SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
-------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 28, 2000
RECKSON SERVICE INDUSTRIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
0-30162 11-3383642
(Commission File Number) (IRS Employer Id. Number)
230 Park Avenue, 10th Floor 10169
New York, New York (Zip Code)
(Address of principal executive offices)
(212) 931-8000
(Registrant's telephone number, including area code)
<PAGE>
Reckson Service Industries, Inc. (the "Company") is filing this Current
Report on Form 8-K to file the financial information below relating to the
merger of VANTAS Incorporated, a subsidiary of the Company, with HQ Global
Workplaces, Inc. (the "Merger"). The Company previously reported the Merger in
a Current Report on Form 8-K filed with the Securities and Exchange Commission
on or about January 25, 2000.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
HQ Global Workplaces, Inc. and Subsidiaries and its Predecessor Entities
------------------------------------------------------------------------
- Consolidated Financial Statements
------------------------------------
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
OmniOffices (UK) Limited - Consolidated Financial Statements
------------------------------------------------------------
Report of the auditors to the members of OmniOffices (UK) Limited
Group Profit and Loss Account for the year ended December 31, 1999 and for
the nine months ended December 31, 1998
Statement of Total Recognized Gains and Losses for the year ended December
31, 1999 and for the nine months ended December 31, 1998
Group and OmniOffices (UK) Limited Balance Sheets as of December 31, 1998
and December 31, 1998
Group Statements of Cash Flows for the year ended December 31, 1999 and
the nine months ended December 31, 1998
Notes to Financial Statements
(b) Pro Forma Financial Information
Reckson Service Industries, Inc. and Subsidiaries
-------------------------------------------------
Pro Forma Condensed Consolidating Balance Sheet (unaudited) as of
December 31, 1999
Pro Forma Condensed Consolidating Statement of Operations (unaudited) for
the year ended December 31, 1999
Notes to Pro Forma Consolidated Financial Statements (unaudited)
HQ - NEWCO
----------
Pro Forma Condensed Consolidating Balance Sheet (unaudited) as of
December 31, 1999
Pro Forma Condensed Consolidating Statement of Operations (unaudited) for
the year ended December 31, 1999
Notes to Pro Forma Consolidated Financial Statements (unaudited)
Schedule I - VANTAS Incorporated and Subsidiaries - Pro Forma
Consolidating Statement of Operations (unaudited) for the
year ended December 31, 1999
Schedule II - HQ Global Workplaces, Inc. and Subsidiaries - Pro Forma
Consolidating Statement of Operations (unaudited) for the year ended
December 31, 1999
(c) Exhibits
23.1 Consent of KPMG LLP
23.2 Consent of KPMG LLP
23.3 Consent of BDO Seidman, LLP
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(formerly OmniOffices, Inc.) and Subsidiaries
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Reports Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders of
HQ Global Workplaces, Inc.:
We have audited the accompanying consolidated balance sheets of HQ Global
Workplaces, Inc. and subsidiaries (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1999 and 1998 and the
period from August 25, 1997 (inception) to December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HQ Global
Workplaces, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999 and 1998, and the period from August 25, 1997 (inception) to December
31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Atlanta, Georgia
February 18, 2000
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
OmniOffices Group, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of OmniOffices Group, Inc. for the period
from January 1, 1997 to August 25, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
OmniOffices Group, Inc. for the period from January 1, 1997 to August 25, 1997,
in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Atlanta, Georgia
February 13, 1998
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands, except shares)
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 57 9,815
Cash in escrow 3,656 18,963
Certificates of deposit 6,923 8,777
Accounts receivable, less allowance for
doubtful accounts of $1,547 and $330, respectively 19,298 6,903
Unbilled service revenues 2,833 1,013
Prepaid rent 5,287 2,627
Income tax receivable 113 --
Deferred tax assets 2,071 2,238
Other receivables 1,426 703
Other prepaid expenses 1,379 685
---------------- ----------------
Total current assets 43,043 51,724
Property and equipment, net of accumulated
depreciation of $16,353 and $5,311, respectively 82,953 42,767
Goodwill, net of accumulated amortization of
$11,431 and $4,848, respectively 189,441 175,762
Other intangible assets, net of accumulated amortization
of $1,817 and $645, respectively 17,077 14,857
Deferred financing costs, net of accumulated
amortization of $837 and $270, respectively 898 1,465
Investment in affiliates 1,387 1,521
Other noncurrent assets 1,880 1,435
Deferred tax assets 456 --
---------------- ----------------
$ 337,135 289,531
================ ================
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
---------------- ----------------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 141,503 1,178
Accounts payable 7,276 3,188
Other current liabilities 6,693 8,872
Advances from Parent company 2,074 1,046
Security deposits 23,675 16,297
Escrow deposit obligations 3,436 16,499
Accrued lease costs 7,033 3,120
Current tax liability -- 476
---------------- ----------------
Total current liabilities 191,690 50,676
Long-term debt 1,024 94,973
Escrow deposit obligations 75 2,075
Deferred income taxes -- 90
---------------- ----------------
Total liabilities 192,789 147,814
---------------- ----------------
Shareholders' equity:
Class A common stock-voting, $.01 par value;
authorized 1,000,000 shares; issued and outstanding
360,526 and 69,192 shares, respectively 4 1
Class B common stock-nonvoting, $.01 par value;
authorized 19,000,000 shares; issued and outstanding
7,016,800 and 6,999,000 shares, respectively 70 70
Additional paid-in capital 147,473 141,382
Retained earnings (accumulated deficit) (3,201) 264
---------------- ----------------
Total shareholders' equity 144,346 141,717
Commitments and contingencies (note 10)
---------------- ----------------
Total liabilities and shareholders' equity $ 337,135 289,531
================ ================
</TABLE>
<TABLE>
<CAPTION>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years ended December 31, 1999 and 1998, the Period from August 25, 1997 (inception)
to December 31, 1997, and the Period from January 1, 1997 to August 25, 1997
(in thousands)
COMPANY'S
COMPANY PREDECESSOR
