Distribution will be treated as a distribution whose
amount equals the value of the RSI Common Stock distributed plus any cash in
lieu of fractional shares. As described above under "--Income Recognition by
Reckson as a Result of the Distribution," the amount of gain, if any, to be
recognized by Reckson as a result of the Distribution will increase Reckson's
earnings and profits. As a result the Distribution will give rise to
additional taxable income for Reckson stockholders to the extent of any such
gain.
Reckson stockholders will receive a basis in RSI Common Stock equal to
the value thereof at the time of the Distribution. A Reckson stockholder's
holding period in the RSI Common Stock will not include any period during
which such stock was held by Reckson or Reckson Operating Partnership. As
long as Reckson qualifies as a REIT in the year of the Distribution, the
portion of the Distribution made to Reckson's taxable U.S. stockholders out
of Reckson's current or accumulated earnings and profits (and not designated
as capital gain dividends) will be taken into account by such U.S.
stockholders as ordinary income and, for corporate stockholders, will not be
eligible for the dividends received deduction. The portion of the
Distribution in excess of current and accumulated earnings and profits
allocable to the Distribution will not be taxable to a stockholder to the
extent that such portion does not exceed the adjusted basis of the
stockholder's Reckson Common Stock, but rather will reduce the adjusted basis
of such shares. To the extent that the portion of the Distribution in excess
of current and accumulated earnings and profits allocable to the Distribution
exceeds the adjusted basis of a stockholder's Reckson Common Stock, the
Distribution will be included in income as capital gain (taxable at the
short-term, mid-term or long-term rates depending on the period of time that
the stockholder has held the shares) assuming the shares are a capital asset
in the hands of the stockholder.
To the extent that Reckson designates a portion of the Distribution as a
capital gain dividend, such portion will be taxable to Reckson stockholders
as gain from the sale of a capital asset held for more than one year, without
regard to the period for which the stockholder has held its Reckson Common
Stock. U.S. stockholders that are corporations may, however, be required to
treat up to 20% of certain capital gain dividends as ordinary income.
Preferred Rights Plan. Based on a published ruling of the Service,
since at the time of the adoption of the Preferred Rights Plan the exercise
of the Rights at any time will likely be both remote and speculative, the
adoption of the Preferred Rights Plan should not constitute the distribution
of stock or property by RSI to its stockholders or an exchange of property or
stock by such stockholders and, therefore, should not result in any income
tax consequences to the holders of the RSI Common Stock.
Taxation of Tax-Exempt Stockholders of Reckson as a Result of the
Distribution. Most tax-exempt employees' pension trusts are not subject to
federal income tax except to the extent of their receipt of "unrelated
business taxable income" as defined in Section 512(a) of the Code ("UBTI").
The Distribution to a stockholder that is a tax-exempt entity should not
constitute UBTI, provided that the tax-exempt entity has not financed the
acquisition of its Reckson Common Shares with "acquisition indebtedness"
within the meaning of the Code and the Reckson Common Shares are not
otherwise used in an unrelated trade or business of the tax-exempt entity.
In addition, certain pension trusts that own more than 10% of a "pension-held
REIT" must report a portion of the dividends that they receive from such a
REIT as UBTI. Reckson has not been and does not expect to be treated as a
pension-held REIT for purposes of this rule.
Taxation of Foreign Stockholders of Reckson as a Result of the
Distribution. The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign stockholders (collectively, "Non-U.S. Stockholders") are
complex, and no attempt will be made in this Prospectus to provide more than
a summary of such rules. Non-U.S. Stockholders should consult with their own
tax advisors to determine the impact of federal, state and local tax laws
with regard to the Distribution, including any reporting requirements. In
general, as is the case with domestic taxable stockholders of Reckson, the
Distribution is treated as a distribution whose amount equals the value of
the RSI Common Stock distributed plus any cash in lieu of fractional shares,
and Reckson stockholders will receive a basis in RSI Common Stock equal to
the fair market value thereof at the time of the Distribution.
The Distribution will be treated as an ordinary income dividend to the
extent that it is made out of current and accumulated earnings and profits of
Reckson and is neither attributable to gain from sale or exchange by Reckson
of United States real property interests nor designated by Reckson as a
capital gain dividend. The portion of the Distribution that will be treated
as an ordinary income dividend ordinarily will be subject to a withholding
tax equal to 30% of the gross amount thereof, unless an applicable tax treaty
reduces or eliminates that tax. Reckson expects to withhold U.S. income tax
at the rate of 30% on the gross amount of the Distribution made to a Non-U.S.
Stockholder unless (i) a lower treaty rate applies and the Non-U.S.
Stockholder has filed the required IRS Form 1001 with Reckson or (ii) the
Non-U.S. Stockholder files an IRS Form 4224 with Reckson claiming that the
distribution is effectively connected with the Non-U.S. Stockholder's conduct
of a U.S. trade or business. The portion of the Distribution that is in
excess of Reckson's current and accumulated earnings and profits allocable to
the Distribution will be subject to a 10% withholding requirement but will
not be taxable to a stockholder to the extent that such excess does not
exceed the adjusted basis of the stockholder's Reckson Common Shares, but
rather will reduce the adjusted basis of such shares. To the extent that the
portion of the Distributions in excess of current and accumulated earnings
and profits allocable to the Distribution exceeds the adjusted basis of a
Non-U.S. Stockholder's shares, the Distribution will give rise to tax
liability if the Non-U.S. Stockholder would otherwise be subject to tax on
any gain from the sale or disposition of the Reckson Common Shares.
Provided that Reckson is a "domestically controlled REIT" for federal
income tax purposes, a Non-U.S. Stockholder would be subject to taxation on
gain from the sale or disposition of Reckson Common Shares only if (i) the
investment in the Reckson Common Shares were treated as effectively connected
with the Non-U.S. Stockholder's U.S. trade or business, in which case the
Non-U.S. Stockholder would be subject to the same treatment as U.S.
stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder were
a nonresident alien individual who was present in the United States for 183
days or more during the taxable year and either the individual has a "tax
home" in the United States or the gain is attributable to an office or other
fixed place of business maintained by the individual in the United States, in
which case the gain would be subject to a 30% tax. The Company believes that
Reckson is and will continue to be a domestically controlled REIT.
As Reckson will not be able to determine, at the time that the
Distribution is made, the portion of the Distribution, if any, that will be
in excess of the current and accumulated earnings and profits allocable to
the Distribution, the Distribution will be subject to withholding as though
the entire Distribution (apart from any portion designated as a capital gain
dividend) were an ordinary income dividend. However, a Non-U.S. Stockholder
may seek a refund of such amounts from the Service if it is subsequently
determined that a portion of the Distribution was, in fact, in excess of
Reckson's current and accumulated earnings and profits allocable to the
Distribution.
Management believes that the Company's Common Stock may constitute a
United States real property interest. However, because management
anticipates that any gain to be recognized by Reckson as a result of the
Distribution will be nominal, as described above under "--Income Recognition
by Reckson as a Result of the Distribution," management does not anticipate
that a significant portion of the Distribution will be treated as
attributable to gain upon the disposition of United States real property
interests. To the extent that a portion of the Distribution were to be
treated as attributable to gain upon the disposition of a United States real
property interest, a non-U.S. Stockholder would be subject to tax on such
portion as though it were gain that was effectively connected with a United
States trade or business of such Non-U.S. Stockholder. Thus, Non-U.S.
Stockholders would be taxed on such portion of the Distribution at the normal
capital gain rates applicable to U.S. stockholders. Reckson is required
under applicable Treasury Regulations to withhold 35% of any distribution to
a Non-U.S. Stockholder that could be designated by Reckson as a capital gain
dividend. The amount so withheld is creditable against the Non-U.S.
Stockholder's U.S. tax liability.
Amounts required to be withheld from payments to Non-U.S. Stockholders
will be collected by converting a portion of the Common Stock to be
distributed into cash.
Taxation of Limited Partners of Reckson Operating Partnership as a
Result of the Distribution. The Distribution will generally result in the
recognition of gain by a Limited Partner of the Operating Partnership to the
extent that the sum of the value of the RSI Common Stock plus any cash in
lieu of fractional shares received by him exceeds his basis in his Units.
The basis of a Limited Partner in the RSI Common Stock he receives will
generally equal such value and the holding period of a Limited Partner in the
RSI Common Stock he receives should include the period that the RSI stock was
held by Reckson Operating Partnership. However, a Limited Partner who has
not contributed appreciated property to the Operating Partnership, or who has
contributed appreciated property where the excess of the value of such
property over its basis at the time of the contribution (the "Precontribution
Gain") was less than the excess of the value of the RSI Common Stock he
received in the Distribution over the Operating Partnership's basis in such
stock immediately before the Distribution, will not recognize gain on the
Distribution in the full amount described above. Such a Limited Partner will
generally recognize gain in an amount not greater than the sum of (i) the
excess of (x) the Operating Partnership's basis in the RSI Common Stock
received by him plus the amount of any cash received by him in lieu of
fractional shares over (y) his basis in his Units and (ii) the amount of
taxable gain that would have been allocated to him as Precontribution Gain if
the Operating Partnership would have sold, in a taxable transaction prior to
the Distribution, all of the property that he had contributed to it. Such a
Limited Partner's basis in the RSI Common Stock received in the Distribution
will be equal to not less than the sum of the Operating Partnership's basis
in such stock immediately before the Distribution plus any gain recognized by
the Limited Partner upon the Distribution.
LISTING AND TRADING OF RSI COMMON STOCK
There is currently no public market for RSI Common Stock and none is
expected to develop prior to the termination of the Rights Offering. Shares
of RSI Common Stock have not been approved for listing on any national
securities exchange or for quotation on any quotation system, and there can
be no assurance that such shares will be so approved or quoted. There can be
no assurance as to the prices at which trading in RSI Common Stock will occur
after the Distribution. Until RSI Common Stock is fully distributed, the
Rights Offering terminates and if and when a regular trading market develops,
the prices at which trading in such stock occurs may fluctuate significantly.
There can be no assurance that a regular trading market in RSI Common Stock
will develop or, if a public market develops, will be sustained or provide
liquidity.
The prices at which RSI Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others,
the performance and prospects of RSI and its affiliates, the depth and
liquidity of the market for RSI Common Stock, investor perception of RSI and
its affiliates and of the sectors in which they operate and economic
conditions in general, RSI's dividend policy, and general financial and other
market conditions. In addition, financial markets have experienced extreme
price and volume fluctuations that have affected the market price of many
stocks and that, at times, could be viewed as unrelated or disproportionate
to the operating performance of such companies. Such fluctuations have also
affected the share prices of many newly public issuers. Such volatility and
other factors may materially adversely affect the market price of RSI Common
Stock.
RSI will have approximately ( ) stockholders of record, based on the
number of record holders of Reckson Common Stock and the number of Limited
Partners on the Record Date. The Transfer Agent and Registrar for the RSI
Common Stock will be American Stock Transfer & Trust Company.
SHARES AVAILABLE FOR FUTURE SALE
RSI Common Stock distributed in the Distribution, which based on a
Record Date of ( ), 1998, is approximately 3,858,909 shares
(subject to reduction to the extent that cash payments are made in lieu of
the issuance of fractional shares of RSI Common Stock), will be freely
transferable, except for securities received by persons who may be deemed to
be "affiliates" of RSI under the Securities Act. Persons who may be deemed
to be affiliates of RSI after the Distribution generally include individuals
or entities that control, are controlled by, or are under common control
with, RSI and may include certain officers and directors of RSI as well as
principal stockholders of RSI. Persons who are affiliates of RSI will be
permitted to sell their shares of RSI Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such as the
exemption afforded by Section 4(2) of the Securities Act (relating to private
sales) or by Rule 144 under the Securities Act. RSI is not able to predict
whether substantial amounts of RSI Common Stock will be sold in the open
market following the Distribution. Sale of substantial amounts of RSI Common
Stock in the public market, or the perception that such sales might occur,
could adversely affect the market price of RSI Common Stock.
THE RIGHTS OFFERING
PURPOSE
RSI has determined to proceed with the Rights Offering as a means for
RSI to (i) fund certain organizational and start-up costs and anticipated
short-term losses of the Company, (ii) provide RSI sufficient initial equity
capital in order to pursue its business objectives, (iii) provide capital
towards meeting minimum capital requirements to commence trading in the
future on an organized trading system and (iv) maintain an appropriate
capital structure. There can be no assurance that the Rights Offering will
be successful or, even if it is successful, that it will enable the Company
to achieve the foregoing purposes.
Prior to the Distribution and the Rights Offering, there has been no
public market for the RSI Common Stock or the Subscription Rights, and there
can be no assurance that a public market for the RSI Common Stock will
develop following completion of the Rights Offering. Since the Subscription
Rights are not transferable, no public market will develop for the
Subscription Rights.
Concurrently with the Distribution of RSI common stock, RSI will grant
to Holders Subscription Rights to purchase up to an aggregate of
approximately 20,310,050 shares of RSI Common Stock.
Each Holder will receive one Subscription Right for every one share of
RSI Common Stock received in the Distribution. Each Subscription Right will
entitle the Holder to purchase one share of RSI Common Stock at a purchase
price of $1.04 per share and, at the election of such Holder, four additional
shares (but not less than four additional shares) at a purchase price of
$1.04 per share. The Exercise Price was determined based upon the fair
market value of a share of RSI Common Stock, which was determined to be its
book value. Holders may exercise their Subscription Rights in respect of one
share or five shares of RSI Common Stock that they are entitled to purchase
pursuant to each Subscription Right. Holders will not be permitted to
purchase more than one share and less than five shares in respect of a
Subscription Right.
As of the date of the Distribution, there are approximately 4,062,010
shares of RSI Common Stock. Accordingly, a total of 4,062,010 Subscription
Rights with respect to an aggregate of 20,310,050 shares of RSI Common Stock
are expected to be issued in the Rights Offering.
EXERCISE PRIVILEGE
Each Subscription Right will entitle the Holder thereof to receive one
share of RSI Common Stock upon the payment of a $1.04 per share Exercise
Price and four additional shares of RSI Common Stock (but not less than four
additional shares) upon the payment of $1.04 per share, subject to the
restrictions described herein (the "Exercise Privilege").
NO FRACTIONAL RIGHTS
No fractional Subscription Rights will be issued in the Rights Offering.
EXPIRATION DATE
The Rights Offering will terminate, and the Subscription Rights will
expire, at 5:00 p.m., New York City time, on May __, 1998, unless extended by
the Company (the "Expiration Date"). After the Expiration Date, unexercised
Subscription Rights will be null and void, subject to the provisions of the
Standby Agreement.
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
The Subscription Rights are not transferable by the Holders thereof, and
may only be exercised prior to the Expiration Date by the Holders thereof.
METHOD OF EXERCISING SUBSCRIPTION RIGHTS
Subscription Rights may be exercised by completing and signing the
"Election to Purchase" form that appears on the back of each Subscription
Rights certificate. The completed and signed "Election to Purchase" form,
accompanied by payment in full of the Exercise Price for all shares for which
the Exercise Privilege has been exercised, must be received by __________
(the "Rights Agent") on or before the Expiration Date. The Company will not
be obligated to honor any purported exercise of Subscription Rights received
by the Rights Agent after the Expiration Date, regardless of when the
documents relating to such exercise were sent.
The Company recommends, for the Holders' protection, that exercised
Subscription Rights, if applicable, be delivered to the Rights Agent by
overnight or express mail courier, or, if mailed, by registered mail. The
Subscription Rights certificate and Exercise Price should be mailed or
delivered to the Rights Agent as follows:
By First Class Mail, Hand or Overnight/Express Mail Courier:
(TA address)
Payment of the Exercise Price must be made in U.S. dollars by cash, check or
money order payable to "__________________________________."
________________ will serve as the escrow agent of the RSI Escrow Account.
A Holder of Subscription Rights who purchases less than all the RSI
Common Stock represented by the related Subscription Rights certificate will
receive from the Rights Agent a new Subscription Rights certificate
representing the balance of the unexercised Subscription Rights, to the
extent that the Rights Agent is able to reissue a Subscription Rights
certificate prior to the Expiration Date.
Certificates representing the RSI Common Stock purchased by exercising
the Exercise Privilege will be issued as soon as practicable after the
Expiration Date. All funds received by the Rights Agent in payment of the
Exercise Price will be retained in escrow by the Escrow Agent and will not be
delivered to the Company until the certificates representing RSI Common Stock
have been issued.
Record holders of shares of Reckson Common Stock who hold such shares
for the account of others (e.g., brokers or depositories for securities), and
who thus receive shares of RSI Common Stock in the Distribution and
Subscription Rights certificates representing Subscription Rights for the
account of more than one beneficial owner, should provide such beneficial
owners with copies of this Prospectus and should ascertain and execute on
their behalf the intentions of such beneficial owners as to the exercise of
such Subscription Rights.
All questions as to the validity, form, eligibility (including times of
receipt and beneficial ownership) and acceptance of subscription forms and
the Exercise Price will be determined by the Company, whose determination
will be final and binding. Once made, subscriptions are irrevocable, and no
alternative, conditional or contingent subscriptions will be accepted. The
Company reserves the absolute right to reject any or all purchases not
properly submitted or the acceptance of which would, in the opinion of its
counsel, be unlawful. The Company also reserves the right to waive any
irregularities (or conditions) and its interpretations of the terms (and
conditions) of the Rights Offering shall be final and binding. Any
irregularities in connection with purchases must be cured within five
business days of the giving of notice of defect by the Rights Agent, but not
later than the Expiration Date, unless waived by the Company. The Company
and the Rights Agent are not under any duty to give notification of defects
in such subscriptions and will not have any liability for failure to give
such notifications. Exercises will not be deemed to have been made until
such irregularities have been cured or waived, and rejected exercises and the
Exercise Price paid therefor, without interest, will be returned promptly by
the Rights Agent to the appropriate holders of the Subscription Rights.
STANDBY AGREEMENT
RSI and the Standby Purchaser have entered into the Standby Agreement
pursuant to which the Standby Purchaser has agreed to purchase, and RSI has
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
(the "Standby Commitment Shares") on the Expiration Date at an Exercise Price
of $1.04 per share relating to the unexercised Subscription Rights.
The Company has entered into the Standby Agreement to provide additional
assurance that the Company would, with the sale of the Standby Commitment
Shares, sell all of the shares of RSI Common Stock that are the subject of
Subscription Rights in the Rights Offering.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the material federal income tax consequences
affecting Holders of RSI Common Stock receiving Subscription Rights in the
Rights Offering under the Code is based upon current law:
Distribution of Subscription Rights to Holders of RSI Common Stock.
Pursuant to Section 305(a) of the Code, holders of RSI Common Stock will not
recognize taxable income in connection with the distribution of the
Subscription Rights.
Basis and Holding Period of Subscription Rights. If either (i) the fair
market value of the Subscription Rights on the date of the Distribution is
15% or more of the fair market value (on such date) of the RSI Common Stock
with respect to which the Subscription Rights are received, or (ii) a Rights
Holder elects, in its federal income tax return for the taxable year in which
the Subscription Rights are received, to allocate part of the basis of such
RSI Common Stock to the Subscription Rights, then upon exercise of any of the
Subscription Rights, the Rights Holder's basis in such RSI Common Stock will
be allocated between such RSI Common Stock and the Subscription Rights
exercised in proportion to the fair market values of each on the date the
Subscription Rights are issued. If neither of the foregoing applies, the
basis of Subscription Rights received by a holder of RSI Common Stock will be
zero. In any event, no allocation of basis will be made to the Subscription
Rights if the Subscription Rights are not exercised (e.g., if the
Subscription Rights expire unexercised).
Lapse of Subscription Rights. Upon the lapse of any Subscription Rights
received by Rights Holders, such Rights Holders will not recognize any gain
or loss and, as indicated above, no allocation of basis in such Rights
Holders' RSI Common Stock will be made to the Subscription Rights.
Exercise of Subscription Rights; Basis and Holding Period of the Common
Stock Acquired Through Exercise. Rights Holders will not recognize any gain
or loss upon the exercise of Subscription Rights. The basis of the RSI
Common Stock acquired upon the exercise of Subscription Rights will be equal
to the sum of the Exercise Price therefor and the Rights Holder's basis in
the Subscription Rights exercised. The holding period for the RSI Common
stock acquired through the exercise of Subscription Rights will begin on the
day following the date on which the Subscription Rights are exercised.
USE OF PROCEEDS
The net proceeds from the Rights Offering are estimated to be
approximately $21.1 million (the "Net Proceeds"). The Company intends to use
the Net Proceeds to pursue its business objectives, including the acquisition
of interests in operating companies providing Commercial Services and
investment in RSVP. The Net Proceeds may also be used by the Company for
working capital and general corporate purposes.
DIVIDEND POLICY
Following the Distribution, RSI intends to use its available funds to
pursue investment and business opportunities and, therefore, does not
anticipate the payment of any cash dividends on RSI Common Stock in the
foreseeable future. The declaration of dividends will be subject to the
discretion of the RSI Board of Directors. In addition, payment of dividends
on RSI Common Stock will be prohibited under the Credit Facilities to be
provided to RSI by Reckson Operating Partnership until all amounts
outstanding thereunder are paid in full, and will also be subject to such
limitations as may be imposed by any other credit facilities or debt
securities that RSI may obtain or issue, as the case may be, from time to
time.
SELECTED FINANCIAL DATA
The selected financial information set forth below has been derived from
the historical financial statements of Reckson Service Industries Inc. The
financial information for the period from July 15, 1997 (date of inception)
to December 31, 1997 is not necessarily indicative of results for subsequent
periods or the full year. This selected financial information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of Reckson Service Industries, Inc. and
the historical financial statements and related notes thereto of Reckson
Service Industries Inc. contained herein.
PERIOD FROM
JULY 15, 1997 THROUGH
DECEMBER 31, 1997
OPERATIONS SUMMARY:
Equity in earnings of RO Partners Management, LLC $ 245,593
Equity in (loss) of ACLC (22,156)
Total revenues 253,820
Corporate operating expenses 479,113
Net loss $ (257,887)
FINANCIAL POSITION:
Investment in RO Partners Management, LLC $ 3,868,093
Investment in ACLC 1,652,165
Loan receivable 325,000
Organization and pre-acquisition costs 681,694
Total assets 7,519,695
Loans payable to affiliates 3,177,857
Total liabilities 3,297,241
Shareholders' equity 4,222,454
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Summary
Condensed Pro Forma Financial Information," "Selected Financial Data" and the
financial statements appearing elsewhere in this Prospectus.
This discussion is based on an analysis of the historical financial
statements of RSI and the pro forma financial statements of RSI. The RSI
historical financial statements include RSI's investment in RO Partners
Management, LLC, which is the general partner of the predecessor to RSVP.
The RSI pro forma financial statements include the pro forma effects of the
acquisition of interests in Dobie Center, ACLC and Reckson Executive Centers
LLC which are accounted for under the equity method of accounting and working
capital convertible loans to OnSite.
RSI was formed on July 15, 1997, to identify and acquire interests in
operating companies that engage in businesses that provide certain services
primarily directed towards occupants of office, industrial and other property
types and to invest in and manage a real estate venture capital fund. On
June 4, 1997, the Company formed and acquired a 33-1/3% equity interest in RO
Partners Management LLC ("RO"). RO is the general partner of Reckson
Opportunity Partners, L.P. ("Opportunity Partners"), predecessor to RSVP.
The Company, through a subsidiary, acts as the managing member of RSVP and
PWRES is a non-managing member. RSVP was formed on January 23, 1998, to
succeed to the operating activities of Opportunity Partners. On July 15,
1997, the Company invested approximately $3.62 million in RO, which then
acquired a 70% interest in Dobie Center, a 27-story off-campus student
housing project located directly opposite the campus of the University of
Texas at Austin. On October 17, 1997, the Company invested approximately
$1.51 million to acquire a 33-1/3% interest in RFG Capital Management
Partners, L.P. ("RFG Capital"), which acquired a 76.09% interest in ACLC, a
student housing enterprise which develops, constructs and acquires on- and
off-campus student housing projects.
RSI financed the acquisitions of its indirect interests in Dobie Center
and ACLC with proceeds from initial capital contributions and loans from
Reckson Operating Partnership. RSI anticipates financing certain short-term
working capital requirements of OnSite with working capital loans from
Reckson Operating Partnership. In addition, RSI is commencing the Rights
Offering and anticipates making borrowings under the Credit Facilities for
purposes of meeting its investment commitment to RSVP, making additional
investments and providing working capital for operations (see "Liquidity and
Capital Resources").
RESULTS OF OPERATIONS
For the period from July 15, 1997 (commencement of operations) to
December 31, 1997 the Company reported total revenues of $253,820. Total
revenues include (i) equity in earnings of RO of $245,593 and substantially
represent RO's 33-1/3% interest in a joint venture that owns a 70% interest in
Dobie Center. For the period July 15, 1997 through December 31, 1997, Dobie
Center reported total revenues of $4.4 million, operating income of
$2.1 million and net income of $.8 million, (ii) equity in loss of ACLC of
($22,156). For the period from October 17, 1997 (date of Company's
investment) through December 31, 1997 ACLC reported total revenues of
$1.5 million, operating income of $.6 million and a net loss of $87,354 and
(iii) interest income of $30,383 relating to loans made to certain
affiliates. The Company also reported total operating expenses of $479,113
which substantially represents payroll and office costs. The following
represents summarized historical operations of Dobie Center and ACLC for the
year ended December 31, 1997 and for the period from the investment
acquisition date through December 31, 1997.
<TABLE>
<CAPTION>
For the Period from
For the Period from October 17, 1997
Year Ended July 15, 1997 through through December 31,
Description December 31, 1997 December 31, 1997 1997
- --------------- ---------------------------- --------------------- ---------------------
Dobie Dobie
Center ACLC Center ACLC
---------- ---------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Total Revenues $9,276,908 $5,414,054 $4,395,907 $1,484,654
Total Operating
Expenses 5,050,591 2,925,395 2,280,857 867,252
Operating Income 4,226,317 2,488,659 2,115,050 617,402
Non-operating
Expenses 2,795,934 2,000,213 1,337,506 704,756
---------- ---------- --------------------- ---------------------
Net Income $1,430,383 $ 488,446 $777,456 ($87,354)
========== ========== ===================== =====================
Company's share -- -- $181,406 ($22,156)
========== ========== ===================== =====================
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of RSI, Reckson
Operating Partnership contributed $4,256,324 to RSI for a 95% non-voting
equity interest. Simultaneously, certain officers of Reckson contributed
$224,017 of notes to RSI in exchange for a 5% voting equity interest, which
notes were subsequently paid off. RSI will rely primarily on funds raised in
the Rights Offering and on Reckson through borrowings under the RSI Facility
for the financing of RSI's operations.
RSI will commence the Rights Offering as a means for RSI to raise
sufficient capital to (i) fund certain organizational and start-up costs and
fund anticipated short-term operating losses of the Company, (ii) provide RSI
sufficient initial equity capital in order to pursue its business objectives,
(iii) provide capital towards meeting minimum capital requirements to
commence trading in the future on an organized trading system and (iv)
maintain an appropriate capital structure.
RSI expects to establish the RSI Facility with Reckson Operating
Partnership in the amount of $100 million for RSI's service sector operations
and other general corporate purposes. In addition, Reckson Operating
Partnership has approved the funding of investments of up to $100 million
with or in RSVP, 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
under the RSVP-ROP Facility. Advances under the RSVP-ROP Facility in excess
of $25 million in respect of any single platform will be 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 Commercial
Services, as well as advances for investments in opportunities in non-
Commercial Services, will be subject to approval by Reckson's board of
directors, or a committee thereof. It is expected that the Credit Facilities
will each have a term of five years and advances thereunder will be recourse
obligations of RSI. Interest will accrue 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 (ii) increasing
annually at a rate of 4% of the prior year's rate. Prior to maturity,
interest will be payable quarterly but only to the extent of net cash flow
and on an interest-only basis and will be prepayable without penalty at the
option of RSI. As long as there are outstanding advances under the Credit
Facilities, RSI will be prohibited from paying dividends on any shares of its
capital stock. The Credit Facilities will be 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.
Additionally, RSVP has obtained the PaineWebber 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 PaineWebber Equity Facility will be used by RSVP to make
investments consistent with its business objectives and to fund working
capital. Under the terms of the PaineWebber 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 PaineWebber Equity Facility
are expected to be partially funded by an investment fund that is jointly
sponsored by financier George Soros and PWRES. In addition, PWRES and such
investment fund, if applicable, will receive a priority or preferred
distribution from RSVP prior to the distribution of cash to RSI.
The Company will use the proceeds from the Rights Offering and the RSI
Facility to support its capital requirements, as described above. The
Company will use the proceeds from the Rights Offering and 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 Company's 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 will target 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 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
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, send invoices,
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 project is estimated to be completed not later than September 30,
1998, which is prior to any anticipated impact on its operating systems. 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 completed timely, the year 2000 issue
could have a material impact on the operations of 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 guarantee 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.
PRO FORMA CAPITAL RESOURCES
RSI has entered into a letter of intent to purchase an interest in
OnSite. Financing for this acquisition is expected to be provided through
either proceeds from the Rights Offering or a loan from Reckson Operating
Partnership under the RSI Facility. RSI has no other external sources of
financing except as described above in "Liquidity and Capital Resources."
RSI's ability to make additional investments will be dependent upon
availability under the RSI Facility and the PaineWebber Equity Facility and
securing additional financing on adequate terms as required. Recently the
Clinton administration has made legislative proposals regarding the tax
advantages enjoyed by "paired" or "stapled" REITs. As currently proposed,
such legislative initiatives would not impact the operations of the Company.
RSI is not aware of any material unfavorable trends in either capital
resources or the outlook for long-term cash generation, nor does it
anticipate any material change in the availability and relative cost of such
capital resources.
PRO FORMA RESULTS OF OPERATIONS
For the year ended December 31, 1997 on a pro forma basis, after giving
effect to the completion of the formation and initial capitalization of RSI,
the acquisition of the Dobie Center interest, and the making of the working
capital loans to OnSite and the ACLC interest, RSI would have incurred a net
loss of $(243,304). This pro forma net loss reflects (i) the historical
operating results of RSI for the period from July 15, 1997 (inception) to
December 31, 1997, which includes RSI's equity in earnings of RO Partners
Management, LLC of $245,593, primarily attributable to RSVP's interest in
Dobie Center, (ii) $152,329 of equity in earnings related to the pro forma
results of Dobie Center for the preacquisition period, (iii) the $146,042
equity in earnings related to the pro forma results of ACLC for the
preacquisition period, (iv) the ($9,128) equity in loss related to the pro
forma results of Reckson Executive Centers LLC for the preacquisition period,
and (v) the $114,182 interest income related to RSI's convertible working
capital loans to OnSite. The pro forma net loss also reflects the pro forma
increase in interest expense on borrowings from Reckson Operating Partnership
in connection with the financing of the acquisitions of the ACLC interest and
the working capital loans to OnSite and incremental corporate general and
administrative expenses of $100,000.
