UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number: 001-14183
RECKSON SERVICE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3383642
(State other jurisdiction of incorporation (IRS. Employer
of organization) Identification Number)
225 Broadhollow Road, Melville, NY 11747
(Address of principal executive office) (zip code)
(516) 719-7400
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes No X
The company has only one class of common stock, issued at $.01 par value
per share with 4,111,730 shares outstanding as of June 11, 1998.
<PAGE>
RECKSON SERVICE INDUSTRIES, INC.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED MARCH 31, 1998
TABLE OF CONTENTS
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets of Reckson Service Industries, Inc. as of March
31, 1998 and December 31, 1997 ...............................
Statement of Operations of Reckson Service Industries, Inc. for
the three months ended March 31, 1998 and ....................
Statement of Cash Flows of Reckson Service Industries, Inc. for
the three months ended March 31, 1998 ........................
Notes to the Financial Statements of Reckson Service Industries,
Inc. .........................................................
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................
PART II OTHER INFORMATION ............................................
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Securities Holders
Item 5. Other Information
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Reckson Service Industries, Inc.
Balance Sheets
<CAPTION>
March 31, December 31,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets:
Cash 65,228 129,704
Investment in RO Partners Management, LLC (Note 3) $ 4,038,660 $ 3,868,093
Investment In ACLC (Note 3) 1,879,642 1,652,165
Investment in and advances to RSVP HOLDINGS,
LLC (Notes 3 and 5) 5,343,588 ----
Equipment (net of depreciation of $1,107) 29,343 ----
Affiliate receivables (Note 5) 1,923,841 832,854
Loan receivables (Note 5) 975,000 325,000
Organization and pre-acquisition costs (net of
amortization of $22,056 and $8,214, respectively) 693,975 681,694
Other Assets 96,208 30,185
-------------- --------------
Total Assets $ 15,045,485 $ 7,519,695
============== ==============
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses $ 233,445 $ 119,384
Loans payables to affiliates (Note 5) 11,863,847 3,177,857
-------------- --------------
Total Liabilities 12,097,292 3,297,241
Commitments (Note 6) --- ----
Stockholders' Equity: (Notes 1 and 4)
Common Stock, $.01 par value 10 10
Additional paid in capital 3,915,279 4,480,331
Retained earnings (967,096) (257,887)
-------------- --------------
Total Stockholders' Equity 2,948,193 4,222,454
-------------- --------------
Total Liabilities and Stockholders' Equity $ 15,045,485 $ 7,519,695
============== ==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Service Industries, Inc.
Statement of Operations
(Unaudited)
<CAPTION>
Three
Months Ended
March 31,
1998
---------------
<S> <C>
Revenues:
Equity in (loss) of RSVP Holdings, LLC $ (543,412)
Equity in income of RO Partners Management, LLC 170,567
Equity in (loss) of ACLC (51,508)
Interest income 46,661
---------------
Total Revenues (377,692)
---------------
Expenses:
General and administrative expenses 187,886
---------------
Total Administrative 187,886
---------------
Net Operating Loss (565,578)
Non Operating Expenses:
Amortization and Depreciation 14,949
Interest Expense 128,682
---------------
Net Loss $ (709,209)
===============
Basic net loss per weighted average common share $ (0.18)
---------------
Weighted average common shares outstanding 3,928,202
---------------
Diluted net loss per weighted average common share $ (0.18)
===============
Diluted weighted average common share outstanding 3,928,202
===============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Service Industries, Inc.
