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 March 31, 1999
Commission file number: 001-14183
RECKSON SERVICE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3383642
(State other jurisdiction of
incorporation of organization) (IRS. Employer Identification Number)
225 Broadhollow Road, Melville, NY 11747
(Address of principal executive office) (zip code)
(516) 719-7400
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) 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 24,686,834 shares outstanding as of May 12, 1999
RECKSON SERVICE INDUSTRIES, INC.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED MARCH 31, 1999
TABLE OF CONTENTS
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets of Reckson Service Industries, Inc. as of
March 31, 1999 and December 31, 1998........................................3
Consolidated Statements of Operations of Reckson Service Industries, Inc.
for the three months ended March 31, 1999 and 1998..........................4
Consolidated Statements of Cash Flows of Reckson Service Industries, Inc.
for the three months ended March 31, 1999 and 1998..........................5
Notes to the Consolidated Financial Statements of Reckson Service Industries,
Inc.........................................................................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
March 31,1999 December 31,1998
(UNAUDITED) (Note 1)
ASSETS:
Cash and cash equivalents $ ----- $ 2,025,527
Equity investments (Note 3) 53,544,834 45,837,711
Affiliate receivables (Notes 3 and 5) 7,500,349 9,396,070
Equipment (net of depreciation of
$22,978 and $15,337 at March 31, 1999
and December 31, 1998, respectively) 101,478 99,928
Other assets 1,202,322 1,483,427
---------- ----------
Total Assets $ 62,348,983 $ 58,842,663
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued expenses $ 2,949,758 $ 1,893,657
Credit facilities with
related parties (Note 5) 45,383,372 40,981,500
---------- ----------
Total Liabilities 48,333,130 42,875,157
---------- ----------
Commitments and Contingencies (Note 8) --- ---
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,24,686,834 and 24,685,514
shares issued and outstanding, at
March 31, 1999 and December 31,1998,
respectively 246,868 246,855
Additional paid in capital 24,129,773 24,126,341
Accumulated deficit (10,360,788) (8,405,690)
---------- ----------
Total Shareholders' Equity 14,015,853 15,967,506
---------- ----------
Total Liabilities and
Shareholders' Equity $ 62,348,983 $ 58,842,663
========== ==========
(See accompanying Notes to Consolidated Financial Statements)
RECKSON SERVICE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three For the three
months ended months ended
March 31, 1999 March 31, 1998
REVENUES:
Interest income.........................$ 448,610 $ 46,661
Management fee income (Note 5).......... 83,333 ----
------- -------
Total Revenues.................. 531,943 46,661
------- -------
Loss on equity investments.............. (371,431) (424,353)
------- -------
EXPENSES:
Professional fees....................... 200,259 ----
General and administrative expenses..... 676,558 187,886
Amortization and depreciation........... 7,641 14,949
Terminated transaction and related costs 13,907 ----
Interest expense (Note 5)............... 1,217,245 128,682
--------- -------
Total Expenses........................... 2,115,610 331,517
--------- -------
Net Loss.................................$ (1,955,098) $ (709,209)
========== =======
Basic and diluted net loss per weighted
average common share.....................$ (0.08) $ (0.18)
========== =======
Basic and diluted weighted average common
shares outstanding....................... 24,686,042 3,928,202
========== =========
(See accompanying Notes to Consolidated Financial Statements)
RECKSON SERVICE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months Three months
ended ended
March 31, 1999 March 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,955,098) $ (709,209)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Amortization and depreciation 7,641 14,949
Loss on equity investments 371,431 424,353
Changes in operating assets and liabilities:
Other assets 281,105 (66,023)
Purchase of equipment (9,191) (30,450)
Organization and pre-acquisition costs ---- (26,123)
Accounts payable and accrued expenses 1,056,101 114,061
Affiliate receivables 1,895,721 (1,090,987)
--------- ---------
Net cash provided by (used in) operating
activities 1,647,710 (1,369,429)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in American Campus
Communities, LLC ---- (278,985)
Investment in and convertible loans
to On-Site Ventures, LLC (1,361,664) (650,000)
Investment in and advances to
RSVP Holdings, LLC (398,589) (5,887,000)
Investment in and advances to Advantis (6,318,301) ----
--------- ---------
Net cash used in investing activities (8,078,554) (6,815,985)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock 3,445 ----
Net proceeds from credit facilities
with related parties 4,401,872 ----
Proceeds from affiliate loans ---- 8,685,990
Costs of capital ---- (565,052)
--------- ---------
Net cash provided by financing activities 4,405,317 8,120,938
--------- ---------
Net decrease in cash and cash equivalents (2,025,527) (64,476)
Cash and cash equivalents at beginning
of period 2,025,527 129,704
--------- --------
Cash and cash equivalents at end of period ---- 65,228
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
interest $ 547,931 ----
========== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:
Contribution of assets from
Interoffice Superholdings Corporation
and Reckson Executive Centers, Inc.
to Advantis $ (21,409,152) ----
============ =======
(See accompanying notes to consolidated financial statements)
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Reckson Service Industries, Inc. ("RSI" or the "Company"), a business service
provider, was formed on July 15, 1997 by Reckson Associates Realty Corp.
("Reckson"), to create, operate and manage a system of inter-related business
services offered for sale to its customer pool which includes business
customers of Reckson Operating Partnership, L.P. ("ROP"), a commercial real
estate owner, Advantis, the Company's executive suite business, On-Site
Ventures, LLC, ("On-Site") the Company's telecommunications business, Reckson
Strategic Venture Partners, LLC ("RSVP") (collectively, the "RSI Customer
Pool") and third parties in the general marketplace through a centralized
infrastructure. The Company's growth strategy is to acquire or form strategic
alliances with established businesses with strong entrepreneurial management
and a reputation for high quality services within each of its targeted business
service sectors ("Business Service Platforms"). Specifically, the Company
seeks opportunities for which there is broad demand in the RSI Customer Pool.
