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 September 30, 1999
Commission file number: 001-14183
RECKSON SERVICE INCUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3383642
(State other jurisdiction of incorporation (IRS. Employer
of organization) Identification Number)
10 East 50th Street, New York, NY 10022
(Address of principal executive office) (zip code)
(212) 931-8000
(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 27,388,431 shares outstanding as of November 5, 1999.
<PAGE>
RECKSON SERVICE INDUSTRIES, INC.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets of Reckson Service
Industries, Inc. as of September 30, 1999
(unaudited) and December 31, 1998
Consolidated Statement of Operations of Reckson
Service Industries, Inc. for the three and nine
months ended September 30, 1999 and 1998
(unaudited)
Consolidated Statement of Cash Flows of Reckson
Service Industries, Inc. for the nine months
ended September 30, 1999 and 1998 (unaudited)
Notes to the Financial Statements of Reckson
Service Industries, Inc. (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item3. Quantitative and Qualitative Disclosures about
Market Risk
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.
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
1999 1998
-------------- --------------
(Unaudited) (Note 2)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 359,699 $ 2,025,527
Ownership interests in and advances to Partner
Companies (Note 3) 90,342,393 30,276,815
Ownership interest in RSVP Holdings, LLC (Note 4) 37,792,350 15,560,896
Affiliate receivables (Notes 4 and 6) 1,968,982 9,396,070
Deferred compensation (Note 5) 4,357,635 ----
Equipment (net) 223,782 99,928
Other assets 1,344,407 1,483,427
-------------- --------------
Total Assets $ 136,389,248 $ 58,842,663
============== ==============
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses $ 9,375,705 $ 1,893,657
Credit facilities with related parties (Note 6) 116,625,383 40,981,500
Note payable to Stockholder (Note 3) 5,596,572 ----
-------------- --------------
Total Liabilities 131,597,660 42,875,157
-------------- --------------
Commitments and Contingencies
Shareholders' Equity: (Notes 1 and 5)
Preferred stock, $.01 par value, 25,000,000 shares
authorized, none issued and outstanding ---- ----
Common stock, $.01 par value, 100,000,000 shares
authorized, 25,656,834 and 24,685,514 shares
issued and outstanding, at September 30, 1999
and December 31,1998, respectively 256,568 246,855
Additional paid in capital 36,471,496 24,126,341
Accumulated deficit (31,936,476) (8,405,690)
-------------- --------------
Total Shareholders' Equity 4,791,588 15,967,506
-------------- --------------
Total Liabilities and Shareholders' Equity $ 136,389,248 $ 58,842,663
============== ==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Service Industries, Inc.
Consolidated Statements of Operations
(Unaudited)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Interest income $ 464,273 $ 411,802 $ 1,651,893 $ 552,734
Management fee income (Note 6) 83,333 125,000 250,000 291,666
--------------- --------------- --------------- ---------------
Total Revenues 547,606 536,802 1,901,893 844,400
--------------- --------------- --------------- ---------------
Losses on ownership interests (4,976,680) (777,125) (6,511,982) (1,283,784)
--------------- --------------- --------------- ---------------
Expenses:
General and administrative expenses 1,998,388 543,654 4,939,022 1,029,352
Amortization of deferred charges (Note 5) 2,305,813 ---- 7,599,626 ---
Terminated transaction and related costs ---- ---- 413,908 ---
Interest expense (Note 6) 3,006,775 460,024 5,968,141 900,950
--------------- --------------- --------------- ---------------
Total Expenses 7,310,976 1,003,678 18,920,697 1,930,302
--------------- --------------- --------------- ---------------
Net Loss $ (11,740,050) $ (1,244,001) $ (23,530,786) $ (2,369,686)
=============== =============== =============== ===============
Basic and diluted net loss per weighted average
common share $ (0.47) $ (0.05) $ (0.95) $ (0.21)
=============== =============== =============== ===============
Basic and diluted weighted average common
share outstanding 25,163,301 24,685,514 24,855,657 11,097,619
=============== =============== =============== ===============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<TABLE>
Reckson Service Industries, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine months Nine months
ended ended
September 30, September 30,
1999 1998
-------------- --------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss
Adjustments to reconcile net loss to net cash $ (23,530,786) $ (2,369,686)
provided by (used in) operating activities:
Amortization and depreciation 35,684 28,592
Losses on ownership interests in partner companies 6,511,982 1,283,784
Non-cash compensation 8,846,423 ---
Changes in operating assets and liabilities:
Other assets 139,020 (498,341)
Equipment (159,538) (47,409)
Organization and pre-acquisition costs ---- (90,355)
Accounts payable and accrued expenses 3,124,413 76,194
Affiliate receivables 7,427,088 (4,971,553)
-------------- --------------
Net cash provided by (used in) operating activities 2,394,286 (6,588,774)
-------------- --------------
Cash Flows From Investing Activities:
Acquisition of ownership interests and advances
to Partner Companies:
OnSite Access, Inc., and predecessor entity (11,083,829) (4,431,793)
eSourceOne, Inc. (5,000,000) ---
Opus360 Corporation (1,000,000) ---
RSVP Holdings, LLC (25,541,334) (12,607,315)
VANTAS and predecessor entities (36,979,779) (1,100,009)
Other ---- (278,985)
-------------- --------------
Net cash used in investing activities (79,604,942) (18,418,102)
-------------- --------------
Cash Flows From Financing Activities:
Issuance of Common Stock 181,445 20,377,465
Costs of capital (280,500) ---
Net proceeds from credit facilities with related parties 75,643,883 6,594,318
-------------- --------------
Net cash provided by financing activities 75,544,828 26,971,783
-------------- --------------
Cash and Cash Equivalents:
Net decrease (1,665,828) 1,964,907
Beginning of period 2,025,527 129,704
-------------- --------------
End of period $ 359,699 $ 2,094,611
============== ==============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 2,498,107 $ 815,604
============== ==============
<FN>
</FN>
</TABLE>
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. DESCRIPTION OF THE COMPANY
Reckson Service Industries, Inc. ("RSI" or the "Company"), was formed on
July 15, 1997. RSI is a publicly-traded operating company that identifies,
acquires interests in, and develops a network of business-to-business ("B2B")
e-commerce and e-services companies (the "Partner Companies") that service small
and medium sized enterprises, independent professionals and the mobile workforce
of larger companies.
The Company acquires significant, long-term stakes in targeted Partner
Companies, which it incorporates into a collaborative network of e-commerce and
e-services companies, seeking to accelerate their growth and increasing their
likelihood of success. RSI has developed an extensive e- Cooperative platform
that allows its Partner Companies to benefit from its operational and management
resources and experience, the Company's extensive customer base, as well as gain
significant synergies from other existing and future Partner Companies. The
e-Cooperative consists of the:
enterprise Development Group ("eDG") and Advisory Board - eDG offers
strategic guidance, organizational design, human resources, recruiting and
technology assistance to its Partner Companies. The Advisory Board of
independent industry professionals will supplement RSI's eDG by providing
management guidance to Partner Companies and sourcing new business
opportunities
Collaborative network of Partner Companies - Enables Partner Companies to
share collective knowledge and benefit from cross-selling and
cross-marketing opportunities
The Company's strategy is to continue to expand its network of Partner
Companies and its e- Cooperative platform by pursuing additional acquisitions
that complement and enhance the overall network. RSI seeks to add significant
value to its Partner Companies with the goal of creating industry leaders that
have the potential to become public companies, act as industry consolidators or
merge with the proper strategic partners. RSI targets early stage companies that
can benefit from RSI's entire franchise and therefore have the potential to
create significant value for RSI.
