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): November 5, 1998
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)
<PAGE>
The Company considers certain statements set forth herein 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, the financing of
the Company's operations, the timing and success of the acquisitions referred
to below and the ability to integrate and manage effectively such
acquisitions, involve certain risks and uncertainties. Although the Company
believes that the expectations 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, the Company's dependence upon financing from
Reckson Operating Partnership, L.P. and conflicts of interest of management.
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.
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 November 20, 1998, as set forth in
the pages attached hereto.
Item 2. Acquisition or Disposition of Assets
On November 9, 1998, Reckson Service Industries, Inc. (the "Company")
announced the exercise of its option to acquire a majority interest in
Interoffice Superholdings Corporation ("Interoffice"), the executive office
suite business held by Reckson Management Group, Inc. ("RMG"). The aggregate
purchase price paid by the Company to RMG was approximately $20.5 million, and
was financed through borrowings under the Company's credit facility with Reckson
Operating Partnership, L.P. The Company also acquired receivables related to
certain advances made by RMG to the other stockholder's of Interoffice
(including advances made in respect of the exercise of the Xebec option
described below) for approximately $10.3 million. Approximately $2.4 million of
these advances have been repaid as of the date hereof.
In July, 1998, Interoffice, through a subsidiary, purchased six
executive office suite centers in the Sacramento, California area from Xebec
Management Services, Inc. ("Xebec") and its affiliates for a purchase price of
approximately $8.4 million (subject to an upwards adjustment to the purchase
price of up to $900,000 based on the future performance of the six centers).
Such $8.4 million was funded entirely by RMG without any additional investment
by the other stockholders of Interoffice. The other stockholders of
Interoffice were granted an option to acquire their pro rata share of this
investment for $3.4 million which was subsequently exercised.
On January 9, 1999, Interoffice's operations were merged with the
operations of Alliance National Incorporated ("Alliance"), a Nevada
corporation that owned 90 executive office suite centers in 37 markets across
the country. A separate current report on Form 8-K will be filed reporting the
closing of the merger.
Item 5. Other Events
As previously reported, Interoffice had also entered into a contract
to acquire all of the stock of a company owning nine executive office suite
centers in southern California for an aggregate purchase price of
approximately $7.3 million, and a contract to acquire three executive office
suite centers in France for an aggregate purchase price of approximately $2
million. Interoffice acquired the three executive office suite centers in
France in January 1999, and, as a result of the merger referred to above, the
successor in the merger with Alliance has succeeded to the contract to acquire
the nine executive office suite centers in southern California.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
Interoffice Superholdings Corporation and Subsidiaries - Consolidated
Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets for the nine months ended September 30,
1998 (unaudited) and for the years ended December 31, 1997 and
1996
Consolidated Statements of Income for the periods January 29, 1998 to
September 30, 1998 (unaudited), January 1, 1998 to January
28, 1998 (unaudited), the nine months ended September 30,
1997 (unaudited) and the years ended December 31, 1997, 1996
and 1995
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows for the periods January 29,
1998 to September 30, 1998 (unaudited), January 1, 1998 to
January 28, 1998 (unaudited), the nine months ended
September 30, 1997 (unaudited) and the years ended December
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Xebec Management Services, Inc. and Affiliate - Combined Financial
Statements
Report of Independent Auditors
Combined Balance Sheets for the years ended December 31, 1997 and 1996
Combined Statements of Income for the years ended December 31, 1997
and 1996 and for the periods January 1, 1998 to July 19,
1998 (unaudited) and January 1, 1997 to September 30, 1997
(unaudited)
Combined Statements of Stockholders' Equity (Deficit)
Combined Statements of Cash Flows for the years ended December 31,
1997 and 1996 and for the periods January 1, 1998 to July
19, 1998 and January 1, 1997 to September 30, 1997
Notes to Combined Financial Statements
(b) Reckson Service Industries, Inc. Pro Forma Financial Information
Pro Forma Condensed Consolidated Balance Sheet (unaudited) as of
September 30, 1998.
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
for the nine months ended September 30, 1998.
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
for the year ended December 31, 1997.
Notes to Pro Forma Financial Statements
<PAGE>
Report of Independent Auditors
To the Board of Directors of
InterOffice (Holdings) Corporation
We have audited the accompanying consolidated balance sheets of InterOffice
(Holdings) Corporation and Subsidiaries ("Interoffice") as of December 31,
1997 and 1996 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of Interoffice's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of InterOffice
(Holdings) Corporation and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
September 18, 1998
<PAGE>
Interoffice Superholdings Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
INTEROFFICE INTEROFFICE
SUPERHOLDINGS (HOLDINGS)
CORPORATION CORPORATION
SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
--------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,293,636 $ 2,418,428 $ 1,455,325
Accounts receivable, net of allowance for
doubtful accounts of $53,000 (unaudited) in
1998, $39,000 in 1997 and $72,000 in 1996 2,261,923 1,922,873 1,882,813
Automobiles held for sale - 106,742 252,834
Prepaid expenses and other assets 186,669 163,718 173,179
Deferred income taxes - - 37,403
Due from related party 169,463 177,977 -
--------------------------------------------------------
Total current assets 5,911,691 4,789,738 3,801,554
--------------------------------------------------------
Property and equipment:
Furniture and fixtures 8,361,587 7,549,031 7,356,618
Equipment 7,575,939 6,505,768 6,522,921
Leasehold improvements 2,044,674 1,689,060 1,593,663
--------------------------------------------------------
17,982,200 15,743,859 15,473,202
Less - accumulated depreciation and
amortization (9,703,468) (7,871,041) (6,287,267)
--------------------------------------------------------
Total property and equipment 8,278,732 7,872,818 9,185,935
--------------------------------------------------------
Investment in residential real estate - 166,464 350,168
Restricted cash 385,887 282,081 -
Certificates of deposit - restricted 627,439 443,078 370,680
Deposits 467,837 432,846 443,556
Due from related party - 141,486 -
Deferred acquisition costs 993,961 - -
Goodwill, net of accumulated amortization of
$719,756 31,877,037 - -
--------------------------------------------------------
Total assets $ 48,542,584 $ 14,128,511 $ 14,151,893
========================================================
</TABLE>
<PAGE>
Interoffice Superholdings Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
INTEROFFICE
SUPERHOLDINGS INTEROFFICE (HOLDINGS)
CORPORATION CORPORATION
SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
--------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,109,967 $ 2,906,318 $ 2,550,333
Notes payable 68,421 225,188 324,837
Capital lease obligations 2,267,588 2,404,320 2,974,177
Income tax payable 106,182 - -
--------------------------------------------------------
Total current liabilities 5,552,158 5,535,826 5,849,347
--------------------------------------------------------
Notes payable (includes $124,876 to related
parties for 1998 (unaudited), 1997 and 1996) 378,048 418,130 527,698
Capital lease obligations 493,998 1,648,347 3,310,281
Deferred rent payable 1,193,534 6,315,186 5,802,664
Deferred income taxes 2,302,429 423,583 -
Security deposits 4,628,034 3,714,854 3,194,124
--------------------------------------------------------
Total liabilities 14,548,201 18,055,926 18,684,114
--------------------------------------------------------
Commitments and contingencies - - -
Stockholder's equity
Common stock, $1 par value; 50,000 shares
authorized; 1,000 shares issued and
outstanding (1997 and 1996); 50,000 Class - 1,000 1,000
A shares authorized, 50,000 Class B shares
authorized; 11,468 Class A shares issued