The Company believes the RSI Customer Pool will attract exceptional investment
opportunities and strategic alliances which can capitalize on enhanced revenue
opportunities through a cross selling effort. The Company will establish
Business Service Platforms that present significant opportunities to provide
business services to the RSI Customer Pool and other third parties. Currently,
the RSI Customer Pool retains third parties to provide many business to
business services for their day-to-day operations. Of these services, the
Company may seek to provide the RSI Customer Pool with telecommunications,
document storage, document reproduction and logistics services (i.e.,
inventory services, messenger services and delivery services), as well as the
other business services that the Company determines may be utilized by the RSI
Customer Pool. The RSI Customer Pool consists of small to medium size
businesses as well as the mobile workforce of large corporations.RSI seeks to
provide the RSI Customer Pool high quality value-added business services
meeting all of their outsourcing needs by providing them with resources to
successfully compete in the marketplace. The Company will seek growth in each
Business Service Platform by (i) accessing the RSI Customer Pool as an anchor
for growth opportunities, (ii) integrating each Business Service Platform into
RSI's centralized infrastructure and (iii) acquiring similar business, forming
strategic alliances or making additional investments within such Business
Service Platforms.
In connection with the initial capitalization of RSI, ROP contributed $4,256,324
for a 95% nonvoting equity interest and certain members of Reckson management
contributed notes of $224,017 to the Company in exchange for a 5% voting
ownership interest. On October 29, 1997 the notes were repaid.
On June 11, 1998, ROP distributed its 95% of the common stock of RSI to its
unit holders of record on May 26, 1998 (the "Distribution"). Immediately prior
to the Distribution, the shares of non-voting common stock held by ROP were
exchanged by RSI for RSI common shares. Each share of the Company's common stock
issued in the Distribution was accompanied by one preferred share purchase
right. Simultaneously, Reckson distributed 100% of the RSI common shares
received from the Distribution to its common shareholders of the same record
date. In addition, simultaneously with the Distribution, the Company issued
rights to its stockholders to subscribe for the purchase of additional shares
of common stock of the Company.Immediately after the Distribution, RSI granted
to its stockholders (a "Holder") one subscription right for each share of RSI
common stock. Each subscription right entitled the Holder to purchase one share
of RSI common stock at a purchase price of $1.03 per share (the "Exercise
Price") and, at the election of such Holder, four additional shares (but not
less than four additional shares) at a purchase price of $1.03 per share.
A Holder of subscription rights had the opportunity to acquire up to an
aggregate of approximately 20,557,130 shares of RSI common stock. RSI and
Reckson Standby, LLC (the "Standby Purchaser") (an entity owned by several
members of management), entered into a standby agreement pursuant to which
the Standby Purchaser agreed to purchase, and RSI agreed to sell, any and all
shares of RSI common stock that were the subject of subscription rights in
the rights offering but were not subscribed for by a Holder on the expiration
date. The proceeds from the stand-by purchaser were approximately $7,325,000.
RSI received net proceeds from the rights offering of approximately
$19,852,000. In connection with the Company's initial capitalization the
Company obtained, from ROP, a five year $100 million unsecured credit facility
(the "RSI Facility"). The RSI Facility bears interest at a rate equal to the
greater of the prime rate plus 2% and (i) 12% per annum with the rate in this
clause (ii) increasing annually on outstanding borrowings at the rate of 4%
per year over the prior years rate. In addition, RSI established a separate
credit facility with ROP for funding of investments of up to $100 million with
or in RSVP (the "RSVP Facility"). The RSVP Facility has similar terms as the
RSI Facility.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. ORGANIZATION AND FORMATION OF THE COMPANY (CONTINUED)
RSVP 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 RSVP. New World Realty, LLC
("New World"), an entity owned by two individuals retained by Holdings, (the
"RSVP Managing Directors"), acts as a managing member of Holdings, and has a
carried interest which provides for the Managing Directors to receive a share
in the profits of RSVP after the Company and Paine Webber Real Estate
Securities, Inc. ("PWRES") have received certain minimum returns and a return
of capital. PWRES is a non-managing member and preferred equity owner who has
committed $200 million in capital (the "PWRES Equity Facility") and shares in
profits and losses of RSVP with the Company, subject to a maximum internal
rate of return of 16% of invested capital. On April 24, 1998, PWRES assigned
25% of its preferred equity interest in RSVP, representing an unfunded capital
commitment of $50 million to Stratum Realty Fund, LP ("Stratum"). The
assignment provides Stratum with similar rights and priorities. On March 17,
1999, PWRES transferred all of its rights, title and interest in its invested
capital to date to Stratum. This transfer includes the rights to distributions
based upon the amount of funded capital contributions.
Holdings has retained the RSVP Managing Directors to manage the day-to-day
operations of RSVP, subject to the strategic direction of RSI. New World, an
entity owned by the RSVP Managing Directors, acts as a managing member of
Holdings. The Holdings operating agreement (the "Managing Member Operating
Agreement") provides for the payment to New World of distributions out of the
cash flow of Holdings after RSI and affiliated persons have received a return
of their capital contributions to RSVP investments plus a 12% internal rate of
return ("IRR") thereon, of $15 million and, thereafter, a share of cash flows
ranging from 15% to 27.75% based upon the IRR received by RSI and affiliated
persons above 12% in respect of RSVP investments. The Managing Member
Operating Agreement obligates RSI to contribute 100% of the capital
contributions to be made by Holdings to RSVP in an amount up to $100 million.
In the event that RSI defaults in making its capital contributions,
distributions to New World and RSI's management rights will be reduced and RSI
will be obligated to purchase, at the election of New World, a portion of New
World's interest in Holdings for a minimum of $15 million. At the termination
of RSVP, New World has a right of first refusal to purchase any RSVP investment
proposed for sale. New World will also be entitled to one-half of any asset
management fee earned by Holdings from ROP. Additionally, New World is entitled
to receive transaction fees of up to $1 million a year for identifying
investment opportunities for RSVP.
ROP and RSI have entered into an intercompany agreement (the "ROP Intercompany
Agreement") to formalize their relationship and to limit conflicts of interest.
Under the ROP Intercompany Agreement, RSI granted ROP a right of first
opportunity to make any Real Estate Investment Trust ("REIT")-qualified
investment that becomes available to RSI. In addition, if a REIT-qualified
investment opportunity becomes available to an affiliate of RSI, including RSVP,
the ROP Intercompany Agreement requires such affiliate to allow ROP to
participate in such opportunities to the extent of RSI's interest.
Under the ROP Intercompany Agreement, ROP granted RSI a right of first
opportunity to provide business services to ROP and its tenants. RSI is
required to provide services to ROP at rates and on terms as attractive as
either the best available for comparable services in the market or those
offered by RSI to third parties. In addition, ROP is required to give RSI
access to its tenants with respect to business services that may be provided to
such tenants and, under the ROP Intercompany Agreement, subject to certain
conditions, ROP granted RSI a right of first refusal to become the lessee of any
real property acquired by ROP. If ROP so determines, consistent with Reckson's
status as a REIT, it is required to enter into a "master" lease agreement.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements present the financial
position of the Company at March 31, 1999, and December 31, 1998 and the
results of its operations and its cash flows for the three months ended
March 31, 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.