Statement of Cash Flows
(Unaudited)
<CAPTION>
Three
Months Ended
March 31,
1998
--------------
<S> <C>
Cash Flows from Operating Activities:
Net Income $ (709,209)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14,949
Equity in loss of RSVP Holdings, LLC 543,412
Equity in loss of ACLC 51,508
Equity in (income) of RO Partners Management,
LLC (170,567)
Changes in operating assets and liabilities:
Other assets (66,023)
Account payable and accrued expenses 114,061
--------------
Net cash (used in) operating activities (221,869)
--------------
Cash Flows from Investing Activities:
Purchase of equipment (30,450)
Pre-acquisition costs (26,123)
--------------
Net cash (used in)investing activities (56,573)
--------------
Cash Flows from Financing Activities:
Loan receivable (650,000)
Costs of preferred equity issuance (5,565,052)
Preferred equity contribution 5,000,000
Proceeds from affiliate loans 8,685,990
Loan to RSVP Holdings, LLC (5,887,000)
Due from affiliates (1,090,987)
Contributions to ACLC investment (278,985)
--------------
Net cash provided by financing activities 213,966
--------------
Net decrease in cash and cash equivalents (64,476)
Cash and cash equivalents at beginning of period 129,704
--------------
Cash and cash equivalents at end of period $ 65,228
==============
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period of interest ---
==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
Reckson Service Industries
Notes to Financial Statements
March 31, 1998
(unaudited)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Reckson Service Industries, Inc. ( "RSI" or the "Company") was formed on
July 15, 1997 to engage in the business of providing commercial services
to properties owned by Reckson Operating Partnership, L.P. ("ROP"), whose
general partner is Reckson Associates Realty Corp. ("Reckson"), and its
tenants and third parties and to invest in Reckson Strategic Venture
Partners, LLC and related entities ("RSVP") a real estate venture capital
fund. The Company will operate under an agreement between the Company
and ROP (the "Intercompany Agreement"). Under the Intercompany Agreement,
the Company and ROP agree, subject to certain terms, to provide each
other with first refusal rights to participate in certain transactions.
In connection with the initial capitalization of RSI, ROP contributed
$4,256,324 for a 95% nonvoting equity interest and certain members of
Reckson management contributed notes of $224,017 to the Company in
exchange for a 5% voting ownership interest. On October 29, 1997, the
notes were paid.
On June 11, 1998, 95% of the common stock of RSI will be distributed (the
"Distribution") to holders of common shares of Reckson and unit holders
of ROP of record on May 26, 1998. 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, a
director of Reckson, and 33 1/3% by an independent third party investor.
RO is the general partner of Reckson Opportunity Partners, L.P.
("Opportunity Partners") predecessor to RSVP. RSVP was formed on January
23, 1998 to succeed to the operating activities of Opportunity Partners.
The Company is the 100% common equity owner and a managing member of RSVP
and Paine Webber 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. On April 1, 1998, the Company
transferred its equity interest in RO to RSVP.
Through RSVP Holdings, LLC the Company is a managing member and 100%
owner of the common equity of RSVP. New World Realty LLC ("New World"),
an entity owned by two individuals retained by RSVP Holdings, LLC as
Managing Directors, acts as a managing member of RSVP Holdings, LLC and
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 a year for identifying investment opportunities for RSVP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements of RSI include the Company's equity
interests in RO, American Campus Lifestyles Companies, L.L.C. ("ACLC"),
and RSVP Holdings, LLC.
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.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented to conform to the
Statement 128 requirements.
3. INVESTMENTS
In March 1998 the Company advanced approximately $5,887,000 to RSVP
Holdings, LLC.
Summarized financial information and a summary of the Company's
investment in, advances and share of loss from RSVP Holdings, LLC is as
follows:
Balance Sheet
March 31,
1998
---------------
Deferred compensation expense $ 5,821,589
Other Assets 384,340
---------------
Total Assets 6,205,929
===============
Due to affiliates 682,686
Other Liabilities 179,655
---------------
Total Liabilities 862,341
---------------
Net investment in and advances to RSVP
Holdings, LLC $ 5,343,588
===============
Statement of Operations
For the period
January 23, 1998
1998 to March
31, 1998
---------------
Operating expenses $ 114,775
General and administrative expenses 338,989
Interest expense 48,397
Depreciation and amortization 41,251
---------------
Net Loss $ (543,412)
===============
In 1997, the Company invested $3.62 million in RO, which contributed such
amount to Opportunity Partners. Opportunity Partners invested
approximately $10.8 million to acquire a 70% interest in Dobie Center,
L.P., which owns 100% in Dobie Center, a mixed use student housing and
retail property located in Austin, Texas.