BUSINESS
OVERVIEW
SERVICE SECTOR OPERATIONS. RSI's primary business is to create and
manage a system of interrelated services to be offered to the marketplace
through a centralized infrastructure. RSI'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"). Such platform investment will serve as a basis for
future acquisitions in such sectors. RSI will establish a platform position
in service sectors (each, a "Service Platform") that present significant
opportunities to provide Commercial Services to the Reckson Customer Base and
other third parties. RSI will seek growth in each Service Platform by (i)
accessing the Reckson Customer Base as an anchor for growth opportunities in
Reckson'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.
Management believes that there are significant opportunities to provide
Commercial Services to the Reckson Customer Base and third parties that are
currently provided by third parties in a more limited and fragmented manner
or not provided at all. Management also believes that RSI will benefit from
Reckson's relationships with its tenants and from Reckson's reputation for
providing high quality service to its tenants. RSI will offer to the
marketplace Commercial Services at a uniformly high quality level and on
competitive market terms which RSI shall facilitate through its centralized
infrastructure. In support of this arrangement, the Intercompany Agreement
will require Reckson Operating Partnership to provide RSI with a right of
first opportunity in respect of Commercial Service opportunities that it
develops or that otherwise become available to it, as well as to provide RSI
with access to its tenants so that RSI may offer Commercial Services directly
to such tenants; provided, however, that RSI must offer to provide such
Commercial Services to Reckson Operating Partnership at market rates and on
terms and conditions as attractive as the best available for comparable
services in the market or those offered by RSI to third parties. Such market
rates and terms will be determined based upon a review of the services
provided by competitors in the markets. RSI will provide this information to
Reckson Operating Partnership in connection with Reckson Operating
Partnership's review of whether to retain RSI to perform such services.
REAL ESTATE VENTURE CAPITAL FUND. RSI, through a subsidiary, is a
managing member of RSVP, a real estate venture capital fund formed to invest
in real estate and real estate-related operating companies outside of
Reckson's core office and industrial focus. RSVP's strategy is to identify
and acquire interests in established entrepreneurial enterprises with
experienced management teams in market sectors which are in the early stages
of their growth cycle or offer unique circumstances for attractive
investments as well as platforms for future growth. RSVP has established a
platform in the area of student housing and is targeting additional market
sectors. RSVP has retained highly experienced investment professionals that
will source, structure and execute transactions within each platform as well
as manage the day-to-day operations of RSVP, subject to the overall
management of RSI's executive officers.
RSI's investments in RSVP will occur in the following manner: Reckson
Operating Partnership has approved the funding of investments of up to $100
million with or in RSVP. This $100 million will be invested at the early
stages of establishing platforms in real estate and real estate-related
sectors in which RSVP determines to make investments. Although RSVP has
reviewed opportunities in certain sectors, it has not yet determined the
sectors in which it may seek to invest. Reckson Operating Partnership will
fund such investments (i) indirectly through advances to RSI under the
RSVP-ROP Facility or (ii) directly in joint ventures with RSVP in REIT-
Qualified Investments. Under the terms of the PaineWebber Equity Facility,
RSVP may invest up to 25% of its capital into a single platform. After a
platform has reached this limit, RSVP may not make any further investment
therein and Reckson may determine to incorporate that platform into its core
business and make additional investments in other opportunities within such
platform; any such investments would be in addition to the RSVP-ROP Facility.
Reckson Operating Partnership and/or RSI may make investments managed by RSVP
in which RSVP has no ownership interest. It is anticipated that Reckson
Operating Partnership and RSI will pay an asset management fee to RSVP
Holdings LLC equal to 1% and 0.50%, respectively, of such investments. In
addition, as further described below, RSVP has obtained the $200 million
PaineWebber Equity Facility from PWRES, which is expected to be partially
funded by an investment fund that is jointly sponsored by financier George
Soros and PWRES. RSI will be required to comply with the terms of the
PaineWebber Equity Facility, including the funding requirements and covenants
thereof. See "--Funding Sources for RSI."
RSVP Holdings LLC, the managing member of RSVP, has retained Mr. Seth B.
Lipsay and Mr. Steven H. Shepsman (the "RSVP Managing Directors") to manage
the day-to-day operations of RSVP, subject to the strategic direction of RSI.
Mr. Lipsay previously served as a Managing Director of PaineWebber Real
Estate Securities Inc. and Mr. Shepsman served as regional managing partner
of the E&Y Kenneth Leventhal Real Estate Group of Ernst & Young LLP. Each of
the RSVP Managing Directors has entered into an employment agreement with
RSVP Holdings LLC which provides for an annual base salary of $500,000 and
has a term of the earlier of seven years or the term of RSVP, but not less
than five years. Each of the RSVP Managing Directors has received from RSI a
$3 million grant of common stock of Reckson that will vest over a five-year
period. New World Realty, LLC ("New World"), an entity owned by Messrs.
Lipsay and Shepsman, acts as a managing member of RSVP Holdings LLC. The
RSVP Holdings LLC operating agreement (the "Managing Member Operating
Agreement") provides for the payment to New World of distributions out of the
cash flow of RSVP Holdings LLC, after RSI and affiliated persons have
received a return of their capital contributions to RSVP investments plus a
12% internal rate of return ("IRR") thereon, of $15 million and, thereafter,
a share of cash flows ranging from 15% to 27.75% based upon the IRR of RSI
and affiliated persons in respect of RSVP investments. New World will also
be entitled to one-half of any asset management fee earned by RSVP Holdings
from Reckson Operating Partnership and RSI. Additionally, it is anticipated
that New World will receive transaction fees of up to $1 million a year for
identifying investment opportunities for RSVP.
The Managing Member Operating Agreement provides New World with certain
rights regarding major capital decisions of RSVP, including the making or
disposition of RSVP's investments (except for dispositions at an
independently determined fair value), unless one of the RSVP Managing
Directors approves of such decision. The Managing Member Operating Agreement
obligates RSI to contribute 100% of the capital contributions to be made by
RSVP Holdings LLC to RSVP in an amount up to $100 million. In the event that
RSI defaults in making its capital contributions, among other things,
distributions of cash to RSI will be subordinated to certain distributions to
New World and RSI's management rights will be reduced and RSI will be
obligated to purchase, at the election of New World, a portion of New World's
interest in RSVP Holdings LLC for a minimum of $15 million. At the
termination of RSVP, New World has a right of first refusal to purchase any
RSVP investment proposed for sale.
The foregoing is only a summary of the referenced documents. Copies of
such documents have been filed as exhibits to the Registration Statement on
file with the Securities and Exchange Commission, of which this Prospectus is
a part.
INITIAL ASSETS OF RSI
RSI's initial investments are comprised of (i) convertible loans made to
OnSite Ventures, L.L.C. ("OnSite"), a company providing advanced
telecommunications systems and services within commercial and residential
buildings and/or building complexes, (ii) a 9.9% equity interest in Reckson
Executive Centers LLC, an executive office suites business operated at
Reckson's properties that was acquired from Reckson Operating Partnership for
an aggregate purchase price of $200,000, and an option to acquire a majority
equity interest in InterOffice (Superholdings) Corporation (the "Office
Suites Company"), a joint venture that owns 100% of InterOffice (Holdings)
Corporation, a national executive office suites business, (iii) RSI's
indirect interest in ACLC and Dobie Center.
ONSITE. On February 20, 1998, RSI entered into a contract to acquire
through its wholly-owned subsidiary, RSI-OSA Holding Inc., an interest in
OnSite, which has been formed as a joint venture entity to acquire and hold
100% of the equity interests of OnSite Access LLC and OnSite Access Local LLC
(collectively, "OSA"). OSA is engaged in the business of installing state-
of-the-art telecommunications infrastructure in commercial and residential
buildings and complexes, including wiring, cabling and transmission equipment
and providing telecommunication, computer and Internet services. OSA
commenced operations in February 1997. The OnSite transaction has been
closed in escrow pending the receipt of regulatory approvals from the Federal
Communications Commission, the State of New York and the State of
Connecticut. Although such approvals are pending and management believes
that such approvals will be obtained, there can be no assurance that the
approvals will be received. As of the date of this prospectus, RSI has made
an aggregate of $975,000 of senior secured loans to Veritech Ventures LLC, an
entity controlled by Jon L. Halpern, a director of Reckson who is one of the
founders of OSA ("Veritech") for the working capital of OSA pending receipt
of the regulatory approvals. Such loans are unconditionally guaranteed by
OSA and secured by Veritech's equity interest in OSA. RSI has also purchased
a membership interest in OnSite equal to 1% of the aggregate membership
interests. Such loans accrue interest at a 12% rate, payable together with
principal not later than March 1, 1999. If regulatory approval is obtained,
the senior secured indebtedness of Veritech to RSI will be subsumed into the
$6.5 million dollar Subordinated Loan Agreement and Promissory Note executed
in connection with the OnSite transaction. Under the terms of this
Subordinated Loan Agreement and Promissory Note, RSI is committed to loan
OnSite up to $6.5 million (less the aggregate subsumed amount of the senior
secured notes). The Company may fund such $6.5 million from borrowings under
the RSI Facility or out of cash flow from operations, or from a combination
thereof. This subordinated convertible note, in the sole discretion of RSI,
may be converted into a membership interest equal to 58.69% of the aggregate
membership interests in OnSite for an aggregate purchase price equal to $6.5
million less the aggregate amount previously loaned by RSI to Veritech or
OnSite. Interest on the subordinated note accrues at a rate of 12% and is
payable to the extent of available cash flow of OSA. Under the subordinated
note, RSI also receives equity distributions equal to 45.19% of the aggregate
distributions as and when distributed to the members in OnSite. The
subordinated convertible note is convertible only during the two year period
subsequent to its issuance. If RSI does not convert the subordinated
convertible note during such two year period, the subordinated convertible
note will be automatically converted into a non-convertible subordinated note
with a term of ten years and accruing interest at a rate of 7%. Veritech
contributed all of the assets used in the OnSite business, including 100% of
the ownership interest in OSA, in return for an interest in OnSite. Veritech
and former members in Veritech own a 39.13% interest in OnSite.
OnSite has been formed as a Delaware limited liability company managed
by a management committee comprised of three designees of RSI and two
designees of Veritech. The Limited Liability Company Agreement of OnSite
(the "OnSite LLC Agreement") provides that certain significant decisions
(i.e., liquidation or dissolution of OnSite, affiliated transactions, the
issuance of equity securities, changing the nature of the business of OnSite,
the hiring of certain executives, incurring indebtedness above a specified
limit, an initial public offering of interests in OnSite and any transaction
which results in RSI, Veritech and another member not controlling the
business and affairs of the Company) by the management committee require the
approval of both a representative of RSI and an OSA Representative. The
OnSite LLC Agreement also provides RSI and Veritech with buy/sell rights in
the event of a deadlock with respect to a significant decision. In
accordance with the OnSite LLC Agreement, Veritech will have the right, but
not the obligation, to purchase all of RSI's interest if (i) RSI authorizes
the dissolution of OnSite any time after its initial capital contribution has
been spent or (ii) OnSite does not within the first two years of its
operations spend RSI's capital contribution of $6.5 million for the wiring of
buildings or building complexes, provided that Veritech proposed transactions
in accordance with the OnSite business plan sufficient to expend such $6.5
million. In addition, Veritech will have the right to sell all of its
membership interest to RSI at any time after the first two years of the joint
venture if RSI does not consent to an initial public offering by OnSite
proposed by Veritech. RSI also will have the right for a period of six
months to require OnSite to purchase 18.6% of the aggregate percentage
interest in OnSite for a purchase price equal to $2 million commencing two
years after the formation of the joint venture. The terms of the OnSite LLC
Agreement provide RSI and Veritech a right of first refusal with respect to
the sale of the other's membership interest, provides customary "tag-along"
and "drag-along" rights and contemplates the adoption of an employee stock
option or similar plan.
Under the terms and conditions of the OnSite LLC Agreement, OnSite has a
right of first opportunity to deliver or provide communication, wiring and
other related services with respect to Reckson's office buildings and
complexes. The cost to Reckson for such services by OnSite will be the
lesser of the best price offered by OnSite to its other customers and the
lowest price otherwise available in the market, for a period through one year
after RSI no longer holds an interest in OnSite.
RSI and the entity controlled by Jon L. Halpern have also agreed to
invest an additional $300,000 and $200,000 in OnSite Commerce and Content
LLC, a newly formed Delaware Limited Liability Company which has been
established to develop and acquire various forms of software products,
content and other related computerized commercial products which may be
delivered primarily by telecommunications and computer equipment service
providers to their respective end users. The terms and conditions of the
Limited Liability Company Agreement of OnSite Commerce and Content LLC will
be substantially similar to the OnSite LLC Agreement.
ONSITE INDUSTRY. Building centric communications, the sector in which
OnSite operates, is a newer sector of the telecommunications industry, having
evolved largely as a result of the Telecommunications Act of 1996. The
sector includes those companies involved in providing local and long-distance
telecommunications and high-speed internet access. The industry and the
sector are regulated on both the federal and state level. Competing in this
sector requires significant capital expenditures for wiring and equipment.
Companies with access to lower-cost capital have a competitive advantage due
to the significant capital expenditures incurred by participants in this
sector. The sector is undergoing rapid change, development and innovation.
As a result, OnSite and other participants in its sector are subject to the
risk of obsolescence of their technology. Changes in office vacancy rates
and interest rates have an impact on the performance of the sector. OnSite
(including its predecessors) has operated in New York City, Long Island and
Westchester County, NY for two years. The New York tri-state market is a
fragmented market comprised of large, national firms (such as Bell Atlantic
and Worldcom) and smaller, regional companies (such as OnSite). OnSite is
one of several companies seeking to establish a significant presence in the
market.
EXECUTIVE OFFICE SUITES. RSI will obtain a 9.9% ownership interest in
Reckson Executive Centers LLC, an executive office suites business which
currently operates at nine of Reckson's properties encompassing approximately
100,800 rentable square feet. RSI will acquire the 9.9% interest in Reckson
Executive Centers LLC from Reckson Operating Partnership for a purchase price
of $200,000. Reckson Executive Centers LLC provides tenants with furnished
office suites and immediate support services, including secretarial services,
telecommunication services and conference facilities. In addition, RSI is
presently seeking to acquire a portion of the remaining 90.1% interest from
the owner of such interest, who presently manages the day-to-day operations
of Reckson Executive Centers LLC. Such owner, Arnold Widder, also currently
serves as a non-executive officer of Reckson.
Reckson Executive Centers LLC leases space at the related Reckson
properties as well as office furniture and equipment from Reckson Operating
Partnership pursuant to five-year leases that provide for rental payments to
Reckson. Reckson Executive Centers LLC effectively subleases such space to
tenants on a short-term basis (generally one to five years).
RSI has also obtained an option from Reckson Management Group, Inc., a
company in which Reckson Operating Partnership owns a 97% non-voting interest
(the "Reckson Management Company"), to acquire a majority equity interest in
the Office Suites Company. Reckson Management Company closed the acquisition
of the Office Suites Company in January 1998. Each of the RO Partners
Managing Directors (as defined below) owns a minority interest in the Office
Suites Company. Jon L. Halpern owns a 22.75% interest in the Office Suites
Company. RSI's option to acquire Reckson Management Company's interest in
the Office Suites Company has a five-year term and is exercisable at any time
at a price equal to Reckson Management Company's cost in acquiring the
interest (estimated to be approximately $_________ million), increasing at 8%
per annum from January ___, 1998 (the date on which Reckson Management
Company acquired such interest in the Office Suites Company). Management has
determined that RSI will not exercise its option to acquire Reckson
Management Company's interest in the Office Suites Company unless significant
due diligence and an audit of such company's financial statements have been
completed to its satisfaction.
THE EXECUTIVE OFFICE SUITES INDUSTRY. The executive office suite
("EOS") business began approximately 35 years ago. There has been a
significant expansion in the business during the last decade. This growth
resulted largely from corporate downsizing and the development of technology
which decreased the need for employees to be present in large corporate
offices. Instead, more work has been outsourced to consultants, or smaller
groups, who often work closer to their homes. A wide range of services are
now offered by EOS businesses and are only paid for on an "as-used" basis.
The EOS business meets the needs of a broad range of businesses from
individual entrepreneurs to branch offices of Fortune 500 firms offering
basic telephone and clerical services, as well as more advanced services such
as teleconferencing, Internet access and virtual office concepts.
The industry combines many aspects of the real estate business - supply
and demand and location -- with those of a service intensive business,
including technology. The industry is currently fragmented, with only four
large participants operating on a national basis, with many operating under
an affiliation, or networking basis. According to industry sources the total
industry revenues are estimated at $2.4 billion, and there are approximately
5,100 centers in North America, including 4,000 in the United States.
INITIAL INVESTMENTS OF RSVP. RSVP (the successor to Opportunity
Partners) has acquired an indirect interest in two investments: ACLC and
Dobie Center. Jon L. Halpern, a director of Reckson, and Martin Rabinowitz
were formerly partners of Opportunity Partners (the "Non-RSI Partners").
Each of the Non-RSI Partners owns a minority interest in ACLC and Dobie
Center and have certain rights for additional investment in that platform.
Jon L. Halpern owns a 33-1/3% interest in the joint venture that owns 76.09%
of ACLC and a 33-1/3% interest in the joint venture that owns 70% of the Dobie
Center. The Non-RSI Partners will not have any involvement in the future
investments and operations of RSVP.
RSVP has acquired a 33-1/3% interest in a joint venture that owns a
76.09% interest in American Campus Lifestyles Companies, LLC ("ACLC"), a
student housing enterprise which develops, constructs, manages and acquires on-
and off-campus student housing projects, for $1.51 million in cash. RSVP
acquired such interest from the Company, which had acquired the interest from
RFG Capital which acquired such interest in October 1997. RSVP is
negotiating to acquire an additional interest in such joint venture. The
Non-RSI Partners each own an interest in such joint venture. ACLC currently
manages approximately 3,600 student beds in several different projects
located in Texas, Oklahoma and Florida. The existing management of ACLC,
which includes construction, development, marketing and accounting personnel,
continued in their existing roles subsequent to the RSVP acquisition. ACLC
employs 11 people at its corporate offices and has in excess of 250 people
(i.e., mostly employees and staff personnel provided by independent
contractors) carrying out responsibilities at its various projects. In
addition to the Dobie Center, ACLC owns/manages student housing at the Texas
A&M University at Prairie View (two projects), Texas A&M University at
Laredo, Centennial Court Apartments, Langston University, Oklahoma, and
Southgate Campus Center at Florida State University in Tallahassee.
RSVP has acquired a 33-1/3% interest in a joint venture that owns a 70%
interest in the Dobie Center, a 27-story off-campus student housing project
located directly opposite the campus of the University of Texas at Austin,
for $3.62 million in cash. RSVP acquired such interest from RO Partners
which acquired such interest in June 1997. Each of the Non-RSI Partners owns
an interest in such joint venture. The Dobie Center is one of the nation's
largest off-campus student housing facilities, with a student residential
tower of 504 rooms accommodating approximately 950 students, a two story
student oriented retail shopping mall comprising 70,000 rentable square feet
and a six story parking garage accommodating up to 668 cars.
STUDENT HOUSING MARKET OVERVIEW. The student housing industry is a
specialized market sector that is highly fragmented and has relatively few
large participants. Management believes that student housing represents a
market sector that will maintain growth trends as the student population
increases. According to the 1994 Statistical Abstract of the United States,
8.6 million students were enrolled in higher education institutions
nationwide in 1970. This population increased to over 12.1 million in 1980.
By 1995, it was estimated that the student population was over 16.5 million
with over 18 million students projected by 2005. While the student
population has continued to increase, the rate of growth slowed somewhat
during the last several years. The U.S. Department of Education estimates
that the student housing industry is currently a $10 billion dollar industry
and could grow to a $20 billion industry in less than ten years.
While the student population and the demand for student housing has
increased, housing stock and in particular on-campus housing stock, has not
kept up with demand. Student housing is comprised of two different sub-
sectors, on-campus which according to industry sources accounts for
approximately 25% of the housing stock and off-campus housing which accounts
for approximately 75%. Currently, overall on-campus occupancy rates are
estimated to be in excess of 90% according to industry sources. However,
some university-run student housing projects are experiencing declining
occupancy rates, as a direct result of age, general mismanagement, and
physical and functional obsolescence rather than due to a lack of demand.
The failure of the housing supply to keep pace with the increased demand
provides the opportunity to develop new private on- and off-campus student
housing and to improve the management and physical condition of existing
university-owned housing through privatization.
FUNDING SOURCES FOR RSI
RSI will commence the Rights Offering as a means for RSI to raise
sufficient capital to (i) fund certain organizational and start-up costs and
fund anticipated short-term operating losses of the Company, (ii) provide RSI
sufficient initial equity capital in order to pursue its business objectives,
(iii) provide capital towards meeting minimum capital requirements to
commence trading on an organized trading system and (iv) maintain an
appropriate capital structure.
RSI expects to establish the RSI Facility with Reckson Operating
Partnership in the amount of $100 million for RSI's service sector operations
and other general corporate purposes. In addition, Reckson Operating
Partnership has approved the funding of investments of up to $100 million
with or in RSVP, 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
under the RSVP-ROP Facility. Advances under the RSVP-ROP Facility in excess
of $25 million in respect of any single platform will be 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 Commercial
Services, as well as advances for investments in opportunities in non-
Commercial Services, will be subject to approval by Reckson's board of
directors, or a committee thereof. It is expected that the Credit Facilities
will each have a term of five years and advances thereunder will be recourse
obligations of RSI. Interest will accrue 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 (ii) increasing
annually at a rate of 4% of the prior year's rate. Prior to maturity,
interest will be payable quarterly but only to the extent of net cash flow
and on an interest-only basis and will be prepayable without penalty at the
option of RSI. As long as there are outstanding advances under the Credit
Facilities, RSI will be prohibited from paying dividends on any shares of its
capital stock. The Credit Facilities will be 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.
RSVP has obtained the $200 million PaineWebber Equity Facility from
PWRES. RSI, through its subsidiaries, has agreed to contribute up to $100
million in the form of common equity to RSVP and PWRES has agreed to
contribute up to $200 million in the form of preferred equity to RSVP. The
PaineWebber Equity Facility requires that the preferred equity be drawn upon
during a period of 36 months subsequent to the execution thereof and has a
seven year term. The preferred equity holder is entitled to a preferred
return in respect of distributions from RSVP's cash flow and from capital
events such as sales and refinancings. Under the terms of the PaineWebber
Equity Facility, the preferred equity holder is generally entitled to a 10%
preferred return on its capital and, after the RSVP Managing Member has
received a 10% return on its capital, an additional 6% return. Thereafter,
amounts are distributed as a return of capital and then 100% to the RSVP
Managing Member. The terms of the PaineWebber Equity Facility also
contemplate periodic unused commitment fees payable to the preferred holder,
as well as a one-time structuring fee paid to the preferred holder at
closing. The PaineWebber Equity Facility contains several other covenants
and events of default, including requirements that RSVP maintain sufficient
earnings, distribute cash sufficient to cover the preferred return, limit
debt in respect of particular investments as well as on a portfolio-wide
basis, maintain the involvement of certain specified officers in its
operations, prohibit RSI from competing with RSVP and prohibit changes-in-
control of RSI. The PaineWebber Equity Facility provides for the formation
of an advisory committee that is comprised of at least one representative of
the preferred holder. Although such committee will review all investments,
in the absence of a default under the PaineWebber Equity Facility it will not
have the authority to approve or disapprove of any investment decisions of
the RSVP Managing Member. The PaineWebber Equity Facility also provides for
the offering of the RSVP Managing Member's share of any REIT-Qualified
Investments to Reckson Operating Partnership, and provides a right of first
opportunity to Reckson Operating Partnership in respect of office and
industrial real estate transactions. The PaineWebber Equity Facility also
provides PWRES with the right, under certain circumstances, to act as a
lender or an underwriter in respect of financing transactions of entities in
which RSVP holds an interest. The PaineWebber Equity Facility also requires
the Operating Partnership's consent for RSVP to enter into any office or
industrial property transactions that the Operating Partnership has chosen
not to pursue. Advances under the PaineWebber Equity Facility are expected
to be partially funded by an investment fund that is jointly sponsored by
financier George Soros and PWRES.
THE INTERCOMPANY AGREEMENT
The Operating Partnership and RSI will enter into an Intercompany
Agreement in order to reduce conflicts of interest by formalizing their
relationship. It is anticipated that decisions regarding such first
opportunity rights of Reckson will be presented to the executive committee of
the board of directors of Reckson, which includes Donald Rechler, Scott
Rechler and two independent directors of Reckson's board of directors. Under
the Intercompany Agreement, RSI will grant Reckson Operating Partnership a
right of first opportunity to make any REIT-Qualified Investment that it
develops or that otherwise becomes available to RSI. In addition, in the
event that any such investment opportunity becomes available to an affiliate
of RSI, such affiliate will be required to allow Reckson Operating
Partnership to participate in such investment opportunity to the extent of
RSI's interest, if any, therein.
Under the Intercompany Agreement, Reckson Operating Partnership will
grant RSI a right of first opportunity to provide Commercial Services to
Reckson Operating Partnership and its tenants or that are developed by or
otherwise become available to Reckson Operating Partnership. Any services
provided by RSI to Reckson Operating Partnership will be required to be at
market rates on terms and conditions as attractive as the best available for
comparable services in the market or those offered by RSI to third parties.
In addition, Reckson Operating Partnership will be required to give RSI
access to its tenants in respect of Commercial Services that may be provided
to such tenants.
The Intercompany Agreement will also provide, subject to certain
conditions, that Reckson Operating Partnership will provide RSI with a right
of first refusal to become the lessee of any real property acquired by
Reckson Operating Partnership if Reckson Operating Partnership determines
that, consistent with Reckson's status as a REIT, it is required to enter
into a "master" lease arrangement.
Under the Intercompany Agreement, RSI will agree not to acquire or make
any REIT-Qualified Investment unless it has provided written notice to
Reckson Operating Partnership of the material terms and conditions of such
investment, and Reckson Operating Partnership has determined not to pursue
such investment either by providing written notice to RSI rejecting the
opportunity within 10 days from the date of receipt of notice of the
opportunity or by allowing such 10-day period to lapse. RSI will also agree
to assist Reckson Operating Partnership in structuring and consummating any
REIT-Qualified Investment which Reckson Operating Partnership elects to
pursue, on terms determined by Reckson Operating Partnership.
Due to certain considerations relating to Reckson's status as a REIT,
the Intercompany Agreement will also obligate RSI to maintain the 9.9% limit
on the ownership of RSI Common Stock set forth in its charter.
PROPERTY
Reckson has agreed to make available to RSI, at Reckson's principal
office at 225 Broadhollow Road, Melville, New York, 11747, space for RSI's
principal corporate office. RSVP maintains offices in Melville, New York and
New York, New York. RSI believes that its facilities are adequate to meet
its expected requirements for the coming year.
EMPLOYEES
As of April , 1998, RSI had ____ employees.
LEGAL PROCEEDINGS
There are no pending legal proceedings or to which the Company is a
party or which any of its properties is subject.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF RSI
As of March , 1998, Scott H. Rechler, Donald J. Rechler and Roger
Rechler were the directors of RSI. At such date, Scott H. Rechler served as
RSI's President and J. Michael Maturo served as the Treasurer, Chief
Financial Officer and Secretary. It is anticipated that RSI will appoint
five additional directors, four of whom are officers of Reckson. The
following table sets forth certain information concerning those persons who
have agreed to serve as executive officers and directors of RSI commencing
subsequent to ( ), 1998 and prior to the Distribution.
<TABLE>
<CAPTION>
NAME Position and Offices Held
- ---- -------------------------------------------------------------
<S> <C>
Donald J. Rechler . . . . . . . . . Chairman of the Board and Director of RSI (term as a
director expires in 199_)
Roger M. Rechler . . . . . . . . . Director of RSI; member of Management Advisory Committee
(term as a director expires in 199_)
Scott H. Rechler . . . . . . . . . President, Chief Executive Officer and Director of RSI (term
as a director expires in 199_)
Michael Maturo . . . . . . . . . . Executive Vice President, Chief Financial Officer, Treasurer
and Director of RSI (term as a director expires in 199_)
Gregg M. Rechler . . . . . . . . . Director and Member of Management Advisory Committee of RSI
(term as a director expires in 199_)
(Independent Director) . . . . . .
Mitchell D. Rechler . . . . . . . . Secretary, Member of Management Advisory Committee and
Director of RSI (term as a director expires in 199_)
Jason M. Barnett . . . . . . . . . Senior Vice President and General Counsel of RSI
Daniel A. DiSano . . . . . . . . . Senior Vice President of Operations
Jeffrey D. Neumann . . . . . . . . Senior Vice President of Investments
</TABLE>
The following is a biographical summary of the experience of the above-
mentioned persons:
Donald J. Rechler, age 63, serves as Chairman of the Board and Director
of RSI and of Reckson. Prior to the initial public offering of Reckson (the
"Reckson IPO"), Mr. Rechler was a Co-Founder and General Partner of Reckson
Associates. As Chief Executive Officer, he coordinates and directs all of
RSI's primary functions as well as establishing policy for RSI. He is a
founder and former President and Chairman of the Association For A Better
Long Island, a founder of the Long Island Commercial & Industrial Development
Association, a member of the Board of Directors of the Development Division
of North Shore Hospital, a member of the Council of Overseers of Long Island
University, C.W. Post College. Mr. Rechler is a graduate of the University
of Miami. Mr. Rechler is the father of Mitchell Rechler and the brother of
Roger Rechler.
Roger M. Rechler, age 56, serves as Director of RSI and member of the
Management Advisory Committee and also serves as Executive Vice President of
Development and the Vice-Chairman of the Board and a Director of Reckson.
Prior to the Reckson IPO, Mr. Rechler was a co-founder and general partner of
Reckson Associates and is responsible for the supervision of development,
property construction, architectural and design services, interior
construction and property management. Mr. Rechler attended the University of
Miami. Mr. Rechler is the father of Scott Rechler and Gregg Rechler and the
brother of Donald Rechler.
Scott H. Rechler, age 30, serves as the President, Chief Executive
Officer and a Director of RSI and of Reckson. Mr. Rechler has been employed
at Reckson since 1989. He is responsible for the day-to-day operations and
directing corporate policy for RSI. Prior to the Reckson IPO, he directed
the financing of approximately $200 million of mortgage debt and the
acquisition of property having a value in excess of $100 million for Reckson.
He is a member of the Board of Directors of the Long Island Children's
Museum. Mr. Rechler is a graduate of Clark University and received a Masters
Degree in Finance with a specialization in real estate from New York
University. He is the son of Roger Rechler and the brother of Gregg Rechler.
Michael Maturo, age 36, serves as an Executive Vice President, Chief
Financial Officer, Treasurer and Director of RSI and of Reckson. He is
responsible for the supervision of all financial, treasury and reporting
functions. Mr. Maturo is also primarily responsible for banking and capital
market activities and investor relations. Prior to joining Reckson, Mr.
Maturo was a Senior Manager at E&Y Kenneth Leventhal Real Estate Group
(formerly Kenneth Leventhal & Company), a public accounting and consulting
firm. He specialized in diverse phases of real estate finance including
corporate and property debt financings and recapitalization transactions.
Mr. Maturo is a graduate of Seton Hall University with a degree in accounting
and finance and is a certified public accountant. Mr. Maturo is a member of
the accounting committee of the National Association of Real Estate
Investment Trusts.