Investments in Dobie Center Properties, Ltd. ("Dobie") and American Campus
Communities, LLC ("ACC") through March 31, 1998, and Holdings, Advantis, its
executive suite business, and On-Site are reflected in the accompanying
financial statements under the equity method of accounting.
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 three month period
ended March 31, 1999, are 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 and Subsidiaries' 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-evaluates 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.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under 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. Under
APB 25, no compensation expense was recognized because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant. (See Note 4).
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 March 31, 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.
Earnings Per Share
In 1997, the FASB issued Statement No. 128 "Earnings per Share" ("FAS 128").
FAS 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented to conform to
the FAS 128 requirements.
Comprehensive Income
In 1997, the FASB issued Statement No. 130, ("SFAS 130") Reporting Comprehensive
Income SFAS No. 130 which is effective for fiscal years beginning after
December 15, 1997. SFAS 130 established standards for reporting comprehensive
income and its components in a full set of general-purpose financial statements.
SFAS 130 requires that all components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The adoption of this standard had no impact on the
Company's financial position or results of operations.
Disclosures about Segments of an Enterprise and Related Information
In 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes standards for
reporting information about operating segments in annual financial statements
and in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of this standard had no impact on the Company's financial position
or results of operations, but did effect the disclosure of segment information.
(See Note 6).
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, 2000. 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
MARCH 31, 1999
(UNAUDITED)
3. INVESTMENTS
The Company's equity investments are summarized as follows:
March 31, 1999 December 31, 1998
Investment in and advances to Holdings...... $ 15,350,318 $ 15,560,896
Investment in and advances to Interoffice
Superholdings Corporation.................... ---- 22,282,591
Investment in and convertible loans to On-Site. 8,440,990 7,101,330
Investment in and advances to Reckson Executive
Centers, Inc................................... ---- 892,894
Investment in Advantis......................... 29,753,526 ----
---------- ----------
Total equity investments.....................$ 53,544,834 $ 45,837,711
========== ==========
The following are the Company's summarized loss on equity investments:
For the three For the three
months ended months ended
March 31, 1999 March 31, 1998
Equity in earnings of Dobie..................$ ---- $ 170,567
Equity in loss of ACC........................ ---- (51,508)
Equity in loss of Holdings................... (609,167) (543,412)
Equity in loss of On-Site.................... (22,004) ----
Equity in earnings of Advantis............... 259,740 ----
-------- --------
Total loss on equity investments.............$ (371,431) $ (424,353)
======== =======
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
3. INVESTMENTS (CONTINUED)
The Company's significant investments are summarized as follows:
RSVP Holdings, LLC
Summarized financial information of Holdings and the Company's investment in,
advances to and share of loss of Holdings is as follows:
Balance Sheets
March 31, 1999 December 31, 1998
Assets:
Investment in Dobie..........................$ 96,027 $ 32,296
Investment in ACC............................ 1,302,896 1,262,415
Investment in Assisted Living Investments, LLC 4,062,211 4,676,272
Investment in Dominion Venture Group, LLC..... 34,880,813 29,288,973
Deferred compensation......................... 4,644,189 4,938,539
Other assets.................................. 5,745,159 4,552,917
---------- ----------
Total Assets............................$ 50,731,295 $ 44,751,412
========== ==========
Liabilities and Members' Equity:
Due to affiliates............................$ 1,591,459 $ 1,591,459
Other liabilities............................. 680,167 1,397,412
--------- ---------
Total Liabilities....................... 2,271,626 2,988,871
--------- --------
Minority Interest............................. 38,109,351 31,201,645
Preferred capital offering costs.............. (5,000,000) (5,000,000)
RSI investment in and advances to Holdings.... 15,350,318 15,560,896
---------- ----------
Total Liabilities and Members' Equity....$ 50,731,295 $ 44,751,412
========== ==========
In connection with the PWRES Equity Facility, RSVP paid a commitment fee of
$5,000,000, which represents 2.5% of the total preferred equity commitment.
On March 17, 1999, PWRES transferred all of its rights, title and interest
in its invested capital to date in RSVP to Stratum.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
3. INVESTMENTS (CONTINUED)
Statements of Operations
Revenues:
For the three For the period from
months ended February 26,1998
March 31,1999 to March 31,1998
Interest income...............................$ 63,116 $ ----
------ -------
Total Revenues......................... 63,116 ----
------ -------
Equity in loss on equity investments
Equity in earnings of Dobie.................... 63,732 ----
Equity in loss of ACC.......................... (9,519) ----
Equity in loss of Gateway Development Group, LLC (52,513) ----
Equity in loss of Assisted Living Investments,LLC (614,061) ----
Equity in loss of Dominion Venture Group, LLC.. (39,504) ----
-------- -------
Total loss on equity investments........ (651,865) ----
-------- -------
Expenses:
Operating expenses............................. 93,571 114,775
General and administrative expenses............ 917,965 338,989
Interest expense............................... 67,514 48,397
Depreciation and amortization.................. 9,555 41,251
--------- -------
Total Expenses............................ 1,088,605 543,412
--------- -------
Minority Interest share of loss................ (1,068,187) ----
--------- ------
RSI's share of net loss of Holdings............$ (609,167) $ (543,412)
--------- --------
Executive Office Suites
On January 8, 1999, Interoffice Superholdings Corporation ("Interoffice")
(36 executive office suite centers) and Reckson Executive Centers, Inc.
("REC") (8 executive office suite centers) merged with Alliance National
Incorporated, a holding company which owns and operates approximately 90
nationally located executive office suite centers (the "Merger"). The merged
entity changed its name to Advantis. The stockholders of Interoffice and REC
received shares of Series C Preferred Stock of Advantis which represent
approximately 40% of the equity interest in Advantis. The Company effectively
owns approximately 23% of Advantis. The holders of the Series C Preferred
Stock have the right to appoint four of the ten members of the board of
directors of Advantis, 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 Interoffice SuperHoldings, LLC, a limited liability company of which
RSI is the sole manager. Likewise, RSI holds the Series C Preferred Stock
received in respect of the Merger through Reckson Office Centers, LLC, a
limited liability company of which a subsidiary of RSI is the managing member.