RSI seeks to focus its future acquisitions in the Internet sector by
targeting three types of B2B e-commerce and e-services companies:
e-commerce and infrastructure (i.e. companies that primarily deliver or
enable the delivery of goods and services over the Internet)
Click and Mortar (i.e. companies that combine a physical infrastructure
with an Internet enabled model to enhance the delivery of their services)
Internet-based outsourcing (i.e. companies that utilize the Internet to
enable the outsourcing of non-core business functions)
Although the Company refers to the companies in which it has acquired an
equity ownership interest as its "Partner Companies" and that it has a
"partnership " with these companies, it does not act as an agent or legal
representative for any of these companies, it does not have the power or
authority to legally bind any of its Partner Companies and it does not have the
types of liabilities in relation to its Partner Companies that a general partner
of a partnership would have.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements present the financial
position of the Company at September 30, 1999, and December 31, 1998 and the
results of its operations for the three and nine months ended September 30, 1999
and 1998 and its cash flows for the nine months ended September 30, 1999 and
1998. The Company accounts for its investments of less than controlling
interests under the equity method of accounting. All significant intercompany
balances and transactions have been eliminated in the consolidated financial
statements.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1999, is not necessarily indicative of the results that may be expected for the
year ended December 31, 1999.
The balance sheet at December 31, 1998, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company's annual report on Form
10-K for the year ended December 31, 1998.
Accounting for Ownership Interests in Partner Companies
The interests that RSI acquires in its Partner Companies are accounted for
under one of three methods: consolidation, equity method and cost method. The
applicable accounting method is generally determined based on the Company's
voting interest in a Partner Company.
Consolidation. Partner Companies in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities are generally
accounted for under the consolidation method of accounting. Under this method, a
Partner Company's results of operations are reflected within the Company's
Consolidated Statements of Operations. All significant intercompany accounts and
transactions have been eliminated.
Equity Method. Partner Companies whose results are not consolidated, but
over whom the Company exercises significant influence, are accounted for under
the equity method of accounting. Whether or not the Company exercises
significant influence with respect to a Partner Company depends on an evaluation
of several factors including, among others, representation on the Partner
Company's Board of Directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the Partner Company, including voting
rights associated with the Company's holdings in common, preferred and any other
convertible instruments in the Partner Company. Under the equity method of
accounting, a Partner Company's accounts are not reflected within the Company's
Consolidated Statements of Operations; however, RSI's share of the earnings or
losses of the Partner Company is reflected in the caption "Loss on ownership
interests in Partner Companies" in the Consolidated Statements of Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Partner Companies accounted for under the consolidation
or equity method of accounting is amortized on a straight-line basis which
adjusts the Company's share of the Partner Company's earnings or losses.
Cost Method. Partner Companies not accounted for under the consolidation or
the equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations. The
Company also recognizes income from dividends on distributed earnings of its
Partner Companies. However, cost method impairment charges are recognized in the
Consolidated Statement of Operations with the new cost basis not written-up if
circumstances suggest that the value of the Partner Company has subsequently
recovered.
The Company records its ownership interest in debt securities of Partner
Companies accounted for under the cost method at cost as it has the ability and
intent to hold these securities until maturity. The Company records its
ownership interests in equity securities of Partner Companies accounted for
under the cost method at cost, unless these securities have readily determinable
fair values based on quoted market prices, in which case these interests would
be classified as available-for-sale securities or some other classification in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". In addition
to the Company's investments in voting and non-voting equity and debt
securities, it also periodically makes advances to its Partner Companies in the
form of promissory notes which are accounted for in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan".
The Company continually evaluates the carrying value of its ownership
interests in and advances to each of its Partner Companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. The business plan objectives and milestones the Company
considers include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site or the hiring of key employees. The fair value of the
Company's ownership interests in and advances to privately held Partner
Companies is generally determined based on the value at which independent third
parties have invested or have committed to invest in the Partner Companies.
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 and Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Stock Options and Grants
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 and grants because
the alternative fair value accounting provided for under Financial Accounting
Standards Board ("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.
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
recognized for temporary difference that will result in deductible amounts in
future years and for carry forward. A valuation allowance is recognized if it is
more likely than not that some portion or the deferred asset will not be
realized. At September 30, 1999 and December 31, 1998, any deferred tax assets
have been reserved for 100% due to the uncertainty as to whether these assets
will have benefit in future periods.
Derivative Instruments and Hedging Activities
In June 1999, the FASB issued Statement No.137, amending Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which extended
the required date of adoption in the years beginning after June 15, 2000. The
Statement permits early adoption as of the beginning of any fiscal quarter after
its issuance. The Company expects to adopt the new Statement effective January
1, 2001. The Company does not anticipate that the adoption of this Statement
will have any effect on its results of operations or financial position.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES
Partner Companies at September 30, 1999 and December 31, 1998 included:
Voting Ownership on Diluted Basis
--------------------------------
Partner
Company September 30, December 31,
Since 1999 1998
-------------- ------------- -------------
CommerceInc Corporation 1999 33 % * N/A
eSourceOne, Inc. 1999 45 % N/A
Giftcertificates.com 1999 less than 1 % * N/A
OnSite Access, Inc. 1997 29 % 1%
OnSite Commerce and Content,LLC 1998 100 % 59%
Opus360 Corporation 1999 less than 1 % N/A
VANTAS Incorporated 1998 29 % 21%
* Ownership interest acquired in November 1999.
The Company's ownership interests in and advances to Partner Companies are
summarized as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
VANTAS and predecessor entities $ 69,781,904 23,175,485
OnSite Access, Inc. and predecessor entity 15,379,701 7,101,330
eSourceOne, Inc. 4,180,788 ----
Opus360 Corporation 1,000,000 ----
----------------- -----------------
Total ownership interests $ 90,342,393 30,276,815
================= =================
</TABLE>
The following are the Company's summarized earnings/(losses) on ownership
interests:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
VANTAS and predecessor entities $ (65,742) $ 9,250 $ 422,568 $ 6,739
OnSite Access, Inc. and predecessor entity (2,735,551) (15,411) (2,805,458) (20,144)
eSourceOne, Inc. (819,212) ---- (819,212) ----
Other investments ---- ---- ---- 119,059
--------------- --------------- --------------- ---------------
Net income (loss) on ownership interests $ (3,620,505) $ (6,161) $ (3,202,102) $ 105,654
=============== =============== =============== ===============
</TABLE>
The Company's significant ownership interests in Partner Companies are
summarized as follows:
Executive Office Suites and Virtual Office Services (VANTAS and Predecessor
Entities)
On January 8, 1999, Interoffice Superholdings Corporation ("Interoffice")
(36 executive office suite centers) and Reckson Executive Centers, Inc.
