- --------------------------------------------------------------------------------
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, 2000
Commission file number: 0-30162
FRONTLINE CAPITAL GROUP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 11-3383642
- -------- ----------
(State other jurisdiction of incorporation of organization) (IRS. Employer Identification Number)
1350 Avenue of the Americas, New York, NY 10019
- ----------------------------------------- -----
(Address of principal executive office) (zip code)
</TABLE>
(212) 931-8000
(Registrant's telephone number including area code)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No __, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
This company has only one class of common stock, issued at $.01 par value
per share with 34,719,254 shares outstanding as of May 5, 2000
----------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
INDEX PAGE
- -------------------------------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets of FrontLine Capital Group and Subsidiaries
as of March 31, 2000 (unaudited) and December 31, 1999.................... 3
Consolidated Statements of Operations of FrontLine Capital Group and
Subsidiaries for the three months ended March 31, 2000 and 1999
(unaudited).............................................................. 4
Consolidated Statements of Cash Flows of FrontLine Capital Group and
Subsidiaries for the three months ended March 31, 2000 and 1999 5
(unaudited)...............................................................
Notes to the Consolidated Financial Statements of FrontLine Capital Group
and Subsidiaries (unaudited).............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 27
- -------------------------------------------------------------------------------------------------------------------
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------------------------------------------
Item 1. Legal Proceedings......................................................... 28
Item 2. Changes in Securities and Use of Proceeds................................. 28
Item 3. Defaults Upon Senior Securities........................................... 28
Item 4. Submission of Matters to a Vote of Securities Holders..................... 28
Item 5. Other Information......................................................... 28
Item 6. Exhibits and reports on Form 8-K.......................................... 28
- -------------------------------------------------------------------------------------------------------------------
SIGNATURES 29
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------- --------------------
<S> <C> <C>
(UNAUDITED)
ASSETS:
Current Assets:
Cash and cash equivalents..................................... $ 89,846 $ 32,740
Restricted cash............................................... 18,472 21,572
Accounts receivable, net of allowance for doubtful accounts of
$1,106 in 2000 and $861 in 1999 9,335 8,426
Other current assets.......................................... 16,635 16,008
----------- -----------
TOTAL CURRENT ASSETS...................................... 134,288 78,746
Ownership interests in and advances to Partner Companies (Note 3) 87,095 61,207
Other ownership interest (Note 8) ............................ 27,694 36,626
Intangible assets, net........................................ 275,124 239,412
Property and equipment, net................................... 93,323 80,425
Other assets, net............................................. 40,225 45,567
----------- -----------
TOTAL ASSETS............................................. $ 657,749 $ 541,983
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable and accrued expenses......................... $ 44,245 $ 51,383
Current portion of notes payable.............................. 13,075 12,500
Deferred rent payable ........................................ 2,427 2,165
Other current liabilities..................................... 1,037 1,139
----------- -----------
Total Current Liabilities................................ 60,784 67,187
Credit facilities with related parties........................ 128,715 121,848
Secured credit facility ...................................... -- 44,407
Notes payable (Note 5) ....................................... 119,125 108,125
Deferred rent payable ........................................ 25,990 22,794
Other liabilities............................................. 29,317 28,175
----------- -----------
Total Liabilities........................................ 363,931 392,536
----------- -----------
Minority Interest............................................. 15,338 35,338
Commitments and Contingencies ................................
Shareholders' Equity: (Notes 1 and 6)
8.875% Cumulative convertible preferred stock, $.01 par value,
25,000,000 shares authorized, 26,000 and 0 issued and outstanding,
at March 31, 2000 and December 31, 1999, respectively......... -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
34,683,722 and 30,672,794 shares issued and outstanding, at
March 31, 2000 and December 31,1999, respectively............ 347 307
Additional paid in capital.................................... 366,696 162,054
Accumulated deficit........................................... (88,563) (48,252)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY................................ 278,480 114,109
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $ 657,749 $ 541,983
=========== ===========
</TABLE>
(See accompanying notes to consolidated financial statements)
3
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
----------------- ----------------
<S> <C> <C>
OPERATING REVENUES:
Executive office suite income................................................ $ 36,071 $ 27,065
Support services and other................................................... 26,502 19,793
----------------- ----------------
TOTAL OPERATING REVENUES................................................... 62,573 46,858
----------------- ----------------
OPERATING EXPENSES:
Cost of revenue.............................................................. 49,779 37,187
Partner Company general and administrative expenses.......................... 7,167 2,562
----------------- ----------------
TOTAL OPERATING EXPENSES................................................... 56,946 39,749
----------------- ----------------
PARTNER COMPANY OPERATING INCOME........................................... 5,627 7,109
PARTNER COMPANY OTHER INCOME (EXPENSES):
Development stage Partner Company............................................ (1,563) --
Merger and integration costs................................................. (826) (744)
Depreciation and amortization................................................ (6,219) (2,816)
Interest expense, net (Note 7) .............................................. (3,382) (1,905)
----------------- ----------------
PARTNER COMPANY INCOME (LOSS)................................................ (6,363) 1,644
CORPORATE INCOME (EXPENSES):
General and administrative expenses.......................................... (4,234) (891)
New hire expenses............................................................ (738) --
Depreciation and amortization................................................ (43) (8)
Amortization of deferred charges............................................. (1,652) --
Interest expense, net ...................................................... (6,621) (768)
----------------- ----------------
LOSS BEFORE PROVISION FOR INCOME TAXES, MINORITY INTEREST, EQUITY IN LOSS
OF PARTNER COMPANIES AND OTHER OWNERSHIP INTEREST, EXTRAORDINARY LOSS AND
DISTRIBUTION TO PREFERRED SHAREHOLDER........................................ (19,651) (23)
Provision for income taxes................................................... (190) (750)
Minority interest............................................................ 902 (550)
Equity in loss of Partner Companies and other ownership interest (Note 3) ... (18,378) (631)
----------------- ----------------
LOSS BEFORE EXTRAORDINARY LOSS AND DISTRIBUTION TO PREFERRED SHAREHOLDER..... (37,317) (1,954)
Extraordinary loss on extinguishment of debt (Note 6) ....................... (2,648) --
----------------- ----------------
NET LOSS BEFORE DISTRIBUTION TO PREFERRED SHAREHOLDER (39,965) (1,954)
Distribution to Preferred Shareholder........................................ (346) --
----------------- ----------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.................................. $ (40,311) $ (1,954)
================= ================
BASIC AND DILUTED NET LOSS PER WEIGHTED AVERAGE COMMON SHARE................. $ (1.27) $ (0.08)
================= =============
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................. 31,717,891 24,686,042
================= =============
</TABLE>
(See accompanying notes to consolidated financial statements)
4
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before distribution to Preferred Shareholder $ (39,965) $ (1,954)
Adjustments to reconcile net loss before distribution to Preferred Shareholder to net
cash provided by (used in) operating activities:
Depreciation and amortization .................................................. 6,262 2,824
Extraordinary loss on early extinguishment of debt............................... 2,648 --
Equity in loss of Partner Companies and other ownership interest................. 18,378 631
Minority interest................................................................ (902) 550
Provision for income taxes....................................................... 190 750
Non-cash compensation............................................................ 1,652 --
Changes in operating assets and liabilities:
Accounts receivable, net......................................................... (873) (1,615)
Acquisition costs and other assets............................................... (4,495) 2,705
Equipment........................................................................ (861) (9)
Deferred rent payable............................................................ 1,363 997
Accounts payable and accrued expenses............................................ (7,130) (1,138)
Other liabilities................................................................ 213 --
Affiliate receivables............................................................ (419) 1,896
----------- ----------
Net cash provided by (used in) operating activities................................... (23,939) 5,637
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of Executive Office Suite Centers................................... (11,608) (19,624)
Restricted cash.................................................................. 3,100 10,000
Acquisition of ownership interests and advances to Partner Companies............. (71,473) (7,940)
Other ownership interest......................................................... 8,708 (399)
----------- ----------
Net cash used in investing activities................................................. (71,273) (17,963)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and warrants, net of costs.............................. 154,481 3
Issuance of preferred stock, net of costs........................................ 24,530 --
Deferred financing costs......................................................... (559) (787)
Net proceeds from credit facilities with related parties......................... 6,867 4,402
Net proceeds from notes payable.................................................. 11,575 8,887
Capital leases................................................................... (263) --
Exercise of options.............................................................. 94 (691)
Net proceeds from secured credit facility........................................ (44,407) --
----------- ----------
Net cash provided by financing activities........................................ 152,318 11,814
----------- ----------
CASH AND CASH EQUIVALENTS:
Net increase (decrease)............................................................... 57,106 (512)
Beginning of period................................................................... 32,740 5,641
----------- ----------
End of period......................................................................... $ 89,846 $ 5,129
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.......................................... $ 6,292 $ 2,286
=========== ==========
Cash paid during the year for income taxes........................................ $ 3,155 --
=========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Contribution of assets from Interoffice Superholdings Corporation and
Reckson Executive Centers, Inc. to predecessor entity................................ $ -- $ (21,409)
=========== ==========
</TABLE>
(See accompanying notes to consolidated financial statements)
5
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. DESCRIPTION OF THE COMPANY
FrontLine Capital Group ("FrontLine" or the "Company") is building a
collaborative network of companies that use the Internet and new technologies to
empower small to medium size enterprises ("SME's"), entrepreneurs, and the
mobile workforce, the fastest growing segment of the new economy. FrontLine
provides its Partner Companies with the capital, customer base, management
resources, and relationships they need for fast-growth and long-term success.