and outstanding (1998 unaudited) 11,468 - -
Additional paid-in capital 32,568,926 - -
Retained earnings/(Accumulated deficit) 1,413,989 (3,928,415) (4,533,221)
--------------------------------------------------------
Total stockholder's equity 33,994,383 (3,927,415) (4,532,221)
--------------------------------------------------------
Total liabilities and stockholder's equity $ 48,542,584 $ 14,128,511 $ 14,151,893
========================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
Interoffice Superholdings Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
INTEROFFICE
SUPERHOLDINGS
CORPORATION INTEROFFICE (HOLDINGS) CORPORATION
FOR THE FOR THE
PERIOD FROM PERIOD FROM FOR THE NINE FOR THE
JANUARY 29 TO JANUARY 1 TO MONTHS ENDED YEARS ENDED
SEPTEMBER 30, JANUARY 28, SEPTEMBER 30, DECEMBER 31,
1998 1998 1997 1997 1996 1995
-------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income $ 13,897,687 $ 1,540,134 $ 13,448,714 $ 18,220,570 $ 15,820,358 $ 12,885,579
Services income 14,965,141 1,675,290 15,129,088 19,879,014 17,377,710 13,992,760
-------------------------------------------------------------------------------------
28,862,828 3,215,424 28,577,802 38,099,584 33,198,068 26,878,339
Expenses:
Rent expense 9,833,761 1,044,915 8,966,886 12,069,785 11,364,969 9,305,950
Operating expenses 6,465,105 703,660 6,563,964 8,956,130 8,255,175 6,980,843
Services expenses 6,159,741 893,247 6,832,660 8,223,163 7,252,139 6,051,419
Depreciation and amortization 2,388,066 193,616 1,775,342 2,247,719 1,996,670 1,414,501
Center general and administrative 1,324,586 110,213 1,255,465 1,517,952 1,521,879 1,629,145
-------------------------------------------------------------------------------------
26,171,259 2,945,651 25,394,317 33,014,749 30,390,832 25,381,858
Income from operations 2,691,569 269,773 3,183,485 5,084,835 2,807,236 1,496,481
Other income (expenses):
Corporate general and
administrative (863,087) (147,894) (1,079,243) (2,001,774) (1,259,880) (836,271)
Interest expense (290,549) (39,896) (492,980) (631,041) (746,422) (586,823)
Other income, net 130,512 (105,452) 18,463 (29,106) 17,749 4,866
-------------------------------------------------------------------------------------
(1,023,124) (293,242) (1,553,760) (2,661,921) (1,988,553) (1,418,228)
Income before provision for income
taxes (benefit) 1,668,445 (23,469) 1,629,725 2,422,914 818,683 78,253
Income tax expense (benefit) 254,456 (295,374) 428,109 614,553 189,778 (65,996)
-------------------------------------------------------------------------------------
Net income $ 1,413,989 $ 271,905 $ 1,201,616 $ 1,808,361 $ 628,905 $ 144,249
=====================================================================================
Earnings per common share-basic
and diluted $ 141 $ 272 $ 1,202 $ 1,808 $ 629 $ 144
=====================================================================================
Cash distributions per common share $ 35 $ 156 $ 582 $ 1,204 $ 1,796 $ 214
=====================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
Interoffice Superholdings Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Interoffice Interoffice
(Holdings) Superholdings
Corporation Corporation
Common Class A and Class Retained Earnings
Shares B Common Shares Additional (Accumulated
$1 par value $1 par value Paid-In Capital Deficit) Total
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 -
InterOffice (Holdings) Corporation $ 1,000 - $ - $ (3,295,833) $ (3,294,833)
Net income for the period - - 144,249 144,249
Stockholder distributions - - (214,250) (214,250)
------------------------------------------------------------------------------------------
Balance at December 31, 1995 -
InterOffice (Holdings) Corporation 1,000 - - (3,365,834) (3,364,834)
Net income for the period - - 628,905 628,905
Stockholder distributions - - (1,796,292) (1,796,292)
------------------------------------------------------------------------------------------
Balance at December 31, 1996 -
InterOffice (Holdings) Corporation 1,000 - - (4,533,221) (4,532,221)
Net income for the period - - 1,808,361 1,808,361
Stockholder distributions - - (1,203,555) (1,203,555)
------------------------------------------------------------------------------------------
Balance at December 31, 1997 -
InterOffice (Holdings) Corporation 1,000 - - (3,928,415) (3,927,415)
Net income for the period - - 271,905 271,905
Stockholder distributions - - (155,900) (155,900)
------------------------------------------------------------------------------------------
Balance at January 28, 1998 -
InterOffice (Holdings) Corporation 1,000 - - (3,812,410) (3,811,410)
Acquisition of InterOffice
(Holdings) Corporation (1,000) 10,000 24,459,500 3,812,410 28,280,910
Net income for the period - - 1,413,989 1,413,989
Issuance of shares in connection
with Xebec acquisition 1,468 (1,468) - -
Stockholders' contributions - 8,460,894 - 8,460,894
Stockholders' distributions - (350,000) - (350,000)
------------------------------------------------------------------------------------------
Balance at September 30, 1998 -
Interoffice Superholdings
Corporation $ - $ 11,468 $ 32,568,926 $ 1,413,989 $ 33,994,383
==========================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
Interoffice Superholdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
INTEROFFICE
SUPERHOLDINGS
CORPORATION INTEROFFICE (HOLDINGS) CORPORATION
FOR THE FOR THE CORPORATION
PERIOD FROM PERIOD FROM FOR THE NINE FOR THE
JANUARY 29 TO JANUARY 1 TO MONTHS ENDED YEARS ENDED
SEPTEMBER 30, JANUARY 28, SEPTEMBER 30, DECEMBER 31,
1998 1998 1997 1997 1996 1995
-------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,413,989 $ 271,905 $ 1,201,616 $ 1,808,361 $ 628,905 $ 144,249
Adjustments to reconcile net income
to net cash provided by
operating activities
Depreciation and amortization 3,107,822 193,616 1,775,342 2,247,719 1,996,670 1,414,501
Deferred income taxes (172,179) (295,374) 316,118 460,986 119,601 (176,132)
Bad debt expense 210,735 16,724 148,551 237,566 116,486 119,385
Net loss on disposal of automobiles
held for sale - - - 77,092 - -
Net loss on disposal of investment
in residential real estate - - - 183,704 - -
Changes in operating assets and
liabilities:
Accounts receivable (432,626) (133,883) 16,675 (277,626) (762,280) (405,617)
Prepaid expenses (22,951) - 18,499 9,461 (173,179) 31,738
Restricted cash (105,232) 1,426 (140,000) (282,081) - -
Certificates of deposit -
restricted (172,822) (11,541) (130,739) (72,398) (4,340) (82,237)
Deposits (34,989) - 26,361 10,710 (116,006) (56,265)
Accounts payable and accrued
expenses 416,265 (212,616) 352,549 355,985 391,386 (102,248)
Deferred rent payable 1,193,534 10,087 384,392 512,522 1,138,203 1,260,212
Security deposits 828,679 84,501 302,366 520,730 1,105,382 675,310
Due from related party 150,000 - (319,463) (319,463) - -
Income tax payable 106,182 - - - - -
-------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 6,486,407 (75,155) 3,952,267 5,473,268 4,440,828 2,822,896
INVESTING ACTIVITIES
Purchases of property and equipment (3,022,765) 35,169 (415,195) (934,602) (4,524,213) (3,077,742)
Automobiles held for sale 49,400 57,342 127,434 69,000 (252,834) -
Investment in residential real
estate - - - - (350,168) -
Deferred acquisition costs (993,961) - - - - -
Goodwill (8,128,293) - - - - -
-------------------------------------------------------------------------------------
Net cash (used in) provided by
investing activities (12,095,619) 92,511 (287,761) (865,602) (5,127,215) (3,077,742)
FINANCING ACTIVITIES
(Payments of) proceeds from notes
payable (195,249) (1,600) (35,465) (209,217) 216,339 (121,520)
(Payments of) proceeds from capital
lease obligations (1,087,662) (203,419) (1,997,803) (2,231,791) 1,333,249 1,288,906
Stockholders' contributions 8,460,894 - - - - -
Distributions to stockholder (350,000) (155,900) (582,457) (1,203,555) (1,796,292) (214,250)
-------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 6,827,983 (360,919) (2,615,725) (3,644,563) (246,704) 953,136
-------------------------------------------------------------------------------------
Change in cash and cash equivalents 1,218,771 (343,563) 1,048,781 963,103 (933,091) 698,290
Cash and cash equivalents,
beginning of period 2,074,865 2,418,428 1,455,325 1,455,325 2,388,416 1,690,126
-------------------------------------------------------------------------------------
Cash and cash equivalents, end of
period $ 3,293,636 $ 2,074,865 $ 2,504,106 $ 2,418,428 $ 1,455,325 $ 2,388,416
=====================================================================================
SUPPLEMENTAL DISCLOSURE
Interest paid $ 299,525 $ 39,968 $ 465,657 $ 594,575 $ 724,307 $ 567,587
=====================================================================================
Income taxes paid $ 470,404 $ - $ 108,073 $ 77,150 $ 195,045 $ 65,768
=====================================================================================
SEE ACCOMPANYING NOTES.
