SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
-------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 1, 2000
FRONTLINE CAPITAL GROUP
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
0-30162 11-3383642
(Commission File Number) (IRS Employer Id. Number)
1350 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices) (Zip Code)
(212) 931-8000
(Registrant's telephone number, including area code)
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant hereby amends the following items, financial statements,
exhibits or other portions of its Current Report on Form 8-K, as filed with
the Securities and Exchange Commission on July 16, 2000, as set forth in the
pages attached hereto.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
HQ Global Holdings, Inc.1
------------------------
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999
Consolidated Statements of Operations for the three months ended
and six months ended June 30, 2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows for the six months ended June
30, 2000 and 1999 (unaudited)
Consolidated Statement of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficiency) for the six months
ended June 30, 2000 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
(b) Pro Forma Financial Information
FrontLine Capital Group and Subsidiaries
----------------------------------------
Pro Forma Condensed Consolidated Balance Sheet as of June 30,
2000 (unaudited)
Pro Forma Condensed Consolidating Statement of Operations for
the six months ended June 30, 2000 (unaudited)
Pro Forma Condensed Consolidating Statement of Operations for
the year ended December 31, 1999 (unaudited)
Notes to Unaudited Pro Forma Consolidated Financial Statements
HQ Global Holdings, Inc.
------------------------
Pro Forma Condensed Consolidating Statement of Operations for
the year ended December 31, 1999 (unaudited)
Pro Forma Condensed Consolidating Statement of Operations for
the six months ended June 30, 2000 (unaudited)
Notes to Unaudited Pro Forma Consolidated Financial Statements
Schedule I - VANTAS Incorporated and Subsidiaries - Pro Forma
Condensed Consolidating Statement of Operations for the year
ended December 31, 1999 (unaudited)
Schedule II - HQ Global Workplaces, Inc. and Subsidiaries - Pro
Forma Condensed Consolidating Statement of Operations for
the year ended December 31, 1999 (unaudited)
--------
1 Certain historical financial statements were previously included in the
Company's Form 8-K filed with the Securities and Exchange Commission
on March 2, 2000.
HQ GLOBAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,464,334 $ 3,807,417
Restricted cash 7,525,060 21,571,590
Accounts receivable, net of allowance for doubtful accounts of $2,949,000
and $861,000 at June 30, 2000 and December 31, 1999, respectively 22,970,207 8,425,968
Prepaid expenses and other current assets 19,615,831 10,853,205
Deferred income taxes -- 5,155,000
Deferred financing costs 7,797,643 908,602
------------- ------------
Total current assets 66,373,075 50,721,782
Intangibles, net 604,097,775 187,115,028
Property and equipment, net 207,263,156 80,064,180
Deferred financing costs, net 36,228,812 4,516,557
Security deposits 6,381,196 4,400,898
Other assets, net 33,773,886 5,638,755
------------- ------------
Total assets $ 954,117,900 $332,457,200
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses $ 43,528,921 $ 38,010,112
Capital lease obligations 1,313,872 1,139,219
Deferred rent payable 4,654,489 2,164,969
Notes payable - Credit Facility 35,475,000 12,500,000
Other liabilities 1,415,000 --
------------- ------------
Total current liabilities 86,387,282 53,814,300
Notes payable - Credit Facility 204,025,000 108,125,000
Notes payable - Bridge Loan 125,000,000 --
Tenants' security deposits 55,945,543 20,163,962
Deferred rent payable 29,845,054 22,794,388
Deferred income taxes -- 3,024,000
Capital lease obligations 1,310,758 625,805
Other liabilities 5,942,214 4,361,721
------------- ------------
Total liabilities 508,455,851 212,909,176
------------- ------------
Redeemable convertible preferred stock:
Series A Convertible Cumulative Preferred Stock, $.01 par value; issued
and outstanding 4,782,692 shares (aggregate liquidation preference 144,491,805 --
$197,377,455)
Series A through E Convertible Preferred Stock of VANTAS,
$.01 par value; issued and outstanding 29,837,272 shares at December
31, 1999 (aggregate liquidation preference $121,505,000) -- 154,041,584
Note receivable from issuance of redeemable preferred stock -- (950,000)
------------- ------------
Total redeemable convertible preferred stock 144,491,805 153,091,584
------------- ------------
Stockholders' equity (deficiency):
Voting common stock, $.01 par value; authorized 75,000,000
shares; issued and outstanding 9,902,065 shares at June 30,
2000 and 1,814,799 shares
at December 31, 1999 99,021 18,148
Nonvoting Class C common stock, $.01 par value; authorized 25,000,000
shares;
issued and outstanding 2,152,988 shares 21,530 --
Additional paid-in capital 362,137,218 52,494
Unearned stock compensation (5,594,033) --
Notes receivable from issuance of common stock -- (945,072)
Accumulated deficit (55,493,492) (32,669,130)
------------- ------------
Total stockholders' equity (deficiency) 301,170,244 (33,543,560)
------------- ------------
Total liabilities and stockholders' equity (deficiency) $ 954,117,900 $332,457,200
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
HQ GLOBAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------- -------------------------------
2000 1999 2000 1999
------------------ ------------------ ------------------ -----------
BUSINESS CENTER OPERATIONS:
REVENUES:
<S> <C> <C> <C> <C>
Office rentals $ 58,085,232 $ 30,571,559 $ 94,156,227 $ 57,636,857
Support services 40,612,303 21,981,819 67,031,081 41,691,527
------------ ------------ ------------ ------------
98,697,535 52,553,378 161,187,308 99,328,384
------------ ------------ ------------ ------------
EXPENSES:
Rent 34,933,792 20,111,485 59,722,886 37,474,431
Support services 14,260,435 7,611,480 23,870,662 14,393,631
Center general and administrative 19,897,212 11,808,038 35,277,033 22,077,702
------------ ------------ ------------ ------------
69,091,439 39,531,003 118,870,581 73,945,764
------------ ------------ ------------ ------------
Contribution from operation of 29,606,096 13,022,375 42,316,727 25,382,620
------------ ------------ ------------ ------------
business centers
OTHER (EXPENSES) INCOME:
Corporate general and administrative (10,265,561) (5,591,757) (17,363,986) (10,926,063)
Merger and integration charges (18,615,417) (640,527) (19,441,417) (1,384,981)
Depreciation and amortization (9,486,506) (3,352,770) (14,946,464) (6,253,673)
Interest expense, net (6,845,296) (2,340,570) (10,227,366) (4,245,289)
Other income 147,460 34,684 78,279 34,684
------------ ------------ ------------ ------------
(45,065,320) (11,890,940) (61,900,954) (22,775,322)
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes (15,459,224) 1,131,435 (19,584,227) 2,607,298
Provision for income taxes (280,116) (581,000) (470,116) (1,331,000)
------------ ------------ ------------ ------------
Net income (loss) (15,739,340) 550,435 (20,054,343) 1,276,298
------------ ------------ ------------ ------------
Accretion of preferred stock (4,101,349) (2,519,440) (6,686,386) (4,268,303)
------------ ------------ ------------ ------------
Net loss applicable to common stock $(19,840,689) $ (1,969,005) $(26,740,729) $ (2,992,005)
============ ============ ============ ============
Per share information:
Basic earnings (loss):
Net loss per common share $ (3.36) $ (1.56) $ (6.82) $ (2.38)
============= ============= ============= =============
Weighted average number of common
shares outstanding 5,903,921 1,259,290 3,921,630 1,259,290
============ ============ ============ ============
Diluted earnings (loss):
Net loss per common share $ (3.36) $ (1.56) $ (6.82) $ (2.38)
============= ============= ============= =============
Weighted average number of common
shares outstanding 5,903,921 1,259,290 3,921,630 1,259,290
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
HQ GLOBAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income $ (20,054,343) $ 1,276,298
Adjustments to reconcile net (loss) income to net cash (used
in)
provided by operating activities:
Depreciation and amortization 14,946,464 6,253,673
Amortization of deferred financing costs 1,062,049 290,553
Deferred income taxes (603,329) --
Provision for doubtful accounts 1,202,725 211,358
Deferred rent payable 3,011,621 2,469,589
Deferred credits (1,016,484) 53,742
Broker referral fees 188,679 --
Non-cash compensation expense 125,405 --
Changes in operating assets and liabilities:
Accounts receivable (8,065,421) (1,026,730)
Prepaid expenses and other current assets 1,208,134 (684,312)
Security deposits and other assets 686,603 61,672
Accounts payable and accrued expenses (29,427,377) (35,747)
Income taxes payable 735,828 591,695
Tenants' security deposits 4,399,713 1,930,155
Other liabilities 1,712,266 --
------------- ------------
Net cash (used in) provided by (29,887,467) 11,391,946
operating activities ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of net assets of business centers, net of cash (254,025,200) (32,056,146)
proceeds
Purchases of property and equipment (23,144,667) (13,310,664)
Restricted cash 23,311,145 10,000,000
------------- ------------
Net cash used in investing activities (253,858,722) (35,366,810)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 276,325,000 35,200,000
Payments on borrowings (171,142,655) (10,525,000)
Deferred financing costs (17,798,912) (904,862)
Payments of capital leases (938,343) (1,294,630)
Proceeds from issuance of preferred stock,
net of issuance costs 167,432,124 (113,215)
Proceeds from issuance of common stock warrants 52,885,650 --
Proceeds from exercise of common stock options and warrants 1,070,868 --
