SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
-------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 8, 1999
RECKSON SERVICE INDUSTRIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
1-14183 11-3383642
(Commission File Number) (IRS Employer Id. Number)
225 Broadhollow Road 11747
Melville, New York (Zip Code)
(Address of principal executive offices)
(516) 719-7400
(Registrant's telephone number, including area code)
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant hereby amends the following items, financial statements,
exhibits or other portions of its Current Report on Form 8-K, as filed with
the Securities and Exchange Commission on January 25, 1999, as set forth in
the pages attached hereto.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
Alliance National Incorporated and Subsidiaries - Consolidated
--------------------------------------------------------------
Financial Statements
--------------------
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1998
and 1997
Consolidated Statements of Income for the transition period ended
December 31, 1998 and for the years ended June 30, 1998,
1997 and 1996
Consolidated Statements of Stockholders' Equity for the transition
period ended December 31, 1998 and for the years ended June
30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the transition period ended
December 31, 1998 and for the years ended June 30, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information
Pro Forma Condensed Consolidated Balance Sheet (unaudited) as of
December 31, 1998
Pro Forma Condensed Consolidating Statement of Operations
(unaudited) for the year ended December 31, 1998
Notes to Pro Forma Financial Statements (unaudited)
(c) Exhibits
23. Consent of PricewaterhouseCoopers LLP
ALLIANCE NATIONAL INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998
AND THE TRANSITION PERIOD ENDED DECEMBER 31, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
February 26, 1999
To the Board of Directors and Stockholders of
Alliance National Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of
ALLIANCE NATIONAL Incorporated and Subsidiaries at June 30, 1997 and 1998 and
December 31, 1998, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1998 and for the period
July 1, 1998 to December 31, 1998, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and 1997
December 31, 1998
<TABLE>
<CAPTION>
ASSETS: JUNE 30, JUNE 30, DECEMBER 31,
1997 1998 1998
---------------- --------------- ---------------
(NOTE 1)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,432,304 $ 5,909,954 $ 3,615,087
Restricted cash - - 10,000,000
Accounts receivable, net of allowance for doubtful accounts of
$257,000, $266,000 and $401,000, respectively 1,086,792 3,299,434 3,821,175
Prepaid expenses and other current assets 1,088,314 2,183,162 5,145,682
Deferred income taxes 823,900 86,000 174,000
Deferred financing costs 382,638 564,000 466,727
---------------- --------------- ---------------
Total current assets 4,813,948 12,042,550 23,222,671
Intangibles, net 19,717,414 61,046,547 81,605,181
Property and equipment, net 8,418,380 15,118,895 23,124,702
Deferred financing costs, net 1,435,171 1,411,563 2,584,418
Deferred income taxes 670,200 - -
Security deposits 998,483 1,391,669 2,110,952
Other assets, net - 1,673,276 1,426,526
---------------- --------------- ---------------
Total assets $ 36,053,596 $ 92,684,500 $ 134,074,450
================ =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 3,036,841 $ 5,581,351 $ 9,578,807
Income taxes payable 98,118 - -
Capital lease obligations 388,432 829,888 731,510
Deferred rent payable 225,646 543,861 727,619
Notes payable 532,099 500,000 7,875,000
---------------- --------------- ---------------
Total current liabilities 4,281,136 7,455,100 18,912,936
Notes payable 11,500,000 37,960,000 65,125,000
Acquisitions payable - 8,430,534 -
Tenants' security deposits 2,982,520 6,630,533 8,592,948
Deferred rent payable 2,086,284 5,319,174 6,607,771
Deferred income taxes - 701,000 1,514,000
Capital lease obligations 589,517 474,515 602,153
---------------- --------------- ---------------
Total liabilities 21,439,457 66,970,856 101,354,808
---------------- --------------- ---------------
Minority interest 1,682,179 821,673 -
---------------- --------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 15,000,000 shares:
Series A Convertible, $.01 par value, issued and outstanding
7,574,711 shares (liquidation preference $12,900,000) 12,324,047 13,695,240 14,407,957
Series B Convertible, $.01 par value, issued and outstanding
1,730,062 shares at June 30, 1998; 3,222,851 shares at
December 31, 1998 (liquidation preference $15,309,000) - 8,062,714 15,700,638
Common stock, $.01 par value, authorized 35,000,000 shares,
issued and outstanding 4,843,468, 4,951,868 and 4,901,868,
shares, respectively 48,435 49,519 49,019
Additional paid-in capital 3,375,609 3,370,608 3,133,608
Retained earnings (deficit) (2,816,131) (286,110) 378,420
---------------- --------------- ---------------
12,931,960 24,891,971 33,669,642
Note receivable from issuance of stock - - (950,000)
---------------- --------------- ---------------
Total stockholders' equity 12,931,960 24,891,971 32,719,642
---------------- --------------- ---------------
Total liabilities and stockholders' equity $ 36,053,596 $ 92,684,500 $ 134,074,450
================ =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended June 30, 1998, 1997 and 1996;
For the transition period ended December 31, 1998
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------------------------
1996 1997 1998 1998
------------- -------------- -------------- --------------
(NOTE 1)
<S> <C> <C> <C> <C>
BUSINESS CENTER OPERATIONS:
REVENUES:
Office rentals $ 7,280,400 $ 17,474,724 $ 39,390,571 $ 31,897,310
Support services 4,683,977 11,622,891 27,147,060 22,159,876
------------- -------------- -------------- --------------
11,964,377 29,097,615 66,537,631 54,057,186
------------- -------------- -------------- --------------
EXPENSES:
Rent 4,358,251 10,394,622 21,737,973 18,765,386
Support services 1,842,885 4,846,502 8,998,258 7,788,189
Center general and administrative 3,880,039 7,871,511 17,343,683 14,456,730
------------- -------------- -------------- --------------
10,081,175 23,112,635 48,079,914 41,010,305
------------- -------------- -------------- --------------
Contribution from operation of
business centers 1,883,202 5,984,980 18,457,717 13,046,881
------------- -------------- -------------- --------------
OTHER (EXPENSES) INCOME:
Corporate general and administrative (985,739) (2,769,544) (5,901,361) (4,552,021)
Depreciation and amortization (569,291) (1,172,594) (3,058,729) (2,762,348)
Interest expense, net (54,648) (930,598) (3,188,126) (2,884,300)
Managed center income 210,801 377,743 692,408 454,105
Other income 177,821 121,405 78,604 47,106
------------- -------------- -------------- --------------
(1,221,056) (4,373,588) (11,377,204) (9,697,458)
------------- -------------- -------------- --------------
Income before minority interest and
income taxes 662,146 1,611,392 7,080,513 3,349,423
Minority interest in net loss (income) of
consolidated partnerships 174,641 (118,880) (290,985) -
------------- -------------- -------------- --------------
Income before income taxes 836,787 1,492,512 6,789,528 3,349,423
(Provision) benefit for income taxes (278,000) 1,389,100 (2,700,000) (1,410,000)
------------- -------------- -------------- --------------
Net income $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
------------- -------------- -------------- --------------
Accretion of preferred stock - (846,437) (1,559,507) (1,274,893)
------------- -------------- -------------- --------------
Net income applicable to
common stock $ 558,787 $ 2,035,175 $ 2,530,021 $ 664,530
============= ============== ============== ==============
Share information:
Basic earnings:
Net income per common share $ 0.12 $ 0.42 $ 0.51 $ 0.13
============= ============== ============== ==============
Average shares outstanding 4,491,026 4,835,029 4,954,035 4,951,325
============= ============== ============== ==============