The Partner Companies in turn provide small to medium size business customers
with the information, tools and services they need to become more competitive,
at a price they can afford. In this way, FrontLine achieves its vision along two
parallel tracks: FrontLine empowers the entrepreneurs that make up its network
of Partner Companies, and empowers the entrepreneurs that make up its customer
base.
The Company acquires significant, long-term stakes in targeted Partner
Companies, which it incorporates into a collaborative network of e-commerce and
e-services companies, seeking to accelerate their growth and increasing their
likelihood of success. FrontLine has developed an extensive e-Cooperative
platform that allows its Partner Companies to benefit from its operational and
management resources and experience, the Company's extensive customer base as
well as gain significant synergies from other existing and future Partner
Companies. The e-Cooperative consists of the:
o enterprise Development Group ("eDG") - eDG offers strategic planning,
project management and functional expertise in areas of organizational
design, recruiting, finance and technology strategy.
o Advisory Board - a group of recognized business and academic leaders
provides strategic insight, expertise, relationships and access to new
opportunities and potential alliances for the Company and its Partner
Companies.
o Network of Partner Companies - facilitates learning and collaboration
among all Partner Companies and provides access to the customer base,
resources and relationships of the entire network. It also facilitates
business partnerships among Partner Companies, including cross-selling
and cross-marketing opportunities.
o Virtual and Physical - Global workplace solutions provider which
offers the Partner Companies the ability to access the virtual and
physical global infastruture as well as a distribution network to a
customer base of SME's.
The Company's strategy is to continue to expand its network of Partner Companies
and its e-Cooperative platform by pursuing additional acquisitions that
complement and enhance the overall network. FrontLine seeks to add significant
value to its Partner Companies with the goal of creating industry leaders that
have the potential to become public companies, act as industry consolidators or
merge with the proper strategic partners. FrontLine targets early stage
companies that can benefit from FrontLine's entire franchise and therefore have
the potential to create significant value for FrontLine.
FrontLine seeks to focus its future acquisitions in the Internet sector by
targeting three types of e-commerce and e-services companies:
o e-commerce and infrastructure: companies that primarily deliver or
enable the delivery of goods and services over the Internet;
o Virtual brick and mortar: companies that combine a physical
infrastructure with an Internet enable model to enhance the delivery
of their services; and
o Internet-based outsourcing: companies that utilize the Internet to
enable the outsourcing of non-core business functions.
Although the Company refers to the companies in which it has acquired an equity
and cost ownership interest as its "Partner Companies" and that it has a
"partnership" with these companies, it does not act as an agent or legal
representative for any of these companies, it does not have the power or
authority to legally bind any of its Partner Companies and it does not have the
types of liabilities in relation to its Partner Companies that a general partner
of a partnership would have.
6
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements present the consolidated
financial position of the Company and its majority owned subsidiaries, VANTAS
Incorporated ("VANTAS") and OneXstream.com, Inc. at March 31, 2000 and December
31, 1999, and the results of their operations and their cash flows for the three
months ended March 31, 2000 and 1999. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes 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, 2000, is
not necessarily indicative of the results that may be expected for the year
ended December 31, 2000.
The balance sheet at December 31, 1999 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 Company's annual report on Form 10-K for the
year ended December 31, 1999.
ACCOUNTING FOR OWNERSHIP INTERESTS IN PARTNER COMPANIES AND OTHER OWNERSHIP
INTEREST
The interests that FrontLine acquires in its Partner Companies and other
ownership interest are accounted for under one of three methods: consolidation,
equity method and cost method. The applicable accounting method is generally
determined based on the Company's voting interest and rights in a Partner
Company.
Consolidation. Partner Companies in which the Company directly or indirectly
owns more than 50% of the outstanding voting securities are generally accounted
for under the consolidation method of accounting. Under this method, a Partner
Company's results of operations are reflected within the Company's Consolidated
Statements of Operations. All significant inter-company accounts and
transactions have been eliminated. Participation of other Partner Company
shareholders in the earnings or losses of a consolidated Partner Company are
reflected in the caption "Minority interest" in the Company's Consolidated
Statements of Operations. Minority interest adjusts the Company's consolidated
results of operations to reflect only the Company's share of the earnings or
losses of the consolidated Partner Company.
7
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity Method. Partner Companies and other ownership interests whose results are
not consolidated, but over whom the Company exercises significant influence, are
accounted for under the equity method of accounting. Whether or not the Company
exercises significant influence with respect to a Partner Company or other
ownership interest depends on an evaluation of several factors including, among
others, representation on the Partner Company's or other ownership interest's
Board of Directors and ownership level, which is generally a 20% to 50% interest
in the voting securities of the Partner Company and other ownership interests,
including voting rights associated with the Company's holdings in common,
preferred and any other convertible instruments in the Partner Company and other
ownership interests. Under the equity method of accounting, a Partner Company's
or other ownership interest's accounts are not reflected within the Company's
Consolidated Statements of Operations; however, FrontLine's share of the
earnings or losses of the Partner Company or other ownership interest is
reflected in the caption "Equity in loss of Partner Companies and other
ownership interests" in the Consolidated Statements of Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Partner Companies or other ownership interests
accounted for under the consolidation or equity method of accounting is
amortized on a straight-line basis over 30 years which adjusts the Company's
share of the Partner Company's or other ownership interest's earnings or losses.
Cost Method. Partner Companies not accounted for under the consolidation or the
equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations. The
Company also recognizes income from dividends on distributed earnings of its
Partner Companies. However, cost method impairment charges are recognized in the
Consolidated Statement of Operations with the new cost basis not written-up if
circumstances suggest that the value of the Partner Company has subsequently
recovered.
The Company records its ownership interest in debt securities of Partner
Companies accounted for under the cost method at cost as it has the ability and
intent to hold these securities until maturity. The Company records its
ownership interests in equity securities of Partner Companies accounted for
under the cost method at cost, unless these securities have readily determinable
fair values based on quoted market prices, in which case these interests would
be classified as available-for-sale securities or some other classification in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". In addition
to the Company's investments in voting and non-voting equity and debt
securities, it also periodically makes advances to its Partner Companies in the
form of promissory notes which are accounted for in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan".
The Company continually evaluates the carrying value of its ownership interests
in and advances to each of its Partner Companies for possible impairment based
on achievement of business plan objectives and milestones, the value of each
ownership interest in the Partner Company relative to carrying value, the
financial condition and prospects of the Partner Company, and other relevant
factors. The business plan objectives and milestones the Company considers
include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site, business development activities, or the hiring of key
employees. The fair value of the Company's ownership interests in and advances
to privately held Partner Companies is generally determined based on the value
at which independent third parties have invested or have committed to invest in
the Partner Companies.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
8
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company's operating revenues for the three months ended March 31, 2000 were
primarily attributable to VANTAS. VANTAS' revenue is derived primarily from the
operation of their executive office suites and the range of telecommunication
and business support services provided to clients, and are recognized as the
related services are provided.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets which range
from five to seven years. Leasehold improvements are amortized over the lesser
of the term of the related lease or the estimated useful lives of the assets. As
of March 31, 2000, and December 31, 1999, accumulated depreciation and
amortization were approximately $20.2 million and $14.0 million, respectively.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill which is the excess of the
purchase price over the net assets of acquired companies by FrontLine and is
being amortized on the straight-line method primarily over 30 years. As of March
31, 2000, and December 31, 1999, accumulated amortization were approximately
$9.1 million and $9.0 million, respectively.
If there is an event or change in circumstances that indicates that the basis of
FrontLine's long-lived intangibles may not be recoverable, FrontLine's policy is
to assess any impairment in value by making a comparison of the current and
projected operating cash flows of the business center for which the intangible
relates over its remaining useful life, on an undiscounted basis, to the
carrying amount of the intangible. Such carrying amount would be adjusted, if
necessary, to reflect an impairment in the value of the intangible assets.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options and grants because
the alternative fair value accounting provided for under Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
("SFAS 123") requires the use of option valuation models that were not developed
for use in valuing employee stock options.
INCOME TAXES
The Company accounts for income taxes under the liability method which requires
recognition of deferred tax assets and liabilities based upon the expected
future tax consequences of events included in the Company's financial statements
and tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. For the three months ended March
31, 2000 and March 31, 1999, the Company recognized a current state income tax
provision of approximately $0.2 million and $0.8 million, respectively.