------------------------------------------------------------------------------
FOR THE FOR THE FOR THE PERIOD FROM FOR THE
YEAR ENDED YEAR ENDED AUGUST 25, 1997 PERIOD FROM
DECEMBER 31, DECEMBER 31, (INCEPTION) TO JANUARY 1, 1997 TO
1999 1998 DECEMBER 31, 1997 AUGUST 25, 1997
----------------- --------------- -----------------------------------------------
<S> <C> <C> <C> <C>
Business center revenues $ 216,316 136,312 17,915 32,086
---------- ------------ --------- -----------
Business center expenses 116,585 67,740 8,661 14,997
General and administrative expense 76,754 47,968 7,053 14,237
Depreciation and amortization expense 18,797 9,445 1,359 1,872
---------- ------------ --------- -----------
Total operating expenses 212,136 125,153 17,073 31,106
---------- ------------ --------- -----------
Net operating income 4,180 11,159 842 980
Other income (expense):
Interest income 1,435 1,653 169 668
Other income 406 -- -- --
Related party interest expense -- (6,105) (1,067) --
Net loss of affiliates accounted for
under the equity method (469) -- -- --
Interest expense (9,521) (4,866) (72) (55)
---------- ------------ --------- -----------
Income (loss) before
income taxes (3,969) 1,841 (128) 1,593
Income tax benefit (expense) 504 (1,496) 47 --
---------- ------------ --------- -----------
Net (loss) income $ (3,465) 345 (81) 1,593
========== ============ ========= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years ended December 31, 1999 and 1998, the Period from August 25, 1997 (inception)
to December 31, 1997, and the Period from January 1, 1997 to August 25, 1997
(in thousands, except shares)
RETAINED
CLASS A CLASS B ADDITIONAL EARNINGS AMOUNTS TOTAL
COMMON STOCK COMMON STOCK PAID-IN (ACCUMULATED DUE FROM SHAREHOLDERS'
---------------------- -------------------------
SHARES AMOUNTS SHARES AMOUNTS CAPITAL DEFICIT) SHAREHOLDERS EQUITY
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 25,400 $ 25 -- $ -- 6,567 6,076 (933) 11,735
Distributions to shareholders -- -- -- -- -- (1,683) -- (1,683)
Shareholder repayments -- -- -- -- -- -- 624 624
Roll-up transaction 74,600 (24) -- -- 24 -- -- --
Net income -- -- -- -- -- 1,593 -- 1,593
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, August 25, 1997,
Company's predecessor 100,000 1 -- -- 6,591 5,986 (309) 12,269
New basis resulting
from acquisition (note 1(a)) (50,000) -- 950,000 9 13,399 (5,986) 309 7,731
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, August 25, 1997 50,000 1 950,000 9 19,990 -- -- 20,000
Net loss -- -- -- -- -- (81) -- (81)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 50,000 1 950,000 9 19,990 (81) -- 19,919
Issuance of common stock 19,192 -- 6,049,000 61 121,392 -- -- 121,453
Net income -- -- -- -- -- 345 -- 345
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1998 69,192 1 6,999,000 70 141,382 264 -- 141,717
Issuance of common stock 291,334 3 17,800 -- 6,091 -- -- 6,094
Net loss -- -- -- -- -- (3,465) -- (3,465)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 1999 360,526 $ 4 7,016,800 $ 70 147,473 (3,201) -- 144,346
========= ========= ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years ended December 31, 1999 and 1998, the Period from August 25, 1997 (inception)
to December 31, 1997, and the Period from January 1, 1997 to August 25, 1997
(in thousands)
COMPANY'S
COMPANY PREDECESSOR
----------------------------------------------- ----------------
FOR THE FOR THE
FOR THE FOR THE PERIOD FROM PERIOD FROM
YEAR ENDED YEAR ENDED AUGUST 25, 1997 JANUARY 1, 1997
DECEMBER 31, DECEMBER 31, (INCEPTION) TO TO
1999 1998 DECEMBER 31, 1997 AUGUST 25, 1997
------------ -------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ (3,465) 345 (81) 1,593
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 18,797 9,445 1,359 1,884
Allowance for doubtful accounts 1,217 270 30 197
Capitalized restructuring costs -- -- -- (254)
Amortization of deferred financing 567 202 -- --
Deferred compensation 267 89 -- --
Net loss of affiliates accounted for under the
equity method 469 -- -- --
Accrued lease costs 3,913 2,780 340 1,163
Loss (gain) on disposal of fixed assets -- -- -- (86)
Deferred taxes (716) 962 (47) --
Changes to assets and liabilities, net of acquisitions:
Accounts receivable (12,695) (3,276) (25) (887)
Income taxes (184) 534 -- 7
Prepaid expenses (3,059) (1,498) (1,120) 578
Other current and noncurrent assets (2,671) 937 43 17
Accounts payable 1,310 728 330 679
Security deposits 6,566 1,836 672 691
Other current liabilities (1,585) 2,458 170 57
-------- -------- -------- --------
Net cash provided by operating activities 8,731 15,812 1,671 5,639
-------- -------- -------- --------
Investing activities:
Maturity (purchase) of certificates of deposit 1,854 (3,095) (1,214) (408)
Investment in affiliates (373) (870) -- --
Capital expenditures (48,378) (19,495) (2,629) (2,701)
Decrease (increase) in cash surrender value of
life insurance -- -- -- (153)
Proceeds from sale of fixed assets -- -- -- 237
Cash received from (placed in) escrow 244 (300) (73) --
Business acquisitions, net of cash acquired (25,308) (166,438) (46,870) --
-------- -------- -------- --------
Net cash used in investing activities (71,961) (190,198) (50,786) (3,025)
-------- -------- -------- --------
Financing activities:
Principal payments on long-term debt -- -- -- (927)
Principal payments on capital leases (383) (859) -- --
Advances (to) from parent company 1,028 (47) 1,093 624
Proceeds from related party borrowing -- 78,707 32,000 --
Proceeds from issuance of common stock 5,827 10,657 20,000 --
Proceeds from draw down on revolving credit agreement 47,000 93,500 -- --
Financing costs on revolving credit agreement -- (1,735) -- --
Cash distributions to shareholders -- -- -- (1,683)
-------- -------- -------- --------
Net cash (used in) provided by
financing activities 53,472 180,223 53,093 (1,986)
-------- -------- -------- --------
Net (decrease) increase in cash and
cash equivalents (9,758) 5,837 3,978 628
Cash and cash equivalents, beginning of period 9,815 3,978 -- 4,589
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 57 9,815 3,978 5,217
======== ======== ======== ========
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
HQ Global Workplaces, Inc. (formerly OmniOffices, Inc.), and
subsidiaries (the "Company") is engaged in the business of
providing business outsourcing services including business centers
and related telecommunications, secretarial, and office support
services. The Company operates 154 business centers located
throughout the United States and abroad.
On August 25, 1997, the Company was formed pursuant to the Asset
Purchase Agreement between OmniOffices Group, Inc. ("Seller") and
CarrAmerica Acquisition Sub, Inc. ("Buyer"), a wholly owned
subsidiary of CarrAmerica Realty Corporation ("Parent").
Subsequent to the acquisition, the Buyer was renamed OmniOffices,
Inc.