Purchase and retirement of common stock (21,742,695) --
Proceeds from repayment of stock related notes receivable 1,939,188 --
Capital contribution from shareholder 372,881 --
------------- ------------
Net cash provided by financing 288,403,106 22,362,293
activities ------------- ------------
Net increase (decrease) in cash 4,656,917 (1,612,571)
Cash at beginning of period 3,807,417 3,615,087
------------- ------------
Cash at end of period $ 8,464,334 $ 2,002,516
============= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
HQ GLOBAL HOLDINGS, INC. CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED) FOR THE SIX
MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Redeemable Convertible Preferred Stock
--------------------------------------
VANTAS
--------------------------------------
Note
Shares Amount Receivable
------ ------ ----------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1999 29,837,272 $ 154,041,585 $(950,000)
Adjustments to retroactively reflect the exchange
ratio in the HQ Merger -- -- --
---------- ------------- ---------
Balances December 31, 1999, as adjusted 29,837,272 154,041,585 (950,000)
Exercise of common stock options and warrants -- -- --
Contribution of capital from shareholder -- -- --
Issuance of preferred stock of VANTAS 3,885,245 25,317,774 --
Accretion of Series B through Series E
Convertible Preferred Stock of VANTAS -- 4,308,931 --
Transactions relating to the HQ Merger:
Repurchase and cancellation of common stock
held by former stockholders of VANTAS -- -- 950,000
Conversion of Series A through Series E
Redeemable Convertible Preferred Stock of (33,722,517) (183,668,290) --
VANTAS
Issuance of Series A Convertible Preferred Stock 4,782,692 142,114,350
Capital contributions by FrontLine Capital Group -- -- --
Issuance of common stock, warrants and options
in the HQ Merger -- -- --
Issuance of warrants to purchase common stock
in connection with the issuance of the Series A
Redeemable Convertible Preferred Stock -- -- --
Issuance of warrants to purchase common stock
in connection with the issuance of notes -- -- --
payable
Issuance of restricted stock -- -- --
Amortization of unearned stock compensation -- -- --
Accretion of Series A Convertible Preferred Stock -- 2,377,455 --
Net loss -- -- --
---------- ------------- ---------
Balances, June 30, 2000 4,782,692 $ 144,491,805 $ --
========== ============= =========
</TABLE>
<TABLE>
<CAPTION>
Redeemable Convertible Preferred Stock
----------------------------------------
HQ Global
-------------------------
Shares Amount Total
Balances, December 31, 1999 ------ ------ -------------
<S> <C> <C> <C>
-- -- $ 153,091,585
Adjustments to retroactively reflect the exchange
ratio in the HQ Merger -- -- --
------ ------ -------------
Balances December 31, 1999, as adjusted -- -- 153,091,585
Exercise of common stock options and warrants
Contribution of capital from shareholder -- -- --
Issuance of preferred stock of VANTAS -- -- 25,317,774
Accretion of Series B through Series E
Convertible Preferred Stock of VANTAS -- -- 4,308,931
Transactions relating to the HQ Merger:
Repurchase and cancellation of common stock
held by former stockholders of VANTAS -- -- 950,000
Conversion of Series A through Series E
Redeemable Convertible Preferred Stock of -- -- (183,668,290)
VANTAS
Issuance of Series A Convertible Preferred Stock
Capital contributions by FrontLine Capital Group -- -- 142,114,350
Issuance of common stock, warrants and options
in the HQ Merger -- -- --
Issuance of warrants to purchase common stock
in connection with the issuance of the Series
A Redeemable Convertible Preferred Stock -- -- --
Issuance of warrants to purchase common stock
in connection with the issuance of notes -- -- --
payable
Issuance of restricted stock -- -- --
Amortization of unearned stock compensation -- -- --
Accretion of Series A Convertible Preferred Stock -- -- 2,377,455
Net loss -- -- --
-- --- -------------
Balances, June 30, 2000 -- $-- $ 144,491,805
== === =============
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity
------------------------------------------------------------------
Voting Common Stock Nonvoting Common Stock
-------------------------------- --------------------------------
Shares Amount Shares Amount
--------------- --------------- --------------- ---------------
<S> <C> <C> <C>
Balances, December 31, 1999 7,064,222 $ 70,642 -- $ --
Adjustments to retroactively reflect the exchange
ratio in the HQ Merger (5,249,423) (52,494) -- --
---------- -------- -------- --------
Balances December 31, 1999, as adjusted 1,814,799 18,148 -- --
Exercise of common stock options and warrants 144,727 1,447 -- --
Contribution of capital from shareholder -- -- -- --
Issuance of preferred stock of VANTAS -- -- -- --
Accretion of Series B through Series E
Convertible Preferred Stock of VANTAS -- -- -- --
Transactions relating to the HQ Merger:
Repurchase and cancellation of common stock
held by former stockholders of VANTAS (1,959,526) (19,595) -- --
Conversion of Series A through Series E
Redeemable Convertible Preferred Stock of 8,663,315 86,633 -- --
VANTAS
Issuance of Series A Convertible Preferred Stock -- -- -- --
Capital contributions by FrontLine Capital Group -- -- -- --
Issuance of common stock, warrants and options
in the HQ Merger 1,082,353 10,824 2,152,988 21,530
Issuance of warrants to purchase common stock
in connection with the issuance of the Series A
Redeemable Convertible Preferred Stock -- -- -- --
Issuance of warrants to purchase common stock
in connection with the issuance of notes -- -- -- --
payable
Issuance of restricted stock 156,397 1,564 -- --
Amortization of unearned stock compensation -- -- -- --
Accretion of Series A Convertible Preferred Stock -- -- -- --
Net loss -- -- -- --
-------- -------- -------- --------
Balances, June 30, 2000 9,902,065 $ 99,021 2,152,988 $ 21,530
========= ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity
-------------------------------------------------
Additional Unearned
Paid-in Stock Note
Capital Compensation Receivable
--------------- --------------- ---------------
<S> <C> <C> <C>
Balances, December 31, 1999 $ -- $ -- $ (945,072)
Adjustments to retroactively reflect the exchange
ratio in the HQ Merger 52,494 -- --
------------ ---------- ----------
Balances December 31, 1999, as adjusted 52,494 -- (945,072)
Exercise of common stock options and warrants 1,113,537 (30,912)
Contribution of capital from shareholder 372,881 -- --
Issuance of preferred stock of VANTAS -- -- --
Accretion of Series B through Series E
Convertible Preferred Stock of VANTAS (1,538,912) -- --
Transactions relating to the HQ Merger:
Repurchase and cancellation of common stock
held by former stockholders of VANTAS (21,723,101) -- 975,984
Conversion of Series A through Series E
Redeemable Convertible Preferred Stock of 183,581,656 -- --
VANTAS
Issuance of Series A Convertible Preferred Stock -- -- --
Capital contributions by FrontLine Capital Group 5,603,646 -- --
Issuance of common stock, warrants and options
in the HQ Merger 120,024,237
Issuance of warrants to purchase common stock
in connection with the issuance of the Series A
Redeemable Convertible Preferred Stock 52,885,650 -- --
Issuance of warrants to purchase common stock
in connection with the issuance of notes 18,424,711 -- --
payable
Issuance of restricted stock 5,717,874 (5,719,438) --
Amortization of unearned stock compensation -- 125,405 --
Accretion of Series A Convertible Preferred Stock (2,377,455) -- --
Net loss -- -- --
------------ ---------- ----------
Balances, June 30, 2000 $362,137,218 $(5,594,033) $ --
============ =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity
------------------------------
Accumulated
Deficit Total
------------- ------------
<S> <C> <C>
Balances, December 31, 1999 $(32,669,130) $(33,543,560)
Adjustments to retroactively reflect the exchange
ratio in the HQ Merger -- --
------------ ------------
Balances December 31, 1999, as adjusted (32,669,130) (33,543,560)
Exercise of common stock options and warrants 1,084,072
Contribution of capital from shareholder -- 372,881
Issuance of preferred stock of VANTAS -- --
Accretion of Series B through Series E
Convertible Preferred Stock of VANTAS (2,770,019) (4,308,931)
Transactions relating to the HQ Merger:
Repurchase and cancellation of common stock
held by former stockholders of VANTAS -- (20,766,712)
Conversion of Series A through Series E
Redeemable Convertible Preferred Stock of -- 183,668,290
VANTAS
Issuance of Series A Convertible Preferred Stock -- --
Capital contributions by FrontLine Capital Group -- 5,603,646
Issuance of common stock, warrants and options
in the HQ Merger 120,056,590
Issuance of warrants to purchase common stock
in connection with the issuance of the Series A
Redeemable Convertible Preferred Stock -- 52,885,650
Issuance of warrants to purchase common stock
in connection with the issuance of notes -- 18,424,711
payable
Issuance of restricted stock -- --
Amortization of unearned stock compensation -- 125,405
Accretion of Series A Convertible Preferred Stock -- (2,377,455)
Net loss (20,054,343) (20,054,343)
------------ ------------
Balances, June 30, 2000 $(55,493,492) $301,170,244
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
HQ GLOBAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
On June 1, 2000, VANTAS Incorporated ("VANTAS", formerly ALLIANCE NATIONAL
Incorporated, and, prior to that, Executive Office Group, Inc.), a
majority-owned subsidiary of FrontLine Capital Group ("FLCG"), merged with HQ
Global Workplaces, Inc. ("Old HQ"), an affiliate of CarrAmerica Realty
Corporation ("CarrAmerica"), in a two step merger (the "HQ Merger"). As a
result of the HQ Merger, the combined company became a wholly owned subsidiary
of a newly formed parent corporation, HQ Global Holdings, Inc. ("HQ Global" or
the "Company"), under the name HQ Global Workplaces, Inc. ("HQ"). See Note 2.