Additionally, deferred tax assets are recognized for temporary differences that
will result in deductible amounts in future years. A valuation allowance is
recognized if it is more likely than not that some portion of the deferred asset
will not be recognized. The Company has recognized a deferred tax asset of
approximately $3.0 million and $9.9 million attributable to VANTAS at March 31,
2000 and December 31, 1999, respectively. The remaining deferred tax assets at
March 31, 2000 and December 31, 1999 have been reserved for 100% due to the
uncertainty as to whether these assets will have benefit in future periods.
9
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" requires
FrontLine to disclose the estimated fair values of its financial instrument
assets and liabilities. The carrying amounts approximate fair value for cash and
cash equivalents because of the short maturity of those instruments. For the
loans payable to affiliates and others, the estimated fair value approximates
the recorded balance.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1999, SFAS No. 137 was issued, amending SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which extended the required date
of adoption for fiscal years beginning after June 15,2000. The Statement permits
early adoption as of the beginning of any fiscal quarter after its issuance. The
Company expects to adopt the new Statement effective January 1, 2001. The
Company does not anticipate that the adoption of this Statement will have any
effect on its results of operations or financial position.
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.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
10
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES
Partner Companies at March 31, 2000 and December 31, 1999 included:
<TABLE>
<CAPTION>
Voting Ownership on a Basic Basis Voting Ownership on a Diluted Basis
Partner Applicable --------------------------------- -----------------------------------
Company Accounting
Since Method March 31, 2000 December 31, 1999 March 31, 2000 December 31, 1999
------- ---------- -------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
AdOutlet.com 1999 Cost 12% 12% 10% 10%
DitigalWork.com 1999 Cost <1% <1% <1% <1%
EmployeeMatters, Inc. 1999 Equity 53% 53% 45% 45%
Giftcertificates.com 1999 Cost <1% <1% <1% <1%
LiveCapital.com 2000 Cost 4% N/A 4% N/A
NeoCarta Ventures 1999 Cost 4% 4% 4% 4%
OneXstream.com, Inc. 1998 Consolidation 93% 93% 80% 80%
OnSite Access, Inc. 1997 Equity 37% 37% 22% 22%
Opus360 Corporation 1999 Cost <1% <1% <1% <1%
PIPE9 Corporation 1999 Equity 31% 31% 26% 26%
RealtyIQ.com 1999 Equity 68% 68% 54% 54%
UpShot.com 2000 Equity 20% N/A 18% N/A
VANTAS Incorporated 1998 Consolidation 84% 84% 76% 76%
</TABLE>
The Company's ownership interests in Partner Companies are classified according
to the applicable accounting method utilized at March 31, 2000 and December 31,
1999. The carrying value represents the Company's acquisition cost less any
impairment charges, plus or minus the Company's share of such Partner Companies'
income or loss. The cost basis represents the Company's acquisition costs less
any impairment charges in such Partner Companies. The Company's ownership
interests in and advances to Partner Companies accounted for under the equity
method or cost method of accounting are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
Carrying Value Cost Basis Carrying Value Cost Basis
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Equity Method $ 72,395 $ 101,483 $ 54,807 $65,741
Cost Method 14,700 14,700 6,400 6,400
-------- ------
$ 87,095 $ 61,207
======== ======
</TABLE>
The following are the Company's summarized losses on ownership interests in
Partner Companies and other ownership interest (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
<S> <C> <C>
OnSite Access, Inc. and predecessor entity........................... $ (8,628) $ (22)
EmployeeMatters, Inc. ............................................... (2,879) --
PIPE9 Corporation.................................................... (2,024) --
RealtyIQ.com......................................................... (4,317) --
UpShot.com........................................................... (305) --
Other ownership interest............................................. (225) (609)
--------------- ---------------
EQUITY IN LOSS OF PARTNER COMPANIES AND OTHER OWNERSHIP INTEREST..... $ (18,378) $ (631)
=============== ===============
</TABLE>
11
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES (CONTINUED)
The Company's ownership interests in Partner Companies are summarized as
follows:
EXECUTIVE OFFICE SUITES AND VIRTUAL OFFICE SERVICES
- ---------------------------------------------------
VANTAS AND PREDECESSOR ENTITIES
As of March 31, 2000, VANTAS operates 206 business centers in 27 states, the
District of Columbia, France and Mexico and manages 5 others for unrelated
property owners. VANTAS provides fully furnished individual offices and suites
and a full range of telecommunication and business support services to its
clients that generally require 2,000 square feet or less of traditional office
space. VANTAS does not own the real estate in which the business centers are
located.
In the first quarter of 2000, the Company paid approximately $43.3 million in
cash and issued 1,294,103 shares of its common stock in connection with the
completion of all remaining stock purchase agreements with other VANTAS
stockholders to increase its ownership interest to approximately 84% on a basic
basis and 76% on a diluted basis.
As a result of the stepped acquisition during 1999 of a controlling interest in
VANTAS, the Company changed the accounting method for its investment in VANTAS
from the equity method to consolidation during the fourth quarter of 1999 and
subsequently restated all 1999 quarters.
On January 21, 2000, the Company executed an agreement and plan of merger of two
executive suites companies (the "Merger"), HQ Global Workplaces, Inc., and
VANTAS. The merged company will retain the name HQ Global Workplaces ("HQ
Global") and will become the world's largest virtual and physical workplace
solutions provider with over 460 locations in 17 countries.
In connection with the Merger, (i) each share of the common stock of VANTAS will
be converted into the right to receive $8.00 per share in cash and (ii) each
share of the convertible preferred stock of VANTAS that is outstanding will be
converted into the right to receive that number of shares of the surviving
corporation that equal to the product of the number of shares of the common
stock of VANTAS that such stockholder would have been entitled to receive had it
converted its shares immediately prior to the Merger and the Conversion Ratio
(as defined in the Merger Agreement), subject, in each case, to adjustment as
provided in the Merger Agreement. In connection with the Merger, VANTAS
established a $35 million letter of credit and FrontLine paid $15 million in
cash. This letter of credit is collateralized by shares of VANTAS that are owned
by FrontLine and guaranteed by FrontLine on a nonrecourse basis. Under certain
circumstances, if this Merger is not consummated by May 31, 2000, then the
current owners of HQ Global Workplaces can call the letter of credit and retain
the deposit.
The merger is expected to be financed by $350 million of HQ Global debt,
carryover equity from the seller representing approximately 19% of the merged
entity and $195 million of new equity from strategic acquisitions. Subsequent to
this transaction, it is anticipated that FrontLine will own approximately 50% of
the merged entity.
During the three months ended March 31, 2000 and March 31, 1999, VANTAS recorded
deferred credits of approximately $2.5 million and $0.7 million, respectively,
related to tenant improvements, which are reimbursed by landlords and amortized
against rent expenses over the lives of the leases.
12
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES (CONTINUED)
E-BUSINESSES
- ------------
ONSITE ACCESS
Summarized financial information, a summary of the Company's investment in and
advances to OnSite Access, Inc. ("OnSite") and FrontLine's share of its loss, is
as follows (in thousands):
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Current assets $ 8,510 $ 25,535
Property and equipment, net 50,708 20,052
Intangibles, net 65,172 25,055
Other assets 10,037 4,132
-------------- --------------
Total Assets $ 134,427 $ 74,774
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities $ 28,344 $ 13,702
Other Liabilities 23,498 1,913
-------------- --------------
Total Liabilities 51,842 15,615
-------------- --------------
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT):
FrontLines' net investment in OnSite 30,389 39,017
Add:Cumulative net loss allocation 16,765 8,137
Less: Payment to OnSite shareholder (23,593) (23,593)
Less: Excess acquisition costs (595) (595)
-------------- --------------
FrontLine preferred and common stock in OnSite 22,966 22,966
Non FrontLine preferred and common stock 154,144 104,274
Stockholders' loans for restricted stock (4,339) (2,471)
Deferred equity compensation (26,131) (24,878)
Dividend on preferred stock (3,875) (2,080)
Accumulated deficit (60,180) (38,652)
-------------- --------------
Total Redeemable Preferred Stock and Stockholders' Equity 82,585 59,159
(deficit) -------------- --------------
Total Liabilities and Stockholders' Equity (deficit) $ 134,427 $ 74,774
============== ==============
</TABLE>
13
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES (CONTINUED)
ONSITE ACCESS (CONTINUED)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31, 2000
----------------
<S> <C>
Revenues $ 1,751
----------------
Expenses:
Direct costs of revenue 1,788
Selling, general and administrative 17,665
Depreciation and amortization 3,978
Interest expense (income) (152)
----------------
Total operating expenses 23,279
Net loss (21,528)
----------------
Other interests, share of net loss (12,900)
----------------
FrontLines' share of net loss $ (8,628)
================
</TABLE>
OnSite has currently filed for an initial public offering of its common stock.