("Reckson Executive") (8 executive office suite centers) merged with Alliance
National Incorporated, a holding company which owned and operated approximately
90 nationally located executive office suite centers (the "Merger"). To
effectuate the merger, the Company contributed approximately $21.4 million of
assets. The merged entity changed its name to VANTAS Incorporated ("VANTAS").
The stockholders of Interoffice and Reckson Executive received Series C
Preferred Stock of VANTAS representing approximately 40% of the equity interest
in VANTAS of which approximately 23% of VANTAS was owned by the Company as of
the merger. The holders of the Series C Preferred Stock have the right to
appoint four of the ten members of the board of directors of VANTAS, including
Chairman of the Board and specified preemptive rights and other specified
rights. RSI and the other stockholders of Interoffice hold the Series C
Preferred Stock received in respect of the Merger through a limited liability
company of which RSI is the sole manager.
RSI acquired certain ownership rights related to the Series C Preferred
Stock of VANTAS from a stockholder of Interoffice which provided the Company
with enhanced governance rights for approximately $6.5 million. In addition, the
Company paid $3.5 million to another stockholder of Interoffice for an option to
purchase that stockholder's effective interest in the Series C Preferred Stock
for a purchase price of $6.75 million. If the option is not exercised, the
stockholder has the right to sell such interests to the Company at fair value,
as determined in accordance with the applicable agreement. A significant number
of items presented to the Board of Directors require the separate approval of a
majority of the representatives of the Series C Preferred Stock on the Board of
Directors, including significant acquisitions, sale or leasing of assets,
approval of VANTAS' annual operating budget, certain borrowings and capital
expenditures by VANTAS, the hiring or termination of senior executives and other
matters. The holders of Series C Preferred Stock also have the right to appoint
half of the members of the executive and audit committees of the Board of
Directors. The preferred stockholders of VANTAS (including the holders of
VANTAS' Class A Preferred Stock, Class B Preferred Stock and Class C Preferred
Stock) were granted super-majority voting rights with respect to certain
corporate actions, including the issuance of equity securities, changes to the
harter documents of VANTAS and other matters.
During the third quarter, the Company increased its ownership in VANTAS to
approximately 29%, on a fully diluted basis with a $23 million equity ownership
interest. This ownership interest was made as a part of a $30 million VANTAS
financing.
The Company has entered into stock purchase agreements to increase its
ownership to between approximately 67% and 87% on a fully diluted basis,
depending upon whether certain shareholders exercise their contractual tag along
rights to sell their shares. The Company's terms to acquire these additional
shares are to pay 70% of the purchase price in cash and the remaining 30% will
be comprised of the Company's issuance of its stock at $19 per share. As a
result, the Company has expended approximately $14.2 million, consisting of
260,000 shares of issued stock, $5 million in deposits, and a short term note
payable for approximately $5.6 million. The closing for additional transactions
is estimated to be between November 1999 and February 2000. RSI's additional
ownership interest will range from approximately $82 million of cash and 2.0
million shares of RSI common stock to $123 million of cash and 3.0 million
shares of RSI common stock, depending on the level of participation of the tag
along shareholders and other potential selling shareholders.
As of September 30, 1999, the excess of RSI's equity in VANTAS over its
ownership interest ("Investment Basis Adjustment") was approximately $9.8
million. The Investment Basis Adjustment is being amortized as income over the
life of the ownership interest estimated at 30 years.
VANTAS and RSI have also entered into an intercompany agreement pursuant to
which RSI has the opportunity to be the exclusive provider of certain business
services to VANTAS, provided certain third party and "most-favored nation"
conditions are satisfied.
Summarized financial information of VANTAS and the Company's ownership
interest in and advances to and share of income from VANTAS is as follows:
<TABLE>
Balance Sheet
<CAPTION>
September 30, 1999
----------------
<S> <C>
Assets:
Current assets $ 53,766,888
Property & Equipment, net of accumulated
depreciation 62,912,816
Intangibles, net of accumulated amortization 187,813,495
Other Assets 16,764,851
----------------
Total Assets $ 321,258,050
================
Liabilities and Stockholders' Equity
Current liabilities $ 33,019,026
Long-term liabilities 161,716,606
----------------
Total Liabilities 194,735,632
----------------
Stockholders' Equity
Non RSI Common and Preferred Stock 60,138,471
Preferred Stock Accretion 6,345,464
----------------
RSI net ownership interest in VANTAS 69,781,904
Less: RSI purchase option (3,500,000)
RSI advance to Shareholder (5,000,000)
RSI payments to ISC Shareholder, net (11,113,042)
Add: Investment Basis Adjustment 9,869,621
----------------
Net RSI basis in VANTAS Preferred Stock 60,038,483
----------------
Total Stockholders' Equity 126,522,418
----------------
Total Liabilities and Stockholders' Equity $ 321,258,050
================
</TABLE>
<TABLE>
Statements of Operations
<CAPTION>
For the period
For the three January 8,
months ended 1999 to
September 30, September 30,
1999 1999
------------------ ------------------
<S> <C> <C>
Revenues
Rental income $ 33,702,534 $ 91,339,391
Services income 24,151,543 65,441,289
Other income 197,439 633,904
------------------ ------------------
Total Revenues 58,051,516 157,414,584
------------------ ------------------
Expenses
Rent 22,644,701 60,119,132
Services 8,430,709 22,824,340
General and administrative 19,400,787 52,404,552
Depreciation and amortization 4,068,277 10,321,950
Interest expense 2,887,939 7,133,228
Other expense 1,083,126 3,799,107
------------------ ------------------
Total Expenses 58,515,539 156,602,309
------------------ ------------------
Net income (loss) as reported by VANTAS (464,023) 812,275
Less: Non-RSI share (313,925) (642,775)
------------------ ------------------
RSI's share of net income (loss) (150,098) 169,500
Add: Investment Basis Adjustment 84,356 253,068
------------------ ------------------
Net income (loss) from VANTAS $ (65,742) $ 422,568
================== ==================
</TABLE>
e-Services (OnSite Access, Inc. and Predecessor Entity)
In 1998, the Company had owned a 1% interest in On-Site Ventures, LLC,
("On-Site"), a company that provides advanced telecommunications systems and
services within commercial buildings and/or building complexes. The Company had
also advanced On-Site $6.5 million through December 31, 1998 to fund operating
costs under the terms of a 12% subordinated convertible note.
On April 16, 1999, the Company contributed approximately $5.25 million to
On-Site as part of a $60.0 million private equity financing agreement (the
"Financing Transaction") which included RSI and several third party private
equity investors. The equity agreement requires the Company to fund up to $15
million of which RSI has funded approximately $10.5 million. On July 1, 1999,
On-Site merged into OnSite Access, Inc., ("OnSite Access"), a Delaware
corporation whereby, closings were completed for approximately $20.5 million of
additional equity in connection with the Financing Transaction. The investors,
including RSI, in the Financing Transaction are committed to invest the
remaining $39.5 million, subject only to satisfaction of the conditions of the
Financing Transaction and the corporation's call for funds. In addition, in
connection with the merger, the principal and accrued interest outstanding under
the $6.5 million subordinated RSI loan was converted into 5,869,000 shares of
Preferred Stock issued to RSI. Upon fully funding its capital commitment, RSI
will own an approximate 34% fully diluted interest in OnSite Access.