Diluted earnings:
Net income per common share $ 0.12 $ 0.30 $ 0.28 $ 0.10
============= ============== ============== ==============
Average shares outstanding 4,491,026 9,498,068 14,509,221 14,411,864
============= ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended June 30, 1998, 1997 and 1996
For the transition period ended December 31, 1998
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------- ------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 - - - - 4,364,700 $ 43,647
Exercise of common stock options - - - - 407,000 4,070
Issuance of common stock - - - - 30,000 300
Adjustment to outstanding common stock - - - - 6,768 68
Net income - - - - - -
----------- ----------- ----------- ----------- ----------- ------------
Balance, June 30, 1996 - - - - 4,808,468 48,085
Issuance of common stock - - - - 35,000 350
Issuance of Series A preferred stock, net 7,574,711 $11,477,610 - - - -
Accretion of preferred stock - 846,437 - - - -
Net income - - - - - -
----------- ----------- ----------- ----------- ----------- ------------
Balance, June 30, 1997 7,574,711 12,324,047 - - 4,843,468 48,435
Exercise of common stock options - - - - 420,000 4,200
Tax benefit from exercise of common stock options - - - - - -
Purchase and retirement of common stock - - - - (311,600) (3,116)
Issuance of Series B preferred stock, net - - 1,730,062 $ 7,874,400 - -
Accretion of preferred stock - 1,371,193 - 188,314 - -
Net income - - - - - -
----------- ----------- ----------- ----------- ----------- ------------
Balance, June 30, 1998 7,574,711 13,695,240 1,730,062 8,062,714 4,951,868 49,519
Purchase and retirement of common stock - - - - (50,000) (500)
Purchase and retirement of Series B
preferred stock - - (5,300) 25,175) - -
Issuance of Series B preferred stock, net - - 1,298,089 6,150,923 - -
Note receivable from stockholder for the
issuance of Series B preferred stock - - 200,000 950,000 - -
Accretion of preferred stock - 712,717 - 562,176 - -
Net income - - - - - -
----------- ----------- ----------- ----------- ----------- ------------
Balance, December 31, 1998 7,574,711 $14,407,957 3,222,851 $15,700,638 4,901,868 $ 49,019
=========== =========== =========== =========== =========== ============
</TABLE>
(table continued)
<TABLE>
<CAPTION>
ADDITIONAL NOTE RETAINED TOTAL
PAID-IN RECEIVABLE FROM EARNINGS STOCKHOLDERS'
CAPITAL STOCKHOLDER (DEFICIT) EQUITY (DEFICIT)
------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Balance, July 1, 1995 $ 3,265,759 - $ (5,410,093) $ (2,100,687)
Exercise of common stock options - - - 4,070
Issuance of common stock - - - 300
Adjustment to outstanding common stock - - - 68
Net income - - 558,787 558,787
------------- --------------- -------------- ----------------
Balance, June 30, 1996 3,265,759 - (4,851,306) (1,537,462)
Issuance of common stock 109,850 - - 110,200
Issuance of Series A preferred stock, net - - - 11,477,610
Accretion of preferred stock - - (846,437) -
Net income - - 2,881,612 2,881,612
------------- --------------- -------------- ----------------
Balance, June 30, 1997 3,375,609 - (2,816,131) 12,931,960
Exercise of common stock options 205,800 - - 210,000
Tax benefit from exercise of common stock options 202,000 - - 202,000
Purchase and retirement of common stock (412,801) - - (415,917)
Issuance of Series B preferred stock, net - - - 7,874,400
Accretion of preferred stock - - (1,559,507) -
Net income - - 4,089,528 4,089,528
------------- --------------- -------------- ----------------
Balance, June 30, 1998 3,370,608 - (286,110) 24,891,971
Purchase and retirement of common stock (237,000) - - (237,500)
Purchase and retirement of Series B
preferred stock - - - (25,175)
Issuance of Series B preferred stock, net - - - 6,150,923
Note receivable from stockholder for the
issuance of Series B preferred stock - (950,000) - -
Accretion of preferred stock - - (1,274,893) -
Net income - - 1,939,423 1,939,423
------------- --------------- -------------- ----------------
Balance, December 31, 1998 $ 3,133,608 $ (950,000) $ 378,420 $ 32,719,642
============= =============== ============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 1998, 1997 and 1996
For the transition period ended December 31, 1998
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------------------------
1996 1997 1998 1998
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 569,291 1,172,594 3,058,729 2,762,348
Amortization of deferred financing costs - 145,845 404,144 175,505
Deferred income taxes - (1,494,100) 2,109,100 725,000
Provision for doubtful accounts 11,100 203,200 387,900 250,672
Minority interest in net income (loss) of
consolidated partnerships (174,641) 118,880 290,985 -
Deferred rent payable 70,442 527,835 823,170 491,047
Deferred credits - - (213,940) (211,675)
Non-cash interest expense - 110,200 118,133 62,522
Changes in operating assets and liabilities:
Accounts receivable (253,506) (221,538) (1,708,163) (555,361)
Prepaid expenses and other assets (416,934) (393,572) (893,165) (776,122)
Security deposits (123,461) (141,569) (167,531) (767,581)
Accounts payable and accrued expenses (486,366) 1,127,311 1,972,993 2,467,215
Income taxes payable 278,000 (179,882) (1,822) (847,942)
Other liabilities (312,655) - - -
Tenants' security deposits 220,999 132,002 1,195,375 1,420,640
------------- -------------- -------------- --------------
Net cash provided by (used in) operating activities (58,944) 3,988,818 11,465,436 7,135,691
------------- -------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of net assets of business centers (675,000) (20,496,983) (33,901,325) (28,397,887)
Purchases of property and equipment (918,516) (1,960,313) (4,860,373) (5,781,922)
Restricted cash - - - (10,000,000)
------------- -------------- -------------- --------------
Net cash used in investing activities (1,593,516) (22,457,296) (38,761,698) (44,179,809)
------------- -------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 779,099 12,912,500 33,229,000 34,665,000
Repayments on borrowings (139,335) (1,846,005) (6,801,099) (125,000)
Deferred financing costs - (1,963,654) (561,898) (1,251,087)
Payments of capital leases (112,964) (356,714) (609,083) (543,108)
Contributions by minority partners 1,600,000 - - -
Distributions to minority partners (353,909) (642,276) (1,151,491) -
Proceeds from exercise of common stock options - - 210,000 -
Purchase and retirement of common and preferred stock - - (415,917) (262,675)
Proceeds from issuance of preferred stock,
net of issuance costs - 11,257,610 7,874,400 2,266,121
------------- -------------- -------------- --------------
Net cash provided by financing activities 1,772,891 19,361,461 31,773,912 34,749,251
------------- -------------- -------------- --------------
Net increase (decrease) in cash 120,431 892,983 4,477,650 (2,294,867)
Cash at beginning of period 418,890 539,321 1,432,304 5,909,954
------------- -------------- -------------- --------------
Cash at end of period $ 539,321 $ 1,432,304 $ 5,909,954 $ 3,615,087
============= ============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 65,000 $ 653,000 $ 2,457,000 $ 2,865,000
============= ============== ============== ==============
Cash paid during the period for income taxes $ 3,000 $ 285,000 $ 561,000 $ 1,425,200
============= ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES:
During the Transition Period, the Company acquired twenty-five business
centers (including the remaining interests in all of its seven controlled
partnerships), for $22,471,168 in cash and issued 817,853 shares of Series
B Convertible Preferred Stock and the assumption of $993,277 in
transaction related liabilities, $572,368 of capital lease obligations,
and $541,775 in tenants' security deposit liabilities. Net assets acquired
included net accounts receivable of $217,052, prepaid expenses and other
assets of $102,704 and security deposits of $85,523.
During the Transition Period, the Company capitalized $1,076,328 in
transaction costs relating to mergers which occurred on January 8, 1999
(see Note 15), of which $536,964 is included in accounts payable at
December 31, 1998.