Advantis 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 Advantis, provided certain third party and "most-favored nation"
conditions are satisfied.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
3. INVESTMENTS (CONTINUED)
RSI acquired certain ownership rights related to the Series C Preferred Stock
of Advantis 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 Advantis' annual operating budget, certain borrowings
and capital expenditures by Advantis, 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 Advantis
(including the holders of Advantis' 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 Advantis and other matters.
As of March 31, 1999, the excess of RSI's equity in Advantis over its investment
("Investment Basis Adjustment") was $10,038,334. The Investment Basis
Adjustment is being amortized as income over the life of the investment
estimated at 30 years.
Summarized financial information of Advantis and the Company's investment in
and advances to and share of income from Advantis is as follows:
<TABLE>
<S> <C>
Balance Sheet March 31, 1999
Assets:
Current assets..........................................$ 20,551,887
Property & Equipment, net of accumulated depreciation... 39,227,102
Intangibles, net of accumulated amortization............ 157,323,564
Other Assets............................................ 8,141,147
-----------
Total Assets................................................. 225,243,700
===========
Liabilities and Stockholders' Equity
Current liabilities.....................................$ 22,229,902
Long-term liabilities................................... 106,272,529
-----------
Total Liabilities............................................ 128,502,431
-----------
Stockholders' Equity
Common Stock............................................. 1,190,216
Non RSI Preferred Stock.................................. 57,289,183
Preferred Stock Accretion................................ 1,970,010
----------
RSI net investment in Advantis............................ 29,753,526
Less: RSI purchase option................................ (3,500,000)
Add: Investment Basis Adjustment......................... 10,038,334
----------
Net RSI basis in Advantis Preferred Stock................. 36,291,860
----------
Total Stockholders' Equity..................................... 96,741,269
----------
Total Liabilities and Stockholder's Equity.....................$ 225,243,700
===========
</TABLE>
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
3. INVESTMENTS (CONTINUED)
Statement of Income
For the period
January 8, 1999 to
March 31, 1999
Revenues
Rental income..................................................$ 27,065,298
Services income................................................ 17,488,254
Other income................................................... 2,221,454
----------
Total Revenues......................................... 46,775,006
----------
Expenses
Rent........................................................... 17,362,946
Services....................................................... 6,782,151
General and administrative..................................... 15,603,970
Depreciation and amortization.................................. 3,045,597
Interest expense............................................... 1,760,025
Other expense.................................................. 1,494,454
----------
Total Expenses......................................... 46,049,143
==========
Net income as reported by Advantis............................. 725,863
Less: Non-RSI share........................................... (550,479)
---------
RSI share of net income........................................ 175,384
Add: Investment Basis Adjustment.............................. 84,356
---------
Net income from Advantis.......................................$ 259,740
=========
Student Housing
The Company acquired a 33 1/3% interest in a wholly owned subsidiary of RFG
Capital Group, LLC for $1.51 million whose sole net investment is a 76.09%
interest in ACC, a student housing enterprise which owns, develops, constructs,
manages and acquires, on-an-off campus student housing projects. On April 1,
1998, RSI transferred its interest in ACC to RSVP. RSI's loss for its period
of ownership, January 1, 1998 to March 31, 1998 was $51,504. For the three
months ended March 31, 1999, RSVP's share of losses were $9,519.
In 1997, the Company invested through other affiliated entities $3.62 million
in Reckson Opportunity Partners, LP ("RO"). RO invested approximately $10.8
million to acquire a 70% interest in Dobie, which owns 100% in Dobie Center,
a mixed use student housing and retail property located in Austin, Texas. On
April 1, 1998, the Company transferred its interest in RO to RSVP, net of
certain proceeds related to the refinancing of Dobie Center. RSI's income
for its period of ownership, January 1, 1998 to March 31, 1998, was $170,567.
For the three months ended March 31, 1999, RSVP's share of income was $63,732.
Privatization
On August 11, 1998, RSVP acquired through a wholly owned subsidiary an interest
in Gateway Development Group, LLC ("Gateway") with Gateway Management for
approximately $377,000. Gateway is a start up entity that pursues opportunities
in privatized military housing. The Company is uncertain whether it will recover
its invested dollars from Gateway's future cash flows. At March 31, 1999,
RSVP has recognized a loss of $52,513 which is a reserve for its invested
dollars.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
3. INVESTMENTS (CONTINUED)
On August 27, 1998, the Company announced the formation of a joint venture
between RSVP 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 RSVP and by Burgess Services, LLC, an
entity owned and controlled by Calvin Burgess, President and Chief Executive
Officer of Dominion. The Dominion Venture will engage primarily in acquiring,
developing and/or owning government occupied office buildings and privately
operated correctional facilities and related activities. Under the operating
agreement, RSVP is to invest up to $100 million, some of which may be invested
by ROP for capital requirements approved by RSVP. RSVP funded its total
capital contribution of $8,597,455 through draws under its PWRES Equity
Facility and the RSVP Facility with ROP. ROP has contributed $13,328,628
in connection with the Dominion Venture. For the three months ended
March 31, 1999, RSVP recognized $39,504 of losses of which RSI's share after
allocation adjustments, was a loss of $83,955.
Assisted Living
On August 12, 1998, RSVP acquired through a wholly owned subsidiary a 45%
interest in Assisted Living Investments, LLC ("ALI") for approximately $3.25
million. ALI is a joint venture that develops, leases, operates and finances
assisted living facilities. In addition, RSVP has agreed to contribute 80% of
the equity of ALI, up to a maximum of $16.0 million for a total maximum
commitment of $19.25 million. RSVP funded $7.5 million of its $19.25 million
commitment upon the closing of the transaction. RSVP funded 50% of its capital
contribution through draws under the PWRES Equity Facility. The remaining 50%
capital contribution was funded through a draw under the RSVP facility (see
Note 5).
For the three months ended March 31, 1999 and RSVP recognized a loss of
$614,061 of which RSI's share was $307,031. As of March 31, 1999, the excess
of the RSVP's investment over its share of the equity in the underlying net
assets of ALI ("Excess ALI Investment") was $2,842,273. The Excess ALI
Investment is being amortized over the life of the investment estimated at 25
years.
Telecommunications
RSI holds 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
has advanced On-Site $6.5 million through March 31, 1999 to fund operating
costs under the terms of the note. The loan bears interest at a rate of 12%
per annum. On May 18, 1998, the Company purchased a membership interest in
On-Site equal to 1% of the aggregate membership interests. At March 31, 1999,
the Company recognized a loss of $22,004 on its interest.
