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 June 30, 1998
Commission file number: 001-14183
RECKSON SERVICE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3383642
(State other jurisdiction of incorporation (IRS. Employer
of organization) Identification Number)
225 Broadhollow Road, Melville, NY 11747
(Address of principal executive office) (zip code)
(516) 719-7400
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The company has only one class of common stock, issued at $.01 par value
per share with 24,685,514 shares outstanding as of August 11, 1998.
<PAGE>
RECKSON SERVICE INDUSTRIES, INC.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED JUNE 30, 1998
TABLE OF CONTENTS
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets of Reckson Service Industries, Inc. as of June
30, 1998 and December 31, 1997 ...............................
Statement of Operations of Reckson Service Industries, Inc. for
the three and six months ended June 30, 1998 .................
Statement of Cash Flows of Reckson Service Industries, Inc. for
the six months ended June 30, 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>
June 30, December 31,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
Assets:
Cash $ 48,398 $ 129,704
Investment in RO Partners Management, LLC (Note 3) --- 3,868,093
Investment in ACC (Note 3) --- 1,652,165
Investment in and advances to RSVP Holdings, LLC
(Notes 3 and 5) 14,941,828 ---
Investment in and advances to Reckson Executive
Centers, LLC (Note 3) 1,066,816 ---
Equipment (net of depreciation of $2,150) 35,281 ---
Affiliate receivables (Note 5) 1,616,283 832,854
Investment in and advances to On-Site Ventures, LLC
(Note 3) 3,429,599 325,000
Receivable from Transfer Agent 13,828,244 ---
Organization and pre-acquisition costs (net of
amortization of $27,056 and $8,214, respectively) 996,620 681,694
Other assets 284,687 30,185
-------------- --------------
Total Assets 36,247,756 7,519,695
============== ==============
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses 558,900 119,384
Loans payable to affiliates (Note 5) 19,464,889 3,177,857
-------------- --------------
Total Liabilities 20,023,789 3,297,241
Commitments (Note 6) --- ---
Shareholders' Equity: (Note 1 and 4)
Common stock, $.01 par value, 24,685,514 shares
issued and outstanding 246,855 10
Additional paid in capital 24,685,843 4,480,331
Common stock subscription (7,325,159) ---
Retained earnings (1,383,572) (257,887)
-------------- --------------
Total Shareholders' Equity 16,223,967 4,222,454
-------------- --------------
Total Liabilities and Shareholders' Equity $ 36,247,756 $ 7,519,695
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Service Industries, Inc.
Statement of Operations
(Unaudited)
<CAPTION>
Three Six
Months Ended Months Ended
June 30, June 30,
1998 1998
--------------- ---------------
<S> <C> <C>
Revenues:
Equity in (loss) of ACC $ --- $ (51,508)
Equity in earnings of RO Partners, Management, LLC --- 170,567
Equity in (loss) of RSVP Holdings, LLC (75,062) (618,474)
Equity in (loss) of Reckson Executive Centers, LLC (2,511) (2,511)
Equity in (loss) of On-site Ventures, LLC (4,733) (4,733)
Other income 166,666 166,666
Interest income 94,271 140,932
--------------- ---------------
Total Revenues 178,631 (199,061)
--------------- ---------------
Expenses:
General and administrative expenses 276,820 464,706
--------------- ---------------
Total Administrative 276,820 464,706
--------------- ---------------
Net Operating Loss (98,189) (663,767)
Non Operating Expenses:
Amortization and Depreciation 6,043 20,992
Interest Expense 312,244 440,926
--------------- ---------------
Net Loss $ (416,476) $ (1,125,685)
=============== ===============
Basic net loss per weighted average common share $ (0.09) $ (0.27)
=============== ===============
Weighted average common shares outstanding 4,513,975 4,191,068
=============== ===============
Diluted net loss per weighted average common share $ (0.07) $ (0.23)
=============== ===============
Diluted weighted average common shares outstanding 5,800,318 4,834,240
=============== ===============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Service Industries, Inc.
