(SM)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 3,905,855 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.
Immediately after the distribution referred to above, RSI will grant at
no cost to its stockholders (collectively, the "Holders") non-transferable
rights (collectively, the "Subscription Rights") to purchase up to an
aggregate of 20,557,130 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 $1.03
per share (the "Exercise Price") and, at the election of such Holder, four
additional shares (but not less than four additional shares) at a purchase
price of $1.03 per share. Holders 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 June 29, 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 20 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
June 11, 1998. The distribution of RSI common stock will be made on the basis
of one share of RSI common stock for (i) every 12.5 units of limited partner
interest in Reckson Operating Partnership held by the limited partners on May
26, 1998 (the "Record Date") and (ii) every 12.5 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 $1.03 per
share.
(text continued on next page)
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.
The date of this Prospectus is June 5, 1998.
(continued from cover)
RSI Standby LLC (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 are the subject of Subscription Rights in the Rights Offering but
are 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 Expiration Date, 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.
TABLE OF CONTENTS
AVAILABLE INFORMATION........................................................ 5
SUMMARY...................................................................... 6
SUMMARY CONDENSED PRO FORMA FINANCIAL INFORMATION............................ 19
RISK FACTORS................................................................. 20
LACK OF OPERATING HISTORY................................................. 20
LACK OF MANAGEMENT EXPERIENCE............................................. 20
NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH............................... 20
UNCERTAINTIES RELATING TO GROWTH BY ACQUISITIONS, INCLUDING
LACK OF OPERATING HISTORY, COMPETITION AND POSSIBLE
DILUTION TO EARNINGS................................................... 21
RESTRICTIONS ON BUSINESS AND FUTURE OPPORTUNITIES......................... 21
DEPENDENCE UPON RECKSON AND RECKSON OPERATING PARTNERSHIP................. 21
POTENTIAL GEOGRAPHIC CONCENTRATION........................................ 21
RELIANCE ON KEY PERSONNEL; ALLOCATION OF MANAGEMENT'S TIME................ 22
LIMITED FINANCIAL RESOURCES; OBLIGATIONS UNDER FINANCING
ARRANGEMENTS; LIMITED FUTURE FUNDING COMMITMENTS....................... 22
CONFLICTS OF INTEREST..................................................... 22
RELATED PARTY TRANSACTIONS................................................ 24
NO PRIOR SPONSORSHIP OF VENTURE CAPITAL VEHICLE; INVESTMENTS
IN COMPANIES IN EARLY STAGE OF DEVELOPMENT OR WITH
HISTORICAL OPERATING LOSSES............................................ 24
OWNERSHIP THROUGH JOINT VENTURES, INCLUDING LIMITS ON ABILITY
TO CONTROL AND INABILITY OF JOINT VENTURER TO PERFORM.................. 25
STUDENT HOUSING SECTOR UNDERGOING RAPID CHANGE; DEPENDENCE
OF PROJECTS ON WELL-BEING OF RELATED SCHOOLS; COMPETITION.............. 25
ABSENCE OF A PUBLIC MARKET FOR RSI COMMON STOCK; VOLATILE
TRADING PRICES......................................................... 25
ABSENCE OF DIVIDENDS ON RSI COMMON STOCK FOLLOWING THE DISTRIBUTION....... 26
RISKS OF LOW-PRICED STOCK................................................. 26
REAL ESTATE INVESTMENT RISKS.............................................. 27
POTENTIAL ENVIRONMENTAL LIABILITY RELATED TO REAL ESTATE.................. 28
CERTAIN ANTITAKEOVER PROVISIONS........................................... 28
FEDERAL INCOME TAX RISKS.................................................. 29
RISK OF DEFAULT UNDER STANDBY COMMITMENT.................................. 30
RISK OF DILUTION IN THE RIGHTS OFFERING; ACQUISITION OF STOCK
UNDER STANDBY COMMITMENT............................................... 30
THE DISTRIBUTION............................................................. 30
BACKGROUND OF, AND REASONS FOR, THE DISTRIBUTION.......................... 30
MANNER OF EFFECTING THE DISTRIBUTION...................................... 31
FEDERAL INCOME TAX CONSEQUENCES........................................... 31
LISTING AND TRADING OF RSI COMMON STOCK................................... 36
SHARES AVAILABLE FOR FUTURE SALE.......................................... 36
THE RIGHTS OFFERING.......................................................... 37
PURPOSE................................................................... 37
EXERCISE PRIVILEGE........................................................ 37
NO FRACTIONAL RIGHTS...................................................... 37
EXPIRATION DATE........................................................... 37
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS................................ 38
METHOD OF EXERCISING SUBSCRIPTION RIGHTS.................................. 38
STANDBY AGREEMENT......................................................... 39
FEDERAL INCOME TAX CONSEQUENCES........................................... 39
USE OF PROCEEDS........................................................... 40
DIVIDEND POLICY.............................................................. 40
SELECTED FINANCIAL DATA...................................................... 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................... 42
RESULTS OF OPERATIONS..................................................... 42
LIQUIDITY AND CAPITAL RESOURCES........................................... 43
IMPACT OF YEAR 2000....................................................... 44
PRO FORMA CAPITAL RESOURCES............................................... 45
PRO FORMA RESULTS OF OPERATIONS........................................... 45
BUSINESS..................................................................... 46
OVERVIEW.................................................................. 46
INITIAL ASSETS OF RSI..................................................... 48
RSI RECENT DEVELOPMENTS................................................... 51
RSVP RECENT DEVELOPMENTS.................................................. 53
FUNDING SOURCES FOR RSI................................................... 55
CHANGES IN INTEREST RATES................................................. 57
THE INTERCOMPANY AGREEMENT................................................ 57
PROPERTY.................................................................. 58
EMPLOYEES................................................................. 58
LEGAL PROCEEDINGS......................................................... 58
MANAGEMENT................................................................... 58
DIRECTORS, DIRECTOR NOMINEE AND EXECUTIVE OFFICERS OF RSI................. 58
COMMITTEES OF THE BOARD OF DIRECTORS...................................... 61
COMPENSATION OF DIRECTORS................................................. 61
ANNUAL MEETING............................................................ 61
EMPLOYMENT AGREEMENTS..................................................... 61
REGISTRATION RIGHTS....................................................... 61
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AFTER THE DISTRIBUTION................................................. 61
BENEFICIAL OWNERSHIP OF RSI COMMON STOCK..................................... 62
EXECUTIVE COMPENSATION.................................................... 63
RSI STOCK OPTION PLAN..................................................... 64
CONFLICTS OF INTEREST..................................................... 66
CERTAIN TRANSACTIONS......................................................... 66
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS............ 66
ACQUISITION OF ASSETS..................................................... 67
FORMATION AND EQUITY CAPITALIZATION OF RSI; OWNERSHIP OF
RSI COMMON STOCK....................................................... 67
THE INTERCOMPANY AGREEMENT................................................ 67
STANDBY AGREEMENT......................................................... 67
DESCRIPTION OF RSI CAPITAL STOCK............................................. 68
AUTHORIZED CAPITAL STOCK.................................................. 68
COMMON STOCK.............................................................. 68
PREFERRED STOCK........................................................... 68
SERIES A JUNIOR PREFERRED STOCK........................................... 69
RESTRICTION ON OWNERSHIP OF RSI CAPITAL STOCK............................. 70
EXCESS STOCK.............................................................. 71
RESTRICTIONS ON OWNERSHIP................................................. 71
CERTAIN ANTITAKEOVER PROVISIONS.............................................. 73
STAGGERED BOARD OF DIRECTORS.............................................. 73
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES........................... 73
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS................ 73
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND
STOCKHOLDER PROPOSALS.................................................. 74
RELEVANT FACTORS TO BE CONSIDERED BY THE RSI BOARD........................ 74
AMENDMENT................................................................. 75
PREFERRED RIGHTS PLAN..................................................... 75
DELAWARE BUSINESS COMBINATION STATUTE..................................... 77
CONTROL SHARE ACQUISITIONS................................................ 78
LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION...................... 79
EXPERTS...................................................................... 80
LEGAL MATTERS................................................................ 80
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 matters set forth under "Risk Factors." Unless the
context requires otherwise, references to "Reckson" herein include 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 3,905,855 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 12.5 shares of Reckson common stock
held on May 26, 1998 and (ii) limited
partners of Reckson Operating Partnership
for every 12.5 units of limited partnership
interest in Reckson Operating Partnership
held on May 26, 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 $1.03 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. Currently, the Reckson
Customer Base retains third parties to
provide many services for their day-to-day
operations. Of these services, RSI may seek
to offer the Reckson Customer Base
telecommunications, document storage,
document reproduction and logistics
services (i.e., inventory services,
messenger services and delivery services),
as well as with other services that RSI
determines may be utilized by the Reckson
Customer Base.