HQ is the largest provider of flexible officing solutions in the world. As
of June 30, 2000, HQ owned and operated 400 business centers in 29 states, the
District of Columbia, and 8 additional countries. This included 7 business
centers under development and 15 business centers open for nine months or
less. Also included are 6 business centers managed by the Company for
unrelated third parties and 9 international joint-venture business centers
with which the Company, through its European subsidiary, HQ Holdings Limited,
is a joint venture partner with Mercury Asset Management. The Company's wholly
owned subsidiary, HQ Network Systems, Inc., is the franchiser of 45 domestic
and 33 international business centers for unrelated franchisees. The Company
provides a complete outsourced office solution through furnished and equipped
individual offices and multi-office suites available on short notice with
flexible contracts. The Company also provides business support and information
services including: telecommunications; broadband Internet access; mail room
and reception services; high-speed copying, faxing and printing services;
secretarial, desktop publishing and IT support services and various size
conference facilities, with multi-media presentation and, in certain cases,
video teleconferencing capabilities. The Company also provides similar
services for those businesses and individuals that do not require offices on a
full-time basis.
FLCG currently owns approximately 57% of the outstanding shares of common
stock of HQ Global ("Common Stock"), assuming the exercise of outstanding
warrants to purchase Common Stock at a nominal exercise price. See Note 6.
Such ownership percentage does not take into account (i) warrants to purchase
approximately 2.1 million shares (subject to increase for anti-dilution) of
Common Stock issued to the purchasers of Series A Preferred Stock described
below, (ii) any shares of Common Stock issuable upon conversion of the Series
A Preferred Stock (due to the fact that the number of such shares is dependent
upon the timing of the conversion and other factors) or (iii) outstanding
options to purchase shares of Common Stock. On a fully diluted basis and
assuming the Series A Preferred Stock converts at the merger conversion price,
FLCG currently owns approximately 42% of the common stock of HQ Global.
The consolidated financial statements include the accounts of HQ Global
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. In the opinion of
management, the consolidated financial statements for the three- and six-month
periods ended June 30, 2000 and 1999, reflect all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
financial position, operating results and cash flows for each period
presented. Results for interim periods are not necessarily indicative of
results for a full year. The December 31, 1999 consolidated balance sheet was
derived from audited financial statements of VANTAS, but does not include all
disclosures required by generally accepted accounting principles. These
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Annual Report
on Form 10-K of VANTAS for the year ended December 31, 1999.
The accompanying financial statements have been prepared using the local
currency as the functional currency. Foreign currency exchange gains and
losses resulting from the translation of financial statements denominated in
local currencies into U.S. dollars are included as a component of
stockholders' equity. As of June 30, 2000, accumulated unrealized foreign
currency translation gains and losses were not significant.
Certain prior period amounts have been reclassified to conform to the
current year presentation.
2. MERGER OF VANTAS INCORPORATED AND HQ GLOBAL WORKPLACES, INC.
As described in Note 1, on June 1, 2000, VANTAS merged with Old HQ
pursuant to the HQ Merger. As a result of the HQ Merger, the combined company
became a wholly owned subsidiary of HQ Global, under the name HQ Global
Workplaces, Inc.
During the three months ended March 31, 2000, VANTAS issued 2,072,745
shares of Series E Convertible Preferred Stock ("Series E Preferred Stock") at
$5.25 per share for net proceeds of approximately $10.9 million. Immediately
prior to the HQ Merger, VANTAS issued 1,812,500 shares of Series E Convertible
Preferred Stock to FLCG at $8.00 per share for net proceeds of approximately
$14.5 million.
In connection with the HQ Merger, (i) each share of the Class A Common
Stock of VANTAS ("VANTAS Common Stock") was converted into the right to
receive $8.00 per share in cash, (ii) each option and warrant to purchase the
common stock of VANTAS, were converted into the right to receive a per share
cash amount equal to $8.00, less the exercise price for such options or
warrants, except for certain VANTAS options which were converted into options
to purchase 12,310 shares of Common Stock, and (iii) each share of the
convertible preferred stock of VANTAS outstanding was converted into .2569
shares of Voting Common Stock of HQ Global ("Voting Common Stock"). The
payment to cancel the outstanding options held by officers and employees was
charged to merger and integration expenses in the three months ended June 30,
2000. The holders of the VANTAS preferred stock received an aggregate of
8,663,315 shares of Voting Common Stock upon conversion of the preferred
stock.
In the HQ Merger, CarrAmerica and certain other stockholders of Old HQ
received approximately $151.1 million in cash and 1,076,009 shares of Voting
Common Stock and 2,152,988 shares of Nonvoting Common Stock of HQ Global in
exchange for the 7,359,527 shares of Old HQ they held. In addition, options to
purchase shares of Old HQ common stock and stock units were cancelled for
approximately $10.8 million in cash, warrants to purchase 101,000 shares of
Old HQ common stock at an exercise price of $20 per share were converted into
warrants to purchase an equal number of shares of Common Stock with the same
terms, and options to purchase 14,000 shares of Old HQ common stock were
converted into 6,344 shares of Common Stock.
Because the former VANTAS stockholders received approximately 66% of the
outstanding shares of Common Stock, the HQ Merger has been accounted for as a
purchase of Old HQ by VANTAS. As a result, the consolidated financial
statements of HQ Global include the assets and liabilities of VANTAS at their
respective historical carrying amounts and include the results of its
operations for all periods presented. All historical share and per share
information has been retroactively adjusted based on an effective conversion
rate of one share of VANTAS Common Stock into .2569 shares of Common Stock.