Gregg M. Rechler, age 31, serves as a member of the Management Advisory
Committee and as a Director of RSI and serves as an Executive Vice President
and Secretary of Reckson and as President of Reckson Construction Group, Inc.
(the "Construction Company"). Mr. Rechler is responsible for the
construction, architectural and property management activities of Reckson.
Since 1985, he has been employed by Reckson and certain affiliates. From
1985 to 1988, Mr. Rechler held non-supervisory roles in the construction and
property management areas. Beginning in 1989, as an Executive Vice President
of Reckson, he served as the person responsible for the construction of the
Omni office building and supervised all construction aspects of this project.
In 1991, he organized the Construction Company and has been responsible for
its significant growth. Mr. Rechler is a member of the Board of Directors of
the Long Island chapter of the Building Owners and Managers Association
("BOMA"). Mr. Rechler attended the New York Institute of Technology. He is
the son of Roger Rechler and the brother of Scott Rechler.
Mitchell D. Rechler, age 38, serves as Secretary and as a Director of
RSI and as a member of the Management Advisory Committee; also serves as an
Executive Vice President and a Director of Reckson and also serves as the
President of Reckson Management Group, Inc. (the "Management Company"). From
1981 to 1985, he was employed by Reckson in various non-supervisory roles
including positions in property management, construction, acquisitions and
space leasing. Since 1986, Mr. Rechler has served as an Executive Vice
President of Reckson, responsible for all leasing activities including the
coordination of leasing and marketing strategies and overseeing tenant
relations. During his career at Reckson, Mr. Rechler has completed over 300
leasing transactions encompassing in excess of 3 million square feet of
office and industrial space. Mr. Rechler has served as President of the
Management Company, since its organization in 1991. Mr. Rechler serves on
the Executive Committee of the Children's Medical Fund of Schneider
Children's Hospital of Long Island Jewish Medical Center and as a member of
the Board of Directors of the Long Island Friends of the Arts. He is a
graduate of Emory University. He is the son of Donald Rechler.
Jason M. Barnett, age 29, serves as Senior Vice President and General
Counsel of RSI and of Reckson. Mr. Barnett joined Reckson in 1996. He is
responsible for the coordination of all legal and compliance matters for RSI.
Prior to joining Reckson, Mr. Barnett practiced law as an associate in the
REIT practice group of Brown & Wood LLP. While at Brown & Wood LLP, Mr.
Barnett participated in numerous corporate and real estate transactions
involving publicly held REITs, including initial public offerings, joint
ventures and corporate and real estate acquisitions. Mr. Barnett holds a
Bachelor of Arts degree from Clark University and Law Degree from Emory
University School of Law. Mr. Barnett is admitted to the Bar of the State of
New York.
Daniel A. DiSano, age 29, serves as Senior Vice President of Operations
of the Company. Mr. DiSano joined RSI in 1998. He is responsible for
developing and implementing the strategic direction of RSI and its operating
companies. Prior to joining Reckson, Mr. DiSano was a Senior Associate at
Booz-Allen & Hamilton, a leading management consulting firm. He worked on
several strategic issues, including growth and acquisition strategies and
organizational design, across a variety of industries. Mr. DiSano holds a
Bachelor of Arts degree in Economics from Clark University and an MBA from
MIT Sloan School of Management.
Jeffrey D. Neumann, age 35, serves as Senior Vice President of
Investments of the Company. Mr. Neumann joined RSI in 1998. He is
responsible for all investments and acquisitions for the Company. Prior to
joining RSI, Mr. Neumann was a Vice President in GE Capital's private equity
investment subsidiary. While at GE Capital, Mr. Neumann participated in
numerous investments in both public and private companies. Additionally, he
has significant operating experience having been President of a manufacturing
company and a health care company. He started his career with the investment
banking firm of Bear, Stearns & Co. Inc. in New York. Mr. Neumann received a
Master in Business Administration degree from New York University Leonard N.
Stern School of Business.
COMMITTEES OF THE BOARD OF DIRECTORS
The RSI Board has standing Audit and Compensation Committees.
(______________ and ______________) will serve as the members of the Audit
Committee and (________________) and (________________) will serve as the
members of the Compensation Committee. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of RSI's internal controls. The Compensation Committee is
responsible for establishing compensation for RSI's officers and
administering RSI's stock option plan.
COMPENSATION OF DIRECTORS
Each director other than Donald J. Rechler, Scott H. Rechler, Roger
Rechler, Michael Maturo, Gregg M. Rechler and Mitchell D. Rechler will
receive from RSI an annual fee of $7,500 or a meeting fee of $500 for each
RSI Board or Committee meeting attended and reimbursements of expenses
incurred in attending meetings.
ANNUAL MEETING
RSI's Bylaws provide that its annual meeting of stockholders will be
held in May of each year at its principal office or on such other date and at
such other place and time as may be fixed by resolution of RSI's Board. The
first annual meeting for which proxies will be solicited from stockholders
will be held in 1999.
EMPLOYMENT AGREEMENTS
None of the Executive Officers or members of the management advisory
committee of RSI have entered into employment agreements with RSI.
REGISTRATION RIGHTS AGREEMENT
The Company has entered into registration rights agreements with each of
the holders of the 5% of its Common Stock owned by Reckson officers. Such
agreements provide for both demand and piggyback registration rights.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AFTER THE
DISTRIBUTION
Executive officers and directors will receive shares of RSI Common Stock
in the Distribution in respect of shares of Reckson Common Stock and Units
held by them on the Record Date. The Distribution will be made on the basis
of one share of RSI Common Stock for every 12 Reckson Common Shares held on
the Record Date and one share of RSI Common Stock for every 12 Units held on
the Record Date.
For purposes of providing an indication of the beneficial ownership of
certain persons following the Distribution, the following table sets forth
the number of shares of RSI Common Stock that will be beneficially owned
immediately following the Distribution, based on a Record Date of ( ),
1998, by each person then serving as an executive officer and director of
RSI, all such executive officers and directors of RSI as a group, and persons
or entities owning 5% or more of the outstanding shares of Reckson Common
Stock and Units.
BENEFICIAL OWNERSHIP OF RSI COMMON STOCK(1)
<TABLE>
<CAPTION>
NUMBER OF Percent of
NAME OF BENEFICIAL OWNER SHARES/(1)/ Total
- ----------------------------------------------- -------------------------- -----------
<S> <C> <C>
Donald J. Rechler . . . . . . . . . . . . . . . ( (2)(4)) ( %)
Roger M. Rechler . . . . . . . . . . . . . . . ( (3)(5)) ( %)
Reckson Officer Entity (6) . . . . . . . . . . ( ) ( %)
Scott H. Rechler . . . . . . . . . . . . . . . ( (7)) ( %)
J. Michael Maturo . . . . . . . . . . . . . . . ( ) ( %)
Mitchell D. Rechler . . . . . . . . . . . . . . ( (8)) ( %)
FMR Corp. (9) . . . . . . . . . . . . . . . . . ( ) ( %)
Cohen & Steers Capital Management Inc. (10) . . ( ) ( %)
All directors and executive officers as a group
(__ persons) . . . . . . . . . . . . . . . . . ( ) ( %)
</TABLE>
_______________
(1) Assumes the exercise in full of Rights held by the respective beneficial
owner and all other Holders in the Rights Offering, but excludes any
shares that may be acquired pursuant to the Standby Commitment.
(2) Includes ( ) shares held by a trust for the benefit of Glenn
Rechler, the son of Donald J. Rechler, beneficial ownership of which is
disclaimed by Donald J. Rechler.
(3) Includes ( ) shares held by a trust for the benefit of Todd
Rechler, the son of Roger M. Rechler, and 1,000 shares held by the wife
of Roger M. Rechler, beneficial ownership of which is disclaimed by
Roger M. Rechler.
(4) Includes ( ) Units held by trusts for the benefit of the sons of
Donald J. Rechler, beneficial ownership of which is disclaimed by Donald
J. Rechler.
(5) Includes ( ) Units held by trusts for the benefit of the sons of
Roger M. Rechler, beneficial ownership of which is disclaimed by Roger
M. Rechler.
(6) Reckson Officer Entity is comprised of certain officers of Reckson.
(7) Includes ( ) shares held in trust for the children of Scott H.
Rechler, beneficial ownership of which is disclaimed by Scott H.
Rechler.
(8) Includes ( ) shares held by the wife of Mitchell D. Rechler and
( ) shares held in trust for the children of Mitchell D.
Rechler, beneficial ownership of which is disclaimed by Mitchell D.
Rechler.
(9) The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts
02109.
(10) The address of Cohen & Steers Capital Management Inc. is 757 Third
Avenue, New York, New York 10019.
EXECUTIVE COMPENSATION
RSI was recently formed. None of the Company's executive officers has
received compensation from or on behalf of RSI since its formation. The
Company has no employment agreements with any executive officer and does not
currently contemplate paying a base salary to any executive officer that is
also an executive officer of Reckson for his services in such capacity,
although options have been, and in the future may be, granted to executive
officers. Subsequent to the commencement of RSI's operations, it expects
that it will pay salaries and other compensation to such executive officers
when it begins conducting business operations material enough to warrant such
compensation.
The following table provides certain information regarding options
granted to the Company's named executive officers. None of the options is
exercisable until after the Distribution Effective Date.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION
NUMBER OF FOR OPTION/SAR
SHARES % OF TOTAL EXERCISE TERM (1)
UNDERLYING OPTIONS/SARs OR BASE ----------------
OPTIONS GRANTED IN PRICE EXPIRATION
NAME GRANTED FISCAL 1998 ($/sh)(2) DATE 5% 10%
- ---------------------- ---------- ------------ --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Donald J. Rechler 128,341 21% 1.10 1/10/2008
255,536 -- 1.04 3/30/2008
Scott H. Rechler 128,341 21% 1.10 1/10/2008
255,536 -- 1.04 3/30/2008
J. Michael Maturo 105,519 17% 1.10 1/10/2008
208,225 -- 1.04 3/30/2008
Roger Rechler 52,392 9% 1.10 1/10/2008
102,980 -- 1.04 3/30/2008
Gregg M. Rechler 52,392 9% 1.10 1/10/2008
102,980 -- 1.04 3/30/2008
Mitchell D. Rechler 52,392 9% 1.10 1/10/2008
102,980 -- 1.04 3/30/2008
</TABLE>
_______________
(1) Potential Realizable Value is based on the assumed annual growth rates
shown over their 10-year option term. For example, a 5% growth rate
compounded annually, for Scott H. Rechler's grant results in stock
prices of $( ) per share and $( ) per share, respectively, and a
10% growth rate, compounded annually, results in stock prices of $( )
per share and $( ) per share, respectively. These Potential Realizable
Values are listed to comply with the regulations of the Commission, and
the Company cannot predict whether these values will be achieved.
Actual gains, if any, on stock option exercises are dependent on the
future performance of the stock.
(2) The exercise or base price per share as of the date of grant, which the
Company's board of directors has determined represents the fair market
value as of the date of grant.
RSI STOCK OPTION PLAN
On January 10, 1998, RSI adopted a Stock Option Plan pursuant to which
grants of options ("Options") to purchase a specified number of shares of RSI
Common Stock were made in order to provide incentives to the recipient
thereof. Additional Options to purchase shares of RSI Common Stock were
granted on March 30, 1998. Each of the Options granted as of the date hereof
has been granted at an option price equal to the fair market value of the RSI
Common Stock at the date of grant. The Options become exercisable
immediately subsequent to the Distribution Effective Date. Under the Stock
Option Plan, grants with respect to up to 3,655,809 shares of RSI Common
Stock (i.e. approximately 15% of the total outstanding shares of RSI Common
Stock after giving effect to the Rights Offering) are authorized for issuance
under the Plan. Non-employee directors of RSI will receive annual grants of
Options to purchase 500 shares of RSI Common Stock (including an initial
grant of an Option to purchase 1,000 shares of RSI Common Stock upon
appointment of any non-employee director). Future grants under the plan,
other than grants to non-employee directors, will be determined in the sole
discretion of the Compensation Committee. The Stock Option Plan expires on
December 31, 2008.
The Compensation Committee of RSI has authority to determine the
employees, officers and advisors to be granted Options, Restricted Stock (as
defined below) and other awards of RSI Common Stock, to interpret the Stock
Options Plan, to prescribe, amend and rescind any rules and regulations
necessary or appropriate for the administration of the Stock Option Plan, to
determine and interpret the details and provisions of each Option agreement,
to modify or amend any Option agreement or waive any conditions or
restrictions applicable to any Option (or the exercise thereof), and to make
all other determinations necessary or advisable for the administration of
the Stock Option Plan. With respect to any provisions of the Stock Option
Plan granting the Compensation Committee the right to agree, in its sole
discretion, to further extend the term of any award, the Compensation
Committee may exercise such right at the time of grant, in the agreement
relating to such award, or at any time or from time to time after the grant
of any award thereunder. The discretion of the Compensation Committee under
the Stock Option Plan does not extend to Options granted to outside
directors.
The Stock Option Plan authorizes (i) the grant of Options that qualify
as incentive stock options under Section 422 of the Code ("ISOs"), (ii) the
grant of Options that do not so qualify ("NQSOs"), (iii) the grant of shares
of RSI Common Stock subject to certain restrictions on transfer and risks of
forfeiture ("Restricted Stock"), (iv) the grant of Options in lieu of cash
Directors' fees and employee bonuses, and (v) the grant of unrestricted
shares of RSI Common Stock in lieu of cash compensation. The exercise price
of Options is determined by the Compensation Committee, but may not be less
than 100% of the fair market value of the shares of RSI Common Stock on the
date of grant in the case of ISOs; provided that, in the case of grants of
NQSOs granted in lieu of cash Directors' fees and employee bonuses, the
exercise price may not be less than 50% of the fair market value of the
shares of RSI Common Stock on the date of grant.
Certain Federal Income Tax Consequences of the Stock Option Plan. The
following is a brief summary of the principal Federal income tax consequences
of awards under the Stock Option Plan. The summary is based upon current
Federal income tax laws and interpretations thereof, all of which are subject
to change at any time, possibly with retroactive effect. This summary is not
intended to be exhaustive and, among other things, does not describe state,
local or foreign tax consequences.
A participant is not subject to Federal income tax either at the time of
grant or at the time of exercise of an ISO. However, upon exercise, the
difference between the fair market value of the RSI Common Stock and the
exercise price is an item of tax preference subject to the possible
application of the alternative minimum tax. If a participant does not
dispose of RSI Common Stock acquired through the exercise of an ISO in a
"disqualifying disposition" (i.e., no disposition occurs within two years
from the date of grant of the share option nor within one year of the
transfer of the RSI Common Stock to the participant), then the participant
will be taxed only upon the gain, if any, from the sale of such RSI Common
Stock, and such gain will be taxable as gain from the sale of a capital
asset.
RSI will not receive any tax deduction on the exercise of an ISO or, if
the above holding period requirements are met, on the sale of the underlying
RSI Common Stock. If there is a disqualifying disposition (i.e., one of the
holding period requirements is not met), the participant will be treated as
receiving compensation subject to ordinary income tax in the year of the
disqualifying disposition and RSI will be entitled to a deduction for
compensation expense in an amount equal to the amount included in income by
the participant. The participant generally will be required to include in
income an amount equal to the difference between the fair market value of the
RSI Common Stock at the time of exercise and the exercise price. Any
appreciation in value after the time of exercise will be taxed as capital
gain and will not result in any deduction by RSI.
If NQSOs are granted to a participant, there are no Federal income tax
consequences at the time of grant. Upon exercise of the NQSO, the
participant must report as ordinary income an amount equal to the difference
between the exercise price and the fair market value of the RSI Common Stock
on the date of exercise. RSI will receive a tax deduction in like amount.
Any appreciation in value after the time of exercise will be taxed as capital
gain and will not result in any deduction by RSI.
A participant who is awarded unrestricted shares of RSI Common Stock
will have compensation income at the time of grant equal to the fair market
value of such shares. The Company will receive a tax deduction in the amount
of the income recognized by the participant.
A participant who is awarded Restricted Stock that is subject to a
substantial risk of forfeiture (as defined in the Code) will not be taxed at
the time of the grant unless the participant makes a special election under
section 83(b) of the Code. Assuming that no such election is made, RSI will
receive no tax deduction at the time of the grant. Upon the lapse of the
substantial risk of forfeiture associated with the Restricted Stock, a
participant will recognize ordinary income equal to the fair market value of
the Restricted Stock at the time of the lapse. At the same time, RSI will
receive a tax deduction in the amount of ordinary income recognized by a
participant.
If a participant makes an election under section 83(b) of the Code or if
the Restricted Stock is subject to restrictions that do not comprise a
substantial risk of forfeiture, he or she will recognize ordinary income in
an amount equal to the fair market value of the Restricted Stock at the time
of the grant (determined without regard to any restrictions which may lapse).
RSI will receive a tax deduction in the equal amount at the same time. No
tax will be payable by a participant (and no additional deduction will be
taken by RSI) upon lapse of the restrictions.
CONFLICTS OF INTEREST
Donald J. Rechler will serve as Chairman of the Board and Chief
Executive Officer of Reckson and Chairman of the Board of RSI, Scott H.
Rechler will serve as the President and Chief Operating Officer of Reckson
and President and Chief Executive Officer of RSI and Michael Maturo will
serve as Executive Vice President, Treasurer and Chief Financial Officer of
Reckson and RSI. Although each of them is committed to the success of RSI,
they are also committed to the success of Reckson. None of Donald J.
Rechler, Scott H. Rechler or Michael Maturo is committed to spending a
particular amount of time on RSI's affairs, nor will any of them devote his
full time to RSI. As a result, such officers may spend more time acting in
their positions with Reckson, particularly if Reckson encounters operating
difficulties or is engaged in significant transactions. Donald Rechler,
Roger Rechler, Scott Rechler, Michael Maturo, Gregg M. Rechler and Mitchell
D. Rechler are members of the RSI Board of Directors and will also be either
insiders of RSI or members of the Reckson board of directors. As noted below
in "--Related Party Transactions," Jon L. Halpern, a director of Reckson, has
an interest in certain entities in which RSI holds an investment. In
addition, the RSI Board includes only one member who is unaffiliated with RSI
and Reckson.
Officers and directors of a corporation owe fiduciary duties to the
stockholders of that corporation. There is a risk that the common membership
of management and members of the Boards of Directors of RSI and Reckson will
lead to conflicts of interest in the fiduciary duties owed to stockholders by
common directors and officers in connection with transactions between the two
companies. However, RSI was formed with the specific purpose of entering
into and performing the Intercompany Agreement with Reckson Operating
Partnership in an effort to avoid conflicts of interest issues by identifying
at the outset which types of opportunities will be pursued by each company.
See "Management--Conflicts of Interest."
In respect of services to be provided to Reckson Operating Partnership
by the Company, management will have a conflict of interest in determining
the terms on which the Company will provide such services. In addition,
management will have a conflict of interest in determining whether an
investment opportunity of RSVP that generates REIT qualifying income but is
outside of Reckson's core business strategy should be pursued by the Company
or Reckson.
CERTAIN TRANSACTIONS
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
As of __________, Donald J. Rechler, Roger M. Rechler and Scott H.
Rechler beneficially own approximately _____%, _____% and _____%,
respectively, of Reckson, which interests consist of shares of Reckson Common
Stock and Units (including vested options to acquire shares of Reckson Common
Stock) and will own RSI Common Stock following the Distribution, as set forth
above under "Management--Security Ownership of Certain Beneficial Owners and
Management After the Distribution."
ACQUISITION OF ASSETS
During 1997, RSI acquired its indirect interests in ACLC and Dobie
Center from a Rechler family entity for $5.13 million. Such entity had
acquired the interests in ACLC and the Dobie Center earlier in 1997 for $5.06
million in contemplation of transferring such interests to RSI, the
difference representing interest carrying costs.
FORMATION AND EQUITY CAPITALIZATION OF RSI; OWNERSHIP OF RSI COMMON STOCK
Due to considerations relating to the Reckson's status as a REIT under
Federal tax laws, RSI was initially formed as a subsidiary in which Reckson
Operating Partnership owned 95% of the outstanding capital stock in the form
of non-voting common stock and Reckson officers owned the remaining 5% of the
outstanding capital stock in the form of common stock. The shares of capital
stock owned by Reckson Operating Partnership and Reckson officers were
acquired on the same terms. Immediately prior to the Distribution, the
shares of non-voting common stock owned by Reckson Operating Partnership were
exchanged for RSI Common Stock. The Holder of the 5% of the RSI Common Stock
owned by Reckson officers have entered into a registration rights agreement
with the Company.
The Company also will obtain the Credit Facilities from Reckson
Operating Partnership which shall bear interest at the rate equal to the
greater of the prime rate plus 2% and 12% per annum, with such 12% increasing
annually at a rate of 4% of the prior year's rate. The Credit Facilities
will be payable on an interest-only basis from net cash flow during its five-
year term. Advances under the Credit Facilities will be recourse obligations
of RSI.
Jon L. Halpern, a director of Reckson, beneficially owned substantially
all of the OnSite business prior to RSI's acquisition of an interest therein
(and will own beneficially a 25.97% interest in OnSite after giving effect to
its acquisition of the OnSite business, assuming RSI converts its
subordinated convertible note into a 58.69% interest), and owns a 33-1/3%
interest in a joint venture that owns a 70% interest in the Dobie Center, a
33-1/3% interest in a joint venture that owns a 76.09% interest in ACLC, and a
22.75% interest in the Office Suites Company, and may participate in the
operation of such entities. Based upon its understanding of the market
generally and discussions with third parties specifically, management
believes that RSI's participation in such investments, or, in the Office
Suites Company's case, possible participation, with Mr. Halpern has been the
subject of arm's-length negotiations.
THE INTERCOMPANY AGREEMENT
The Intercompany Agreement between the Company and Reckson Operating
Partnership will set forth the basis on which RSI and Reckson Operating
Partnership will allocate business opportunities among them. See "Business--
The Intercompany Agreement."
STANDBY AGREEMENT
The Company and the Standby Purchaser have entered into the Standby
Agreement pursuant to which the Standby Purchaser has agreed to purchase, and
the Company has 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 (the "Standby Commitment Shares") on the Expiration Date at
the Exercise Prices.
The Company has entered into the Standby Agreement to provide additional
assurance that, the Company would, with the sale of the Standby Commitment
Shares, sell all of the shares of RSI Common Stock that are the subject of
Subscription Rights in the Rights Offering. The Standby Purchaser is owned
by members of management of RSI.
DESCRIPTION OF RSI CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
RSI's authorized capital stock consists of 25,000,000 shares of
preferred stock, par value $.01 per share (the "Preferred Stock"),
100,000,000 shares of RSI Common Stock and 25,000,000 shares of excess stock,
par value $.01 per share. Immediately following the Distribution,
approximately ( ) shares of RSI Common Stock will be outstanding
(subject to reduction to the extent that cash payments are made in lieu of
the issuance of fractional shares of RSI Common Stock). All of the shares of
RSI Common Stock that will be outstanding immediately following the
Distribution will be validly issued, fully paid and nonassessable.
COMMON STOCK
The holders of RSI Common Stock will be entitled to one vote for each
share on all matters voted on by stockholders, including elections of
directors, and, except as otherwise required by law or provided in any
resolution adopted by RSI's Board with respect to any series of Preferred
Stock, the holders of such shares will possess all voting power. The Charter
does not provide for cumulative voting in the election of directors. Subject
to any preferential rights of any outstanding series of Preferred Stock
created by the RSI Board from time to time, the holders of RSI Common Stock
will be entitled to such dividends as may be declared from time to time by
the RSI Board from funds available therefor, and upon liquidation will be
entitled to receive pro rata all assets of the Company available for
distribution to such holders.
PREFERRED STOCK
The Charter authorizes the RSI Board to establish one or more series of
Preferred Stock and to determine, with respect to any series of Preferred
Stock, the terms and rights of such series, including (i) the designation of
the series, (ii) the number of shares of the series, which number the RSI
Board may thereafter (except where otherwise provided in the applicable
certificate of designation) increase or decrease (but not below the number of
shares thereof then outstanding), (iii) whether dividends, if any, will be
cumulative or noncumulative, and, in the case of shares of any series having
cumulative dividend rights, the date or dates or method of determining the
date or dates from which dividends on the shares of such series shall be
cumulative, (iv) the rate of any dividends (or method of determining such
dividends) payable to the holders of the shares of such series, any
conditions upon which such dividends will be paid and the date or dates or
the method for determining the date or dates upon which such dividends will
be payable, (v) the redemption rights and price or prices, if any, for shares
of the series, (vi) the terms and amounts of any sinking fund provided for
the purchase or redemption of shares of the series, (vii) the amounts payable
on and the preferences, if any, of shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of RSI, (viii) whether the shares of the series will be convertible
or exchangeable into shares of any other class or series, or any other
security, of RSI or any other corporation, and, if so, the specification of
such other class or series or such other security, the conversion or exchange
price or prices or rate or rates, any adjustments thereof, the date or dates
as of which such shares will be convertible or exchangeable and all other
terms and conditions upon which such conversion or exchange may be made, (ix)
restrictions on the issuance of shares of the same series or of any other
class or series, (x) the voting rights, if any, of the holders of the shares
of the series, and (xi) any other relative rights, preferences and
limitations of such series.
RSI believes that the ability of the RSI Board to issue one or more
series of Preferred Stock will provide it with flexibility in structuring
possible future financings and acquisitions, and in meeting other corporate
needs which might arise. The authorized shares of Preferred Stock, as well
as shares of RSI Common Stock, will be available for issuance without further
action by RSI's stockholders, unless such action is required by applicable
law or the rules of any stock exchange or automated quotation system on which
RSI's securities may be listed or traded. If the approval of RSI's
stockholders is not required for the issuance of shares of Preferred Stock or
RSI Common Stock, the RSI Board may determine not to seek stockholder
approval.
Although the RSI Board has no intention at the present time of doing so,
it could issue a series of Preferred Stock that could, depending on the terms
of such series, impede the completion of a merger, tender offer or other
takeover attempt. The RSI Board will make any determination to issue such
shares based on its judgment as to the best interests of RSI and its
stockholders. The RSI Board, in so acting, could issue Preferred Stock
having terms that could discourage an acquisition attempt through which an
acquiror may be able to change the composition of the RSI Board, including a
tender offer or other transaction that some, or a majority, of RSI's
stockholders might believe to be in their best interests or in which such
stockholders might receive a premium for their stock over the then-current
market price of such stock.
SERIES A JUNIOR PREFERRED STOCK
The Company has reserved ( ) shares of Series A Junior Preferred
Stock for issuance upon exercise of the Rights. The Series A Junior
Preferred Stock will not be redeemable and will rank, with respect to the
payment of dividends and the distribution of assets, junior to any other
series of any other classes of Preferred Stock that may exist from time to
time. Generally, each share of Series A Junior Preferred Stock will entitle
its holder to 100 votes on all matters submitted to a vote of the Company's
stockholders.
Subject to the rights of holders of any shares of any series of
Preferred Stock ranking prior and superior to the Series A Junior Preferred
Stock with respect to dividends, holders of shares of Series A Junior
Preferred Stock, in preference to holders of RSI Common Stock and any other
junior stock, will be entitled to receive, when, as and if declared by the
RSI Board, quarterly cash dividends, in an amount per share equal to the
greater of (i) $1 or (ii) subject to adjustment as set forth herein, 100
times the aggregate per share amount of all cash dividends and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or
other distributions (other than dividends payable in RSI Common Stock or a
subdivision of outstanding shares of RSI Common Stock) declared on the RSI
Common Stock since the immediately preceding quarterly dividend payment date,
or since the first issuance of any share of Series A Junior Preferred Stock,
in the case of the first quarterly dividend payment date. In the event the
Board declares or pays a dividend on the RSI Common Stock payable in shares
of RSI Common Stock or subdivides, combines or consolidates the outstanding
shares of RSI Common Stock into a greater or lesser number of shares of RSI
Common Stock, the amount of in-kind dividend payable to holders of Series A
Junior Preferred Stock will be adjusted for such dividend on, or subdivision,
combination or consolidation of, shares of RSI Common Stock. Dividends on
the Series A Junior Preferred Stock generally will be declared immediately
following a dividend declaration on the RSI Common Stock, and will be
cumulative. Accrued but unpaid dividends will not bear interest.
During such times as dividends payable on the Series A Junior Preferred
Stock are in arrears, and until such arrearages have been paid in full, RSI
will be prohibited from (i) declaring or paying dividends, or making other
distributions on any shares of stock ranking junior to the Series A Junior
Preferred Stock, (ii) declaring or paying dividends, or making other
distributions on any shares of stock ranking on a parity with the Series A
Junior Preferred Stock, except dividends paid ratably on the Series A Junior
Preferred Stock and all such parity stock, in proportion to the amounts to
which holders of all such shares are then entitled, (iii) redeeming or
otherwise acquiring for value any stock ranking junior to the Series A Junior
Preferred Stock, and (iv) redeeming or otherwise acquiring for value any
shares of Series A Junior Preferred Stock, or any shares of stock ranking on
a parity with the Series A Junior Preferred Stock, except in accordance with
a purchase offer made under certain limited circumstances. Redemptions and
other acquisitions of stock ranking junior to the Series A Junior Preferred
Stock will be permissible if such redemptions or acquisitions are made in
exchange for shares of any stock of RSI ranking junior to the Series A Junior
Preferred Stock.
In the event of any liquidation, dissolution or winding up of RSI, no
distribution will be made to the holders of shares of stock ranking junior to
the Series A Junior Preferred Stock unless and until the holders of the
Series A Junior Preferred Stock have received $100 per share, plus an amount
equal to accrued and unpaid dividends and distributions thereon. Holders of
Series A Junior Preferred Stock will be entitled to receive an aggregate
amount per share equal to 100 times the aggregate amount to be distributed
per share to holders of RSI Common Stock. Further, no distribution will be
made to the holders of shares of stock ranking on a parity with the Series A
Junior Preferred Stock, except distributions made ratably on the Series A
Junior Preferred Stock and all such parity stock in proportion to the totals
to which the holders are entitled upon such liquidation, dissolution or
winding up. In the event the Board declares or pays a dividend payable in
shares of RSI Common Stock or subdivides, combines or consolidates the
outstanding shares of RSI Common Stock into a greater or lesser number of
shares of RSI Common Stock, the amount of the liquidating distribution
payable to holders of Series A Junior Preferred Stock will be adjusted for
such dividend on, or subdivision, combination or consolidation of, shares of
RSI Common Stock.
In the event RSI enters into a consolidation, merger, combination or
other transaction pursuant to which shares of RSI Common Stock are exchanged
for or changed into other stock or securities, cash or other property, each
share of Series A Junior Preferred Stock must be similarly exchanged or
changed into an amount per share equal to 100 times the aggregate amount of
stock, securities, cash or other property (payable in kind) into which or for
which each share of RSI Common Stock is changed or exchanged. In the event
the Board declares or pays a dividend payable in shares of RSI Common Stock
or subdivides, combines or consolidates the outstanding shares of RSI Common
Stock into a greater or lesser number of shares of RSI Common Stock, the
amount payable to holders of Series A Junior Preferred Stock in respect of a
consolidation, merger, combination or other such transaction will be adjusted
for such dividend on, or subdivision, combination or consolidation of, shares
of RSI Common Stock.