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 is as follows:
Balance Sheets
March 31, December 31,
1998 1997
-------------- --------------
Property and equipment, less
depreciation $ 35,161,387 $ 35,345,013
Other Assets 5,976,392 6,700,605
-------------- --------------
Total Assets 41,137,779 42,045,618
============== ==============
Mortgage payable 20,030,500 20,280,500
Other Liabilities 3,806,783 5,195,624
-------------- --------------
Total Liabilities 23,837,283 25,476,124
-------------- --------------
Minority Interest 5,134,763 4,915,462
Members' equity 12,165,733 11,654,032
Less: Other members' equity (8,127,073) (7,785,939)
-------------- --------------
Net investment in RO $ 4,038,660 $ 3,868,093
============== ==============
Statement of Income
For the three Period from
months ended July 15, 1997
March 31, to December
1998 31, 1997
-------------- --------------
Rental Income $ 2,573,145 $ 4,265,584
Interest Income 63,507 102,971
Other Income 4,226 434,264
-------------- --------------
Total Income 2,640,878 4,802,819
-------------- --------------
Property operating expenses 969,607 1,691,906
General and administrative expenses 293,405 663,337
Interest expense 361,943 875,019
Depreciation and amortization 210,426 381,292
Non-recurring expense 74,495 221,222
-------------- --------------
Total Expense 1,909,876 3,832,776
-------------- --------------
Minority interest 219,301 233,264
Net income 511,701 736,779
Less: Other members' share 341,134 491,186
-------------- --------------
Company's share $ 170,567 $ 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 projects. As of March 31, 1998, the excess of the
Company's investment over its share of the equity in the underlying net
assets of ACLC ("Excess Investment") was $190,920. This Excess
Investment is being amortized over the life of the investment. On April
1, 1998, the Company transferred its equity interest in ACLC to RSVP.
Summarized financial information and a summary of the Company's investment
in and share of loss from ACLC is as follows:
Balance Sheets
March 31, December 31,
1998 1997
-------------- --------------
Investment in leasehold estates,
less accumulated depreciation $ 33,627,068 $ 30,042,101
Other Assets 3,615,695 4,035,570
-------------- --------------
Total Assets 37,242,763 34,077,671
============== ==============
Note payable 28,178,960 25,635,208
Other Liabilities 3,357,893 3,633,473
-------------- --------------
Total Liabilities 31,536,853 29,268,681
-------------- --------------
Minority Interest 639,741 425,254
Members' equity 5,066,169 4,383,736
Less: Other members' equity (3,377,447) (2,922,491)
-------------- --------------
Company's share of the equity
in underlying net assets of ACLC 1,688,722 1,461,245
Excess investment 190,920 190,920
-------------- --------------
Net investment in ACLC $ 1,879,642 $ 1,652,165
============== ==============
Statement of Operations
For the three Period from
months ended October 17,
March 31, 1997 to December
1998 31, 1997
-------------- --------------
Rental Income $ 1,219,340 $ 980,402
Other Income 197,365 504,252
-------------- --------------
Total Income 1,416,705 1,484,654
-------------- --------------
General and administrative expenses 603,150 612,682
Property operating expenses 310,357 353,912
Interest expense 543,599 452,864
Depreciation 162,686 152,550
-------------- --------------
Total Expense 1,619,792 1,572,008
-------------- --------------
Minority interest (48,564) (20,886)
Net income (154,523) (66,468)
Less: Other members' share (103,015) (44,312)
-------------- --------------
Company's share $ (51,508) $ (22,156)
============== ==============
RSI has contracted to acquire a 58.69% equity interest in On-Site
Venture, LLC ("On-Site"), a company that provides advanced
telecommunications systems and services within commercial and residential
buildings and/or building complexes. Under the terms of the contract,
the Company has also committed to contribute $6.5 million to On-Site to
fund certain capital costs of installing telecommunication systems and
for working capital (see Note 5).
4. SHAREHOLDERS' EQUITY
The Company has established the 1998 stock option plan (the "Plan") for
the purpose of attracting and retaining executive officers, directors and
other key employees. Pursuant to the Plan 3,700,376 of the Company's
authorized shares have been reserved for issuance under the Plan. On
January 10, 1998 and March 30, 1998, the Company granted options to
purchase 542,890 and 2,613,745, respectively of the Company's common
shares at an exercise price of $1.10 and $1.04 respectively per share
based on the fair value on each date of grant, which the board of
directors of the Company has concluded to be book value on each date of
grant.