HQ Global also acquired the interests of CarrAmerica in OmniOffices (UK)
Limited and OmniOffices (Lux) 1929 Holding Company S.A. (collectively
"OmniOffices UK"), two companies engaged in the executive office suites
business outside of the United States, for approximately $90.2 million in
cash. The aggregate cost of the HQ Merger and the acquisition of OmniOffices
UK consisted of the following (in thousands):
Cash paid to former Old HQ shareholders
$151,058 Cash paid to former Old HQ option, and
stock unit holders 10,754 Cash paid to acquire
OmniOffices 90,176 3,235,341 shares of Common
Stock issued to Old HQ
shareholders and option holders 118,381
Warrants to purchase 101,000 shares of Common
Stock issued to Old HQ warrant holders 1,676
Investment advisor, legal, accounting, and other
professional fees
and other expenses 20,076
--------
$392,121
========
The costs of the HQ Merger and the acquisition of OmniOffices have been
allocated to the respective assets acquired and liabilities assumed of Old HQ
and OmniOffices, with the remainder recorded as goodwill, based on preliminary
estimates of fair values as follows (in thousands):
Working capital $ (14,841)
Favorable operating 22,900
leases
Property and equipment 107,047
Goodwill 396,404
Other assets 32,504
Other liabilities (13,200)
Notes payable repaid (138,693)
----------
$ 392,121
==========
The estimates of fair value were determined by the Company's management
based on information furnished by the management of Old HQ and OmniOffices.
The goodwill recorded in the HQ Merger is being amortized over a 20-year
period based on management's assessment of the significant barriers to entry
due to the rapid consolidation in the executive suites business and the lack
of exposure to technological obsolescence in the global officing solutions
business. The Company engages in lease commitments ranging from 10-15 years,
typically with 5 year renewal options. The results of operations of Old HQ and
OmniOffices are included in the consolidated results of HQ Global for periods
subsequent to June 1, 2000.
In connection with the HQ Merger, HQ Global issued 4,782,692 shares of
Series A Convertible Cumulative Preferred Stock ("Series A Preferred"),
warrants to purchase up to 1,445,358 shares of Common Stock exercisable at a
price of $.01 per share (the "Series A Warrants"), and warrants to purchase up
to 697,964 shares of Common Stock exercisable at a price of $.01 per share
under certain conditions (the "Series B Warrants") for a total consideration
of $195 million. See Notes 5 and 6.
Merger and integration costs related to the HQ Merger incurred and charged
to expense during the six-month period ended June 30, 2000 include the
following (in thousands):
Payments to cancel options to purchase VANTAS common stock
held by officers and employees $ 11,382
Severance, retention incentives and other benefits 6,225
Professional fees and other expenses 1,834
--------
$ 19,441
========
Of the total merger and integration costs incurred through June 30, 2000
of $19.4 million, approximately $15.9 million required cash outlays. At June
30, 2000, the remaining balance to be paid totaled approximately $3.5 million,
relating to employee severance, retention incentives, and other benefits, and
relocation costs.
In connection with the HQ Merger, HQ Global is consolidating and
relocating the former headquarters of VANTAS and Old HQ in New York, New York
and Atlanta, Georgia, respectively, into a new corporate headquarters in
Dallas, Texas. Due to the HQ Merger and pending relocations, VANTAS and Old HQ
entered into incentive bonus agreements with certain key executives and
employees, which bonuses will be earned as long as such executives and
employees remain with the Company through a specified date. Relocation costs
and retention incentives are being charged to expense as incurred.
3. EARNINGS (LOSS) PER SHARE INFORMATION
Basic earnings (loss) per common share is computed by dividing income
(loss) applicable to common stockholders by the weighted average number of
common shares outstanding during each period. Diluted earnings (loss)
applicable to common stockholders is computed by dividing income (loss)
applicable to common stockholders by the weighted average number of common
shares outstanding during each period and common equivalent shares consisting
of preferred stock, stock options and warrants, if dilutive.
4. NOTES PAYABLE
On May 31, 2000, the Company completed a transaction which increased its
$157.9 million credit facility (the amended and restated "Credit Facility") to
$275.0 million. The Credit Facility provides for $219.4 million under four
term loans, all of which are repayable in various quarterly installments
through November 2005. The Credit Facility also provides for borrowings up to
$55.6 million in two revolving loan commitments. Availabilities under the
revolving portion of the Credit Facility are formula based. As of June 30,
2000, there was $219.4 million in outstanding borrowings under the term loans
and $20.1 million in borrowings outstanding under one revolver. At June 30,
2000, $10.5 million was available for additional borrowings under the
revolving loan commitments.
Borrowings under the Credit Facility bear interest ranging from LIBOR plus
3.25% to 4.0% or PRIME plus 2.25% to 3.00% for a one, three or nine month
period at the election of the Company. The Company's weighted average interest
rate on borrowings under the term loans at June 30, 2000 was approximately
11.48%. The Company converted to a LIBOR option on July 5, 2000. The Company
pays a commitment fee of 1/2 of 1.0% per annum on the unused portion of the
Credit Facility. As of June 30, 2000, the Company had hedged the interest rate
on approximately $46 million of borrowings under the Credit Facility using
various instruments with various expiration dates through July 31, 2002. These
instruments lock in the maximum underlying 30 day LIBOR rate at 7.93%. The
Credit Facility contains certain financial covenants related to interest
coverage, leverage ratios and other limitations. At June 30, 2000, the Company
was in compliance with all of its covenants.
Maturities of borrowings outstanding under the Credit Facility subsequent to
June 30, 2000 are as follows:
Twelve months ending June 30 (in millions):
2001 $ 35.4
2002 23.6
2003 23.5
2004 47.1
2005 70.9
Thereafter 39.0
--------
Total $ 239.5
========
On May 31, 2000, the Company entered into a Senior Subordinated Credit
Facility (the "Bridge Loan") of $125.0 million provided by UBS Warburg LLC.
The Bridge Loan bears interest at LIBOR plus 6.5% and matures on May 31, 2007.
On August 11, 2000, the Company replaced the Bridge Loan with a $125.0
million Senior Subordinated Note Agreement (the "Mezzanine Loan"). The
Mezzanine Loan bears interest at 13.5% per annum and matures on May 31, 2007.
The Mezzanine lenders received 503,545 Class A warrants and 227,163 Class B
warrants.
The terms of the Class A warrants and Class B warrants are identical
except that Class A warrants are exercisable at the option of the holder at
any time and Class B warrants are exercisable on or after March 1, 2002, but
only in the event that a Qualified Initial Public Offering (as defined in the
Purchase Agreements) has not occurred prior to that date.
As of June 30, 2000, the Company had letters of credit outstanding in the
aggregate amount of $26.9 million, of which the Company pledged $5.5 million
and $21.4 million were supported by FrontLine Capital Group.
The fair value of the warrants to purchase Common Stock issued to the
lenders was recorded as debt issuance costs and is being amortized over the
terms of the related loan. Such amortization is included as a component of
interest expense in the accompanying statements of operations.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the HQ Merger, all issued and outstanding shares of
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series D Convertible Preferred Stock and
Series E Convertible Preferred Stock of VANTAS were converted into an
aggregate of 8,663,315 shares of Voting Common Stock on June 1, 2000 (Note 2).
The Company has authorized 7,500,000 shares of $0.01 par value preferred
stock, of which 5,395,858 shares have been designated as Series A Convertible
Cumulative Preferred Stock.
To finance a portion of the cash requirements of the HQ Merger, the
Company issued 4,782,692 shares Series A Preferred, Series A Warrants and
Series B Warrants to new investors for a total consideration of $195.0
million.
Holders of the shares of Series A Preferred are entitled to receive
dividends, when, as and if authorized by the Board of Directors, equal to the
dividend rate, as defined, multiplied by the liquidation amount per share of
Series A Preferred. The initial dividend rate is 13.5% per annum, increasing
by 0.50% per annum on May 31, 2001 and on each annual anniversary date
thereafter until November 30, 2007 or earlier redemption, conversion or
liquidation. Dividends on the Series A Preferred are cumulative from May 31,
2000 and are payable semiannually in arrears on May 31 and November 30 of each
year, commencing November 30, 2000. Payment of all such dividends occurs on
each dividend payment date through an increase in the liquidation preference
of each share. Holders of the Series A Preferred are also entitled to
additional dividends if dividends in the form of cash or other consideration
are declared on the Common Stock or other equity securities junior to the
Series A Preferred.
On or after May 31, 2004, HQ Global may redeem shares of the Series A
Preferred, in whole or in part, from time to time, for cash at a redemption
price per share which is initially equal to 105% of the liquidation
preference, declining ratably on each anniversary of May 31, 2004 until
reaching 100% of the liquidation preference on May 31, 2007. All of the
outstanding shares of Series A Preferred must be redeemed in cash on November
30, 2007 ("Mandatory Redemption Date"), at a redemption price equal to 100% of
the liquidation preference per share.