RESTRICTION ON OWNERSHIP OF RSI CAPITAL STOCK
In order for Reckson to qualify as a REIT under the Code, it must
satisfy a variety of requirements, including annual tests with respect to the
nature of its gross income. Substantially all of Reckson's gross income
meets these requirements by qualifying as "rentals from real property" under
Section 856(d) of the Code. Under this provision, however, a REIT's real
property rentals can be disqualified if the rent is received by the REIT from
a related party or if noncustomary services are performed for the tenant
other than by an independent contractor. The characterization of a party as
a related-party tenant or as an independent contractor depends, in part, upon
the percentage of stock, assets or net profits of such party that may be
owned by the REIT or by shareholders of the REIT. Such ownership may be
direct or may be indirect under certain attribution rules prescribed by the
Code. Immediately after the Distribution, there will be a substantial
identity of ownership between stockholders of Reckson and stockholders of the
Company. It cannot be predicted how long or to what degree such identity of
ownership may continue. In order to protect Reckson from the risk that
rental income that it will earn from the Company or its affiliates and from
tenants with respect to which the Company or its affiliates may provide
Commercial Services will not be disqualified as rent from real property for
REIT qualification purposes, the ownership by any person or entity of RSI
Common Stock is limited to 9.9% of the aggregate number or value of shares of
RSI stock.
EXCESS STOCK
The Articles of Incorporation provide that the Company may issue up to
75 million shares of excess stock, par value $.01 per share ("Excess Stock").
For a description of Excess Stock, see "--Restrictions on Ownership" below.
RESTRICTIONS ON OWNERSHIP
In order to protect Reckson against the risk of failing to satisfy
certain tax laws applicable to REITs, the Certificate of Incorporation
provides that no stockholder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.9% (the "Ownership Limit") of
the aggregate number or value of the Company's outstanding shares of Common
Stock, provided that in no event will a stockholder be limited in the amount
of RSI Common Stock acquired in connection with the Rights Offering, the
Standby Agreement and awards or exercises of employee stock options. In the
event the Company issues Preferred Stock, it may, in the Designating
Amendment, determine a limit on the ownership of such stock. Any direct or
indirect ownership of shares of stock in excess of the Ownership Limit or
that would result in common ownership among 10% holders of RSI Common Stock
and Reckson Common Stock, shall be null and void, and the intended transferee
will acquire no rights to the shares of capital stock. The foregoing
restrictions on transferability and ownership will not apply if Reckson
determines that it is no longer in its best interests to attempt to qualify,
or to continue to qualify, as a REIT. Under the terms of the Intercompany
Agreement, the RSI Board of Directors will have the right to waive the
Ownership Limit only if permission to do so is granted by Reckson, in
Reckson's sole discretion, and the RSI Board of Directors otherwise decides
that such action is in the best interest of the Company.
Shares of capital stock owned, or deemed to be owned, or transferred to
a stockholder in excess of the Ownership Limit will automatically be
converted into shares of Excess Stock that will be transferred, by operation
of law, to the trustee of a trust for the exclusive benefit of one or more
charitable organizations described in Section 170(b)(1)(A) and 170(c) of the
Code (the "Charitable Beneficiary"). The trustee of the trust will be deemed
to own the Excess Stock for the benefit of the Charitable Beneficiary on the
date of the violative transfer to the original transferee-stockholder. Any
dividend or distribution paid to the original transferee-stockholder of
Excess Stock prior to the discovery by the Company that capital stock has
been transferred in violation of the provisions of the Company's Certificate
of Incorporation shall be repaid to the trustee upon demand. Any dividend or
distribution authorized and declared but unpaid shall be rescinded as void ab
initio with respect to the original transferee-stockholder and shall instead
be paid to the trustee of the trust for the benefit of the Charitable
Beneficiary. Any vote cast by an original transferee-stockholder of shares
of capital stock constituting Excess Stock prior to the discovery by the
Company that shares of capital stock have been transferred in violation of
the Company's Certificate of Incorporation shall be rescinded as void ab
initio. While the Excess Stock is held in trust, the original transferee-
stockholder will be deemed to have given an irrevocable proxy to the trustee
to vote the capital stock for the benefit of the Charitable Beneficiary. The
trustee of the trust may transfer the interest in the trust representing the
Excess Stock to any person whose ownership of the shares of capital stock
converted into such Excess Stock would be permitted under the Ownership
Limit. If such transfer is made, the interest of the Charitable Beneficiary
shall terminate and the proceeds of the sale shall be payable to the original
transferee-stockholder and to the Charitable Beneficiary as described herein.
The original transferee-stockholder shall receive the lesser of (i) the price
paid by the original transferee-stockholder for the shares of capital stock
that were converted into Excess Stock or, if the original transferee-
stockholder did not give value for such shares (e.g., the stock was received
through a gift, devise or other transaction), the average closing price for
the class of shares from which such shares of capital stock were converted
for the ten trading days immediately preceding such sale or gift, and (ii)
the price received by the trustee from the sale or other disposition of the
Excess Stock held in trust. The trustee may reduce the amount payable to the
original transferee-stockholder by the amount of dividends and distributions
relating to the shares of Excess Stock which have been paid to the original
transferee-stockholder and are owed by the original transferee-stockholder to
the trustee. Any proceeds in excess of the amount payable to the Original
transferee-stockholder shall be paid by the trustee to the Charitable
Beneficiary. Any liquidation distributions relating to Excess Stock shall be
distributed in the same manner as proceeds of a sale of Excess Stock. If the
foregoing transfer restrictions are determined to be void or invalid by
virtue of any legal decision, statute, rule or regulations, then the original
transferee-stockholder of any shares of Excess Stock may be deemed, at the
option of the Company, to have acted as an agent on behalf of the Company in
acquiring the shares of Excess Stock and to hold the shares of Excess Stock
on behalf of the Company.
In addition, the Company will have the right, for a period of 90 days
during the time any shares of Excess Stock are held in trust, to purchase all
or any portion of the shares of Excess Stock at the lesser of (i) the price
initially paid for such shares by the original transferee-stockholder, or if
the original transferee-stockholder did not give value for such shares (e.g.,
the shares were received through a gift, devise or other transaction), the
average closing price for the class of stock from which such shares of Excess
Stock were converted for the ten trading days immediately preceding such sale
or gift, and (ii) the average closing price for the class of stock from which
such shares of Excess Stock were converted for the ten trading days
immediately preceding the date the Company elects to purchase such shares.
The Company may reduce the amount payable to the original transferee-
stockholder by the amount of dividends and distributions relating to the
shares of Excess Stock which have been paid to the original transferee-
stockholder and are owned by the original transferee-stockholder to the
trustee. The Company may pay the amount of such reductions to the trustee
for the benefit of the Charitable Beneficiary. The 90-day period begins on
the later date of which notice is received of the violative transfer if the
original transferee-stockholder gives notice to the Company of the transfer
or, if no such notice is given, the date the RSI Board of Directors
determines that a violative transfer has been made.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Each stockholder shall, upon demand by the Company, be required to
disclose to the Company in writing any information with respect to the
direct, indirect and constructive ownership of capital stock of the Company
as Reckson deems necessary for Reckson to comply with the provision of the
Code applicable to REITs.
The Company is required to maintain in its charter the foregoing
Ownership Limit, Excess Stock and stock ownership disclosure requirements
under the terms of the Intercompany Agreement.
The Ownership Limit may have the effect of delaying, deferring or
preventing a change in control of the Company.
CERTAIN ANTITAKEOVER PROVISIONS
STAGGERED BOARD OF DIRECTORS
The Charter and the Bylaws provide that the RSI Board will be divided
into three classes of directors, each class constituting approximately
one-third of the total number of directors, with the classes serving
staggered three-year terms. The classification of the RSI Board will have
the effect of making it more difficult for stockholders to change the
composition of the RSI Board, because only a minority of the directors are up
for election, and the RSI Board may not be replaced by vote of the
stockholders, at any one time. RSI believes, however, that the longer terms
associated with the classified RSI Board will help to ensure continuity and
stability of the Company's management and policies.
The classification provisions also could have the effect of discouraging
a third party from accumulating a large block of RSI Common Stock or
attempting to obtain control of RSI, even though such an attempt might be
beneficial to the Company and some, or a majority, of its stockholders.
Accordingly, under certain circumstances stockholders could be deprived of
opportunities to sell their shares of RSI Common Stock at a higher price than
might otherwise be available.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Charter provides that, subject to any rights of holders of Preferred
Stock to elect additional directors under specified circumstances ("Preferred
Holders' Rights"), the number of directors will be fixed by the Bylaws. The
Bylaws provide that, subject to any Preferred Holders' Rights, the number of
directors will be fixed by the RSI Board, but must not be more than 25 nor
less than three. In addition, the Bylaws provide that, subject to any
Preferred Holders' Rights, and unless the RSI Board otherwise determines, any
vacancies (other than vacancies created by an increase in the total number of
directors) will be filled by the affirmative vote of a majority of the
remaining directors, though less than a quorum, and any vacancies created by
an increase in the total number of directors may be filled by a majority of
the entire RSI Board. Accordingly, the RSI Board could temporarily prevent
any stockholder from enlarging the RSI Board and then filling the new
directorships with such stockholder's own nominees.
The Charter and the Bylaws provide that, subject to any Preferred
Holders' Rights, directors may be removed only for cause upon the affirmative
vote of holders of at least 80% of the entire voting power of all the
then-outstanding shares of stock entitled to vote generally in the election
of directors, voting together as a single class.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Charter and Bylaws provide that any action required or permitted to
be taken by the stockholders of RSI must be effected at a duly called annual
or special meeting of such holders and may not be effected by any consent in
writing by such holders. Except as otherwise required by law and subject to
the rights of the holders of any Preferred Stock, special meetings of
stockholders of RSI for any purpose or purposes may be called only by the
Chairman of the Board, Vice Chairman, President or the RSI Board pursuant to
a resolution stating the purpose or purposes thereof. No business other than
that stated in the notice shall be transacted at any special meeting. These
provisions may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called by
the Chairman of the Board, Vice Chairman, President or the RSI Board.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS
The Bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for directors or bring other business before
an annual meeting of stockholders of RSI (the "Stockholder Notice
Procedure").
The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the RSI Board, or by a stockholder who
has given timely written notice containing specified information to the
Secretary of RSI prior to the meeting at which directors are to be elected,
will be eligible for election as directors of RSI and (ii) at an annual
meeting, only such business may be conducted as has been brought before the
meeting by, or at the direction of the Chairman or the RSI Board or by a
stockholder who has given timely written notice to the Secretary of RSI of
such stockholder's intention to bring such business before such meeting. In
general, for notice of stockholder nominations or proposed business to be
conducted at an annual meeting to be timely, such notice must be received by
the Company not less than 70 days nor more than 90 days prior to the first
anniversary of the previous year's annual meeting.
The purpose of requiring stockholders to give the Company advance notice
of nominations and other business is to afford the RSI Board a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business and, to the extent deemed
necessary or desirable by the RSI Board, to inform stockholders and make
recommendations about such nominees or business, as well as to ensure an
orderly procedure for conducting meetings of stockholders. Although the
Bylaws do not give the RSI Board power to block stockholder nominations for
the election of directors or proposal for action, they may have the effect of
discouraging a stockholder from proposing nominees or business, precluding a
contest for the election of directors or the consideration of stockholder
proposals if procedural requirements are not met, and deterring third parties
from soliciting proxies for a non-management slate of directors or proposal,
without regard to the merits of such slate or proposal.
RELEVANT FACTORS TO BE CONSIDERED BY THE RSI BOARD
The Charter, which provides that one of the purposes of RSI is to
perform the Intercompany Agreement, also provides that, in determining what
is in the best interest of RSI in evaluating a "business combination,"
"change in control" or other transaction, a director of RSI shall consider
all of the relevant factors, which may include (i) the immediate and
long-term effects of the transaction on RSI's stockholders, including
stockholders, if any, who do not participate in the transaction; (ii) the
social and economic effects of the transaction on the Company's employees,
suppliers, creditors and customers and others dealing with the Company and on
the communities in which the Company operates and is located; (iii) whether
the transaction is acceptable, based on the historical and current operating
results and financial condition of the Company; (iv) whether a more favorable
price would be obtained for the Company's stock or other securities in the
future; (v) the reputation and business practices of the other party or
parties to the proposed transaction, including its or their management and
affiliates, as they would affect employees of the Company; (vi) the future
value of the Company's securities; (vii) any legal or regulatory issues
raised by the transactions; (viii) the effect on the Intercompany Agreement;
and (ix) the business and financial condition and earnings prospects of the
other party or parties to the proposed transactions including, without
limitation, debt service and other existing financial obligations, financial
obligations to be incurred in connection with the transaction and other
foreseeable financial obligations of such other party or parties. Pursuant
to this provision, the RSI Board may consider subjective factors affecting a
proposal, including certain nonfinancial matters, and on the basis of these
considerations, may oppose a business combination or other transaction which,
evaluated only in terms of its financial merits, might be attractive to some,
or a majority, of the Company's stockholders.
AMENDMENT
The Charter provides that the affirmative vote of the holders of at
least 80% of the stock entitled to vote generally in the election of
directors (the "Voting Stock"), voting together as a single class, is
required to amend provisions of the Charter relating to stockholder action
without a meeting; the calling of special meetings; the number, election and
term of the Company's directors; the filling of vacancies and the removal of
directors. The Charter further provides that the related Bylaws described
above (including the Stockholder Notice Procedure) may be amended only by the
RSI Board or by the affirmative vote of the holders of at least 80% of the
voting power of the outstanding shares of Voting Stock, voting together as a
single class. In all cases, amendments to the charter and by-laws require
that the RSI Board determines that the proposed amendment is advisable.
PREFERRED RIGHTS PLAN
The RSI Board will adopt the Preferred Rights Plan on or prior to the
Distribution Effective Date. Pursuant to the Preferred Rights Plan, the RSI
Board will cause to be issued one Preferred Right for each share of RSI
Common Stock outstanding on the Distribution Effective Date. Each Preferred
Right will entitle the registered holder to purchase from RSI one one-
hundredth of a share of Series A Junior Participating Preferred Stock at a
price of $__ (the "Purchase Price"), subject to adjustment. The description
and terms of the Preferred Rights will be set forth in a Preferred Rights
Agreement (the "Preferred Rights Agreement"), between RSI and the designated
Preferred Rights Agent (the "Preferred Rights Agent"). The description set
forth below is intended as a summary only and is qualified in its entirety by
reference to the form of the Preferred Rights Agreement filed as an exhibit
to the Registration Statement. See "Available Information."
Until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of __% or more of the
outstanding shares of RSI Common Stock or (ii) 10 business days (or such
later date as may be determined by action of the RSI Board prior to such time
as any person becomes an Acquiring Person) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of __% or more of such outstanding shares of RSI Common Stock (the
earlier of such dates being called the "Preferred Rights Distribution
Effective Date"), the Preferred Rights will be evidenced by the certificates
representing the RSI Common Stock.
The Preferred Rights Agreement will provide that, until the Preferred
Rights Distribution Effective Date (or earlier redemption or expiration of
the Rights), the Preferred Rights will be transferred with and only with the
RSI Common Stock. Until the Preferred Rights Distribution Effective Date (or
earlier redemption or expiration of the Preferred Rights), the RSI Common
Stock certificates will contain a notation incorporating the Preferred Rights
Agreement by reference. As soon as practicable following the Preferred
Rights Distribution Effective Date, separate certificates evidencing the
Rights ("Preferred Right Certificates") will be mailed to holders of record
of the RSI Common Stock as of the close of business on the Preferred Rights
Distribution Effective Date and such separate Preferred Right Certificates
alone will evidence the Preferred Rights.
The Preferred Rights will not be exercisable until the Preferred Rights
Distribution Effective Date. The Preferred Rights will expire on the tenth
anniversary of the Record Date (the "Final Expiration Date"), unless the
Final Expiration Date is extended or unless the Preferred Rights are earlier
redeemed or exchanged by RSI, in each case, as summarized below.
In the event that any person or group of affiliated or associated
persons becomes an Acquiring Person, proper provision shall be made so that
each holder of a Preferred Right, other than Preferred Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise that number of shares of
RSI Common Stock having a market value of two times the exercise price of the
Preferred Right. In the event that RSI is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets or
earning power are sold after a person or group of affiliated or associated
persons becomes an Acquiring Person, proper provision will be made so that
each holder of a Preferred Right will thereafter have the right to receive,
upon the exercise thereof at the then current exercise price of the Right,
that number of shares of common stock of the acquiring company which at the
time of such transaction will have a market value of two times the exercise
price of the Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of __% or more of the outstanding
RSI Common Stock, and prior to the acquisition by such person or group of 50%
or more of the outstanding RSI Common Stock, the RSI Board may exchange the
Preferred Rights (other than Preferred Rights owned by such person or group
which have become void), in whole or in part, at an exchange ratio of one
share of RSI Common Stock, or one one-hundredth of a share of Series A Junior
Preferred Stock (or a share of a class or series of the Preferred Stock
having equivalent rights, preference and privileges) per Right (subject to
adjustment).
At any time prior to the acquisition by a person or group of affiliated
or associated persons of beneficial ownership of 10% or more of the
outstanding shares of RSI Common Stock, the RSI Board may redeem the
Preferred Rights in whole, but not in part, at the Redemption Price of $__
per Preferred Right. The redemption of the Preferred Rights may be made
effective at such time on such basis and with such conditions as the RSI
Board in its sole discretion may establish. Immediately upon any redemption
of the Preferred Rights, the right to exercise the Preferred Rights will be
terminated and the only right of the holders of Preferred Rights will be to
receive the Redemption Price.
The terms of the Preferred Rights may be amended by the RSI Board
without the consent of the holders of the Preferred Rights; provided,
however, that from and after such time as any person or group of affiliated
or associated persons becomes an Acquiring Person, no such amendment may
adversely affect the interests of the holders of the Preferred Rights.
Until a Preferred Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of RSI, including, without limitations, the
right to vote or to receive dividends.
The number of outstanding Preferred Rights and the number of one one-
hundredths of a share of Series A Junior Preferred Stock issuable upon
exercise of each Preferred Right also will be subject to adjustment in the
event of a stock split of the RSI Common Stock, or a stock dividend on the
RSI Common Stock payable in RSI Common Stock or subdivisions, consolidations
or combinations or the RSI Common Stock occurring, in any such case, prior to
the Preferred Rights Distribution Effective Date.
The Purchase Price payable, and the number of shares of Series A Junior
Preferred Stock or other securities or property issuable, upon exercise of
the Preferred Rights will be subject to adjustment from time to time to
prevent dilution (i) in the event or a stock dividend on, or a subdivision,
combination or reclassification of, the shares of Series A Junior Preferred
Stock; (ii) upon the grant to holders of shares of Series A Junior Preferred
Stock of certain rights or warrants to subscribe for or purchase shares of
Series A Junior Preferred Stock at a price, or securities convertible into
shares of Series A Junior Preferred Stock with a conversion price, less than
the then-current market price of shares of the Series A Junior Preferred
Stock; or (iii) upon the distribution to holders of shares of Series A Junior
Preferred Stock of evidences of indebtedness or assets (excluding regular
periodic cash dividends paid out of earnings or retained earnings or
dividends payable in shares of Series A Junior Preferred Stock) or of
subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent in such Purchase Price. No fractional shares of Series A Junior
Preferred Stock will be issued (other than fractions which are integral
multiples of one one-hundredth of a share of Series A Junior Preferred Stock,
which may, at the election of the Company, be evidenced by depositary
receipts) and, in lieu thereof, an adjustment in cash will be made based on
the market price of the shares of Series A Junior Preferred Stock on the last
trading day prior to the date of exercise.
Shares of Series A Junior Preferred Stock purchasable upon exercise of
the Rights will not be redeemable. Each share of Series A Junior Preferred
Stock will be entitled to a minimum preferential quarterly dividend payment
of $__ per share but will be entitled to an aggregate dividend of ___ times
the dividend declared per share of RSI Common Stock. In the event of
liquidation, the holders of the shares of Preferred Stock will be entitled to
a minimum preferential liquidation payment of $__ per share but will be
entitled to an aggregate payment of ___times the payment made per share of
RSI Common Stock. Each share of Series A Junior Preferred Stock will have
___ votes voting together with the RSI Common Stock. Finally, in the event
of any merger, consolidation or other transaction in which shares of RSI
Common Stock are exchanged, each share of Series A Junior Preferred Stock
will be entitled to receive ___ times the amount received per share of RSI
Common Stock. These rights are protected by customary anti-dilution
provisions.
Due to the nature of the shares of Series A Junior Preferred Stock's
dividend, liquidation and voting rights, the value of the one one-hundredth
interest in a share of Series A Junior Preferred Stock purchasable upon
exercise of each Right should approximate the value of one share of RSI
Common Stock.
The Preferred Rights have certain antitakeover effects. The Preferred
Rights will cause substantial dilution to a person or group of persons that
attempts to acquire RSI on terms not approved by the RSI Board. The
Preferred Rights should not interfere with any merger or other business
combination approved by the RSI Board prior to the time that a person or
group has acquired beneficial ownership of 10% or more of the RSI Common
Stock since the Preferred Rights may be redeemed by RSI at the Redemption
Price until such time.
The Preferred Rights Plan contains certain provisions to exclude RSI and
its affiliates from the operative provisions thereof.
DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation
shall not engage in any business combination, including mergers or
consolidations or acquisitions of additional shares of the corporation, with
the corporation for a three-year period following the date that such
stockholder becomes an interested stockholder unless (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 662/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at
any time within three years immediately prior to the date of determination
and (y) the affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. RSI has not elected
to be exempt from the restrictions imposed under Section 203. However, the
Charter excludes Reckson and its affiliates from the definition of
"interested stockholder" pursuant to the terms of Section 203. The
provisions of Section 203 may encourage persons interested in acquiring RSI
to negotiate in advance with the RSI Board, since the stockholder approval
requirement would be avoided if a majority of the directors then in office
approves either the business combination or the transaction which results in
any such person becoming an interested stockholder. Such provisions also may
have the effect of preventing changes in the management of RSI. It is
possible that such provisions could make it more difficult to accomplish
transactions which the Company's stockholders may otherwise deem to be in
their best interests.
CONTROL SHARE ACQUISITIONS
The Charter provides that the holder of "control shares" of RSI acquired
in a control share acquisition have no voting rights with respect to such
control shares except to the extent approved by a vote of two-thirds of the
votes entitled to be cast by stockholders, excluding shares owned by the
acquiror, officers of RSI and employees of RSI who are also directors.
"Control shares" are shares which, if aggregated with all other shares
previously acquired which the person is entitled to vote, would entitle the
acquiror to vote (i) 20% or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority of the outstanding shares.
Control shares do not include shares that the acquiring person is entitled to
vote on the basis of prior stockholder approval. A "control share
acquisition" means the acquisition of control shares subject to certain
exceptions.
The Charter provides that a person who has made or proposed to make a
control share acquisition and who has obtained a definitive financing
agreement with a responsible financial institution providing for any amount
of financing not to be provided by the acquiring person may compel the RSI
Board to call a special meeting of stockholders to be held within 50 days of
demand to consider the voting rights of the holder in respect of such control
shares. If no request for a meeting is made, the Charter permits RSI itself
to present the question at any stockholders' meeting.
Pursuant to the Charter, if voting rights are not approved at a
stockholders' meeting or if the acquiring person does not deliver an
acquiring person's statement, which would disclose certain information about
the particular control share acquisition, as required by the Charter, then,
subject to certain conditions and limitations set forth in the Charter, RSI
may redeem any or all of the control shares, except those for which voting
rights have previously been approved, for "fair value." Fair value is
determined, without regard to the absence of voting rights, as of the date of
the last control share acquisition or of any meeting of stockholders at which
the voting rights of the holder in respect of such control shares are
considered and not approved, and means, for purposes of the redemption, the
highest closing sale price during the 30-day period immediately prior to and
including the date in question, of a share of such stock on the exchange on
which the shares are listed or, if not so listed, the highest closing bid
quotation during such 30-day period or, if no such quotations are available,
the fair market value as determined by the RSI Board. Under the Charter, if
voting rights of the holder in respect of such control shares are approved at
a stockholders' meeting and, as a result, the acquiror would be entitled to
vote a majority of the shares entitled to vote, then the Charter shall be
amended to so state, and all other stockholders will have the rights of
dissenting stockholders under the DGCL. The Charter provides that the fair
value of the shares for purposes of such appraisal rights may not be less
than the highest price per share paid by the acquiror in the control share
acquisition, and that certain limitations and restrictions of the DGCL
otherwise applicable to the exercise of dissenters' rights do not apply.
The control share acquisition provisions do not apply to the holder in
respect of control shares acquired in a merger, consolidation or share
exchange if RSI is a party to the transaction, or if the acquisition is
approved or excepted by the Charter or Bylaws prior to a control share
acquisition. The control share provisions in the Charter do not apply to
Reckson and its affiliates.
LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION
The Charter provides that a director of RSI will not be personally
liable to RSI or its stockholders for monetary damages for breach of
fiduciary duty as a director, except, if required by the DGCL, as amended
from time to time, for liability (i) for any breach of the director's duty of
loyalty to RSI or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. Neither the
amendment nor repeal of such provision will eliminate or reduce the effect of
such provision in respect of any matter occurring, or any cause of action,
suit or claim that, but for such provision, would accrue or arise prior to
such amendment or repeal.
While the Charter provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate
such duty. Accordingly, the Charter will have no effect on the availability
of equitable remedies such as an injunction or rescission based on a
director's breach of his or her duty of care.
The Charter provides that each person who was threatened to be made a
party to or is involved in any proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director
or officer of RSI or is or was serving at the request of RSI as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to
employee benefit plan, whether the basis of such proceeding in an alleged
action in an official capacity as a director, officer, employee or agent or
in any other capacity while serving as a director, officer, employee or
agent, will be indemnified and held harmless by RSI to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits RSI to provide broader indemnification rights than said law permitted
RSI to provide prior to such amendment), against all expense, liability and
loss reasonably incurred or suffered by such person in connection therewith.
Such right to indemnification includes the right to have RSI pay the expenses
incurred in defending any such proceeding in advance of its final
disposition, subject to the provisions of the DGCL. Such rights are not
exclusive of any other right which any person may have or thereafter acquire
under any statute, provision of the Charter, Bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. No repeal or
modification of such provision will in any way diminish or adversely affect
the rights of any director, officer, employee or agent of RSI thereunder in
respect of any occurrence or matter arising prior to any such repeal or
modification. The Charter also specifically authorizes RSI to maintain
insurance and to grant similar indemnification rights to employees or agents
of RSI.
RSI has entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require,
among other things, that RSI indemnify its officers and directors to the
fullest extent permitted by law, and advance to the officers and directors
all related expenses, subject to reimbursement if it is subsequently
determined that the indemnification is not permitted. The Company also must
indemnify and advance expenses incurred by officers and directors seeking to
enforce their rights under the indemnification agreements and cover officers
and directors under the Company's directors' and officers' liability
insurance. Although the indemnification agreements offer substantially the
same scope of coverage afforded by provisions in the Charter and Bylaws, they
provide greater assurance to directors and executive officers that
indemnification will be available, because, as contracts, they cannot be
modified unilaterally in the future by the Board of Directors or by the
stockholders to alter, limit or eliminate the rights they provide.
EXPERTS
The financial statements of RSI, RO Partners Management LLC, Veritech
Ventures, L.L.C., American Campus Lifestyles Company L.L.C. and Dobie Center
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, to the extent indicated in their
reports thereon also appearing elsewhere herein and in the Registration
Statement. Such financial statements have been included herein in reliance
upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The financial statements and Schedule of Dobie Center as of December 31,
1996 and 1995, and for the three years in the period ended December 31, 1996,
included in this prospectus and elsewhere in this registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and
auditing in giving said reports.
The financial statements of American Campus Lifestyles Companies LLC as
of December 31, 1996 and 1995, and for the two years in the period ended
December 31, 1996, included in this prospectus and elsewhere in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
LEGAL MATTERS
The legality of the issuance of the shares of RSI Common Stock to be
distributed in the Distribution and to be issued in respect of the Rights,
and certain legal matters relating to federal income tax considerations, will
be passed upon for the Company by Brown & Wood LLP, New York, New York.
INDEX TO FINANCIAL STATEMENTS
Page
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RECKSON SERVICE INDUSTRIES, INC.
Pro Forma Condensed Combining Balance Sheet (unaudited)
as of December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . F-4
Pro Forma Condensed Combining Statement of Operations (unaudited)
for the year ended December 31, 1997 . . . . . . . . . . . . . . . . . F-7
RECKSON SERVICE INDUSTRIES, INC.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . F-10
Balance Sheet as of December 31, 1997 . . . . . . . . . . . . . . . . F-11
Statement of Operations for the Period July 15, 1997
(commencement of operations) to December 31, 1997 . . . . . . . . . . F-12
Statement of Shareholders' Equity for the Period July 15, 1997
(commencement of operations) to December 31, 1997 . . . . . . . . . . F-13
Statement of Cash Flows for the Period July 15, 1997
(commencement of operations) to December 31, 1997 . . . . . . . . . . F-14
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-15
RO PARTNERS MANAGEMENT, L.L.C.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . F-23
Consolidated Balance Sheet as of December 31, 1997 . . . . . . . . . . F-24
Consolidated Statement of Income for the period June 4, 1997
(commencement of operations) to December 31, 1997) . . . . . . . . . F-25
Consolidated Statement of Members' Equity for the period June
4, 1997 (commencement of operations) to December 31, 1997 . . . . . . F-26
Consolidated Statement of Cash Flows for the period June 4,
1997 (commencement of operations) to December 31, 1997 . . . . . . . F-27
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-28
INVESTEES ACCOUNTED FOR UNDER THE EQUITY METHOD
DOBIE CENTER
Report of Independent Public Accountants . . . . . . . . . . . . . . F-34
Balance Sheets as of December 31, 1996 and 1995 . . . . . . . . . . . F-35
Statement of Changes in Project Equity (Deficit) for the years
ended December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . F-37
Combined Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 and the unaudited Statement
of Operations for the nine months ended September 30, 1996 . . . . . F-38
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 and the unaudited Statement
of Cash Flows for the nine months ended September 30, 1996 . . . . . F-39
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-40
Schedule III - Real Estate Investments, Accumulated
Depreciation and Amortization as of December 31, 1996 . . . . . . . . F-47
Notes to Schedule III . . . . . . . . . . . . . . . . . . . . . . . . F-48
DOBIE CENTER
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . F-49
Balance Sheet as of December 31, 1997 . . . . . . . . . . . . . . . . F-50
Statements of Income for the year ended December 31, 1997
and the periods January 1, 1997 through June 26, 1997 and
June 27, 1997 through December 31, 1997 . . . . . . . . . . . . . . . F-51
Statement of Changes in Members' Equity (Deficit) for the
year ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . F-52
Statement of Cash Flows for the year ended December 31, 1997 . . . . F-53
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . F-54
Supplemental Statement of Income for the period July 15,
1997 through December 31, 1997 . . . . . . . . . . . . . . . . . . . . F-60
Schedule III-Real Estate and Accumulated Depreciation as
of December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . F-61
Notes to Schedule III . . . . . . . . . . . . . . . . . . . . . . . . . F-62
AMERICAN CAMPUS LIFESTYLES COMPANIES, L.L.C.