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. The opportunities that the Company may
determine to pursue include
telecommunications, document storage,
document reproduction and logistics
services. 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 will 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 subordinated debt of 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 $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 (recently re-
named American Campus Communities, 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." RSI and RSVP are currently
negotiating to acquire additional assets as
describe below under "Business-RSI Recent
Developments" and "-RSVP Recent
Development."
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.
Reckson Operating Partnership will have the
option of participating in RSVP-controlled
joint venture REIT-Qualified Investments.
It is currently anticipated that in most
cases REIT-Qualified Investments made by
RSVP will be made through joint ventures in
which Reckson Operating Partnership
provides one-third of the equity portion of
the investment and the PaineWebber Equity
Facility provides two-thirds of the equity.
It is currently anticipated that in such
circumstances RSI will not be required to
make any capital contributions. RSI will
not be entitled to share in any profits in
respect of Reckson Operating Partnership's
investment in such joint ventures.
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 will 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
has established a management advisory
committee 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 April
27, 1998, RSI's executive officers and the
members of the management advisory committee
beneficially owned approximately 9.77% 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
approximately 12.56% of RSI.
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 of RSI in the
form of non-voting common stock. Lightpost
LLC owns the remaining 5% of the outstanding
capital stock of RSI in the form of common
stock. Donald J. Rechler, Scott H. Rechler,
Michael Maturo, Roger Rechler, Mitchell D.
Rechler and Gregg M. Rechler and trusts
controlled by certain of such executive
officers own 70% of the member interests of
Lightpost LLC and the other 30% of the member
interests is owned by members of Reckson
management who are not executive officers or
directors of Reckson and a Rechler family
member who is not a member of Reckson
management. The shares of capital stock owned
by Reckson Operating Partnership and
Lightpost LLC were issued by RSI on the same
dates and at the same per share price of
$1.10. 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 331/3% interest in
a joint venture that owns 76.09% of American
Campus Lifestyles Companies, LLC, a 331/3%
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, or, in the
Office Suites Company's case, possible
participation, in such investments with Mr.
Halpern has been the subject of arm's-length
negotiations. See "Certain Transactions."
In addition, RSI Standby LLC, an entity
owned by Donald J. Rechler, Scott H.
Rechler, Michael Maturo, Roger Rechler,
Mitchell D. Rechler, Gregg M. Rechler,
certain non-executive officers of RSI and
Reckson and certain trusts controlled by
executive officers of Reckson, has entered
into the Standby Agreement relating to the
Rights Offering as described below under
"Rights Offering."
Organization Chart The following chart indicates the
organizational structure of the Company.
---------------------------------
|Reckson Service Industries, Inc. |
| (the "Company" or "RSI") |
|---------------------------------|
| |
| |
| |
--------------------------------- ----------------------------------------
| RSI-OSA Holding Inc. | | RSI Fund Management LLC |
| 100% owned by the Company | | 100% owned by RSI |
| | | |
--------------------------------- ----------------------------------------
| |
| |
--------------------------------- ----------------------------------------
| On-Site Ventures LLC | | RSVP Holding LLC |
| Current investment consists of | | 100% owned by RSI Fund Management LLC |
| commitment on loan $6.5 million| | which also acts as a managing member. |
| to On-Site in the form of | | Managing directors have a "carried |
| subordinated debt convertible | | interest" in profits through New World|
| into a 58.69% interest On-Site,| | Realty, LLC which also acts as a |
| of which $2.125 million has | | managing member. |
| been funded. | ----------------------------------------
--------------------------------- |
|
|
------------------------------------------
| Reckson Strategic Venture Partners, LLC |
| ("RSVP") 100% of common ownership |
| interest owned by RSVP Holdings LLC |
| which also acts as a managing member. |
| 100% of preferred equity ownership |
| interest owned by PWRES and a fund|
| jointly sponsored by financier George|
| Soros and PWRES. |
------------------------------------------
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. Brown & Wood
LLP has rendered its opinion that the
foregoing discussion, together with the
discussion of federal income tax
consequences discussed hereinafter, fairly
summarizes the federal income tax
considerations likely to be material to a
recipient of RSI common stock in the
Distribution. A copy of the opinion is
filed as an exhibit to the Registration
Statement.
Preferred Stock Purchase
Rights Plan of RSI RSI will adopt a Preferred Stock Purchase
Rights Plan (the "Preferred Rights Plan")
prior to the Distribution after
consideration by the directors of the RSI
Board of their fiduciary duties and
applicable law. As a result, shares of RSI
common stock issued in the Distribution and
the Rights Offering will also initially
represent 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, under certain circumstances, 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 Acquisitions"),
(viii) subject to certain exceptions, 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 a limitation on the
ownership by any person of RSI capital
stock to 9.9% of the aggregate value of all
classes of RSI capital 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 and will 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 May 26, 1998.