In May 1998, the Company made an initial capital contribution of $300,000
for a 58.69% interest in On-Site Commerce and Content, LLC ("OCC"), a Company
established to acquire and develop software products. As of March 31, 1999,
OCC had no operations.
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
$4,000,000. The Members initially funded $2,000,000, in which RSI funded
approximately $1.35 million. The note matures in February 2000. Interest is
compounded monthly at a variable rate subject to the terms in the loan
agreement.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
4. SHAREHOLDERS' EQUITY
The Company has established the 1998 and 1999 stock option plans (the "Plans")
for the purpose of attracting and retaining executive officers, directors and
other key employees. Pursuant to the Plans, 3,700,376 and 1,750,000
respectively, of the Company's authorized shares have been reserved for
issuance.
On January 10, 1998 and March 30, 1998, the Company granted options to
purchase 542,892 and 2,732,085, respectively of the Company's common shares
at an exercise price of $1.10 and $1.04 respectively per share based on the
fair value on each date of grant, which the board of directors of the Company
has concluded to be book value on each date of grant. These options were fully
vested on January 1, 1999.
On August 4, 1998, the Board of Directors of the Company adopted a "broad based"
stock option plan for the purpose of awarding options to non-executive officers
and new hires. Pursuant to such adoption, 100,000 of the Company's authorized
shares have been reserved for this purpose. Additionally, the Company granted
options to purchase 456,564 shares at an exercise price of $2 per share, which
approximated market value at the time of the grant. These options have a three
year vesting period.
RECKSON SERVICE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
5. TRANSACTIONS WITH RELATED PARTIES
On June 15, 1998, RSI established the RSI Facility with ROP in the amount of
$100 million for RSI's service sector operations and other general corporate
purposes. ROP has advanced the Company $34,670,444 at March 31, 1999. These
advances bear interest at 12% per annum. Additionally, RSI established the
RSVP Facility with ROP for funding the RSVP investments. The amount available
under RSVP Facility is reduced by any amount invested by ROP in joint ventures
with RSVP. As of March 31, 1999, ROP has advanced RSI $10,712,928 under the
RSVP Facility and has invested $13,328,628 in joint ventures with RSVP. The
total outstanding at March 31, 1999, owed by RSI under both credit facilities
was $45,383,372.
In February 1998, Holdings entered into employment agreements with the two
RSVP Managing Directors. The agreements provide for a minimum annual salary
of $500,000 and have a seven-year term. In addition to the base salary, each
RSVP Managing Director has received from the Company a $3.0 million grant of
common stock of Reckson (the "Reckson Stock") which will vest equally over
five years. The Reckson Stock was purchased by the Company and contributed
to Holdings. In addition, in April 1998, the Company advanced each RSVP
Managing Director a tax loan of approximately $1.4 million in connection
with the grant of Reckson Stock. These loans bear interest at 8% per annum,
are due in April, 2003 and are secured by the Reckson Stock. Additionally,
New World is entitled to receive transaction fees of up to $1 million per year
related to identifying RSVP investment opportunities.
The Company is entitled to a cumulative annual management fee of $2 million
with respect to RSVP, of which $1.5 million is subordinate to PWRES receiving
an annual minimum rate of return of 16% and a return of its capital. The
unsubordinated amount for the three months ended March 31, 1999 was $125,000.
The Company reimburses ROP with respect to general and administrative expenses
(including payroll expenses) incurred by ROP for the benefit of the Company.
For the three months ended March 31, 1999, the Company reimbursed ROP $162,239
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
MARCH 31, 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 three
months ended March 31, 1999 and March 31, 1998.
<TABLE>
March 31, 1999
<S> <C> <C> <C> <C> <C> <C> <C>
EXECUTIVE OFFICE TELECOMMU ASSISTED STUDENT OTHER
SUITES NICATIONS LIVING PRIVATIZATION HOUSING HOLDINGS TOTAL
--------------- -------------- ----------- ------------ ------------ ------------ ------------
INVESTMENT $ 29,753,526 $ 8,440,990 $ 2,031,106 $ 2,886,815 $ 1,398,923 $ 9,033,474 $ 53,544,834
--------------- -------------- ----------- ------------ ------------ ------------ ------------
REVENUES 46,775,006 561,972 3,233,325 15,057,183 5,112,505
--------------- -------------- ----------- ------------ ------------ ------------ ------------
EXPENSES 46,049,143 2,439,925 4,143,324 14,687,603 4,869,370 254,890
--------------- -------------- ----------- ------------ ------------ ------------ ------------
NET INCOME (LOSS) 725,863 (1,877,953) (909,999) 369,580 243,135 (254,890)
--------------- --------------- ----------- ------------ ------------ ------------- -----------
RSI/EQUITY
IN (LOSS)INCOME$ 259,740 $ (22,004) $ (307,031)$ (101,459) $ 54,213 $ (254,890)$ (371,431)
--------------- --------------- ------------- ------------ ------------ ------------ ------------
</TABLE>
March 31, 1998
STUDENT HOUSING OTHER HOLDINGS TOTAL
REVENUES $ 4,057,583
------------- --------------
EXPENSES 3,529,668 $ 543,412
------------- ---------------
NET INCOME (LOSS) 527,915 (543,412)
------------- --------------- ------------
RSI/EQUITY IN
INCOME (LOSS) $ 119,059 (543,412) $ (424,353)
------------ --------------- -------------
7. SUBSEQUENT EVENTS
On April 9, 1999, the Company made an additional advance of $677,583 to
On-Site. This advance is subject to the same terms in the promissory note
from On-Site. (See Note 3).
On April 16, 1999, the Company contributed approximately $3.2 million to
On-Site as part of an equity financing agreement which includes RSI and
several third party private equity investors. The $60 million equity
agreement requires the Company to fund up to $15 million. Upon reaching
its capital commitment, RSI will own an approximate 33% diluted interest in
On-Site.
In an amendment to ALI's credit agreement, dated April 19,1999, a member of
Sun Healthcare Group, Inc., ("Sun"), the parent of an ALI member recently
informed ALI that they no longer desire to be involved in the assisted living
business. Sun has further advised ALI of their desire that (i) ALI commence a
disposition of all of the operating facilities and sites so that Sun may
receive repayment of amounts outstanding under the credit agreement earlier
than it would have under the credit agreement and (ii) future fundings under
the credit agreement be reduced as a result of Sun proposing to no longer
provide funding for the development of new facilities to be constructed by ALI.