During the Transition Period, the Company recorded deferred credits of
approximately $1,243,000 related to tenant improvements which are
reimbursed by landlords and amortized against rent expense over the life
of the leases.
During the Transition Period, the Company issued 200,000 shares of Series B
Convertible Preferred Stock to a key executive, for a note receivable of
$950,000.
During fiscal 1998, the Company acquired forty-three business centers for
$42,159,702 in cash and related acquisitions payable and the assumption of
$571,517 in transaction related liabilities, $583,479 of capital lease
obligations, and $2,452,638 in tenants' security deposit liabilities. Net
assets acquired included net accounts receivable of $892,379, prepaid
expenses and other assets of $255,672 and security deposits of $225,655.
During fiscal 1998, options for shares of common stock were exercised by
certain directors and an officer. A tax benefit of $202,000 was recorded
as an increase in additional paid-in capital and a reduction to income
taxes payable.
During fiscal 1998, the Company recorded deferred credits of approximately
$2,940,000 related to tenant improvements, which are reimbursed by
landlords and amortized against rent expense over the life of the leases.
During fiscal 1998, the Company entered into capital lease obligations
approximating $352,000.
During fiscal 1997, the Company acquired twenty-five business centers for
$20,496,983 in cash and the assumption of a $308,508 interest bearing
note, $925,468 in transaction related liabilities, $756,357 of capital
lease obligations and $1,630,673 in tenants' security deposit liabilities.
Net assets acquired included net accounts receivable of $690,574, prepaid
expenses of $142,647 and security deposits of $138,095.
During fiscal 1997, notes payable to directors of $220,000 were converted to
approximately 129,100 shares of Series A convertible preferred stock, $.01
par value.
During fiscal 1997, the Company recorded interest expense of $110,200 related
to the issuance of 65,000 shares of common stock, 30,000 of which were
issued on June 30, 1996, to a financial institution.
During fiscal 1997, the Company entered into capital lease obligations
approximating $380,490.
During fiscal 1996, the Company acquired three business centers for $675,000
in cash, issuance of a $100,000 interest bearing note and the assumption
of $173,000 in liabilities.
During fiscal 1996, the Company entered into capital lease obligations
approximating $94,000.
The accompanying notes are an integral part of these consolidated financial
statements.
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Alliance National Incorporated and Subsidiaries (the "Company") operate
98 business centers in 24 states and the District of Columbia and
manage 5 others for unrelated property owners, as of December 31, 1998.
The Company provides fully furnished individual offices and suites and
a full range of telecommunication and business support services to its
clients that generally require 2,000 square feet or less of traditional
office space. The Company does not own the real estate in which the
business centers are located. The Company, through its OfficeAccess
plan, also provides full time telephone answering and mail room
services with access to conference room facilities for businesses and
individuals that do not require offices on a full-time basis.
The Company has changed its fiscal year end from June 30 to December
31. For clarity of presentation herein, the period from July 1, 1998 to
December 31, 1998 is referred to as the "Transition Period Ended
December 31, 1998" or "Transition Period".
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Alliance
National Incorporated and its wholly-owned subsidiaries. The minority
interest represented the minority partners' proportionate share of the
net equity of the Company's consolidated partnerships as of June 30,
1996, 1997 and 1998 (see Note 2). All significant intercompany balances
and transactions have been eliminated in consolidation.
INCOME RECOGNITION
Office rental revenue and support services revenue are recognized as
the related services are provided.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the lesser of the term of the
related lease or the estimated useful lives of the assets.
If there is an event or a change in circumstances that indicates that
the basis of the Company's long-lived assets may not be recoverable,
the Company's policy is to assess any impairment in value by making a
comparison of the current and projected operating cash flows of the
asset over its remaining useful life, on an undiscounted basis, to the
carrying amount of the asset. Such carrying amount would be adjusted,
if necessary, to reflect an impairment in the value of the assets.
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INTANGIBLE ASSETS
Intangible assets consist of goodwill which is the excess of the
purchase price over the net assets of acquired companies and is being
amortized on the straight-line method primarily over 30 years.
If there is an event or change in circumstances that indicates that the
basis of the Company's long-lived intangibles may not be recoverable,
the Company's policy is to assess any impairment in value by making a
comparison of the current and projected operating cash flows of the
business center for which the intangible relates over its remaining
useful life, on an undiscounted basis, to the carrying amount of the
intangible. Such carrying amount would be adjusted, if necessary, to
reflect an impairment in the value of the intangible assets.
DEFERRED FINANCING COSTS
The Company amortizes deferred financing costs over the term of the
related debt. As of June 30, 1997 and 1998 and December 31, 1998,
accumulated amortization was approximately $146,000, $500,000 and
$675,000, respectively.
RECEIVABLES AND CONCENTRATION OF CREDIT RISK
The Company leases office space and provides support services to
clients in various industries, ranging in size from small
entrepreneurial entities to local offices of international
corporations. The Company performs limited credit evaluations of its
clients and generally requires at least two months' rent as a security
deposit. The Company's facilities are located throughout the United
States which limits the Company's exposure to certain economic risks,
based upon local economic conditions.
Cash balances are held primarily at one financial institution and may,
at times, exceed insurable amounts. The Company believes it mitigates
its risk by investing in or through a major financial institution.
Recoverability is dependent upon the performance of the institution.
RENT EXPENSE
Generally accepted accounting principles require that rent expense be
recognized on a straight-line basis over the term of the related lease.
The difference between the rent expense recognized for financial
reporting purposes and the actual payments made in accordance with the
lease agreement is recognized as a deferred rent liability.
Rent expense charged to operations for the years ended June 30, 1996,
1997, 1998 and the Transition Period exceeded actual rental payments by
approximately $70,000, $528,000, $823,000 and $491,000, respectively.
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As of June 30, 1998 and December 31, 1998, the deferred rent liability
includes approximately $2,728,000 and $3,709,000 of deferred credits
relating to tenant improvements, which are reimbursed or paid by
landlords and amortized against rent expense over the lives of the
leases, respectively.
INCOME TAXES
The Company accounts for income taxes under the deferral method which
requires recognition of deferred tax assets and liabilities based upon
the expected future tax consequences of events included in the
Company's financial statements and tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse (see Note 8).
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," ("SFAS 128"), became effective for the year ended June 30,
1998. In accordance with SFAS 128, basic earnings per share are
computed by dividing net income applicable to common stock by the
weighted average number of common shares outstanding. Diluted earnings
per share are computed by dividing net income by the sum of the
weighted average number of common shares outstanding and the dilutive
effects of options, warrants and convertible securities. All periods
prior to June 30, 1998 have been restated to conform with the
requirements of SFAS 128.
RECENTLY ISSUED PRONOUNCEMENTS
In fiscal 1998, the Company adopted the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). The adoption of SFAS 130 did not
have any impact on the Company's financial statements as there are no
elements of comprehensive income other than net income. Accordingly,
comprehensive income equals net income for all periods presented.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. The most
significant assumptions and estimates relate to depreciable lives and
recoverability of long-lived assets and intangibles. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current period presentation.
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. ACQUISITIONS:
During the Transition Period, in 6 unrelated acquisitions, the Company
acquired 16 business centers for an aggregate purchase price of $17.4
million (see Note 13).
Effective July 1, 1998, the Company acquired the remaining interests in
all of its 7 controlled partnerships, representing 9 business centers,
for 817,853 shares of Series B Convertible Preferred Stock and cash of
approximately $2.0 million.
Pro Forma Financial Information (Unaudited)
The pro forma financial information set forth below is based upon the
Company's historical consolidated statements of income for the year
ended June 30, 1998 and the Transition Period ended December 31, 1998,
adjusted to give effect to these acquisitions as of July 1, 1997.