The 1997 predecessor financial statements include the combined
accounts of 43 subchapter S Corporations (the "S-Corporations")
under the common control of the Company. The S-Corporations were
engaged in similar business activities, except for The Travel
Desk, Inc. which operates as a travel agency and accounted for
less than 10% of revenues. On April 1, 1997, the S Corporations
were merged into a new corporation, "OmniOffices Group, Inc."
(roll-up transaction), and the existing shareholders in the
previous S Corporations received a prorata share in the new
Company. With effect from April 1, 1997, the financial statements
have been presented on a consolidated basis, including OmniOffices
Group, Inc. and Travel Desk, Inc. All significant intercompany
accounts and transactions have been eliminated.
In 1999 and 1998, the Company acquired 19 and 70 franchised HQ
Business Centers (HQ), respectively, which brought the Company's
total business centers owned and franchised to 232 as of December
31, 1999. The Company's consolidated statements of operations
include the operating results of the acquired entities from their
respective acquisition dates.
In 1999, the Company legally changed its name to HQ Global
Workplaces, Inc.
(B) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of intercompany
accounts and transactions. Investments in the other companies that
the Company does not control but has the ability to exercise
significant influence over operating and financial policies are
accounted for using the equity method.
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
(C) ESTIMATES
The preparation of financial statements in accordance with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(D) STOCK/UNIT OPTION PLANS
The Company accounts for stock options in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, which established a new
method of accounting for stock-based compensation arrangements
with an entity's employees. The new method is a fair value based
method rather than the intrinsic value based method prescribed by
the Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES. SFAS No. 123 allows entities to
retain the current approach set forth in APB No. 25 for
recognizing stock-based compensation expense in the basic
financial statements. Entities electing to apply the provisions of
APB No. 25 are required to make pro forma disclosures of net
earnings and earnings per share as if the fair value based method
had been used. The Company continues to apply the provisions of
APB No. 25 for purposes of measuring compensation cost and follows
the disclosure provisions of SFAS No. 123.
(E) ADVERTISING
Advertising costs are expensed as incurred. Advertising costs
amounted to approximately $3,092, $2,952, $645 and $780 for the
years ended December 31, 1999 and 1998, the period from August 25,
1997 to December 31, 1997, and the period from January 1, 1997 to
August 25, 1997, respectively.
(F) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is
computed using the straight-line method over the following
estimated useful lives: furniture and fixtures - seven years;
office equipment - five years; leasehold improvements - the
shorter of the estimated useful life or the life of the respective
lease.
The Company reviews its property and equipment for impairment
whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of
assets held and used is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
(G) INTANGIBLE ASSETS
Goodwill represents the excess of purchase price over the fair
value of net assets acquired in business combinations accounted
for as purchases. Goodwill is amortized on the straight-line basis
over the estimated period benefited of 30 years. Other intangible
assets include the fair value of leases assumed, capitalized
development costs and acquisition costs, and are amortized on the
straight-line basis over the period benefited, using the term of
the leases for fair value of leases assumed and development costs
and 30 years for acquisition costs.
The Company assesses the recoverability of these intangible assets
by determining whether the balance can be recovered over its
remaining life through undiscounted future operating cash flows of
the operations acquired. The amount of impairment loss, if any, is
measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets. The assessment of the
recoverability of intangible assets will be impacted if estimated
future operating cash flows are not achieved. As of December 31,
1999, management believes no impairment is indicated.
(H) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized
in income in the period that includes the enactment date.
The Company's predecessor operated through a number of S
Corporations prior to August 25, 1997 and as a result the income
tax liability was the responsibility of the individual
shareholders.
(I) CASH AND CASH EQUIVALENTS
The Company, at December 31, 1999 and 1998 had balances in various
operating accounts and certificates of deposit. The Company
considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(J) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the following financial instruments
approximates fair value because of their short-term maturity; cash
and cash equivalents, accounts receivable, accounts payable and
accrued expenses (see note 6 regarding long-term debt).
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
(K) RENTAL EXPENSE
The Company recognizes base rental expense straight-line over the
terms of the respective leases. The Company records accrued lease
costs representing the amount that straight-line rental expense
exceeds rents paid under the lease agreements.
(L) DEFERRED FINANCING COSTS
Deferred financing costs include fees and costs incurred to obtain
financing and are being amortized over the terms of the respective
loan on a basis which approximates the interest method.
(M) CAPITALIZED ACQUISITION AND DEVELOPMENT COSTS
The Company capitalizes acquisition and development costs under
SFAS No. 67, ACCOUNTING FOR COSTS AND INITIAL RENTAL OPERATIONS OF
REAL ESTATE PROJECTS. The Company amortizes the acquisition costs
on a straight-line basis over 30 years and the development costs
on a straight-line basis over the life of the related lease.
(N) ESCROW DEPOSIT OBLIGATIONS
Escrow deposit obligations are monies placed in escrow accounts,
as a result of business acquisitions. These escrow accounts were
established to allow for settlement of contingencies that were not
known at the date of acquisition and will be settled in accordance
with the terms of the respective purchase agreements. Amounts
expected to be paid or resolved within the next 12 months have
been classified as current liabilities. The Company earns interest
on the escrow funds during the period held in escrow.
(O) INDUSTRY SEGMENT
On January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The
Company operates and manages its business in one segment,
providing business outsourcing services.
(P) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its
components in a full set of financial statements. The Company
has no "other comprehensive income" to report for any of the
periods presented.
(Q) REVENUE RECOGNITION
The Company records revenue from business outsourcing services as
the related services are performed, usually at amounts agreed in
written arrangements.
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
(R) RECLASSIFICATIONS
Certain reclassifications of the prior periods' amounts have been
made to conform to the 1999 presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1999 1998
--------------- ------------
Furniture and fixtures $ 31,970 17,372
Office equipment 37,810 19,882
Leasehold improvements 29,526 10,824
--------------- ------------
Total property and equipment 99,306 48,078
Less accumulated depreciation 16,353 5,311
--------------- ------------
$ 82,953 42,767
=============== ============
(3) RELATED PARTY TRANSACTIONS
The Company paid monthly interest expense at a rate of 9.5% to the
Parent pursuant to a promissory note executed between the Company and
the Parent. The note (principal balance of $110,707) was exchanged for
5,535,353 shares of nonvoting common stock on September 30, 1998. The
total amount of interest paid to the Parent was approximately $-0- and
$6,105 for the years ended December 31, 1999 and 1998, respectively.
The Company owed approximately $2,074 and $1,046 to the Parent as of
December 31, 1999 and 1998, respectively, for costs paid by the Parent
on the Company's behalf.
Approximately $381 in advertising expense was incurred through a company
affiliated with a majority shareholder for the period ended August 25,
1997.