Report of Independent Public Accountants . . . . . . . . . . . . . . F-63
Statements of Assets, Liabilities, and Members'
Equity (Deficit) as of December 31, 1996 and 1995 . . . . . . . . . . F-64
Statements of Revenues and Expenses for the years ended December 31,
1996 and 1995 and the unaudited Statement of Revenues and Expenses
for the nine months ended September 30, 1996 . . . . . . . . . . . . F-66
Statement of Changes in Members' Equity (Deficit)
for the years ended December 31, 1996 and 1995 . . . . . . . . . . . F-67
Statements of Cash Flows for the years ended December 31,
1996 and 1995 and the unaudited Statement of Cash Flows for
the nine months ended September 30, 1996 . . . . . . . . . . . . . . F-68
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-69
AMERICAN CAMPUS LIFESTYLES COMPANIES, L.L.C.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . F-76
Consolidated Balance Sheet as of December 31, 1997 . . . . . . . . . F-77
Consolidated Statements of Income for the year ended
December 31, 1997 and for the periods June 1, 1997
through December 31, 1997 and January 1, 1997 through
May 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-78
Consolidated Statement of Changes in Members' Equity
for the year ended December 31, 1997 . . . . . . . . . . . . . . . . F-79
Consolidated Statement of Cash Flows for the year ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . F-80
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-81
Supplemental Consolidation Statement of Income for the
period from October 17, 1997 through December 31, 1997 . . . . . . . . F-88
OTHER INVESTMENTS
VERITECH VENTURES LLC
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . F-89
Balance Sheets as of December 31, 1996 and 1997 . . . . . . . . . . F-90
Statements of Operations for the period July 5, 1996
(date of inception) to December 31, 1996 and for the
year ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . F-91
Statements of Members' Equity for the period July 5, 1996
(date of inception) to December 31, 1996 and the year ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . F-92
Statements of Cash Flows for the period July 5, 1996
(date of inception) to December 31, 1996 and the year ended
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . F-93
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-94
RECKSON SERVICE INDUSTRIES INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
The following unaudited pro forma condensed combining balance sheet is
presented as if the Company had (i) made working capital loans to OnSite and
(ii) exercised its option to acquire a 9.9% equity interest in Reckson
Executive Centers, LLC on December 31, 1997.
This pro forma condensed combining balance sheet should be read in
conjunction with the pro forma condensed combining statement of operations of
the Company for the year ended December 31, 1997 and notes thereto and the
historical financial statements and notes thereto of the Company as of and
for the period ended December 31, 1997 included elsewhere in this
Registration Statement.
This pro forma condensed combining balance sheet is unaudited and is not
necessarily indicative of what the actual financial position would have been
had the Company made working capital loans to OnSite or exercised its option
to acquire a 9.9% equity interest in Reckson Executive Centers, LLC on
December 31, 1997, nor does it purport to represent the future financial
position of the Company.
Pro Forma Balance Sheet 12-97
RECKSON SERVICE INDUSTRIES INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
RECKSON DECEMBER
EXECUTIVE 31,
HISTORICAL CENTERS ON-SITE 1997
(A)(B) (C) (D) PRO FORMA
------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
Assets
Cash $ 129,704 $ - $ - $ 129,704
Investment in RO Partners Management, LLC 3,868,093 - - 3,868,093
Investment in ACLC 1,652,165 - - 1,652,165
Investment in Reckson Executive Centers, LLC - 200,000 - 200,000
Loan receivable 325,000 - 650,000 975,000
Affiliate receivable 832,854 - - 832,854
Organization and pre-acquisition costs 681,694 - - 681,694
Other Assets 30,185 - - 30,185
------------ ------------- --------- -------------
Total Assets $7,519,695 $200,000 $650,000 $8,369,695
============ ============= ========= =============
Liabilities and shareholders' equity
Accounts payable and accrued expenses $ 119,384 $ $ - - $ 119,384
Loans payable to Affiliates 3,177,857 200,000 650,000 4,027,857
------------ ------------- --------- -------------
Total liabilities 3,297,241 200,000 650,000 4,147,241
============ ============= ========= =============
Commitments - - - -
Shareholder's equity
Common Stock 10 - - 10
Additional paid-in capital 4,480,331 - - 4,480,331
Retained earnings (257,887) - - (257,887)
------------ ------------- --------- -------------
Total shareholders' equity 4,222,454 - - 4,222,454
------------ ------------- --------- -------------
Total Liabilities and Shareholders'
Equity $7,519,695 $200,000 $650,000 $8,369,695
============ ============= ========= =============
</TABLE>
RECKSON SERVICE INDUSTRIES INC.
NOTES TO PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF DECEMBER 31, 1997
(UNAUDITED)
(a) Reflects the Company's historical balance sheet as of December 31, 1997.
(b) In connection with the formation and capitalization of RSI, Reckson
Operating Partnership contributed $4,256,324 to RSI for a 95% non-voting
equity interest. Simultaneously, certain officers of Reckson contributed
$224,017 of Notes to RSI in exchange for a 5% voting equity interest.
The shares of capital stock owned by Reckson Operating Partnership and
Reckson officers were acquired on the same terms. On October 29, 1997,
the notes were paid. Immediately prior to the Distribution, the shares
of non-voting common stock owned by Reckson Operating Partnership were
exchanged for RSI Common Stock. Such shares will be distributed to
holders of Reckson Common Stock and Units on the basis of one share of
RSI Common Stock for every 12 shares of Reckson Common Stock held by
Reckson stockholders on the Record Date and one share of RSI Common
Stock for every 12 Units held by Limited Partners on the Record Date.
RSI Common Stock to be distributed in the Distribution is approximately
3,858,909 shares (subject to reduction to the extent that cash payments
are made in lieu of the issuance of fractional shares of RSI Common
Stock, which is immaterial) plus the right to subscribe to an additional
20,310,050 shares (Subscription Rights). No adjustment has been made to
reflect the impact of the Standby Agreement whereby an entity owned by
members of management of Reckson have agreed to purchase any and all
shares of RSI common stock that were the subject of Subscription Rights
but were not subscribed for or for the impact of the shares of RSI
common stock issuable in connection with grants under the Company's
Stock Option Plan.
(c) Reflects the Company's exercise of its option to acquire a 9.9% equity
interest in Reckson Executive Centers, LLC for $200,000 from Reckson.
(d) Under the terms of the OnSite letter of intent, RSI has made a
commitment to fund, in the aggregate, $6.5 million of loans which are
convertible into an approximately 58.69% interest in OnSite. As of
December 31, 1997, RSI had loaned $325,000. The pro forma adjustment
reflects an additional advance to OnSite of $650,000 with proceeds from
Reckson Operating Partnership, L.P. Such loans bear interest at 12%.
RECKSON SERVICE INDUSTRIES INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
The following unaudited pro forma condensed combining statement of operations
for the year ended December 31, 1997 is presented as if the Company had
acquired (i.) through its interest in RSVP, a 33 1/3% interest in a joint
venture that owns a 76.09% interest in ACLC, (ii.) through its interest in
RSVP, a 33 1/3% interest in a joint venture that owns a 70% interest in Dobie
Center, (iii.) working capital loans to OnSite and (iv.) a 9.9% equity
interest in Reckson Executive Centers, LLC (collectively the "Acquired
Investments") as of January 1, 1997.
This pro forma condensed combining statement of operations should be read in
conjunction with the pro forma condensed combining balance sheet and notes
thereto as of December 31, 1997 and the historical financial statements and
notes thereto of the Company as of and for the period ended December 31, 1997
included elsewhere in this Registration Statement.
This pro forma condensed combining statement of operations is unaudited and
is not necessarily indicative of what the actual results of operations would
have been had the Company acquired the Acquired Investments on January 1,
1997, nor does it purport to represent the operations of the Company for
future periods.
PRO FORMA OPERATIONS 12-97
RECKSON SERVICE INDUSTRIES INC.
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO
RECKSON FORMA
EXECUTIVE ADJUST- DECEMBER
Historical DOBIE ACLC CENTERS ON-SITE MENTS 31, 1997
(a) (B) (C) (D) (E) (F) PRO FORMA
---------- ---------- -------- --------- ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
EQUITY IN EARNINGS OF
RO PARTNERS
MANAGEMENT, LLC $ 245,593 $ 152,329 $ - $ - $ - $ - $ 397,922
EQUITY IN LOSS OF ACLC (22,156) - 146,042 - - - 123,886
EQUITY IN LOSS OF RECKSON
EXECUTIVE CENTERS, LLC - - - (9,128) - - (9,128)
INTEREST INCOME 30,383 - - - 114,182 - 144,565
---------- ---------- -------- --------- --------- --------- --------------
TOTAL REVENUES 253,820 152,329 146,042 (9,128) 114,182 - 657,245
---------- ---------- -------- --------- --------- --------- --------------
EXPENSES:
GENERAL AND ADMINISTRATIVE 479,113 - - - - 100,000 579,113
---------- ---------- -------- --------- --------- --------- --------------
TOTAL OPERATING EXPENSES 479,113 - - - - 100,000 579,113
---------- ---------- -------- --------- --------- --------- --------------
NET OPERATING LOSS (225,293) 152,329 146,042 (9,128) 114,182 (100,000) 78,132
NON-OPERATING EXPENSES
INTEREST 24,380 - - - - 288,842 313,222
AMORTIZATION 8,214 - - - - - 8,214
---------- ---------- -------- --------- --------- --------- --------------
NET LOSS $(257,887) $ 152,329 $146,042 $ (9,128) $114,182 $(388,842) $ (243,304)
========== ========== ======== ========= ========= ========= ==============
BASIC AND DILUTED NET
INCOME PER COMMON
SHARE (G) $ (0.06)
==============
BASIC AND DILUTED COMMON
SHARES OUTSTANDING (G) 4,062,010
==============
</TABLE>
RECKSON SERVICE INDUSTRIES INC.
NOTES TO PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(a) Reflects the Company's historical operations for the period ended
December 31, 1997 which includes the operations of Dobie Center for the
period from July 15, 1997 through December 31, 1997 and ACLC for the
period from October 17, 1997 through December 31, 1997 and interest
income from OnSite for the period from December 5, 1997 through December
31, 1997 on a $325,000 loan.
(b) Reflects the pre-acquisition equity in earnings of Dobie Center, a mixed
use student housing retail property in Austin, Texas for the period from
January 1, 1997 to July 14, 1997 based on net income of $652,838, which,
as a result of RSVP's, 33 1/3% interest in a joint venture that owns 70%
of Dobie Center, results in an adjustment for equity in earnings of
$152,329.
(c) Reflects the pre-acquisition equity in earnings of ACLC for the period
from January 1, 1997 to October 16, 1997 based on net income of
$575,800, which as a result of RSVP's 33 1/3% interest in a joint
venture that owns 76.09% of ACLC results in an adjustment for equity in
earnings of $146,042.
(d) Reflects the pre-acquisition equity in loss of Reckson Executive
Centers, LLC for the year ended December 31, 1997 based on a net loss of
$92,202, which as a result of the Company's 9.9% interest in Reckson
Executive Center, LLC, results in an adjustment for equity in loss of
$9,128.
(e) Reflects the interest income on the $975,000 advanced to OnSite at an
interest rate of 12% for the year ended December 31, 1997.
(f) Reflects the effect of an increase in interest costs associated with
borrowings from Reckson Operating Partnership, L.P. to fund the
acquisition of the Acquired Investments at a 12% interest rate and
incremental general and administrative costs of $100,000, which
represent the cost of operating the business.
(g) Basic and diluted pro forma net (loss) per share of common stock is
based upon 4,062,010 shares outstanding.
Report of Independent Auditors
Board of Directors of
Reckson Service Industries, Inc.
We have audited the accompanying balance sheet of Reckson Service Industries,
Inc. (the "Company") as of December 31, 1997 and the related statements of
operations, shareholders' equity and cash flows for the period from July 15,
1997 (commencement of operations) to December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company at December 31,
1997, and the results of its operations and its cash flows for the period
from July 15, 1997 (commencement of operations) to December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
March 10, 1998
Reckson Service Industries, Inc.
Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Assets
Cash $ 129,704
Investment in RO Partners Management, LLC (Note 3) 3,868,093
Investment in ACLC (Note 3) 1,652,165
Organization and pre-acquisition costs (net of
amortization of $8,214) 681,694
Affiliate receivable (Note 5) 832,854
Loan receivable (Note 5) 325,000
Other assets 30,185
----------------
Total assets $7,519,695
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 119,384
Loans payable to Affiliates (Note 5) 3,177,857
----------------
Total liabilities 3,297,241
Commitments (Note 6) -
Shareholders' equity (Note 1 and 4):
Common Stock, $.01 par value 10
Additional paid-in capital 4,480,331
Retained earnings (257,887)
----------------
Total shareholders' equity 4,222,454
----------------
Total liabilities and shareholders' equity $7,519,695
================
</TABLE>
See accompanying notes.
Reckson Service Industries, Inc.
Statement of Operations
Period from July 15, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Revenues:
Equity in earnings of RO Partners Management, LLC $245,593
Equity in loss of ACLC (22,156)
Interest income 30,383
----------------
Total revenues 253,820
----------------
Expenses:
General and administrative expenses 479,113
----------------
Total operating expenses 479,113
Net operating loss (225,293)
Non operating expenses:
Interest 24,380
Amortization 8,214
----------------
Net loss $(257,887)
================
</TABLE>
See accompanying notes.
Reckson Service Industries, Inc.
Statement of Shareholders' Equity
Period from July 15, 1997 (Commencement of Operations)
to December 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED SHAREHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Stock issued-
July 15, 1997 $ 10 $4,480,331 - $4,480,341
Net loss - - $ (257,887) (257,887)
---------------------------------------------------------------
Shareholders' equity
December 31, 1997 $ 10 $4,480,331 $ (257,887) $4,222,454
===============================================================
</TABLE>
See accompanying notes.
Reckson Service Industries, Inc.
Statement of Cash Flows
Period from July 15, 1997 (Commencement of Operations) to December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net loss $ (257,887)
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization 8,214
Changes in operating assets and liabilities:
Organization costs (524,129)
Other assets (30,185)
Accounts payable and accrued expenses 119,384
----------------
Net cash used in operating activities (684,603)
----------------
INVESTING ACTIVITIES
Investment in RO Partners Management, LLC (3,868,093)
Investment in ACLC (1,652,165)
Pre-acquisition costs (165,779)
----------------
Net cash used in investing activities (5,686,037)
----------------
FINANCING ACTIVITIES
Capital contributions 4,480,341
Proceeds from Affiliate loans 3,177,857
Loan advances to affiliate (832,854)
Loan receivable (325,000)
----------------
Net cash provided by financing activities 6,500,344
----------------
Net increase in cash 129,704
Cash beginning of period -
----------------
Cash end of period $ 129,704
================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ -
================
</TABLE>
See accompanying notes.
Reckson Service Industries, Inc.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT TRANSACTIONS
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 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 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 paid.
Subsequent to the effectiveness of the Company's Registration Statement on
Form S-1, 95% of the common stock of RSI will be distributed (the
"Distribution") to holders of common shares of Reckson and unitholders of
ROP. Immediately prior to the Distribution, the shares of non-voting common
stock held by ROP will be exchanged by RSI for RSI common shares. Each share
of the Company's Common Stock issued in the Distribution is expected to be
accompanied by one Preferred Share Purchase Right. In addition,
simultaneously with the Distribution, the Company will issue rights to its
stockholders to subscribe for the purchase of additional shares of common
stock of the Company.
The Company owns 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 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 Reckson
Strategic Venture Partners ("RSVP"). RSVP was formed on January 23, 1998 to
succeed to the operating activities of Opportunity Partners. The Company is
the 100% common equity owner and managing member of RSVP and PaineWebber Real
Estate Securities, Inc. ("PWRES") is a non-managing member and preferred
equity owner. 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 of RSI include the Company's equity
interest in RO and its equity interest in American Campus Lifestyles
Companies, L.L.C. ("ACLC").
Reckson Service Industries, Inc.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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)
EQUITY INVESTMENTS
The Company accounts for its investment of less than 50% in other entities
using the equity method.
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.
Reckson Service Industries, Inc.
Notes to Financial Statements (continued)
3. INVESTMENTS
The Company has 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., a mixed use student
housing and retail property located in Austin, Texas.
Substantially all of RO's assets, liabilities, revenues and expenses relate
to its investment in Dobie Center. Summarized financial information and a
summary of the Company's investment in and share of income from RO follows:
BALANCE SHEET
DECEMBER 31, 1997
-----------------
Property and equipment, less accumulated depreciation $35,345,013
Other assets 6,700,605
-----------------
Total assets $42,045,618
=================
Mortgage payable $20,280,500
Other liabilities 5,195,624
-----------------
Total liabilities 25,476,124
-----------------
Minority interest 4,915,462
Members' equity 11,654,032
Less: Other members' equity (7,785,939)
-----------------
Net investment in RO $3,868,093
=================
Reckson Service Industries, Inc.
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
STATEMENT OF INCOME
PERIOD FROM
JULY 15,
1997 TO
DECEMBER 31, 1997
-----------------
Rental income $4,265,584
Interest income 102,971
Other income 434,264
-----------------
Total income 4,802,819
-----------------
Property operating expenses 1,691,906
General and administrative expenses 663,337
Interest expense 875,019
Depreciation and amortization 381,292
Non-recurring expense 221,222
-----------------
Total expenses 3,832,776
-----------------
Minority interest 233,264
Net income 736,779
Less: Other members' share 491,186
-----------------
Company's share $245,593
=================
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 ACLC, a student housing enterprise which owns, develops,
constructs, manages and acquires, on-and off campus student housing project.
As of December 31, 1997, the excess of the Company's investment over its
share of the equity in the underlying net assets of the joint venture
("Excess Investment") was $190,920. This Excess Investment is being
amortized over the life of the investment.
Reckson Service Industries, Inc.
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Summarized financial information and a summary of the Company's investment in
and share of income from ACLC follow:
BALANCE SHEET
DECEMBER 31, 1997
-----------------
Investment in leasehold estates, less
accumulated depreciation: $30,042,101
Other assets 4,035,570
-----------------
Total assets 34,077,671
-----------------
Notes payable 25,635,208
Other liabilities 3,633,473
-----------------
Total liabilities 29,268,681
-----------------
Minority interest 425,254
Members' equity 4,383,736
Less: other members' equity (2,922,490)
-----------------
Company's share of the equity in
underlying net assets of ACLC 1,461,245
Excess investment 190,920
-----------------
Net investment in ACLC $ 1,652,165
=================
Reckson Service Industries, Inc.
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
STATEMENT OF OPERATIONS
PERIOD FROM
OCTOBER 17,
1997 TO
DECEMBER 31,
1997
-----------------
Rental income $ 980,402
Other income 504,252
-----------------
Total income 1,484,654
-----------------
General and administrative expenses 612,682
Property operating expenses 353,912
Interest expense 452,864
Depreciation 152,550
-----------------
Total expenses 1,572,008
-----------------
Minority interest (20,886)
Net loss (66,468)
Less: other members' share (44,312)
-----------------
Company's share $ (22,156)
=================
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 3,655,809 of the Company's authorized
shares have been reserved for issuance under the Plan. On January 10, 1998,
the Company granted options to purchase 542,890 of the Company's common
shares at an exercise price of $1.10 per share based on the fair value on the
date of grant, which the board of directors of the Company have concluded to
be book value on the date of grant.
Reckson Service Industries, Inc.
Notes to Financial Statements (continued)
5. TRANSACTIONS WITH RELATED PARTIES
ROP has advanced the Company $2,943,210, to fund the purchase of its interest
in ACLC and for other general operating expenses. These advances bear
interest at 12% per annum.
On August 28, 1997 the Company made an unsecured loan of $666,666 to RFG
Capital. In addition, the Company advanced RFG Capital $166,188. The note
and advance bear interest at 12% per annum.
RSI acquired its interests in ACLC and Dobie Center from a Rechler family
entity for $5.13 million. Such entity had acquired the interests in ACLC and
the Dobie Center in 1997 for $5.06 million in contemplation of transferring
such interest to RSI. The difference represents interest carry costs.
The Company advanced On-Site Venture L.L.C. ("On-Site") $325,000 in December
1997 and an additional $650,000 through March 10, 1998 to fund certain
operating costs. The advances are evidenced by subordinated loans which bear
interest at a rate of 12% per annum and mature on March 1, 1999 (See Note 7).
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
RSI has contracted to acquire a 58.69% equity interest in 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. The subordinated loans will be converted into
subordinated notes convertible at the option of the Company, which when
converted, together with the contributions of the $6.5 million pursuant to
its commitment will comprise a 58.69% common equity interest.
Reckson Service Industries, Inc.
Notes to Financial Statements (continued)
7. SUBSEQUENT EVENTS (CONTINUED)
RSI has obtained an option from Reckson Management Group, Inc., 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, the managing member of RSVP ("RSVP
Holdings") 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 a $3.0 million grant of
common stock of Reckson (the "Reckson Stock") which will vest equally over
five years. The Reckson Stock will be purchased by the Company and
contributed to RSVP Holdings. The Company is a managing member and 100%
owner of the common equity of RSVP Holdings. New World Realty LLC ("New
World"), an entity owned by the managing directors, acts as a managing member
of RSVP Holdings and owns a carried interest which provides for the Managing
Directors to receive a share in the profits of RSVP after the Company has
received certain minimum returns and a return of capital. In addition, it is
anticipated that New World will receive transaction fees of up to $1 million
dollars a year for identifying investment opportunities for RSVP.
The Company has entered into an agreement which provides for PWRES to invest
up to $200 million in RSVP in the form of a preferred equity interest. In
connection with the PWRES preferred equity financing the Company paid a
commitment fee of 2.5% of the total preferred equity investment of which
$1,400,000 was paid to an entity owned by one of the Managing Directors who
is a former employee of PWRES.
Subsequent to year end the Company contributed its equity interest in ACLC to
RSVP.
Subsequent to year end the Company purchased Reckson's 9.9% equity interest
in Reckson Executive Centers, LLC for $200,000.
Report of Independent Auditors
Members of
RO Partners Management, L.L.C.
We have audited the accompanying consolidated balance sheet of RO Partners
Management, L.L.C. (the "Company") as of December 31, 1997 and the related
consolidated statements of income for the period from June 4, 1997
(commencement of operations) to December 31, 1997, and for the periods from
June 4, 1997 through July 14, 1997 and July 15, 1997 through December 31,
1997, and members' equity and cash flows for the period from June 4, 1997
(commencement of operations) to December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1997, and the consolidated results of its operations for the
period from June 4, 1997 (commencement of operations) to December 31, 1997,
and for the periods from June 4, 1997 through July 14, 1997 and July 15, 1997
through December 31, 1997 and its cash flows for the period from June 4, 1997
(commencement of operations) to December 31, 1997, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
New York, New York
March 10, 1998
RO Partners Management, L.L.C.
Consolidated Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2) $ 5,020,110
Due from affiliate 117,606
Accounts receivable 952,662
Other current assets 7,668
-----------------
Total current assets 6,098,046
Fixed assets: (Note 2)
Land, building and equipment 35,751,430
Accumulated depreciation (406,417)
-----------------
Total fixed assets 35,345,013
Organization costs (net of amortization of $15,248) 336,525
Deposit contract 266,034
-----------------
Total assets $42,045,618
=================
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,019,912
Tenant security deposits 224,942
Deferred income 3,510,099
Current portion mortgage notes 1,000,000
Other liabilities 35,300
-----------------
Total current liabilities 5,790,253
Due to Affiliate (Note 5) 405,371
Mortgage notes payable 19,280,500
-----------------
Total liabilities 19,685,871
Minority interest 4,915,462
Members' equity 11,654,032
-----------------
Total liabilities and members' equity $42,045,618
=================
</TABLE>
See accompanying notes.
RO Partners Management, L.L.C.
Consolidated Statement of Income
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD JUNE FOR THE PERIOD JULY
4, 1997 PERIOD JUNE 15, 1997
THROUGH 4, 1997 THROUGH
DECEMBER 31, THROUGH JULY DECEMBER 31,
1997 14, 1997 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
Tower rental revenue $3,737,698 $357,865 3,379,833
Mall rental revenue 720,388 68,973 651,415
Garage revenue 259,148 24,812 234,336
Interest and other revenue 144,122 13,799 130,323
-------------- -------------- ---------------
Total revenues $4,861,356 $465,449 $4,395,907
Operating expenses:
Tower expenses 1,581,703 151,441 1,430,262
Mail expenses 289,347 27,703 261,644
Administrative/other 651,309 62,359 588,950
-------------- -------------- ---------------
Total operating expenses 2,522,359 241,503 2,280,856
Operating income 2,338,997 223,946 2,115,051
Other income 184,621 --- 184,621
Non-operating expenses:
Interest expense 812,814 77,823 734,991
Depreciation 421,665 40,373 381,292
Non-recurring expense 244,645 23,423 221,222
-------------- -------------- ---------------
Total non-operating expense 1,479,124 141,619 1,337,505
-------------- -------------- ---------------
Minority interest 257,962 24,698 233,264
-------------- -------------- ---------------
Net income $ 786,532 57,629 729,903
============== ============== ===============
</TABLE>
See accompanying notes.
RO Partners Management, L.L.C.
Consolidated Statement of Members' Equity
Period from June 4, 1997 (Commencement of Operations) to December 31, 1997
MEMBERS' EQUITY
---------------
Members' equity June 4, 1997 $ ---
Capital contributions - June 26, 1997 10,867,500
Net income 786,532
---------------
Members' equity - December 31, 1997 $ 11,654,032
===============
See accompanying notes.
RO Partners Management, L.L.C.
Consolidated Statement of Cash Flows
Period from June 4, 1997 (Commencement of Operations) to December 31, 1997
Operating activities
Net income $ 786,532
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 421,665
Minority interest 257,962
Gain on sale of securities (184,621)
Changes in operating assets and liabilities:
Accounts Receivable (952,662)
Other assets (7,668)
Deferred Rents 3,510,099
Accounts payable and accrued expenses 1,055,212
Tenants security deposits 224,942
-----------
Net cash provided by operating activities 5,111,461
-----------
INVESTING ACTIVITIES
Acquisition of building (31,093,930)
Acquisition costs (617,807)
Purchase of securities (4,038,556)
Proceed from sale of securities (net of transaction costs) 4,223,177
-----------
Net cash used in investing activities (31,527,116)
===========
FINANCING ACTIVITIES
Capital contributions 10,867,500
Proceeds from mortgages 20,280,500
Loan from affiliate 405,371
Payments to affiliate, net (117,606)
-----------
Net cash provided by financing activities 31,435,765
-----------
Net increase in cash 5,020,110
Cash beginning of period -
-----------
Cash end of period $5,020,110
===========
See accompanying notes.
RO Partners Management, L.L.C.
Notes to Consolidated Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT TRANSACTIONS
DESCRIPTION OF BUSINESS
RO Partners Management, LLC ("RO" or the "Company") was formed on June 4,
1997 as the 99.9% general partner of Reckson Opportunity Partners, L.P.
("Opportunity Partners"). The .1% limited partner interest in RO is held by
an executive officer of Reckson Service Industries, Inc. ("RSI").
Opportunity Partners is the predecessor entity to Reckson Strategic Venture
Partners ("RSVP") a real estate venture capital fund which will invest in
real estate and real estate-related operating companies. RSVP was formed on
January 23, 1998 to succeed to the operating activities of Opportunity
Partners. RSVP's common equity is 100% owned by RSI. RSVP's strategy is to
identify and acquire interests in established enterprises in market sectors
which are in early stages of their growth cycle or offer unique circumstances
for attractive investments as well as a platform for future growth. It is
anticipated that future investments by RSI in real estate venture capital
fund activities will be conducted through RSVP.
ORGANIZATION AND FORMATION OF THE COMPANY
The Company's general partner, RSI, has invested approximately $3,620,000 in
the Company for a 33 1/3% equity interest. The two other partners, Jon L.
Halpern and an unrelated third party investor, each contributed approximately
$3,620,000 to the Company for their respective 33 1/3% interest. RSI will
operate under an agreement between it and Reckson Operating Partnership, L.P.
("ROP"), under which RSI and ROP agree, subject to certain terms, to provide
each other with first refusal rights to participate in certain transactions.
INVESTMENT
On June 26, 1997, the Company invested approximately $10.8 million in
Opportunity Partners which acquired a 70% interest in Dobie Center
Properties, Ltd. ("Dobie"), a mixed use student housing and retail property
located in Austin, Texas.
Dobie, which is located immediately adjacent to the University of Texas at
Austin, consists of the Dobie tower, a 932-bed, 27-story student residence
hall that is situated on top of the Dobie mall, a 96,000-square foot retail
mall. The facility also includes a 644-car commercial parking garage.
RO Partners Management, L.L.C.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of RO Partners Management,
LLC include the accounts of the Company and Opportunity Partners. The
Company consolidates all entities in which it has a 50% or greater interest.
All significant intercompany balances and transactions have been eliminated
in consolidation.
The minority interest at December 31, 1997 represent a 30% interest in Dobie.
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.
The Company maintains cash balances at four banks. Cash accounts at banks
are insured by the FDIC up to $100,000. Amounts in excess of insured limits
were approximately $4,639,368 at December 31, 1997.
LONG-LIVED ASSETS
Statement of Financial Accounting Standard ("SFAS") No.121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" requires that long-lived assets to be held and used be reviewed for
impairment whenever events or circumstances indicate that the carrying amount
of an asset may not be recoverable. As of December 31, 1997, the Company has
determined that their long-lived assets are not impaired.
RO Partners Management, L.L.C.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS AND DEPRECIATION
Fixed assets are recorded at cost. Repairs and maintenance of fixed assets
are charged to operations. Major improvements are capitalized. The
estimated useful lives of the assets are as follows:
FIXED ASSETS AND DEPRECIATION
YEARS
-----------
Furniture, fixtures & equipment 5-10
Building & improvements 40
Mall renovation and improvements 5-40
Depreciation is computed using the straight-line method for financial
reporting purposes. Depreciation expense was $406,417 for the period June 4,
1997 through December 31, 1997. Upon retirement, sale, or other disposition
of property and equipment, the cost and related accumulated depreciation are
removed from the related accounts and the resulting gains or losses are
included in operations.
OTHER ASSETS AND AMORTIZATION
Organization costs are being amortized over 60 months on a straight-line
basis. Amortization expense was $15,248 for the period from June 4, 1997
through December 31, 1997.
REVENUE RECOGNITION
STUDENT HOUSING
Upon execution of student dormitory contracts, Dobie records a receivable for
the full value of the contract with an off-setting increase to deferred
revenue. Income is then recognized on a straight-line basis over the
remaining life of the contracts.
RO Partners Management, L.L.C.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
MALL TENANTS
Minimum rental revenue is recognized on a straight-line basis over the term
of the lease. The excess of rents recognized over amounts contractually due
are included in accounts receivable on the accompanying consolidated balance
sheet.