Distribution Effective Date June 11, 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
Expiration Date, 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
(estimated to be $1.5 million) and
short-term losses of the Company, (ii)
providing RSI sufficient initial equity
capital in order to pursue its business
objectives and (iii) providing capital
towards meeting minimum capital
requirements to commence trading in the
future on an organized trading system.
Grant of Subscription
Rights Immediately after the Distribution of RSI
common stock, RSI will grant to its
stockholders (collectively, "Holders") one
Subscription Right for each share of RSI
common stock. Each Subscription Right will
entitle the Holder to purchase one share of
RSI common stock at a purchase price of
$1.03 per share (the "Exercise Price") and,
at the election of such Holder, four
additional shares (but not less than four
additional shares) at a purchase price of
$1.03 per share. Holders 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
20,557,130 shares of RSI common stock.
Expiration Date June 29, 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 are the
subject of Subscription Rights in the Rights
Offering but are not subscribed for by the
Holders thereof (the "Standby Commitment
Shares") on the Expiration Date at the
Exercise Price.
Rights Agent
American Stock Transfer & Trust Company will
be the Rights Agent of RSI in the Rights
Offering.
Number of shares of RSI
common stock to be
outstanding after
the Rights Offering 24,668,556 shares
RISK FACTORS
Reckson stockholders and Limited Partners of Reckson Operating
Partnership should consider certain matters 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 (including RSVP), 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 331/3% 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 331/3% interest in a joint
venture that owns a 70% interest in the Dobie Center, (iii) convertible loans
to OnSite Ventures L.L.C. ("OnSite") and (iv) a 9.9% equity interest in
Reckson Executive Centers LLC (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 $ 397,922 $ 245,593
Equity in earnings (loss) of ACLC 123,886 (22,156)
Interest income 162,565 30,383
Total revenues 675,245 253,820
Interest expense 331,222 24,380
Corporate operating expenses 579,113 479,113
Net (loss) (243,304) (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 1,125,000 325,000
Organization and pre-acquisition costs 681,694 681,694
Total assets 8,519,695 7,519,695
Loans payable to Affiliates 4,177,857 3,177,857
Total liabilities 4,297,241 3,297,241
Shareholders' equity 4,222,454 4,222,454
---------------
(1) The above historical information is presented from the date of
inception of RSI, July 15, 1997.
</TABLE>
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, has sustained operating losses since its
inception and is expected to sustain operating losses in the near future. 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 could, 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, it is anticipated
that the RSI Board will include only two members who are 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. However, RSVP Holdings LLC, the
entity through which RSI holds an interest in RSVP, will continue to be entitled
to the carried interest component of its interest in RSVP in respect of the
portion of such investment funded by the PaineWebber Equity Facility.
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). A portion of the income
generated by certain RSVP investment opportunities may satisfy Federal tax law
requirements applicable to REITs ("Qualified Income"), while a portion of the
income of the same investments may not satisfy such requirements. In these
circumstances, the investments may be structured so that the portion of the
investments generating Qualified Income may be pursued through joint ventures
between RSVP and Reckson Operating Partnership and the other portion of such
investments would be pursued directly by RSVP. RSVP and the RSVP-Reckson
Operating Partnership joint venture may have conflicts of interest in the
structuring, valuation, management and disposition of such investments.
Finally, in respect of the Rights Offering, RSI Standby LLC, an entity
owned by Donald J. Rechler, Scott H. Rechler, Michael Maturo, Roger Rechler,
Mitchell D. Rechler, Gregg M. Rechler, certain non-executive officers of RSI and
Reckson and certain trusts controlled by executive officers of Reckson, has
agreed to purchase, and RSI has agreed to sell, any and all shares of RSI common
stock that are the subject of Subscription Rights in the Rights Offering but are
not subscribed for by the Holders thereof. 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 331/3% interest in a joint venture that owns a 70% interest in the
Dobie Center, a 331/3% 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, or, in the Office Suites Company's case, possible
participation, in such investments 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, RSI Standby LLC, an entity owned by Donald J. Rechler, Scott
H. Rechler, Michael Maturo, Roger Rechler, Mitchell D. Rechler, Gregg M.
Rechler, certain non-executive officers of RSI and Reckson and certain trusts
controlled by executive officers of Reckson, has 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 will 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 common stock of RSI, par value
$0.01 per share (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. 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 equity security
that is not traded on a national securities exchange or quoted on NASDAQ and
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.
The Commission's penny stock regulations 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. At any time that the RSI Common Stock is
subject to the rules on penny stocks, the market liquidity for the RSI Common
Stock is likely to 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 following information discusses the material
risks relating to the real estate investments of RSI. 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. The revenues received by RSI from RSVP's real estate
investments and the value of such investments 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 rents which properties may command and the ability to re-let space are
dependent upon the perceptions of prospective tenants of the safety, convenience
and attractiveness of the properties. The cash flow received from real estate
investments may be negatively effected by the inability 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 ultimately result in decreases in cash flows from real
estate properties and 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, the value of RSVP's real estate
investments and income from such investment 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 and, as a
result, RSVP may not be able to realize the full value of its real estate
investments if it has to dispose of such investments at inopportune times.
RSI and its affiliates, including RSVP, may engage in the selective
development and construction of real estate properties. Development and
construction activities include the risk that development opportunities may be
abandoned after expending resources to determine feasibility, in which case RSI
will incur losses from pursuing such opportunities. In addition, RSI's
construction and development activities may generate less net income or losses
for RSI as a result of construction costs of a project exceeding original
estimates; occupancy rates and rents at a newly completed property being
insufficient to make the property profitable; financing not being available on
favorable terms for development of a property; and construction and lease-up not
being 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.
Each of these factors may lead to losses or less income for RSI. 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) subject to certain exceptions, 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 limit the ownership by any person of RSI
capital stock to 9.9% of the aggregate value of all classes of RSI capital
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 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 are the
subject of Subscription Rights in the Rights Offering but are 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 of RSI Common Stock 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 20,557,130 shares (or
approximately 83%) of the 24,668,556 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
REITQualified 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 of RSI in the form of
non-voting common stock. Lightpost LLC owns 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 Lightpost LLC were issued by
RSI 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 will be 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 June 11, 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 of limited partnership interest in
Reckson Operating Partnership (the "Units") as of the Record Date. The
Distribution will be made on the basis of one share of RSI Common Stock for
every 12.5 shares of Reckson Common Stock held by Reckson stockholders on the
Record Date and one share of RSI Common Stock for every 12.5 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 $1.03 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 American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005, or by
telephone at (718) 921-8200 (telecopier (718) 234-5001)), 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) 719-7400, 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, commencing with
its taxable year ended December 31, 1995, Reckson has been 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.
Tax Counsel has also addressed what Tax Counsel believes to be the material
issues with respect to the qualification of Reckson as a REIT which are raised
by the structure and currently anticipated activities of RSI. In particular, Tax
Counsel has opined that Reckson and RSI will be treated as separate corporate
entities, that RSI will not be treated as an agent of Reckson and that Reckson
and RSI will not constitute stapled entities under Section 269B of the Code.
