UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number: 0-30162
RECKSON SERVICE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3383642
(State other jurisdiction of
incorporation of organization) (IRS. Employer 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) Yes X No __,
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
This company has only one class of common stock, issued at $.01 par
value per share with 25,361,834 shares outstanding as of August 10, 1999
Reckson Service Industries, Inc.
Quarterly Report
For the Three Months Ended June 30, 1999
Table of Contents
Index Page
----------------- -------------------------------------------------------
Part I. Financial Information
-------------------------------------------------------------------------
Item 1.Financial Statements
Consolidated Balance Sheets of Reckson Service Industries,
Inc. as of June 30, 1999 (unaudited) and December 31, 1998---------3
Consolidated Statements of Operations of Reckson Service
Industries, Inc. for the three and six months ended June 30, 1999
and 1998 (unaudited)-----------------------------------------------4
Consolidated Statements of Cash Flows of Reckson Service
Industries, Inc.for the six months ended June 30, 1999
and 1998 (unaudited)-----------------------------------------------5
Notes to the Consolidated Financial Statements of Reckson
Service Industries, Inc (unaudited)--------------------------------6
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations-----------------------------------------19
Item 3.
Quantitative and Qualitative Disclosures about Market Risk--------25
---------------------------------------------------------------------------
Part II. Other Information
---------------------------------------------------------------------------
Item 1. Legal Proceedings--------------------------------------------26
Item 2. Changes in Securities and Use of Proceeds....................26
Item 3. Defaults Upon Senior Securities..............................26
Item 4. Submission of Matters to a Vote of Securities Holders........26
Item 5. Other Information............................................26
Item 6. Exhibits and reports on Form 8-K.............................26
----------------- ------------------------------------------------ --------
Signatures 26
----------------- ------------------------------------------------ --------
Part 1 - Financial information
Item 1 - Financial statements
Reckson Service Industries, Inc.
Consolidated Balance Sheets
<TABLE>
<S> <C> <C>
June 30, 1999 December 31, 1998
---------------------- ----------------------
(Unaudited) (Note 1)
Assets:
Cash and cash equivalents..................................... $ 192,714 $ 2,025,527
Equity investments (Note 3)................................... 76,372,758 45,837,711
Affiliate receivables (Notes 3 and 5)......................... 1,951,182 9,396,070
Equipment (net of depreciation of $35,013 and $15,337 at
June 30, 1999 and December 31, 1998, respectively) ........... 203,986 99,928
Other assets.................................................. 2,060,217 1,483,427
---------------------- ----------------------
Total Assets.............................................. $ 80,780,857 $ 58,842,663
====================== ======================
Liabilities and Shareholders' Equity:
Accounts payable and accrued expenses......................... $ 5,839,029 $ 1,893,657
Credit facilities with related parties (Note 5) .............. 67,006,239 40,981,500
---------------------- ----------------------
Total Liabilities........................................ 72,845,268 42,875,157
---------------------- ----------------------
Commitments and Contingencies................................. --- ---
Shareholders' Equity: (Notes 1 and 4)
Preferred stock, $.01 par value, 25,000,000 shares authorized,
None issued and outstanding................................ --- ---
Common stock, $.01 par value, 100,000,000 shares authorized,
24,811,834 and 24,685,514 shares issued and outstanding, at
June 30, 1999 and December 31,1998, respectively.............. 248,118 246,855
Additional paid in capital.................................... 27,883,897 24,126,341
Accumulated deficit........................... (20,196,426) (8,405,690)
---------------------- ----------------------
Total Shareholders' Equity................................ 7,935,589 15,967,506
---------------------- ----------------------
Total Liabilities and Shareholders' Equity................ $ 80,780,857 $ 58,842,663
====================== ======================
(See accompanying Notes to Consolidated Financial Statements)
</TABLE>
Reckson Service Industries, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- ---------------- --------------- ----------------
Revenues:
Interest income........................ $ 739,010 $ 94,271 $ 1,187,620 $ 140,932
Management fee income (Note 5)........ 83,334 166,666 166,667 166,666
---------------- ---------------- --------------- ----------------
Total Revenues 822,344 260,937 1,354,287 307,598
---------------- ---------------- --------------- ----------------
Loss on equity investments................ (1,163,871) (82,306) (1,535,302) (506,659)
---------------- ---------------- --------------- ----------------
Expenses:
Professional fees..................... 257,284 ---- 457,543 ---
General and administrative expenses............ 7,092,705 282,863 7,776,904 485,698
Terminated transaction and related costs.......... 400,001 ---- 413,908 ---
Interest expense (Note 5)................. 1,744,121 312,244 2,961,366 440,926
---------------- ---------------- --------------- ----------------
Total Expenses...................... 9,494,111 595,107 11,609,721 926,624
---------------- ---------------- --------------- ----------------
Net Loss........................... $ (9,835,638) $ (416,476) $(11,790,736) $ (1,125,685)
================ ================ =============== ================
Basic and diluted net loss per weighted average
common share............. $ (0.40) $ (0 .09) $ (0.48) $ (0.27)
================ ================ =============== ================
Basic and diluted weighted average common
shares outstanding.................... 24,712,383 4,513,975 24,699,285 4,191,068
================ ================ =============== ================
</TABLE>
(See accompanying Notes to Consolidated Financial Statements)
Reckson Service Industries, Inc.
consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<S> <C> <C>
Six months Six months
ended ended
June 30, 1999 June 30, 1998
--------------------- ---------------------
Cash Flows from Operating Activities:
Net Loss $ (11,790,736) $ (1,125,685)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization and depreciation.............................................. 19,676 20,992
Loss on equity investments................................................. 1,535,302 506,659
Non-cash compensation...................................................... 3,719,372 ----
Changes in operating assets and liabilities:
Other assets............................................................... (576,790) (254,502)
Purchase of equipment...................................................... (123,734) (37,431)
Organization and pre-acquisition costs..................................... ---- (333,768)
Accounts payable and accrued expenses...................................... 3,945,374 439,516
Affiliate receivables...................................................... 7,444,888 (783,426)
--------------------- ---------------------
Net cash provided by (used in) operating activities............................. 4,173,352 (1,567,645)
--------------------- ---------------------
Cash Flows From Investing Activities:
Investment in and convertible loans to On-Site Ventures, LLC............... (5,247,077) (3,109,332)
Investment in and advances to RSVP Holdings, LLC........................... (14,504,971) (9,642,000)
Investment in and advances to VANTAS and predecessor entities.............. (12,318,301) (1,069,326)
Other investments.......................................................... ---- (278,985)
--------------------- ---------------------
Net cash used in investing activities........................................... (32,070,349) (14,099,643)
--------------------- ---------------------
Cash Flows From Financing Activities:
Issuance of Common Stock.................................................... 135,445 ----
Net proceeds from credit facilities with related parties.................... 26,024,739 ----
Net proceeds from affiliate loans........................................... ---- 16,287,032
Costs of capital............................................................ (96,000) (701,050)
--------------------- ---------------------
Net cash provided by financing activities....................................... 26,064,184 15,585,982
--------------------- ---------------------
Net decrease in cash and cash equivalents....................................... (1,832,813) (81,306)
Cash and cash equivalents at beginning of period................................ 2,025,527 129,704
--------------------- ---------------------
Cash and cash equivalents at end of period...................................... $ 192,714 $ 48,398
===================== =====================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest.................................... $ 1,091,443 $ -----
===================== =====================
Supplemental Disclosure of Non-Cash Transactions:
Contribution of assets from Interoffice SuperHoldings Corporation and
Reckson Executive Centers, Inc. to VANTAS........................ $ (21,409,152) $ -----
===================== =====================
</TABLE>
(See accompanying notes to consolidated financial statements)
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
1. Description of the Company
Reckson Service Industries, Inc. ("RSI" or the "Company"), was formed on July
15, 1997, to create a service company that focuses on providing outsourced
business services for small to medium sized companies. RSI seeks to accomplish
this by identifying and acquiring interests in operating companies that engage
in such outsource service businesses or by forming and growing such businesses
internally.
The Company's primary business is to create and manage a system of
interrelated outsource business services to be offered to small to medium sized
companies in the marketplace through an e-commerce based infrastructure. Over
time, RSI's strategic goal is to develop and package a bundle of outsource
business service products that it will market as a "one stop" solution to
satisfy the outsourcing needs of small to medium sized businesses. RSI's growth
strategy is to acquire businesses or significant interests in businesses in
targeted business service sectors, and, where appropriate, to retain the
existing management of such businesses. Specifically, RSI seeks opportunities
for which there is broad demand in the marketplace, strong entrepreneurial
management, a reputation for high quality services and growth potential. The
Company seeks to add value by supporting management, offering strategic advice
and assisting in other aspects of developing the businesses where appropriate.