</TABLE>
<PAGE>
Interoffice Superholdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
For the periods January 29, 1998 to September 30, 1998 (unaudited),
January 1, 1998 to January 28, 1998 (unaudited) and the years
ended December 31, 1997, 1996 and 1995
1. ORGANIZATION
Interoffice Superholdings Corporation (the "Company"), was formed on November
20, 1997 in connection with its acquisition of InterOffice (Holdings)
Corporation ("Interoffice" - see Acquisition Transaction below).
The Company operates approximately 36 office centers throughout the United
States. The Company leases executive office suites and provides secretarial
and administrative services and amenities to their tenants for lease terms
generally ranging from one month to one year. The Company is self administered
and also provides contract management services to unrelated parties.
2. ACQUISITION TRANSACTION
On January 29, 1998, the Company purchased from the sole stockholder of
Interoffice (the "Seller") all of the outstanding shares of common stock for
approximately $24.5 million pursuant to the terms and conditions of a stock
purchase agreement assigned to the Company by RFG Capital Management Partners,
L.P. ("RFG"). The purchase price was paid by RFG directly to the Seller and
resulted in an increase to goodwill and additional paid in capital for that
amount. Concurrently with the purchase of Interoffice, the Company caused
Interoffice to issue an additional 9,000 shares of common stock to the Company
at par value. The Company wholly owns Interoffice.
On July 14, 1998, Interoffice reclassified its common stock into Class A
common stock and Class B common stock. Each share of common stock is identical
except that the Class B shares do not entitle the holder to vote for, or
consent to any matter, transaction or event. Each share of issued and
outstanding common stock of Interoffice was converted to a share of Class A
common stock.
Based on the above transactions, Interoffice has 50,000 authorized Class A
common stock and 50,000 authorized Class B common stock. In July 1998,
Interoffice issued approximately 1,468 shares to the Company, the proceeds of
which were used to fund the Xebec purchase discussed in Note 12.
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
2. ACQUISITION TRANSACTION (CONTINUED)
In connection with the sale, Interoffice transferred its investment in
residential real estate to the Seller and forgave all loans to the Seller.
Reckson Management Group, Inc. ("RMG") owns 58.9% of the Company and Reckson
Services Industries, Inc. ("RSI") has an option to purchase RMG's entire
interest in the Company (see note 13).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
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 these estimates.
INCOME RECOGNITION
Rental income and services income are recognized as the related services are
provided.
CASH AND CASH EQUIVALENTS
Investments with maturities at purchase of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable primarily consists of fixed and variable charges due from
tenants, net of prepayments.
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Furniture, equipment and leasehold improvements are stated at cost.
Depreciation is computed using straight-line methods over terms ranging from 3
1/2 to 15 years. Expenditures for major renewals and betterments that extend
the useful lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense when paid.
RESTRICTED CASH
Restricted cash represents monies pledged as collateral for letters of credit
required under certain lease agreements.
GOODWILL
Goodwill represents the excess of the Company's purchase price over the
amounts allocated to the underlying assets and liabilities. Goodwill is
amortized over a period of 25 years.
INCOME TAXES
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes," has been adopted.Statement 109 utilizes the asset and liability method
for computing tax expenses. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying statutory tax rates to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Deferred tax assets are recognized for temporary differences that
will result in deductible amounts in future years and for carryforwards. A
valuation allowance is recognized if it is more likely than not that some
portion of the deferred asset will not be recognized. When evaluating whether
a valuation allowance is appropriate, Statement 109 requires a company to
consider such factors as previous operating results, future earnings
potential, tax planning strategies and future reversals of existing temporary
differences. The valuation allowance is increased or decreased in future years
based on changes in these criteria.
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 deferred rent payable.
INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying interim unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in
the financial statements prepared in accordance with generally accepted
accounting principals may have been condensed or omitted pursuant to such
rules and regulations, although management believes that the disclosures are
adequate to make the information presented not misleading. The unaudited
financial statements for the interim periods reported are not necessarily
indicative of the results to be expected for the year.
4. CERTIFICATES OF DEPOSIT - RESTRICTED
The Company has certificates of deposit totaling $627,439 (unaudited),
$443,078 and $370,680 as of September 30, 1998, December 31, 1997 and 1996,
respectively, which are pledged as collateral for letters of credit, required
under certain lease agreements totaling approximately $1,631,000 (unaudited)
and $1,310,000 as of September 30, 1998 and December 31, 1997, respectively.
5. CAPITAL LEASE OBLIGATIONS
The Company leases substantially all of the furniture and equipment under
capital leases. At December 31, 1997 and 1996, approximately $10,010,000 and
$9,196,000, respectively, of property and equipment were under capital leases.
The present value of future minimum lease payments under these leases and the
corresponding liabilities have been recorded in the financial statements as
property and equipment and capital lease obligations, respectively.
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
5. CAPITAL LEASE OBLIGATIONS (CONTINUED)
The future minimum lease payments under capital leases together with the
present value of minimum lease payments as of December 31, 1997 are as
follows:
Year ending December 31,
1998 $ 2,553,171
1999 1,391,145
2000 493,131
2001 54,485
2002 -
-------------------
4,491,932
Less - amount representing interest 439,265
-------------------
Present value of minimum lease payments $ 4,052,667
===================
6. NOTES PAYABLE
The Company has three notes payable to a related party totaling $124,876
(unaudited) and $124,876 as of September 30, 1998 and December 31, 1997,
respectively, as discussed below and in note 8. The remaining notes payable
are due to unrelated third parties.
Two notes provide for interest only payments at 8.56% until June 2004, when
balloon payments will be due totaling $93,750. The third note provides for
interest only payments at 8.56% until August 2005, when a balloon payment will
be due totaling $31,126.
A subsidiary rented office space under a lease that expired in July 1997. The
original lease, including amendments, provided for a note payable in the
amount of $252,172 to be due at lease end. At lease end, the subsidiary signed
a new 10 year lease expiring July 2007. The lease requires the original note
payable due in July 1997, to become due in July 2007. This note will be
reduced each year by 5% of the total amount of the note, provided the monthly
lease payments are made on a timely basis.
Another subsidiary signed a note payable in the amount of $192,348 plus
interest of prime plus 1.5% due to the landlord as an amendment to its
original lease. The note is to be paid in 24 equal installments that were to
begin June 1997. During 1997, note payments were not made as management was in
negotiations with the landlord to reduce the note amount and extend the
current lease that expires in May 1999. The full amount
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
6. NOTES PAYABLE (CONTINUED)
due is included in notes payable on the accompanying consolidated balance
sheets. In February 1998, the Company made a lump sum payment covering the
June 1997 through February 1998 period.