The pro forma financial information is presented for informational
purposes only and may not be indicative of what actual results of
operations would have been had the acquisitions occurred on July 1,
1997, nor does it purport to represent the results of operations for
future periods.
TRANSITION
PERIOD ENDED
JUNE 30, DECEMBER 31,
1998 1998
-------------- -----------------
Revenues $105,465,000 $57,233,000
Net income 6,973,000 2,098,000
Basic earnings per common share 0.99 0.14
Diluted earnings per common share 0.44 0.10
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of:
<TABLE>
<CAPTION>
DEPRECIABLE JUNE 30, JUNE 30, DECEMBER 31,
LIFE 1997 1998 1998
---------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Office equipment, furniture and fixtures 5 - 7 years $ 7,964,902 $ 13,851,209 $ 21,649,976
Leasehold improvements Shorter of
lease term or
useful life 2,525,067 4,982,545 6,663,780
---------------- ---------------- ---------------
10,489,969 18,833,754 28,313,756
Less: Accumulated depreciation and
amortization (2,071,589) (3,714,859) (5,189,054)
---------------- ---------------- ---------------
$ 8,418,380 $ 15,118,895 $ 23,124,702
================ ================ ===============
</TABLE>
Office equipment, furniture and fixtures include approximately
$1,452,000, $2,387,870 and $3,003,680 of office equipment under capital
leases, net of accumulated depreciation of $210,819, $581,223 and
$824,664 at June 30, 1997 and 1998 and December 31, 1998, respectively.
4. INTANGIBLES:
Intangible assets consist of:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1997 1998 1998
------------------ ----------------- ------------------
<S> <C> <C> <C>
Goodwill $ 20,396,422 $ 63,159,485 $ 84,295,771
Less: Accumulated amortization (679,008) (2,112,938) (2,690,590)
------------------ ----------------- ------------------
$ 19,717,414 $ 61,046,547 $ 81,605,181
================== ================= ==================
</TABLE>
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. NOTES PAYABLE:
On January 16, 1997, the Company entered into a $20 million credit
agreement with a lending institution, which was amended on June 24,
1997 to $40 million with various lending institutions. The credit
agreement provided for a $26 million acquisition loan commitment, a $12
million term loan, and a $2 million revolving loan commitment,
including letters of credit. The Company also issued 90,958 warrants to
the lenders to acquire the Company's common stock at $1.70 per share
during the year ended June 30, 1997.
Effective April 15, 1998, the Company increased the $40 million credit
agreement with various lending institutions to $55 million. The credit
agreement provided for a $38 million acquisition loan commitment, a $12
million term loan, and a $5 million revolving loan commitment,
including letters of credit.
Effective November 6, 1998, the Company increased the $55 million
credit agreement with various lending institutions to $100 million. The
credit agreement provides for a $23 million acquisition loan
commitment, $70 million term loans, and a $7 million revolving loan
commitment, including letters of credit. Interest on each commitment
ranges from LIBOR plus 3.00% (8.56% at December 31, 1998) to LIBOR plus
3.50% (9.06% at December 31, 1998) for a one, three or six month
period, at the election of the Company.
The credit agreement contains certain covenants, one of which requires
the Company to not exceed a maximum ratio of consolidated indebtedness
to consolidated earnings before interest, income taxes, depreciation
and amortization. In addition, there are also other covenants
pertaining to financial ratios and limitations on capital expenditures.
Pursuant to the credit agreement, the lending institutions have an
assignment of leases and rents associated with the Company's business
centers to collateralize the notes payable.
Acquisition Loan Commitment:
The credit agreement provides the Company with an acquisition loan
commitment which allows the Company to make acquisitions subject to
certain terms and conditions. As of December 31, 1998, the Company had
no borrowings outstanding under the acquisition loan commitment. In
accordance with the credit agreement, the Company cannot borrow under
the acquisition loan commitment after November 6, 2000. Principal
repayments under the acquisition loan commitment shall commence on
December 31, 2000 and are based upon percentages of the amount borrowed
as follows:
REPAYMENT
PERIOD PERCENTAGE
------------------------------------------ -----------------------
December 2000 - September 2001 2.5% quarterly
December 2001 - September 2002 10% quarterly
December 2002 - June 2003 12.5% quarterly
November 2003 12.5%
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Term Loan:
The $40 million Term Loan A outstanding at December 31, 1998 requires
quarterly principal payments of $1,000,000 from March 31, 1999 through
September 30, 1999, $1,625,000 from December 31, 1999 through September
30, 2000, $2,000,000 from December 31, 2000 through September 30, 2001,
$2,625,000 from December 31, 2001 through September 30, 2002,
$3,000,000 from December 31, 2002 through June 30, 2003 and $3,000,000
on November 6, 2003.
The $30 million Term Loan B outstanding at December 31, 1998 requires
quarterly principal payments of $62,500 from March 31, 1999 through
June 30, 2003, $125,000 on September 30, 2003, $3,250,000 from December
31, 2003 through September 30, 2004, $3,937,500 from December 31, 2004
through June 30, 2005 and $3,937,500 on November 6, 2005.
At December 31, 1998, $10 million of the Term Loan was funded into a
cash collateral account that the Company was not permitted to utilize
until the completion of the merger with InterOffice Superholding
Corporation and Reckson Executive Centers, Inc. (see Note 15).
Revolving Loan Commitment:
The $7 million revolving loan commitment, which expires on November 6,
2003, had $3 million outstanding at December 31, 1998.
At December 31, 1998, the Company had outstanding letters of credit of
approximately $1,486,000 for landlord security deposits which reduced
the borrowings available under the revolving loan commitment.
The carrying value of the notes payable approximates its fair value as
of June 30, 1997 and 1998 and December 31, 1998.
The total future principal repayments as of December 31, 1998 for each
of the next five fiscal years and in the aggregate are:
1999 $ 7,875,000
2000 7,125,000
2001 8,875,000
2002 11,125,000
2003 12,500,000
Thereafter 25,500,000
-----------------
$ 73,000,000
=================
6. CAPITAL LEASES:
The Company is the lessee of office equipment under a number of capital
leases expiring at various dates through 2002.
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Minimum future lease payments under capital leases as of December 31,
1998 for each of the next four years are approximately:
1999 $ 839,000
2000 421,000
2001 202,000
2002 56,000
----------------
Total minimum lease payments 1,518,000
Less: Amount representing interest (184,337)
----------------
Present value of minimum lease payments $ 1,333,663
================
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company and its subsidiaries lease certain business center
facilities and their corporate offices under noncancellable operating
leases expiring at various dates through 2012. Certain of these
noncancellable operating leases provide for renewal options.
Minimum future rental payments under these noncancellable operating
leases as of December 31, 1998 for each of the next five years and in
the aggregate are approximately:
1999 $ 39,111,000
2000 38,871,000
2001 36,377,000
2002 32,185,000
2003 29,003,000
Thereafter 77,548,000
-----------------
$ 253,095,000
=================
The Company is also generally obligated to reimburse the lessor for its
proportionate share of operating expenses, which are not included in
the above amounts.
EMPLOYMENT CONTRACT
The Company has an employment contract with a key executive which
expires in 2002 and includes automatic one-year renewal options. This
contract provides for a minimum annual salary of $250,000 with annual
increases based upon the Consumer Price Index for New York City, a
performance bonus and an incentive plan.
CUSTODIAL ACCOUNTS
The Company acts as a trustee in connection with business centers that
it manages for unrelated property owners. The cash held in trust and
not reflected on the accompanying consolidated balance sheets
approximated $740,000, $918,000 and $1,036,000 at June 30, 1997 and
1998 and December 31, 1998, respectively.