Taxation of RSI. RSI will not seek to qualify for taxation as a real estate
investment trust. Accordingly, RSI 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. RSI 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 RSI 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.
At the time of the Distribution, RSI will have approximately 455
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 issued in the Distribution and the Rights Offering 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. RSI has granted certain demand and
"piggyback" registration rights to Donald J. Rechler, Scott H. Rechler, Michael
Maturo, Roger Rechler, Mitchell D. Rechler and Gregg M. Rechler in respect of
shares of RSI Common Stock received by them in the Distribution and the Rights
Offering or owned by them through Lightpost LLC. RSI is not able to predict
whether substantial amounts of RSI Common Stock currently not freely
transferable 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 (estimated to be $1.5
million) and anticipated short-term losses of the Company, (ii) provide RSI
sufficient initial equity capital in order to pursue its business objectives,
and (iii) provide capital towards meeting minimum capital requirements to
commence trading in the future on an organized trading system. 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.
Immediately after the Distribution, RSI will grant to Holders of RSI Common
Stock received in the Distribution Subscription Rights to purchase up to an
aggregate of approximately 20,557,130 shares of RSI Common Stock.
Each Holder will receive one Subscription Right for every 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
$1.03 per share and, at the election of such Holder, four additional shares (but
not less than four additional shares) at a purchase price of $1.03 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.
At the time of the Distribution, there will be approximately 4,111,426
shares of RSI Common Stock, based on the outstanding shares of Reckson Common
Stock and Units of Reckson Operating Partnership as of the Record Date.
Accordingly, a total of 4,111,426 Subscription Rights with respect to an
aggregate of 20,557,130 shares of RSI Common Stock will 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 the Exercise Price of $1.03 per
share and four additional shares of RSI Common Stock (but not less than four
additional shares) upon the payment of $1.03 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 June 29, 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 on or prior to the Expiration Date by the Holders thereof.
METHOD OF EXERCISING SUBSCRIPTION RIGHTS
Subscription Rights may be exercised by completing and signing the relevant
information appearing on the back of each Subscription Rights certificate. The
completed and signed certificate, accompanied by payment in full of the Exercise
Price for all shares for which the Exercise Privilege has been exercised, must
be delivered by hand or sent by mail to American Stock Transfer & Trust Company
(the "Rights Agent"), and 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 hand,
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:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Payment of the Exercise Price must be made in U.S. dollars by cash, check or
money order payable to "American Stock Transfer & Trust Company." American Stock
Transfer & Trust Company 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 are the subject of
Subscription Rights in the Rights Offering but are not subscribed for (the
"Standby Commitment Shares") on the Expiration Date at an Exercise Price of
$1.03 per share.
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 and thereby achieve its stated
purposes.
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 acquire interests in operating companies providing Commercial Services,
including the funding of a portion of its $6.5 million commitment to OnSite, and
to fund investments in RSVP. To the extent not utilized for the foregoing, the
Net Proceeds will be used by the Company for working capital and general
corporate purposes, including the funding of certain organizational and start-up
costs (estimated to be $1.5 million) and short-term losses.
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 331/3% 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
nonmanaging 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 331/3% 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 331/3%
interest in a joint venture that owns a 70% interest in Dobie Center (i.e., 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 (i.e., 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
July 15, 1997 from October 17,
Year Ended through 1997 through
Description December 31, 1997 December 31, 1997 December 31, 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 5,050,591 2,925,395 2,280,857 867,252
Expenses
Operating Income 4,226,317 2,488,659 2,115,050 617,402
Non-operating 2,795,934 2,000,213 1,337,506 704,756
--------- ---------- --------- ---------
Expenses
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,
and (iii) provide capital towards meeting minimum capital requirements to
commence trading in the future on an organized trading system.
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 will be partially funded by an
investment fund that is jointly sponsored by financier George Soros and PWRES.
In addition, PWRES and such investment fund will receive a priority or preferred
distribution from RSVP prior to the distribution of cash to RSI.
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 companies are anticipated to produce net cash flow as a
result of their operating activities. Although the level and timing of net cash
flow for each investment in the short term and long term may vary based upon the
stage of the respective operating companies growth cycle. The Company 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 will 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 $132,182 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"). Specifically, RSI will seek opportunities for which there is broad
demand in the Reckson Customer Base, strong entrepreneurial management, a
reputation for high quality services and growth potential. Such 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. Currently, the Reckson
Customer Base retains third parties to provide many services for their
day-to-day operations. Of these services, the Company may seek to provide the
Reckson Customer Base with telecommunications, document storage, document
reproduction and logistics services (i.e., inventory services, messenger
services and delivery services), as well as with other services that the Company
determines may be utilized by the Reckson Customer Base. 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. The opportunities that the Company may determine to pursue
include telecommunications, document storage, document reproduction and
logistics services. 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 who 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, other than the student housing sector and those sectors
described below under "-RSI Recent Developments" and "-RSVP Recent
Developments." 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. Reckson Operating
Partnership will have the option of participating in joint ventures with RSVP in
REIT-Qualified Investments. It is currently anticipated that in most cases
REIT-Qualified Investments made by RSVP will be made through joint ventures in
which Reckson Operating Partnership provides one-third of the equity portion of
the investment and the PaineWebber Equity Facility provides two-thirds of the
equity. It is currently anticipated that in such circumstances RSI will not be
required to make any capital contributions. RSI will not be entitled to share in
any profits in respect of Reckson Operating Partnership's investment in such
joint ventures. 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 will
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 material aspects 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) subordinated 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 $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, and (iii) RSI's indirect interest in ACLC and Dobie Center.
ONSITE. In May, 1998, RSI acquired through its wholly-owned subsidiary,
RSI-OSA Holding Inc., an interest in OnSite (in the form of a subordinated
convertible note), 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. As of the date of this prospectus, RSI
has made an aggregate investment of $2.125 million under the $6.5 million dollar
Subordinated Loan Agreement and Promissory Note executed in connection with the
OnSite transaction. The Company may fund its obligations under the Subordinated
Loan Agreement from borrowings under the RSI Facility or out of cash flow from
operations, or from a combination thereof. Until June 19, 2000, 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 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. 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 Ventures LLC,
an entity controlled by Jon L. Halpern, a director of Reckson who is one of the
founders of OSA ("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.
Jon L. Halpern, a director of Reckson, beneficially owned substantially all
of the OnSite business prior to the transactions described above. Prior to RSI's
conversion of any of the subordinated indebtedness that it acquires in OnSite,
Mr. Halpern will continue to own substantially all of the OnSite business. Mr.
Halpern 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.
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 has obtained 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 acquired the 9.9% interest in Reckson
Executive Centers LLC from Reckson Operating Partnership for $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 $13.8 million), increasing at 8% per annum from January 27,
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.
RSI RECENT DEVELOPMENTS
In accordance with its business strategy, RSI is currently pursuing
additional investment opportunities in companies providing Commercial Services.