At December 31, 1997 the aggregate maturities of notes payable are as follows:
December 31, 1998 $ 225,188
1999 40,082
2000 -
2001 -
2002 -
Thereafter 378,048
-------------------
$ 643,318
===================
7. INCOME TAXES
The Company accounts for income taxes in accordance with Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes." Deferred
income tax assets and liabilities are determined based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE
PERIOD FROM PERIOD FROM
JANUARY 29 TO JANUARY 1 TO
SEPTEMBER 30, JANUARY 28, FOR THE YEARS ENDED DECEMBER 31,
1998 1998 1997 1996 1995
--------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current federal tax $ 610,346 $ - $ 9,499 $ - $ 13,800
Current state tax - - 144,068 70,177 96,336
Deferred federal tax (473,297) (242,382) 528,186 198,655 (85,595)
Deferred state tax 117,407 (52,992) (67,200) (79,054) (90,537)
================================================================================
$ 254,456 $(295,374) $ 614,553 $ 189,778 $ (65,996)
================================================================================
</TABLE>
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the U.S. federal statutory rate
to income tax expense is as follows:
FOR THE FOR THE
PERIOD FROM PERIOD FROM
JANUARY 29 TO JANUARY 1 TO
SEPTEMBER 30, 1998 JANUARY 28, 1998
AMOUNT PERCENT AMOUNT PERCENT
-------------------------------------------------
(UNAUDITED) (UNAUDITED)
Tax at U.S. statutory rate $ 583,955 35.0 % $ (8,214) (35.0)%
State taxes, net of federal
benefit 83,422 5.0 % (1,174) (5.0)%
Change in valuation allowance (684,804) (41.0)% 128,558 547.9 %
Effect of permanent
differences 271,883 16.3 % (414,544) (1,766.3)%
=================================================
$ 254,456 15.3 % $ (295,374) (1,258.6)%
=================================================
(table continued)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
---------------------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rate $ 848,020 35.0% $ 286,539 35.0% $ 27,389 35.0%
State taxes, net of federal
benefit 121,146 5.0% 40,934 5.0% 3,913 5.0%
Change in valuation allowance (387) -% 260,794 31.9% (112,391) (143.6)%
Effect of permanent differences (354,226) (14.6)% (398,489) (48.7)% 15,093 19.3%
===========================================================================
$ 614,553 25.4% $ 189,778 23.2% $ (65,996) (84.3)%
===========================================================================
</TABLE>
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred income taxes are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997 1996
--------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 199,654 $ 1,312,148 $ 1,312,921
AMT credit carryforward 473,756 23,299 13,800
Book/tax basis difference 283,962 244,362 117,118
Less: valuation allowance (99,827) (656,074) (656,461)
--------------------------------------------------------
857,545 923,735 787,378
--------------------------------------------------------
Deferred tax liabilities:
Rent accrual 2,022,800 77,734 89,826
Depreciation 344,984 330,636 443,342
Book/tax basis difference 775,620 938,948 216,807
Goodwill 16,570 - -
--------------------------------------------------------
3,159,974 1,347,318 749,975
--------------------------------------------------------
Net deferred tax (liability) asset after valuation
allowance $ (2,302,429) $ (423,583) $ 37,403
========================================================
</TABLE>
Statement 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative,
management has determined that approximately $100,000 (unaudited), $656,000
and $656,000 of a valuation allowance at September 30, 1998, December 31, 1997
and 1996, respectively, is necessary to reduce the deferred tax assets to the
amount that will more likely than not be realized.
At September 30, 1998, December 31, 1997, 1996 and 1995, Interoffice has
available unused net operating loss carryforwards of approximately $0
(unaudited), $2,724,000, $3,086,000 and $1,958,000, respectively, expiring in
fiscal years from 2004 through 2011.
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
8. RELATED PARTIES
An executive of Interoffice owns a real estate brokerage company which has
received commissions from landlords of the centers for leasing certain
facilities at the sites the subsidiaries are located. The brokerage company
received commissions from the landlords and shared an allocated portion with
Interoffice. Total commissions earned for the period ended September 30, 1998
and the years ended December 31, 1997, 1996 and 1995 were approximately
$254,000 (unaudited), $329,000, $365,000 and $443,000, respectively, and have
been included in service income on the accompanying consolidated statements of
income. Commissions earned during 1997 include $347,463 net of $28,000 in
payments to be made to the executive.
The Company has notes payable to the above mentioned related party as
discussed in note 6.
9. 401(K) PROFIT SHARING PLAN
Interoffice Management, Inc. has an established profit sharing plan under
Section 401(k) of the Internal Revenue Code. The plan, which is open to
substantially all employees, provides for employer matching contributions of
50%, up to a maximum of $2,400 per employee per year. Employer contributions
totaled $66,825 (unaudited), $86,448, $85,745 and $63,886 for the period ended
September 30, 1998 and for the years ended December 31, 1997, 1996 and 1995,
respectively.
10. MANAGEMENT INCENTIVE BONUS STRUCTURE
Certain members of the senior management team of the Company, consisting of
five employees, by contract are paid an incentive bonus based on Interoffice's
cash flow, as defined, monthly. Senior management bonus percentages during
1997, 1996 and 1995 averaged 11%, 12% and 12%, respectively.
Also, most other Company employees receive incentive bonuses through a
discretionary bonus structure monitored by senior management.
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
11. BANKRUPTCY
Interoffice and one of its subsidiaries, Interoffice Management, Inc.,
voluntarily filed for bankruptcy under Chapter 11 in the United States
Bankruptcy Court on January 9, 1997, to protect Interoffice's assets. The
bankruptcy cases were dismissed on July 11, 1997. During the period of
bankruptcy, Interoffice continued normal operations and was able to meet all
obligations. Interoffice incurred legal fees, consulting fees and other costs
of approximately $355,000 and $97,000 for the years ended December 31, 1997
and 1996, respectively, resulting from the bankruptcy reorganization.
12. COMMITMENTS AND CONTINGENCIES
The Company leases the premises from which operations are conducted from third
parties. These noncancellable arrangements expire from January 1998 to May
2009 and contain rent escalations up to 5% per year. Rent paid during the
period ended September 30, 1998 and for the years ended December 31, 1997,
1996 and 1995 was approximately $8,284,000 (unaudited), $11,557,000,
$10,227,000 and $8,046,000, respectively.
As of December 31, 1997, the approximate minimum lease payments under the
terms of these agreements are as follows:
December 31, 1998 $ 12,131,000
1999 11,451,000
2000 11,053,000
2001 11,085,000
2002 10,240,000
Thereafter 31,207,000
-------------------
$ 87,167,000
===================
Included in rent expense is escalation expenses of approximately $315,000
(unaudited), $715,000, $414,000 and $117,000 in the period ended September 30,
1998 and for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company has guaranteed approximately $2.5 million of lease payments for
certain of its subsidiaries.
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On May 8, 1998, the Company entered into a stock purchase agreement whereby
Interoffice will purchase all of the issued and outstanding shares of the
capital stock of Pacific Office Centers, Inc. for approximately $7.1 million.
Pacific Office Center, Inc. consists of nine office centers located in
southern California. The Company anticipates settling on this agreement during
the first quarter of 1999.
During 1998, the Company entered into four separate employment agreements. The
employees have been awarded options to purchase 225 shares of Class B common
stock of the aggregate issued and outstanding shares of Class A and Class B
common stock of the Company at an aggregate purchase price per share, as
defined. Such options vest in equal installments over a two to three year
period.
During 1997, a former employee filed a claim for breach of contract against
Interoffice. On May 19, 1998, the Company executed a settlement agreement and
mutual release of the claim. In accordance with the January 29, 1998 stock
purchase agreement, the Seller is responsible for the settlement of this
claim.
On July 20, 1998, the Company purchased the net assets of Xebec Management
Services, Inc. and XMS Greenhaven, Inc. (collectively known as "Xebec") for
approximately $8.9 million. Xebec consists of six office centers located in
Sacramento, California.
13. SUBSEQUENT EVENTS (UNAUDITED)
On November 9, 1998, RSI exercised its option to purchase RMG's entire
interest in the Company.
On January 5, 1999, the Company closed on a contract to acquire three
executive office suite centers in France for approximately $2.0 million.
On January 8, 1999, the Company merged with a wholly-owned subsidiary of
Alliance National Incorporated ("Alliance"), a Nevada corporation. In
connection with the merger, Alliance issued 11,567,247 shares of Series C
preferred stock to shareholders of the Company.
<PAGE>
Interoffice Superholdings Corporation And Subsidiaries
Notes To Consolidated Financial Statements (continued)
14. IMPACT OF YEAR 2000 (UNAUDITED)
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 recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and will 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. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
The Company is also identifying critical information and support provided by
third parties such as vendors and landlords and will follow-up with them
concerning their plans and progress addressing the Year 2000 problem.