Upon the consummation of a Qualified Initial Public Offering or Qualified
Merger, as defined, each share of Series A Preferred automatically converts
into shares of Common Stock at the Conversion Rate (the liquidation preference
divided by the applicable conversion price). Upon the occurrence of certain
other events (Conversion Option Event), holders of the Series A Preferred have
the option to convert shares of Series A Preferred into Common Stock at the
Conversion Rate. In the event that a Qualified Merger, a Qualified Initial
Public Offering or a Conversion Option Event has not occurred prior to the
close of business on the last business day immediately preceding the Mandatory
Redemption Date, holders of the Series A Preferred have the right to convert
their shares into shares of Common Stock on the Mandatory Redemption Date at
the Conversion Rate. Assuming the conversion price was equal to the value of
the Common Stock utilized to record the Mergers, the Series A Preferred Stock
would be convertible into 5,329,324 shares of Common Stock at June 30, 2000.
In general, holders of the Series A Preferred vote together with the
holders of Common Stock as a single class on an as converted basis. In
addition, prior to a Qualified IPO or a Qualified Merger, the consent of the
holders of at least 62.5% of the outstanding shares of Series A Preferred are
required for certain corporate actions, including sales or purchases of
certain assets or businesses, mergers, liquidation, and the incurrence of
certain indebtedness.
The fair value of the Series A Warrants has been recorded as an increase
in additional paid-in capital with on offsetting reduction in the carrying
value of the Series A Preferred Stock. No value will be assigned to the Series
B Warrants until such time as it becomes probable the Series B Warrants will
become exercisable by the holders.
The carrying value of the Series A Preferred Stock is being accreted to
its liquidation value on November 30, 2007, including accrued dividends, using
the effective interest rate method, resulting in an effective dividend rate of
20.08%.
On August 11, 2000, the Company issued 613,166 additional shares of Series
A Preferred in the amount of $25.0 million. In connection with this sale, the
Company issued 312,274 Class A warrants and 164,902 Class B warrants.
6. COMMON STOCKHOLDERS' EQUITY
General
The Company has authorized 100 million shares of $0.01 common stock of
which 75 million shares have been designated as Voting Common Stock and 25
million shares have been designated as Nonvoting Class C Common Stock
("Nonvoting Common Stock"). Each share of Voting Common Stock has one vote on
each matter submitted to a vote of the stockholders. Each share of Nonvoting
Common Stock does not have any vote on such matters, except as required by
law. The Nonvoting Common Stock will convert into Voting Common Stock upon i)
the transfer by the holder to another person or entity (other than an entity
in which such holder directly or indirectly owns more than 9.9% of the voting
securities) or ii) January 1, 2001.
Warrants
At June 30, 2000, the Series A Warrants can be exercised at any time up to
and including May 31, 2010 to purchase 1,445,358 shares of Common Stock at an
exercise price of $0.01 per share. The Series B Warrants only become
exercisable on or after March 31, 2001 if a Qualified Initial Public Offering
has not occurred prior to that date. If exercisable, the Series B Warrants
could be exercised to purchase 697,964 shares of Common Stock at an exercise
price of $0.01 per share. The Series B Warrants expire May 31, 2010.
The Mezzanine lenders received 503,545 Class A warrants and 227,163 Class
B warrants to purchase common stock. In addition, on August 11, 2000 the
Company issued 312,274 Class A warrants and 164,902 Class B warrants to the
purchasers of the additional shares of Series A Preferred. These warrants
expire August 11, 2010.
In the HQ Merger, the Company assumed warrants to purchase 101,000 shares
of common stock at an exercise price of $20 per share.
Stock Plans
In the HQ Merger, all existing options to purchase the common stock of
VANTAS were converted to the right to receive cash, except for certain VANTAS
options, which were converted into options to purchase 12,310 shares of Common
Stock. All existing options to purchase the common stock of Old HQ were
cancelled in exchange for cash payments except for 14,000 options, which were
converted to 6,344 shares of Common Stock of HQ Global. See Note 2.
Effective June 1, 2000, the Company adopted the HQ Global Holdings, Inc.
2000 Stock Option and Restricted Stock Plan (the "Plan") which provides for
grants of incentive stock options, nonqualified stock options, and restricted
stock to be granted to officers and key employees. HQ has reserved 800,000
shares of Common Stock for issuance upon exercise of options granted pursuant
to the Plan. The Board of Directors establishes the terms of each option
granted under the Plan. In June 2000, options to purchase 510,269 shares of
Common Stock at an exercise price of $ 36.57 were granted to officers and
employees. The options vest over 4 years and expire 10 years from date of
grant. Effective June 1, 2000, the Company also granted 156,397 shares of
Common Stock to certain officers and employees which vest over a four year
period, with 37.5% vesting 18 months from the date of grant and 12.5% vesting
each six months thereafter. The grants of restricted common stock resulted in
aggregate deferred stock option compensation expense of $5.7 million, which is
being recognized over the vesting period.
7. CHANGE IN ACCOUNTING ESTIMATE
In connection with the HQ Merger, the Company reassessed the estimated
life of goodwill resulting from acquisitions of businesses and business
centers. As a result, the amortization period for goodwill was reduced from 30
years to 20 years resulting in a pre-tax charge of $305,095.
8. INCOME TAXES
The tax provision for the three and six months ended June 30, 2000
consists principally of state and foreign income taxes. As of June 30, 2000,
the Company's deferred tax assets have been fully reserved because of the
uncertainty of the timing and amount of future taxable income.
Unaudited Pro Forma Consolidated Financial Statements
The following unaudited pro forma financial statements are presented for
illustrative purposes only and are not indicative of the financial position or
results of operations of future periods or the results that actually would
have been realized had FrontLine Capital Group's ("FrontLine") majority owned
subsidiary VANTAS Incorporated ("VANTAS") merged (the "Merger") with and into
HQ Global Workplaces, Inc. ("HQ") with the new merged entity retaining the
name HQ Global Holdings, Inc. ("HQ Global"). Refer to the accompanying HQ
Global unaudited pro forma notes to Statements of Operations for more details
on the Merger. As a result of the Merger, FrontLine's basic voting ownership
percentage in HQ Global is 57%. This transaction was funded with draws under
credit facilities and $195 million in preferred equity from investors. The pro
forma financial statements, including the notes thereto, are qualified in
their entirety by reference to, and should be read in conjunction with, (i)
the historical financial statements of FrontLine as included in its Form 10-Q
for the six months ended June 30, 2000, and its Form 10-K for the year ended
December 31, 1999, and, (ii) the historical financial statements of HQ Global
as included in this Form 8-K for the six months ended June 30, 2000, and (iii)
the historical financial statements of VANTAS for the year ended December 31,
1999 included on Form 8-K dated February 28, 2000, and (iv) the historical
financial statements of HQ for the year ended December 31, 1999 included
on Form 8-K dated February 28,2000.
The following pro forma financial statements of FrontLine give effect to the
Merger. The pro forma financial statements are based on the
historical financial statements and the notes thereto of FrontLine, VANTAS, HQ
and HQ Global. The pro forma adjustments are based on management's estimates
of the value of the tangible and intangible assets acquired.
The pro forma statements of operations of FrontLine for the six
months ended June 30, 2000 and the year ended December 31, 1999 assume that
the Merger occurred as of January 1, 1999.