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
OTHER
There are pending claims and litigation against the Company arising in
the ordinary course of business. Management believes, after
consultation with counsel, that these actions will not have a material
adverse effect on the Company's results of operations.
8. INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
-------------------------------------------------
1996 1997 1998 1998
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Current:
Federal $ 255,834 $ 40,000 $ 260,000 $ 521,000
State and local 22,166 65,000 330,900 164,000
---------------- --------------- -------------- ----------------
278,000 105,000 590,900 685,000
---------------- --------------- -------------- ----------------
Deferred:
Federal - (1,269,985) 1,792,735 566,000
State and local - (224,115) 316,365 159,000
---------------- --------------- -------------- ----------------
- (1,494,100) 2,109,100 725,000
---------------- --------------- -------------- ----------------
Total provision (benefit) $ 278,000 $ (1,389,100) $ 2,700,000 $ 1,410,000
================ =============== ============== ================
</TABLE>
The deferred tax effects of temporary differences as of June 30, 1997
and 1998 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, DECEMBER 31,
1997 1998 1998
---------------- ---------------- -----------------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable allowance $ 76,600 $ 86,000 $ 174,000
Deferred rent payable 27,300 694,000 969,000
Net operating losses 1,730,200 - -
---------------- ---------------- -----------------
1,834,100 780,000 1,143,000
Deferred tax liabilities:
Fixed assets (159,700) (704,000) (429,000)
Intangibles (177,900) (687,000) (2,054,000)
Other (2,400) (4,000) -
---------------- ---------------- -----------------
(340,000) (1,395,000) (2,483,000)
Net deferred tax asset (liability) $ 1,494,100 $ (615,000) $ (1,340,000)
================ ================ =================
</TABLE>
During the Transition Period, the difference between the actual
provision for income taxes and the income tax provision calculated by
applying the statutory federal income tax rate is primarily
attributable to certain nondeductible goodwill.
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
During fiscal 1998, the difference between the actual provision for
income taxes and the income tax tax provision calculated by applying
the statutory federal income tax rate is primarily attributable to the
Company's utilization of its net operating losses.
During fiscal 1997, the difference between the actual benefit for
income taxes and the income tax benefit calculated by applying the
statutory federal income tax rate is primarily attributable to the
elimination of the previously established deferred tax valuation
allowance.
During fiscal 1996, the difference between the actual provision for
income taxes and the income tax provision calculated by applying the
statutory federal income tax rate relates mainly to state income taxes
and the higher marginal tax rates required by a settlement with the
Internal Revenue Service.
9. EBITDA:
The following table sets forth the computation of earnings before
interest expense (net), provision (benefit) for income taxes,
depreciation and amortization expense ("EBITDA") for each of the
periods presented:
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
-------------------------------------------------
1996 1997 1998 1998
--------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 11,964,377 $ 29,097,615 $ 66,537,631 $ 54,057,186
================ ============== ============== ================
Net income $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
Interest expense, net 54,648 930,598 3,188,126 2,884,300
Provision (benefit) for income taxes 278,000 (1,389,100) 2,700,000 1,410,000
Depreciation and amortization 569,291 1,172,594 3,058,729 2,762,348
Minority interest in EBITDA
of consolidated partnerships (413,207) (662,041) (667,490) -
---------------- -------------- -------------- ----------------
EBITDA $ 1,047,519 $ 2,933,663 $ 12,368,893 $ 8,996,071
================ ============== ============== ================
EBITDA as a percentage of revenues 9% 10% 19% 17%
================ ============== ============== ================
</TABLE>
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. EARNINGS PER SHARE:
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, DECEMBER 31,
-----------------------------------------------
1996 1997 1998 1998
--------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
Accretion of preferred stock - (846,437) (1,559,507) (1,274,893)
--------------- ------------- --------------- --------------
Numerator for basic earnings
per share-income applicable
to common stock $ 558,787 $ 2,035,175 $ 2,530,021 $ 664,530
Effect of dilutive securities:
Accretion of preferred stock - 846,437 1,559,507 712,717
--------------- ------------- --------------- --------------
Numerator for diluted earnings
per share-income applicable
to common stock after
assumed conversions $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,377,247
Denominator:
Denominator for basic earnings per
share-Weighted average shares 4,491,026 4,835,029 4,954,035 4,951,325
Effect of dilutive securities:
Stock options - 314,170 933,387 871,895
Warrants - - 614,572 1,013,933
Convertible preferred stock - 4,348,869 8,007,227 7,574,711
--------------- ------------- --------------- --------------
Dilutive potential common shares - 4,663,039 9,555,186 9,460,539
Denominator for diluted earnings
per share-adjusted weighted
average shares and assumed
conversions 4,491,026 9,498,068 14,509,221 14,411,864
=============== ============= =============== ==============
</TABLE>
Options and warrants to purchase 1,000,000, 3,653,119, 137,130 and
200,000 shares of common stock were outstanding as of June 30, 1996,
1997, 1998 and the Transition Period Ended December 31, 1998,
respectively, but were not included in the computation of diluted
earnings per share because their effect would be anti-dilutive.
Additionally, 3,222,851 shares of Series B Convertible Preferred Stock
were outstanding as of December 31, 1998, but were not included in the
computation of diluted earnings per share because their effect would
also be anti-dilutive.
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. STOCK OPTION PLAN:
During the Transition Period, options were granted by the Company's
Board of Directors to a key executive, to acquire 200,000 shares of
common stock. The options vested immediately and expire five years from
the date of grant.
During fiscal 1997, the Company's Board of Directors approved the
adoption of the 1996 Stock Option Plan ("1996 Plan"). The 1996 Plan
provided for the issuance of non-qualified stock options to key
employees, directors and consultants. Under the 1996 Plan, options may
be granted at prices determined by the Company's Board of Directors,
but in no case shall such price be less than $2.00 per share. Options
granted under this plan expire ten years from the date of grant and
vest over a ten-year period. Under certain conditions, these options
may vest on an accelerated basis. Options granted during fiscal 1997
and 1998 to acquire 1,225,000 and 220,750 shares of common stock,
respectively, were granted under this plan. At December 31, 1998,
1,375,250 options were outstanding under this plan and no further
options were available for grant.
Certain options, granted in 1996 and 1997, prior to the adoption of the
1996 Plan, generally vested immediately, expire five years from the
date of grant and are exercisable at prices that in the Board's opinion
were equal to or exceeded the fair market value of the stock on the
date of grant. Certain options granted in 1996, to acquire 440,000
shares of common stock expire seven years from the date of grant and
vest over a three-year period.
The following is a summary of the non-qualified stock options activity
for the years ended June 30, 1996, 1997, 1998 and the Transition Period
Ended December 31, 1998:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, DECEMBER 31,
1996 1997 1998 1998
---------------------- ---------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ---------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 677,000 $ 0.53 1,000,000 $ 1.16 2,725,000 $ 1.68 2,525,250 $ 1.98
Granted 1,207,000 0.88 1,725,000 2.00 220,750 2.86 200,000 6.00
Exercised (407,000) 0.01 - - (420,000) 0.50 - -
Expired (70,000) 1.00 - - -
Retired (407,000) 0.50 - - (500) 2.00 (70,000) 2.98
---------- ---------- ---------- ---------
Options outstanding,
end of period 1,000,000 $ 1.16 2,725,000 $ 1.68 2,525,250 $ 1.98 2,655,250 $ 2.26
========== ========== ========== =========
Options exercisable,
end of period 670,000 $ 0.75 1,280,000 $ 1.34 1,092,500 $ 1.81 1,186,583 $ 1.82
========== ========== ========== =========
Options available for
grant, end of period - 245,000 24,250 -
---------- ========== ========== ---------
Weighted-average
fair value of
options granted
during the period $0.08 $0.22 $0.61 $0.11
========= ========== ========== =========
</TABLE>
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
During fiscal 1996, a key executive was granted a reduction in the
exercise price of 407,000 stock options from $0.50 to $0.01.