Accordingly, ALI's assets are held for sale at March 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the accompanying
Financial Statements of Reckson Service Industries, Inc. (the "Company" or
"RSI") and related notes thereto.
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., ("ROP") 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
The Company's primary business is to create and operate a system of
interrelated services for sale to its customer pool which includes customers
of ROP, a commercialized real estate owner, Advantis, the Company's executive
suite business, On-Site Ventures, LLC ("On-Site"), the Company's
telecommunications business, and Reckson Strategic Venture Partners, LLC
("RSVP"), (collectively, the "RSI Customer Pool") and third parties in the
general marketplace through a centralized infrastructure. The Company's
growth strategy is to acquire or form strategic alliances with strong
entrepreneurial management and a reputation for high quality services within
each of its targeted business service sectors ("Business Service Platforms").
Specifically, the Company seeks opportunities for which there is broad demand
in the RSI Customer Pool. Such Business Service Platform investment or
alliance serves as a basis for sale and delivery of business services to the
RSI Customer Pool. The Company will establish Business Service Platforms that
present significant opportunities to provide business services to the RSI
Customer Pool and other third parties. Currently, the RSI Customer Pool
retains third parties to provide many business to business services for their
day-to-day operations. Of these services, the Company may seek to provide
the RSI Customer Pool with telecommunications, outsourced business services,
E-commerce and content, executive suites and concierge services, as well as
with other business services that the Company determines may be utilized by
the RSI Customer Pool. The Company will seek growth in each Business Service
Platform by (i) accessing the RSI Customer Pool as an anchor for growth
opportunities (ii) integrating each Business Service Platform into RSI's
centralized infrastructure and (iii) acquiring similar businesses or making
additional investments within such Business Service Platform.
In connection with the initial capitalization of RSI, ROP contributed
$4,256,324 for a 95% non-voting equity interest and certain members of
Reckson management contributed notes of $224,017 to the Company in exchange
for a 5% voting ownership interest. On October 29, 1997 the notes were repaid.
On June 11, 1998, ROP distributed its 95% of the common stock of RSI to its
unit holders of record on May 26, 1998 (the "Distribution"). Immediately prior
to the Distribution, the shares of non-voting common stock held by ROP were
exchanged by RSI for RSI common shares. Each share of the Company's common
stock issued in the Distribution was accompanied by one preferred share
purchase right. Simultaneously, Reckson Associates Realty Corp. ("Reckson")
distributed 100% of the RSI common shares received from the Distribution to
its common shareholders of the same record date. In addition, simultaneously
with the Distribution, the Company issued rights to its stockholders to
subscribe for the purchase of additional shares of common stock of the
Company.
Immediately after the Distribution of RSI common stock, RSI granted to its
stockholders (each a "Holder") one subscription right for each share of RSI
common stock. Each subscription right entitled the Holder to purchase one
share of RSI common stock at a purchase price of $1.03 per share (the
"Exercise Price") and, at the election of such Holder, four additional shares
(but not less than four additional shares) at a purchase price of $1.03 per
share. A Holder of subscription rights had the opportunity to acquire up to
an aggregate of approximately 20,557,130 shares of RSI common stock. RSI and
Reckson Standby, LLC (the 'Standby purchaser") (an entity owned by several
members of management), entered into a standby agreement pursuant to which
the Standby Purchaser agreed to purchase, and RSI agreed to sell, any and all
shares of RSI common stock that were the subject of subscription rights in the
rights offering but were not subscribed for by a Holder on the expiration date
at the Exercise Price. The proceeds from the Standby Purchaser were
approximately $7,325,000. RSI received net proceeds from the rights offering
of approximately $19,852,000. In connection with the Company's initial
capitalization, the Company obtained from ROP a five year $100 million
unsecured credit facility (the "RSI Facility"). The RSI Facility bears
interest at a rate equal to the greater of prime rate plus 2% and (i) 12% per
annum with the rate in clause (ii) increasing annually on outstanding borrowings
at the rate of 4% per year over the prior year's rate.
ROP and RSI have entered into an intercompany agreement (the "ROP Intercompany
Agreement") to formalize their relationship and to limit conflicts of interest.
Under the ROP Intercompany Agreement, RSI granted ROP a right of first
opportunity to make any Real Estate Investment Trust ("REIT") -qualified
investment that becomes available to RSI. In addition, if a REIT-qualified
investment opportunity becomes available to an affiliate of RSI, including
RSVP, the ROP Intercompany Agreement requires such affiliate to allow ROP to
participate in such opportunity to the extent of RSI's interest.
Under the ROP Intercompany Agreement, ROP granted RSI a right of first
opportunity to provide commercial services to ROP and its tenants. RSI will
provide services to ROP at rates and on terms as attractive as either the best
available for comparable services in the market or those offered by RSI to
third parties. In addition, ROP is required to give RSI access to its
tenants with respect to business services that may be provided to such tenants
and, under the ROP Intercompany Agreement, subject to certain conditions, ROP
granted RSI a right of first refusal to become the lessee of any real property
acquired by ROP. If ROP so determines, consistent with Reckson's status as a
REIT, it is required to enter into a "master" lease agreement.
RSI Fund Management, LLC, a wholly owned subsidiary of RSI, is a managing
member of RSVP Holdings, LLC ("Holdings"), the managing member of RSVP, a real
estate venture capital fund formed to invest in real estate and real estate-
related operating companies outside of Reckson's core interests. RSVP will
invest in established entrepreneurial enterprises 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 ("RSVP Investments"). ROP has committed $100 million to be
invested in RSVP Investments (the "RSVP Facility"). Paine Webber Real Estate
Securities, Inc. ("PWRES") is a non-managing member who holds a preferred
interest in RSVP. PWRES has committed $200 million in capital (the "PWRES
Equity Facility") and shares in profits and losses of RSVP, subject to a
maximum internal rate of return ("IRR") of 16% of invested capital. On
April 24, 1998, PWRES assigned 25% of its preferred equity interest in RSVP,
representing an unfunded capital commitment of $50 million to Stratum Realty
Fund, LP ("Stratum"). The assignment provides Stratum with similar rights
and priorities. Excess returns over 16% on the PWRES Equity Facility is to be
distributed to Holdings. On March 17, 1999, PWRES transferred all of its
rights, title and interest on its invested capital to date in RSVP to Stratum.