Included in such additional opportunities is an additional potential investment
in the office suites sector and an investment in a logistics company.
Important Note: Each of the following transactions is under negotiation and
is also subject to completion of due diligence and final agreement between the
parties. There can be no assurance that any of the transactions will be
completed or that they will be completed on the terms described below.
Office Suites. RSI has entered into a letter of intent to acquire an
interest in a national office suites company (the "Additional Office Suites
Company"). In connection with the letter of intent, RSI is currently negotiating
to form a combined executive office suites company comprised of Reckson
Executive Centers, the Office Suites Company and the Additional Office Suites
Company. Such a combined company would provide RSI with an interest in an
executive office suites company with a total of approximately 130 suites. It is
anticipated that RSI would exercise its option to acquire the Office Suites
Company and contribute it to such combined entity to the extent RSI is able to
structure such combined company on acceptable terms.
Logistics. RSI has entered into a letter of intent to acquire a 20%
interest in a national logistics service company for approximately $3.0 million.
Under the proposed terms, RSI would have an option to purchase an additional 31%
and 19% of the company one year and two years, respectively, after the closing
of the transaction at a 12% premium to the initial price. It is also
contemplated that RSI would provide a $15 million senior unsecured credit
facility. It is contemplated that if RSI does not exercise its option to acquire
an additional 31% of the company, the other shareholders of the company will
have the right to repurchase RSI's interest and the credit facility will be
repaid. It is anticipated that current management will be responsible for the
day-to-day operation of the company and that RSI will appoint two of the four
members of the company's board of directors, and will have the right to appoint
an additional member if RSI exercises its option to acquire an additional 31%
interest in the company.
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 331/3% interest in
the joint venture that owns 76.09% of ACLC and a 331/3% 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 331/3% 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
offcampus 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 331/3% 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.
The Dobie Center is subject to a $17.4 million first mortgage note maturing
in 2002 which bears interest at a floating rate of interest equal to LIBOR plus
1.75%. Such mortgage note is fully amortizing and may be prepaid prior to
maturity without the payment of a penalty. The Dobie Center is also subject to a
$2.9 million second mortgage note maturing in 2002 which bears interest at a
fixed rate of 7 1/2%. Such note may be prepaid prior to maturity without the
payment of a penalty and is payable on an interest only basis prior to maturity.
A payment of $2.9 million plus accrued and unpaid interest will be due and
payable at the maturity of the mortgage debt. The Company believes that the
Dobie Center is in good condition and, other than a $2.2 million capital
improvement program currently being implemented, there are no present plans for
significant renovation of or improvement to the Dobie Center. In management's
opinion, the Dobie Center is adequately covered by insurance. The student
housing at the Dobie Center was 82%, 90%, 100%, 100% and 100% leased during the
1993 through 1997 academic years, respectively, and had an average effective
annual rent per bed of $5,570, $6,662, $6,785, $6,929 and $7,390, during such
years. The retail space at the Dobie Center was 72%, 77%, 75%, 86% and 84%
leased during the 1993 to 1997 academic years, respectively, and had an average
effective rent per square foot of $19.72, $19.84, $20.25, $20.14 and $20.68,
during such years. The federal tax basis of the Dobie Center is $10.8 million,
and the Dobie Center is depreciated based upon a 40 year straight line method.
The Dobie Center pays an annual property tax of $430,000.
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,
oncampus and off-campus housing. 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
offcampus student housing and to improve the management and physical condition
of existing university-owned housing through privatization.
RSVP RECENT DEVELOPMENTS
In accordance with its business strategy, RSVP is currently pursuing
additional investment opportunities involving (i) privatization initiatives,
including military housing, government offices and prisons, as well as student
housing, (ii) the acquisition and lease back of real estate from non-real estate
operating companies, which effectively results in the outsourcing or
disaggregation of real estate by such companies, and (iii) the assisted living
sector. Several of RSVP's potential investments are REIT Qualified Investments
and may, at the option of Reckson Operating Partnership, be structured as joint
ventures, with Reckson Operating Partnership providing one-third of the equity
portion of the investment and RSVP providing the remaining two-thirds of the
equity utilizing the PaineWebber Equity Facility (each such joint venture being
referred to as a "RSVP-Reckson Operating Partnership Joint Venture"). It is
currently anticipated that the RSVP-Reckson Operating Partnership Joint Venture
investments would not require any capital contributions by RSI, however, RSI
through its ownership interest in RSVP would be entitled to a share of any
profits from such investments after the holder of the preferred equity
outstanding under the PaineWebber Equity Facility has received a return of its
capital and a cumulative 16% return thereon. Accordingly, RSI would not share in
the profits relating to the capital contributed by Reckson Operating Partnership
to any such investments. Although it is contemplated that a portion of each of
RSVP's potential investments will be funded by borrowings in an amount currently
expected not to exceed 70% of the total acquisition cost, no such borrowings
have been arranged.
Important Note: Each of the following transactions is under negotiation and
is also subject to completion of due diligence and final agreement between the
parties. There can be no assurance that any of the transactions will be
completed or that they will be completed on the terms described below.
o Privatization Initiatives
Military Housing. RSVP has entered into a joint venture arrangement with a
development company to create a new venture to pursue acquisition, development
and ownership opportunities resulting from privatization initiatives in military
housing. The joint venture will actively bid to develop military housing
privatization projects of the U.S. Federal government. In addition, RSVP and the
development company have entered into an exclusivity letter agreement which
contemplates that the development company would manage the day-to-day operations
of the joint venture and RSVP would have approval rights over certain major
decisions. It is presently contemplated that RSVP would contribute 90% of the
joint venture's capital up to a maximum of $50 million, although any required
capital contribution would be subject to RSVP's approval. It is anticipated that
the development company would receive a carried interest in the profits of the
joint venture after a return of contributed capital and a preferred return
thereon. It is contemplated that this investment would be acquired through a
RSVP-Reckson Operating Partnership Joint Venture.