Statement of Cash Flows
(Unaudited)
<CAPTION>
Six
Months Ended
June 30,
1998
--------------
<S> <C>
Cash Flows from Operating Activities:
Net Loss $ (1,125,685)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 20,992
Equity in loss of RSVP Holdings, LLC 618,474
Equity in loss of ACC 51,508
Equity in (earnings) of RO Partners Management, LLC (170,567)
Equity in loss of Reckson Executive Centers, LLC 2,511
Equity in loss of On-Site Ventures, LLC 4,733
Changes in operating assets and liabilities:
Other assets (254,502)
Accounts payable and accrued expenses 439,516
--------------
Net cash (used in) operating activities (413,020)
Cash Flows From Investing Activities:
Purchase of equipment (37,431)
Pre-acquisition costs (333,768)
Investment in Reckson Executive Centers, LLC (200,000)
--------------
Net cash (used in) investing activities (571,199)
Cash Flows From Financing Activities:
Advances to On-Site Ventures, LLC (3,109,332)
Costs of preferred equity issuance (5,701,050)
Proceeds from preferred equity contribution 5,000,000
Proceeds from affiliate loans 16,287,032
Loan to RSVP Holdings, LLC (9,642,000)
Due from affiliates (783,426)
Loans to Reckson Executive Centers, LLC (869,326)
Contributions to ACC investment (278,985)
--------------
Net cash provided by financing activities 902,913
Net decrease in cash and cash equivalents (81,306)
Cash and cash equivalents at beginning of period 129,704
Cash and cash equivalents at end of period $ 48,398
==============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest ---
==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
Reckson Service Industries
Notes to Financial Statements
June 30, 1998
(unaudited)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Reckson Service Industries, Inc. ( "RSI" or the "Company") was formed on
July 15, 1997 to engage in the business of providing commercial services to
properties owned by Reckson Operating Partnership, L.P. ("ROP"), whose
general partner is Reckson Associates Realty Corp. ("Reckson"), and its
tenants and third parties and to invest in Reckson Strategic Venture
Partners, LLC and related entities ("RSVP") a real estate venture capital
fund. The Company will operate under an agreement between the Company and
ROP (the "Intercompany Agreement"). Under the Intercompany Agreement, the
Company and ROP agree, subject to certain terms, to provide each other with
first refusal rights to participate in certain transactions.
In connection with the initial capitalization of RSI, ROP contributed
$4,256,324 for a 95% nonvoting equity interest and certain members of
Reckson management contributed notes of $224,017 to the Company in exchange
for a 5% voting ownership interest. On October 29, 1997 the notes were
satisfied.
On June 11, 1998, ROP distributed its 95% of the common stock of RSI to its
unit holders of record on May 26, 1998. Immediately prior to the
Distribution, the shares of non-voting common stock held by ROP were
exchanged by RSI for RSI common shares. Each share of the Company's common
stock issued in the Distribution was accompanied by one preferred share
purchase right. Simultaneously, Reckson distributed 100% of the RSI common
shares received from the distribution to its common shareholders of the
same record date. In addition, simultaneously with the Distribution, the
Company issued rights to its stockholders to subscribe for the purchase of
additional shares of common stock of the Company.
The Company owned a 33 1/3% interest in RO Partners Management, LLC ("RO"),
the remaining interest in RO is held 33 1/3% by Jon L. Halpern, a former
director of Reckson, and 33 1/3% by an independent third party investor.
RO is the general partner of Reckson Opportunity Partners, L.P.
("Opportunity Partners") predecessor to RSVP. RSVP was formed on January
23, 1998 to succeed to the operating activities of Opportunity Partners.
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 who has committed $200 million in capital
and shares 66 2/3% in profits and losses of RSVP with the Company subject
to a maximum internal rate of return of 16% on invested capital. It is
anticipated that future investments by the Company in real estate venture
capital fund activities will be conducted through RSVP. 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 and Paine Webber Real Estate
Securities 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 related to identifying RSVP investment
opportunities.