OTHER E-BUSINESSES
During the first quarter of 2000, the Company invested approximately $23.5
million to purchase ownership interests in two new e-business companies and
funded $20.1 million of commitments to existing Partner Companies. Subsequent to
March 31, 2000, the Company funded an additional $8.9 million to existing
Partner Companies.
4. PARENT COMPANY FINANCIAL INFORMATION
The Company's consolidated financial statements reflect all consolidated VANTAS
and OneXstream.com, Inc. ("OneXstream.com") accounted for under the
consolidation method of accounting at March 31, 2000 and December 31, 1999 and
for the three months ended March 31, 2000 and 1999.
Parent Company financial information is provided to present the financial
position and results of operations of the Company as if VANTAS and
OneXstream.com were accounted for under the equity method of accounting for all
periods presented. The Company's share of VANTAS and OneXstream.com losses are
included in "Equity in loss Partner Companies and other ownership interests" in
the Parent Company Statements of Operations for all periods presented based on
the Company's ownership percentage in each period.
14
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
4. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
PARENT COMPANY BALANCE SHEETS (IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------ --------------------
<S>
ASSETS <C> <C>
Current assets $ 79,197 $ 28,933
Ownership interests in and advances to Partner Companies 287,192 197,714
Other assets 56,760 67,089
------------------ --------------------
TOTAL ASSETS $ 423,149 $ 293,736
================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 15,954 $ 13,372
Non-current liabilities 128,715 166,255
Shareholders' equity 278,480 114,109
------------------ --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 423,149 $ 293,736
================== ====================
</TABLE>
<TABLE>
<CAPTION>
PARENT COMPANY STATEMENTS OF OPERATIONS (IN THOUSANDS) FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------------- -------------------
<S> <C> <C>
REVENUES $ 83 $ 83
-------------------- -------------------
Operating expenses (4,972) (891)
Other expenses (1,695) (8)
Interest expense, net (6,621) (768)
-------------------- -------------------
TOTAL EXPENSES (13,288) (1,667)
-------------------- -------------------
LOSS BEFORE EQUITY IN LOSS OF PARTNER COMPANIES AND OTHER OWNERSHIP
INTEREST, EXTRAORDINARY LOSS AND DISTRIBUTION TO PREFERRED SHAREHOLDER (13,205) (1,584)
Equity in loss of Partner Companies and other ownership interest (24,112) (370)
-------------------- -------------------
LOSS BEFORE EXTRAORDINARY LOSS AND DISTRIBUTION TO PREFERRED SHAREHOLDER (37,317) (1,954)
Extraordinary loss from early extinguishment of debt (2,648) --
Distribution to Preferred Shareholder (346) --
-------------------- -------------------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (40,311) $ (1,954)
==================== ===================
</TABLE>
15
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
5. NOTES PAYABLE
VANTAS currently has a credit agreement with various lending institutions for
$157.9 million. The credit agreement provides for a $5 million acquisition loan,
$127.9 million term loans, (comprised of Term Loan A for up to $38.0 million and
Term Loan B for up to $89.9 million) and a $25 million revolving loan, including
letters of credit. The credit agreement contains certain financial covenants one
of which requires VANTAS not to exceed a maximum ratio of consolidated
indebtedness to consolidated earnings before interest, income taxes,
depreciation and amortization. There are also other covenants pertaining to
additional financial ratios and limitations on capital expenditures. At March
31, 2000, VANTAS did not meet certain of its financial covenants. VANTAS is
currently negotiating with its lenders for an increase in the amount of the
credit agreement and/or waiver of those covenants in connection with VANTAS'
proposed merger with HQ Global Workplaces. VANTAS has obtained a commitment
letter for the provision of a new credit facility, subject to various
conditions, which would provide a portion of the financing necessary to
consummate the merger, including funds necessary to refinance the credit
facility. Accordingly, $119.1 million of this debt has been classified as
long-term as of March 31, 2000. There can be no assurance that VANTAS will meet
the conditions required to satisfy the existing commitment, that the HQ Global
merger will occur or that, if the HQ Global Workplace merger does not occur,
VANTAS will be able to obtain a waiver with respect to the financial covenants
contained in the credit facility for the fiscal quarter ended March 31, 2000 and
satisfy such covenants or obtain a waiver thereafter.
The $38 million Term Loan A had $28 million outstanding at March 31, 2000 which
requires quarterly principal payments. The final principal payment is due on
June 30, 2002.
The $89.9 million Term Loan B had $89.5 million outstanding at March 31, 2000
which requires quarterly principal payments. The final principal payment is due
on November 6, 2005.
At March 31, 2000 $18.5 million of the Term Loan was funded into a cash
collateral account that VANTAS will be permitted to utilize in connection with
permitted acquisitions.
The $25 million revolving loan commitment had $14.7 million outstanding at March
31, 2000. The final principal payment is due on November 6, 2003.
At March 31, 2000, VANTAS had outstanding letters of credit of approximately
$10.2 million for landlord security deposits which reduced the borrowings
available under the revolving loan commitment.
6. SHAREHOLDERS' EQUITY
In January 2000, the Board of Directors for the Company approved the 2000 stock
option plan and reserved 2,500,000 shares of common stock for issuance.
As part of the Company's ongoing investment in organizational infrastructure and
the retention of high quality senior management, certain incentive stock option
awards were granted on March 24, 1999 when the closing stock price was $4.625.
These incentive compensation awards were subject to stockholder approval of the
1999 Stock Option Plan which occurred on June 24, 1999, when the closing stock
price was $14.9375. Pursuant to financial accounting guidelines the date for
measuring compensation costs would be June 24, 1999. These awards vest over
various periods ranging from six months to three years and include tax loans
which will be forgiven one year thereafter. During the three months ended March
31, 2000, results include approximately $1.7 million or $.05 per basic and
diluted share, associated with these awards, the majority, of which is non-cash
in nature. In addition, pursuant to the 1999 stock option plan, 550,000 shares
reserved were issued in August 1999, resulting in $3.5 million of deferred
compensation, net of amortization, as of March 31, 2000.
During the three months ended March 31, 2000, the Company completed preferred
stock offerings of 26,000 shares of 8.875% Cumulative Convertible Preferred
Stock, at a price of $1,000 per share with net proceeds of $24.6 million. These
shares are convertible into the Company's common stock at a price of $70.48. On
May 6, 2000, the Company paid a preferred dividend to the preferred shareholder
of approximately $0.6 million.
16
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUTED)
On March 7, 2000, an investment partnership invested $30 million to purchase 1.5
million warrants to acquire FrontLine's common stock at an exercise price of $70
per share. The warrants have a term of 3.25 years. The Company utilized
approximately half of these proceeds to reduce its $60 million Secured Credit
Facility ("Credit Facility") with a significant financial institution.
On March 31, 2000, the Company sold approximately 2.6 million shares of its
common stock at a price of $47.25 per share for an aggregate consideration of
approximately $122.6 million. Proceeds from the sale were utilized to repay the
remaining portion of the Credit Facility. As a result, certain deferred
financing costs of approximately $2.6 million incurred in connection with the
established of the Credit Facility were expensed as an extraordinary loss in the
accompanying consolidated statements of operations.
7. TRANSACTIONS WITH RELATED PARTIES
The Company has a Credit Facility with Reckson Operating Partnership, L.P.
("Reckson") in the amount of $100 million ("FrontLine Facility"). Reckson has
advanced the Company approximately $92.7 million at March 31, 2000. These
advances bear interest at 12% per annum. Additionally, FrontLine established a
$100 million facility with Reckson for funding the Reckson Strategic Venture
Partners, LLC ("Reckson Strategic") investments ("Reckson Strategic Facility").
As of March 31, 2000, Reckson has advanced FrontLine approximately $36.0 million
under the Reckson Strategic Facility and has invested approximately $24.8
million under the facility in joint ventures with Reckson Strategic. The total
outstanding at March 31, 2000, owed by FrontLine under both Credit Facilities
was approximately $128.7 million. Interest accrued on these facilities at March
31, 2000, was approximately $8.6 million. Both of the FrontLine and Reckson
Strategic Facilities expire in June 2003. Currently, the Company has two short
term open letters of credit totaling $3.2 million, which have been utilized as
consideration for future FrontLine investment acquisitions. These letters of
credit decrease the availability under the FrontLine Facility.
The Company is entitled to a cumulative annual management fee of $2 million with
respect to Reckson Strategic, of which $1.5 million is subordinate to Paine
Webber receiving an annual minimum rate of return of 16% and a return of its
capital. The earned fee for the three months ended March 31, 2000 and March 31,
1999 was approximately $0.1 million in both periods.
The Company reimburses Reckson with respect to general and administrative
expenses (including payroll expenses) incurred by Reckson for the benefit of the
Company. These services include payroll, human resources and accounting
services. During the three months ended March 31, 2000 and March 31, 1999, the
Company reimbursed approximately $0.4 million and $0.2 million, respectively,
for such activities.