RSI pursues growth opportunities in each business by (i) accessing small to
medium sized companies included in Reckson Associates Realty Corp. customer base
and in the general marketplace nationwide, (ii) integrating each business into
its centralized e-commerce based infrastructure and (iii) acquiring other
businesses with complementary outsource service products.
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 of 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 committment as of June 30,1999.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements present the financial
position of the Company at June 30, 1999, and December 31, 1998 and the results
of its operations for the three and six months ended June 30, 1999 and 1998 and
its cash flows for the six months ended June 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 six month period ended June 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.
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.
Long-Lived Assets
The Company assesses the need to record impairment losses on long-lived
assets used in operations when indicators of impairment are present. On an
on-going basis, management reviews the value and period of amortization or
depreciation of long-lived assets, including excess investments of equity
investments. During this review, the Company re-evaluated the significant
assumptions used in determining the original cost of long-lived assets. Although
the assumptions may vary from transaction to transaction, they generally include
revenue growth, operating results, cash flows and other indicators of value.
Management then determines whether there has been a permanent impairment of the
value of long-lived assets based upon events or circumstances which have
occurred since acquisition. As of June 30, 1999, the Company has determined that
there has been no impairment on its long lived assets.
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.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
At inception, the Company adopted Statement of Financial Accounting
Standards ("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 June 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 1998, the FASB issued Statement No.133, "Accounting for Derivative
Instruments and Hedging Activities", which is required to be adopted in years
beginning after June 15, 1999. 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.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
3. Investments
The Company's equity investments are summarized as follows:
<TABLE>
<S> <C> <C> <C> <C>
June 30, 1999 December 31, 1998
----------------- --------------------
RSVP Holdings, LLC................... $ 28,112,162 $ 15,560,896
Convertible loans to On-Site Ventures, LLC..... 12,278,500 7,101,330
VANTAS and predecessor entities............ 35,982,096 23,175,485
----------------- --------------------
Total equity investments............. $ 76,372,758 $ 45,837,711
================= ====================
The following are the Company's summarized earnings/(losses) on
equity investments:
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
----------------- -------------------- ------------------ -----------------
RSVP Holdings, LLC................. $ (1,344,538) $ (75,062) $ (1,953,705) $ (618,474)
On-Site Ventures, LLC.................. (47,903) (4,733) (69,907) (4,733)
VANTAS and predecessor entities............ 228,570 (2,511) 488,310 (2,511)
Other investments................. ---- ---- ---- 119,059
----------------- -------------------- ------------------ -----------------
Net loss on equity investments............. $ (1,163,871) $ (82,306) $ (1,535,302) $ (506,659)
================= ==================== ================== =================
</TABLE>
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
3. Investments (continued)
The Company's significant investments are summarized as follows:
RSVP Holdings, LLC
Summarized financial information of RSVP Holdings, LLC and the
Company's investment in, advances to and share of loss of RSVP
Holdings, LLC is as follows:
<TABLE>
<S> <C> <C>
Balance Sheets June 30, 1999 December 31, 1998
--------------------- ----------------------
Assets:
Investment in Dominion Venture Group, LLC................. $ 38,979,848 $ 29,288,973
Other equity investments...................... 17,751,585 5,970,983
Deferred compensation........................... 4,349,839 4,938,539
Other assets................................ 5,507,424 4,552,917
--------------------- ----------------------
Total Assets............................... $ 66,588,696 $ 44,751,412
===================== ======================
Liabilities and Members' Equity:
Due to affiliates................................ $ 1,591,459 $ 1,591,459
Other liabilities.............................. 1,471,501 1,397,412
--------------------- ----------------------
Total Liabilities............................ 3,062,960 2,988,871
--------------------- ----------------------
Minority Interest.............................. 40,413,574 31,201,645
Preferred capital offering costs.......................... (5,000,000) (5,000,000)
RSI's investment in and advances to Holdings.................. 28,112,162 15,560,896
--------------------- ----------------------
Total Liabilities and Members' Equity................. $ 66,588,696 $ 44,751,412
===================== ======================
</TABLE>
In connection with the Preferred Equity Facility, Reckson
Strategic paid a commitment fee of $5 million, which represents
2.5% of the total preferred equity commitment.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
3. Investments (continued)
<TABLE>
<S> <C> <C> <C> <C>
Statements of Operations
For the three For the three For the six For the period from
Revenues: months ended months ended months ended February 26, 1998