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 RSVP managing
directors who is a former employee of PWRES.
The following is the Company's reconciliation of the numerators and
denominators of the basic and diluted net loss per weighted average
common share computations and other related disclosures required be FAS
Statement 128:
The following table set forth the computation of basic and diluted
earnings per share:
Three
Months Ended
March 31,
1998
---------------
Numerator:
Net loss $ (709,209)
---------------
Numerator for basic and diluted
earnings per share $ (709,209)
---------------
Denominator:
Denominator for basic earnings per
share - weighted average shares 3,928,202
Effect of dilutive securities:
Employee stock options ---
---------------
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversions 3,928,202
---------------
Basic earnings per common share:
Net loss per common share $ (0.18)
---------------
Diluted earnings per common share:
Diluted net loss per common share $ (0.18)
---------------
5. TRANSACTIONS WITH RELATED PARTIES
Included in affiliate receivables on the accompanying Balance Sheet is a
secured by interest loan of $666,666 to RFG Capital, an entity which is
owned evenly at 33 1/3% by the Company, Jon L. Halpern, and an
independent third party investor. The note bears interest at 12% per
annum.
ROP has advanced the Company $5,976,847 and $2,943,210 at March 31, 1998
and December 31, 1997 respectively. These advances bear interest at 12%
per annum.
In February 1998, RSVP Holdings, LLC, entered into employment agreements
with the two managing directors of RSVP. The agreements provide for a
base salary of $500,000 and have a seven-year term. In addition to the
base salary each Managing Director has received a $3.0 million grant of
common stock of Reckson (the "Reckson Stock") which will vest equally
over five years. The Reckson Stock was purchased by the Company and
advanced to RSVP Holdings, LLC.
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.
The Company advanced On-Site $975,000 through March 31, 1998 and an
additional $150,000 through April 10, 1998 to fund certain operating
costs. The advances are evidenced by loans convertible into equity
interests in On-Site which bear interest at a rate of 12% per annum and
mature on March 1, 1999 (See Note 3).
6. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires RSI to disclose the
estimated fair values of its financial instrument assets and liabilities.
The carrying amounts approximate fair value for cash and cash equivalents
because of the short maturity of those instruments. For the loans
payable to affiliates the estimated fair value approximates the recorded
balance.
7. SUBSEQUENT EVENTS
On April 1, 1998 the Company purchased Reckson's 9.9% equity interest in
Reckson Executive Centers, LLC ("REC") for $200,000. REC owns and
operates executive office suite business in the New York tri-state area.
All of REC's centers are located within buildings owned and operated by
ROP.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
accompanying Financial Statements of Reckson Service Industries, Inc.
(the "Company" or "RSI") and related notes thereto.
OVERVIEW AND BACKGROUND
The Company's primary business is to create and manage a system of
interrelated services to be offered to Reckson Operating Partnership,
L.P. ("ROP"), ROP's tenants (the "Reckson Customer Base") and the general
marketplace through a centralized infrastructure. The Company's growth
strategy is to acquire primarily established businesses within each of
its targeted service sectors, and, where appropriate, to retain the
existing management of such businesses ("Service Platforms").
Specifically, the Company 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 Service Platform investment will serve as a basis for future
acquisitions in such sectors. The Company will establish Service
Platforms that present significant opportunities to provide commercial
services to the Reckson Customer Base and other third parties. Currently,
the Reckson Customer Base retains third parties to provide many services
for their day-to-day operations. Of these services, the Company may seek
to provide the Reckson Customer Base with telecommunications, document
storage, document reproduction and logistics services (i.e., inventory
services, messenger services and delivery services), as well as with
other services that the Company determines may be utilized by the Reckson
Customer Base. The Company will seek growth in each Service Platform by
(i) accessing the Reckson Customer Base as an anchor for growth
opportunities in ROP's markets, (ii) integrating each Service Platform
into RSI's centralized infrastructure and (iii) acquiring similar
businesses or making additional investments within such Service Platform.