8. OTHER OWNERSHIP INTEREST
Reckson Strategic invests in operating companies with experienced management
teams in real estate and real estate related market sectors which are in the
early stages of their growth cycle or offer unique circumstances for attractive
investments, as well as platforms for future growth. Through RSVP Holdings, LLC
("Holdings"), the Company is a managing member and 100% owner of the common
equity of Reckson Strategic. New World Realty, LLC, an entity owned by two
individuals retained by Holdings, (the "RSVP Managing Directors"), acts as a
managing member of Holdings, and have a carried interest which provides for the
RSVP Managing Directors to receive a share in the profits of Reckson Strategic
after the Company, Paine Webber Real Estate Securities, Inc., ("Paine Webber")
and Stratum Realty Fund, L.P. ("Stratum") have received certain minimum returns
and a return of capital. Paine Webber and Stratum are non-managing members and
preferred equity owners who have committed $150 million and $50 million,
respectively, in capital (the "Preferred Equity Facility") and shares in profits
and losses of Reckson Strategic with the Company, subject to a maximum internal
rate of return of 16% of invested capital.
For the three months ended March 31, 2000 and March 31, 1999, FrontLine's share
of Holdings' losses were was approximately $0.2 million and $0.6 million,
respectively.
17
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
9. 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.
FrontLine's governance and control rights are generally exercised through Board
of Directors seats and through representation on the executive committees of the
various segment entities.
The following table sets forth the Company's segments and their revenues and
expenses and other related disclosures as required by SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information" ("SFAS 131") for the
three months ended March 31, 2000 and 1999 (in thousands).
<TABLE>
<CAPTION>
MARCH 31, 2000
EXECUTIVE OFFICE
SUITES AND
VIRTUAL OFFICE SERVICES E-BUSINESSES OTHER OPERATIONS TOTAL
------------------------ ------------------- ------------------ ----------
<S> <C> <C> <C> <C>
Total Assets $ 435,582 $ 87,095 $ 135,072 $ 657,749
----------------- ------------------- ------------------ ----------
Total Operating Revenues 62,490 -- 83 62,573
----------------- ------------------- ------------------ ----------
Total Operating Expenses 56,946 -- -- 56,946
----------------- ------------------- ------------------ ----------
Other Income (Expenses),
Provision for Income Taxes, and
Minority Interest (8,957) (1,583) (14,026) (24,566)
----------------- ------------------- ------------------ ----------
Equity in Loss of Partner
Companies and Other
Ownership Interest -- (18,153) (225) (18,378)
----------------- ------------------- ------------------ ----------
Extraordinary Loss from Early
Extinguishment of Debt -- -- (2,648) (2,648)
----------------- ------------------- ------------------ ----------
Distribution to Preferred shareholder -- -- (346) (346)
----------------- ------------------- ------------------ ----------
Net Loss $ (3,413) $ (19,736) $ (17,162) $ (40,311)
----------------- ------------------- ------------------ ----------
</TABLE>
<PAGE>
FRONTLINE CAPITAL GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
9. SEGMENT DISCLOSURE (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------
EXECUTIVE OFFICE
SUITES AND
VIRTUAL OFFICE SERVICES E-BUSINESSES OTHER OPERATIONS TOTAL
------------------------- ------------------ ------------------ -------------
<S> <C> <C> <C> <C>
Total Operating Revenues $ 46,775 $ -- $ 83 $ 46,858
--------------- ------------ ------------ ----------
Total Operating Expenses 39,749 -- -- 39,749
--------------- ------------ ------------ ----------
Other Income (Expenses),
Provision for Income Taxes,
and Minority Interest (6,766) -- (1,666) (8,432)
--------------- ------------ ------------ ----------
Equity in Loss of Partner
Companies and Other Ownership -- (22) (609) (631)
Interest
--------------- ------------ ------------ -----------
Net Income (Loss) $ 260 $ (22) $ (2,192) $ (1,954)
--------------- ------------ ------------ -----------
</TABLE>
19
<PAGE>
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 FrontLine Capital Group (the "Company" or "FrontLine")
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 new Partner Companies, consummation of the
merger with HQ Global Workplaces, Inc, the financing of the Company's and
Partner Companies', 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 and Partner Companies can give no
assurance that its expectations will be achieved. Certain factors that might
cause the results of the Company and Partner Companies to differ materially from
those indicated by such forward-looking statements include, among other factors,
general economic conditions, a lack of attractive business opportunities or
suitable acquisitions, the Company's dependence upon financing from Reckson
Operating Partnership, L.P., ("Reckson") conflicts of interest of management,
competition for targeted acquisitions and the ability to otherwise finance
business opportunities. Consequently, such forward-looking statements should be
regarded solely as reflections of the Company's and Partner Companies 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
FrontLine is building a collaborative network of companies that use the Internet
and new technologies to empower small to medium size enterprises ("SME's"),
entrepreneurs, and the mobile workforce, the fastest growing segment of the new
economy. FrontLine provides its Partner Companies with the capital, customer
base, management resources, and relationships they need for fast-growth and
long-term success. The Partner Companies in turn provide small to medium size
business customers with the information, tools and services they need to become
more competitive, at a price they can afford. In this way, FrontLine achieves
its vision along two parallel tracks: FrontLine empowers the entrepreneurs that
make up its network of Partner Companies, and empowers the entrepreneurs that
make up its customer base.
The Company is to acquire significant, long-term stakes in targeted Partner
Companies, which will be incorporated into a collaborative network of e-commerce
and e-services companies, in effect to accelerate their growth and increase
their likelihood of success. FrontLine has developed an extensive e-Cooperative
platform that allows its Partner Companies to benefit from its operational and
management resources and experience and the Company's extensive customer base as
well as gain significant synergies from other existing and future Partner
Companies. The e-Cooperative consists of the:
o enterprise Development Group or eDG - eDG offers strategic planning,
project management and functional expertise in the areas of organizational
design, recruiting, finance and technology strategy.
o Advisory Board - a group of recognized business and academic leaders
provides strategic insight, expertise, relationships and access to new
opportunities and potential alliances for the Company and its Partner
Companies.
o Network of Partner Companies - facilitates learning and collaboration among
all Partner Companies and provides access to the customer base, resources
and relationships of the entire network. It also facilitates business
partnerships among Partner Companies, including cross-selling and
cross-marketing opportunities.
o Virtual and Physical - Global workplace solutions provider which offers the
Partner Companies the ability to access the virtual and physical global
infrastructure as well as a distribution network to a customer base of
SMEs.
The Company's strategy is to continue to expand its network of Partner Companies
and its e-Cooperative platform by pursuing additional acquisitions that
complement and enhance the overall network. FrontLine seeks to add significant
value to its Partner Companies with the goal of creating industry leaders that
have the potential to become public companies, act as industry consolidators or
merge with the proper strategic partners. FrontLine targets early stage
companies that can benefit from FrontLine's entire franchise and therefore have
the potential to create significant value for FrontLine.
20
<PAGE>
FrontLine seeks to focus its future acquisitions in the Internet sector by
targeting three types of e-commerce and e-services companies:
o e-Commerce and infrastructure: companies that deliver or enable the
delivery of goods and services over the Internet;
o Virtual brick and mortar: companies that combine a physical
infrastructure with an Internet-enabled model to enhance the delivery
of their services; and
o Internet-based outsourcing: companies that utilize the Internet to
enable the outsourcing of non-core business functions.
Although the Company refers to the companies in which it has acquired an equity
and cost ownership interest as its "Partner Companies" and that it has a
"partnership" with these companies, it does not act as an agent or legal
representative for any of these companies, it does not have the power or
authority to legally bind any of its Partner Companies and it does not have the
types of liabilities in relation to its Partner Companies that a general partner
of a partnership would have.
Because FrontLine acquires significant interests in e-commerce companies, many
of which generate net losses, FrontLine has experienced, and expects to continue
to experience, significant volatility in the quarterly results. Management does
not know if the Company will report net income in any period, and expects to
report net losses for the foreseeable future. While most Partner Companies have
consistently reported losses, the Company may experience significant volatility
from period to period due to one-time transactions and other events incidental
to the ownership interests in and advances to Partner Companies. On a continuous
basis, but no less frequently than at the end of each quarterly reporting
period, management evaluates the carrying value of the ownership interests in
and advances to each of the Partner Companies for possible impairment based on
achievement of business plan objectives and milestones, the fair value of each
ownership interest and advance in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. The business plan objectives and milestones that are taken
into consideration include, among others, those related to financial performance
such as achievement of planned financial results or completion of capital
raising activities, and those that are more operational in nature such as the
launching of a web site or the hiring of key employees. The fair value of the
ownership interests in and advances to privately held Partner Companies is
generally determined based on the value at which independent third parties have
invested or have committed to invest in Partner Companies.