The exercise prices for options outstanding as of December 31, 1998
range from $0.50 to $6.00 per share. The weighted average remaining
contractual life for options outstanding as of December 31, 1998 is
approximately 6 years.
The Company has elected to adopt the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation". Accordingly, no compensation cost has been
recognized with regard to options granted under the Plan in the
accompanying financial statements. If stock-based compensation costs
had been recognized based on the estimated fair values at the dates of
grant for options awarded during the years ended June 30, 1996, 1997,
and 1998 and the Transition Period Ended December 31, 1998, the
Company's net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
JUNE 30, JUNE 30, JUNE 30, DECEMBER 31,
1996 1997 1998 1998
------------ -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Net income as reported $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
Net income - pro forma 525,797 2,752,612 4,049,598 1,909,131
Basic earnings per common share - as reported 0.12 0.42 0.51 0.13
Basic earnings per common share - pro forma 0.11 0.39 0.50 0.13
Diluted earnings per common share - as reported 0.12 0.30 0.28 0.10
Diluted earnings per common share - pro forma 0.11 0.29 0.28 0.10
</TABLE>
The weighted average fair value of each option has been estimated on
the date of grant using the Black-Scholes options pricing model with
the following weighted average assumptions used for grants in fiscal
1996, 1997, 1998 and the Transition Period, respectively: no dividend
yield; expected volatility of 0%, risk free interest rates of 6.3%,
6.2%, 5.7% and 5.3%; and expected lives approximating 5 years.
12. BENEFIT PLAN:
The Company has a 401(k) voluntary savings and investment plan (the
"Plan") open to all employees who meet certain minimum requirements.
The Company can make voluntary contributions to the Plan not to exceed
6% of eligible participant compensation. Participants vest 100% in
Company contributions after 3 years of service. The Company contributed
approximately $17,000, $21,000, $95,000 and $86,000 to the Plan in
fiscal 1996, 1997, 1998 and the Transition Period, respectively.
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. PREFERRED STOCK:
During the Transition Period, the Company issued 817,853 shares of
Series B Convertible Preferred Stock ("Series B") to acquire the
remaining interests in all of its 7 controlled partnerships (see Note
2). Concurrent with this transaction, the Company issued 480,236 shares
of Series B for net proceeds of $2,266,121 (net of issuance costs of
$15,000). The Company also issued 200,000 shares of Series B to a key
executive in exchange for a note of $950,000, due on August 4, 2001
bearing interest at the rate of 5.48%, payable annually.
During fiscal 1998, the Company authorized 3,500,000 shares and issued
1,730,062 shares of Series B for net proceeds of $7,874,400 (net of
issuance costs of $343,395). In connection with the Series B offering,
the Company issued 54,380 warrants to purchase the Company's common
stock. The warrants are exercisable at $4.75 per share and expire on
April 30, 2003.
During fiscal 1997, the Company amended its Articles of Incorporation
to increase the authorized shares of its common stock from 12.5 million
to 35 million and its preferred stock from 2.5 million to 15 million.
In addition, the Company reduced the par value of its preferred stock
from $4 per share to $0.01 per share.
During fiscal 1997, the Company authorized and issued 7,574,711 shares
of Series A Convertible Preferred Stock ("Series A") for net proceeds
of $11,257,610 (net of issuance costs of $1,430,455) and the conversion
of $220,000 in notes payable to directors. In connection with the
Series A offering, the Company issued 1,488,119 warrants to purchase
the Company's common stock. The warrants are exercisable at $1.70 per
share and expire in November 2001.
The Series A and Series B (collectively, the "Preferred Stock") rank on
a parity with each other and senior to the Company's common stock (the
"Common Stock") with respect to payment of dividends and liquidation
preferences. The holders of Preferred Stock are entitled to
non-cumulative cash dividends when and as declared by the Company's
Board of Directors in an amount equal to any equivalent per share cash
dividend declared on the Common Stock. The shares of the Preferred
Stock are convertible, in whole or in part, at any time prior to
November 15, 2004 at the option of the holder thereof into an
equivalent number of shares of Common Stock (subject to adjustments for
certain dilutive events). Mandatory conversion of such shares into
Common Stock will occur at the conversion rate described in the
preceding sentence upon an initial public offering meeting certain
quantitative standards.
The outstanding shares of the Preferred Stock must be redeemed by the
Company on November 15, 2004 at a price per share equal to $1.7041 (in
the case of the Series A) or $4.75 (in the case of the Series B) plus a
cumulative return computed on each such amount at the rate of 8% per
annum for the period for which such shares were outstanding less the
aggregate amount of all declared and paid cash dividends on such
shares, if any (see Note 15). The redemption price is payable either in
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
cash or Common Stock, at the Company's election. Upon the occurrence of
certain liquidation events, the holders of Preferred Stock shall be
entitled to receive an amount per share equal to the respective
redemption amounts set forth above. The holders of Preferred Stock are
entitled to vote, on any matter requiring shareholder vote, equivalent
to the number of shares of Common Stock into which such shares are
convertible.
In the event that there has not been an initial public offering or a
merger involving the Company, in each case meeting certain standards,
by November 15, 2001, the holders of the outstanding shares of the
Preferred Stock may require the Company to repurchase (the "Put") such
shares at a price per share equal to the greater of (i) $1.7041 (in the
case of the Series A) or $4.75 (in the case of the Series B) plus a
cumulative return computed on each such amount at the rate of 8% per
annum for the period for which such shares were outstanding less the
aggregate amount of all declared and paid cash dividends on such
shares, if any, and (ii) the appraised value of the Common Stock into
which the Preferred Stock is then convertible. The exercise of the Put
requires participation by 66-2/3% of the then outstanding Preferred
Stock and is subject to the consent of the Company's senior lender.
In connection with the Put, the Company is accreting the difference
between the carrying value of the Preferred Stock and the minimum
repurchase price as a reduction in retained earnings. The aggregate
reduction as of December 31, 1998 was $3,680,837. During fiscal 1997
and 1998 the accretion had no impact on diluted earnings per common
share. The accretion during the Transition Period ended December 31,
1998 resulted in a $0.01 decrease to diluted earnings per common share.
14. TRANSITION PERIOD COMPARATIVE DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
-------------------- -------------------
(UNAUDITED)
<S> <C> <C>
Revenues $ 54,057,186 $ 27,179,231
==================== ===================
Contribution from operation of business centers $ 13,046,881 $ 7,405,804
==================== ===================
Income before income taxes 3,349,423 3,266,256
Provision for income taxes 1,410,000 1,305,000
-------------------- -------------------
Net income $ 1,939,423 $ 1,961,256
==================== ===================
Net income applicable to common stock $ 664,530 $ 1,290,736
==================== ===================
</TABLE>
CONTINUED
ALLIANCE NATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
-------------------- -------------------
(UNAUDITED)
<S> <C> <C>
Share information:
Basic earnings:
Net income per common share $ 0.13 $ 0.27
==================== ===================
Average shares outstanding 4,951,325 4,843,468
==================== ===================
Diluted earnings:
Net income per common share $ 0.10 $ 0.15
==================== ===================
Average shares outstanding 14,411,864 12,657,812
==================== ===================
</TABLE>
15. SUBSEQUENT EVENTS:
On January 8, 1999, two newly formed subsidiaries of the Company were
merged (the "Mergers") with and into InterOffice Superholding
Corporation ("InterOffice") and Reckson Executive Centers, Inc.