At December 31, 1997, the Company had estimated its total Year 2000 cost to be
$30,000 which was expected to be completed no later than December 1998. As a
result of the merger with Alliance on January 8, 1999, the Company plans to
convert its computer systems to those used by Alliance.
<PAGE>
Report of Independent Auditors
Board of Directors
Xebec Management Services, Inc.
We have audited the accompanying combined balance sheets of Xebec Management
Services, Inc. and affiliate (the "Company") as of December 31, 1997 and 1996,
and the related combined statements of income, stockholders' equity (deficit)
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Xebec Management
Services, Inc. and affiliate at December 31, 1997 and 1996, and the combined
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Francisco, California
January 4, 1999
<PAGE>
Xebec Management Services, Inc. and Affiliate
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
------------------- ------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 24,586 $ 27,159
Accounts and notes receivable, (net of allowance for
doubtful accounts of $32,068 in 1997 and $30,719 in 1996)
347,447 245,190
Prepaid expenses 239,606 194,303
------------------- ------------------
Total current assets 611,639 466,652
Property and equipment:
Office building 1,197,742 1,197,742
Land 407,271 407,271
Furniture and equipment 2,162,287 1,782,767
Leasehold improvements 228,207 142,420
------------------- ------------------
3,995,507 3,530,200
Less accumulated depreciation (1,268,316) (1,191,997)
------------------- ------------------
Total property and equipment, net 2,727,191 2,338,203
Other assets:
Deposits, franchise cost, and loans fees, net 63,520 81,034
Goodwill, less accumulated amortization of $152,897, in
1997 and $136,956 in 1996 229,512 245,448
------------------- ------------------
Total other assets 293,032 326,482
------------------- ------------------
Total assets $ 3,631,862 $ 3,131,337
=================== ==================
<PAGE>
December 31
1997 1996
------------------- ------------------
Liabilities and stockholders' equity (deficit)
Current liabilities:
Current maturities of notes payable $ 225,932 $ 300,971
Current maturities of capital lease obligations 104,955 127,405
Current maturities of stockholder notes payable 9,531 19,223
Accounts payable and accrued expenses 113,256 31,060
Customer deposit refunds payable 24,654 63,730
Current portion of accrued rental expense 12,699 -
------------------- ------------------
Total current liabilities 491,027 542,389
Long-term liabilities:
Notes payable, net of current maturities 1,751,060 1,487,890
Capital lease obligations, net of current maturities 220,968 83,007
Stockholder notes payable, net of current maturities - 25,001
Customer security deposits 320,697 264,201
Accrued rental expense 917,081 881,708
------------------- ------------------
Total long-term liabilities 3,209,806 2,741,807
Stockholders' equity (deficit):
Common stock, no par value, 200,000 shares authorized in
1997 and 1996, shares issued and outstanding: 9,176 at
December 31, 1997,
9,092 at December 31, 1996 - -
Additional paid-in capital 709,633 659,529
Accumulated deficit (598,452) (603,425)
Less stockholder notes receivable (180,152) (208,963)
------------------- ------------------
Total stockholders' equity (deficit) (68,971) (152,859)
------------------- ------------------
Total liabilities and stockholders' equity (deficit) $ 3,631,862 $ 3,131,337
=================== ==================
</TABLE>
See accompanying notes.
<PAGE>
Xebec Management Services, Inc. and Affiliate
Combined Statements of Income
<TABLE>
<CAPTION>
For the period
January 1, January 1,
1998 to 1997 to
Years ended December 31 July 19, September 30,
1997 1996 1998 1997
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(Unaudited)
Rental income $ 3,126,438 $ 2,995,402 $ 1,756,800 $ 2,309,574
Services and other income 2,223,144 2,016,963 1,357,917 1,733,999
--------------- ---------------- ---------------- ----------------
5,349,582 5,012,365 3,114,717 4,043,573
Expenses:
Building occupancy 1,973,686 1,888,423 1,327,708 1,579,465
Personnel 1,293,056 1,155,980 689,314 860,194
Communications 347,377 272,342 167,915 262,476
Amortization and depreciation 326,520 329,937 208,758 243,158
Office expense 286,340 274,715 178,567 191,198
General and administrative 237,352 299,973 224,985 174,088
Sales and marketing 175,457 127,499 107,300 158,506
Maintenance 163,188 143,671 87,913 112,603
Equipment and furniture 63,208 61,616 27,848 42,090
--------------- ---------------- - ---------------- ----------------
4,866,184 4,554,156 3,020,308 3,623,778
Income from operations before
provision for state income taxes
483,398 458,209 94,409 419,795
Provision for state income taxes (8,425) (4,697) - -
--------------- ---------------- ---------------- ----------------
Net income $ 474,973 $ 453,512 $ 94,409 $ 419,795
=============== ================ ================ ================
</TABLE>
See accompanying notes.
<PAGE>
Xebec Management Services, Inc. and Affiliate
Combined Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Shares Additional Stockholder
Issued and Par Paid-in Notes Accumulated
Outstanding Value Capital Receivable Deficit Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 9,008 $ - $ 623,582 $ (221,706) $ (801,937) $ (400,061)
Net income - - - - 453,512 453,512
Distributions to stockholders - - - - (255,000) (255,000)
Stockholder notes receivable
payments
- - - 12,743 - 12,743
Issuance of additional shares of
common stock 84 - 35,947 - - 35,947
--------------------------------------------------------------------------------------------
Balance, December 31, 1996 9,092 - 659,529 (208,963) (603,425) (152,859)
Net income - - - 474,973 474,973
Distributions to stockholders - - - (470,000) (470,000)
Stockholder notes receivable
payments - - - 28,811 - 28,811
Issuance of additional shares of
common stock 84 - 50,104 - 50,104
--------------------------------------------------------------------------------------------
Balance, December 31, 1997 9,176 $ - $ 709,633 $ (180,152) $ (598,452) $ (68,971)
============================================================================================
</TABLE>
See accompanying notes.
<PAGE>
Xebec Management Services, Inc. and Affiliate
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
For the period
January 1, 1998 January 1, 1997 to
Year ended December 31 to July 19, September 30,
1997 1996 1998 1997
--------------- --------------- ------------------ -------------------
<S> <C> <C> <C> <C>
(Unaudited)
Operating activities
Net income $ 474,973 $ 453,512 $ 94,409 $ 419,795
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 326,520 329,937 208,758 243,158
Stock bonus issued to stockholders 50,104 35,947 - 39,215
Loss on abandonment of furniture and
equipment 52,286 - - 7,760
Bad debt expense 1,350 - 24,001 1,013
Change in assets and liabilities:
Accounts and notes receivable (103,607) (67,562) 323,446 (314,115)
Prepaid expenses (45,303) (151,802) 181,766 130,631
Deposits and other assets 17,514 13,659 11,966 (25,846)
Accounts payable and accrued expenses
82,196 (65,887) 49,691 166,397
Accrued rental expense 48,072 (79,491) (7,937) 36,054
Customer security deposits 17,420 (20,156) 79,142 52,483
--------------- --------------- ------------------ -------------------
Net cash provided by operating activities 921,525 448,157 965,242 756,545
Investing activities
Purchase of property and equipment (468,268) (85,732) (179,533) (321,764)
Financing activities
Proceeds from notes payable 514,000 185,000 - 385,500
Repayments of notes payable (325,869) (85,808) (283,728) (279,830)
Repayment of capital lease obligations (168,079) (237,746) (108,911) (66,426)
Distributions to stockholders (470,000) (255,000) (310,040) (139,626)
Collection of stockholder notes receivable 28,811 12,743 33,653 32,094
Proceeds from stockholder notes payable 109,688 - 60,000 109,688
Payment of stockholder notes payable (144,381) (16,282) (13,245) (26,222)
--------------- --------------- ------------------ -------------------
Net cash (used for) provided by financing (455,830) (397,093) (622,271) 15,178
activities
Net (decrease) increase in cash and
cash equivalents (2,573) (34,668) 163,438 449,959
Cash and cash equivalents at
beginning of period 27,159 61,827 24,586 27,159
--------------- --------------- ------------------ -------------------
Cash and cash equivalents at
end of period $ 24,586 $ 27,159 $ 188,024 $ 477,118
=============== =============== ================== ===================
</TABLE>
See accompanying notes.