The presentation and content of the Company's financial statements is largely a
function of the presentation and content of the financial statements of the
Partner Companies. As a result, to the extent Partner Companies change the
presentation or content of their financial statements, as may be required by the
Securities and Exchange Commission or changes in accounting literature, the
presentation and content of the Company's financial statements may also change.
EFFECT OF VARIOUS ACCOUNTING METHODS ON RESULTS OF OPERATIONS
The various interests that FrontLine acquires in Partner Companies are accounted
for under one of three methods: consolidation, equity method and cost method.
The applicable accounting method is generally determined based on the Company's
voting interest in a Partner Company.
Consolidation. Partner Companies in which the Company directly or indirectly
owns more than 50% of the outstanding voting securities and controls the board
of directors are generally accounted for under the consolidation method of
accounting. Under this method, a Partner Company's results of operations are
reflected within the Company's Consolidated Statements of Operations. In the
fourth quarter 1999, the Company acquired control of VANTAS Incorporated
("VANTAS") (See Note 3 to the Consolidated Financial Statements). Additionally,
the Company consolidates OneXstream.com, Inc. with FrontLine's financial
statements. Participation of other Partner Company shareholders in the earnings
or losses of a consolidated Partner Company is reflected in a caption "Minority
interest" in the Consolidated Statements of Operations. Minority interest
adjusts the consolidated net results of operations to reflect only FrontLine's
share of the earnings or losses of the consolidated Partner Company.
The effect of a Partner Company's results of operations on FrontLine's results
of operations is generally the same under either the consolidation method of
accounting and the equity method of accounting, because under each of these
methods only FrontLine's share of the earnings or losses of a Partner Company is
reflected in the results of operations in the Consolidated Statements of
Operations.
21
<PAGE>
Equity Method. Partner Companies whose results are not consolidated, but over
whom the Company exercises significant influence, are generally accounted for
under the equity method of accounting. Whether or not the Company exercises
significant influence with respect to a Partner Company depends on an evaluation
of several factors including; among others, representation on the Partner
Company's board of directors and ownership level, which is generally a 20% to
50% interest in the voting securities of the Partner Company, including voting
rights associated with the Company's holdings in common, preferred and other
convertible instruments in the Partner Company. Under the equity method of
accounting, a Partner Company's accounts are not reflected within the Company's
Consolidated Statements of Operations; however, FrontLine's share of the
earnings or losses of the Partner Company is reflected in the caption "Equity in
loss of Partner Companies and other ownership interest" in the Consolidated
Statements of Operations.
Partner Companies accounted for under the equity method of accounting included:
<TABLE>
<CAPTION>
PARTNER VOTING OWNERSHIP ON BASIC BASIS VOTING OWNERSHIP ON DILUTED BASIS
COMPANY ------------------------------- ---------------------------------
SINCE MARCH 31, 2000 DECEMBER 31, 1999 MARCH 31, 2000 DECEMBER 31, 1999
-------- -------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
EmployeeMatters, Inc. 1999 53% 53% 45% 45%
OnSite Access, Inc. 1997 37% 37% 22% 22%
PIPE9 Corporation 1999 31% 31% 26% 26%
RealtyIQ.com 1999 68% 68% 54% 54%
UpShot.com 2000 20% N/A 18% N/A
</TABLE>
FrontLine has representation on the board of directors of all of the above
Partner Companies, and as of March 31, 2000, generally owned voting convertible
preferred stock in all of them. Most of FrontLine's equity method Partner
Companies are in a very early stage of development and have not generated
significant revenues. In addition, equity method Partner Companies have incurred
substantial losses since their inception and are expected to continue to incur
substantial losses in 2000.
Cost Method. Partner Companies not accounted for under either the consolidation
or the equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
these companies is not included in the Consolidated Statements of Operations.
Partner Companies accounted for under the cost method of accounting included:
<TABLE>
<CAPTION>
VOTING OWNERSHIP ON BASIC BASIS VOTING OWNERSHIP ON DILUTED BASIS
PARTNER ------------------------------- -----------------------------------
COMPANY
SINCE MARCH 31, 2000 DECEMBER 31, 1999 MARCH 31, 2000 DECEMBER 31, 1999
-------- -------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
AdOutlet. com 1999 12% 12% 10% 10%
DigitalWork.com 1999 <1% <1% <1% <1%
Giftcertificates.com 1999 <1% <1% <1% <1%
LiveCapital.com 2000 4% N/A 4% N/A
NeoCarta Ventures 1999 4% 4% 4% 4%
Opus 360 Corporation 1999 <1% <1% <1% <1%
</TABLE>
The cost method Partner Companies are in a very early stage of development and
have not generated significant revenues. In addition, FrontLine's cost method
Partner Companies incurred substantial losses since their inception and are
expected to continue to incur substantial losses in 2000.
EFFECT OF CONSOLIDATION ON THE PRESENTATION OF FRONTLINE'S FINANCIAL STATEMENTS
The presentation of FrontLine's financial statements may differ from period to
period primarily due to whether or not the
22
<PAGE>
consolidation method of accounting or the equity method of accounting is
applied. To understand the Company's results of operations and financial
position without the effect of the consolidation of VANTAS, Note 4 to the
consolidated financial statements summarizes the Company's Statements of
Operations and Balance Sheets treating the ownership interest in VANTAS as if it
were accounted for under the equity method of accounting for all periods
presented. FrontLine's share of VANTAS' losses is included in "Equity in loss of
Partner Companies and other ownership interest."
RESULTS OF OPERATIONS
The reportable segments in FrontLine's financial statements are Executive Office
Suites and Virtual Office Services, e-Businesses and Other Operations. Executive
Office Suites and Virtual Office Services includes the effect of consolidating
the operations of VANTAS. e-Businesses includes the effect of transactions and
other events incidental to the ownership interest in FrontLine's Partner
Companies, excluding VANTAS. Other Operations represents the expenses of
providing strategic and operational support to the Partner Companies, the
administrative costs related to these expenses and FrontLine's operations in
general.
EXECUTIVE OFFICE SUITES AND VIRTUAL OFFICE SERVICES
FrontLine's operating revenues and substantially all of its Partner Company
operating expenses for the three months ended March 31, 2000 and March 31, 1999
were attributable to VANTAS. The following is a discussion of VANTAS' results of
operations for the three months ended March 31, 2000.
VANTAS' executive office suite income for the three months ended March 31, 2000
was $62.5 million, an increase of $15.7 million or 33.6% from the corresponding
period in 1999.
Acquired Executive Office Suites that were effective after January 1, 1998
("Acquired Office Suites") had income for the three months ended March 31, 2000
of $10.9 million, an increase of $9.5 million from the corresponding period in
1999. This increase in income resulted primarily from the acquisition of
executive office suites during the twelve months ended March 31, 2000.
Executive Office Suites, excluding Acquired and Developing Office Suites, that
were operating for the entire comparable period of the prior year ("Same Office
Suites"), had income for the three months ended March 31, 2000 of $48.5 million,
an increase of $4.1 million, or 9.2% from the corresponding period in 1999.
While office occupancy levels remained relatively stable at approximately 89%
for the comparable periods, the increase in executive office income of $2.1
million, or 8.6%, was due to more favorable office pricing. The increase in
support service revenues of $2.0 million, or 9.8% from 1999 is partially
attributable to an increase in broadband Internet access, information technology
support services and administrative support services.
Developing Executive Office Suite ("Developing Office Suites") income was $3.0
million for the three months ended March 31, 2000, an increase of $2.1 million
from the corresponding period in 1999. For the three months ended March 31, 2000
and 1999 there were 18 and 7 Developing Office Suites that were opened,
respectively. This increase is primarily due to the greater number of Developing
Office Suites opened during the three months ended March 31, 2000.
Executive Office Suite expenses for the three months ended March 31, 2000 were
$49.8 million, representing an increase of $15.4 million or 44.6% from the
corresponding period in 1999.
Acquired Office Suite expenses for the three months ended March 31, 2000 and
1999 were $9.0 million and $0.8 million respectively, representing an increase
of $8.2 million from the corresponding period in 1999. This increase resulted
primarily from an increase in the number of executive office suites acquired as
compared to those acquired in the comparable period of the prior year.
Same Office Suite expenses for the three months ended March 31, 2000 were $36.3
million, an increase of $3.9 million or 12.1% from the corresponding period in
1999. This increase is primarily attributable to higher rent expense resulting
from inflation adjusted rental increases and support service expenses associated
with increased greater support service revenues.
Developing Office Suite expenses for the three months ended March 31, 2000 were
$4.5 million, an increase of $3.3 million from the corresponding period in 1999.
This increase is due to a total of 28 Developing Office Suites with expenses
during the
23
<PAGE>
three months ended March 31, 2000 as compared to 13 Developing Office Suites
during the three months ended March 31, 1999.
For the three months ended March 31, 2000, other expenses were $16.8 million,
representing an increase of $6.0 million or 54.7% from the corresponding period
in 1999. This increase is primarily attributable to corporate general and
administrative expenses, depreciation and amortization and interest expense of
$1.8 million, $2.6 million and $1.5 million or 33.1%, 88.2% and 77.6%,
respectively.