(4) INVESTMENT IN AFFILIATES
On May 19, 1998, the Company acquired a 5% interest in OmniOffices (UK)
Limited ("Omni UK") based in London, England for approximately $870 in
cash. OmniOffices (UK) Limited is a provider of business outsourcing
services including business centers and related business support
services. The Company contributed additional cash in 1999 and 1998
maintaining its 5% interest. The Company also acquired a 5% interest in
several Luxembourg entities ("Omni Lux") with a nominal cash investment.
Omni Lux is also a provider of business outsourcing services including
business centers and related business support services. These investments
are accounted for under the equity method, as the Company has the ability
to exercise significant influence over operating and financial policies
of these affiliated companies.
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
Summarized financial information of Omni UK and Omni Lux as of and for
the year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
UK LUX
---------------- ----------------
(unaudited)
<S> <C> <C>
Assets:
Current assets $ 11,724 1,466
Fixed assets, net 17,112 715
Other assets 55,099 1,536
---------------- ----------------
$ 83,935 3,717
================ ================
Liabilities and shareholders' equity:
Current liabilities $ 17,864 939
Noncurrent liabilities 38,285 3,558
Shareholders' equity (deficit) 27,786 (780)
---------------- ----------------
$ 83,935 3,717
================ ================
Revenue $ 20,011 1,324
Gross profit 17,350 1,016
Loss before income taxes (8,722) (1,300)
Net loss (8,335) (1,038)
</TABLE>
(5) ACQUISITIONS
In both 1999 and 1998, the Company acquired various HQ franchises
consisting of 19 and 70 facilities, respectively. Each of these
transactions was accounted for as a purchase business combination. Based
on the allocation of the purchase price to the net assets acquired,
goodwill of approximately $20,112 and $144,384 was recorded in 1999 and
1998, respectively. Such goodwill is being amortized on a straight-line
basis using an estimated useful life of 30 years.
On January 21, 1999, the Company acquired all of the outstanding stock of
HQ Argentina for approximately $3.0 million in cash. On March 15, 1999,
the Company acquired all of the outstanding stock of HQ Network Systems,
Inc. ("HQNS") for approximately $2.6 million in cash. On March 31, 1999,
the Company acquired certain net assets of HQ Portland, for approximately
$5.6 million in cash. On April 1, 1999, the Company acquired certain net
assets of HQ-BusinesSuites Austin Co., BusinesSuites Greatfields Ltd. And
BusinesSuites Dallas Ltd. (HQ Austin) for approximately $6.0 million in
cash. On April 15, 1999, the Company acquired all of the outstanding
stock of Overfield Balk and Associates, Inc. ("HQ San Jose") for
approximately $4.7 million in cash. On May 14, 1999, the Company acquired
certain net assets of HQ Buffalo for approximately $0.9 million in cash.
On September 30, 1999, the Company acquired certain net assets of HQ
Seattle for approximately $2.5 million in cash. These acquisitions were
all accounted for under the purchase method of accounting,
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
and accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on the estimated fair values at
the date of acquisition. The fair values for the assets acquired,
including goodwill, and the liabilities assumed are summarized in the
table below. The results of operations for these acquired companies
are included in the Company's consolidated statement of operations
from the dates of each of the acquisitions.
<TABLE>
<CAPTION>
HQ HQ HQ HQ HQ HQ
ARGENTINA HQNS PORTLAND AUSTIN SAN JOSE BUFFALO SEATTLE
----------- -------- ---------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Fair value of assets acquired $ 858 1,808 1,242 898 2,400 189 945
Goodwill and acquisition 2,399 1,346 4,540 5,372 3,197 739 2,519
costs
Fair value of liabilities (262) (511) (147) (346) (863) (70) (945)
assumed
----------- -------- ---------- -------- --------- --------- --------
Total purchase price $ 2,995 2,643 5,635 5,924 4,734 858 2,519
=========== ======== ========== ======== ========= ========= ========
</TABLE>
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
On March 4, 1998, the Company acquired all of the outstanding stock of Executive
Office Network, Ltd. and Subsidiaries, ("HQ New York") for approximately $33.5
million in cash. On March 14, 1998, the Company acquired all of the outstanding
stock of HQ Washington, D.C. for approximately $9.9 million in cash. On April
24, 1998, the Company acquired all of the outstanding stock of HQ - Business
Centers, ("HQ-Boston") for approximately $18.6 million in cash. On April 30,
1998, the Company acquired certain net assets of HQ San Rafael for approximately
$1.0 million in cash. On May 1, 1998, the Company acquired certain net assets of
HQ-Whitehouse Affiliated Companies, ("HQ Chicago"), for approximately $55.7
million in cash. On May 1, 1998, the Company acquired all of the outstanding
stock of HQ Business Centers of Atlanta, ("HQ Atlanta'), for approximately $12.3
million in cash. On May 1, 1998, the Company acquired certain net assets of
Charles W. Roy Associates, Inc. et als., ("HQ New Jersey"), for approximately
$17.7 million in cash. On July 1, 1998, the Company acquired certain net assets
of HQ Parsippany for approximately $6.2 million in cash. On July 22, 1998, the
Company acquired all of the outstanding stock of HQ Salt Lake City for
approximately $5.8 million in cash. On July 31, 1998, the Company acquired all
of the outstanding stock of HQ Phoenix for approximately $3.6 million in cash.
On August 7, 1998, the Company acquired certain net assets of HQ Saint Louis for
approximately $2.3 million in cash. These acquisitions were all accounted for
under the purchase method of accounting, and accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based on the
estimated fair values at the date of acquisition. The fair values for the assets
acquired, including goodwill, and the liabilities assumed are summarized in the
table below. The results of operations for these acquired companies are included
in the Company's consolidated statement of operations from the date of each
acquisition.
<TABLE>
<CAPTION>
HQ
HQ WASHINGTON, HQ HQ HQ HQ SAN
NEW YORK DC CHICAGO ATLANTA BOSTON RAFAEL
-------- ---------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Fair value of assets acquired $ 14,046 2,798 9,573 2,428 1,665 65
Goodwill 24,298 8,805 50,483 10,398 17,413 1,001
Fair value of liabilities assumed (4,802) (1,671) (4,596) (498) (509) (66)
-------- -------- -------- -------- -------- --------
Total purchase price $ 33,542 9,932 55,460 12,328 18,569 1,000
======== ======== ======== ======== ======== ========
(table continued)
HQ NEW HQ HQ SALT HQ HQ SAINT
JERSEY PARSIPPANY LAKE CITY PHOENIX LOUIS
-------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fair value of assets acquired 3,112 1,039 1,162 784 426
Goodwill 16,085 5,804 4,941 3,170 1,986
Fair value of liabilities assumed (1,497) (609) (349) (366) (81)
-------- -------- -------- -------- --------
Total purchase price 17,700 6,234 5,754 3,588 2,331
======== ======== ======== ======== ========
</TABLE>
The following unaudited pro forma summary presents information as if the
Company's acquisitions through December 31, 1999 had occurred at the beginning
of 1998. The pro forma information is provided for informational purposes only.