June 30, 1999 June 30, 1998 June 30, 1999 to June 30, 1998
------------------ ----------------- ---------------- --------------------
Other income.................... $ ---- $ 254,746 $ ---- $ 254,746
Interest income................... 84,466 52,114 147,582 52,547
------------------ ----------------- ----------------- ------------------
Total Revenues................ 84,466 306,860 147,582 307,293
------------------ ----------------- ----------------- -----------------
Equity in earnings/(loss) on equity investments
Dominion Venture Group, LLC........... 123,879 ---- 84,375 ----
Other equity investments................. (2,019,243) (117,148) (2,631,604) (117,148)
------------------ ----------------- ----------------- -----------------
Net loss on equity investments......... (1,895,364) (117,148) (2,547,229) (117,148)
------------------ ----------------- ----------------- -----------------
Expenses:
Operating expenses................. 240,170 219,848 369,439 400,196
General and administrative expenses......... 1,017,182 1,019,233 1,899,449 1,292,649
Interest expense.................... 238,207 229,694 305,721 278,524
Depreciation and amortization.............. 15,248 32,950 24,803 74,201
------------------ ----------------- ----------------- -----------------
Total Expenses.................. 1,510,807 1,501,725 2,599,412 2,045,570
------------------ ----------------- ----------------- -----------------
Minority Interest share of loss............. (1,977,167) (1,236,951) (3,045,354) (1,236,951)
------------------ ----------------- ----------------- -----------------
RSI's share of net loss of RSVP Holdings, LLC..... $ (1,344,538) $ (75,062) $ (1,953,705) $ (618,474)
------------------ ----------------- ----------------- -----------------
</TABLE>
Dominion Venture Group,LLC
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 $15.6 million in connection with the Dominion Venture.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
Other
On April 26, 1999, Reckson Strategic acquired interests in joint ventures
in two lodging 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 June 30,1999, Reckson Strategics' investment in the assisted living
industry, which has a carrying value of $2.6 million, is currently being held
for sale. No loss has been recognized as a result of this decision.
Executive Office Suites
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"). The merged
entity changed its name to 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
charter documents of VANTAS and other matters.
Subsequent to June 30, 1999, the Company increased its ownership in VANTAS
to 28.7%, on a fully diluted basis with a $23 million equity investment. With
this investment, RSI increases its percentage of "as if converted" voting shares
it controls to 52.4% non-controlling interest. This investment was made as a
part of a $30 million financing, a further portion of which the Company intends
to purchase in the third quarter.
As of June 30, 1999, the excess of RSI's equity in VANTAS over its
investment ("Investment Basis Adjustment") was approximately $9.9 million. The
Investment Basis Adjustment is being amortized as income over the life of the
investment 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 investment in
and advances to and share of income from VANTAS is as follows:
<TABLE>
<S> <C>
Balance Sheet
June 30, 1999
---------------------
Assets:
Current assets............................ $ 18,792,681
Property & Equipment, net of accumulated depreciation.......... 49,138,215
Intangibles, net of accumulated amortization................... 179,681,076
Other Assets............................. 10,166,448
---------------------
Total Assets................................ $ 257,778,420
=====================
Liabilities and Stockholders' Equity
Current liabilities........................... $ 32,069,308
Long-term liabilities.......................... 128,530,623
---------------------
Total Liabilities............................... 160,599,931
---------------------
Stockholders' Equity
Common Stock............................. 563,321
Non RSI Preferred Stock......................... 56,225,968
Preferred Stock Accretion........................ 3,953,127
---------------------
RSI net investment in VANTAS..................... 35,982,096
Less: RSI purchase option....................... (3,500,000)
RSI advance to VANTAS............................ (6,000,000)
Add: Investment Basis Adjustment................... 9,953,977
---------------------
Net RSI basis in VANTAS Preferred Stock............... 36,436,073
---------------------
Total Stockholders' Equity....................... 97,178,489
---------------------
Total Liabilities and Stockholders' Equity................ $ 257,778,420
=====================
</TABLE>
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
3. Investments (continued)
<TABLE>
<S> <C> <C>
Statements of Income For the three For the period
months ended January 8, 1999 to
June 30, 1999 June 30, 1999
--------------------- --------------------
Revenues
Rental income............................ $ 30,571,559 $ 57,636,857
Services income........................... 19,532,452 37,020,706
Other income.............................. 2,484,051 4,705,505
--------------------- --------------------
Total Revenues............................ 52,588,062 99,363,068
--------------------- --------------------
Expenses
Rent................................... 20,111,485 37,474,431
Services................................ 7,611,480 14,393,631
General and administrative........................ 17,399,795 33,003,765
Depreciation and amortization..................... 3,498,629 6,544,226
Interest expense............................ 2,194,711 3,954,736
Other expense............................ 1,221,527 2,715,981
--------------------- --------------------
Total Expenses......................