The increase in corporate general and administrative expenses was attributable
to increases in the corporate personnel infrastructure and its associated travel
and related expenses, related office expansion, and professional and consulting
fees associated with VANTAS' growth. The increase in depreciation and
amortization relates to fixed assets acquired and goodwill associated with the
mergers and acquisitions. It is also attributable to an increase in capital
expenditures associated with technology infrastructure additions and leasehold
improvements for Developing and Same Office Suites. Interest expense is
primarily related to VANTAS' credit agreement. This increase resulted from
interest expense on borrowings related to VANTAS' acquisitions as well as
increases in interest rates.
VANTAS incurred merger and integration costs of approximately $0.8 million and
$0.7 million for the three months ended March 31, 2000 and March 31, 1999,
respectively, in connection with mergers and one-time costs related to
agreements with shareholders of VANTAS to purchase a portion of the
shareholders' securities in VANTAS.
E-BUSINESSES
A significant portion of FrontLine's net loss is derived from corporations in
which it holds a significant minority ownership interest accounted for under the
equity method of accounting. Equity loss fluctuates with the number of Partner
Companies accounted for under the equity method, FrontLine's voting ownership
percentage in these companies, the amortization of goodwill related to newly
acquired equity method Partner Companies, and the results of operations of these
companies. As of March 31, 2000, FrontLine accounted for five of its Partner
Companies under this method as compared to one Partner Company during the three
months ended March 31, 1999. All five of these companies incurred losses for the
three months ended March 31, 2000. Under this method, the results of operations
of these entities are not consolidated within the Consolidated Statements of
Operations; however, FrontLine's share of these companies' losses is reflected
in the caption "Equity in loss of Partner Companies and other ownership
interest" in the Consolidated Statements of Operations. (See Note 3 of the
Consolidated Financial Statements).
In addition, the consolidated results of OneXstream, Inc, have been expensed as
development stage company due to its early phase of existence. No revenues have
been generated since its inception.
OTHER OPERATIONS
FrontLine's Other Operations consist primarily of general and administrative
cost for compensation, office costs, and outside services such as legal,
accounting and travel related costs. As the number of FrontLine's employees grow
to support its operations and those of its Partner Companies, its general and
administrative costs will increase. As a result of the increase in the number of
employees from 5 to 40 between March 31, 1999 and March 31, 2000 and the
increase in the acquisition of interests in Partner Companies, general and
administrative costs for the three months ended March 31, 2000 increased by $3.3
million as compared to the same period in 1999. FrontLine plans to continue to
increase the number of new employees and build its overall infrastructure. These
costs are expected to continue to be higher compared to historical periods.
During the three months ended March 31, 2000, the Company recorded compensation
costs of approximately $1.7 million in connection with incentive stock awards to
management and $0.7 million associated with new hire costs.
FrontLine's interest expense for the three months ended March 31, 2000 was
approximately $6.6 million compared to approximately $0.8 million for the three
months ended March 31, 1999. The increase is due to an increase in the amounts
borrowed under the Company's existing credit facilities and the $60 million
Secured Credit Facility.
Included in Other Operations is FrontLine's ownership interest in RSVP Holdings,
LLC. For the three months ended March 31, 2000 and March 31, 1999, FrontLine's
share of RSVP Holdings, LLC's loss was approximately $0.2 million and $0.6
million, respectively.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
FrontLine has funded operations and investing activities through a combination
of borrowings under various credit facilities and issuances of the Company's
equity securities.
FrontLine funded approximately $86.9 million in cash and issued $24.6 million of
the Company's common stock to acquire interests in or make advances to new and
existing Partner Companies during the three months ended March 31, 2000. These
companies include: EmployeeMatters, Inc., LiveCapital.com, NeoCarta Ventures,
RealtyIQ.com, UpShot.com and VANTAS Incorporated.
The Company has a credit facility with Reckson in the amount of $100 million
("FrontLine Facility"). Additionally, Reckson Strategic Venture Partners, LLC
("Reckson Strategic") has established a $100 million facility with Reckson to
fund Reckson Strategic investments. Note 7 to the consolidated financial
statements summarizes the outstanding amounts and terms of the FrontLine and
Reckson Strategic Facilities. The Company had approximately $92.7 million
outstanding under the FrontLine Facility at March 31, 2000. Borrowings were
primarily used to fund acquisitions of ownership interests in Partner Companies
and general operations. Approximately $36.0 million was outstanding under the
Reckson Strategic Facility at March 31, 2000. These borrowings were utilized to
fund Reckson Strategic investments and general operations. At March 31, 2000,
$43.8 million was available on these Facilities.
FrontLine's secured credit facility for $60 million was fully drawn and repaid
during the three months ended March 31, 2000, and is therefore no longer
available.
On January 21, 2000, the Company entered into a merger agreement pursuant to
which VANTAS will be merged with HQ Global Workplaces, Inc. which is scheduled
to close by May 31, 2000. The merger is expected to be financed by $350 million
of HQ Global debt, carryover equity from the seller representing approximately
19% of the merged entity and $195 million of new equity from strategic
acquisitions. VANTAS has established a $35 million letter of credit and
FrontLine paid $15 million in cash to secure the obligations under the merger
agreement. This letter of credit is collateralized by shares of VANTAS stock
that are owned by FrontLine and guaranteed by FrontLine on a nonrecourse basis.
In the event that the letter of credit is drawn upon and the lender forecloses
upon the Company's shares of VANTAS, VANTAS is obliged to reimburse the Company
in the form of additional shares of VANTAS for any loss of the Company's shares
of VANTAS provided that such loss was not a result of the Company's gross
negligence. FrontLine has obtained commitments for the debt financing which are
subject to certain conditions and is in negotiations to obtain the equity
financing. However, no assurance can be given that the Company will be
successful in obtaining the equity financing required under the merger agreement
such that the merger will be consummated on its current terms or that the merger
will not be consummated for any other reason.
VANTAS has a credit agreement in the amount of $157.9 million (the "Credit
Agreement") with a significant financial institution. The credit agreement
contains certain financial covenants one of which requires VANTAS not to exceed
a maximum ratio of consolidated indebtedness to consolidated earnings before
interest, income taxes, depreciation and amortization. There are also other
covenants pertaining to additional financial ratios and limitations on capital
expenditures. At March 31, 2000, VANTAS did not meet certain of its financial
covenants. VANTAS is currently negotiating with its lenders for an increase in
the amount of the credit agreement and/or waiver of those covenants in
connection with VANTAS' proposed merger with HQ Global Workplaces. VANTAS has
obtained a commitment letter for the provision of a new credit facility, subject
to satisfaction of various conditions, which would provide a portion of the
financing necessary to consummate the merger, including funds necessary to
refinance the credit facility. There can be no assurance that VANTAS will meet
the conditions required to satisfy the existing commitment, that the HQ Global
Workplaces merger will occur or that, if the HQ Global Workplace merger does not
occur, VANTAS will be able to obtain a waiver with respect to the financial
covenants contained in the credit facility for the fiscal quarter ended March
31, 2000 and satisfy such covenants or obtain a waiver thereafter. Currently,
VANTAS has short term letters of credit totaling $10.2 million.
25
<PAGE>
The Company also funded investing activities for the three months ended March
31, 2000 with net proceeds of approximately $24.6 million from the completion of
26,000 shares of privately placed Convertible Preferred Stock offerings. On May
6, 2000, the Company paid a preferred dividend to the preferred shareholder of
approximately $0.6 million.
On March 7, 2000, an investment partnership invested $30 million to purchase 1.5
million warrants to acquire FrontLine's common stock at an exercise price of $70
per share. The warrants have a term of 3.25 years. The Company utilized
approximately half of these proceeds to reduce its $60 million Secured Credit
Facility ("Credit Facility") with a significant financial institution and the
remaining portion will be utilized for acquisitions of interest in Partner
Companies and working capital purposes.
On March 31, 2000, the Company sold approximately 2.6 million shares of its
common stock at a price of $47.25 per shares for an aggregate consideration of
approximately $122.6 million. Proceeds from the sale were utilized to repay the
remaining portion of the Credit Facility. As a result, certain deferred
financing costs of approximately $2.6 million were incurred in connection with
the Credit Facility were expensed as an extraordinary loss in the accompanying
consolidated statements of operations.
Subsequent to March 31, 2000, the Company funded an additional $8.9 million to
existing Partner Companies.
Currently, the Company has two short-term letters of credit totaling $3.2
million, which have been utilized as deposits for future acquisitions of
ownership interests in Partner Companies.
FrontLine's operations do not require intensive capital expenditures. There were
no significant capital expenditure commitments as of March 31, 2000.