On October 15, 1999, the Company increased its ownership in OnSite Access
by 7% to 36% on a fully diluted basis by issuing 1,731,597 of common stock at
$19.50 per share to another Onsite Access shareholder.
e-Commerce (eSourceOne, Inc.)
On August 11, 1999, RSI acquired a 45% interest on a fully diluted basis in
eSourceOne, Inc., ("eSourceOne") for a purchase price of $15 million which
includes a $10 million note. eSourceOne is a recently formed Internet-based
employee benefits and human administration outsourcing company targeting small
and medium-size businesses.
RSI acquired Series A Preferred Stock of eSourceOne which is convertible
into shares of common stock of eSourceOne. The preferred stock will convert
automatically in the event eSourceOne completes an initial public offering
within certain parameters. RSI is also committed to invest an additional $7.5
million in connection with a future equity funding. RSI also entered into a
Stockholders' Agreement and a Registration Rights Agreement in respect of
certain governance, voting and stockholder rights, including rights with respect
to board representation, rights of first offer with respect to their eSourceOne
stock, pre-emptive rights, registration rights and other matters.
In September, 1999, the Company invested $1 million for a minority interest
in Opus360 Corporation, a leading provider of an Internet-based e-commerce
platform for managing the supply chain of knowledge workers.
In November 1999, the Company invested approximately $15 million for an
interest of 33% in Commercelnc Corporation, an Internet-based publisher of
detailed "Supplier Cards" on more than 11 million small and medium sized U.S.
businesses that enable customers and suppliers to make informed decisions about
prospective e-commerce business partners.
In November 1999, the Company invested $0.2 million in
Giftcertificates.com, a web site that offers corporate customers the ability to
purchase gift certificates from numerous top branded merchants.
4. OWNERSHIP INTEREST IN RSVP Holdings, LLC
Reckson Strategic Venture Partners, LLC ("Reckson Strategic") was formed on
March 5, 1998 to invest in real estate and real estate-related operating
companies with experienced management teams in market sectors which are in the
early stages of their growth cycle or offer unique circumstances for attractive
investments, as well as platforms for future growth. Through RSVP Holdings, LLC
("Holdings"), the Company is a managing member and 100% owner of the common
equity of Reckson Strategic. New World Realty, LLC, an entity owned by two
individuals retained by Holdings, (the "RSVP Managing Directors"), acts as a
managing member of Holdings, and have a carried interest which provides for the
RSVP Managing Directors to receive a share in the profits of Reckson Strategic
after the Company and Paine Webber Real Estate Securities, Inc., ("Paine
Webber") have received certain minimum returns and a return of capital. Paine
Webber is a non-managing member and preferred equity owner who has committed
$200 million in capital (the "Preferred Equity Facility") and shares in profits
and losses of Reckson Strategic with the Company, subject to a maximum internal
rate of return of 16% of invested capital. On April 24, 1998, Paine Webber
assigned 25% of its preferred equity interest in Reckson Strategic, representing
an unfunded capital commitment of $50 million to Stratum Realty Fund, LP
("Stratum"). The assignment provided Stratum with similar rights and priorities.
On March 17, 1999, Paine Webber transferred all of its rights, title and
interest in its initial invested capital to Stratum. This transfer included the
right to distributions based upon the amount of funded capital contributions. As
a result of this transfer, Stratum has funded its entire $50 million commitment
as of June 30, 1999.
Summarized financial information of RSVP Holdings, LLC and the Company's
ownership interest in, advances to and share of loss is as follows:
<TABLE>
Balance Sheets
<CAPTION>
September 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
Investment in Dominion Venture Group, LLC $ 43,191,404 $ 29,288,973
Other equity investments 31,320,529 5,970,983
Deferred compensation 4,055,489 4,938,539
Other assets 10,637,528 4,552,917
------------------ ------------------
Total Assets $ 89,204,950 $ 44,751,412
================== ==================
Liabilities and Members' Equity:
Due to affiliates $ 1,591,459 $ 1,591,459
Other liabilities 1,709,722 1,397,412
------------------ ------------------
Total Liabilities 3,301,181 2,988,871
------------------ ------------------
Minority Interest 54,376,598 31,201,645
Preferred capital offering costs (6,265,179) (5,000,000)
RSI's ownership interest in and advances to Holdings 37,792,350 15,560,896
------------------ ------------------
Total Liabilities and Members' Equity $ 89,204,950 $ 44,751,412
================== ==================
</TABLE>
In connection with the Preferred Equity Facility, Reckson Strategic has
paid commitment fees of approximately $6.3 million.
<TABLE>
Statement of Operations
<CAPTION>
For the period
For the three For the three For the nine from February
months ended months ended months ended 26, 1998 to
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Other income $ --- $ --- $ --- $ 254,746
Interest income 143,199 71,469 290,781 124,016
--------------- --------------- --------------- ---------------
Total Revenues 143,199 71,469 290,781 378,762
--------------- --------------- --------------- ---------------
Equity in earnings/(loss) on equity investments
Dominion Venture Group, LLC 785,576 ---- 869,951 ----
Other equity investments (2,268,419) (967,048) (4,900,023) (1,084,196)
--------------- --------------- --------------- ---------------
Net loss on equity investments (1,482,843) (967,048) (4,030,072) (1,084,196)
--------------- --------------- --------------- ---------------
Expenses:
Operating expenses 177,781 181,390 547,220 581,586
General and administrative expenses 997,151 973,120 2,896,600 2,265,769
Interest expense 378,089 44,647 683,810 323,171
Depreciation and amortization 24,859 31,637 49,662 105,838
--------------- --------------- --------------- ---------------
Total Expenses 1,577,880 1,230,794 4,177,292 3,276,364
--------------- --------------- --------------- ---------------
Minority Interest share of loss (1,561,349) (1,355,409) (4,606,703) (2,592,360)
--------------- --------------- --------------- ---------------
RSI's share of net loss of RSVP Holdings, LLC $ (1,356,175) $ (770,964) $ (3,309,880) $ (1,389,438)
--------------- --------------- --------------- ---------------
</TABLE>
Dominion Venture Group
On August 27, 1998, the Company formed a joint venture between Reckson
Strategic and Dominion, an Oklahoma-based, privately owned group of companies
that focuses on the development, acquisition and ownership of government
occupied office buildings and correctional facilities. The new venture, Dominion
Venture Group, LLC (the "Dominion Venture"), is owned by RSVP-Dominion LLC, a
subsidiary of Reckson Strategic and by Burgess Services, LLC, an entity owned
and controlled by Calvin Burgess, President and Chief Executive Officer of
Dominion. The Dominion Venture engages primarily in acquiring, developing and/or
owning government occupied office buildings and privately operated correctional
facilities and related activities. Under the operating agreement, Reckson
Strategic is to invest up to $100 million, some of which may be invested by
Reckson Operating Partnership, LP ("Reckson") for capital requirements approved
by Reckson Strategic. Reckson Strategic funded its total capital contribution of
approximately $8.5 million through draws under its $200 million Preferred Equity
Facility and a $100 million Reckson Strategic Facility with Reckson. Reckson has
contributed approximately $17.6 million in connection with the Dominion Venture.