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 Communities, L.L.C. ("ACC") through March
31, 1998, RSVP Holdings, LLC, Reckson Executive Centers, LLC and On-Site
Ventures, 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
As of June 1998, the Company advanced approximately $9,642,000 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
June 30,
1998
--------------
Investment in RO $ 4,049,957
Investment in ACC 1,751,197
Deferred compensation expense 5,527,239
Other assets 5,217,371
--------------
Total Assets 16,545,764
==============
Due to affiliates 1,549,297
Other liabilities 1,291,590
--------------
Total Liabilities 2,840,887
--------------
Other member's deficit (1,236,951)
--------------
Net investment in and advances to RSVP Holdings, LLC $ 14,941,828
==============
Statements of Operations
For the
period from
Three January 23,
Months Ended 1998 to
June 30, June 30,
1998 1998
--------------- ---------------
Revenues:
Equity in (loss) of ACC $ (128,445) $ (128,445)
Equity in earnings of RO 11,297 11,297
Other income 254,746 254,746
Interest income 52,114 52,547
--------------- ---------------
Total Income 189,712 190,145
--------------- ---------------
Expenses:
Operating expenses 219,848 400,196
General and administrative expenses 1,019,233 1,292,649
Interest expense 229,694 278,524
Depreciation and amortization 32,950 74,201
--------------- ---------------
Total Expenses 1,501,725 2,045,570
--------------- ---------------
Net Loss (1,312,013) (1,855,425)
Less: Others member's share (1,236,951) (1,236,951)
--------------- ---------------
Company's Share $ (75,062) $ (618,474)
=============== ===============
In 1997, the Company invested $3.62 million in RO, which contributed such
amount to Opportunity Partners. Opportunity Partners invested
approximately $10.8 million to acquire a 70% interest in Dobie Center,
L.P., which owns 100% in Dobie Center, a mixed use student housing and
retail property located in Austin, Texas. On April 1, the Company
transferred its interest in RO to RSVP.
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 Sheet
June 30, December 31,
1998 1997
-------------- --------------
Property and equipment, less accumulated
depreciation 35,727,283 $ 35,345,013
Other assets 4,461,250 6,700,605
-------------- --------------
Total Assets 40,188,533 42,045,618
-------------- --------------
Mortgage payable 19,880,500 20,280,500
Other liabilities 2,959,121 5,195,624
-------------- --------------
Total Liabilities 22,839,621 25,476,124
-------------- --------------
Minority interest 5,149,287 4,915,462
RO Partners equity 12,199,625 11,654,032
Less: Non-RSVP equity (8,149,668) (7,785,939)
-------------- --------------
Net RSVP investment in RO $ 4,049,957 $ 3,868,093
============== ==============
Statement of Income
For the three For the six
months ended months ended
June 30, June 30,
1998 1998
--------------- ---------------
Rental income $ 2,083,144 $ 4,265,289
Interest income 95,626 159,133
Other income 7,665 11,891
--------------- ---------------
Total Income 2,186,435 4,827,313
--------------- ---------------
Property operating expenses 776,295 1,745,902
General and administrative expenses 768,278 1,061,683
Interest expense 380,695 742,638
Depreciation and amortization 212,749 423,175
Non-recurring expense ---- 74,495
--------------- ---------------
Total Expenses 2,138,017 4,047,893
--------------- ---------------
Minority interest 14,525 233,827
Net income 33,893 545,593
Less: Non-RSVP share (22,596) (363,729)
Less: Company's share ---- (170,567)
--------------- ---------------
RSVP's share $ 11,297 $ 11,297
=============== ===============
The Company contributed $1.51 million to and acquired a 33 1/3% interest in
RFG Capital Management Partners ("RFG Capital") whose sole net investment
is a 76.09% interest in ACC, a student housing enterprise which owns,
develops, constructs, manages and acquires, on-and off campus student
housing projects. As of December 31, 1997, the excess of the Company's
investment over its share of the equity in the underlying net assets of ACC
("Excess Investment") was $190,920. This Excess Investment is being
amortized over the life of the investment estimated at 25 years. On April
1, 1998, the Company transferred its equity interest in ACC to RSVP.