FrontLine will continue to evaluate acquisition opportunities and expects to
acquire additional ownership interests in new and existing Partner Companies in
the next 12 months, all of which could make it necessary for the Company to
raise additional funds. The Company may not be able to obtain additional bank or
other financing beyond this period, or may only be able to do so on terms not
favorable or acceptable to the Company. If additional funds are raised through
the issuance of equity securities, existing shareholders may experience
significant dilution. Although management believes that it will continue to have
access to the public markets, the availability and amount of funds from these
markets is subject to numerous factors including some that are beyond the
Company's control, and therefore is not assured.
INFLATION
The Credit Facilities generally bear interest at variable rates. These rates
will be influenced by changes in the prime rate and is sensitive to inflation
and other economic factors. A significant increase in interest rates may have a
negative impact on the earnings of the Company due to the variable interest rate
under the Credit Facilities.
26
<PAGE>
ITEM 3. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk on its Credit
Facilities. The Company does not hedge interest rate risk using financial
instruments. The Credit Facilities bear interest at the greater of the prime
rate plus 2% or 12% (with interest on balances outstanding more than one year
increasing by 4% of the previous year's rate). The rate of interest on the
Credit Facilities will be influenced by changes in the prime rate and is
sensitive to inflation and other economic factors. A significant increase in
interest rates may have a negative impact on the earnings of the Company due to
the variable interest rate 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, 2000 (in thousands).
<TABLE>
<CAPTION>
For the year ended December 31,
2000 2001 2002 2003 2004 Thereafter Total FMV
---- ---- ---- ---- ---- ---------- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate $-- $-- $-- $128,715 $-- $ -- $128,715 $128,715
Average
interest rate -- -- -- 12.02% -- -- 12.02% --
</TABLE>
The primary market risk facing VANTAS is interest rate risk on its Credit
Agreement. As of March 31, 2000, VANTAS hedged interest rate risk using
financial instruments for a limited amount of its outstanding debt. The Credit
Agreement bears interest ranging from LIBOR plus 3.0% to LIBOR plus 3.75% for a
one, three or six month period at the election of VANTAS. The rate of interest
on the Credit Agreement 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 VANTAS due to the
variable interest under the Credit Agreement.
Based on variable rate debt levels, a 10% change in market interest rates (59
basis points on a weighted-average) would have an approximate 2.8% impact on the
VANTAS' interest expense, net.
VANTAS has not, and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes. As of March 31, 2000, VANTAS
had no other material exposure to market risk.
27
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds
The following securities were issued in transactions pursuant to the exemption
from registration under Section 4(2) of the Securities Act of 1933 and involved
only accredited investors.
From January 26, 2000 to March 17, 2000, the Company completed convertible
preferred stock offerings, to an accredited investor, of an aggregate of 26,000
shares of 8.875% Cumulative Convertible Preferred Stock, at a price of $1,000
per share, for net proceeds of $24.6 million.
Dividends on the Preferred Stock are payable quarterly in cash or, at the
Company's election, in common stock, provided certain conditions have been
satisfied. The Preferred Stock is redeemable on or after the third anniversary
of the date of issuance and is convertible at any time, at the option of the
holder, on or after the one year anniversary of the date of issuance. The
Preferred Stock is convertible into shares of the Company's common stock at a
price of $70.48.
On March 7, 2000, an investment partnership invested $30 million to purchase 1.5
million warrants to acquire the Company's common stock at an exercise price of
$70 per share. The warrants have a term of 3.25 years. The Company utilized
approximately half of these proceeds to reduce its $60 million Secured Credit
Facility with a significant financial institution.
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
<TABLE>
<S> <C>
Form 8K dated January 25, 2000 Relating to the Company's execution of merger agreements
with VANTAS Incorporated and HQ Global Workplaces, Inc.
Form 8K dated February 15, 2000 Relating to the Company's completion of
the acquisitions of ownership interests in VANTAS Incorporated.
Form 8K dated, March 2, 2000 Relating to the filing of financial statements with respect to
the Company's execution of merger agreements with VANTAS
Incorporated and HQ Global Workplaces, Inc.
Form 8K dated March 2, 2000 Relating to the filing of the financial information relating
to the merger of VANTAS Incorporated and HQ Global Workplaces,
Inc.
Form 8K dated March 28, 2000 Relating to the Company's name change to FrontLine Capital
Group, the issuance of 8.75% Cumulative Convertible Preferred
Stock and Warrant Purchase Agreement with Gotham Partners,
L.P. and affiliates.
</TABLE>
Exhibit 10.1 Letter Amendment to Frontline Capital Group's Credit Agreements.
28
<PAGE>
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.
FRONTLINE CAPITAL GROUP
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 15, 2000
29
EXHIBIT 10.1
November 30, 1999
Reckson Service Industries Inc.
10 East 53rd Street
New York, New York 10022
Re: Second Amended and Restated Credit Agreements
Dear Sirs:
Reference is made to the Amended and Restated Credit Agreement, dated as of
August 4, 1999, between Reckson Service Industries, Inc., as Borrower (the
"Borrower") and Reckson Operating Partnership, L.P., as Lender (the "Lender")
relating to the operations of the Borrower (the "RSI Facility"), and the Amended
and Restated Credit Agreement, dated as of August 4, 1999, between the Borrower
and the Lender relating to Reckson Strategic Venture Partners LLC (together with
the RSI Facility, the "Credit Facilities"). Capitalized terms used herein and
not otherwise defined shall have the meaning ascribed to such terms in the
Credit Facilities.
You have advised us of your proposal to obtain (i) a $60 million secured
loan from Warburg Dillon Read and UBS AG (or other lenders) substantially on the
terms set forth on the term sheet attached hereto as Exhibit A (the "Secured $60
million Loan") and (ii) a $75 million secured loan from Reckson Strategic
Venture Partners LLC (or other lenders) substantially on the terms set forth in
the term sheet attached hereto as Exhibit B (the "Secured $75 million Loan" and,
together with the Secured $60 million Loan, the "Secured Loans"). You have also
advised us of your proposal to issue up to $200 million in preferred stock (the
"Preferred Stock").
<PAGE>
1. Amendments. We hereby agree to the following amendments to the Credit
Facilities:
a. Section 1.1(b) is hereby amended to add the following definition:
"Adjusted EBITDA" shall mean, for any fiscal quarter, EBITDA less any
amounts payable (i) by any subsidiary in respect of the Indebtedness
of such Subsidiary (including, but not limited to, Indebtedness of
VANTAS Incorporated and the Secured $75 million Loan) and (ii) by the
Borrower in respect of the Secured $60 million Loan.
b. The third sentence of Section 3.1 of the Credit Facilities is hereby
amended by deleting the references to "EBITDA" and replacing such
references with the term "Adjusted EBITDA."
c. Section 7.2(c) of the Credit Facilities is hereby amended to add the
following:
(iv) Indebtedness of the Borrower payable to its subsidiaries, partner
companies or other companies into which the Borrower makes
investments to evidence the obligation of the Borrower to fund
future capital commitments into such entities.
2. Consents. We hereby consent to the following:
a. The Liens to be granted under the Secured Loans shall be deemed to be
Permitted Liens for purposes of the Credit Facilities.
b. In accordance with Section 7.2(c)(iii) of the Credit Facilities, the
incurrence of Indebtedness under the Secured Loans and the payment of
interest thereon is hereby approved.
c. In accordance with Sections 7.2(d) and 7.2(e) of the Credit
Facilities, the filing of one or more Certificates of Designation and
any amendments thereto in respect of the Preferred Stock, and the
payment by the Borrower of dividends to the holders of the Preferred
Stock, is hereby approved.
3. Fees. It is understood that a fee equal to 176,186 shares of common stock,
par value $.01 per share, of the Borrower shall be paid to us upon delivery
of this letter in consideration of the matters covered in this letter.
Very truly yours,
RECKSON OPERATING PARTNERSHIP, L.P.
By: Reckson Associates Realty Corp., general partner
By:
--------------------------------
Name:
Title:
Confirmed and Accepted:
RECKSON SERVICE INDUSTRIES, INC.
By:
-------------------------------
Name:
Title:
2
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001052743
<NAME> FRONTLINE CAPITAL GROUP
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JAN-31-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 108,318
<SECURITIES> 0
<RECEIVABLES> 9,335
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 134,288
<PP&E> 295,409
<DEPRECIATION> (20,285)
<TOTAL-ASSETS> 657,749
<CURRENT-LIABILITIES> 60,784
<BONDS> 303,147
0
0
<COMMON> 347
<OTHER-SE> 278,133
<TOTAL-LIABILITY-AND-EQUITY> 657,749
<SALES> 0
<TOTAL-REVENUES> 62,573
<CGS> 0
<TOTAL-COSTS> 56,946
<OTHER-EXPENSES> 15,275
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,003
<INCOME-PRETAX> (19,651)
<INCOME-TAX> 190
<INCOME-CONTINUING> (37,137)
<DISCONTINUED> 0
<EXTRAORDINARY> 2,648
<CHANGES> 0
<NET-INCOME> (40,311)
<EPS-BASIC> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