Holdings has retained two managing directors (the "RSVP Managing Directors")
to manage the day-to-day operations of RSVP, subject to the strategic
direction of RSI. New World Realty, LLC ("New World"), an entity owned by
the RSVP Managing Directors acts as a managing member of Holdings. The
Holdings operating agreement (the "Managing Member Operating Agreement")
provides for the payment to New World of distributions out of the cash flow
of Holdings after RSI and affiliated persons have received a return of their
capital contributions to RSVP investments plus a 12% IRR thereon, of $15
million and, thereafter, a share of cash flows ranging from 15% to 27.75% based
upon the IRR received by RSI and affiliated persons above 12% in respect of RSVP
investments. The Managing Member Operating Agreement obligates RSI to
contribute 100% of the capital contributions to be made by Holdings to RSVP
in an amount up to $100 million. In the event that RSI defaults in making its
capital contributions, distributions to New World and RSI's management rights
will be reduced and RSI will be obligated to purchase, at the election of New
World, a portion of New World's interest in Holdings for a minimum of $15
million. At the termination of RSVP, New World has a right of first refusal
to purchase any RSVP Investment proposed for sale. New World will also be
entitled to one-half of any asset management fee earned by Holdings from ROP.
Additionally, New World is entitled to receive transaction fees of up to $1
million a year for identifying investment opportunities for RSVP.
On April 1, 1998. The Company acquired a 9.9% membership interest in Reckson
Executive Centers, LLC ("REC, LLC") for $200,000 from ROP and assumed debt of
approximately $322,000. On October 5, 1998, the Company contributed its
interest in REC, LLC to Reckson Executive Centers, Inc. ("REC") in exchange
for 75% of the common stock of REC.
On November 9, 1998, the Company acquired a majority interest in Interoffice
SuperHoldings Corporation ("Interoffice"), a nationally operated executive
office suite business. The aggregate purchase price paid by Company was
approximately $20.5 million and was financed through borrowing under the RSI
Facility. The company also acquired receivables related to certain advances
made to certain other stockholders of Interoffice for approximately $10.3
million. Such receivables were secured by the shares held by these
stockholders.
On January 8, 1999, Interoffice (36 executive office suite centers) and REC
(8 executive office suite centers) merged with Alliance National Incorporated,
a holding company which owns and operates approximately 90 nationally located
executive office suite centers (the "Merger"). The merged entity changed its
name to Advantis. The stockholders of Interoffice and REC received shares of
the Series C Preferred Stock of Advantis which represent approximately 40% of
the equity interest in Advantis. The Company effectively owns approximately
23% of Advantis. The holders of the Series C Preferred Stock received in
respect of the Merger through Interoffice Superholdings, LLC, a limited
liability company of which RSI is the sole managing member. RSI also holds
the Series C Preferred Stock received in respect of the Merger through
Reckson Office Centers, LLC, a limited liability company of which a
subsidiary of RSI is the managing member.
Advantis 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 Advantis, provided certain third party and "most-favored nation"
conditions are satisfied.
RSI acquired certain ownership rights related to the Series C Preferred Stock
of Advantis 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 Advantis' annual operating budget, certain borrowings
and capital expenditures by Advantis, 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 Advantis
(including the holders of Advantis' 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 Advantis and other matters.
The Company currently has a 1% interest and holds a subordinated note
convertible into a 58.69% equity interest in On-Site, a company that provides
advanced telecommunications systems and services within commercial and
residential buildings and/or building complexes. The Company has advanced
On-Site $6.5 million through March 31, 1999 to fund certain operating costs
under the terms of the subordinated note. The loan bears interest at a rate
of 12% per annum. In May 1998,the Company made an initial capital contribution
of $300,000 for a 58.69% interest in On-Site Commerce and Content, LLC, ("OCC")
a Company established to acquire and develop software products. As of March 31,
1999, OCC had no operations.
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
$4,000,000. The Members initially funded $2,000,000, in which RSI funded
approximately $1.35 million. The note matures in February 2000. Interest is
compounded monthly at a variable rate subject to the terms in the loan
agreement. On April 9, 1999, the Company made an additional advance of
$677,583 under the On-Site note.
On April 16, 1999, the Company contributed approximately $3.2 million to
On-Site as part of an equity financing agreement which includes RSI and
several private equity investors. The $60 million equity agreement requires
the Company to fund up to $15 million. Upon reaching its capital commitment,
RSI will own an approximate 33% diluted interest in On-Site.
RESULTS OF OPERATIONS
The Company commenced operations on July 15, 1997 and had minimal activities
through March 31, 1998, therefore, the following periods are not comparable.
Three months ended March 31, 1998
For the three months ended March 31, 1998 the Company reported a net loss of
$709,209. Total revenues include (i) equity in earnings of Dobie Center
Properties, Ltd. ("Dobie") of $170,567 which represents a 33 1/3% interest
in a joint venture that owns a 70% interest in an entity which owns Dobie
Center located in Austin, Texas. Dobie Center, L.P. reported total revenues
of $2.6 million, operating income of $1.6 million and net income of $.7
million, (ii) equity in loss of American Campus Communities, LLC, a student
housing company ("ACC") of $51,508. ACC reported total revenues of $1.4
million, operating income of $.9 million and a net loss of $154,523, (iii)
equity in loss of Holdings of $543,412 and (iv) interest income of $46,661
relating to loans made to certain affiliates. The Company also reported
total expenses of $331,517, which substantially represents interest, payroll
and office costs.
Summary of Operations by Business Segment for the Three Months ended
March 31, 1999
Executive Suites
For the period January 8, 1999 to March 31, 1999 Advantis reported income of
$725,863. RSI's share after adjustments, was income of $259,740.
Telecommunications
For the three months ended March 31, 1999, On-Site reported losses of
$1,877,953. On-Site's losses were generally attributable to start-up costs
such as staffing, in accordance with On-Site's business plan. The Company's
share of losses attributable to its 1% equity interest was $22,004 after
adjustments. In connection with the Company's convertible notes and secured
financing with On-Site, RSI recognized $223,947 in interest income.
RSVP Holdings, LLC
For the three months ended March 31, 1999, Holdings reported total revenues of
$63,116, losses on equity investments of $651,865 and expenses of $1,220,550.
RSI's share of Holdings' loss for the three months ended March 31, 1999 was
$609,167. Included in Holdings' operating results are the following RSVP
activities:
Student Housing
For the three months ended March 31, 1999, Dobie reported income of $273,138.