Summarized financial information and a summary of the Company's investment
in and share of loss from ACC is as follows:
Balance Sheet
June 30, December 31,
1998 1997
--------------- ---------------
Investment in leasehold estates, less
accumulated depreciation $ 39,174,335 $ 30,042,101
Other assets 3,224,413 4,035,570
--------------- ---------------
Total Assets 42,398,748 34,077,671
--------------- ---------------
Note payable 33,798,527 25,635,208
Other liabilities 3,393,217 3,633,473
--------------- ---------------
Total Liabilities 37,191,744 29,268,681
--------------- ---------------
Minority interest 520,422 425,254
RFG Capital equity 4,686,582 4,383,736
Less: Non-RSVP equity (3,124,396) (2,922,491)
--------------- ---------------
Company's share of the equity in underlying
net assets of ACLC 1,562,186 1,461,245
Excess investment 189,011 190,920
--------------- ---------------
Net investment in ACLC $ 1,751,197 $ 1,652,165
=============== ===============
Statement of Operations
For the three For the six
months ended months ended
June 30, June 30,
1998 1998
--------------- ---------------
Rental income $ 750,897 $ 1,970,237
Other income 248,345 445,710
--------------- ---------------
Total Income 999,242 2,415,947
--------------- ---------------
General and administrative expenses 525,612 1,128,762
Property operating expenses 276,658 587,015
Interest expense 533,176 1,075,775
Depreciation 162,683 325,369
--------------- ---------------
Total Expense 1,498,129 3,117,921
--------------- ---------------
Minority interest (119,284) (167,848)
Net loss (379,603) (534,126)
Less: Other non-RSVP share (251,158) (354,173)
Less: Company's share --- (51,508)
--------------- ---------------
RSVP's share $ (128,445) $ (128,445)
=============== ===============
RSI has contracted to acquire a 58.69% equity interest in On-Site Ventures,
LLC ("On-Site"), a company that provides advanced telecommunications
systems and services within commercial and residential buildings and/or
building complexes. Under the terms of the contract, the Company has also
committed to contribute $6.5 million to On-Site to fund certain capital
costs of installing telecommunication systems and for working capital. Jon
L. Halpern, a former director of Reckson, beneficially owns substantially
all of the On-Site business prior to RSI's acquisition of an interest
therein (and will own beneficially a 25.97% interest in On-Site assuming
the Company acquires its 58.69% interest). The Company has advanced On-
Site $3,125,000 through June 30, 1998 to fund certain operating costs.
The advances are evidenced by loans convertible into equity interests in
On-Site which bear interest at a rate of 12% per annum and mature on March
1, 1999. On May 18, 1998, the Company purchased a membership interest in
On-Site equal to 1% of the aggregate membership interests and recognized an
equity loss of ($4,733).
On April 1, 1998 the Company purchased Reckson's 9.9% equity interest in
Reckson Executive Centers, LLC ("REC") for $200,000 and assumed debt of
approximately $322,000. REC owns and operates executive office suite
business in the New York tri-state area. All of REC's centers are located
within buildings owned and operated by ROP. For the period from April 1,
1998 to June 30, 1998, the Company recognized an equity loss of ($2,511).
The Company has also loaned REC approximately $538,000 to fund purchases of
certain business assets in connection with the operation of the executive
centers. The loans accrue interest at 12%.
4. SHAREHOLDERS' EQUITY
The Company has established the 1998 stock option plan (the "Plan") for the
purpose of attracting and retaining executive officers, directors and other
key employees. Pursuant to the Plan 3,700,376 of the Company's authorized
shares have been reserved for issuance under the Plan. On January 10, 1998
and March 30, 1998, the Company granted options to purchase 542,890 and
2,755,468, respectively of the Company's common shares at an exercise
price of $1.10 and $1.04 respectively per share based on the fair value on
each date of grant, which the board of directors of the Company has
concluded to be book value on each date of grant.
In connection with the PWRES preferred equity financing, the Company paid a
commitment fee of 2.5% of the total preferred equity commitment of which
$1,400,000 was paid to an entity owned by a former employee of PWRES who
is one of RSVP's managing directors.
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 Six
Months Months
Ended Ended
June 30, June 30,
1998 1998
------------ ------------
Numerator:
Net loss $ (416,476) (1,125,685)
------------ ------------
Numerator for basic and diluted
earnings per share $ (416,476) (1,125,685)
------------ ------------
Denominator:
Denominator for basic earnings per
share - weighted average shares 4,513,975 4,191,068
Effect of dilutive securities:
Employee stock options 1,286,343 643,172
------------ ------------
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversions 5,800,318 4,834,240
------------ ------------
Basic earnings per common share:
Net loss per common share $ (0.09) (0.27)
------------ ------------
Diluted earnings per common share:
Diluted net loss per common share $ (0.07) (0.23)
------------ ------------
5. TRANSACTIONS WITH RELATED PARTIES
Included in affiliate receivables on the accompanying balance sheet is an
unsecured loan of $666,666 to RFG Capital, an entity which is owned evenly
at 33 1/3% by the Company, Jon L. Halpern, and an independent third party
investor. The note bears interest at 12% per annum.
RSI established a credit facility (the "RSI Facility") with ROP in the
amount of $100 million for RSI's service sector operations and other
general corporate purposes. ROP has advanced the Company $10,697,889 and
$2,943,210 at June 30, 1998 and December 31, 1997, respectively. These
advances bear interest at 12% per annum. The Company repaid ROP
approximately $13 million in July, 1998.