It is based on historical information and does not necessarily reflect the
actual results that would have occurred nor is it necessarily indicative of
future results of operations of the Company.
1999 1998
--------- ---------
Total revenue $ 224,391 195,051
Net loss (3,273) (2,446)
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
(6) LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------------- ----------------
<S> <C> <C>
Balance outstanding on $200,000 credit agreement, guaranteed by
Parent, at either the higher of the prime rate or the Federal Funds
Rate, or an interest rate equal to 90 basis points above the 30 day
LIBOR (6.73% and
5.76% at December 31, 1999 and 1998, respectively) $ 140,500 93,500
Improvement loans from landlords payable in monthly
installments including interest at 10%-12% through
December, 2008 460 473
Equipment purchases obligations, collateralized by specific
equipment, payable in monthly installments including
interest at various rates maturing from 1999 to 2003
1,182 2,118
Promissory notes at 4.5% interest paid annually, maturing
in January 2000; subordinate to credit agreement 325 --
Promissory note at 6.0% interest paid annually, maturing
April 30, 2004 60 60
-------------- ----------------
142,527 96,151
Less current maturities 141,503 1,178
-------------- ----------------
Total long-term debt $ 1,024 94,973
============== ================
</TABLE>
On August 27, 1998, the Company entered into an unsecured credit
agreement, guaranteed by an affiliated company, providing for an
aggregate availability of up to $200 million, consisting of a 3-year,
$200 million revolving credit facility and available letters of credit.
The credit facility bears interest at either the higher of the prime
rate or the Federal Funds Rate, or an interest rate equal to 90 basis
points above the 30-day London Interbank Offered Rate, LIBOR, and is
due in August of 2001. The Company has predominantly elected interest
rates equal to the LIBOR plus 90 basis points. The credit facility
requires a facility fee equal to .20% per annum on the aggregate
commitments and a letter of credit fee ranging from .55% to .80% per
annum on undrawn issued letters of credit, both payable quarterly. The
credit facility contains certain covenants including a restriction of
further indebtedness, a restriction of the amount of dividends payable,
and restrictions on changes of control. As of December 31, 1999, the
Company was in compliance with all such covenants (See Note 14). The
credit agreement also includes available letters of credit totaling the
aggregate amount of $20.0 million, of which $10.8 million were
outstanding as of December 31, 1999. At December 31, 1999, the Company
had unused availability of $48.7 million under this credit agreement.
The fair market value of the Company's long-term debt approximates the
carrying value, because the current rates are variable or approximate
rates currently available to the Company.
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
Annual maturities for the next five years and thereafter are as follows:
YEAR AMOUNT
--------------
2000 $ 141,503
2001 438
2002 185
2003 73
2004 121
Thereafter 207
--------------
Total $ 142,527
==============
(7) OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Rent collected in advance $ 222 1,994
Accrued bonuses 1,711 1,754
Accrued payroll and payroll taxes 1,312 865
Other accrued taxes 710 1,765
Accrued acquisition costs 1,044 1,164
Travel deposits 101 204
Other liabilities 1,593 1,126
------------- -------------
$ 6,693 8,872
============= =============
</TABLE>
(8) LEASE COMMITMENTS
The Company operates in leased office facilities at 154 facility
locations under noncancelable operating leases with 10-15 year terms
which expire at various dates through 2015. Many office facility leases
provide for annual adjustments relating to changes in property taxes and
operating expenses. The Company provided standby letters of credit in
lieu of security deposits totaling $15,344 and $11,259 at December 31,
1999 and 1998, respectively. These standby letters of credit are
collateralized by $6,923 and $8,777 of certificates of deposit as of
December 31, 1999 and 1998, respectively. The remaining letters of credit
at December 31, 1999 are collateralized by the Company's credit
agreement.
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
The following is a schedule at December 31, 1999 of future minimum lease
payments under the office facilities' operating leases excluding annual
operating adjustments:
YEAR AMOUNT
--------------
2000 $ 72,991
2001 73,856
2002 69,558
2003 65,462
2004 60,475
Thereafter 302,006
--------------
Total $ 644,348
==============
Office rent expense including operating expense adjustments for the years
ended December 31, 1999 and 1998, the period from August 25, 1997 to
December 31, 1997, and the period from January 1, 1997 to August 25, 1997
was $78,374, $44,809, $5,064, and $8,344, respectively.
(9) INCOME TAXES
The provision (benefit) for Federal and state income taxes for the years
ended December 31, 1999 and 1998 and the period from August 25, 1997 to
December 31, 1997 is comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ---------
Current:
<S> <C> <C> <C>
Federal $ -- 58 --
State 212 476 --
----------- ------------ ---------
212 534 --
----------- ------------ ---------
Deferred:
Federal $ (649) 929 (40)
State (67) 33 (7)
----------- ------------ ---------
(716) 962 (47)
----------- ------------ ---------
Income tax (benefit) expense $ (504) 1,496 (47)
=========== ============ =========
</TABLE>
Income (loss) before taxes consisted of the following:
1999 1998 1997
----------- --------- --------
U.S. operations $ (4,183) 1,841 (128)
Foreign operations 214 -- --
----------- --------- --------
$ (3,969) 1,841 (128)
=========== ========= ========
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
The effective tax rate applied to income from continuing operations
before income taxes and minority interest varies from the U.S. Federal
statutory tax rate for the years ended December 31, 1999 and 1998 and the
period from August 25, 1997 to December 31, 1997 principally due to the
following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 35.0 35.0
State and city income taxes, net of
Federal income tax effect (2.7) 10.5 3.9
Federal income tax effect of amortization
nondeductible for tax purposes (15.9) 28.2 --
Income tax effect of meals and
entertainment expenses not deductible
for tax purposes (4.2) 4.2 --
Other 0.5 3.3 (2.2)
----------- ---------- ----------
Total effective income tax rate 12.7% 81.2 36.7
=========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred income taxes
as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Deferred income tax assets:
Net operating loss carry forwards $ -- 4,211 -- 3,015
Accrued lease costs -- 3,102 -- 1,322
Miscellaneous deferred items 9 -- -- --
Security deposits and revenues 1,411 -- 1,967 --
collected in advance
Allowance for doubtful accounts 651 -- 159 --
General liability provision -- -- 46 --
Alternative minimum tax -- 66 66 --
------------ -------------- ------------ --------------
Deferred income tax assets 2,071 7,379 2,230 4,337
Deferred income tax liabilities -
depreciation and amortization -- 6,923 -- 4,427
------------ -------------- ------------ --------------
Net deferred income tax assets
(liabilities) $ 2,071 456 2,238 (90)
============ ============== ============ ==============
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment and believe such items are sufficient to
realize the deferred tax assets.