GARAGE REVENUES
Upon execution of semester garage contracts, Dobie records the cash received
pursuant to each contract as deferred revenue. Income is then recognized on
a straight-line basis over the life of the contracts. Daily parking revenues
are recognized as received.
INCOME TAXES
The Company is not subject to federal or state income taxes. As such, no
provision for these taxes has been made, since the aforementioned taxes are
the responsibility of the individual members of the Company. The Company is
subject to the New York State LLC/LP fee.
3. SALE OF SECURITIES
During 1997, the Company invested approximately $4,000,000 in marketable
securities. These investments were sold for total proceeds of approximately
$4,400,000, resulting in a gain of approximately $185,000, net of transaction
costs.
RO Partners Management, L.L.C.
Notes to Consolidated Financial Statements (continued)
4. MORTGAGE NOTES PAYABLE
The mortgage notes payable which are collateralized by the Company's interest
in the mixed use student housing and retail property owned by Dobie Center
Properties, Ltd., have outstanding balance as of December 31, 1997 as
follows:
DECEMBER 31, 1997
-----------------
First mortgage notes payable - stated interest at
7.25% at December 31, 1997 maturing August 30, 2002 $17,380,500
Second mortgage note payable - fixed interest rate at
7.5%, maturing August 30, 2002 2,900,000
-----------------
$20,280,500
=================
The following is a schedule of future maturities of the Mortgage Notes
Payable debt at December 31, 1997:
1998 $ 1,000,000
1999 1,000,000
2000 1,000,000
2001 1,000,000
2002 16,280,500
-----------
$20,280,500
===========
At the option of the holders of the first mortgage notes, the entire
principal balance and accrued and unpaid interest thereon is due and payable
in full upon the occurrence of an event of default, as defined.
An additional capital improvement reserve of $1,219,500 is available through
September 30, 1998 on the First mortgage notes.
RO Partners Management, L.L.C.
Notes to Consolidated Financial Statements (continued)
4. MORTGAGE NOTES PAYABLE (CONTINUED)
At December 31, 1997, the interest rate on the first mortgage notes payable
is fixed at the applicable LIBOR rate selected by the Company in accordance
with the provisions of the notes defining the option interest period
elections. Interest is payable in arrears on each quarterly roll over date
with the stated principal repayment as set forth in the note agreements. A
portion of the principal balance of the notes is to repaid in twenty-eight
(28) consecutive quarterly installment payments before the maturity date of
the notes.
The Second Mortgage Note Payable was obtained on September 1, 1995. Interest
payments are to be made quarterly, with the entire principal balance due at
the maturity date.
5. RELATED PARTIES
Management fees paid to an affiliated company were $120,483 for the period
from June 4, 1997 through December 31, 1997.
ROP, and another affiliate have advanced the Company approximately $340,000
and $65,000, respectively. The advances bear interest at 12% per annum.
6. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires Dobie to disclose the estimated
fair values of its financial instrument assets and liabilities. The carrying
amounts approximate fair value for cash and cash equivalents and the
improvement reserve because of the short maturity of those instruments. For
the first and second mortgage notes payable the estimated fair value
approximates the recorded balance.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Management of
Dobie Center:
We have audited the accompanying balance sheets of Dobie Center as of Decem-
ber 31, 1996 and 1995, and the related combined statements of operations,
changes in project equity (deficit), and cash flows for each of the three
years in the period ending December 31, 1996. These financial statements and
the schedule referred to below are the responsibility of the Projects'
management. Our responsibility is to express an opinion on these financial
statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dobie Center as of Decem-
ber 31, 1996 and 1995, and the results of its operations and its cash flows
for the each of the three years in the period ending December 31, 1996, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule III attached to the
financial statements is presented for purposes of complying with the Securi-
ties and Exchange Commission's rules and is not part of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ Arthur Andersen LLP
Dallas, Texas,
April 4, 1997
DOBIE CENTER
------------
BALANCE SHEETS-DECEMBER 31, 1996 AND 1995
-----------------------------------------
<TABLE>
<CAPTION> As of December 31,
ASSETS 1996 1995
------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,678,742 $ 2,403,348
Accounts receivable-
Student contracts 553,433 578,400
Straight line rent 77,614 109,372
Other 139,625 89,280
Prepaid insurance 59,496 62,579
------------- -------------
Total current assets 3,508,910 3,242,979
FIXED ASSETS:
Land 2,263,599 2,263,599
Building and improvements 11,826,888 10,364,362
Mall renovations and improvements 5,438,501 5,250,550
Furniture, fixture, and equipment 1,678,839 1,437,245
Less- Accumulated depreciation (2,960,020) (2,004,563)
------------- -------------
Total fixed assets 18,247,807 17,311,193
OTHER ASSETS:
Lease commissions 235,172 214,977
Organization costs 10,195 10,195
Software 117,223 150,573
Loan fees 599,443 599,443
Less- Accumulated amortization (292,123) (165,915)
------------- -------------
Total other assets 669,910 809,273
------------- -------------
Total assets $22,426,627 $21,363,445
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
DOBIE CENTER
------------
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
As of December 31,
LIABILITIES AND PROJECT EQUITY (DEFICIT) 1996 1995
---------------------------------------- ------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 908,435 $ 746,020
Accrued interest 126,454 259,808
Deferred income 3,240,553 3,002,908
Tenant deposits 234,609 221,005
Note payable - Landesbank Hessen 462,500 393,750
Note payable - Bayerische Landesbank 462,500 393,750
------------- -------------
Total current liabilities 5,435,051 5,017,241
LONG-TERM LIABILITIES:
Note payable - Landesbank Hessen 8,142,500 8,105,000
Note payable - Bayerische Landesbank 8,142,500 8,105,000
Notes payable - Proeller Brothers 2,900,000 2,900,000
------------- -------------
Total long-term liabilities 19,185,000 19,110,000
------------- -------------
Total liabilities 24,620,051 24,127,241
------------- -------------
PROJECT EQUITY (DEFICIT) (2,193,424) (2,763,796)
------------- -------------
Total liabilities and
project equity (deficit) $ 22,426,627 $ 21,363,445
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
DOBIE CENTER
------------
STATEMENTS OF CHANGES IN PROJECT EQUITY (DEFICIT)
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
-----------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CAPITAL BALANCE, December 31, 1993 $(2,591,791)
Distributions, net (983,398)
Net income 208,761
-------------
CAPITAL BALANCE, December 31, 1994 (3,366,428)
Contributions, net 1,216,622
Net loss (613,990)
-------------
CAPITAL BALANCE, December 31, 1995 (2,763,796)
Distributions, net (77,378)
Net income 647,750
-------------
CAPITAL BALANCE, December 31, 1996 $(2,193,424)
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
DOBIE CENTER
------------
COMBINED STATEMENTS OF OPERATIONS
---------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995
------------------------------------- ----------------------------------
Tower Mall Combined Tower Mall Combined
------------ ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental revenue $ 6,318,380 $ 850,001 $7,168,381 $6,026,227 $ 965,479 $6,991,706
Other revenue 297,028 313,921 610,949 308,361 247,912 556,273
Garage 498,344 - 498,344 409,110 - 409,110
Interest and other income 122,793 13,542 136,335 188,680 14,751 203,431
------------ ---------- ----------- ----------- ----------- ----------
Total revenues 7,236,545 1,177,464 8,414,009 6,932,378 1,228,142 8,160,520
OPERATING EXPENSES:
Wages and contract labor 1,329,517 116,318 1,445,835 1,348,632 116,888 1,465,520
Food cost 746,881 - 746,881 714,029 - 714,029
Administrative 895,685 233,116 1,128,801 792,058 228,863 1,020,921
Utilities 604,157 217,165 821,322 592,312 164,468 756,780
Contract services 166,678 74,796 241,474 282,816 75,658 358,474
Maintenance 172,499 206,876 379,375 138,424 194,252 332,676
Depreciation and amortization 807,793 273,872 1,081,665 574,667 257,276 831,943
Property tax 328,453 77,314 405,767 295,548 65,796 361,344
Nonrecurring expenses 45,238 3,345 48,583 4,282 1,427 5,709
------------ ---------- ----------- ----------- ----------- ----------
Total operating expenses 5,096,901 1,202,802 6,299,703 4,742,768 1,104,628 5,847,396
------------ ---------- ----------- ----------- ----------- ----------
NET OPERATING INCOME (LOSS) 2,139,644 (25,338) 2,114,306 2,189,610 123,514 2,313,124
NONOPERATING EXPENSES:
Interest expense 1,173,245 293,311 1,466,556 2,325,059 602,055 2,927,114
------------ ---------- ----------- ----------- ----------- ----------
NET INCOME (LOSS) $ 966,399 $(318,649) $ 647,750 $(135,449) $(478,541) $(613,990)
============ ========== =========== =========== =========== ==========
</TABLE>
(table continued)
<TABLE>
<CAPTION>
For the Years Ended December 31, For the
Nine Months
Ended
September 30,
1994 1996
-------------------------------------------------- -------------
Tower Mall Combined Combined
------------ ----------- ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Rental revenue $5,578,081 $ 893,883 $6,471,964 $5,106,385
Other revenue 173,422 307,748 481,170 469,319
Garage 334,725 - 334,725 357,808
Interest and other income 27,664 - 27,664 102,250
------------ ----------- ------------- -------------
Total revenues 6,113,892 1,201,631 7,315,523 6,035,762
OPERATING EXPENSES:
Wages and contract labor 1,454,214 24,022 1,478,236 1,067,388
Food cost 643,900 - 643,900 507,006
Administrative 938,195 99,343 1,037,538 847,144
Utilities 622,442 161,194 783,636 587,605
Contract services 120,692 112,194 232,886 284,836
Maintenance 209,677 115,141 324,818 208,665
Depreciation and amortization 422,482 140,827 563,309 814,493
Property tax 281,042 70,260 351,302 299,946
Nonrecurring expenses 26,166 8,722 34,888 18,841
------------ ----------- ------------- -------------
Total operating expenses 4,718,810 731,703 5,450,513 4,635,924
------------ ----------- ------------- -------------
NET OPERATING INCOME (LOSS) 1,395,082 469,928 1,865,010 1,399,838
NONOPERATING EXPENSES:
Interest expense 1,242,187 414,062 1,656,249 1,076,106
------------ ----------- ------------- -------------
NET INCOME (LOSS) $ 152,895 $ 55,866 $208,761 $ 323,732
============ =========== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
DOBIE CENTER
------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
For the
Nine Months
Ended
For the Years Ended December 31, September 30,
---------------------------------------
1996 1995 1994 1996
---------- ------------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income (loss) $ 647,750 $ (613,990) $ 208,761 $ 323,732
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities-
Depreciation and amortization 1,081,665 831,943 563,309 814,495
Write-off of unamortized discount - 1,280,696 - -
Amortization of discount on notes payable - 220,823 655,805 (29,450)
Decrease (increase) in accounts receivable 6,380 (75,559) (55,203) (1,413,895)
Decrease (increase) in prepaid insurance 3,083 (6,370) (2,884) (21,458)
Increase in lease commissions (20,195) (44,452) (16,117) -
Increase in loan costs - (599,443) - -
Increase (decrease) in accounts payable and
accrued expenses 162,415 208,472 (75,824) (209,446)
Increase in deferred income 237,645 210,450 560,082 2,151,727
Increase (decrease) in accrued interest (133,354) 259,808 - (101,938)
Increase (decrease) in tenant deposits 13,604 13,324 12,023 (77,035)
---------- ------------ ------------- -------------
Total adjustments 1,351,243 2,299,692 1,641,191 1,113,000
---------- ------------ ------------- -------------
Net cash provided by operating activities 1,998,993 1,685,702 1,849,952 1,436,732
---------- ------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures, and equipment (241,594) (5,687) (11,315) (45,966)
Purchase of building and improvements (1,462,526) (83,815) - (1,268,460)
Increase in mall renovations and improvements (187,951) (1,260,979) (624,457) (1,032,326)
Decrease (increase) in software 33,350 (66,473) (84,100) 33,350
---------- ------------ ------------- -------------
Net cash used in investing activities (1,858,721) (1,416,954) (719,872) (2,313,402)
---------- ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions, net - 1,216,622 - 27,061
Repayment of notes payable (787,500) (19,814,116) - (562,500)
Proceeds from notes payable 1,000,000 20,074,927 - 1,000,000
Distributions, net (77,378) - (983,398) -
---------- ------------ ------------- -------------
Net cash provided by (used in) financing
activities 135,122 1,477,433 (983,398) 464,561
---------- ------------ ------------- -------------
Net cash provided by (used in) operating,
investing, and financing activities 275,394 1,746,181 146,682 (412,109)
---------- ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, beginning of year 2,403,348 657,167 510,485 2,403,348
---------- ------------ ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 2,678,742 $ 2,403,348 $ 657,167 $ 1,991,239
========== ============ ============= =============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest expense $ 1,599,910 $ 1,256,836 $ 1,022,679 $ 1,076,106
========== ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
DOBIE CENTER
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1996, 1995, AND 1994
---------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Located immediately adjacent to The University of Texas at Austin, Dobie
Center ("Dobie" or the "Project") consists of Dobie Tower, a 932-bed,
27-story student residence hall that sits on top of Dobie Mall, a
96,000-square foot retail mall. The mall includes student-oriented tenants
such as a copy/printing shop, student bookstore, movie theater, video store,
tanning salon, hair salon, video arcade, and a 500-seat food court. The
student-residence tower includes a full service cafeteria, state-of-the-art
computer center, fitness center, junior Olympic swimming pool, Jacuzzi,
volleyball court, basketball court, mini-theater, study rooms, meeting rooms,
and a 24-hour service desk. The facility also includes a 644-car commercial
parking garage.
Dobie is wholly owned by AustInvest I, Ltd. ("AustInvest"), which was formed
on March 30, 1992, under the laws of the state of Texas. AustInvest is a
limited partnership formed for the purpose of owning, operating, and managing
Dobie.
Leasing figures for the student residence hall for the fall 1996 semester
showed that the maximum capacity of 932 spaces, or beds, were occupied by
888 students (95%) with the remaining 44 spaces primarily occupied by
resident advisors (5%). Leasing figures for the student residence halls for
the Spring 1996 semester show that the maximum capacity of 932 spaces, or
beds, will be attained. This figure reflects spaces primarily occupied by
students (95%) with their supporting resident advisors (5%). At December 31,
1996, the retail mall occupancy rate was approximately 82%. The commercial
parking garage generates revenues from both contract parking (68%) and daily
parking (32%) fees.
The facility is staffed with nearly 100 employees responsible for all areas
of operation including business administration, residence life/student
development, food service, maintenance, housekeeping, and accounting.
Student services are administered by a professional management team in
conjunction with a paraprofessional staff consisting of a resident director
and 20 student resident assistants.
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared from the records of
the Project and include its assets, liabilities, revenues and expenses. The
accompanying financial statements do not include assets, liabilities, reve-
nues, or expenses pertaining solely to AustInvest.
Dobie uses the accrual method of accounting for financial reporting in
conformity with generally accepted accounting principles (GAAP). Therefore,
revenue is recorded as earned and costs and expenses are recorded as
incurred.
The allocation of income and expenses between the tower and mall are based on
actual results and estimates made by management. The income and expenses of
the garage are included with the income and expenses of the tower.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of preparing the statement of cash flows, unrestricted currency,
certificates of deposit, and money market accounts are considered cash, and
investments with an original maturity of one year or less are considered cash
equivalents.
Dobie maintains cash balances at two banks. Cash accounts at banks are
insured by the FDIC up to $100,000. Amounts in excess of insured limits were
approximately $2,633,741, $2,203,348, and $357,166, at December 31, 1996,
1995, and 1994, respectively.
ACCOUNTS RECEIVABLE
Accounts receivable include $553,433 of deferred student revenues. Upon
completion of dormitory contracts with students, Dobie records a receivable
for the full value of the contract with an off-setting increase to deferred
revenue. Income is then recognized over the life of the contracts from the
deferred revenue account.
Dobie generally considers all accounts receivable to be fully collectible.
Accordingly, no allowance for doubtful accounts has been recorded.
FIXED ASSETS AND DEPRECIATION
Fixed assets are recorded at cost. Repairs and maintenance of fixed assets
are charged to operations. Major improvements are capitalized. The
estimated useful lives of the assets are as follows:
Years
-----
Furniture, fixtures & equipment 5-10
Building & improvements 40
Mall renovation and improvements 5-40
Depreciation is computed using the straight-line method for financial report-
ing purposes. Depreciation expense was $955,457, $760,150, and $504,457 for
the years ended December 31, 1996, 1995, and 1994, respectively. Upon
retirement, sale, or other disposition of property and equipment, the cost
and related accumulated depreciation are removed from the related accounts
and the resulting gains or losses are included in operations. There were no
gains or losses for the years ended December 31, 1996, 1995, and 1994.
OTHER ASSETS AND AMORTIZATION
Lease commissions are being amortized over the life of the lease on a
straight-line basis. Organization costs and software are being amortized
over 60 and 36 months on a straight-line basis. Amortization expense was
$126,208, $71,793, and $58,852 for the years ended December 31, 1996, 1995,
and 1994, respectively.
FEDERAL INCOME TAXES
No income tax provision has been included in the financial statements since
profit or loss of Dobie Center is required to be reported by the respective
partners of AustInvest on their income tax returns.
2. LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Note payable to Landesbank Hessen-
Thuringen Girozentrale, stated interest at
7.25% and 7.625% at December 31, 1996 and
1995, respectively, maturing August 30,
2002 $8,605,000 $8,498,750 $ -
Note payable to Bayerische Landesbank
Girozentrale, stated interest at 7.25% and
7.625% at December 31, 1996 and 1995, re-
spectively, maturing August 30, 2002. 8,605,000 8,498,750 -
Note payable to Proeller Brothers, stated
interest at 7.5%, maturing August 30,
2002. 2,900,000 2,900,000 -
Note payable to partner, stated interest
at 10.0%, pay rate at 7.5% (at December
31, 1994), maturing May 1999 - - 2,067,231
Note payable to Lincoln National Life
Insurance Company, non-interest bearing,
maturing May 1999. - - 3,937,655
Note payable to partner, non-interest
bearing, maturing May 1999 - - 1,850,000
Note payable to Lincoln National Life
Insurance Company, stated interest at 10%,
pay rate of 7.5% (at December 31, 1994),
maturing May 1999 - - 11,771,730
------------ ------------ ------------
Total debt 20,110,000 19,897,500 19,626,616
------------ ------------ ------------
Less-
Discounts - - (1,485,605)
Current portion (925,000) (787,500) -
------------ ------------ ------------
Net long-term debt $19,185,000 $19,110,000 $18,141,011
============ ============ ============
</TABLE>
The following is a schedule of future maturities of long-term debt at
December 31, 1996:
1997 $ 925,000
1998 1,000,000
1999 1,000,000
2000 1,000,000
2001 1,000,000
Thereafter 15,185,000
On September 1, 1995, two mortgage payable balances were paid to Lincoln
National Life Insurance Company and AustInvest I Partners, Ltd., in the
amounts of $15,709,385 and $3,917,231, respectively. These two mortgage
payable balances, comprised of four promissory notes secured by Dobie, were
executed and delivered on March 25, 1992. A portion of the mortgage payable
to AustInvest I Partners, Ltd., in the amount of $2,067,231 was made in
connection with the restructuring of the notes. The one additional note to
AustInvest I Partners, Ltd., of $1,850,000 and the two notes to Lincoln
National Life Insurance Company of $15,709,385 were given in renewal and
extension of the outstanding balance of principal left owing and unpaid by
AustInvest I, Ltd. These three additional notes were assigned to AustInvest.
Two of the four notes were noninterest bearing and were held by Lincoln
National Life Insurance Company and AustInvest I Partners, Ltd., in the
amounts of $3,937,655 and $1,850,000, respectively. The noninterest bearing
note held by Lincoln National Life Insurance Company was being discounted at
7.5%. The noninterest bearing note held by AustInvest I Partners, Ltd., was
being discounted at 7.0%. Interest expense in 1995 includes $1,280,696 of
unamortized discount on notes payable written-off in conjunction with the
refinancing of the company's notes payable.
The notes described above were all paid off on September 1, 1995, via a
refinancing transaction. The total refinancing transaction costs of $599,443
have been capitalized over the seven-year note term. At the option of
Landesbank Hessen-Thuringen Girozentrale and Bayerische Landesbank
Girozentrale, the holders of the new notes, totaling $17,210,000 and
$16,997,500 at December 31, 1996 and 1995, respectively, the entire principal
balance and accrued and unpaid interest thereon shall become due and payable
in full upon the occurrence of any of the following events:
1. default in the payment of the principal balance on the maturity date of
August 30, 2002,
2. the occurrence of any other default, as defined, which has occurred and
has continued for more than five (5) business days after written notice
from the holder of such default, or
3. the occurrence of any other default or event by which, under the terms
of the other Loan documents, shall have occurred and have continued
after the expiration of any applicable grace and/or notice period set
forth in such other Loan documents.
An additional capital improvement reserve is available on the Landesbank
Hessen and Bayerische Landesbank loans. Dobie exercised its option to draw
the advance of $1,000,000 in 1996. No funds had been drawn on this reserve
as of December 31, 1995 and 1994. An additional $2,325,073 can be drawn by
Dobie prior to September 1, 1997, after which time no additional advances are
provided for in the note agreements. This reserve is not reflected on the
corresponding Balance Sheet.
At December 31, 1996 and 1995, the interest rate on the loan is fixed at the
applicable LIBOR rate selected by Dobie in accordance with the provisions of
the notes defining the option interest period elections. Interest is payable
in arrears on each quarterly roll over date with the stated principal repay-
ment as set forth in the note agreements. A portion of the principal balance
of the notes are to repaid in twenty-eight (28) consecutive quarterly
installment payments before the maturity date of the notes. The interest
rate on this note in effect at December 31, 1996 and 1995, was 7.25% and
7.625%, respectively.
A loan of $2,900,000 was also obtained from Hubert Proeller, Arthur Proeller,
Hermann Proeller, and Manfred Proeller on September 1, 1995. The loan is due
on August 30, 2002, and is collateralized by a second mortgage on Dobie. The
interest rate is fixed at 7.5% per annum. Interest payments are to be made
quarterly, with the entire principal balance due at the maturity date.
The total cash paid for interest expense on all loans during 1996, 1995, and
1994 was $1,599,910, $1,256,836 and $1,022,679, respectively.
3. RELATED PARTIES
Management fees paid to an affiliated company were $395,677, $414,874, and
$332,707 for 1996, 1995, and 1994, respectively.
4. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires Dobie to disclose the estimated
fair values of its financial instrument assets and liabilities. The carrying
amounts approximate fair value for cash and cash equivalents and the improve-
ment reserve because of the short maturity of those instruments. For Dobie's
mortgage payable and note payable (Proeller) it is presumed that estimated
fair value approximates the recorded book balance due to the recent refinanc-
ing.
5. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This state-
ment requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Dobie has adopted the principles of this statement in
1996. Its adoption did not have a material effect on the financial position
of Dobie.
SCHEDULE III
REAL ESTATE INVESTMENTS, ACCUMULATED DEPRECIATION AND AMORTIZATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Gross Amount at Which
Initial Cost Costs Carried at Close of Period
--------------------------------------- Capitalized --------------------------------------------
Related Building & Subsequent Buildings &
Description Encumbrance Land Improvements to Acquisition Land Improvements Totals
- ------------------ ------------ ---------- ------------ -------------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Dobie Center $20,110,000 $2,263,599 $10,286,964 $ 6,978,425 $2,263,599 $17,265,389 $19,528,988
</TABLE>
(table continued)
<TABLE>
<CAPTION>
Accumulated
Depreciation Date of Date Depreciable
Description & Amortization Construction Acquired Lives(years)
- --------------- -------------- ------------ --------
<S> <C> <C> <C>
Dobie Center $ (2,131,214) 1969 4/23/92 5-40
</TABLE>
See accompanying notes to Schedule III
Notes To Schedule III
Real Estate Investments, Accumulated Depreciation and Amortization
A summary of activity for the Partnership's real estate investments and
accumulated depreciation and amortization is as follows:
<TABLE>
<CAPTION>
For Year Ended
Real estate investments: 1996
- ------------------------ ----------------
<S> <C>
Balance at beginning of year $ 17,878,511
Improvements 1,650,477
----------------
Balance at end of year $ 19,528,988
================
Accumulated depreciation and amortization:
- -----------------------------------------
Balance at beginning of year $ (1,444,221)
Depreciation (686,993)
----------------
Balance at end of year $ (2,131,214)
================
</TABLE>
Report of Independent Auditors
To the Management of
Dobie Center
We have audited the accompanying balance sheet of Dobie Center (the
"Project") as of December 31, 1997, and the related statements of income for
the year then ended, and for the periods from January 1, 1997 through June
26, 1997 and June 27, 1997 through December 31, 1997 and the related
statements of project equity (deficit) and cash flows for the year ended
December 31, 1997. These financial statements and the schedules referred to
below are the responsibility of the Projects' management. Our responsibility
is to express an opinion on these financial statements and the schedules
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Dobie Center as of
December 31, 1997, and the results of its operations for the year then ended
and for the period from January 1, 1997 through June 26, 1997 and June 27
through December 31,1997 and its cash flows for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental statement of income
for the period July 15, 1997 through December 31, 1997 is presented for
purposes of additional analysis and the Schedule III attached to the
financial statements is provided for purpose of complying with the Securities
and Exchange Commission's rules. The supplemental statement of income and
Schedule III are not a required part of the basic financial statements. Such
information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Ernst & Young LLP
New York, New York
February 23, 1998
Dobie Center
Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,849,614
Accounts receivable - students 305,719
Accounts receivable - AustInvest 594,883
Accounts receivable - other 52,060
Other current assets 7,668
-------------
Total current assets 5,809,944
Fixed assets:
Land, building and equipment 35,716,430
Accumulated depreciation (406,417)
-------------
Total fixed assets 35,310,013
Intangible assets:
Organizational costs 152,482
Accumulated amortization (15,248)
-------------
Total intangible assets 137,234
-------------
Total assets $41,257,191
=============
LIABILITIES AND PROJECT EQUITY
Current liabilities:
Accounts payable and accrued expenses $856,777
Tenant security deposits 224,942
Deferred income - students 3,508,099
Other deferred income 2,000
Current portion mortgage notes payable 1,000,000
-------------
Total current liabilities 5,591,818
-------------
Non-current liabilities:
Mortgage notes payable 19,280,500
-------------
Total liabilities 24,872,318
Project equity 16,384,873
-------------
Total liabilities and project equity $41,257,191
=============
</TABLE>
See accompanying notes.
Dobie Center
Statement of Income
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
YEAR JANUARY 1, 1997 JUNE 27, 1997
ENDED DECEMBER THROUGH JUNE 26, THROUGH DECEMBER
31, 1997 1997 31, 1997
---------------------------------------------------
<S> <C> <C> <C>
Revenues:
Tower rental revenue $7,137,515 $3,399,817 $3,737,698
Mall rental revenue 1,377,878 657,490 720,388
Garage revenue 504,527 245,379 259,148
Other revenue 96,186 65,938 30,248
Interest and other revenue 160,802 46,928 113,874
---------------------------------------------------
Total revenues 9,276,908 4,415,552 4,861,356
Operating expenses:
Tower expenses:
Wages 1,231,907 630,551 601,356
Food costs 628,418 302,952 325,466
Administrative/other 928,423 460,260 468,163
Utilities 569,268 279,547 289,721
Management fee 267,991 169,390 98,601
Maintenance 146,089 61,773 84,316
Property taxes 344,677 162,434 182,243
---------------------------------------------------
Total tower expenses 4,116,773 2,066,907 2,049,866
Mall expenses:
Wages 116,741 46,958 69,783
Administrative/other 370,521 187,375 183,146
Utilities 237,002 116,756 120,246
Management fee 64,488 42,606 21,882
Maintenance 58,899 27,023 31,876
Property taxes 86,167 40,607 45,560
---------------------------------------------------
Total mall expenses 933,818 461,325 472,493
---------------------------------------------------
Total operating expenses 5,050,591 2,528,232 2,522,359
Operating income 4,226,317 1,887,320 2,338,997
Non-operating expense:
Depreciation/amortization - tower 650,517 350,629 299,888
Depreciation/amortization - mall 238,259 116,482 121,777
Interest expense 1,543,186 730,372 812,814
Nonrecurring expenses 363,972 119,327 244,645
---------------------------------------------------
Total non-operating expense 2,795,934 1,316,810 1,479,124
---------------------------------------------------
Net income $1,430,383 $ 570,510 $ 859,873
===================================================
</TABLE>
See accompanying notes.
Dobie Center
Statement of Changes in Project Equity (Deficit)
<TABLE>
<CAPTION>
<S> <C>
Project deficit, December 31, 1996 $(2,193,424)
Net income for the period January 1, 1997 through June 26, 1997 570,510
Elimination of deficit - purchase transaction 1,622,914
Contributions - June 26, 1997 15,525,000
Net income for the period June 27, 1997 through December 31, 1997 859,873
-------------
Project equity, December 31, 1997 $16,384,873
=============
</TABLE>
See accompanying notes.
Dobie Center
Statement of Cash Flows
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income $1,430,383
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 888,776
Changes in operating assets and liabilities:
Accounts receivable-students 247,714
Accounts receivable - AustInvest (594,883)
Other accounts receivables 165,179
Other current assets 51,828
Accounts payable (178,112)
Tenant security deposits payable (9,667)
Deferred income-students 267,546
Deferred parking income 2,000
-------------
Net cash provided by operating activities 2,270,764
-------------
Investing activities
Increase in organizational costs (142,287)
Purchase of fixed assets (15,653,105)
-------------
Net cash used in investing activities (15,795,392)
-------------
Financing activities
Repayment of notes payable (925,000)
Contributions 15,525,000
Net proceeds from notes payable 1,095,500
-------------
Net cash provided by financing activities 15,695,500
-------------
Net increase in cash and cash equivalents 2,170,872
Cash and cash equivalents at beginning of period 2,678,742
-------------
Cash and cash equivalents at end of period $4,849,614
=============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Non-cash activities:
Net decrease in fixed assets 1,233,715
Decrease in accumulated depreciation and amortization (3,719,250)
Elimination of Project deficit - purchase transaction 1,622,914
Elimination of Intangible assets - purchase transaction 951,838
</TABLE>
See accompanying notes.
Dobie Center
Notes to Financial Statements (continued)
December 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Dobie Center ("Dobie" or the "Project") which is located immediately adjacent
to the University of Texas at Austin, consists of the Dobie tower, a 932-bed,
27-story student residence hall that is situated on top of the Dobie mall, a
96,000-square foot retail mall. The mall includes student-oriented tenants
such as a copy/printing shop, student bookstore, movie theater, video store,
tanning salon, hair salon, video arcade, and a 500-seat food court. The
student-residence tower includes a full service cafeteria, state-of-the-art
computer center, fitness center, junior olympic swimming pool, Jacuzzi,
volleyball court, basketball court, mini-theater, study rooms, meeting rooms,
and a 24-hour service desk. The facility also includes a 644-car commercial
parking garage.