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, entered into employment agreements
with the two managing directors of RSVP. The agreements provide for a base
salary of $500,000 and have a seven-year term. In addition to the base
salary each managing director has received from the Company a $3.0 million
grant of common stock of Reckson (the "Reckson Stock") which will vest
equally over five years. The Reckson Stock was purchased by the Company
and advanced to RSVP Holdings, LLC.
In addition, in April 1998, the Company advanced each managing director a
tax loan of $1.44 million in connection with the grant of Reckson stock.
These loans bear interest at 8% per annum and are due in April, 2003.
RSI and Reckson Standby, LLC (the "Standby Purchaser") (an entity owned by
several members of management), entered into a Standby Agreement pursuant
to which the Standby Purchaser agreed to purchase, and RSI agreed to sell,
any and all shares of RSI common stock that are the subject of Subscription
Rights in the Rights Offering but are not subscribed for by the Holders on
the Expiration Date at the Exercise Price. The proceeds from the stand-by
purchaser were approximately $7,325,000.
The Company is entitled to an annual asset management fee of $2 million
with respect to RSVP, of which $1.5 million is subordinate to PWRES
receiving a minimum rate of return of 16% and a return of its capital. The
unsubordinated amount for the period March 5, 1998 to June 30, 1998 of
$166,666 is included in affiliate receivables on the accompanying balance
sheet.
6. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires RSI to disclose the
estimated fair values of its financial instrument assets and liabilities.
The carrying amounts approximate fair value for cash and cash equivalents
because of the short maturity of those instruments. For the loans payable
to affiliates the estimated fair value approximates the recorded balance.
7. SUBSEQUENT EVENTS
On August 4, 1998, Dobie Center Properties, Ltd. issued $46,560,000
principal amount of AAA series 1998 taxable insured notes in connection
with the property's refinancing. The net proceeds of $45.1 million were
utilized to repay $20.4 million of secured debt and for reserves related to
renovations to the project. In connection with this transaction, RSVP
received approximately $4.79 million, net of reserves.
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 third parties in
the general marketplace through a centralized infrastructure. The
Company's growth strategy is to acquire primarily established
businesses within each of its targeted service sectors, and, where
appropriate, to retain the existing management of such businesses ("Service
Platforms"). Specifically, the Company 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 from the Company a $3.0 million grant of common stock of
Reckson Associates Realty Corp. ("Reckson"), (the "Reckson Stock") which
will vest equally over five years. The Reckson Stock was purchased by the
Company and advanced to RSVP Holdings, LLC. In addition, in April 1998,
the Company advanced each Managing Director a tax loan of $1.44 million in
connection with the grant of Reckson stock. These loans bear interest at
8% per annum and are due in April, 2003. The Company is a managing member
and 100% owner of the common equity of RSVP Holdings, LLC. New World
Realty LLC ("New World"), an entity owned by the Managing Directors, acts
as a managing member of RSVP Holdings, LLC and owns a carried interest
which provides for the Managing Directors to receive a share in the profits
of RSVP after the Company and Paine Webber Real Estate Securities
("PWRES"), the preferred equity investor, have received certain minimum
returns and a return of capital. In addition, it is anticipated that New
World will receive transaction fees of up to $1 million a year
related to identifying RSVP investment opportunities.
RESULTS OF OPERATIONS
For the three months ended June 30, 1998 the Company reported a net loss of
($416,476). Total revenues include (i) equity in loss of RSVP Holdings,
LLC of ($75,062) and, (ii) equity in loss of On-Site of ($4,733), (iii)
equity in loss of REC of ($2,511), (iv) management fee income of $166,666
and (v) interest income of $94,271 relating to loans made to certain
affiliates. The Company also reported total expenses of $595,107 which
substantially represents interest, payroll and office costs.
For the six months ended June 30, 1998 the Company reported a net loss of
$(1,125,685). Total revenues include (i) equity in earnings of RO of
$170,567 and represent RO's 331/3 % 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, (ii) equity in loss of
American Campus Communities, a student housing company ("ACC") of
$(51,508), (iii) equity in loss of RSVP Holdings, LLC of ($618,474) and
(iv) equity in loss of On-Site of ($4,733), (v) equity in loss of
REC of ($2,511), (vi) management fee income of $166,666 and (vii) interest
income of $140,932 relating to loans made to certain affiliates. The
Company also reported total expenses of $926,624 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, ROP distributed its 95% of
the common stock of RSI (the "Distribution") to its unit holders of record
on May 26, 1998. Immediately prior to the Distribution, the shares of non-
voting common stock held by ROP were exchanged by RSI for RSI common
shares. Each share of the Company's Common Stock issued in the
Distribution was accompanied by one Preferred Share Purchase Right.