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
(Dollars in thousands, except share amounts)
(UNAUDITED)
FRONTLINE
HISTORICAL AND
PRO FORMA (9)
--------------
ASSETS
------
Cash and cash equivalents $25,239
Restricted cash 7,525
Accounts receivables 22,970
Other current assets 19,616
--------------
Total Current Assets 75,350
Ownership interests in and
advances to unconsolidated companies 99,962
Intangible assets, net 676,457
Property and equipment, net 210,871
Deferred financing costs 44,300
Other assets, net 65,360
--------------
TOTAL ASSETS $1,172,300
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $51,924
Current portion of notes payable 35,475
Deferred rent payable 4,654
Other current liabilities 2,729
--------------
Total Current Liabilities 94,782
Credit facilities with related parties 131,243
Senior secured debt 204,025
Subordinated notes payable 125,000
Deferred rent payable 29,845
Other liabilities 75,920
--------------
TOTAL LIABILITIES 660,815
--------------
Minority Interest 276,329
Commitments and Contingencies
SHAREHOLDERS' EQUITY
--------------------
Preferred Stock, $.01 par value -
Common Stock, $.01 par value 360
Additional paid in capital 390,185
Accumulated deficit (155,389)
--------------
TOTAL SHAREHOLDERS' EQUITY 235,156
--------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,172,300
==============
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(Dollars in thousands, except share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
HQ HISTORICAL
FRONTLINE 5 MONTHS ENDED PRO FORMA FRONTLINE
HISTORICAL MAY 31, 2000 (1) ADJUSTMENTS (4) PRO FORMA
-------------- -------------- ------------- ------------
REVENUES
--------
<S> <C> <C> <C> <C>
Executive office suite income $94,156 $81,897 $- $176,053
Support services 67,198 46,303 - 113,501
-------------- -------------- ------------- ------------
Total operating revenues 161,354 128,200 - 289,554
-------------- -------------- ------------- ------------
OPERATING EXPENSES
------------------
Cost of revenue 118,871 88,780 1,000 (2) 208,651
Partner Company general and administrative 17,286 18,462 (7,760) (2) 27,988
-------------- -------------- ------------- ------------
Total operating expenses 136,157 107,242 (6,760) 236,639
-------------- -------------- ------------- ------------
Partner Company Operating income 25,197 20,958 6,760 52,915
-------------- -------------- ------------- ------------
PARTNER COMPANY OTHER INCOME (EXPENSES)
---------------------------------------
Development stage Partner Company expenses (3,706) - - (3,706)
Merger and integration costs (19,441) (5,149) 24,590 (2) -
Depreciation and amortization (16,194) (10,755) (14,005) (2),(5) (40,954)
Interest expense, net (10,227) (6,207) (8,007) (2) (24,441)
-------------- -------------- ------------- ------------
Partner Company Loss (24,371) (1,153) 9,338 (16,186)
CORPORATE INCOME (EXPENSES)
---------------------------
General and administrative expenses (9,939) - - (9,939)
New hire expenses (1,032) - - (1,032)
Depreciation and amortization (399) - - (399)
Amortization of deferred charges (5,530) - - (5,530)
Interest expense, net (10,009) - - (10,009)
-------------- -------------- ------------- ------------
Income (Loss) before income taxes, minority interest,
equity in loss of unconsolidated companies,
extraordinary loss and distribution to Preferred
Shareholder (51,280) (1,153) 9,338 (43,095)
-------------- -------------- ------------- ------------
Minority Interest 1,098 - (15,928) (2)(3) (14,830)
-
Provision for income taxes (470) (99) - (569)
Equity in earnings (loss) of unconsolidated companies (52,914) - - (52,914)
-------------- -------------- ------------- ------------
Income (Loss) Before extraordinary loss and
distribution to Preferred Shareholder (103,566) (1,252) (6,590) (111,408)
Extraordinary loss on extinguishment of debt (2,648) - - (2,648)
Distribution to preferred shareholders (923) - - (923)
-------------- -------------- ------------- ------------
Net Income (Loss) Applicable to Common Shareholders $(107,137) $(1,252) $(6,590) $(114,979)
============== ============== ============= ============
Basic and diluted net loss per weighted average
common share ($3.22) ($3.32)
============== ============
Basic and diluted weighted average common shares
outstanding 33,300,693 1,383,029 (8) 34,683,722
============== ============= ============
</TABLE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands, except share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
FRONTLINE VANTAS HQ GLOBAL PRO FORMA FRONTLINE
HISTORICAL HISTORICAL (6) PRO FORMA (7) ADJUSTMENTS (4) PRO FORMA
------------- ------------- ------------ ------------ ------------
REVENUES
<S> <C> <C> <C> <C> <C>
Executive office suite income $124,564 $(124,564) $287,589 $- $287,589
Support services and other 90,812 (90,479) 185,671 - 186,004
------------- ------------- ------------ ------------ ------------
Total operating revenues 215,376 (215,043) 473,260 - 473,593
------------- ------------- ------------ ------------ ------------
OPERATING EXPENSES
Cost of revenue 175,454 (175,454) 251,526 - 251,526
Partner Company general and administrative
expenses 11,995 (11,996) 158,900 - 158,899
------------- ------------- ------------ ------------ ------------
Total operating expenses 187,449 (187,450) 410,426 - 410,425
------------- ------------- ------------ ------------ ------------
Partner Company Operating income 27,927 (27,593) 62,834 - 63,168
------------- ------------- ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Merger and integration costs (26,730) 26,730 - - -
Corporate general and administrative expenses (9,509) - - - (9,509)
Depreciation and amortization (15,680) 14,858 (65,939) (3,792) (5) (70,553)
Amortization of deferred charges (8,455) - - - (8,455)
Interest income (expense) (18,432) 10,265 (49,953) - (58,120)
------------- ----------- ------------ ------------ ------------
Loss Before minority interest, income tax
benefit (expense) equity in loss of
Partner Companies and other ownership interest (50,879) 24,260 (53,058) (3,792) (83,469)
------------- ------------ ------------ ------------ ------------
Income tax benefit (expense) 2,841 (2,841) (714) - (714)
Loss Before minority interest, equity in
loss of Partner Companies and other
ownership interest (48,038) 21,419 (53,772) (3,792) (84,183)
------------- ------------ ------------ ------------ ------------
Minority Interest 18,790 (18,790) (28,529) 22,476 (3) (6,053)
Equity in loss of Partner Companies and
other ownership interest (10,599) - - - (10,599)
------------- ------------ ------------ ------------ ------------
NET INCOME (LOSS) $(39,847) $2,629 $(82,301) $18,684 $(100,835)
============= ============ ============ ============ ============
Basic and diluted net loss per weighted
average common share ($1.56) ($2.91)
============= ============
Basic and diluted weighted average
common shares outstanding 25,600,985 9,082,737 (8) 34,683,722
============= ============ ============
</TABLE>
Notes to Unaudited Pro Forma Consolidated Financial Statements:
(1) Represents the adjustment to reflect the operations of business
centers of HQ for the five months ended May 31, 2000, which were not
included in the historical results of operations of FrontLine and HQ
Global for the six months ended June 30, 2000.
(2) Represents pro forma adjustments, to reflect the VANTAS, HQ merger,
see accompanying HQ Global pro forma financial statements and
footnotes for the six months ended June 30, 2000, for more detail.
(3) Represents adjustment to minority interest of HQ Global at
approximately 42%, as a result of FrontLine's consolidation of HQ
Global.
(4) The FrontLine unaudited pro forma results of operations for the six
months ended June 30, 2000 and the year ended December 31,1999 assume
that the VANTAS merger with HQ, occurred on January 1,1999,as adjusted
for the impact of completed and pending acquisitions and the Merger.
(5) Represents amortization expense of goodwill associated with the VANTAS
and HQ merger, as if the merger occurred on January 1,1999. Goodwill is
being amortized over a 20 year period based on FrontLine's assessment
of the significant barriers to entry due to the rapid consolidation in
the executive suites business and the continuing value of the HQ
trademark. The goodwill adjustment represents amortization for six and
twelve months, respectively, which were not included in the historical
results.
(6) Represents elimination of VANTAS historical statement of operations
for the year ended December 31, 1999, which have been included in
FrontLine's historical amounts. As a result of the Merger, VANTAS will
first be consolidated into HQ Global and then into FrontLine.
(7) Represents HQ Global's unaudited pro forma statement of operations for
the year ended December 31, 1999. The pro forma financial statements
are based upon the December 31, 1999 historical financial statements
of HQ and VANTAS, as adjusted for the impact of completed and pending
acquisitions and the Merger.
(8) Represents the number of common stock shares outstanding as of June 30,
2000.
(9) The historical and pro forma balance sheet of FrontLine as of June 30,
2000 are the same, as the Merger has been reflected in the historical
amounts, therefore no material adjustments are necessary.
HQ Global Holdings, Inc.
Unaudited Pro Forma Consolidated Statements of Operations
On June 1, 2000, VANTAS Incorporated ("VANTAS"), a majority-owned
subsidiary of FrontLine Capital Group ("FrontLine"), merged with HQ Global
Workplaces, Inc.("HQ"), an affiliate of CarrAmerica Realty Corporation
("CarrAmerica"), in a two step merger ("HQ Merger"). As a result of the HQ
Merger, the combined company became a wholly owned subsidiary of a newly
formed parent corporation, HQ Global Holdings, Inc. ("HQ Global" or the
"Company"), under the name HQ Global Workplaces, Inc. ("HQ").