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
At December 31, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $11,391 which are
available to offset future federal taxable income, if any, through 2019.
In addition, the Company has alternative minimum tax credit carryforwards
of approximately $66 which are available to reduce future regular income
taxes, if any, over an indefinite period.
(10) COMMITMENTS AND CONTINGENCIES
The Company is named as a defendant in various actions arising out of
normal conduct of business, including claims relating to commercial
transactions and employment matters. While the ultimate resolution of
these lawsuits, investigations and claims cannot be determined,
management does not expect that these matters will have a material
adverse impact on the results of operations or financial position of the
Company.
The Company currently is involved in litigation with two stockholders of
the Company involving the conversion of approximately $111 million of
debt previously loaned by its Parent into stock of the Company. The
Company and Parent initiated this litigation by filing a complaint
seeking a declaratory judgment that the terms of the debt conversion were
fair, after these two shareholders threatened to challenge the terms of
the conversion, claiming that the conversion price utilized, and the
methods by which the conversion price was agreed upon between the Company
and its Parent, were not fair to the Company or these shareholders. The
two shareholders filed counterclaims against the Company, its Parent, and
the board of directors of the Company, seeking a judgment declaring the
conversion void or voidable, or in the alternative compensatory and
punitive damages.
Although the Company believes that the two shareholders' claims are
without merit and that the Company and its Parent will ultimately prevail
in their actions against the two shareholders, there can be no assurance
that the court will not find the conversion price to have been unfair and
declare the conversion void, which would have the effect of diluting the
Parent's equity interest in the Company, or award the two shareholders
compensatory and punitive damages. However, even if the two shareholders
were successful in their claims, the Company does not believe that such a
result would have a material adverse effect on the financial condition or
results of operations of the Company.
(11) EMPLOYEE BENEFIT PLANS
The Company established a 401(k) savings plan (the "Plan") available to
all employees aged 21 years or older. Employees may contribute up to 15%
of their pre-tax income to the Plan up to federal limits in 13 different
investment accounts. The Company matched 50% of the first 4% contributed
by each employee with one year of service and over 1,000 hours worked in
the preceding year. The Company made a matching contribution of $395 for
the year ended December 31, 1999. The Company may also make a
discretionary contribution to the plan to all employees active as of
December 31 with at least one year of service and over 1,000 hours
worked. There were no discretionary contributions made by
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
the Company in 1999, 1998, and 1997. Vesting percentages for employer
contributions are 10%, 20%, 40%, 70% and 100% for employees with 1 to 5
eligible years worked, respectively.
The Company also maintains an Employee Stock Purchase Plan (the "ESPP"),
in which employees may invest in the stock of its Parent, CarrAmerica
Realty Corporation, through direct deductions of up to 20% of their gross
wages. The Company pays all fees for the stock purchases made pursuant to
the ESPP.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
Cash was paid for the following:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 25, PERIOD FROM
YEAR YEAR 1997 JANUARY 1,
ENDED ENDED (INCEPTION) TO 1997 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, AUGUST 25,
1999 1998 1997 1997
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Interest $ 8,469 10,971 1,121 54
Income taxes 426 98 -- --
Acquisitions for the
period ended:
Fair value of assets 28,787 182,549 57,462 --
Fair value of
liabilities 3,144 15,365 6,442 --
----------------- ---------------- ---------------- ---------------
Cash paid 25,643 167,184 51,020 --
Plus acquisition costs 974 4,393 1,006 --
Less cash acquired 1,309 5,139 5,156 --
----------------- ---------------- ---------------- ---------------
Net cash paid $ 25,308 166,438 46,870 --
================= ================ ================ ===============
</TABLE>
(13) STOCK OPTIONS AND UNITS
On March 4, 1998, the Company established the OmniOffices, Inc. 1998
Stock Option and Incentive Plan ("the Plan"), a stock option and
incentive plan for the benefit of certain employees. The plan is
administered by the Board of Directors and the granting of stock options
is at the sole discretion of the Board of Directors. The first grant of
options under this plan was in December 1998.
The Plan allows for the grant of 420,000 Class B convertible nonvoting
common stock options ("Class B convertible options") or convertible
nonvoting restricted stock units ("stock units") and the grant of 400,000
nonvoting common stock options. The Class B convertible nonvoting common
stock is convertible to nonvoting common stock. The options vest ratably
over a five-year period. The restricted stock units vest ratably over a
nine-year period.
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
The following is a summary of activity for the various stock options and
units:
(a) Restricted Stock Units
During 1998, 120,000 stock units were granted and issued under
the Plan, and $267 and $89 was recognized as compensation
expense for the years ended December 31, 1999 and 1998,
respectively. The stock units are subject to a put option, by
the holder, for all vested units after April 1, 2001, with the
price to be determined by a valuation of the related shares.
(b) Class B Convertible Nonvoting Stock
In addition, in 1998 options for 300,000 shares of Class B
convertible nonvoting stock were granted with exercise prices
of 100,000 shares at $25 per share, 100,000 at $35 per share,
and 100,000 at $45 per share, respectively. At December 31,
1999, 60,000 shares are vested.
(c) Nonvoting Common Stock
A summary of the activity in the Company's nonvoting common
stock options as of December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------ --------------- ------------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 202,015 $ 20 -- $ --
Granted 32,000 20 202,015 20
Forfeited (28,550) 20 -- --
------------ ------------
Outstanding at end of year 205,465 20 202,015 20
============ ============
Options exercisable at year-end 38,933 --
============ ============
</TABLE>
Under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company
is permitted to continue accounting for the issuance of stock options in
accordance with APB Opinion No. 25, which generally does not require
recognition of compensation expense for option grants unless the exercise
price is less than the market price on the date of grant. If the Company
had recognized compensation cost for the "fair value" of the option
grants to employees under the provisions of SFAS No. 123, the pro forma
financial results for the year ended December 31, 1999 would have been as
follows:
Net loss:
As reported $ (3,465)
Pro forma (3,901)
<PAGE>
HQ GLOBAL WORKPLACES, INC.