Other
On April 26, 1999, Reckson Strategic acquired interests in joint ventures
in two lodging and golf resorts. Reckson Strategic invested approximately $5.7
million for interests in both properties. The objective of these investments is
to participate in the economic revitalization of Sullivan County, New York which
includes the Catskill Mountains area.
As of September 30, 1999, Reckson Strategic's investment in the assisted
living industry, which has a carrying value of approximately $.9 million, is
currently being held for sale.
5. SHAREHOLDERS' EQUITY
In June 1999, the shareholders approved the 1999 Stock Option Plan for the
purpose of attracting and retaining executive officers, directors and other key
employees. Pursuant to the plan, 1,750,000 of the Company's authorized common
shares have been reserved for issuance, of which 550,000 shares were issued in
August, 1999. At September 30, 1999, the Company has recognized deferred
compensation of approximately $4.4 million, net of amortization.
As a part of the Company's ongoing investment in organizational
infrastructure and the retention of high quality senior management, certain
incentive stock and stock option awards were granted on March 24, 1999 when the
closing stock price was $4.625. These incentive compensation awards were subject
to stockholder approval of the 1999 Stock Option Plan which occurred on June 24,
1999, when the closing stock price was $14.9375. Pursuant to financial
accounting guidelines the date for measuring compensation costs would be June
24, 1999. These awards vest over various periods ranging from six months to
three years and include tax loans which will be forgiven one year thereafter.
During the nine month period ended September 30, 1999, results include $7.6
million or $.31 per basic and diluted share, associated with these awards, the
majority, of which is non-cash in nature.
6. TRANSACTIONS WITH RELATED PARTIES
On June 15, 1998, the Company established a RSI Facility with Reckson in
the amount of $100 million ("RSI Facility") for their service sector operations
and other general corporate purposes. Reckson has advanced the Company
approximately $83.6 million at September 30, 1999. These advances bear interest
at 12% per annum. Additionally, RSI established a $100 million RSVP Facility
with Reckson for funding the Reckson Strategic investments. The amount available
under RSVP Facility is reduced by any amount invested by Reckson in joint
ventures with Reckson Strategic. As of September 30, 1999, Reckson has advanced
RSI approximately $32.9 million under the RSVP Facility and has invested
approximately $21.7 million in joint ventures with Reckson Strategic. The total
outstanding at September 30, 1999, owed by RSI under both credit facilities was
approximately $116.5 million. Interest accrued on these facilities at September
30, 1999 was approximately $4.2 million. Currently, the Company has three short
term letters of credit totaling $14.6 million, which have been utilized as
consideration for future RSI investment acquisitions. These letters of credit
decrease the availability on the RSI Facility.
The Board of Directors of both RSI and Reckson have approved amendments to
the credit facilities which are necessary in order for RSI to proceed with
certain proposed acquisition financing. As consideration for such approvals, RSI
will pay a fee to Reckson in the form of approximately 176,000 shares of RSI
common stock.
The Company is entitled to a cumulative annual management fee of $2 million
with respect to Reckson Strategic, of which $1.5 million is subordinate to Paine
Webber receiving an annual minimum rate of return of 16% and a return of its
capital. The unsubordinated amount for the three and nine months ended September
30, 1999 was $125,000 and $375,000, respectively.
The Company reimburses Reckson with respect to general and administrative
expenses (including payroll expenses) incurred by Reckson for the benefit of the
Company. For the three and nine months ended September 30, 1999, the Company
reimbursed Reckson $85,609 and $386,499, respectively, for such activities.
SEGMENT DISCLOSURE
Each of the segments has a managing director who reports directly to the
Board of Directors/Executive Committees who have been identified as the Chief
Operating Decision Makers ("CODM") because of their final authority over
resource allocation decisions and performance assessment.
The CODM evaluate the operating performance of these segments based on
sectors.
RSI's governance and control rights are generally exercised through Board
of Directors seats and through representation on the executive committees of the
various segment entities.
The following table sets forth the Company's segments and their revenues
and expenses and other related disclosures as required by SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information", ("SFAS
131"), for the three months ended September 30, 1999 and 1998.
<TABLE>
September 30, 1999
<CAPTION>
Executive
Office
Suites
and
Virtual
Office RSVP
Services e-Services e-Commerce Holdings Total
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Ownership interest $ 69,781,904 $ 15,379,701 $ 5,180,788 $ 37,792,350 $ 128,134,743
--------------- --------------- --------------- --------------- ---------------
Revenues and losses on ownership interests 58,051,516 972,022 97,697 (1,339,644)
--------------- --------------- --------------- ---------------
Expenses 58,515,539 7,041,159 916,909 1,577,880
--------------- --------------- --------------- ---------------
Net Income (loss) (464,023) (6,069,137) (819,212) (2,917,524)
--------------- --------------- --------------- ---------------
RSI/equity in income (loss) $ (65,742) $ (2,735,551) $ (819,212) $ (1,356,175) $ (4,976,680)
--------------- --------------- --------------- --------------- ---------------
</TABLE>
<TABLE>
September 30, 1998
<CAPTION>
Executive
Office
Suites
and
Virtual
Office RSVP
Services e-Services Holdings Total
-------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues and losses on ownership interests $ 1,575,801 $ 260,766 $ (895,579)
--------------- --------------- ---------------
Expenses 1,482,372 1,801,819 1,230,794
--------------- --------------- ---------------
Net income (loss) 93,429 (1,541,053) (2,126,373)
--------------- --------------- ---------------
RSI/equity in income (loss) $ 9,250 $ (15,411) $ (770,964) $ (777,125)
--------------- --------------- --------------- ---------------
</TABLE>
The following table sets forth the Company's segments and their revenues
and expenses and other related disclosures as required by SFAS 131 for the nine
months ended September 30, 1999 and 1998.
<TABLE>
September 30, 1999
<CAPTION>
Executive
Office
Suites
and
Virtual
Office RSVP
Services e-Services e-Commerce Holdings Total
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues and losses on ownership interests $ 157,414,584 $ 2,255,014 $ 97,697 $ (3,739,291)
--------------- --------------- --------------- ---------------
Expenses 156,602,309 14,669,888 916,909 4,177,292
--------------- --------------- --------------- ---------------
Net Income (loss) 812,275 (12,414,874) (819,212) (7,916,583)
--------------- --------------- --------------- ---------------
RSI/equity in income (loss) $ 422,568 $ (2,805,458) $ (819,212) $ (3,309,880) $ (6,511,982)
--------------- --------------- --------------- --------------- ---------------
</TABLE>
<TABLE>
September 30, 1998
<CAPTION>
Executive
Office
Suites
and
Virtual
Office RSVP
Services e-Services e-Commerce Holdings Total
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues and losses on ownership interests $ 3,054,227 $ 332,841 $ 4,057,583 $ (705,434)
--------------- --------------- --------------- ---------------
Expenses 2,986,160 2,347,230 3,529,668 3,276,364
--------------- --------------- --------------- ---------------
Net income (loss) 68,067 (2,014,389) 527,915 (3,981,798)
--------------- --------------- --------------- ---------------
RSI/equity in income (loss) $ 6,739 $ (20,144) $ 119,059 $ (1,389,438) $ (1,283,784)
--------------- --------------- --------------- --------------- ---------------
</TABLE>
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 consolidated Financial Statements of Reckson Service Industries,
Inc. (the "Company" or "RSI") and related notes thereto.