52,037,627 98,086,770
--------------------- --------------------
Net income as reported by VANTAS................... 550,435 1,276,298
Less: Non-RSI share............................. (406,221) (956,700)
--------------------- --------------------
RSI's share of net income.......................... 144,214 319,598
Add: Investment Basis Adjustment..................... 84,356 168,712
--------------------- --------------------
Net income from VANTAS......................... $ 228,570 $ 488,310
===================== ====================
</TABLE>
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
3. Investments (continued)
Telecommunications
In May 1998, the Company purchased a membership interest in On-Site
Ventures, LLC, ("On-Site") equal to 1% of the aggregate membership interests. In
addition, RSI held a subordinated note convertible into a 58.69% equity interest
in On-Site, a company that provides advanced telecommunications systems and
services within commercial buildings and/or building complexes. The Company had
advanced On-Site $6.5 million through December 31, 1998 to fund operations costs
under the terms of the note. The loan beared interest at a rate of 12% per
annum. For the three months ended June 30, 1999, the Company recognized a loss
of $47,903 on its equity interest.
On February 10, 1999, the Company, along with another member of On-Site
(the "Members"), executed a senior secured promissory note with On-Site for $4.0
million. The Members initially funded $2 million in which RSI funded
approximately $1.35 million. On April 9, 1999, the Company made an additional
advance of $677,583. Interest was compounded monthly at a variable rate subject
to the terms in the loan agreement.
On April 16, 1999, the Company contributed approximately $3.2 million to
On-Site as part of a $60 million private equity financing agreement 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 $5.2 million which included approximately $2 million funded by
RSI under the $4 million senior secured promissory note.
Upon receipt of required regulatory approvals, on June 30, 1999, On-Site
merged into OnSite Access, Inc., a Delaware corporation. On July 1, 1999,
closings were completed for approximately $20.5 million of additional equity in
connection with the $60 million private equity financing (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 33% diluted interest in OnSite
Access, Inc.
4. 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
subsequent to June 30,1999.
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 second quarter and six month periods ended June 30, 1999, results
include $5.6 million or $0.23 per basic diluted share, associated with these
awards, the majority of which is non-cash in nature.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
5. 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 $46.4 million at June 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 June 30, 1999, Reckson has advanced RSI
approximately $20.6 million under the RSVP Facility and has invested
approximately $16.2 million in joint ventures with Reckson Strategic. The total
outstanding at June 30, 1999, owed by RSI under both credit facilities was
approximately $67.0 million. Interest accrued on these facilities at June 30,
1999 was approximately $2.7 million.
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 six months ended June 30,
1999 was $125,000 and $250,000, 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 six months ended June 30, 1999, the Company
reimbursed Reckson $138,651 and $300,890, respectively, for such activities.
6. 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.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
The following table sets for 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 June 30, 1999 and 1998.