("Reckson"), respectively. InterOffice and Reckson collectively owned
48 business centers, which generated revenues of approximately $52.7
million (unaudited) and contribution from operation of business centers
of approximately $11.4 million (unaudited) for the twelve months ended
December 31, 1998. As a result of the Mergers, InterOffice and Reckson
became wholly-owned subsidiaries of the Company and the former
shareholders of such entities received 13,325,424 shares of the
Company's Series C Convertible Preferred Stock ("Series C").
In connection with the Mergers, the Company authorized 15,000,000
shares of Series C, which will rank on a parity with the Series A and
Series B. In connection with the issuance of the Series C, the Series A
and Series B were modified in certain respects, including the
elimination of redemption rights. Except for certain class voting
rights and except for the conversion feature described below, the
Series C will have substantially identical terms as the Series A and
Series B. If the original holders of the Series C or certain of their
permitted transferees are the holders of the Series C at the time of
conversion thereof, the Series C will be converted into Class B Common
Stock which will have identical terms and conditions as the Company's
Class A Common Stock (formerly the Common Stock) except that such Class
B Common Stock will carry the right to elect a specified number of
directors, not to exceed four, following an initial public offering.
Effective February 1, 1999, a wholly-owned subsidiary of the Company
acquired the stock of an entity that owned nine business centers for a
purchase price of $7,200,000 which was funded through the Company's
loan facility.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial statements are presented for
illustrative purposes only and are not indicative of the financial positions or
results of operations of future periods or the results that actually would have
been realized had RSI disposed of its 58.9% interest in Interoffice
Superholdings Corporation ("Interoffice") and its interest in Reckson Executive
Centers, Inc. ("REC") and had RSI acquired its 22.7% interest in Advantis, an
entity formed through the merger of Interoffice, REC and Alliance National
Incorporated ("Alliance") during the specified periods. The pro forma financial
statements, including the notes thereto, are qualified in their entirety by
reference to, and should be read in conjunction with, the historical financial
statements of RSI as filed in Form S-1 for the period from July 15, 1997
(commencement of operations) to December 31, 1997, the historical unaudited
financial statements of RSI for the year ended December 31, 1998, and the
historical financial statements of Alliance included elsewhere herein.
The following pro forma financial statements of RSI give effect to acquisitions
by Interoffice and Alliance using the purchase method of accounting. The pro
forma financial statements are based on the historical financial statements and
notes thereto of RSI, Interoffice and Alliance. The pro forma adjustments are
preliminary and based on management's estimates of the value of the tangible and
intangible assets acquired.
The pro forma balance sheet of RSI assumes that the acquisition of the interest
in Advantis and the dispositions of the interests in Interoffice and REC
occurred on December 31, 1998. The pro forma statement of operations of RSI for
the year ended December 31, 1998 assumes that the acquisition and the
dispositions occurred as of January 1, 1998.
<TABLE>
<CAPTION>
RECKSON SERVICES INDUSTRIES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(UNAUDITED)
RSI
UNAUDITED PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------------- --------------- -----------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 2,025,527 $ -- $ 2,025,527
Investment in and advances to RSVP Holdings, LLC 15,560,896 -- 15,560,896
Investment in and advances to Reckson Executive
Centers, LLC 892,894 (892,894) (1) --
Investment and advances to On-Site Ventures, LLC 7,101,330 -- 7,101,330
Investment in Interoffice Superholdings Corporation 22,532,591 (22,532,591) (1) --
Investment in Advantis -- 23,425,485 (1) 23,425,485
Property and equipment, net 99,928 -- 99,928
Affiliate receivable 9,146,070 -- 9,146,070
Other assets 1,483,427 -- 1,483,427
----------------- --------------- -----------------
Total Assets $ 58,842,663 $ -- $ 58,842,663
================= =============== =================
Liabilities and Shareholders' Equity
Accounts payable and accrued expenses $ 1,893,657 $ -- $ 1,893,657
Loan payable to affiliates 40,981,500 -- 40,981,500
----------------- --------------- -----------------
Total Liabilities 42,875,157 -- 42,875,157
----------------- --------------- -----------------
Shareholders' Equity
Common stock 246,855 -- 246,855
Additional paid-in capital 24,126,341 -- 24,126,341
Accumulated deficit (8,405,690) -- (8,405,690)
----------------- --------------- -----------------
Total Shareholders' Equity 15,967,506 -- 15,967,506
----------------- --------------- -----------------
Total Liabilities and Shareholders' Equity $ 58,842,663 $ -- $ 58,842,663
================= =============== =================
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
<TABLE>
<CAPTION>
RECKSON SERVICES INDUSTRIES, INC.
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
RSI
HISTORICAL PRO FORMA
UNAUDITED ADJUSTMENTS PRO FORMA
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Equity in loss of American Campus Communities LLC $ (51,504) $ -- $ (51,504)
Equity in earnings of RO Partners Management LLC 170,567 -- 170,567
Equity in loss of RSVP Holdings, LLC (4,098,878) -- (4,098,878)
Equity in loss of Reckson Executive Centers Inc. (149,079) 149,079 (2) --
Equity in loss of On-Site Venture, LLC (30,555) -- (30,555)
Equity in earnings of Interoffice Superholdings Corporation 54,161 (54,161) (1) --
Equity in earnings of Advantis -- 1,377,071 (1) 1,377,071
(103,484) (2) (103,484)
Other income 474,842 -- 474,842
Interest income 1,006,551 -- 1,006,551
---------------- ---------------- ----------------
Total Revenues (2,623,895) 1,368,505 (1,255,390)
---------------- ---------------- ----------------
Expenses:
Professional fees 457,901 457,901
Terminated deal costs 288,773 288,773
General and administrative expenses 3,086,855 -- 3,086,855
---------------- ---------------- ----------------
Total Operating Expenses 3,833,529 -- 3,833,529
---------------- ---------------- ----------------
Depreciation and amortization 39,179 -- 39,179
Interest 1,651,200 -- 1,651,200
---------------- ---------------- ----------------
Total Expenses 5,523,908 -- 5,523,908
---------------- ---------------- ----------------
Net Loss $ (8,147,803) $ 1,368,505 $ (6,779,298)
================ ================ ================
Basic and diluted net loss per share $ (0.56) $ (0.47)
================ ================
Basic and diluted weighted average common shares outstanding 14,522,513 14,522,513
================ ================
</TABLE>
See accompanying notes to unaudited pro forma financial statements.
(1) On January 8, 1999, Interoffice Superholdings Corporation ("Interoffice")
and Reckson Executive Centers, Inc. ("REC") merged with Alliance National
Incorporated. Prior to the merger, RSI held partial ownership of Interoffice and
REC. Pursuant to the merger, RSI holds a 22.7% interest in the merged entity,
Advantis.
Substantially all of the assets of Xebec Management Services, Inc. and XMS
Greenhaven, Inc. (collectively known as "Xebec") were acquired by Interoffice on
July 20, 1998. The unaudited pro forma results of operations assume Interoffice
completed its acquisition on January 1, 1998. The historical results for Xebec
for the period July 20, 1998 to December 31, 1998 and the historical balance
sheet for Xebec at December 31, 1998 are included in the historical balance
sheet and results of operations of Interoffice for the year ended December 31,
1998.
The unaudited pro forma statement of income for Alliance is presented to give
effect to Alliance's acquisition of (i) 60 business centers and (ii) the
remaining interests in all 7 of its controlled partnerships (representing 9
business centers) as if such acquisitions occurred on January 1, 1998.