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements
December 31, 1997
1. Organization
Xebec Management Services, Inc. and affiliate (collectively referred to herein
as the "Company") own and operate franchised HQ Business Centers and
independent Executive Office Network business centers offering office space
for subleasing, as well as office support staff, equipment, and services
located in Sacramento, Rancho Cordova and Roseville, California.
2. Accounting Policies
Basis of Accounting and Principles of Combination
The accompanying financial statements have been prepared on the accrual basis
of accounting and present the combined accounts of Xebec Management Services,
Inc. and its affiliate, XMS Greenhaven, Inc. The financial statements are
combined because the stockholders of Xebec Management Services, Inc. hold all
the ownership shares of XMS Greenhaven, Inc. All intercompany balances and
transactions have been eliminated in combining the accounts of Xebec
Management Services, Inc. and its affiliate.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents. At December 31, 1997 and 1996, $6,360
and $8,238, respectively, of short-term investments are included in cash and
cash equivalents.
Revenue Recognition
Rental income on leases with scheduled rent increases or free rent is recorded
on a straight-line basis over the lease term. The majority of the leases have
terms of one year or less. Therefore, the differences between accrued rental
income and the payments provided in the leases are not material.
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
2. Accounting Policies (continued)
Income Taxes
The stockholders of the Company elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code effective May 1, 1986. The State of
California conformed to these Subchapter S provisions as of January 1, 1987,
and the stockholders elected to be taxed under these provisions. Under these
elections, all tax liabilities or benefits from the operations of the Company
pass through to the individual stockholders, and the Company is only liable
for a state income tax in the amount of 1.5 percent after certain state
temporary and net operating loss adjustments. The net effect of these
adjustments are not considered material and no net deferred tax asset or
liability is reported in the accompanying combined balance sheets.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents reported in the combined
balance sheets approximate fair value of those assets. The carrying value of
substantially all the Company's notes payable and capital lease obligations
approximate their fair value since the interest rates are adjustable or the
terms of such obligations approximate those presently available for similar
financial instruments.
Intangible Assets
Intangible assets are amortized on a straight-line basis. Franchise costs are
amortized over the 20 year term of the agreement. Loan fees are amortized over
the term of the respective term of the underlying debt.
Costs of investments in purchased business centers and franchises in excess of
the underlying fair value of net assets at the date of acquisition in 1994 are
recorded as goodwill and amortized using the straight-line method over a life
of 22 years.
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
2. Accounting Policies (continued)
Property and Equipment
Property and equipment are reported at cost, and depreciation is provided
using the straight-line method. Depreciation expense also includes the
amortization of equipment acquired by capital lease obligations. The estimated
useful lives of furniture and equipment range from five to ten years, and
forty years for the office building.
The costs of repairs and maintenance are reported as expenses when incurred
while significant improvements are added to property and equipment costs.
Use of Estimates
The preparation of the combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the combined
financial statements and the reported combined amounts of revenues and
expenses during the reported period. Actual results could differ from these
estimates.
3. Property and Equipment
Furniture and equipment with a cost of $279,471 and accumulated depreciation
of $227,185 were abandoned in 1997. Furniture and equipment, and leasehold
improvements with a cost of $99,069 and accumulated depreciation of $99,069
were abandoned or disposed of in 1996.
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
4. Stockholder Notes Receivable
Stockholder notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
Stockholder 1997 1996
- ----------- -------------------- ------------------
<S> <C> <C>
Richard Tenge, Jr. $ 93,125 $ 98,640
Stephen Fowler 87,027 92,458
Ann L. Peebles - 17,865
-------------------- ------------------
Total stockholder notes receivable and accrued interest 180,152 208,963
Less current maturities (31,686) (29,652)
-------------------- ------------------
$ 148,466 $ 179,311
==================== ==================
</TABLE>
These notes are secured by the stockholders' equity in the Company, bear
interest at 8% per annum, and require monthly payments beginning in January
1995 of approximately $3,910 until August 2001 when such amounts will be paid
in full. Interest in the amount of $14,124 and $17,265 on these notes was
recognized as income in 1997 and 1996, respectively.
In August 1997, the stockholders of the Company agreed to forgive twenty
percent of the unpaid balance each year, provided certain net income goals are
met, beginning in 1998.
These stockholder notes receivable are netted against stockholders' equity
(deficit).
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
5. Stockholder Notes Payable
Stockholder notes payable consisted of the following unsecured promissory
notes at December 31:
<TABLE>
<CAPTION>
Stockholder 1997 1996
- ----------- -------------------- ------------------
<S> <C> <C>
Ann Peebles promissory note, interest at 13% per
annum, monthly payments of $1,011 through
October 1998 $ 9,531 $ 19,692
Ted Van Leeuwen promissory note, interest at 13%
per annum, monthly payments of $674 through
October 1998, repaid in 1997 - 13,308
Paul Clark promissory note, interest at 13% per
annum, monthly payments of $301 through
December 2000, repaid in 1997 - 11,224
-------------------- ------------------
Total stockholders' notes payable 9,531 44,224
Less current maturities (9,531) (19,223)
-------------------- ------------------
Stockholder note payable, net of current maturities $ - $ 25,001
==================== ==================
6. Notes Payable
Notes payable consists of the following as of December 31:
1997 1996
----------------- ----------------
Note payable to bank, secured by first deed of trust on land
and office building, principal and interest payments
payable monthly in the amount $7,400, interest accrues at
prime plus 2%, remaining balance due September 1999. $ 781,151 $ 789,544
Note payable to bank, secured by general business assets
and stockholder guarantees, principal and interest
payments payable monthly in the amount of $9,885,
interest accrues at prime plus 2%, remaining balance due
October 2001. 372,030 -
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
6. Notes Payable (continued)
1997 1996
----------------- ----------------
Note payable to bank, secured by second deed of trust on
land and office building, principal and interest payments
payable monthly in the amount of $2,900, interest accrues
at prime plus 2%, remaining balance due September 1999. $ 308,210 $ 308,293
Note payable to bank, secured by first deed of trust on
land and office building, principal and interest payments
payable monthly in the amount of $2,450, interest accrues
at 11%, remaining balance due September 2000. 244,376 246,534
Revolving bank line of credit in the amount of $200,000,
secured by a financing statement and stockholder
guarantees, interest payable monthly at prime plus 2%,
remaining balance due April 1998. 50,000 185,000
Note payable to an individual, unsecured, interest payments
payable monthly in the amount of $1,000 through June
1996, then principal and interest payments through June
2000, interest accrues at 12%. 67,961 89,951
Note payable to bank, secured by a security agreement on
telephone equipment, principal and interest
payments payable monthly in the amount of $2,048,
interest accrues at prime plus 2%, remaining balance
due May 2001. 66,806 -
Note payable to an individual, secured by a second deed of
trust on land and office building, beneficial interest
assigned to Ray Grenz Construction Company on May 1,
1997, principal and interest payments due monthly in the
amount of $499, interest accrues at 11.25%, remaining
balance due September 2000. 49,036 49,478
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
6. Notes Payable (continued)
Note payable to bank, secured by equipment, principal and
interest payments due monthly in the amount of $1,680,
interest accrues at 12.75%, remaining balance due
November 1998. $ 17,422 $ 35,061
Revolving bank line of credit in the amount of $75,000,
interest payable monthly at prime plus 2%, balance paid
in 1997. - 30,000
Note payable to a general partnership, secured by a third party
deed of trust on land and building, interest payments
payable monthly in the amount of $1,083, interest accrues
at 13%, balance paid in 1997. - 35,000
Note payable to individuals, unsecured, interest accrues at
11%, principal and accrued interest due February 1998. 20,000 20,000
----------------- ----------------
1,976,992 1,788,861
Less current maturities (225,932) (300,971)
----------------- ----------------
Notes payable, net of current maturities $ 1,751,060 $ 1,487,890
================= ================
</TABLE>
The prime rate was 8.50% and 8.25% at December 31, 1997 and 1996, respectively.