Prisons and Other Government Facilities. RSVP has entered into an
exclusivity letter agreement to form a joint venture with a development and
construction company to pursue the development, acquisition, construction and
management of commercial real estate for use by state, local and federal
governments, including prisons, government occupied office buildings and
government occupied warehouses. Should RSVP elect to complete the transaction on
the terms of the exclusivity letter agreement, RSVP would commit to contribute
up to $75 million and another equity investor would contribute up to $25 million
to the joint venture and such company would contribute assets to the joint
venture and may make additional capital contributions, although any required
capital contribution would be subject to RSVP's approval. Such assets include
eleven government tenanted office buildings, two correctional facilities that
are under construction, and certain other assets. The exclusivity letter
agreement contemplates that such company would manage the day-to-day operations
of the joint venture, subject to the oversight of a board consisting of an equal
number of persons designated by RSVP and such company. It is contemplated that
the joint venture agreement would provide for a carried interest in net cash
flow and profits to be paid to the development and construction company, after a
preferred return on, and a return of, contributed capital. It is contemplated
that the portion of this investment that is a REIT-Qualified Investment would be
acquired through a RSVP-Reckson Operating Partnership Joint Venture. The balance
of the investment would be acquired by RSVP with RSI providing one-third of the
equity portion of the investment and the PaineWebber Equity Facility funding
two-thirds of the equity.
o Real Estate Outsourcing
Real Estate Company. RSVP is currently negotiating to acquire, together
with one or more co-investors, up to approximately $475 million of the common
stock of a commercial real estate company. Under the proposed terms of such
transaction RSVP, together with one or more co-investors, would initially
acquire $75 million of such common stock and commit to acquire the remaining
amount. RSVP would also acquire warrants to purchase additional shares of such
company. RSVP's equity investment in this transaction would not exceed $75
million. It is anticipated that RSI would not share in any profits generated by
the co-investor(s) but may receive management fees in respect of such
co-investor(s) investment. It is anticipated that RSVP would have representation
on the company's board of directors commensurate with its ownership interest and
that it would have veto rights over certain matters. It is contemplated that
this investment would be acquired through a RSVP-Reckson Operating Partnership
Joint Venture.
National Construction Company. RSVP is negotiating to make an investment in
a national construction company that specializes in construction of properties
to be net leased to companies. Under the proposed terms of the transaction, RSVP
would make an approximately $15 million preferred equity investment. It is
contemplated that the current management of the company would continue to
conduct the day-to-day operations of the company with RSVP holding a majority of
the positions on the board. It is contemplated that this investment would be
acquired by RSVP with RSI providing one-third of the equity portion of the
investment and the PaineWebber Equity Facility providing two-thirds of the
equity.
Family Entertainment. RSVP is negotiating to form a joint venture with a
privately held family entertainment company to develop and acquire family
entertainment centers anchored by ice skating rinks for lease to such family
entertainment company. It is contemplated that the joint venture would be
managed by a board of managers a majority of whom would be appointed by RSVP and
that certain decisions would require a supermajority vote of the Board. It is
anticipated that RSVP would own an 80% interest in the joint venture and the
family entertainment company would own a 20% interest, with RSVP committing to
contribute up to approximately $25 million of the capital and the family
entertainment company committing to contribute approximately $6 million in cash
or real property, although any capital calls would be subject to RSVP's
approval. It is currently contemplated that this investment would be acquired
through a RSVP-Reckson Operating Partnership Joint Venture.
In addition to the joint venture with the family entertainment company,
RSVP is negotiating to acquire shares of common stock and warrants of the family
entertainment company for approximately $4 million. It is contemplated that RSVP
would become a party to the family entertainment company's shareholders
agreement and would have the right to name two representatives to the seven
member board of the family entertainment company. It is contemplated that this
investment would be acquired by RSVP with RSI providing one-third of the equity
portion of the investment and the PaineWebber Equity Facility providing
two-thirds of the equity.
o Assisted Living
RSVP is negotiating with an affiliate of a national real estate developer
and a manager of assisted living facilities to form a joint venture which would
seek to acquire, construct, develop and net lease assisted living facilities
throughout the United States, initially including four existing facilities, four
facilities presently under development and additional proposed facilities with
land currently under options. It is contemplated that the real estate developer
would manage the day-to-day operations of the joint venture and would also enter
into development agreements with the joint venture to develop the facilities.
The manager would also have an option to enter into net leases with the venture
in respect of the facilities. It is contemplated that a management committee
comprised of the representatives of RSVP, two representatives of the national
real estate developer and one representative of the manager would oversee the
real estate developer and approve all major decisions (which approval will
require the approval of at least one member designated by RSVP). It is
anticipated that RSVP would purchase a 45% interest in the joint venture from
the developer for approximately $3.25 million and agree to contribute 80% of any
additional capital in an amount up to an additional $25 million. It is
contemplated that RSVP would receive 80% of net cash flow from the joint venture
until it achieves a certain return, and that thereafter, the other parties would
receive a share of net cash flow in excess of their interests. It is
contemplated that the portion of the investment that is a REIT-Qualified
Investment would be acquired through a RSVP-Reckson Operating Partnership Joint
Venture. The balance of the investment would be acquired by RSVP with RSI
providing one-third of the equity portion of the investment and the PaineWebber
Equity Facility funding two-thirds of the equity.
RSVP is negotiating to form joint ventures with regional developers of
assisted living facilities. It is anticipated that under the terms of such joint
ventures, RSVP would have the option to participate in the development of
assisted living projects, including four projects under development, at a price
equal to the cost of RSVP's portion of the investment (mainly the cost of the
land and pre-development costs), plus interest from the date such costs were
funded by the developer. It is contemplated that these investments would be
acquired through a RSVP-Reckson Operating Partnership Joint Venture.
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
(estimated to be $1.5 million) and fund anticipated short-term operating losses
of the Company, (ii) provide RSI sufficient initial equity capital in order to
pursue its business objectives and (iii) provide capital towards meeting minimum
capital requirements to commence trading on an organized trading system.
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. The anticipated terms of the
Credit Facilities were not negotiated at arms' length and thus may not reflect
terms that could have been obtained from independent third parties. 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 the RSVP operating agreement 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 will be partially funded by an investment fund that
is jointly sponsored by financier George Soros and PWRES.
CHANGES IN INTEREST RATES
As indicated above, borrowings under the Credit Facilities accrue interest
at the greater of (i) the prime rate plus 2% and (ii) 12% per annum, with the
rate referred to in (ii) increasing annually at a rate of 4% of the prior year's
rate. Due to the variable component of the interest rates payable under the
Credit Facilities, significant increases in market interest rates may impact
negatively the earnings of the Company. Since it is anticipated that the Company
will borrow money under the Credit Facilities (particularly the RSI Facility) to
fund its investments in whole or in part, increases in market rates of interest
may reduce or eliminate the spread between the cost of the Company's funds under
the Credit Facilities and the return on its investments. However, increases in
the prime rate that do not result in a rate greater than the rate detailed in
clause (ii) above will not affect the borrowing cost of the Company under the
Credit Facilities.
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% limits on the
ownership of RSI Common Stock and RSI capital stock set forth in its charter.
The anticipated terms of the Intercompany Agreement have not been
negotiated at arms' length and thus may not reflect terms which could have been
obtained from independent third parties.
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 May 13, 1998, RSI had 10 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, DIRECTOR NOMINEE AND EXECUTIVE OFFICERS OF RSI
RSI's Board of Directors will be expanded immediately after the
Distribution to include the director nominee named in the following table, who
has been nominated for election and has consented to serve. In addition, RSI
anticipates nominating one additional director who is unaffiliated with RSI and
Reckson prior to December 31, 1998. The following table sets forth certain
information with respect to executive officers, directors and director nominee
of RSI immediately after the Distribution.