The following are the pro-forma results of Interoffice and Alliance and the
combined pro-forma results for the year ended December 31, 1998.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO THE PRO-FORMA FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
INTEROFFICE SUPERHOLDINGS CORPORATION
UNAUDITED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
Interoffice Xebec (period Pro Forma Pro Forma
Historical 1/1/98-7/19/98) Adjustments Interoffice
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Business Center Operations:
Office rentals $ 21,477,295 $ 1,756,800 $ -- $ 23,234,095
Support services 22,345,063 1,357,917 -- 23,702,980
---------------------------------------------------------------
43,822,358 3,114,717 -- 46,937,075
---------------------------------------------------------------
Expenses:
Rent 14,933,782 1,287,713 -- 16,221,495
Support Services 9,384,970 1,092,437 -- 10,477,407
Center general and administrative 8,818,651 27,848 -- 8,846,499
---------------------------------------------------------------
33,137,403 2,407,998 -- 35,545,401
---------------------------------------------------------------
Contributions from operations of business centers 10,684,955 706,719 -- 11,391,674
---------------------------------------------------------------
Other (expenses) income:
Corporate general and administrative (6,149,354) (403,552) (258,147)(a) (6,811,053)
Depreciation and amortization (3,562,206) (208,758) -- (3,770,964)
Interest expense (401,724) -- -- (401,724)
Managed center income -- -- -- --
Other income 10,076 -- -- 10,076
---------------------------------------------------------------
Income before minority interest and income taxes 581,747 94,409 (258,147) 418,009
Minority interest in net (income) loss of consolidated partnerships -- -- -- --
Income before taxes 581,747 94,409 (258,147) 418,009
Provisions for income taxes (153,581)(b) -- -- (153,581)
---------------------------------------------------------------
Net income $ 428,166 $ 94,409 $ (258,147) $ 264,428
===============================================================
</TABLE>
(a) To record amortization expense on goodwill associated with the purchase of
Interoffice (Holdings) Corporation by Interoffice and of Xebec by
Interoffice as if the acquisitions occurred on January 1 1998. Goodwill is
being amortized over a 25 year period based on the RSI assessment of the
significant barriers to entry due to the rapid consolidation in the
executive suites business and increase over the last several years of the
large national corporations which utilize executive suites companies that
have an expanded national presence. The goodwill adjustment represents the
amortization for the twelve month period which is not included in the
historical results.
(b) The income tax expense is computed at the blended effective tax rate for
the twelve months ended December 31, 1998.
<TABLE>
<CAPTION>
ALLIANCE NATIONAL INCORPORATED
UNAUDITED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
ALLIANCE
NATIONAL PRO FORMA
INCORPORATED ALLIANCE
HISTORICAL PRO FORMA NATIONAL
(UNAUDITED) ACQUSITIONS(a) ADJUSTMENTS INCORPORATED
-------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
BUSINESS CENTER OPERATIONS:
REVENUES:
Office Rentals $55,099,625 $26,695,943 $ -- $81,795,568
Support Services 38,315,961 7,084,427 -- 45,400,388
-------------- --------------- -------------- ----------------
93,415,586 33,780,370 -- 127,195,956
-------------- --------------- -------------- ----------------
EXPENSES:
Rent 31,716,572 17,010,171 -- 48,726,743
Support Services 12,769,816 3,076,877 -- 15,846,693
Center general and administrative 24,830,404 7,186,814 -- 32,017,218
-------------- --------------- -------------- ----------------
69,316,792 27,273,862 -- 96,590,654
-------------- --------------- -------------- ----------------
Contribution from operation
of business centers 24,098,794 6,506,508 -- 30,605,302
OTHER (EXPENSES) INCOME:
Corporate general and
administrative (7,896,172) -- -- (7,896,172)
Depreciation and amortization (4,535,486) (453,373) (1,056,738) (b) (6,045,597)
Interest expense, net (5,381,885) -- (2,555,631) (c) (7,937,516)
Managed center income 795,286 -- -- 795,286
Other income 125,710 122,953 -- 248,663
-------------- --------------- -------------- ----------------
(16,892,547) (330,420) (3,612,369) (20,835,336)
-------------- --------------- -------------- ----------------
Income before minority
interest and income taxes 7,206,247 6,176,088 (3,612,369) 9,769,966
Minority interest in net income of
consolidated partnerships (333,552) -- 333,552 (d) --
-------------- --------------- -------------- ----------------
Income before taxes 6,872,695 6,176,088 (3,278,817) 9,769,966
Provision for income taxes 2,805,000 2,498,668 (1,335,668) (e) 3,968,000
-------------- --------------- -------------- ----------------
Net income $4,067,695 $3,677,420 $(1,943,149) $5,801,966
-------------- --------------- -------------- ----------------
</TABLE>
(a) Reflects the results of operations of 60 business centers acquired for
the periods which are not included in the historical results.
(b) To record amortization expense on goodwill associated with the purchase
of 60 business centers and the acquisition of its remaining interest in
all of its 7 controlled partnerships (representing 9 business centers) by
Alliance National Incorporated as if the acquisitions had occurred on
January 1, 1998. Goodwill is being amortized over a 30-year period and
the adjustment represents the amortization for the periods which are not
included in the historical results.
(c) To record interest expense relating to borrowings on the Company's
acquisition loan facility utilized to finance the purchase of 60 business
centers, as if such acquisitions had occurred on January 1, 1998. The
interest expense is based on the Company's effective interest rate under
the facility and includes interest expense for the periods which are not
included in the historical results.
(d) To eliminate minority interest in net income of consolidated partnerships
assuming the acquisition of the remaining interests in the Company's 7
controlled partnerships occurred as of January 1, 1998.
(e) To record income tax effects as a result of the pro forma adjustments.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO THE PRO-FORMA FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
ALLIANCE NATIONAL INCORPORATED
INTEROFFICE SUPERHOLDINGS CORPORATION
TOTAL UNAUDITED PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
PRO FORMA
PRO FORMA ALLIANCE TOTAL
INTEROFFICE INCORPORATED PRO FORMA
-------------------------------------------------------------
<S> <C> <C> <C>
Business Center Operations:
Office rentals $23,234,095 $81,795,568 $105,029,663
Support Services 23,702,980 45,400,388 69,103,368
-------------------------------------------------------------
46,937,075 127,195,956 174,133,031
-------------------------------------------------------------
Expenses:
Rent 16,221,495 48,726,743 64,948,238
Support Services 10,477,407 15,846,693 26,324,100
Center general and
administrative 8,846,499 32,017,218 40,863,717
-------------------------------------------------------------
35,545,401 96,590,654 132,136,055
-------------------------------------------------------------
Contributions from operations
of business centers 11,391,674 30,605,302 41,996,976
-------------------------------------------------------------
Other (expenses) income:
Corporate general and
administrative (6,811,053) (7,896,172) (14,707,225)
Depreciation and amortization (3,770,964) (6,045,597) (9,816,561)
Interest expense (401,724) (7,937,516) (8,339,240)
Managed center income - 795,286 795,286
Other income 10,076 248,663 258,739
-------------------------------------------------------------
Income before minority
interest and income taxes 418,009 9,769,966 10,187,975
Minority interest in net (income) loss of
consolidated partnerships - - -
Income before taxes 418,009 9,769,966 10,187,975
Provision for income taxes (153,581) (3,968,000) (4,121,581)
-------------------------------------------------------------
Net income $264,428 $5,801,966 $6,066,394
=============================================================
RSI ownership 22.70%
RSI equity in earnings 1,377,071
</TABLE>
(2) To eliminate the historical equity in loss of REC and record 22.7% of loss
of REC as equity in loss of Advantis for the year ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities 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.
/s/ Scott H. Rechler
-------------------------------
Scott H. Rechler
President and Chief Executive Officer
Date: March 24, 1999
Exhibit 23
Consent of Independent Accountants
We consent to the inclusion in this Form 8-K/A of Reckson Service Industries,
Inc. of our report dated February 26, 1999, on our audits of the consolidated
financial statements of Alliance National Incorporated.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 23, 1999