The Company considers certain statements set forth to be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, with respect to
the Company's expectations for future periods. Certain forward-looking
statements, including, without limitation, statements relating to the ability to
identify and acquire interest in commercial services companies, the financing of
the Company's operations, the timing and success of such acquisitions and the
ability to integrate and manage effectively its various acquisitions, involve
certain risks and uncertainties. Although the Company believes that the
expectation reflected in such forward-looking statements are based on reasonable
assumptions, the actual results may differ materially from those set forth in
the forward-looking statements and the Company can give no assurance that its
expectations will be achieved. Certain factors that might cause the results of
the Company to differ materially from those indicated by such forward-looking
statements include, among other factors, general economic conditions, a lack of
attractive business opportunities or suitable acquisitions, the Company's
dependence upon financing from Reckson Operating Partnership, L.P., ("Reckson")
conflicts of interest of management, competition for targeted acquisitions and
the ability to otherwise finance business opportunities. Consequently, such
forward-looking statements should be regarded solely as reflections of the
Company's current operating and development plans and estimates. These plans and
estimates are subject to revision from time to time as additional information
becomes available, and actual results may differ from those indicated in the
referenced statements.
OVERVIEW AND BACKGROUND
RSI was formed on July 15, 1997 and is a publicly-traded operating company
that identifies, acquires interests in, and develops a network of
business-to-business ("B2B") e-commerce and e-services companies (the "Partner
Companies") that service small and medium sized enterprises, independent
professionals and the mobile workforce of larger companies.
The Company acquires significant, long-term stakes in targeted Partner
Companies, which it incorporates into a collaborative network of companies,
seeking to accelerate their growth and increasing their likelihood of success.
RSI has developed an extensive e-Cooperative platform that allows its Partner
Companies to benefit from its operational and management resources and
experience, as well as gain significant synergies from other existing and future
Partner Companies. The e-Cooperative consists of the:
enterprise Development Group ("eDG") and Advisory Board - eDG offers
strategic guidance, organizational design, human resources, recruiting and
technology assistance to its Partner Companies. The Advisory Board of
independent industry professionals will supplement RSI's eDG by providing
management guidance to Partner Companies and sourcing new business
opportunities
Collaborative network of Partner Companies - Enables Partner Companies to
share collective knowledge and benefit from cross-selling and
cross-marketing opportunities
The Company's strategy is to continue to expand its network of Partner
Companies and its e-Cooperative platform by pursuing additional acquisitions
that complement and enhance the overall network. RSI seeks to add significant
value to its Partner Companies with the goal of creating industry leaders that
have the potential to become public companies, act as industry consolidators or
merge with the proper strategic partners. RSI targets early stage companies that
can benefit from RSI's entire franchise and therefore have the potential to
create significant value for RSI.
RSI seeks to focus its future acquisitions in the Internet sector by
targeting three types of B2B e-commerce and e-services companies:
e-commerce and infrastructure (i.e. companies that primarily deliver or
enable the delivery of goods and services over the Internet)
Click and Mortar (i.e. companies that combine a physical infrastructure
with an Internet enabled model to enhance the delivery of their services)
Internet-based outsourcing (i.e. companies that utilize the Internet to
enable the outsourcing of non-core business functions)
Because RSI acquires significant interests in B2B e-commerce companies,
many of which generate net losses, RSI has experienced, and expect to continue
to experience, significant volatility in the quarterly results. Management does
not know if the Company will report net income in any period, and expects to
report net losses in many quarters for the foreseeable future. While most
Partner Companies have consistently reported losses, the Company may experience
significant volatility from period to period due to one-time transactions and
other events incidental to the ownership interests in and advances to Partner
Companies. On a continuous basis, but no less frequently than at the end of each
quarterly reporting period, management evaluates the carrying value of the
ownership interests in and advances to each of the Partner Companies for
possible impairment based on achievement of business plan objectives and
milestones, the fair value of each ownership interest and advance in the partner
company relative to carrying value, the financial condition and prospects of the
partner company, and other relevant factors. The business plan objectives and
milestones that are taken into consideration include, among others, those
related to financial performance such as achievement of planned financial
results or completion of capital raising activities, and those that are not
primarily financial in nature such as the launching of a web site or the hiring
of key employees. The fair value of the ownership interests in and advances to
privately held Partner Companies is generally determined based on the value at
which independent third parties have invested or have committed to invest in
Partner Companies.
The presentation and content of the Company's financial statements is
largely a function of the presentation and content of the financial statements
of the Partner Companies. To the extent Partner Companies change the
presentation or content of their financial statements, as may be required upon
review by the Securities and Exchange Commission or changes in accounting
literature, the presentation and content of the Company's financial statements
may also change.
Effect of Various Accounting Methods on Results of Operations
The various interests that RSI acquires in Partner Companies are accounted
for under one of three methods: consolidation, equity method and cost method.
The applicable accounting method is generally determined based on the Company's
voting interest in a Partner Company.
Consolidation. Partner Companies in which the Company directly or
indirectly own more than 50% of the outstanding voting securities are generally
accounted for under the consolidation method of accounting. Under this method, a
Partner Company's results of operations are reflected within the Company's
Consolidated Statements of Operations. As a result of certain commitments the
Company has made to acquire the ownership held by certain VANTAS Incorporated
("VANTAS") shareholders (See Note 3 to the Consolidated Financial Statements),
management expects to consolidate VANTAS commencing with the fourth quarter of
1999. Participation of other Partner Company shareholders in the earnings or
losses of a consolidated Partner Company will be reflected in a caption
"Minority interest" in the Consolidated Statements of Operations. Minority
interest adjusts the consolidated net results of operations to reflect only
RSI's share of the earnings or losses of the consolidated Partner Company.
The effect of a Partner Company's net results of operations on RSI's net
results of operations is generally the same under either the consolidation
method of accounting and the equity method of accounting, because under each of
these methods only RSI's share of the earnings or losses of a Partner Company is
reflected in the net results of operations in the Consolidated Statements of
Operations.
Equity Method. Partner Companies whose results are not consolidated, but
over whom the Company exercises significant influence, are generally accounted
for under the equity method of accounting. Whether or not the Company exercises
significant influence with respect to a Partner Company depends on an evaluation
of several factors including, among others, representation on the Partner
Company's board of directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the Partner Company, including voting
rights associated with the Company's holdings in common, preferred and other
convertible instruments in the Partner Company. Under the equity method of
accounting, a Partner Company's accounts are not reflected within the Company's
Consolidated Statements of Operations; however, RSI's share of the earnings or
losses of the Partner Company is reflected in the caption "Loss on ownership
interests in Partner Companies" in the Consolidated Statements of Operations.
Partner Companies accounted for under the equity method of accounting at
September 30, 1999 and December 31, 1998 included:
Voting Ownership on Diluted Basis
--------------------------------
Partner
Company September 30, December 31,
Since 1999 1998
------------ ------------- --------------
Commercelnc Corporation (*) 1999 33 % N/A
eSourceOne, Inc. 1999 45 % N/A
OnSite Access, Inc. 1997 29 % 1%
OnSite Commerce and Content LLC 1998 100 % 59%
VANTAS Incorporated 1998 29 % 21%
*In November 1999, the Company acquired an interest of 33% in Commercelnc
Corporation, an Internet-based publisher of detailed "Supplier Cards" on more
than11 million small and medium sized U.S. businesses that enable customers and
suppliers to make informed decisions about prospective e-commerce business
partners.