The aggregate scheduled maturities of notes payable are as follows:
Year ending December 31
- -----------------------
1998 $ 225,932
1999 457,917
2000 958,125
2001 335,018
-------------------
$ 1,976,992
==================
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
7. Obligations Under Capital Leases
The Company's capital lease obligations consist principally of leases for
office furniture and equipment. Most of the leases contain an option to
purchase the furniture and equipment for either $1 or 10% of the original
lease amount. All of the leases expire at various dates through February 2002.
Property under capital lease as of December 31, consisted of the following:
1997 1996
------------------- ------------------
Furniture and equipment in operation $ 553,251 $ 1,044,755
Accumulated depreciation (204,832) (665,964)
------------------- ------------------
Total furniture and equipment $ 348,419 $ 378,791
=================== ==================
The following is a schedule of future minimum lease payments under capital
leases, together with the present value of the net minimum lease payments as
of December 31, 1997:
1998 $ 133,923
1999 90,212
2000 64,790
2001 64,791
2002 41,955
------------------
Total minimum lease payments 395,671
Less: amount representing interest based on
imputed annual interest rates ranging
from 12.3% to 18.4% (69,748)
------------------
Present value of net minimum lease payments 325,923
Less: current maturities (104,955)
------------------
Capital lease obligations, net of current maturities $ 220,968
==================
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
8. Operating Lease Arrangements
The Company conducts its operations from various facilities that are leased
under noncancelable operating lease arrangements with varying terms expiring
between March 2002 and August 2007. Rental expenses on leases with scheduled
rent increases or free rent is recorded on a straight-line basis over the
lease term. The difference between rental expense and the payment provided in
the leases amounted to $48,072 and ($79,491) for 1997 and 1996, respectively,
and is included in accrued rental expense in the accompanying combined
statements of income.
The following is a schedule of future minimum lease payments required under
the above operating leases:
Year ending December 31,
- ------------------------
1998 $ 1,762,549
1999 1,810,989
2000 1,879,728
2001 1,913,539
2002 1,648,156
Thereafter 3,006,800
-------------------
$ 12,021,761
===================
Rental expense was $1,740,612 for 1997 and $1,808,466 for 1996.
9. Contingent Liability
As security for performance on operating lease arrangements, the Company is
contingently liable, in the amount of $125,000, under standby letters of credit
with SierraWest Bank. A letter of credit in the amount of $75,000 is
automatically extended for one year from any future expiration date until
terminated by SierraWest. The other two letters of credit amounting to $25,000
each, expire on April 1, 1999 and January 1, 2000.
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
10. Employee Stock Compensation Plans
The Company has two employee stock compensation plans. In 1991, the Company
established the first plan in order to provide additional compensation and
ownership in the Company for two employees, both of whom are stockholders and
full-time managers of the Company. The two employees received a total of 1,552
shares of stock which was restricted as to transferability and voting rights.
Such restrictions were to be removed upon the Company achieving a defined
level of cumulative earnings. As of December 31, 1997, the Company met its
targeted cumulative earnings goal and the restrictions were removed.
The second plan was established in 1995. The purpose of the plan is to provide
future additional compensation and ownership in the Company to an employee who
also became a stockholder in 1995. Under this plan, the employee will be
issued 84 shares of unrestricted common stock each year if employed by the
Company, for a total of 420 shares over a five-year period. If the
individual's employment is terminated prior to January 15, 2000, the employee
is required to sell the shares back to the Company at $50 per share.
The Company accounts for both of its stock based compensation plans under
Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Total compensation expense recognized for stock based compensation
plans for 1997 and 1996 was $50,104 and $35,947, respectively.
11. Related Party Transactions
The Company pays a consulting firm to provide accounting services. Such
consulting firm is owned by one of the stockholders of the Company. During
1997 and 1996, the Company paid the consulting firm $9,275 and $52,500,
respectively.
<PAGE>
Xebec Management Services, Inc. and Affiliate
Notes to Combined Financial Statements (continued)
12. Subsequent Events
In July 1998, the operations of the Company were acquired for approximately
$8.4 million, subject to an upward adjustment of $900,000 based on future
performance by Interoffice Superholdings Corporation (Interoffice), a
subsidiary of Reckson Management Group (RMG). On November 9, 1998 , Reckson
Services Industries, Inc. exercised its option to acquire a majority interest
in Interoffice for $23.5 million (representing cost plus interest charges
aggregating approximately $14.9 million for RMG's acquisition of Interoffice
and approximately $8.6 million for Interoffice's subsequent acquisition of the
Company).
13. Supplemental Disclosure of Cash Flow Information and Noncash Operating and
Investing Activities
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
<S> <C> <C>
Cash paid during the year of:
Interest $ 208,159 $ 224,968
Income taxes 5,541 3,800
Supplemental disclosure of noncash operating
and investing activities:
Wage expense recognized on stock bonuses
issued to stockholders 44,189 17,243
Acquisition of new equipment under capital lease
obligations 283,590 -
</TABLE>
<PAGE>
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 position or
results of operations of future periods or the results that actually would
have been realized had RSI acquired its 58.9% interest in Interoffice
Superholdings Corporation ("Interoffice") and had Interoffice acquired
substantially all of the assets of Xebec Management Services, Inc. and XMS
Greenhaven, Inc. (collectively known as "Xebec") 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 financial statements of RSI as filed on Form 10-Q for the nine
months ended September 30, 1998, and the historical financial statements of
Interoffice and Xebec included elsewhere herein.
The following pro forma financial statements of RSI give effect to
Interoffice's acquisition of Xebec using the purchase method of accounting.
The pro forma financial statements are based on the historical financial
statements and the notes thereto of RSI, Interoffice and Xebec. RSI's
investment in Interoffice will be accounted for under the equity method of
accounting as the remaining partners have significant participating rights.
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 of Interoffice and Interoffice's acquisition of Xebec occurred on
September 30, 1998. The pro forma statements of operations of RSI for the nine
months ended September 30, 1998 and for the year ended December 31, 1997
assume that the acquisitions occurred as of January 1, 1997.
<PAGE>
Reckson Service Industries, Inc.
Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS TOTAL
-----------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 2,094,611 $ - $ 2,094,611
Investment in and advances to RSVP Holdings, LLC 17,136,179 - 17,136,179
Investment in and advances to Reckson Executive Centers, LLC 1,106,747 - 1,106,747
Investment in and convertible loans to On-Site Ventures, LLC 4,736,650 - 4,736,650
Investment in Interoffice Superholdings Corporation - 20,479,000 (1) 20,479,000
Notes receivable, including accrued interest - 10,271,000 (1) 10,271,000
Property and equipment, net 42,659 - 42,659
Affiliate receivables 2,736,439 - 2,736,439
Organization and pre-acquisition costs, net 748,207 - 748,207
Other noncurrent assets 528,526 - 528,526
-----------------------------------------------------
Total assets $ 29,130,018 $30,750,000 $ 59,880,018
-----------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 195,578 $ - $ 195,578
Credit facilities 6,704,207 30,750,000 (1) 37,454,207
-----------------------------------------------------
Total liabilities 6,899,785 30,750,000 37,649,785
-----------------------------------------------------
Shareholders' equity:
Common stock 246,855 - 246,855
Additional paid-in capital 24,610,951 - 24,610,951
Retained earnings (2,627,573) - (2,627,573)
-----------------------------------------------------
Total shareholders' equity 22,230,233 - 22,230,233
-----------------------------------------------------
Total liabilities and shareholders' equity $ 29,130,018 $30,750,000 $ 59,880,018
=====================================================
SEE ACCOMPANYING NOTES TO UNAUDITED PRO-FORMA FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Reckson Service Industries, Inc.