(FORMERLY OMNIOFFICES, INC.) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(dollars in thousands, except per share amounts)
The pro forma impact takes into account options granted since January 1,
1998 and is likely to increase in future years as additional options are
granted and amortized ratably over the vesting period. The
weighted-average fair value of options granted during 1999 and 1998 were
$8.93 and $4.47, respectively. This fair value was estimated using the
Black-Scholes option pricing model based on the market price at date of
grant and the following weighted-average assumptions:
1999 1998
-------------- --------------
Dividend yield 0% 0%
Risk-free interest rate 6.0 6.0
Volatility 0 0
Expected life (years) 8 years 8 years
(14) SUBSEQUENT EVENTS
On January 20, 2000, the Company executed an agreement and plan of merger
with Reckson Service Industries, Inc. ("RSI"). Pursuant to the merger
agreement, Vantas Incorporated ("Vantas"), an 82%-owned subsidiary of
RSI, will be merged with and into the Company. Vantas is engaged in
providing business outsourcing services including business centers
and related business support services. The merged company will retain the
name HQ Global Workplaces, Inc. and management believes the merged
company will become the world's largest workplace solutions provider.
As a result of the transaction, the Company's shareholders will receive
cash in an amount equal to $380 million, less any amounts necessary to
pay off indebtedness of the Company's existing credit agreement at the
time of the merger and will retain approximately 19% interest in the
merged entity.
REPORT OF INDEPENDENT AUDITORS
To the shareholders and Board of Directors of OmniOffices (UK) Limited
We have audited the Group financial statements, appearing on pages 3 through
16, of OmniOffices (UK) Limited and subsidiaries. The Group financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these Group financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned OmniOffices (UK) Limited Group financial
statements present fairly, in all material respects, the financial position of
OmniOffices (UK) Limited and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for the year ended
December 31, 1999 and the nine months ended December 31, 1998 in conformity
with generally accepted accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the
United States. Application of generally accepted accounting principles in the
United States would have affected results of operations for the year ended
December 31, 1999 and the nine months ended December 31, 1998 and
shareholders' equity as of December 31, 1999 and 1998, to the extent
summarized in the note 21 of the group financial statements.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
February 28, 2000
31 December 1999 2
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
GROUP PROFIT AND LOSS ACCOUNT
FOR THE 12 MONTH PERIOD ENDED 31 DECEMBER 1999
<TABLE>
<CAPTION>
Notes 12 MONTHS 9 months
31 DECEMBER 31 December
1999 1998
(POUND) (pound)
<S> <C> <C> <C>
TURNOVER 2 12,379,389 5,152,524
Cost of sales (1,646,342) (674,924)
GROSS PROFIT 10,733,047 4,477,600
Administrative expenses (13,326,429) (3,963,834)
Other operating income 342,827 105,603
OPERATING PROFIT/(LOSS) 3 (2,250,555) 619,369
Other interest receivable and similar income 6 41,019 40,706
Interest payable and similar charges 7 (2,249,810) (856,974)
Amortisation of goodwill (953,260) -
(LOSS) ON ORDINARY ACTIVITIES BEFORE TAXATION (5,412,606) (196,899)
Tax on ordinary activities 366 -
(LOSS) ON ORDINARY ACTIVITIES AFTER TAXATION (5,412,972) (196,899)
RETAINED (LOSS) FOR THE PERIOD 17 (5,412,972) (196,899)
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
</TABLE>
There were no recognised gains or losses other than the loss for the period.
31 December 1999 3
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
GROUP BALANCE SHEET
AT 31 DECEMBER 1999
<TABLE>
<CAPTION>
Notes 31 DECEMBER 31 December
1999 1998
(POUND) (pound)
<S> <C> <C> <C>
FIXED ASSETS
Intangible assets 9 18,181,577 19,054,552
Tangible assets 10 10,717,570 6,959,077
Investments 11 15,347,836 14,187,836
---------- ----------
44,246,983 40,201,465
CURRENT ASSETS
Debtors 12 5,454,351 4,302,088
Cash at bank and in hand 13 1,798,470 687,597
---------- ----------
7,252,821 4,989,685
CREDITORS: amounts falling due within one)
year 14 (10,883,866) (7,850,566
---------- ----------
NET CURRENT LIABILITIES (3,631,045) (2,860,881)
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 40,615,938 37,340,584
CREDITORS: amounts falling due after more
than one year 15 (23,683,955) (19,131,019)
---------- ----------
16,931,983 18,209,565
========== ==========
CAPITAL AND RESERVES
Called up share capital 16 21,116 17,241
Share premium 17 22,520,738 18,389,223
Profit and loss account 17 (5,609,871) (196,899)
---------- ----------
Shareholders' funds 17 16,931,983 18,209,565
========== ==========
</TABLE>
Approved by the Board on 2000.
DIRECTOR
31 December 1999 4
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
COMPANY BALANCE SHEET
AT 31 DECEMBER 1999
<TABLE>
<CAPTION>
NOTE 31 DECEMBER 31 December
1999 1998
(POUND) (pound)
<S> <C> <C> <C>
FIXED ASSETS
Investments 11 22,588,267 22,504,011
---------- ----------
CURRENT ASSETS
Debtors 12 24,863,917 18,160,728
Cash at bank and in hand (19,016) 147,011
---------- ----------
24,844,901 18,307,739
CREDITORS: amounts falling due within one
year 14 (5,839,333) (4,102,705)
---------- ----------
NET CURRENT ASSETS 19,005,568 14,205,034
---------- ----------
TOTAL ASSETS LESS CURRENT LIABILITIES 41,593,835 36,709,045
CREDITORS: amounts falling due after
more than one year 15 (23,218,692) (19,131,019)
---------- ----------
18,375,143 17,578,026
========== ==========
CAPITAL AND RESERVES
Called up share capital 16 21,116 17,241
Share premium account 17 22,520,738 18,389,223
Profit and loss account 17 (4,166,711) (828,438)
---------- ----------
Shareholders' funds 17 18,375,143 17,578,026
========== ==========
Approved by the Board on 2000.