In connection with the HQ Merger, (i) each share of the Class A
Common Stock of VANTAS ("VANTAS Common Stock") was converted into the right to
receive $8.00 per share in cash; (ii) each option and warrant to purchase the
common stock of VANTAS, were converted into the right to receive a per share
cash amount equal to $8.00, less the exercise price for such options or
warrants, except for certain VANTAS options which were converted into options
to purchase 12,310 shares of Voting Common Stock of HQ Global ("Voting
Common Stock"), and (iii) each share of the convertible preferred stock of
VANTAS outstanding was converted into .2569 shares of Voting Common Stock. The
payment to cancel the outstanding options held by officers and employees was
charged to merger and integration expenses in the three months ended June 30,
2000. The holders of the VANTAS preferred stock received an aggregate of
8,663,315 shares of Voting Common Stock upon conversion of the preferred
stock.
In the HQ Merger, CarrAmerica and certain other stockholders of
HQ received approximately $151.1 million in cash and 1,076,009 shares of Voting
Common Stock and 2,152,988 shares of Nonvoting Common Stock of HQ Global in
exchange for the 7,359,527 shares of HQ they held. In addition, options to
purchase shares of HQ common stock and stock units were cancelled for
approximately $10.8 million in cash, warrants to purchase 101,000 shares of
HQ common stock at an exercise price of $20 per share were converted into
warrants to purchase an equal number of shares of Common Stock with the same
terms, and options to purchase 14,000 shares of HQ common stock were
converted into 6,344 shares of Voting Common Stock.
Because the former VANTAS shareholders received approximately 66% of
the outstanding shares of common stock of HQ Global, the HQ Merger has been
accounted for as a purchase of HQ by VANTAS. As a result, the consolidated
financial statements of HQ Global include the assets and liabilities of
VANTAS at their respective historical carrying amounts and include the results
of its operations for all periods presented. All historical share and per
share information have been retroactively adjusted based on an effective
conversion rate of one share of VANTAS Common Stock into .2569 shares of
Common Stock.
HQ Global also acquired the interests of CarrAmerica in OmniOffices
(UK) Limited and OmniOffices (Lux) 1929 Holding Company S.A. (collectively
"OmniOffices UK"), two companies engaged in the executive office suites business
outside of the United States, for approximately $90.2 million in cash.
The following unaudited pro forma statements of operations of HQ
Global give effect to the HQ Merger and the acquisition of OmniOffices UK as if
such transactions had occurred as of January 1, 1999. The pro forma statements
of operations are based on the historical financial statements and the notes
thereto of HQ Global, VANTAS, HQ and OmniOffices UK. The unaudited pro forma
condensed combined financial statements are based on the estimates and
assumptions set forth in the notes, including management's estimates of the
value of the tangible and intangible assets acquired. These estimates and
assumptions are preliminary and have been made solely for purposes of
developing this pro forma information. The pro forma statements of operations
are presented for illustrative purposes only and are not indicative of the
actual results of operations which would have been achieved had the HQ Merger
and acquisition of OmniOffices UK occurred on January 1, 1999, nor are they
indicative of the future results of operations of HQ Global.
The pro forma financial statements, including the notes thereto, are
qualified in their entirety by reference to, and should be read in conjunction
with, (i) the historical financial statements of HQ Global as filed in its
Form 10-Q for the six months ended June 30, 2000, (ii) the historical
financial statements of VANTAS as filed in its Form 10-K for the year ended
December 31, 1999, and (iii) the historical financial statements of HQ and
OmniOffices UK as filed in the Form 8-K of VANTAS dated February 28, 2000.
HQ GLOBAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
VANTAS HQ PRO FORMA COMBINED
PRO FORMA (1) PRO FORMA (2) ADJUSTMENTS PRO FORMA
------------- --------------- ------------- ------------
REVENUES
<S> <C> <C> <C> <C>
Executive office suite income $132,081 $155,508 $- $287,589
Support services 95,452 90,219 - 185,671
------------- --------------- ------------- ------------
227,533 245,727 - 473,260
------------- --------------- ------------- ------------
EXPENSES
Cost of revenue 119,748 129,378 2,400 (4) 251,526
Center general and administrative 51,660 44,086 (16,780) (5) 78,966
------------- --------------- ------------- ------------
171,408 173,464 (14,380) 330,492
------------- --------------- ------------- ------------
Contribution from operations of
business centers 56,125 72,263 14,380 142,768
------------- --------------- ------------- ------------
OTHER (EXPENSES) INCOME
Corporate general and administrative
expense (25,659) (52,763) (1,512) (6) (79,934)
Merger and integration (26,730) - 26,730 (7) -
Depreciation and amortization (15,487) (20,632) (29,820) (8) (65,939)
Interest expense, net (11,263) (12,228) (26,462) (9) (49,953)
-
------------- --------------- ------------- ------------
(79,139) (85,623) (31,064) (195,826)
------------- --------------- ------------- ------------
loss before benefit for income taxes (23,014) (13,360) (16,684) (53,056)
Benefit for income taxes 2,333 1,117 (4,164) (10) (714)
------------- --------------- ------------- ------------
Net loss (20,681) (12,243) (20,848) (53,772)
Accretion of preferred stock (12,252) - (16,277) (11) (28,529)
------------- --------------- ------------- ------------
Net loss applicable to common stock $(32,933) $(12,243) $(37,125) $(82,301)
============= =============== ============= ============
Basic and diluted net loss per weighted
average common share ($24.93) ($5.87)
============= ============
Basic and diluted weighted average
common shares outstanding 1,321 12,708 (12) 14,029
============= ==================== ============
</TABLE>
See accompanying notes
HQ GLOBAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HQ HISTORICAL
HQ GLOBAL FIVE MONTHS ENDED PRO FORMA PRO FORMA
HISTORICAL MAY 31, 2000 (3) ADJUSTMENTS COMBINED
--------------- ------------------ ------------- ----------------
REVENUES:
<S> <C> <C> <C> <C>
Executive office suite income $94,156 $81,897 $- $176,053
Support services 67,031 46,303 - 113,334
--------------- ------------ ----------- --------------
161,187 128,200 - 289,387
--------------- ------------ ----------- --------------
EXPENSES:
Rent 59,723 44,168 1,000 (4) 104,891
Support services 23,871 23,485 - 47,356
Center general and administrative 35,277 21,127 (8,390) (5) 48,014
--------------- ------------ ----------- --------------
118,871 88,780 (7,390) 200,261
--------------- ------------ ----------- --------------
Contribution from operation of
business centers 42,316 39,420 7,390 89,126
--------------- ------------ ----------- --------------
OTHER (EXPENSES) INCOME
-----------------------
Corporate general and administrative (17,364) (18,462) (630) (6) (36,456)
Merger and integration (19,441) (5,149) 24,590 (7) -
Depreciation and amortization (14,946) (10,755) (12,425) (8) (38,126)
Interest expense, net (10,227) (6,207) (8,007) (9) (24,441)
Other income 78 - - 78
--------------- ------------ ----------- --------------
(61,900) (40,573) 3,528 (98,945)
--------------- ------------ ----------- --------------
Income (loss) before provision for
income taxes (19,584) (1,153) 10,918 (9,819)
Provision for income taxes (470) (99) - (569)
--------------- ------------ ----------- --------------
Net loss (20,054) (1,252) 10,918 (10,388)
Accretion of preferred stock (6,687) - (7,578) (11) (14,265)
--------------- ------------ ----------- --------------
Net loss applicable to common stock ($26,741) ($1,252) 3,340 ($24,653)
=============== ============ =========== ==============
Basic and diluted net loss per weighted
average common share ($6.82) ($1.76)
=============== ==============
Basic and diluted weighted average
common shares outstanding 3,922 10,107 (12) 14,029
=============== =========== ==============
</TABLE>
See accompanying notes
HQ Global Holdings, Inc.
Notes to Unaudited Pro Forma Consolidated Financial Statements
(1) The VANTAS pro forma results of operations for the year ended
December 31, 1999 were based on the historical results of operations
of VANTAS as adjusted for acquisitions. See Schedule I for more
detail.