Pro Forma Condensed Consolidated Statement of Operations
Nine months ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS TOTAL
----------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Equity in (loss) of ACC $ (51,508) $ - $ (51,508)
Equity in earnings of RO Partners Management, LLC 170,567 - 170,567
Equity in (loss) of RSVP Holdings, LLC (1,389,438) - (1,389,438)
Equity in earnings of Reckson Executive Centers, LLC 6,739 - 6,739
Equity in (loss) of On-Site Ventures, LLC (20,144) - (20,144)
Equity in earnings of Interoffice Superholdings Corporation - 896,550 (1) 896,550
Other income 291,666 - 291,666
Interest income 552,734 862,470 (3) 1,415,204
----------------------------------------------------------
Total revenues (439,384) 1,759,020 1,319,636
----------------------------------------------------------
Expenses:
General and administrative expense 1,000,760 - 1,000,760
Net operating (loss) income (1,440,144) 1,759,020 318,876
Non-operating expenses:
Amortization and depreciation 28,592 - 28,592
Interest expense 900,950 2,767,500 (2) 3,668,450
----------------------------------------------------------
Net income $ (2,369,686) $ (1,008,480) $ (3,378,166)
==========================================================
Basic and diluted net loss per weighted average common share $ (0.21) - $ (0.30)
==========================================================
Basic and diluted weighted average common shares outstanding 11,097,619 - 11,097,619
==========================================================
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Reckson Service Industries, Inc.
Pro Forma Condensed Consolidated Statement of Operations
Year ended December 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS TOTAL
-----------------------------------------------------
<S> <C> <C> <C>
Revenues:
Equity in earnings of RO Partners Management, LLC $ 245,593 $ - $ 245,593
Equity in loss of ACLC (22,156) - (22,156)
Interest income 30,383 1,150,000 (3) 1,180,383
Equity in earnings of Interoffice Superholdings Corporation - 576,903 (1) 576,903
-----------------------------------------------------
Total revenues 253,820 1,726,903 1,980,723
-----------------------------------------------------
Expenses:
General and administrative expenses 479,113 - 479,113
-----------------------------------------------------
Total operating expenses 479,113 - 479,113
-----------------------------------------------------
Interest 24,380 3,690,000 (2) 3,714,380
Amortization 8,214 - 8,214
-----------------------------------------------------
Total expenses 511,707 3,690,000 4,201,707
-----------------------------------------------------
Net loss $ (257,887) $ (1,963,097) $ (2,220,984)
=====================================================
Basic and diluted net loss per share $ (0.06) $ (0.54)
=====================================================
Basic and diluted weighted average common shares outstanding 4,111,426 4,111,426
=====================================================
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
Reckson Service Industries, Inc.
Notes to pro-forma financial statements
(unaudited)
<TABLE>
<S><C>
(1) On November 9, 1998, RSI acquired (i) Reckson Management Group's ("RMG's") 58.9% interest in Interoffice Superholdings
Corporation ("Interoffice") and (ii) receivables held by RMG which were secured by substantially all of the remaining 41.1%
equity interest held by others. The unaudited pro forma condensed consolidated balance sheet has been prepared as if RSI
acquired RMG's interest in Interoffice and the receivables on September 30, 1998. RSI will account for its investment in
Interoffice under the equity method of accounting. The unaudited pro forma results of operations are as if RSI acquired its
investment in Interoffice and the receivables on January 1, 1997. The RSI investment was funded with a loan from Reckson
Operating Partnership ("ROP"), which bears interest at 12% per annum. 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 result of operations assume Interoffice completed its acquisition on January 1, 1997. The historical
results for Xebec for the period July 20, 1998 to September 30, 1998 and the historical balance sheet for Xebec at September
30, 1998 are included in the historical balance sheet and results of operations of Interoffice for the period ended September
30, 1998. The following are the pro-forma results of Interoffice for the nine months ended September 30, 1998 and the year
ended December 31, 1997.
</TABLE>
<TABLE>
Interoffice Superholdings Corporation
Unaudited Pro Forma Statement of Operations
Nine months ended September 30, 1998
(Unaudited)
<CAPTION>
INTEROFFICE XEBEC (PERIOD PRO FORMA PRO FORMA
HISTORICAL 1/1/98 - 7/19/98) ADJUSTMENTS INTEROFFICE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 15,437,821 $ 1,756,800 $ - $ 17,194,621
Service income 16,640,431 1,357,917 - 17,998,348
-----------------------------------------------------------------------
Total revenues 32,078,252 3,114,717 - 35,192,969
-----------------------------------------------------------------------
Expenses:
Rent 10,878,676 1,287,713 - 12,166,389
Operating expenses 7,168,765 924,522 - 8,093,287
Service expense 7,052,988 167,915 - 7,220,903
Depreciation and amortization 2,581,682 208,758 - 2,790,440
Center general and administrative expenses 1,434,799 27,848 - 1,462,647
-----------------------------------------------------------------------
Total expenses 29,116,910 2,616,756 - 31,733,666
-----------------------------------------------------------------------
Income from operations 2,961,342 497,961 - 3,459,303
Other income (expense):
Corporate general and administrative expense (1,010,981) (403,552) (258,147) (a) (1,672,680)
Interest expense (330,445) - - (330,445)
Other income 25,060 - - 25,060
-----------------------------------------------------------------------
Income before provision for income taxes 1,644,976 94,409 (258,147) 1,481,238
Provision for income taxes 40,918 - - 40,918
-----------------------------------------------------------------------
Net income $ 1,685,894 $ 94,409 $ (258,147) $ 1,522,156
=======================================================================
RSI share of pro forma net income $ 896,550
==================
</TABLE>
<PAGE>
Reckson Service Industries, Inc.
Notes to pro-forma financial statements
(unaudited) (continued)
<TABLE>
<CAPTION>
Interoffice Superholdings Corporation
Unaudited Pro Forma Statement of Operations
Year ended December 31, 1997
(Unaudited)
INTEROFFICE PRO FORMA PRO FORMA
HISTORICAL XEBEC ADJUSTMENTS INTEROFFICE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rental Income $ 18,220,570 $ 3,126,438 $ - $ 21,347,008
Services Income 19,879,014 2,223,144 - 22,102,158
-----------------------------------------------------------------------
38,099,584 5,349,582 - 43,449,166
-----------------------------------------------------------------------
Expenses:
Rent expense 12,069,785 1,740,612 - 13,810,397
Operating expense 8,956,130 1,864,775 - 10,820,905
Services expense 8,223,163 347,377 - 8,570,540
Depreciation and amortization 2,247,719 326,520 - 2,574,239
Center general and administrative expenses 1,517,952 63,208 - 1,581,160
-----------------------------------------------------------------------
33,014,749 4,342,492 37,357,241
-----------------------------------------------------------------------
Income from operations 5,084,835 1,007,090 - 6,091,925
Other income (expense):
Corporate general and administrative (2,001,774) (523,692) (1,303,872)(a) (3,829,338)
Interest expense (631,041) - - (631,041)
Other expense (29,106) - - (29,106)
-----------------------------------------------------------------------
Income before provision for income taxes 2,422,914 483,398 (1,303,872) 1,602,440
Income tax expense (614,553) (8,425) - (622,978)
=======================================================================
Net income $ 1,808,361 $ 474,973 $ (1,303,872) $ 979,462
=======================================================================
RSI share of pro forma net income $ 576,903
==================
</TABLE>
<TABLE>
<S><C>
(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, 1997. 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 the income over the last several years of the large national corporations which utilize
executive suites company that have an expanded national presence. The goodwill adjustment represents the amortization for
the respective nine and twelve month periods which is not included in the historical results.
(2) To record interest expense for RSI borrowings from Reckson Operating Partnership, L.P., which bear interest at a fixed rate of
12% per annum, of $2,767,500 and $3,690,000 for the nine months ended September 30, 1998 and the year ended December 31, 1997,
respectively.
(3) To record interest income on the notes receivable, which earn interest at 12%, of $862,470 and $1,150,000 for the nine months
ended September 30, 1998 and the year ended December 31, 1997, respectively.
</TABLE>
(c) Exhibits
None.
<PAGE>
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/ Michael Maturo
---------------------------------
Michael Maturo
Executive Vice President, Chief Financial
Officer and Treasurer
Date: January 19, 1999