<TABLE>
<S> <C> <C> <C> <C>
June 30, 1999
Executive office Telecommunications RSVP Holdings Total
suites
---------------------- -------------------- ------------------ --------------
Investment $ 35,982,096 $ 12,278,500 $ 28,112,162 $ 76,372,758
---------------------- -------------------- ------------------ --------------
Revenues and loss
on equity 52,588,062 721,020 (1,810,898)
investments
---------------------- -------------------- ------------------
Expenses 52,037,627 5,188,804 1,510,807
---------------------- -------------------- ------------------
Net Income (loss) 550,435 (4,467,784) (3,321,705)
---------------------- -------------------- ------------------
RSI/Equity
in (loss) income $ 228,570 $ (47,903) $ (1,344,538) $ (1,163,871)
---------------------- -------------------- ------------------ --------------
June 30, 1998
Executive office Telecommunications RSVP Holdings Total
suites
---------------------- ------------------- ------------------ ---------------
Revenues $ 1,478,426 $ 72,075 $ 189,712
---------------------- ------------------- ------------------
Expenses 1,503,788 545,411 1,501,725
---------------------- ------------------- ------------------
Net income (loss) (25,362) (473,336) (1,312,013)
---------------------- ------------------- ------------------
RSI/equity in
income (loss) $ (2,511) $ (4,733) $ (75,062) $ (82,306)
---------------------- ------------------- ------------------ ---------------
</TABLE>
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(UNAUDITED)
The following table sets for the Company's segments and their revenues and
expenses and other related disclosures as required by SFAS 131 for the six
months ended June 30, 1999 and 1998.
<TABLE>
<S> <C> <C> <C> <C>
June 30, 1999
Executive office Telecommunications RSVP Holdings Total
suites
--------------------- --------------------- ------------------ ------------------
Revenues and loss on
equity investments $ 99,363,068 $ 1,282,992 $ (2,399,647)
--------------------- --------------------- ------------------
Expenses 98,086,770 7,628,726 2,599,412
--------------------- --------------------- ------------------
Net Income (loss) 1,276,298 (6,345,734) (4,999,059)
--------------------- --------------------- ------------------
RSI/Equity
in (loss) income $ 488,310 $ (69,907) $ (1,953,705) $ (1,535,302)
--------------------- --------------------- ------------------ ------------------
June 30, 1998
Executive office Telecommunications Student housing RSVP Holdings Total
suites
--------------------- ------------------- ---------------- ----------------- ----------------
Revenues $ 1,478,426 $ 72,075 $ 4,057,583 $ 190,145
--------------------- ------------------- ---------------- -----------------
Expenses 1,503,788 545,411 3,529,668 2,045,570
--------------------- ------------------- ---------------- -----------------
Net income (loss) (25,362) (473,336) 527,915 (1,855,425)
--------------------- ------------------- ---------------- -----------------
RSI/equity in
income (loss) $ (2,511) $ (4,733) $ 119,059 $ (618,474) $ (506,659)
--------------------- ------------------- ---------------- ----------------- ----------------
</TABLE>
7. Subsequent Events
On August 11, 1999, the Company made a $15 million acquisition of a
non-controlling interest in eSourceOne, a fully integrated Internet-based
employee benefits and human resource administration outsourcing company for
small and medium-size businesses. RSI has committed to invest an additional $7.5
million in connection with a future equity funding.
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
Reckson Service Industries, Inc., was formed on July 15, 1997, to create a
service company that focuses on providing outsourced business services to small
to medium sized companies. RSI seeks to accomplish this by identifying and
acquiring interests in operating companies that engage in such outsource service
businesses or by forming and growing such businesses internally.
The Company's primary business is to create and manage a system of
interrelated outsource business services to be offered to small to medium-size
companies in the marketplace through an e-commerce based infrastructure. Over
time, RSI's strategic goal is to develop and package a bundle of outsource
business service products that it will market as a "one stop" solution to
satisfy the outsourcing needs of small to medium-size businesses. RSI's growth
strategy is to acquire businesses or significant interests in businesses in
targeted business service sectors, and, where appropriate, to retain the
existing management of such businesses. Specifically, RSI seeks opportunities
for which there is broad demand in the marketplace, strong entrepreneurial
management, a reputation for high quality services and growth potential. The
Company seeks to add value by supporting management, offering strategic advice
and assisting in other aspects of developing the businesses where appropriate.
RSI pursues growth opportunities in each business by (i) accessing small to
medium-size companies included in Reckson Associates Realty Corp. customer base
and in the general marketplace nationwide, (ii) integrating each business into
its centralized e-commerce based infrastructure and (iii) acquiring other
businesses with complimentary outsource service products.
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
rare 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 committment
as of June 30,1999.
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"). The merged
entity changed its name to 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.
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.
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 will 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 charter documents of VANTAS and other matters.
Subsequent to June 30, 1999, the Company increased its ownership in VANTAS
to 28.7%, on a fully diluted basis with a $23 million equity investment. With
this investment, RSI increases its percentage of "as if converted" voting shares
it controls to 52.4%. This investment was made as a part of a $30 million
financing, a further portion of which the Company intends to purchase in the
third quarter.