In February 1998, RSVP Holdings, LLC, the managing member of Reckson
Strategic Venture Partners ("RSVP") entered into employment agreements
with two highly experienced real estate professionals (the "Managing
Directors"). The agreements provide for a base salary of $500,000 and
have a seven-year term. In addition to the base salary each Managing
Director has received a $3.0 million grant of common stock of Reckson
Associates Realty Corp. ("Reckson"), (the "Reckson Stock") which will
vest equally over five years. The Reckson Stock was purchased by the
Company and advanced to RSVP Holdings, LLC. The Company is a managing
member and 100% owner of the common equity of RSVP Holdings, LLC. New
World Realty LLC ("New World"), an entity owned by the Managing
Directors, acts as a managing member of RSVP Holdings, LLC and owns a
carried interest which provides for the Managing Directors to receive a
share in the profits of RSVP after the Company and Paine Webber Real
Estate Securities ("PWRES"), the preferred equity investor, have received
certain minimum returns and a return of capital. In addition, it is
anticipated that New World will receive transaction fees of up to $1
million a year for identifying investment opportunities for RSVP.
RESULTS OF OPERATIONS
For the three months ended March 31, 1998 the Company reported a net loss
of $709,209. Total revenues include (i) equity in earnings of RO of
$170,567 and represent RO's 33 1/3 % interest in a joint venture that owns
a 70% interest in Dobie Center, L.P. an entity which owns the Dobie
Center Student Housing Facility located in Austin, Texas. Dobie Center,
L.P. reported total revenues of $2.6 million, operating income of $1.6
million and net income of $.7 million, (ii) equity in loss of American
Campus Lifestyles Companies, a student housing company ("ACLC") of
$51,508. ACLC reported total revenues of $1.4 million, operating income
of $.9 million and a net loss of $154,523, (iii) equity in loss of RSVP
Holdings, LLC of $543,412 and (iv) interest income of $46,661 relating to
loans made to certain affiliates. The Company also reported total
expenses of $331,517 which substantially represents interest, payroll and
office costs.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of RSI, ROP
contributed $4,256,324 to RSI for a 95% non-voting equity interest.
Simultaneously, certain officers of Reckson contributed $224,017 of
subscription notes to RSI in exchange for a 5% voting equity interest,
which subscription notes were subsequently paid off. On June 11, 1998,
95% of the common stock of RSI will be distributed (the "Distribution")
to holders of common shares of Reckson and unit holders 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 20,557,130
additional shares of common stock of the Company at a purchase price of
$1.03. RSI will rely primarily on funds raised in the rights offering
and on ROP through borrowings under the Credit Facility from ROP 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.
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. RSI
and Reckson Standby, LLC (the "Standby Purchaser") (an entity owned by
several members of management), have entered into a 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 on the Expiration Date at the Exercise Price.
RSI expects to establish a credit facility (the "RSI Facility") with ROP
in the amount of $100 million for RSI's service sector operations and
other general corporate purposes. In addition, ROP 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 similar to the RSI Facility (the "RSVP Facility"). Advances
under the RSVP 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 a Service Platform, 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 RSI and RSVP Facilities (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 Paine Webber Equity Facility from
PWRES which provides for the investment by PWRES of up to $200 million in
RSVP in the form of preferred equity, subject to certain conditions.
Amounts available under the Paine Webber Equity Facility will be used by
RSVP to make investments consistent with its business objectives and to
fund working capital. Under the terms of the Paine Webber Equity
Facility, RSVP is subject to various covenants and events of default and
related remedies. Such remedies include increased control rights of
PWRES over the operation of RSVP under certain circumstances. Advances
under the Paine Webber Equity Facility will be partially funded by an
investment fund that is jointly sponsored by financier George Soros and
PWRES. In addition, PWRES and such investment fund will receive a
priority or preferred distribution from RSVP prior to the distribution of
cash to RSI.
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 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.
INFLATION
Student housing is subject to incremental rent increases each year. The
Company believes that inflationary increases will be offset by these rent
increases.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information - None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RECKSON SERVICE INDUSTRIES, INC.
Registrant
June 29, 1998 Scott H. Rechler
Date Scott H. Rechler, President,
Chief Operating Officer and Director
(Principal Executive Officer)
June 29, 1998 Michael Maturo
Date Michael Maturo, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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