RSVP's share of income was $63,732. In August of 1998, the mortgage
indebtedness in Dobie Center was refinanced with a larger mortgage loan which
results in increased interest expense over the prior year.
For the three months ended March 31, 1999, ACC reported losses of $30,003.
RSVP's share of loss was $9,519. ACC's losses generally related to operating
expenses on new projects and interest expense on leaseholds.
Privatization
On August 11, 1998, RSVP, through a wholly owned subsidiary, formed a joint
venture, Gateway Development Group, LLC ("Gateway") with Gateway Management
Group. RSVP is currently uncertain whether it will recover its invested
dollars from Gateway's future cash flows. For the three months ended March 31,
1999, RSVP has recognized a loss of $52,513 which is a reserve for its
invested dollars. For the three months ended March 31, 1999,Dominion Venture
Group, LLC reported income of $369,580. RSVP's share of loss after
allocation adjustments was $39,504.
Assisted Living
For the three months ended March 31,1999, Assisted Living Investments, LLC
("ALI") reported losses of $909,999. RSVP's share of losses amounted to
$614,061. ALI's losses were generally attributable to expenses of new centers
prior to these centers reaching stabilized occupancy.
LIQUIDITY AND CAPITAL RESOURCES
Summary of Cash Flows
Net cash provided by and used by operating activities totaled approximately
$1.6 million for the three months ended March 31, 1999, and $1.4 million for
the three months ended March 31, 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 $8.1 million for
the three months ended March 31, 1999, and $6.8 million for the three months
ended March 31, 1998. Cash used in investing activities related primarily to
investments in and advances to Holdings, Interoffice, and On-Site.
Net cash provided by financing activities totaled approximately $4.4 million
for the three months ended March 31, 1999, and $8.1 million for the three
months ended March 31, 1998. Cash provided by financing activities during
1999 is attributable to draws on the RSI Facility and the RSVP Facility.
Financing Activities
On June 15, 1998, RSI established the RSI Facility with ROP 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 ROP for
funding of investments of up to $100 million with or in RSVP through (i)
RSVP-controlled joint venture REIT-qualified Investments, or (ii) advances made
to RSI subsequent to the Distribution. 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 March 31, 1999,
approximately $34.7 million was outstanding under the RSI Facility and
approximately $24 million was advanced under the RSVP Facility of which
approximately $13.3 million represents an investment by ROP in RSVP joint
ventures and approximately $10.7 million represents outstanding borrowings.
Additionally, RSVP has obtained the PWRES Equity Facility which provides for
the investment by PWRES of up to $200 million in RSVP in the form of
preferred equity, subject to certain conditions. Amounts available under
the PWRES Equity Facility have been used by RSVP to make investments
consistent with its business objectives and to fund working capital. Under
the terms of the PWRES Equity Facility, RSVP is subject to various covenants
and events of default and related remedies. Such remedies include increased
control rights of PWRES over the operation of RSVP under certain circumstances.
Advances under the PWRES Equity Facility were partially funded by an investment
fund that is jointly sponsored by financier George Soros and PWRES. In
addition, PWRES and such investment fund are entitled to receive priority or
preferred distributions from RSVP prior to the distributions of cash to RSI.
On March 17, 1999, PWRES transferred all of its rights, title and interest on
its invested capital to date in RSVP to Stratum. As of March 31, 1999, PWRES
and Stratum have contributed $46,336,509.
The Company utilizes the advances under the RSI Facility primarily to make
investments in operating companies that provide business services. The Company
may make additional investments 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 investments
in 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 invest in 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. Currently, the entire property
management system is year 2000 compliant and has been thoroughly tested. Since
the Company's accounting software is maintained and supported by a third party,
the total year 2000 project cost is estimated to be minimal.
The year 2000 project is estimated to be completed not later than July 31, 1999,
which is prior to any anticipated impact on its operating systems. Additionally,
the Company has received assurances from its contractors that all of the
Company's building management and mechanical 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 contractors will comply with
their assurances and therefore, the Company may not be able to determine year
2000 compliance of those contractors. At that time, the Company will determine
the extent to which the Company will be able to replace non-compliant
contractors. 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.
To date, the Company has expended approximately $21,000 and expects to expend
an additional $60,000 in connection with upgrading building management,
mechanical and computer systems. The costs of the project and the date on
which the Company believes it will complete the year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and costs of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
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 they
determine that the compliance plans will not be implemented by July 31, 1999.
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 short-term rates and is sensitive to inflation and
other economic factors. A significant increase in interest rates may have a
negative impact on the earnings of the Company due to the variable interest
rate under the Credit Facilities.
The privatization, assisted living and student housing sectors are subject
to incremental rent increases each year. The Company believes that
inflationary increases will be offset by these rent increases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary 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 short term rates and is sensitive
to inflation and other economic factors. A significant increase in interest
rates may have a negative impact on the earnings of the Company due to the
variable interest 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 March 31, 1999.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 Thereafter Total FMV
Variable rate $ ----- $ ----- $ ----- $ ----- $45,383,372 $ ----- $45,383,372 $45,383,372
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 - None
Item 5. Other information - None
Item 6. Exhibits and Reports on Form 8-K
Form 8-K/A dated January 19, 1999 Relating to the filing
of financial statements
with respect to the
Company's exercise of
its option to acquire a
majority interest in
Interoffice
Superholdings Corporation
from Reckson Management
Group, Inc.
Form 8-K dated January 25, 1999 Relating to the Company's
execution of merger
agreements with Alliance
National Incorporated and
Reckson Executive
Centers, Inc., and
Interoffice Superholdings
Corp.
Form 8-K/A dated March 24, 1999 Relating to the filing
of financial statements
with respect to the
Company's execution of
merger agreements with
Alliance National
Incorporated and Reckson
Executive Centers, Inc.,
and Interoffice
Superholdings Corp.
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: May 14, 1999
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
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<RECEIVABLES> 62,248
<ALLOWANCES> 0
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<DEPRECIATION> 23
<TOTAL-ASSETS> 62,349
<CURRENT-LIABILITIES> 48,333
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0
0
<COMMON> 247
<OTHER-SE> 13,769
<TOTAL-LIABILITY-AND-EQUITY> 62,349
<SALES> 532
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<CGS> 0
<TOTAL-COSTS> 899
<OTHER-EXPENSES> 371
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