RSI has representation on the board of directors of all of the above
Partner Companies, and as of September 30, 1999, generally owned voting
convertible preferred stock in all of them. With the exception of VANTAS, the
equity method Partner Companies are in a very early stage of development and
have not generated significant revenues. In addition, with the exception of
VANTAS, the equity method Partner Companies incurred substantial losses since
their inception and are expected to continue to incur substantial losses in
1999.
Cost Method. Partner Companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, the Company's share of the
earnings or losses of these companies is not included in the Consolidated
Statements of Operations. The Companies first Partner Company to be accounted
for under the cost method resulted from an interest of less than 1% of the
voting ownership of Opus360 Corporation ("Opus360"), being acquired during the
third quarter of 1999. This Partner Company is in a very early stage of
development, has not generated significant revenues, has incurred substantial
losses in 1999, and is expected to continue to incur substantial losses for the
remainder of 1999. Opus360 has not paid dividends during RSI's period of
ownership and is generally not expected to pay dividends in the foreseeable
future.
In November 1999, the Company invested $0.2 million in
Giftcertificates.com, a web site that offers corporate customers the ability to
purchase gift certificates from numerous top branded merchants.
RESULTS OF OPERATIONS
The Company commenced operations on July 15, 1997 and had minimal
activities through September 30, 1998; therefore, the following periods are not
comparable.
Summary of Operations by Business Segment for the Three Months ended September
30, 1999
Operations
Net loss for the three months ended September 30, 1999 was approximately
$11.7 million due to higher general and administrative expenses associated with
the Company's elevated level of operating activity and include certain third
quarter non-cash charges attributable to incentive stock compensation for key
members of senior management.
Executive Office Suites and Virtual Office Services (VANTAS and Predecessor
Entities)
For the three months ended September 30, 1999, VANTAS reported losses of
approximately $0.5 million. RSI's share after adjustments was a loss of
approximately $0.1 million. VANTAS reported $58.1 million in revenues primarily
due to occupancy and service revenue.
e-Services (OnSite Access, Inc. and Predecessor Entity)
For the three months ended September 30, 1999, OnSite Access, Inc. ("OnSite
Access") reported losses of approximately $6.0 million. OnSite Access' losses
were generally attributable to interest expense and start-up costs such as
staffing. The Company's share of these losses was approximately $2.7 million,
after adjustments.
e-Commerce (eSourceOne, Inc.)
With development stage operations commencing during the third quarter,
eSourceOne Inc. ("eSource One") reported losses of approximately $0.8 million
primarily due to start up costs of the business. RSI recognized a loss of
approximately $0.8 million on its equity interest, after adjustments.
RSVP Holdings, LLC ("Holdings")
For the three months ended September 30, 1999, Holdings had losses of
approximately $2.9 million. These losses are attributable to the start-up nature
of the businesses in which Holdings has invested. Operating expenses consisted
primarily of interest, payroll and other operating costs. RSI's share of
Holdings loss for the three months ended September 30, 1999, was approximately
$1.4 million.
Summary of Operations by Business Segment for the Nine Months ended September
30, 1999
Operations
Net loss for the nine months ended September 30, 1999, was approximately
$23.5 million, including general and administrative expenses associated with the
Company's elevated level of operating activity and non-cash charges attributable
to incentive stock compensation for key members of senior management.
Executive Office Suites and Virtual Office Services (VANTAS and Predecessor
entities)
For the nine months ended September 30, 1999, VANTAS reported net income of
approximately $0.8 million. RSI's share after adjustments was income of $0.4
million. VANTAS reported $157.4 million in revenues primarily due to occupancy
and service revenues. Merger expenses of approximately $1.6 million were
incurred in connection with various acquisitions consummated during the period.
e-Services (OnSite Access, Inc. and Predecessor Entity)
For the nine months ended September 30, 1999, OnSite Access reported losses
of approximately $12.4 million. OnSite Access' losses were generally
attributable to interest expense and start-up costs. The Company's share of
losses was approximately $2.8 million after adjustments.
e-Commerce (eSourceOne, Inc.)
With development stage operations commencing during the third quarter,
eSourceOne reported losses of approximately $0.8 million during the nine months
ended September 30, 1999, primarily due to start up costs related to the
business. RSI recognized a loss of approximately $0.8 million on its equity
interest, after adjustments.
RSVP Holdings, LLC
For the nine months ended September 30, 1999, Holdings had losses of
approximately $7.9 million. These losses are attributable to the start-up nature
of the businesses in which Holdings has invested. Operating expenses consisted
primarily of interest, payroll and other operating costs. RSI's share of
Holdings loss for the nine months ended September 30, 1999, was approximately
$3.3 million.
Summary of Operations for the three and nine months ended September 30, 1998
For the three months ended September 30, 1998, the Company reported a net
loss of approximately $1.2 million. Total revenues included interest income
relating to loans made to certain affiliates. The Company also reported expenses
primarily related to interest, payroll and office costs.
For the nine months ended September 30, 1998 the Company reported a net
loss of approximately $2.4 million. Total revenues included management fee
income and interest income relating to loans made to certain affiliates. The
Company also reported total expenses of approximately $1.9 million, which
substantially represented interest, payroll and office costs.
LIQUIDITY AND CAPITAL RESOURCES
Summary of Cash Flows
Net cash totaling approximately $2.4 million was provided by operating
activities for the nine months ended September 30, 1999, and $6.6 million was
used for operating activities for the nine months ended September 30, 1998. Cash
provided by operations in 1999 were primarily attributable to collections of
affiliate receivables. Cash used in operations in 1998 was primarily
attributable to the start-up losses incurred by the Company and Holdings,
advances to affiliates and general and administrative operating costs.
Net cash used in investing activities totaled approximately $79.6 million
for the nine months ended September 30, 1999, and $18.4 million for the nine
months ended September 30, 1998. Cash used in investing activities related
primarily to acquisitions of ownership interests in and advances to Holdings,
VANTAS, OnSite Access and eSourceOne.
Net cash provided by financing activities totaled approximately $75.5
million for the nine months ended September 30, 1999, and $27.0 million for the
nine months ended September 30, 1998. Cash provided by financing activities
during 1999 is primarily attributable to draws on both the RSI Facility and the
RSVP Facility.
Financing Activities
On June 15, 1998, RSI established the RSI Facility with Reckson in the
amount of $100 million for RSI's service sector operations and other general
corporate purposes. On the same date, RSI established the RSVP Facility with
Reckson for funding of investments of up to $100 million with or in Reckson
Strategic through (i) Reckson Strategic controlled joint venture Real Estate
Investment Trust ("REIT")-qualified Investments, or (ii) advances made to RSI.
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 business 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% or (ii) 12% per annum, with the rate on balances outstanding for more
than one year increasing annually at a rate of 4% of the prior year's rate.