NAME Position and Offices Held
-----------------------------------------
Donald J. Rechler ................
Chairman of the Board and Director (term as
a director expires in 2001)
Roger Rechler .....................
Director; Member of Management Advisory
Committee (term as a director expires in
2001)
Scott H. Rechler ..................
President, Chief Executive Officer and
Director (term as a director expires in
1999)
Michael Maturo ....................
Executive Vice President, Chief Financial
Officer, Treasurer and Director (term as a
director expires in 2000)
Gregg M. Rechler ..................
Director and Member of Management Advisory
Committee (term as a director expires in
2001)
Mitchell D. Rechler ...............
Secretary, Member of Management Advisory
Committee and Director (term as a director
expires in 2000)
Paul F. Amoruso ...................
Director Nominee (term as a director
expires in 1999)
Independent Director ..............
Director to be nominated prior to December
31, 1998 (term as director will expire in
2000)
Jason M. Barnett ..................
Senior Vice President and General Counsel
Daniel A. DiSano ..................
Senior Vice President of Operations
Jeffrey D. Neumann ................
Senior Vice President of Investments
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.
Paul F. Amoruso, age 37, has been nominated for election as a Director of
RSI. Since 1983, Mr. Amoruso has been the President of Oxford & Simpson
Realty, Inc. of Jericho, New York. Prior to that time, he was President of
Lanstar International Realty, Inc., a real estate advisory services firm. Mr.
Amoruso is a member of the Board of Directors of the Nature Conservancy and
has been appointed to the Task Force of the Empire State Development Corp. He
is a co- founder of the Long Island Commercial Industrial Brokers Society and
is a licensed real estate broker in New York and Connecticut.
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. The
independent director nominee will initially serve as the sole member of the
Audit Committee and it is expected that an additional independent director, if
and when added to the RSI Board, will be added as a member of the Audit
Committee. Donald J. Rechler, Scott H. Rechler and the independent director
nominee 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
RSI has granted certain demand and "piggyback" registration rights to
Donald J. Rechler, Scott H. Rechler, Michael Maturo, Roger Rechler, Mitchell D.
Rechler and Gregg M. Rechler in respect of RSI Common Stock received in the
Distribution and the Rights Offering or owned by them through Lightpost LLC.
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 12.5 Reckson Common Shares held on the Record Date
and one share of RSI Common Stock for every 12.5 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 May 26, 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.
<TABLE>
BENEFICIAL OWNERSHIP OF RSI COMMON STOCK(1)
<CAPTION>
Percent
NUMBER OF of
NAME OF BENEFICIAL OWNER SHARES(1) Total
------------------------ --------- -----
<S> <C> <C>
Donald J. Rechler................................ 136,722(2)(4) 3.33%
Roger M. Rechler................................. 134,959(3)(5) 3.28%
Lightpost LLC (6)................................ 143,900 3.5%
Scott H. Rechler................................. 30,813 .75%
Michael Maturo................................... 6,879 .17%
Mitchell D. Rechler.............................. 32,407 .79%
Gregg Rechler.................................... 30,872 .75%
FMR Corp. (7).................................... 4,448,300 9.33%
Cohen & Steers Capital 5,595,100 11.74%
Management Inc. (8)..............................
LaSalle (9)...................................... 2,841,077 5.96%
All directors and executive 516,552 12.56%
officers as a group (6 persons)..................
- ---------------
(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
Standby Commitment Shares.
(2) Includes 10,544 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 10,628 shares held by a trust for the benefit of Todd Rechler,
the son of Roger M. Rechler, and 84 shares held by the wife of Roger M.
Rechler, beneficial ownership of which is disclaimed by Roger M.
Rechler.
(4) Includes 21,890 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 21,890 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) Donald J. Rechler, Scott H. Rechler, Michael Maturo, Roger Rechler,
Mitchell D. Rechler and Gregg M. Rechler and trusts controlled by
certain of such executive officers own 70% of the member interests of
Lightpost LLC and the other 30% of the member interests is owned by
members of Reckson management who are not executive officers or
directors of Reckson and a Rechler family member who is not a member of
Reckson management.
(7) The address of FMR Corp. is 82 Devonshire Street, Boston, Massachusetts
02109.
(8) The address of Cohen & Steers Capital Management Inc. is 757 Third Avenue,
New York, New York 10019.
(9) LaSalle Advisors Capital Management, Inc. ("LaSalle") beneficially owns
1,279,930 shares (2.7% of the total) and ABKB/LaSalle Securities Limited
Partnership ("ABKB") beneficially owns 1,561,147 shares (3.26% of the
total). The address of LaSalle and ABKB is 200 East Randolph Drive,
Chicago, Illinois 60601.
</TABLE>
In addition, as described under "The Rights Offering", certain members of
RSI management are members of the Standby Purchaser, which has agreed to
purchase any and all Standby Commitment Shares.
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
NUMBER OF PRICE APPRECIATION
SHARES % OF TOTAL EXERCISE FOR OPTION/SAR TERM
UNDERLYING OPTIONS/SARs OR BASE (1)
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 $ 88,555 $ 224,597
629,477 -- 1.04 3/30/2008 409,160 1,044,932
Scott H. Rechler 128,341 21% 1.10 1/10/2008 88,555 224,597
629,477 -- 1.04 3/30/2008 409,160 1,044,932
Michael Maturo 105,519 17% 1.10 1/10/2008 72,808 184,658
541,476 -- 1.04 3/30/2008 351,959 898,850
Roger Rechler 52,392 9% 1.10 1/10/2008 36,150 91,686
271,105 -- 1.04 3/30/2008 176,218 450,034
Gregg M. Rechler 52,392 9% 1.10 1/10/2008 36,150 91,686
271,105 -- 1.04 3/30/2008 176,218 450,034
Mitchell D. Rechler 52,392 9% 1.10 1/10/2008 36,150 91,686
271,105 -- 1.04 3/30/2008 176,218 450,034
- ---------------
(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 $1.79 per share and $1.69 per share, respectively,
and a 10% growth rate, compounded annually, results in stock prices
of $2.85 per share and $2.70 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.
</TABLE>
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 January
1, 1999. Under the Stock Option Plan, grants with respect to up to 3,700,376
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. However, in any year, no person
eligible for awards under the plan may be granted options covering a total of
more than 1,000,000 shares of RSI Common Stock. 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 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. Furthermore, Roger Rechler, 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, it is anticipated that the RSI Board will include only two members who
are 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 April 27, 1998, Donald J. Rechler, Roger M. Rechler, Scott H.
Rechler, Michael Maturo, Mitchell D. Rechler and Gregg M. Rechler beneficially
own approximately 3.59%, 3.54%, 0.81%, 0.18%, 0.85% and 0.81%, 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." In addition, RSI has granted the aforementioned RSI
officers and directors certain registration rights in respect of their RSI
Common Stock. See "Management-Registration Rights."