In May 1998, the Company purchased a membership interest in On-Site
Ventures, LLC, ("On-Site"), equal to 1% of the aggregate membership interests.
In addition, RSI held a subordinated note convertible into a 58.69% equity
interest in On-Site Ventures, LLC, a company that provides advanced
telecommunications systems and services within commercial buildings and/or
building complexes. The Company had advanced On-Site $6.5 million through
December 31, 1998 to fund operations costs under the terms of the note. The loan
beared interest at a rate of 12% per annum.
On February 10, 1999, the Company, along with another member of On-Site
(the "Members"), executed a senior secured promissory note with On-Site for $4.0
million. The Members initially funded $2.0 million, in which RSI funded
approximately $1.3 million. On April 9, 1999, the Company made an additional
advance of $677,583. Interest was compounded monthly at a variable rate subject
to the terms in the loan agreement.
On April 16, 1999, the Company contributed approximately $3.2 million to
On-Site as part of a $60 million private equity financing agreement 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 $5.2 million which included approximately $2 million funded by
RSI under the $4 million senior secured promissory note.
Upon receipt of required regulatory approvals, on June 30, 1999, On-Site
merged into OnSite Access, Inc., a Delaware corporation. On July 1, 1999,
closings were completed for approximately $20.5 million of additional equity in
connection with the $60 million private equity financing (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 33% diluted interest in OnSite
Access, Inc.
Results of Operations
The Company commenced operations on July 15, 1997 and had minimal
activities through June 30, 1998, therefore, the following periods are not
comparable.
Three and six months ended June 30, 1998
For the three months ended June 30, 1998, the Company reported a net loss
of $416,476. 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 six months ended June 30, 1998 the Company reported a net loss of
$1,125,685. Total revenues included management fee income and interest income
relating to loans made to certain affiliates. The Company also reported total
expenses of $926,624 which substantially represented interest, payroll and
office costs.
Summary of Operations by Business Segment for the Three Months ended June 30,
1999
Operations
Net loss for the quarter was $9.8 million due to higher general and
administrative expenses associated with the Company's elevated level of
operating activity and include certain second quarter non-cash charges
attributable to incentive stock compensation for key members of senior
management.
Executive Suites
For the three months ended June 30, 1999, VANTAS reported income of
$550,435. RSI's share after adjustments, was income of $228,570. VANTAS reported
$52.6 million in revenues primarily due to occupancy and service revenue.
Telecommunications
For the three months ended June 30, 1999, OnSite reported losses of
$4,467,784. OnSite's losses were generally attributable to interest expense and
start-up costs such as staffing. The Company's share of losses attributable to
its 1% equity interest was $47,903 after adjustments. In connection with the
Company's convertible notes and secured financing with OnSite, RSI recognized
$337,822 in interest income.
RSVP Holdings, LLC
For the three months ended June 30, 1999, Holdings reported total revenues
of $84,466, losses on equity investments of $1,895,364 and expenses of
$1,510,806. RSI's share of Holdings' loss for the three months ended June 30,
1999 was $1,344,538.
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.
Summary of Operations by Business Segment for the Six Months ended June 30, 1999
Operations
Net loss for the quarter was $11.8 million due to higher general and
administrative expenses associated with the Company's elevated level of
operating activity and include certain second quarter non-cash charges
attributable to incentive stock compensation for key members of senior
management.
Executive Suites
For the six months ended June 30, 1999, VANTAS reported net income of
$1,276,298. RSI's share after adjustments, was income of $488,310. VANTAS
reported $99.4 million in revenues reflecting 12% growth in the second quarter
over the first quarter. Merger expenses of approximately $1.4 million were
incurred in connection with the merger of Reckson Executive and Interoffice.
Telecommunications
For the six months ended June 30, 1999, OnSite reported losses of
$6,345,737. On-Sites losses were generally attributable to interest expense and
start-up costs such as staffing. The Company's share of losses attributable to
its 1% equity interest was $69,907 after adjustments. In connection with the
Company's convertible notes and secured financing with OnSite, RSI recognized
$561,769 in interest income.
RSVP Holdings, LLC ("Holdings")
For the six months ended June 30, 1999, Holdings reported total revenues of
$147,582, losses on equity investments of $2,547,229 and expenses of $2,599,412.
RSI's share of Holdings' loss for the six months ended June 30, 1999 was
$1,953,705. 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.