On June 26, 1997, AustInvest I, Ltd. ("AustInvest") sold 70% of Dobie Center
to Reckson Opportunity Partners, L.P. ("ROP"). Simultaneously, ROP and
AustInvest contributed their interest in Dobie Center to a new entity, Dobie
Center Properties, Ltd.
BASIS OF ACCOUNTING
The accompanying financial statements include the assets, liabilities,
revenues and expenses directly related to the Project. These financial
statements do not include accounts of AustInvest or Dobie Center Properties,
Ltd.
Dobie uses the accrual method of accounting for financial reporting in
conformity with generally accepted accounting principles (GAAP). Therefore,
revenue is recorded as earned and costs and expenses are recorded as
incurred.
The allocation of income and expenses between the tower and mall are based on
historical results and estimates made by management. The expenses of the
garage are included with the expenses of the tower.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Dobie Center
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of preparing the statement of cash flows, unrestricted currency,
certificates of deposit, and money market accounts are considered cash, and
investments with an original maturity of three months or less are considered
cash equivalents.
Dobie maintains cash balances at three banks. Cash accounts at banks are
insured by the FDIC up to $100,000. Amounts in excess of insured limits were
approximately $4,639,368 at December 31, 1997.
FIXED ASSETS AND DEPRECIATION
Fixed assets are recorded at cost. Repairs and maintenance of fixed assets
are charged to operations. Major improvements are capitalized. The
estimated useful lives of the assets are as follows:
YEARS
---------------
Furniture, fixtures & equipment 5-10
Building & improvements 40
Mall renovation and improvements 5-40
Depreciation is computed using the straight-line method for financial
reporting purposes. Depreciation expense was $873,528 for the year ended
December 31, 1997. Upon retirement, sale, or other disposition of property
and equipment, the cost and related accumulated depreciation are removed from
the related accounts and the resulting gains or losses are included in
operations.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires that long-lived assets to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 has not had an
impact on the financial position of Dobie.
Dobie Center
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS AND AMORTIZATION
Organization costs are being amortized over 60 months on a straight-line
basis. Amortization expense was $15,248 for the year ended December 31,
1997.
REVENUE RECOGNITION
STUDENT HOUSING
Upon execution of student dormitory contracts, Dobie records a receivable for
the full value of the contract with an off-setting increase to deferred
revenue. Income is then recognized on a straight-line basis over the
remaining life of the contracts.
MALL TENANTS
Minimum rental revenue is recognized on a straight-line basis over the term
of the lease. The excess of rents recognized over amounts contractually due
are included in accounts receivable - other on the accompanying balance
sheet.
GARAGE REVENUES
Upon execution of semester garage contracts, Dobie records the cash received
pursuant to each contract as deferred revenue. Income is then recognized on
a straight-line basis over the life of the contracts. Daily parking revenues
are recognized as received.
FEDERAL INCOME TAXES
No income tax provision has been included in the financial statements since
profit and loss of Dobie is required to be reported by the respective
partners of AustInvest and Dobie Center Properties, Ltd. on their respective
income tax returns.
Dobie Center
Notes to Financial Statements (continued)
2. LONG-TERM LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
<S> <C>
First Mortgage Notes Payable - collateralized by the Project:
Note payable to Landesbank Hessen-Thuringen Girozentrale, ("LH-TG") stated
interest at 7.25% at December 31, 1997 maturing August 30, 2002 $8,690,250
Note payable to Bayerische Landesbank Girozentrale,("BLG") stated interest at
7.25% at December 31, 1997, maturing August 30, 2002 8,690,250
Second Mortgage Note Payable - collateralized by the Project:
Note payable to Proeller Brothers, stated interest at 7.5%, maturing
August 30, 2002 2,900,000
-------------
Total long term debt $20,280,500
=============
</TABLE>
The following is a schedule of future maturities of long-term debt at
December 31, 1997:
1998 $ 1,000,000
1999 1,000,000
2000 1,000,000
2001 1,000,000
2002 16,280,500
-----------
$20,280,500
===========
At the option of LH-TG and BLG, the holders of the first mortgage notes,
$17,380,500, the entire principal balance and accrued and unpaid interest
thereon is due and payable in full upon the occurrence of an event of
default, as defined.
An additional capital improvement reserve of $1,219,500 is available through
September 30, 1998 on the LH-TG and BLG loans.
Dobie Center
Notes to Financial Statements (continued)
2. LONG-TERM LIABILITIES (CONTINUED)
At December 31, 1997, the interest rate on the first mortgage notes payable
to LH-TG and BLG is fixed at the applicable LIBOR rate selected by Dobie in
accordance with the provisions of the notes defining the option interest
period elections. Interest is payable in arrears on each quarterly roll over
date with the stated principal repayment as set forth in the note agreements.
A portion of the principal balance of the notes is to repaid in twenty-eight
(28) consecutive quarterly installment payments before the maturity date of
the notes. The interest rate on this note in effect at December 31, 1997 was
7.259%.
A loan of $2,900,000 was also obtained from the Proeller Brothers on
September 1, 1995. The loan is due on August 30, 2002. The interest rate is
fixed at 7.5% per annum. Interest payments are to be made quarterly, with
the entire principal balance due at the maturity date.
3. RELATED PARTIES
Management fees paid to an affiliated company were $332,479 for the year
ended December 31, 1997.
4. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires Dobie to disclose the estimated
fair values of its financial instrument assets and liabilities. The carrying
amounts approximate fair value for cash and cash equivalents and the
improvement reserve because of the short maturity of those instruments. For
Dobie's first and second mortgage notes payable the estimated fair value
approximates the recorded balance.
Supplemental Information
Dobie Center
Supplemental Statement of Income (Note 1)
For the period from July 15, 1997 through December 31, 1997
Revenues:
Tower rental revenue $3,379,833
Mall rental revenue 651,415
Garage revenue 234,336
Other revenue 27,352
Interest and other revenue 102,971
-----------
Total revenues 4,395,907
Operating expenses:
Tower expenses:
Wages 543,779
Food costs 294,304
Administrative/other 423,339
Utilities 261,983
Management fee 89,160
Maintenance 76,243
Property taxes 164,794
-----------
Total tower expenses 1,853,602
Mall expenses:
Wages 63,102
Administrative/other 165,611
Utilities 108,733
Management fee 19,787
Maintenance 28,824
Property taxes 41,198
-----------
Total mall expenses 427,254
-----------
Total operating expenses 2,280,857
Operating income 2,115,050
Non-operating expense:
Depreciation/amortization - tower 271,175
Depreciation/amortization - mall 110,118
Interest expense 734,991
Nonrecurring expenses 221,222
-----------
Total non-operating expense 1,337,506
-----------
Net income $ 777,545
===========
See accompanying notes.
Dobie Center
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1997
<TABLE>
<CAPTION>
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH
INITIAL COST ACQUISITION/(1)/ CARRIED AT CLOSE OF
RELATED BUILDING & BUILDINGS & PERIOD BUILDINGS &
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dobie Center, $20,280,500 $2,263,599 $10,286,964 $1,787,041 $20,185,360 $4,050,640 $30,472,324
Austin Texas
</TABLE>
(table continued)
<TABLE>
<CAPTION>
ACCUMULATED DATE OF DATE DEPRECIABLE LIFE
DESCRIPTION TOTALS DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dobie Center, $34,522,964 $(380,904) 1969 1992 40
Austin Texas
</TABLE>
See accompanying notes to Schedule III.
/(1)/ Reflects the step-up in basis associated with the sale of a 70%
interest in the property to an unrelated third party.
Dobie Center
Notes to Schedule III
Real Estate and Accumulated Depreciation
December 31, 1997
A summary of activity for the Partnership's real estate and accumulated
depreciation is as follows:
FOR THE YEAR ENDED
1997
------------------
Real estate investments:
Balance at beginning of year $ 19,528,988
Improvements/(1)/ 14,993,976
------------------
Balance at end of year $ 34,522,964
==================
Accumulated depreciation and amortization:
Balance at beginning of year $ (2,131,214)
Depreciation (873,528)
Reduction of accumulated depreciation/(1)/ 2,623,838
------------------
Balance at end of year $ (380,904)
==================
/(1)/ Reflects the step-up in basis associated with
the sale of a 70% interest in the property to
an unrelated third party.
/(2)/ A reconciliation of land, building and equipment is as follows:
Real estate investments balance at end of year $ 34,522,964
Furniture, fixtures and equipment 1,193,466
----------------
Land, building and equipment $ 35,716,430
================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
American Campus Lifestyles Companies, L.L.C.:
We have audited the accompanying statement of assets, liabilities, and
members' equity of American Campus Lifestyles Companies, L.L.C. (a Texas
limited liability company) and subsidiaries as of December 31, 1996 and 1995,
and the related statements of revenues and expenses, changes in members'
equity, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of American Campus Lifestyles
Companies, L.L.C. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Dallas, Texas,
March 28, 1997
AMERICAN CAMPUS LIFESTYLES COMPANIES, L.L.C. AND SUBSIDIARIES
-------------------------------------------------------------
STATEMENTS OF ASSETS, LIABILITIES, AND MEMBERS' EQUITY (DEFICIT)
----------------------------------------------------------------
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------
ASSETS 1996 1995
------ ------------------ ------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents,
including restricted cash
of $74,164 as of December 31, 1996 $ 619,754 $ 12,306
Deposits 3,315 3,415
Accounts receivable 1,153,912 141,943
Prepaid expenses - -
Contributions receivable - 1,000
------------------ ------------------
Total current assets 1,776,981 158,664
------------------ ------------------
INVESTMENTS:
Investment in leasehold
estate -- completed
contract, including
restricted cash of
$175,800, as of December
31, 1996 10,277,687 -
Investment in leasehold
estate - projects under
development 929,224 -
------------------ ------------------
Total investments 11,206,911 -
------------------ ------------------
FIXED ASSETS:
Equipment 137,140 10,377
Less-accumulated depreciation (18,456) (2,512)
------------------ ------------------
Total fixed assets 118,684 7,865
------------------ ------------------
Total assets $13,102,576 166,529
================== ==================
AMERICAN CAMPUS LIFESTYLES COMPANIES, L.L.C. AND SUBSIDIARIES
-------------------------------------------------------------
STATEMENTS OF ASSETS, LIABILITIES, AND MEMBERS' EQUITY (DEFICIT)
----------------------------------------------------------------
LIABILITIES AND MEMBERS EQUITY (DEFICIT)
- ----------------------------------------
As of December 31,
---------------------------------------
CURRENT LIABILITIES: 1996 1995
- ------------------- ------------------ ------------------
Construction accounts
payable - leasehold estate $ 403,456 $ -
Accounts payable 580,424 45,125
Security deposits 31,074 -
Deferred rental income 877,536 -
Advances from members - 1,449,184
Distributions payable 50,510 -
Notes payable - leasehold
estates 87,088 -
Notes payable - other 47,669 -
------------------ ------------------
Total current liabilities 2,077,757 1,494,309
------------------ ------------------
NONCURRENT LIABILITIES:
Notes Payable - leasehold
estates 10,716,367 -
------------------ ------------------
Total noncurrent liabilities 10,716,367 -
------------------ ------------------
Total liabilities 12,794,124 1,494,309
------------------ ------------------
MEMBERS' EQUITY:
Advances from members - 1,404,327
Members' equity:
Beginning balance (1,327,780) (2,388,000)
Contributions 1,490,000 68,034
Distributions (855,552) (5,800)
Net income (loss) 1,001,784 (406,341)
------------------ ------------------
Total members' equity
(deficit) 308,452 (1,327,780)
------------------ ------------------
Total liabilities and
members' equity $13,102,576 $ 166,529
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
AMERICAN CAMPUS LIFESTYLES COMPANIES, L.L.C. AND SUBSIDIARIES
-------------------------------------------------------------
STATEMENTS OF REVENUES AND EXPENSES
-----------------------------------
<TABLE>
<CAPTION>
For the Years Ended For the Nine
December 31, Months Ended
------------------------------ September 30,
1996 1995 1996
---------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
REVENUES:
Development/construction fees $1,727,668 - 1,504,785
Prairie View Phase I rental revenue 776,582 - 265,423
Management fees 752,374 622,911 531,361
Other income 10,383 - 1,937
---------- ------------- -------------
Total revenues 3,267,007 622,911 2,303,506
---------- ------------- -------------
OPERATING EXPENSES:
Personnel 821,706 397,289 592,863
Administrative 607,412 435,406 337,775
Marketing 42,222 4,894 24,655
Prairie View Phase I operating expenses 623,354 - 265,423
Depreciation 15,944 2,058 11,021
---------- ------------- -------------
Total operating expenses 2,110,638 839,647 1,231,737
---------- ------------- -------------
Net operating income (loss) 1,156,369 (216,736) 1,071,769
---------- ------------- -------------
OTHER EXPENSE:
Interest, including Prairie View Phase I 154,585 189,605 468
---------- ------------- -------------
NET INCOME (LOSS) $1,001,784 $ (406,341) $ 1,071,301
========== ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
AMERICAN CAMPUS LIFESTYLES COMPANIES, L.L.C. AND SUBSIDIARIES
-------------------------------------------------------------
STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
--------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
<CAPTION>
Campus Landmark
Management JHD Campus Campus
Associates, Ventures Investments, Adelie,
L.L.C. L.L.C. L.L.C. L.L.C. Totals
----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
MEMBERS' DEFICIT,
December 31, 1994 (unaudited) $(597,000) $(895,500) $ - $ (895,500) $(2,388,000)
Advances from members - 1,404,327 - - 1,404,327
Contributions - 68,034 - - 68,034
Distributions - (5,800) - - (5,800)
Net loss (101,585) (152,378) - (152,378) (406,341)
----------- ---------- ------------ ----------- ------------
MEMBERS' (DEFICIT) EQUITY,
December 31, 1995 (698,585) 418,683 - (1,047,878) (1,327,780)
Adjustments due to
capital restructure 707,333 (341,947) (836,387) 471,001 -
Contributions - - 900,000 590,000 1,490,000
Distributions - (427,776) (427,776) - (855,552)
Net income (loss) (8,748) 505,266 518,389 (13,123) 1,001,784
----------- ---------- ------------ ----------- ------------
MEMBERS' EQUITY,
December 31, 1996 $ - $154,226 $154,226 $ - $ 308,452
=========== ========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
AMERICAN CAMPUS LIFESTYLES COMPANIES, L.L.C. AND SUBSIDIARIES
-------------------------------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
For the Years Ended For the Nine
December 31, Months Ended
---------------------------------- September 30,
1996 1995 1996
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,001,784 $ (406,341) $1,071,301
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities-
Depreciation 15,944 2,058 11,020
Decrease in deposits 100 11,586 -
Increase in accounts receivable (1,011,969) (102,289) (1,075,423)
Decrease (increase) in prepaid
expenses - 4,500 (5,808)
Decrease in contributions
receivable 1,000 - -
Increase (decrease) in accounts
payable 535,299 (222,923) 315,664
Increase in construction accounts
payable -leasehold estate 403,456 - 1,352,950
Increase in security deposits 31,074 - -
Increase in deferred rental
income 877,536 - 87,754
Increase in accrued interest - 91,956 -
Increase in restricted cash (74,164) - -
Increase (decrease) in advances
from members (189,184) 483,087 (189,184)
--------------- --------------- ---------------
Total adjustments 589,092 267,975 496,973
--------------- --------------- ---------------
Net cash provided by (used
in) operating activities 1,590,876 (138,366) 1,568,274
--------------- --------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Investment in leasehold estate -
completed contract (10,277,687) - (10,277,687)
Investment in leasehold estate -
projects under development (929,224) - -
Purchase of equipment (126,763) (6,577) (95,111)
--------------- --------------- ---------------
Net cash used in investing
activities (11,333,674) (6,577) (10,372,798)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable-
leasehold estates 10,803,455 - 8,924,736
Proceeds from notes payable 51,643 - -
Repayment of notes payable - computer
equipment (3,974) - -
Contributions 900,000 68,034 900,000
Distributions (805,042) (5,800) (205,226)
Capital restructure - cash paid to
Adelie, L.L.C. (670,000) - (670,000)
--------------- --------------- ---------------
Net cash provided by
financing activities 10,276,082 62,234 8,949,510
--------------- --------------- ---------------
Net cash provided by (used
in) operating, investing, and
financing activities 533,284 (82,709) 144,986
CASH AND CASH EQUIVALENTS, beginning of
year 12,306 95,015 12,306
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of year,
net $ 545,590 $ 12,306 $ 157,292
--------------- --------------- ---------------
NONCASH TRANSACTIONS:
Contribution of Adelie, L.L.C.
advances to capital $ 590,000 $ - $ 590,000
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
AMERICAN CAMPUS LIFESTYLES COMPANIES, L.L.C. AND SUBSIDIARIES
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1996 AND 1995
--------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
American Campus Lifestyles Companies, L.L.C. ("the Company"), a Texas private
limited liability company, was formed on October 8, 1993. The Company is
committed to providing colleges, universities, and other educational institu-
tions with private sector assistance in financing, developing, constructing,
refurbishing, and managing on-campus and off-campus student housing.
The Company generates monthly management fees from two on-campus (one of
which was added during 1996) and two off-campus student housing projects
located in Texas, Oklahoma, and Florida. In addition, the Company generates
monthly development and construction management fees from two on-campus
student housing development projects located in Texas. Upon the scheduled
completion of these two projects in August 1997, the Company will generate
monthly management fees for the property management of these facilities.
The Company's principal owners as of December 31, 1996, are J.H. Domberger
Campus Ventures, L.L.C. ("Domberger"), Campus Management Associates, L.L.C.
("CMA"), and Landmark Campus Investments, L.L.C. ("Landmark"), an affiliate
of the Austin-based Landmark Companies.
At the end of 1995, CMA negotiated a redemption of the interest of Adelie,
L.L.C. ("Adelie"), a former owner, for the amount of $670,000 cash from the
Company to Adelie and the admission of Landmark as a member of the Company
together with a cash capital contribution from Landmark of $900,000. This
redemption, with the creation of Landmark's member interest, led to the
restructuring as of January 31, 1996, resulting in ownership of 25% by CMA,
37.5% by Domberger and 37.5% by Landmark.
Per the Second Amended and Restated Limited Liability Company Agreement (the
"Agreement"), dated January 31, 1996, net income of the Company is allocated
equally to Landmark and Domberger until the net income allocated to Landmark
and Domberger equals the sum of current and prior year distributions to
Landmark and Domberger. Additionally, the next $1,100,000 in net income is
allocated equally to Landmark and Domberger. Subsequent net income is then
allocated 25% to CMA, 37.5% to Domberger, and 37.5% to Landmark.
Net losses of the Company are allocated equally to Domberger and Landmark to
the extent that cumulative net losses of the Company do not exceed
$1,800,000. Net losses are then allocated equally to Domberger and Landmark
to the extent of previously allocated net income. Subsequent net losses are
allocated 25% to CMA, 37.5% to Domberger, and 37.5% to Landmark.
Net losses of the Company incurred prior to January 31, 1996, were allocated
under the First Amended and Restated Limited Liability Company Agreement
dated January 1, 1994. Such losses were allocated by the members' Shared
Ratios, as defined.
Excess cash flows, as defined by the Agreement, are payable equally to
Domberger and Landmark until such time as they have received $1,450,000 plus
interest at 5% per annum ("Preferred Return"), compounded annually, in
cumulative distributions. Subsequent excess cash flows will be paid 25% to
CMA, 37.5% to Domberger, and 37.5% to Landmark. As of December 31, 1996, the
cumulative Preferred Return for Domberger and Landmark was $60,119 each.
Distribution payments are computed and paid, if available, every quarter in
accordance with the allocation of excess cash flows. Distributions of
$805,042 and $5,800 were paid during the years ended December 31, 1996 and
1995. An additional $50,510 in distributions were declared in 1996 but not
yet paid at year-end.
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the accrual basis
of accounting in conformity with generally accepted accounting principles
("GAAP"). Therefore, revenue is recorded as earned and costs and expenses
are recorded as incurred.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly-liquid investments with a maturity of three months or less to be cash
equivalents.
As of December 31, 1996, the Company maintained its cash balance of $619,754
at two banks. Cash accounts at banks are insured by the FDIC up to $100,000.
RESTRICTED CASH
Restricted cash represents tenant security deposits included in cash and cash
equivalents and debt service and operating reserves held by Texas Commerce
Bank ("the Lender"), which is included in "Investment in leasehold estate -
completed" (see Note 3).
ACCOUNTS RECEIVABLE
Accounts receivable includes $877,536 of deferred student revenues. At the
inception of the school year, the Company records a receivable for the
respective academic year's total rent receivable with a credit to Deferred
Revenue. Income is then recognized over the course of the academic year from
the Deferred Revenue account.
FIXED ASSETS AND DEPRECIATION
Fixed assets are recorded at historical cost. Repairs and maintenance of
fixed assets are charged to operations, but major improvements are capital-
ized. The estimated useful lives of the assets are as follows:
Years
-----
Equipment 5-10
Depreciation is computed using the straight-line method for financial report-
ing purposes. Depreciation expense was $15,944 and $2,058 for the years
ended December 31, 1996 and 1995. Upon retirement, sale, or other
dispositions of the equipment, the cost and related accumulated depreciation
are removed from the related accounts and the resulting gains or losses are
included in operations. There were no gains or losses for the years ended
December 31, 1996 and 1995.
INVESTMENTS IN LEASEHOLD ESTATE
Investments in leasehold estate reflects the project costs incurred to date,
including development and construction fees, on the three student housing
development projects located in Texas. These investments in leasehold
estates are subject to ground leases (See Note 2). The investments are
reduced by an amount equal to the principal reduction of the notes payable-
leasehold estate, as payments are submitted to the Lender.
FEDERAL INCOME TAXES
No provision for income taxes has been recorded in the financial statements
as the owners are required to report their share of the Company's earnings in
their respective income tax returns. The Company's tax returns and the
amounts of the allocable income or loss are subject to examination by federal
and state taxing authorities. If such examinations result in changes to
income or loss, the tax liability of the members could be changed
accordingly.
2. INVESTMENTS IN LEASEHOLD ESTATE
The Company leases from the Texas A&M University System ("TAMUS") a tract of
land at Prairie View A&M University under a ground lease (the "Lease")
effective February 1, 1996, at a cost of $100 per year ($4,000) paid upon
inception of the Lease. The Company entered into this Lease for the purpose
of developing, constructing and maintaining a student housing project
("Prairie View Phase I" or the "Project"). Subsequent to the execution of
and in accordance with the provisions of the Lease, the Company obtained
financing (See Note 3) and constructed the Project for a total cost of
$10,277,687, including debt service and operating cash reserves. Under the
provisions of the Lease, all improvements to the land are owned fee simple by
TAMUS. The Lease expires on August 31, 2035. However, the Lease will
terminate upon repayment of all indebtedness related to the Project. The
Lease requires that all indebtedness be repaid prior to August 31, 2021.
Under the Lease, TAMUS has the option to purchase the leasehold estate at the
close of each calendar year. The purchase price is defined in the Lease as
the lesser of (1) the sum of the present cash value of the Company's
leasehold estate in Prairie View Phase I discounted at 9.5%, the Company's
leasehold estate in the equipment of Prairie View Phase I, and the amount
required to repay the debt secured by the Prairie View Phase I loan,
including principal, accrued interest, prepayment fees and any additional
obligations; or (2) the sum of the fair market value, as defined in the
Lease, of Prairie View Phase I and the equipment of Prairie View Phase I. In
no event shall the purchase price be less than the amount required to repay
the Prairie View Phase I loan.
In the event the Company were to receive a bona fide offer, acceptable to the
Company (the "Offer"), to purchase the Company's leasehold estate in Prairie
View Phase I, TAMUS has the right of first refusal to purchase the leasehold
estate under the terms of the Offer.
A development fee and a construction fee were earned by the Company for the
services it provided during construction of the Project. Additionally, the
Company manages the Project for a fee of 5% of gross receipts as defined in
the management agreement, plus 50% of net cash flow of the Project, as
defined in the Lease. No income with respect to the net cash flow has been
recognized in 1996 as the net cash flow calculation is based on year-end cash
flow which is defined by the management agreement as ending with the academic
year.
For the year ended December 31, 1996, the Company was paid a total of
$2,346,566 in development, construction and management fees.
The Company is involved in two additional projects, one each at Prairie View
A&M University ("Prairie View Phase II") and Texas A&M International
University ("Laredo"), under substantially the same terms as the original
ground lease.
3. DEVELOPMENT/CONSTRUCTION FEES
The Company receives management fees on the development and construction
("Development") of properties included in the "Investments in leasehold
estate" and on Development of properties managed in which the Company does
not hold a leasehold estate. The Development fees are paid via construction
loan proceeds by the projects during the construction and development phase
to development and construction companies affiliated with the Company.
4. NOTES PAYABLE - LEASEHOLD ESTATE
Notes payable - leasehold estate (collectively, "the Loans") reflects the
project costs incurred to date on the three student housing development
projects located in Texas. A construction loan ("the Prairie View Phase I
loan") of $10,277,687 was obtained from the Lender in March 1996 to finance
the construction of Prairie View Phase I. Upon maturity of the Prairie View
Phase I loan in February 1997, it will convert to a three-year mini-perm loan
with a balloon payment due and payable at the end of the three-year period.
Two additional construction credit facilities ("the Facilities") were
obtained from the Lender in December 1996 to finance the development and
construction of Prairie View Phase II and Laredo. The total credit available
under the Facilities is approximately $10,700,000 and $5,100,000 for Prairie
View Phase II and Laredo, respectively. No principal payments are due under
the Facilities until January 1998. Upon maturity of the Facilities in
January 1998, both will convert to three-year mini-perm loans with payments,
based on a 25 year amortization, of principal and interest due monthly. As
of December 31, 1996, the total borrowings outstanding under the Prairie View
Phase II and Laredo loans were $525,768.
The interest rate on the Loans is defined as LIBOR plus 250 basis points.
Interest is due monthly depending upon the rate and length of time offered by
the bank. Interest was capitalized for the Prairie View Phase I loan as
"Investment in leasehold estate - completed" and was 8.093% at December 31,
1996. Interest was capitalized for the Prairie View Phase II and Laredo
Facilities as the "Investments in leasehold estate - projects under develop-
ment" and was 8.125% at December 31, 1996. Capitalized interest on the Loans
for the year ended December 31, 1996 was $102,777.
The Company entered into an interest rate cap agreement ("the Cap") with the
Lender effective September 3, 1996, to hedge the floating rate cost of the
Prairie View Phase I loan. The Cap calls for a principal amount of
$10,000,000 from September 3, 1996, through September 30, 1996, and
$10,277,687 from October 1, 1996 through October 1, 1997, which is the
termination date. Under the agreement, the Company has the right to receive
payments based on the principal amount of the Cap to the extent that LIBOR
exceeds 5.5%. The Company paid a premium of $90,500 in connection with this
transaction, which is included in "Investment in leasehold estate -
completed" on the accompanying balance sheet.
Aggregate maturities of the Loans for five years subsequent to December 31,
1996, and thereafter are as follows:
Year Ending
December 31,
- ------------
1997 $ 117,270
1998 140,724
1999 140,724
2000 9,878,969
-------------
10,277,687
Prairie View Phase II 309,709
Laredo 216,059
-------------
Total Notes Payable - leasehold estate $ 10,803,455
=============
5. ADVANCES FROM MEMBERS
During 1994, Domberger and Adelie each advanced the Company funds to cover
operating expenses during the first year of operations, bearing interest at
the rate of 15% per annum. The Adelie advance became noninterest bearing
effective January 1, 1995. During the January 31, 1996 restructuring, the
Company negotiated the extinguishment of both advances. (See Note 1).
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires the Company to disclose the
estimated fair values of its financial instrument assets and liabilities.
The carrying amount of cash and cash equivalents approximate fair value
because of the short maturity of those instruments. The carrying amount of
the Company's notes payable - leasehold estate approximates fair value.
7. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company adopted the principles of
this statement in 1996. Its adoption did not have a material effect on the
carrying value of the Company's long-lived assets.
8. RELATED-PARTY TRANSACTIONS
The Company receives monthly management fees from the management,
development, and construction companies affiliated with the Company (see
Notes 1 and 3).
Report of Independent Auditors
Members of
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
We have audited the accompanying consolidated balance sheet of American
Campus Lifestyles Companies, L.L.C. and subsidiaries (the "Company") as of
December 31, 1997, and the related consolidated statements of income for the
year then ended, and for the periods from January 1, 1997 through May 31,1997
and June 1, 1997 through December 31, 1997 and the related consolidated
statements of members' equity and cash flows for the year ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company as
of December 31, 1997, and the results of their operations for the year then
ended and for the periods from January 1, 1997 through May 31, 1997 and June
1, 1997 through December 31, 1997 and their cash flows for the year ended
December 31, 1997 in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental statement of income
for the period October 17, 1997 through December 31, 1997 is presented for
purpose of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
New York, New York Ernst & Young LLP
February 23, 1998
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Consolidated Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,642,357
Deposits 161,549
Accounts receivable 2,115,355
Other assets 3,916
------------
Total current assets 3,923,177
Investments:
Investment in leasehold estate - PVAMU-I 11,867,752
Investment in leasehold estate - PVAMU-II 12,335,104
Investment in leasehold estate - PVAMU-III 332,749
Investment in leasehold estate - Laredo 5,879,673
Accumulated depreciation on leasehold estates (373,177)
------------
Total investments 30,042,101
Fixed assets:
Equipment 147,702
Accumulated depreciation (35,309)
------------
Total fixed assets 112,393
------------
Total assets $34,077,671
============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $606,450
Security deposits 161,549
Deferred rental income 1,662,948
Construction note payable - PVAMU-III 332,749
Note payable - related parties 522,500
Current portion of long-term debt 318,000
------------
Total current liabilities 3,604,196
Non-current liabilities:
Notes payable - PVAMU-I 10,022,421
Notes payable - PVAMU-II 10,560,806
Notes payable - Laredo 5,051,981
Note payable - other 29,279
------------
Total non-current liabilities 25,664,487
------------
Total liabilities 29,268,683
------------
Comments and contingencies -
Members' equity 4,808,988
------------
Total liabilities and members' equity $34,077,671
============
</TABLE>
See accompanying notes.
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD
PERIOD JUNE 1, JANUARY 1, 1997
YEAR ENDED DECEMBER 1997 THROUGH THROUGH
31, 1997 DECEMBER 31, 1997 MAY 31, 1997
----------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Development and construction fees $ 1,025,508 $ 564,075 $ 461,433
Prairie View Phase I and II revenue 3,093,983 2,346,418 747,565
Laredo revenue 183,107 183,107 -
Management fees 797,926 456,301 341,625
Other income 313,530 280,582 32,948
----------------------------------------------------------------
Total revenues 5,414,054 3,830,483 1,583,571
Expenses:
Personnel 1,234,123 859,703 374,420
Administrative 622,981 370,702 252,279
Marketing 51,990 32,126 19,864
Prairie View Phase I and II expense 942,645 647,858 294,787
Laredo expense 73,656 73,656 -
----------------------------------------------------------------
Operating expenses 2,925,395 1,984,045 941,350
Operating income 2,488,659 1,846,438 642,221
Non-operating expenses:
Interest (including leasehold
expense) 1,162,518 833,716 328,802
Depreciation 390,032 264,752 125,280
Ground lessor participation 70,000 70,000 -
Professional fees 377,663 254,063 123,600
----------------------------------------------------------------
Total non-operating expenses 2,000,213 1,422,531 577,682
----------------------------------------------------------------
Net income $ 488,446 $ 423,907 $ 64,539
================================================================
</TABLE>
See accompanying notes.