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. Lightpost LLC owns the remaining 5% of the outstanding
capital stock in the form of common stock. Donald J. Rechler, Scott H. Rechler,
Michael Maturo, Roger Rechler, Mitchell D. Rechler and Gregg M. Rechler and
trusts controlled by certain of such executive officers own 70% of the member
interests of Lightpost LLC and the other 30% of the member interests is owned by
members of Reckson management who are not executive officers or directors of
Reckson and a Rechler family member who is not a member of Reckson management.
The shares of capital stock owned by Reckson Operating Partnership and Lightpost
LLC were issued by RSI on the same dates and at the same price per share of
$1.10. Immediately prior to the Distribution, the shares of non-voting common
stock owned by Reckson Operating Partnership will be exchanged for RSI Common
Stock.
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 331/3% interest in a joint
venture that owns a 70% interest in the Dobie Center, a 331/3% 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, or, in the
Office Suites Company's case, possible participation, in such investments 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 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
Donald J. Rechler, Scott H. Rechler, Michael Maturo, Roger Rechler, Mitchell D.
Rechler, Gregg M. Rechler, certain non-executive officers of RSI and Reckson and
certain trusts controlled by executive officers of Reckson.
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 Rights Offering, approximately 24,668,556
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 legally 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 expects to reserve approximately 247,000 shares of Series A
Junior Preferred Stock for issuance upon exercise of the Preferred Stock
Purchase 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 senior 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. Accumulated 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
accumulated 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, subject to certain exceptions, 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 Common Stock and the ownership by any
person of RSI capital stock is limited to 9.9% of the aggregate value of all
classes of RSI capital stock.
EXCESS STOCK
The Articles of Incorporation provide that the Company may issue up to 25
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, or more than 9.9% of
the aggregate value of the outstanding shares of all classes of the Company's
capital stock, provided that in no event will a stockholder be limited in the
amount of RSI Common Stock acquired in connection with the Distribution, 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 or the Aggregate Ownership Limit
(9.9% of the aggregate value of all outstanding classes of stock of the Company)
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 and the Aggregate
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 determine its compliance with the provisions 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 75 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 transaction; (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 transaction,
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 after consideration by the directors of the RSI
Board of their fiduciary duties and applicable law. Pursuant to the Preferred
Rights Plan, the RSI Board will cause to be issued one Preferred Stock Purchase
Right (each, a "Preferred Right") for each share of RSI Common Stock issued in
the Distribution and the Rights Offering. 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 to be determined by the RSI
Board (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
actual provisions of the Preferred Rights Agreement approved by the RSI Board in
the future.
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 10% 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 10% 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, in lieu of its right to receive one one-hundredth of a
share of Series A Junior Participating Preferred Stock per Preferred Right, 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 Preferred 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 Preferred Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 10% 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 Preferred 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 $.01 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).
Notwithstanding anything to the contrary contained herein, no adjustment in
the Purchase Price payable, or the number of shares of Series A Junior Preferred
Stock or other securities or property issuable, upon exercise of the Preferred
Rights shall be made in respect of the Rights Offering. 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 purchased upon exercise of the
Preferred Rights will not be redeemable. For a discussion of the dividend,
liquidation and voting provisions applicable to the Series A Junior Preferred
Stock, see "Description of RSI Capital Stock-Series A Junior Preferred Stock."
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 Preferred 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 time that such stockholder becomes an interested
stockholder unless (i) prior to such time, 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 time, 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 an 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 will enter into indemnification agreements with each of its executive
officers and directors. The indemnification agreements will 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 will be required to indemnify
and advance expenses incurred by officers and directors seeking to enforce their
rights under the indemnification agreements and will cover officers and
directors under the Company's directors' and officers' liability insurance.
Although the indemnification agreements will offer substantially the same scope
of coverage afforded by provisions in the Charter and Bylaws, they will 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
Offering, and certain legal matters relating to federal income tax
considerations, will be passed upon for RSI by Brown & Wood LLP, New York, New
York.
INDEX TO FINANCIAL STATEMENTS
Page
----
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 - 800,000 1,125,000
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 $800,000 $8,519,695
============ ============= ========= =============
Liabilities and shareholders' equity
Accounts payable and accrued expenses $ 119,384 $ $ - - $ 119,384
Loans payable to Affiliates 3,177,857 200,000 800,000 4,177,857
------------ ------------- --------- -------------
Total liabilities 3,297,241 200,000 800,000 4,297,241
============ ============= ========= =============
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 $800,000 $8,519,695
============ ============= ========= =============
</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 12.5 shares of Reckson Common Stock held by
Reckson stockholders on the Record Date and one share of RSI Common
Stock for every 12.5 Units held by Limited Partners on the Record Date.
RSI Common Stock to be distributed in the Distribution is approximately
3,905,855 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
20,557,130 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 $800,000 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 - - - 132,182 - 162,565
---------- ---------- -------- --------- --------- --------- --------------
TOTAL REVENUES 253,820 152,329 146,042 (9,128) 132,182 - 675,245
---------- ---------- -------- --------- --------- --------- --------------
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) 132,182 (100,000) 96,132
NON-OPERATING EXPENSES
INTEREST 24,380 - - - - 288,842 331,222
AMORTIZATION 8,214 - - - - - 8,214
---------- ---------- -------- --------- --------- --------- --------------
NET LOSS $(257,887) $ 152,329 $146,042 $ (9,128) $132,182 $(406,842) $ (243,304)
========== ========== ======== ========= ========= ========= ==============
BASIC AND DILUTED NET
INCOME PER COMMON
SHARE (G) $ (0.06)
==============
BASIC AND DILUTED COMMON
SHARES OUTSTANDING (G) 4,111,426
==============
</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 $1,125,000 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 4,111,426 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 3,700,376 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 interests in ACLC
and Dobie Center 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
=================
'' 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 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 be 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 OR OFFERING MADE PURSUANT HERETO SHALL,
UNDER ANY CIRCUMSTANCES, 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
Page
Summary................................................................... 6
Risk Factors.............................................................. 20
The Distribution.......................................................... 30
The Rights Offering....................................................... 37
Dividend Policy........................................................... 40
Selected Financial Data................................................... 41
Management's Discussion and Analysis
and Financial Condition and Results
of Operations........................................................... 42
Business.................................................................. 46
Management................................................................ 58
Beneficial Ownership of RSI
Common Stock............................................................ 62
Certain Transactions...................................................... 66
Description of RSI Capital Stock.......................................... 68
Certain Antitakeover Provisions........................................... 73
Experts................................................................... 80
Legal Matters............................................................. 80
Index to Financial Statements..............................................F-1
UNTIL JULY 24, 1998 (25 DAYS AFTER THE EXPIRATION DATE OF THE RIGHTS OFFERING),
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.
RECKSON SERVICE INDUSTRIES, INC.
COMMON STOCK
RIGHTS TO SUBSCRIBE
FOR COMMON STOCK
PROSPECTUS
JUNE 5, 1998