Liquidity and Capital Resources
Summary of Cash Flows
Net cash provided by and used in operating activities totaled approximately
$4.2 million for the six months ended June 30, 1999, and $1.6 million for the
six months ended June 30, 1998, respectively. Cash provided by operations in
1999 were attributable to collections of affiliate receivables. Cash used in
operations for 1998 were 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 $32.1 million
for the six months ended June 30, 1999, and $14.1 million for the six months
ended June 30, 1998. Cash used in investing activities related primarily to
investments in and advances to Holdings, VANTAS, and On-Site.
Net cash provided by financing activities totaled approximately $26.1
million for the six months ended June 30, 1999, and $15.6 million for the six
months ended June 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 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% and (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
June 30, 1999, approximately $46.4 million was outstanding under the RSI
Facility and approximately $36.8 million was advanced under the RSVP Facility of
which approximately $16.2 million represented investments by Reckson in Reckson
Strategic joint ventures and approximately $20.6 million represented outstanding
borrowings.
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 million to Stratum. As
of June 30, 1999, Paine Webber and Stratum have contributed $51.1 million.
The Company utilizes the advances under the RSI Facility primarily to
acquire 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 investments 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 is does not fully control.
Thereby cash flow of these companies will be used for growth opportunities at
such companies not for distribution to its owners. It is also expected that the
Company will acquire companies where it controls such companies operations and
consolidates such companies cash flows with those of the Company. Under such
circumstances, net cash flow produced will be used for debt service under the
RSI Facility and for the Company's operating costs. The Company expects to meet
its short term liquidity requirements generally through its net cash flow
produced by its operations along with advances under the RSI Facility. The
Company expects that it will refinance indebtedness under the RSI Facility at
maturity or retire such debt through the issuance of debt securities or equity
securities, although there can be no assurance that the Company will be able to
refinance or retire such indebtedness. The Company anticipates that cash on
hand, net cash flows from operating activities, together with cash available
from borrowings under the RSI Facility, will be adequate to meet the capital and
liquidity requirements of the Company in both the short-and long-term.
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 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 on the Company.
The Company has expended approximately $66,000 in connection with year 2000
issues.
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 expects to develop 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 inflationary increases will be offset by higher
revenues.
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 June 30, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 Thereafter Total FMV
Variable rate $ ----- $ ----- $ ----- $ ----- $67,006,239 $ ----- $67,006,239 $67,006,239
Average interest rate ----- ----- ----- ----- 12% ----- 12% -----
</TABLE>
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds- None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Securities Holders
On June 24, 1999, the Company held its annual meeting of stockholders. The
matters on which the stockholders voted, in person or by proxy, were (1) the
election of two nominees as Class I Directors to serve until the 2002 annual
meeting of stockholders, or until their respective successors are duly elected
and qualified, (2) to ratify the selection of the independent auditors of the
Company and (3) to approve the Company's 1999 Stock Option Plan. The two
nominees were elected, the auditors were ratified and the 1999 Stock Option Plan
was approved. The results of the voting are set forth below:
Election of Directors Votes Cast For
Scott Rechler 21,587,563
Paul F. Amoruso 21,587,515
Ratification of Auditors
Votes Cast For Votes Cast Against
21,297,755 12,505
Approval of 1999 Stock Option Plan
Votes Cast For Votes Cast Against
13,825,593 2,691,530
Item 5. Other information - None
Item 6. Exhibits and Reports on Form 8-K
Form 8-K dated April 16, 1999
Relating to the Company's additional investment with On-Site Ventures,LLC
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.
By: \s\ Scott H. Rechler
Scott H. Rechler, President and Chief Executive Officer
(Principal Executive Officer)
\s\ Michael Maturo
Michael Maturo, Executive Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 193
<SECURITIES> 0
<RECEIVABLES> 80,384
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 80,577
<PP&E> 239
<DEPRECIATION> (35)
<TOTAL-ASSETS> 80,781
<CURRENT-LIABILITIES> 72,845
<BONDS> 0
0
0
<COMMON> 248
<OTHER-SE> 7688
<TOTAL-LIABILITY-AND-EQUITY> 80,781
<SALES> 1,354
<TOTAL-REVENUES> 1,354
<CGS> 0
<TOTAL-COSTS> 8,648
<OTHER-EXPENSES> 1,536
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,961
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,791)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