Simultaneously, Reckson distributed 100% of the RSI common shares
received from the distribution to its common stockholders of the same
record date. In addition, simultaneously with the Distribution, the
Company issued rights to its stockholders to subscribe for the purchase of
20,557,130 additional shares of common stock of the Company at a purchase
price of $1.03.
Immediately after the Distribution of RSI common stock, RSI granted to its
stockholders (collectively, "Holders") one Subscription Right for each
share of RSI common stock. Each Subscription Right entitled the Holder to
purchase one share of RSI common stock at a purchase price of $1.03 per
share (the "Exercise Price") and, at the election of such Holder, four
additional shares (but not less than four additional shares) at a purchase
price of $1.03 per share. Holders of Subscription Rights had the
opportunity to acquire up to an aggregate of approximately 20,557,130
shares of RSI common stock. RSI and Reckson Standby, LLC (the "Standby
Purchaser") (an entity owned by several members of management), entered
into a Standby Agreement pursuant to which the Standby Purchaser agreed to
purchase, and RSI agreed to sell, any and all shares of RSI common stock
that are the subject of Subscription Rights in the Rights Offering but are
not subscribed for by the Holders on the Expiration Date at the Exercise
Price. The proceeds from the stand-by purchaser were approximately
$7,325,000. RSI received net proceeds from the rights offering of
approximately $21,153,000. RSI will utilize funds raised in the rights
offering and borrowings under the Credit Facility from ROP for the
financing of RSI's operations.
RSI established a credit facility (the "RSI Facility") with ROP in the
amount of $100 million for RSI's service sector operations and other
general corporate purposes. 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 are subject to
approval by Reckson's board of directors, while advances under the RSI
Facility in excess of $10 million in respect of any single investment in a
Service Platform, as well as advances for investments in opportunities in
non-commercial services, are subject to approval by Reckson's board of
directors, or a committee thereof. The RSI and RSVP Facilities (the
"Credit Facilities") each have a term of five years and advances thereunder
are recourse obligations of RSI. Interest accrues on advances made
under the Credit Facilities at a rate equal to the greater of (i) the prime
rate plus 2% and (ii) 12% per annum, with the rate referred to in clause
(iii) increasing annually at a rate of 4% of the prior year's rate. Prior
to maturity, interest is be payable quarterly but only to the extent of net
cash flow and on an interest-only basis and is prepayable without
penalty at the option of RSI. As long as there are outstanding advances
under the Credit Facilities, RSI is prohibited from paying dividends on any
shares of its capital stock. The Credit Facilities are subject to certain
other covenants and will prohibit advances thereunder to the extent such
advances could, in the determination of Reckson, endanger Reckson's status
as a REIT. Additional indebtedness may be incurred by subsidiaries of RSI.
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 remaining 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 remaining proceeds from the rights offering and advances
under the RSI Facility. The Company expects that it will refinance
indebtedness under the RSI Facility at maturity or retire such debt through
the issuance of debt securities or equity securities, although there can be
no assurance that the Company will be able to refinance or retire such
indebtedness. The Company anticipates that cash on hand, from remaining
proceeds of the rights offering and net cash flows from operating
activities, together with cash available from borrowings under the RSI
Facility, will be adequate to meet the capital and liquidity requirements
of the Company in both the short and long term.
The Credit Facilities bear interest at the greater of the Prime Rate plus
2% or 12% (increasing 4% per year, as described above). The rate of
interest on the Credit Facilities will be influenced by changes in short
term rates and is sensitive to inflation and other economic factors. A
significant increase in interest rates may have a negative impact
on the earnings of the Company due to the variable interest rate under the
Credit Facilities.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognizes a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions, 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
accounting 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
August 12, 1998 /s/ Scott H. Rechler
Date Scott H. Rechler, President,
Chief Operating Officer and Director
(Principal Executive Officer)
August 12, 1998 /s/ Michael Maturo
Date Michael Maturo, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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