(2) The HQ pro forma results of operations for the year ended
December 31, 1999 were based on historical results of operations of
HQ and OmniOffices as adjusted for acquisitions and other costs. See
Schedule II for more detail.
(3) Represents the adjustment to reflect the historical results of
operations of HQ for the five months ended May 31, 2000, which were
not included in the historical results of operations of HQ Global for
the six months ended June 30, 2000.
(4) Represents amortization of the costs allocated to favorable operating
leases recorded under purchase accounting.
(5) Adjustment reflects a reduction in general and administrative
expenses. As a result of the HQ Merger HQ Global management believes
it will realize cost savings related to (a) a reduction in the number
of (i) VANTAS corporate administrative and support employees, (ii)
termination of duplicate area district managers and client service
specialists, (b) the combination of overlapping support and
administrative systems as well as the elimination of rent, marketing,
travel and entertainment expenses.
A summarization of these savings is outlined below for the year ended December
31, 1999 (in thousands):
HQ Global
Employees Cost Pro Forma
Terminated Savings Adjustment
------------- --------- -------------
Salaries and related
benefits $ (12,150) $ - $ (12,150)
Rent expense - (1,840) (1,840)
Marketing and promotion - (1,490) (1,490)
Travel and entertainment - (1,300) (1,300)
------------- ----------- ------------
$ (12,150) $ (4,630) $ (16,780)
============= =========== ============
A summarization of these savings is outlined below for the six months
ended June 30, 2000 (in thousands)
HQ Global
Employees Cost Pro Forma
Terminated Savings Adjustment
------------- --------- -------------
Salaries and related
benefits $ (6,075) $ - $ (6,075)
Rent expense - (920) (920)
Marketing and promotion - (745) (745)
Travel and entertainment - (650) (650)
------------- ----------- ------------
$ (6,075) $ (2,315) $ (8,390)
============= =========== ============
(6) Represents amortization of unearned stock compensation related
to 164,601 shares of restricted common stock granted to certain
officers and employees on June 1, 2000. These grants resulted in
aggregate deferred stock option compensation expense of $5.7 million,
which is being recognized over the vesting period.
(7) Represents merger and integration costs and expenses associated
with all acquisitions in the period, as these costs are incremental
non-recurring costs directly attributable to such acquisitions.
(8) Represents amortization expense on goodwill computed as if
the HQ Merger occurred on January 1,1999. Goodwill is being amortized
over a 20 year period based on HQ Global's assessment of the
significant barriers to entry due to the rapid consolidation in the
executive suites business and the lack of exposure to technological
obsolescence in the global officing solutions business. The goodwill
adjustment represents amortization which was not included in the
historical results.
(9) Represents additional interest expense on borrowings under
credit facilities used to fund a portion of cash requirement of the
HQ Merger. Interest expense was calculated on the outstanding
indebtedness as follows: (i) $189.375 million at an interest rate of
LIBOR +4% (10.7%), (ii) $30 million at an interest rate of LIBOR
+3.25% (9.95%), (iii) $5.625 million at an interest rate of LIBOR
+3.5% (10.2%) and, (iv) $125 million at an interest rate of 13.5%.
Additionally as part of the obtaining debt financing the HQ Global
issued warrants valued at approximately $18.4 million, which are
being amortized into interest expense term of the related debt.
(10) Represents elimination of the federal deferred tax benefit for
the period. As of June 30, 2000, the Company's deferred tax assets
have been fully reserved because of the uncertainty of the timing and
amount of future taxable income.
(11) Reflects the accretion of the HQ Global Series A redeemable
convertible preferred stock issued in the HQ Merger to its
liquidation value on November 30, 2007, including accrued dividends.
The accretion was computed using the effective interest rate method,
resulting in an effective dividend rate of 20.08%. Also reflects the
elimination of the accretion of the carrying value of the VANTAS
convertible preferred stock which was converted into common stock in
the HQ Merger.
(12) Represents the adjustment to the weighted average shares
outstanding resulting from i) the repurchase of all outstanding
shares of VANTAS common stock, ii) the issuance of 3,235,341 shares
of common stock of HQ Holdings to CarrAmerica and certain other
stockholders of HQ and iii) the conversion of all outstanding shares
of redeemable convertible preferred stock of VANTAS into an aggregate
of 8,663,315 shares of common stock in connection with the HQ Merger.
Schedule I
VANTAS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(Dollars in Thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
VANTAS PRO FORMA VANTAS
HISTORICAL ADJUSTMENTS (1) PRO FORMA
--------------- ------------------ ----------------
REVENUES
<S> <C> <C> <C>
Executive office suite income $124,564 $7,517 $132,081
Support services 90,479 4,973 95,452
--------------- ------------------ ----------------
215,043 12,490 227,533
--------------- ------------------ ----------------
EXPENSES
Cost of revenue 113,725 6,023 119,748
General and administrative expense 48,705 2,955 51,660
--------------- ------------------ ----------------
Total operating expenses 162,430 8,978 171,408
OTHER INCOME (EXPENSES)
-----------------------
Merger and integration (26,730) - (26,730)
Depreciation and amortization (14,858) (629) (15,487)
Interest income (expense) (10,265) (998) (11,263)
Corporate general and administrative
expense (25,020) (639) (25,659)
--------------- ------------------ ----------------
TOTAL EXPENSES 239,303 11,244 250,547
--------------- ------------------ ----------------
Income (loss) before income tax
benefit (expense) (24,260) 1,246 (23,014)
Income tax benefit (expense) 2,841 (508) 2,333
--------------- ------------------ ----------------
NET INCOME (LOSS) (21,419) 738 (20,681)
Accretion of preferred stock (12,252) - (12,252)
--------------- ------------------ ----------------
Net (loss) income applicable
to common stock ($33,671) 738 (32,933)
============== ================== ================
</TABLE>
(1) Pro forma adjustments reflects the results of operations of business
centers acquired for the periods which are not included in the historical
results. These adjustments also include: additional depreciation expense on
fixed assets acquired as well as amortizartion expense on goodwill associated
with the purchase of the business centers by VANTAS as if the acquisitions had
occured on January 1, 1999. Additionally, interest expense relating to
borrowings on VANTAS' loan facility to finance the purchases has also been
reflected.
Schedule II
HQ GLOBAL WORKPLACE , INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
HQ HQ (UK) PRO FORMA HQ
HISTORICAL HISTORICAL ADJUSTMENTS (1) PRO FORMA
------------------- ---------------- ------------ --------------
REVENUES
<S> <C> <C> <C> <C>
Executive office suite income $135,081 $14,557 $5,870 $155,508
Support services 81,235 5,454 3,530 90,219
------------------- ---------------- ------------ --------------
TOTAL REVENUES 216,316 20,011 9,400 245,727
------------------- ---------------- ------------ --------------
EXPENSES
Cost of revenue 116,585 8,629 4,164 129,378
Center general and administrative 33,688 8,012 2,386 44,086
Corporate general and administrative 43,066 7,832 1,865 52,763
Interest expense, net 7,680 1,541 3,007 12,228
Depreciation and amortization 18,797 2,719 (884) 20,632
------------------- ---------------- ------------ --------------
TOTAL EXPENSES 219,816 28,733 10,538 259,087
------------------- ---------------- ------------ --------------
Loss before
income tax benefit (3,500) (8,722) (1,138) (13,360)
------------------- ---------------- ------------ --------------
Income tax benefit 504 389 224 1,117
------------------- ---------------- ------------ --------------
NET LOSS $(2,996) $(8,333) $(914) $(12,243)
=================== ================ ============ ==============
</TABLE>
(1) Pro forma adjustment represents adjustments to the operations of the
entities acquired during fiscal 1998 and fiscal 1999 and also HQ UK and HQ
Europe to show the operations as if the acquisitions were effective at January
1, 1999. These adjustments include the following: adjustment in rent expense
to conform with Generally Accepted Accounting Principles ("GAAP"), adjustments
in goodwill amortization arising from the allocation of purchase price
(goodwill is amortized straight-line over its estimated useful life of 20
years), adjustment in depreciation expense to conform with GAAP, compensation
expense associated with the vesting of restricted stock units and income tax
effects of pro forma adjustments.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTLINE CAPITAL GROUP
By: /s/ Michael Maturo
---------------------------
Michael Maturo
Executive Vice President,
Chief Financial Officer and Treasurer
Date: August 15, 2000