Prior to maturity, interest is payable quarterly but only to the extent of net
cash flow and on an interest-only basis and is pre-payable 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. As of September 30, 1999,
approximately $83.6 million was outstanding under the RSI Facility and
approximately $54.6 million was advanced under the RSVP Facility of which
approximately $21.7 million represented investments by Reckson in Reckson
Strategic joint ventures and approximately $32.9 million represented outstanding
borrowings.
Additionally, as of September 30, 1999, the Company has three short-term
letters of credit totaling $14.6 million, which have been utilized as deposits
for future acquisitions of ownership interests in Partner Companies. These
letters of credit decrease the availability on the RSI Facility.
Additionally, Reckson Strategic has obtained the Preferred Equity Facility,
which provides for the investment by Paine Webber of up to $200 million in
Reckson Strategic in the form of preferred equity, subject to certain
conditions. Amounts available under the Preferred Equity Facility have been used
by Reckson Strategic to make investments consistent with its business objectives
and to fund working capital. Under the terms of the Preferred Equity Facility,
Reckson Strategic is subject to various covenants and events of default and
related remedies. Such remedies include increased control rights of Paine Webber
over the operation of Reckson Strategic under certain circumstances. Advances
under the Preferred Equity Facility were partially funded by an investment fund
that is jointly sponsored by financier George Soros and Paine Webber. In
addition, Paine Webber and such investment fund are entitled to receive priority
or preferred distributions from Reckson Strategic prior to the distributions of
cash to RSI. On March 17, 1999, Paine Webber transferred all of its rights,
title and interest on its initial invested capital of $50.0 million to Stratum.
As of September 30, 1999, Paine Webber and Stratum have contributed
approximately $67.2 million.
The Company utilizes the advances under the RSI Facility primarily to
acquire ownership interests in operating companies that provide business
services. The Company may acquire additional interests in these operating
companies to accommodate their respective growth plans. The Company's
acquisitions of ownership interests in operating companies are anticipated to
produce net cash flow as a result of their operating activities over the long
term, although the level and timing of net cash flow for each investment in the
short-and long-term may vary based upon the stage of the respective operating
company's growth cycle and the level of the Company's ownership interest. The
Company targets operating companies that will produce net cash flow in the
long-term. It is expected that certain of the Company's investments will be made
in companies which it does not fully control. Thereby cash flow of these
companies will be used for growth opportunities at such companies and not for
distribution to its owners. 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.
In order to finance the acquisition of the additional ownership interest in
VANTAS, the terms of the RSI Facility are currently being renegotiated, a $75.0
million facility is being negotiated with an affiliate of Holdings, and a
facility for up to an additional $60.0 million is being negotiated with a
significant investment banking institution. These cash resources in conjunction
with between 2.0 and 3.0 million RSI shares, will be adequate to finance this
VANTAS transaction and provide resources for the acquisition of ownership
interests in other existing or new Partner Companies. Prior to the Company
entering into any new debt facilities,the RSI Facility with Reckson will need to
be modified, this modification has been approved by the Board of directors of
both RSI and Reckson. Additionally, the Company is currently exploring options
for the sale of equity securities either in a private placement or a public
offering, and thus enabling significant new acquisitions of interests in Partner
Companies, as well as funding working capital needs.
The Company anticipates that cash on hand, net cash flows from operating
activities, together with cash available from borrowings under the RSI Facility
and other facilities that are being negotiated, will be adequate to meet the
capital and liquidity requirements of the Company in both the short-and
long-term.
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, 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. Since the Company's accounting software
is maintained and supported by a third party, the total year 2000 project cost
was minimal. The Company has expended approximately $0.1 million in connection
with year 2000 issues.
The year 2000 project has been completed to date on its operating systems.
Additionally, the Company has received assurances from its significant service
providers that all their systems are currently year 2000 compliant or will be
made compliant prior to any impact on those systems. However, the Company cannot
guarantee that all significant service providers will comply with their
assurances and therefore, the Company may not be able to determine year 2000
compliance of those significant service providers. At that time, the Company
will determine the extent to which the Company will be able to replace
non-compliant significant service providers. The Company believes that with
modifications to existing software and conversions to new software, the year
2000 issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are not
complete timely, costs associated with the year 2000 issue could be significant
and have a material impact on the operations of RSI.
In a "worst case scenario" of the failure of the third party to deliver to,
on a timely basis, the necessary upgrades to the accounting software, the
Company would be required to process transactions, such as the issuance of
disbursements, manually until an alternative system was implemented.
If the Company is not successful in implementing its year 2000 compliance
plan, the Company may suffer a material adverse impact on their results of
operations and financial condition. Because of the importance of addressing the
year 2000 issue, the Company has developed contingency plans if it determines
that the compliance plans will not be implemented.
INFLATION
The Credit Facilities bear interest at the greater of the prime rate plus
2% or 12% (on balances outstanding more than one year increasing 4% per year, as
described above). The rate of interest on the Credit Facilities will be
influenced by changes in the prime rate 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 rates under
the Credit Facilities.
The Company believes that higher revenues will offset inflationary
increases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk on its
Credit Facilities. The Company does not hedge interest rate risk using financial
instruments. The Credit Facilities bear interest at the greater of the prime
rate plus 2% or 12% (with balances outstanding more than one year increasing 4%
per year, as described above). The rate of interest on the Credit Facilities
will be influenced by changes in the prime rate 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
rates under the Credit Facilities.
The following table sets forth the Company's Credit Facilities obligations,
principal cash flows by scheduled maturity, weighted average interest rates and
estimated fair market value ("FMV") at September 30, 1999.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total FMV
------- ------- ------- ------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate $ --- $ --- $ --- $ --- $ 116,625,383 $ --- $ 116,625,383 $ 116,625,383
Average interest
rate --- --- --- --- 12% --- 12%
</TABLE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds
On September 29, 1999 and October 15, 1999, the Company issued an
aggregate of 1,991,597 shares of its common stock as partial
consideration for the purchase of an entity which indirectly owns shares
of VANTAS Incorporated, and membership interests in OnSite Commerce and
Content LLC and OnSite Access, Inc., from certain affiliates of Jon L.
Halpern. The transaction increased the Company's ownership interest in
each of these companies and was previously reported by the Company in
Current Reports on Form 8-K. The offering was made pursuant to the
exemption from registration under Section 4(2) of the Securities Act of
1933 and involved only accredited investors.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders - None
Item 5. Other information - None
Item 6. Exhibits and Reports on Form 8-K
Form 8-K dated July 16, 1999. Relating to the Company's ownership
interest in OnSite Access, Inc.
Form 8-K dated August 13, 1999 Relating to the Company's ownership
interest in VANTAS
Form 8-K dated September 1, 1999 Relating to the Company's ownership
interest in eSourceOne, Inc.
Form 8-K/A dated September 20, 1999 Relating to the Company's ownership
interest in VANTAS
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
November 10, 1999 /s/ Scott H. Rechler
Date Scott H. Rechler, President and
Chief Executive Officer
(Principal Executive Officer)
November 10, 1999 /s/ Michael Maturo
Date Michael Maturo, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
<TABLE> <S> <C>
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<NAME> RECKSON SERVICE INDUSTRIES, INC.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
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<RECEIVABLES> 135,805
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