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Consolidated Statement of Changes in Members' Equity
<TABLE>
<CAPTION>
J.H.
RFG Domberger Landmark
Capital Campus Campus
Management Ventures, Investments, William
Partners, L.P. L.L.C. L.L.C. Bayless Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Members' equity,
December 31,
1996 $ - $154,226 $154,226 $ - $308,452
Adjustments due to
purchase price 4,012,090 - - - 4,012,090
Net income 371,644 26,546 53,092 37,164 488,446
---------------------------------------------------------------------------
MEMBERS' EQUITY,
DECEMBER 31,
1997 $4,383,734 $180,772 $207,318 $37,164 $4,808,988
===========================================================================
</TABLE>
See accompanying notes.
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Consolidated Statement of Cash Flows
For the Year ended December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES
Net income $ 488,446
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 390,032
Changes in operating assets and liabilities:
Deposits 1,267
Accounts receivable (961,409)
Restricted cash (87,385)
Other assets (1,868)
Accounts payable and accrued expenses (24,487)
Security deposits payable 130,475
Deferred rental income 785,412
Note payable - related party 522,500
Note payable - other (18,388)
--------------
Net cash provided by operating activities 1,224,595
--------------
INVESTING ACTIVITIES
Investment in leasehold estate - PVAMU-I (1,265,655)
Investment in leasehold estate - PVAMU-II (9,369,903)
Investment in leasehold estate - PVAMU-III (332,749)
Investment in leasehold estate - Laredo (4,298,711)
Purchase of equipment (10,562)
--------------
Net cash used in investing activities (15,277,580)
--------------
FINANCING ACTIVITIES
Repayment of current notes payable - leasehold estates (122,269)
Repayment of long term notes payable - leasehold estates (10,716,367)
Proceeds from construction note payable - PVAMU-III 332,749
Proceeds from notes payable - PVAMU-I 10,195,601
Proceeds from notes payable - PVAMU-II 10,360,057
Proceeds from notes payable - Laredo 5,099,981
--------------
Net cash provided by financing activities 15,149,752
--------------
Net increase in cash and cash equivalents 1,096,767
Cash and cash equivalents at beginning of period 545,590
--------------
Cash and cash equivalents at end of period $ 1,642,357
==============
</TABLE>
See accompanying notes
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
For the Year ended December 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
American Campus Lifestyles Companies, L.L.C., a Texas limited liability
company formed on October 8, 1993, and subsidiaries (the "Company"),
provides colleges, universities, and other educational institutions with
private sector assistance in financing, developing, constructing,
refurbishing, and managing on-campus and off-campus student housing.
The Company is a private, limited liability company whose principal owners
are RFG Capital Management Partners, L.P. ("RFG Capital"), Landmark Campus
Investments, L.L.C. ("Landmark"), William Bayless and J.H. Domberger Campus
Ventures, L.L.C. ("Domberger").
The Company currently generates monthly management fees from four on-campus
and two off-campus student housing projects located in Texas, Oklahoma, and
Florida. In addition, the Company generated monthly development and
construction management fees in 1997 from three on-campus student housing
development projects located in Texas, of which two were completed in August
1997 and the third began construction in December 1997.
On May 31, 1997, RFG Capital acquired an interest in American Campus
Lifestyles Companies, L.L.C. by purchasing certain common units, senior
preferred units and junior preferred units from the existing members for
$4,012,090. This transaction resulted in the following ownership of the
common units: 76.09% by RFG Capital, 10.87% by Landmark, 7.61% by William
Bayless and 5.43% by Domberger.
In accordance with the purchase agreement, net income and loss of the Company
is allocated to the partners based on their individual ownership of common
unit interest.
The capital structure of American Campus Lifestyles Companies, L.L.C.
consists of common units, senior preferred units and junior preferred units.
The senior preferred units and junior preferred units have a liquidation
preference of $1,000 per unit. RFG Capital holds 700 common units, 50 senior
preferred units and 2,900 junior preferred units, Domberger holds 50 common
units and 1,000 senior preferred units, Landmark holds 100 common units and
846.154 senior preferred units and William Bayless holds 70 common units and
42.308 senior preferred units. Annual distributions of cash flow, as defined
agreement, are payable first to the senior preferred holders in the amount of
$100 per unit per year and second to the junior preferred holders in the
amount of $100 per unit per year. The Company pays a 2% of debt guarantee
per annum to a related party of RFG Capital for the guarantee of $5.0 million
of the Company's Notes Payable - Leasehold Estate (See Note 3). Excess cash
flow is then distributed to the common unit holders based on their individual
ownership interest.
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the accrual basis
of accounting in conformity with generally accepted accounting principles
("GAAP"). Therefore, revenue is recorded as earned and costs and expenses
are recorded as incurred.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany balances and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly-liquid investments with a maturity of three months or less to be cash
equivalents.
As of December 31, 1997, the Company maintained its cash balance of
$1,642,357 at two banks. Cash accounts at banks are insured by the FDIC up
to $100,000.
RESTRICTED CASH
Restricted cash represents debt service and operating reserves held by Texas
Commerce Bank ("the Lender"), which is included in "Investment in leasehold
estate" (see Notes 2 and 3),and tenant security deposits.
FIXED ASSETS AND DEPRECIATION
Fixed assets are recorded at historical cost. Repairs and maintenance of
fixed assets are charged to operations, but major improvements are
capitalized. The estimated useful lives of the assets are as follows:
Years
----------
Equipment 5-10
Depreciation is computed using the straight-line method for financial
reporting purposes. Depreciation expense was $390,032 for year ended December
31, 1997. Upon retirement, sale, or other dispositions of the equipment, the
cost and related accumulated depreciation are removed from the related
accounts and the resulting gains or losses are included in operations.
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS AND DEPRECIATION (CONTINUED)
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
requires that long-lived assets and certain identifiable intangibles to be
held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 has not had an impact on the financial position of the
Company.
OPTIONS
The Company has issued to William Bayless options to purchase 20 common units
from the Company at an initial purchase price of $3,177.30 per unit. The
options vest in the following manner: 10 units vest May 1999, 5 units vest
May 2000 and the remaining 5 units vest May 2002.
The Company has issued to Thomas Trubiana options to purchase 80 common units
from the Company at an initial purchase price of $1,588.65 per unit. The
options vest in the following manner: 20 common units vest on January 1,
1998, 20 common units vest on July 1, 1998, 20 common units vest on July 1,
1999 and the remaining 20 common units vest on July 1, 2000.
The effect on proforma net income and earnings per unit of amortizing to
expense over the options vesting period the estimated fair value of the
options, is immaterial.
INVESTMENTS IN LEASEHOLD ESTATE
Investments in leasehold estate reflects the project costs incurred to date,
including development and construction fees, on the four student housing
development projects located in Texas. These investments in leasehold
estates are subject to ground leases (see note 2). The carrying amounts of
the investments include an amount capitalized (based on the estimated fair
value of the acquired assets, principally investments in leasehold estates)
for the capital restructure. The investments are amortized on a straight
line method over the life of the lease.
STUDENT DORMITORY HOUSING REVENUES
Upon execution of student dormitory contracts, the Company records a
receivable for the full value of the contract with an offsetting increase to
deferred revenue. Income is then recognized on a straight-line basis over
the life of the contract.
DEVELOPMENT/CONSTRUCTION FEES
The Company receives management fees on the development and construction
("Development Fees") of properties included in the "Investments in leasehold
estate" and on development of properties managed in which the Company does
not hold a leasehold estate. Development Fees are paid from construction loan
proceeds related to the projects during the construction and development
phase to development and construction companies affiliated with the Company.
Development Fees income is recognized monthly as costs are incurred.
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FEDERAL INCOME TAXES
No provision for income taxes has been recorded in the financial statements
as the owners are required to report their share of the Company's earnings in
their respective income tax returns.
2. INVESTMENTS IN LEASEHOLD ESTATE
The Company leases from the Texas A&M University System ("TAMUS") tracts of
land at both Prairie View A&M University and Texas A&M International
University under a ground lease (the "Lease") effective February 1, 1996, at
a cost of $100 per year ($4,000) paid upon inception of the Lease. The
Company entered into this Lease for the purpose of developing, constructing
and maintaining student housing projects (Prairie View Phase I, Prairie View
Phase II, and Texas A&M International - Laredo) or the ("Projects").
Subsequent to the execution of and in accordance with the provisions of the
Lease, the Company obtained financing (see Note 3) and constructed the
Projects for a total cost of $25,953,208, including debt service and
operating cash reserves. Under the provisions of the Lease, all improvements
to the land are owned by TAMUS. The Lease expires on August 31, 2035.
However, the lease will terminate upon repayment of all indebtedness related
to the Projects. The Lease requires that all indebtedness be repaid prior to
August 31, 2021. In December 1997 the Company began construction on the
fourth student housing project Prairie View Phase III. Prairie View Phase III
is subject to the same terms and conditions as Prairie View Phase I and II.
The Lease provides that in the event the Company were to receive a bona fide
offer, acceptable to the Company (the "Offer"), to purchase the Company's
leasehold estate in Prairie View Phase I, Prairie View Phase II, Prairie View
Phase III and Texas A&M International - Laredo, TAMUS has the right of first
refusal to purchase the leasehold estate under the terms of the Offer.
Additionally the Lease provides that TAMUS has the option to purchase the
leasehold estate at the close of each calendar year. The purchase price is
defined in the Lease as the lesser of (1) the sum of the present cash value
of the Company's leasehold estate in Prairie View Phase I, Prairie View Phase
II, Prairie View Phase III and Texas A&M International - Laredo, and the
amount required to repay the debt secured by the Prairie View Phase I,
Prairie View Phase II, Prairie View Phase III and Texas A&M International -
Laredo loans, including principal, accrued interest, prepayment fees and any
additional obligations; or (2) the sum of the fair market value, as defined
in the Lease of Prairie View Phase I, Prairie View Phase II, Prairie View
Phase III and Texas A&M International - Laredo and the equipment of Prairie
View Phase I, Prairie View Phase II, Prairie View Phase III and Texas A&M
International - Laredo.
A development fee and construction fee was earned by the Company for the
services it provided during construction of each project. Additionally, the
Company manages each project for a fee of 5% of gross receipts as defined in
the management agreement, and 50% of net cash flow of the Project, as defined
in the Lease.
For the year ended December 31, 1997, the Company was paid a total of
$1,823,434 in development, construction and management fees.
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
3. NOTES PAYABLE - LEASEHOLD ESTATE
Notes payable - Prairie View Phase I reflects the project costs incurred to
date on a student housing development project located in Texas. The
construction loan which was in place in 1996 converted to a three year mini-
perm in February 1997 with a balloon payment due and payable at the end of
the three-year period.
Notes payable - Prairie View Phase II reflects the project costs incurred to
date on a student housing development project located in Texas. A
construction loan of $10,615,308 was obtained from the Lender in December
1996 to finance the construction of Prairie View Phase II. In December 1997
the Prairie View Phase II construction loan was converted into a three year
mini-perm loan with payments, based on a 25 year amortization of principal
and interest, due monthly, with a balloon payment due and payable at the end
of the three-year period.
Note payable - Texas A&M International - Laredo reflects the project costs
incurred to date on a student housing development project located in Texas.
A construction loan of $5,037,236 was obtained in December 1996 to finance
the construction of Texas A&M International - Laredo. In December 1997 the
construction loan was converted into a three-year mini-perm loan with
payments, based on a 25 year amortization of principal and interest, due
monthly, with a balloon payment due and payable at the end of the three-year
period.
The interest rate on the Notes Payable is defined as LIBOR plus 250 basis
points. Each Note Payable is collateralized by a lien on the leasehold
estates of each respective Project. Prairie View Phase II and Texas A&M
International - Laredo have a floating interest rate which calls for LIBOR
plus 250 basis points in the first year, LIBOR plus 275 basis points in the
second year and LIBOR plus 300 basis points in the third year.
The Company entered into an interest rate cap agreement ("the Cap") effective
September 3, 1996, to hedge the floating rate cost of the Prairie View Phase
I loan. The Cap provided for a principal amount of $10,000,000 from
September 3, 1996, through September 30, 1996, and $10,277,687 from October
1, 1996 through October 1, 1997, which was the termination date. Under the
agreement, the Company had the right to receive payments based on the
principal amount of the Cap to the extent that LIBOR exceeds 5.5%.
Aggregate maturities of the Notes Payable for three years subsequent to
December 31, 1997 are as follows:
Year ending December 31,
1998 $ 318,000
1999 359,570
2000 25,275,638
------------
Total $25,953,208
============
4. CONSTRUCTION NOTE PAYABLE
Construction note payable - Prairie View Phase III reflects the project costs
incurred to date on a student housing development project located in Texas.
The construction loan currently bears interest at a rate of 8.5%, when
cumulative advances exceed $1,000,000 the interest rate will be set at LIBOR
plus 2.5%. The construction loan is convertible into a three year mini-perm
upon completion of the development.
American Campus Lifestyles Companies, L.L.C. and Subsidiaries
Notes to Consolidated Financial Statements
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires the Company to disclose the
estimated fair values of its financial instrument assets and liabilities.
The carrying amount of cash and cash equivalents approximate fair value
because of the short maturity of those instruments. The carrying amount of
the Company's notes payable - leasehold estate approximates fair value.
6. RELATED-PARTY TRANSACTIONS
At December 31, 1997 the Company has loans outstanding with affiliates as
follows, RFG Capital $469,400, Domberger $17,700, and Landmark $35,400.
These loans bear interest at 10% per annum and mature on December 1, 1998.
The Company receives monthly fees from the management, development, and
construction of affiliates of the Company (see Notes 1 and 3).
Supplemental Information
American Campus Lifestyle Companies, L.L.C. and Subsidiaries
Supplemental Consolidated Statement of Income (Note 1)
For the period from October 17, 1997 through December 31, 1997
Revenues:
Development and construction fees $ 55,679
Prairie View Phase I and II revenue 875,673
Laredo revenue 104,729
Management fees 215,372
Other income 233,201
------------
Total revenues 1,484,654
Expenses:
Personnel 333,393
Administrative 167,754
Marketing 12,193
Prairie View Phase I and II expense 301,959
Laredo expense 51,953
------------
Operating expenses 867,252
Operating income 617,402
Non-operating expenses:
Interest (including leasehold expense) 452,864
Depreciation 152,550
Ground lessor participation 41,522
Professional fees 57,820
------------
Total non-operating expenses 704,756
------------
Net income $ (87,354)
============
Report of Independent Auditors
To the Board of Members of
Veritech Ventures LLC
We have audited the accompanying consolidated balance sheets of Veritech
Ventures LLC (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of operations and members' equity and cash
flows for the year ended December 31, 1997 and for the period from July 5,
1996 (date of inception) to December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Veritech
Ventures LLC at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for the year ended December 31, 1997 and
for the period from July 5, 1996 (date of inception) to December 31, 1996 in
conformity with generally accepted accounting principles.
February 5, 1998, except for Ernst & Young LLP
Note 9, as to which the date
is February 20, 1998
Veritech Ventures LLC
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $121,830 $ -
Accounts receivable 8,779 11,994
Prepaid expenses and other current assets 49,019 -
----------------------------
Total current assets 179,628 11,994
Property and equipment, net 568,451 2,956
Deposits 154,729 -
Organization costs, net of accumulated
amortization
of $1,542 ($514 in 1996) 3,597 4,625
---------------------------
Total assets $906,405 $19,575
===========================
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $310,400 $5,256
Current portion of capital lease obligation 50,945 -
---------------------------
Total current liabilities 361,345 5,256
Deferred rent 40,175 -
Capital lease obligation 118,782 -
RSI loan 325,000 -
Commitments
Members' equity:
Members' capital 1,179,065 75,739
Accumulated deficit (1,117,962) (61,420)
------------------------------
Total liabilities and members' equity $ 906,405 $ 19,575
==============================
</TABLE>
See accompanying notes.
Veritech Ventures LLC
Consolidated Statements of Operations
<TABLE>
<CAPTION> PERIOD FROM
JULY 5, 1996
(DATE OF
YEAR ENDED INCEPTION)
DECEMBER TO DECEMBER
31, 1997 31, 1996
-------------------------------------------
<S> <C> <C>
Consulting revenue $ 335,126 $ 20,109
Telecommunications and Internet Services 12,682 -
-------------------------------------------
Total revenue 347,808 20,109
Costs of revenue 127,214 -
General and administrative 689,577 76,504
Sales and marketing 344,541 1,034
Operations and development 155,713 -
Depreciation and amortization 23,345 991
--------------------------------------------
1,340,390 78,529
--------------------------------------------
Loss from operations (992,582) (58,420)
Other income (expenses):
Interest expense (2,833) -
Interest income 843 -
Preferred return (61,970) (3,000)
--------------------------------------------
Net loss $(1,056,542) $(61,420)
============================================
</TABLE>
See accompanying notes.
Veritech Ventures LLC
Consolidated Statements of Members' Equity
Year ended December 31, 1997 and period
from July 5, 1996 (date of inception) to December 31, 1996
<TABLE>
<CAPTION>
MANAGING NON-MANAGING ACCUMULATED
MEMBER MEMBERS DEFICIT TOTAL
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital contributed $72,739 $ - $ - $ 72,739
Preferred return 3,000 - - 3,000
Net loss for the period
July 5, 1997 (date of
inception) to December
31, 1996 - - (61,420) (61,420)
---------------------------------------------------------------------
Balance as of December 31, 1996 75,739 - (61,420) 14,319
Capital contributed 774,760 266,596 - 1,041,356
Preferred return 60,945 1,025 - 61,970
Net loss for the year ended
December 31, 1997 - - (1,056,542) (1,056,542)
----------------------------------------------------------------------
Balance as of December 31, 1997 $911,444 $267,621 $(1,117,962) $ 61,103
======================================================================
</TABLE>
See accompanying notes.
Veritech Ventures LLC
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION> PERIOD FROM
JULY 5, 1996
(DATE OF INCEPTION)
YEAR ENDED DECEMBER TO DECEMBER
31, 1997 31, 1996
--------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,056,542) $ (61,420)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 23,345 991
Deferred rent 40,175 -
Preferred return 61,970 3,000
Changes in operating assets and liabilities:
Accounts receivable 3,215 (11,994)
Prepaid expenses (49,019) -
Deposits (154,729) -
Accounts payable and accrued expenses 204,840 5,256
--------------------------------------------
Net cash used in operating activities (890,745) (64,167)
CASH USED IN INVESTING ACTIVITIES
Organization costs - (5,139)
Acquisition of property and equipment (349,850) (3,433)
--------------------------------------------
Net cash used in investing activities (349,850) (8,572)
CASH FROM FINANCING ACTIVITIES
Payment of capital lease obligation (3,931) -
RSI loan 325,000 -
Members' contributions 1,041,356 72,739
-------------------------------------------
Net cash provided by financing activities 1,362,425 72,739
-------------------------------------------
Increase in cash 121,830 -
Cash at beginning of period - -
-------------------------------------------
Cash at end of period $ 121,830 $ -
===========================================
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND
NONCASH INVESTING AND
FINANCING ACTIVITIES
Included in property and equipment at December 31, 1997 is $173,658 of
equipment acquired under a capital lease and $64,303 of equipment included in
accounts payable and accrued expenses.
See accompanying notes.
VERITECH VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Veritech Ventures, LLC (the "Company") was formed on July 5, 1996, as a New
York Limited Liability Company, pursuant to an operating agreement (the
"Members' Agreement") which will terminate on July 5, 2016 unless terminated
earlier by certain events, as defined, in such Members' Agreement.
The Company has been organized for the purpose of developing and implementing
concepts related to the integration of modern technology applications within
commercial and residential real estate operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
EQUIPMENT
Equipment is recorded at cost and is depreciated on the straight-line method
over its estimated useful life.
INCOME TAXES
The Company is taxed as a limited liability Company and, accordingly, no
provision for federal, state or local income taxes has been made in the
accompanying financial statements.
ORGANIZATION COSTS
Organization costs are being amortized on a straight-line basis over five
years.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with
a maturity of three months or less to be cash equivalents. At December 31,
1997, the Company's cash is maintained at one financial institution.
VERITECH VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION
For the year ended December 31, 1997, approximately 89% of revenue was
derived from one customer.
ADVERTISING COSTS
The Company's policy is to expense advertising costs as incurred. For the
year ended December 31, 1997, the Company incurred approximately $19,000 of
advertising expenses which are included in sales and marketing expenses.
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.
2. MEMBERS' EQUITY
The Members' Agreement provides that the Company shall have two classes of
membership interest, managing and non-managing, with both classes voting
equally. The Agreement further provides governance for the maintenance of
individual member capital accounts, the allocation of profit and loss to such
capital accounts, the accretion of a preferred return to certain outstanding
member capital balances, and the return of such capital from available cash
flow.
3. RSI LOAN
In December 1997 and January 1998 the Company received loans from Reckson
Service Industries, Inc. ("RSI") in the amounts of $325,000 and $300,000,
respectively. The loans bear interest at 12% per annum and were contributed
to the joint venture formed by the Company and RSI in February 1998 (See Note
9).
VERITECH VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31
1997 1996
-----------------------------------
Wiring $ 138,486 $ -
Computer hardware, software
and equipment 378,319 3,433
Leasehold improvement 69,330 -
Furniture and fixtures 5,109 -
-----------------------------------
591,244 3,433
Less accumulated depreciation 22,794 477
------------------------------------
$568,450 $2,956
====================================
5. CAPITAL LEASE
In December 1997, the Company executed a long-term lease agreement for
equipment. The lease bears interest at 13.4% per annum and provides the
Company with a bargain purchase option. For financial reporting purposes, the
lease has been classified as a capital lease; accordingly, an asset of
$173,658 (included in property and equipment at December 31, 1997) has been
recorded.
The future minimum lease payments under the capital lease at December 31,
1997 is as follows:
1998 $70,632
1999 70,617
2000 64,732
-----------
Total minimum lease payment 205,981
Amounts representing interest (36,253)
Present value of net
-----------
Minimum lease payments (including
current portion of $50,945) $169,727
===========
VERITECH VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS
LEASES
The Company has lease commitments for office rentals which expire through
July 30, 2002. These operating leases provide for basic annual rents plus
escalation charges. Minimum commitments through the life of such lease are
approximately as follows:
1998 $102,000
1999 105,000
2000 115,000
2001 119,000
2002 71,000
---------
Total $512,000
=========
In accordance with the provisions of Statement of Financial Accounting
Standards No. 13, Accounting for Leases, the aggregate of the total minimum
lease payments is amortized on the straight-line method over the term of the
lease. The difference between the straight-line rent expense and the amounts
paid in accordance with the terms of the lease has been included in "Deferred
Rent". Rent expense was approximately $63,800 and $0 for the year ended
December 31, 1997 and for the period from July 5, 1996 (date of inception) to
December 31, 1996, respectively.
EMPLOYMENT AGREEMENTS
On January 6, 1997, the Company entered into a three-year employment
agreement which obligates the Company to a minimum of $100,000 per year in
guaranteed payments.
7. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, the Company rented temporary office
space from its managing member whereby the Company paid approximately $5,250
to such managing member.
During the year ended December 31, 1997, the Company purchased $56,000 of
construction services from a related party of which $26,000 is included in
accounts payable at December 31, 1997.
8. ORGANIZATION
On February 7, 1997, the Company formed two wholly-owned subsidiaries, OnSite
Access, LLC and OnSite Access Local, LLC for purposes of implementing
distinct elements of its business intentions (i.e., providing Internet access
and local phone service, respectively).
VERITECH VENTURES LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SUBSEQUENT EVENT
On February 20, 1998, the Company entered into an agreement (the "RSI
Agreement") with RSI and other third parties whereby the parties agreed to
form a new company, OnSite Ventures, LLC ("OSV"). Pursuant to the RSI
Agreement, the Company has agreed to contribute to OSV all of its assets and
liabilities in consideration for approximately a 26% interest in OSV and RSI
has agreed to contribute $6.5 million in consideration for its approximate
59% interest in OSV.
=============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION MADE PURSUANT HERETO SHALL,
UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
TABLE OF CONTENTS
Summary
Risk Factors
The Distribution
Dividend Policy
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business
Management
Certain Transactions
Description of RSI Capital
Stock
Certain Antitakeover Provisions
Experts
Legal Matters
Index to Financial Statements
(UNTIL ( ), 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK DISTRIBUTED PURSUANT
HERETO, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.)
============================================================================
RECKSON SERVICE INDUSTRIES, INC.
COMMON STOCK
-----------------------------------
PROSPECTUS
-----------------------------------
, 1998
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the Common Stock registered
hereby, all of which expenses, except for the SEC registration fee, are
estimates:
DESCRIPTION AMOUNT
------------------ -------
SEC Registration Fee . . . . . . . . . . . . . . . $
Listing Fee . . . . . . . . . . . . . . . . . . . . $ *
Transfer Agent's and Registrar's Fee . . $ *
Printing and Engraving Fees . . . . . . . . . . . $ *
Legal Fees and Expenses . . . . . . . . . . . . . $ *
Accounting Fees and Expenses . . . . .. . . . . . $ *
Miscellaneous . . . . . . . . . . . . . . . . . . . $ *
Total . . . . . . . . . . . . . . . . $ *
==========
- -------------------
* To be furnished by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law (the "Delaware Law") provides that a
corporation may limit the liability of each director to the corporation of
its stockholders for monetary damages except for liability (i) for any breach
of the director's duty of loyalty to the corporation or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) in respect of certain
unlawful dividend payments or stock redemptions or repurchases, and (iv) for
any transaction from which the director derives an improper personal benefit.
The Certificate of Incorporation and Bylaws provide for the elimination and
limitation of the personal liability of directors of the Company for monetary
damages to the fullest extent permitted by the Delaware Law. In addition,
the Certificate of Incorporation and Bylaws provide that if the Delaware Law
is amended to authorize the further elimination or limitation of the
liability of a director, then the liability of the directors shall be
eliminated or limited to the fullest extent permitted by the Delaware Law, as
so amended. The effect of this provision is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits on
behalf of the Company) to recover monetary damages against a director for
breach of the fiduciary duty of care as a director (including breaches
resulting from negligent or grossly negligent behavior) except in the
situations described in clauses (i) through (iv) above. The provision does
not limit or eliminate the rights of the Company or any stockholder to seek
non-monetary relief such as an injunction or rescission in the event of a
breach of a director's duty of care. In addition, the Bylaws provide that
the Company shall, to the full extent permitted by the Delaware Law, as
amended from time to time, indemnify and advance expenses to each of its
currently acting and former directors, officers, employees and agents.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Reckson Operating Partnership, L.P. has acquired 95% of the Registrant's
outstanding equity interests in the form of non-voting common stock for
$4,256,324. Certain Reckson officers have acquired the remaining 5% of the
Registrant's outstanding equity interests in the form of voting common stock
for $224,017. The foregoing issuances of unregistered securities are claimed
to be exempt from the registration provisions of the Securities Act of 1933
pursuant to Section 4(2) of the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
3.1 -- Certificate of Incorporation*
3.2 -- Restated Certificate of Incorporation*
3.3 -- Bylaws*
4.1 -- Specimen stock certificate*
4.2 -- Form of Preferred Stock Purchase Preferred Rights
Plan*
5.1 -- Opinion of Brown & Wood LLP regarding the validity
of the securities being registered*
8.1 -- Opinion of Brown & Wood LLP regarding certain tax
matters*
10.1 -- Form of Intercompany Agreement between Reckson
Operating Partnership, L.P. and Reckson Services
Industries Inc.*
10.2 -- Form of Credit Agreement between Reckson Operating
Partnership, L.P. and Reckson Service Industries,
Inc. together with related Line of Credit Note*
10.3 -- Form of Limited Liability Company Agreement of
OnSite Ventures L.L.C.*
10.4 -- Standby Purchase Agreement*
10.5 -- Limited Liability Company Agreement of RSVP Holdings,
LLC*
10.6 -- Operating Agreement of Reckson Strategic Venture
Partners, LLC*
10.7 -- Form of Registration Rights Agreement between the
Company and holders of common stock prior to the
Distribution*
10.8 -- Employment Agreement of Steven H. Shepsman*
10.9 -- Employment Agreement of Seth V. Lipsay*
21.1 -- List of Subsidiaries of Reckson Service Industries,
Inc.*
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Arthur Andersen LLP
23.4 -- Consent of Brown & Wood LLP (included as part of
exhibit 5.1)*
24.1 -- Power of Attorney**
- ------------
*To be filed by amendment.
**Previously filed.
(b) Financial Statement Schedules.
Dobie Center -
Schedule III Real Estate Investments, Accumulated Depreciation and
Amortization
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer of controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Melville, New York on
April 2, 1998.
RECKSON SERVICE INDUSTRIES, INC.
By: /s/ Scott H. Rechler
---------------------------------
Scott H. Rechler
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement and Power of Attorney have been signed by the
following persons in the capacities and on the dates indicated.
Donald Rechler* Director and Chief April 2, 1998
---------------- Executive Officer
Donald Rechler
/s/ Scott H. Rechler Director, President April 2, 1998
---------------------
Scott H. Rechler and Chief Operating
Officer (Principal
Executive Officer)
Michael Maturo* Executive Vice April 2, 1998
--------------- President and Chief
Michael Maturo Financial Officer
(Principal Financial
and Accounting
Officer)
Roger Rechler* Director April 2, 1998
---------------
Roger Rechler
*By: /s/ Scott H. Rechler
---------------------
Scott H. Rechler
Attorney-in-Fact
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------ -----------
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of Arthur Andersen LLP
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our reports dated March 10, 1998, with respect to the financial
statements of Reckson Service Industries Inc., March 10, 1998, with respect
to RO Partners Management LLC, February 5, 1998, except for Note 9 as to
which the date is February 20, 1998, with respect to Veritech Ventures LLC,
February 23, 1998, with respect to American Campus Lifestyles Companies,
L.L.C. and February 23, 1998, with respect to Dobie Center all of which are
included in the Registration Statement (Form S-1) and related Prospectus of
Reckson Service Industries, Inc. for the registration of $25,135,717 of its
common stock.
New York, New York /s/ Ernst & Young LLP
April 2, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 4, 1997, on the financial statements of Dobie Center (and to all
references to our Firm), included in or made part of this Registration
Statement on Amendment No. 1 to Form S-1.
Dallas, Texas /s/ Arthur Andersen LLP
March 27, 1998
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 28, 1997, on the financial statements of American Campus
Lifestyles Companies, L.L.C. (and to all references to our Firm), included in
or made part of this Registration Statement on Amendment No. 1 to Form S-1.
Dallas, Texas /s/ Arthur Andersen LLP
March 27, 1998