</TABLE>
DIRECTOR
31 December 1999 5
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
GROUP STATEMENT OF CASH FLOWS
FOR THE 12 MONTH PERIOD ENDED 31 DECEMBER 1999
<TABLE>
<CAPTION>
NOTE 12 MONTHS 9 months
31 DECEMBER 31 December
1999 1998
(POUND) (pound)
<S> <C> <C> <C>
NET CASH INFLOW FROM OPERATING ACTIVITIES 19(A) 2,574,834 4,318,896
--------- ---------
RETURN ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 41,019 40,706
Interest paid (403,126) (856,974)
--------- ---------
(362,107) (816,268)
TAXATION
Corporation tax paid (366) -
--------- ---------
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
Payments to acquire intangible fixed assets (84,153) (74,000)
Payments to acquire tangible fixed assets (3,992,725) (7,109,626)
Payments to acquire investments (1,160,000) (14,187,836)
--------- ---------
(5,236,878) (21,371,462)
--------- ---------
ACQUISITIONS AND DISPOSALS - (18,981,052)
--------- ---------
NET CASH (OUTFLOW) BEFORE FINANCING (3,024,517) (36,849,886)
=========== ===========
FINANCING
Issue of ordinary share capital 3,875 17,241
Share premium 4,131,515 18,389,223
Other loans - 18,131,019
--------- ---------
vvvvvvvvvvv
4,135,390 37,537,483
--------- ---------
INCREASE IN CASH 19(B) 1,110,873 687,597
=========== ===========
RECONCILIATION OF NET CASH FLOW TO
MOVEMENT IN NET DEBT
Increase in cash 1,110,873 687,597
--------- ---------
Change in net debt resulting from cash flows 1,110,873 687,597
Increase in loans and accrued interest (4,318,181) (18,900,511)
--------- ---------
MOVEMENT IN NET DEBT (3,207,308) (18,212,914)
NET DEBT AT BEGINNING OF PERIOD (18,212,914) -
--------- ---------
NET DEBT AT END OF PERIOD (21,420,222) (18,212,914)
=========== ===========
</TABLE>
31 December 1999 6
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES
(FORMING PART OF THE FINANCIAL STATEMENTS)
1 ACCOUNTING POLICIES
The following accounting policies have been applied consistently in
dealing with items which are considered material in relation to the
company's non-statutory financial statements.
BASIS OF PREPARATION
The non-statutory financial statements have been prepared in accordance
with applicable United Kingdom accounting standards and under the
historical cost accounting rules.
As the shareholders of the company are based in the United States of
America, the directors have decided to include within these non
statutory accounts a UK/US GAAP reconciliation which reconciles both
the loss for the period and shareholders' funds at the balance sheet
as reported within the statutory accounts of the company prepared
under UK companies act legislation and accounting standards to the
amounts which would have resulted if the non-statutory financial
statements had been prepared using the United States of America's
generally accepted accounting principles. This reconciliation is set
out in note 21.
The financial information set out above does not constitute the
company's statutory accounts for the year ended 31 December 1999.
Statutory accounts for the year ended have reported on those accounts;
their reports were unqualified and did not contain a statement under
section 237(2) or (3) of the Companies Act 1985.
CONSOLIDATION
The group accounts comprise the consolidated accounts of Omni Offices
(UK) Limited and its subsidiaries drawn up to 31 December.
GOODWILL
Goodwill arising on acquisitions, representing the excess of purchase
price over the fair value of the net assets acquired, is capitalised.
Goodwill is amortised to nil by equal annual instalments over 20 years
beginning in the first full year of operation.
TURNOVER
Turnover, which excludes value added tax and intra-group sales,
represents income from goods and services provided during the period.
LICENCES
Amortisation is calculated so as to write off the cost of an asset, net
of anticipated disposal proceeds, over the useful economic life of that
asset as follows:
Licence agreement - (pound)3,868 per annum
31 December 1999 7
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES (continued)
1 ACCOUNTING POLICIES (CONTINUED)
FIXED ASSETS AND DEPRECIATION
Depreciation is provided by the group to write off the costs of the
estimated residual value of tangible fixed assets over their estimated
useful economic lives as follows:
Motor vehicles - 25% reducing balance
Plant and machinery - 10% straight line
Fixtures and fittings - 10% straight line
Equipment - 10% straight line
No depreciation is provided in the year of acquisition except for motor
vehicles.
It is the group's practice to maintain its freehold properties in a
continued state of sound repair and to extend and make improvements
thereto from time to time. Accordingly the directors consider that the
lives of these properties and residual values are such that their
depreciation is insignificant.
INVESTMENTS
Fixed asset investments are stated at cost less provision for
diminution in value.
OPERATING LEASES
Rentals payable under operating leases are charged against income on a
straight line basis over the lease term.
DEFERRED TAXATION
Provision is made for deferred taxation using the liability method to
take account of timing differences between the incidence of income and
expenditure for taxation and accounting purposes except to the extent
that the directors consider that a liability to taxation is unlikely to
crystallise.
2 TURNOVER
The whole of the turnover and profit before taxation is attributable to
the provision of office space and services. All of the group's turnover
arises in the UK.
3 OPERATING PROFIT
<TABLE>
<CAPTION>
12 MONTHS 9 months
31 DECEMBER 31 December
1999 1998
OPERATING PROFIT IS STATED AFTER CHARGING: (POUND) (pound)
<S> <C> <C>
Auditors' remuneration
- Audit services 30,000 20,000
Depreciation of tangible assets 234,232 150,549
Amortisation of intangible assets 957,128 500
Operating lease rentals:
- Land and buildings 3,519,093 1,361,083
- Other 641,982 255,000
======= =======
</TABLE>
31 December 1999 8
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES (CONTINUED)
4 DIRECTORS' EMOLUMENTS
None of the directors of the company received any emoluments from the
company or any of its subsidiaries during the period (1998: NONE).
5 STAFF NUMBERS AND COSTS
The average number of persons employed by the group during the year was
as follows:
<TABLE>
<CAPTION>
12 MONTHS 9 months
31 DECEMBER 31 December
1999 1998
NO. No.
<S> <C> <C>
158 118
========= =========
Employment costs:
12 MONTHS 9 months
31 DECEMBER 31 December
1999 1998
(POUND) (pound)
Wages and salaries 2,844,564 1,362,139
Social security costs 293,753 134,218
--------- ---------
3,138,317 1,496,357
========= =========
6 OTHER INTEREST RECEIVABLE AND SIMILAR INCOME
12 MONTHS 9 months
31 DECEMBER 31 December
1999 1998
(POUND) (pound)
Bank interest receivable 41,019 40,706
========= =========
7 INTEREST PAYABLE AND SIMILAR CHARGES
12 MONTHS 9 months
31 DECEMBER 31 December
1999 1998
(POUND) (pound)
Interest payable on parent company loans and overdrafts 2,249,810 856,974
========= =========
</TABLE>
8 LOSS ATTRIBUTABLE TO THE MEMBERS OF THE HOLDING COMPANY
The loss dealt with in the accounts of the parent company amounted to
(pound)3,338,273 (1998:(POUND)828,438).
31 December 1999 9
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES (CONTINUED)
9 INTANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
GROUP GOODWILL LICENCES TOTAL
(POUND) (POUND) (POUND)
COST:
<S> <C> <C> <C> <C> <C>
At 1 January 1999 18,981,052 74,000 19,055,052
Subsidiaries acquired 84,153 - 84,153
---------- ------ ----------
AT 31 DECEMBER 1999 19,065,205 74,000 19,139,205
---------- ------ ----------
AMORTISATION
At 1 January 1999 - 500 500
Charge for the period 953,260 3,868 957,128
---------- ------ ----------
AT 31 DECEMBER 1999 953,260 4,368 957,628
---------- ------ ----------
NET BOOK VALUE:
AT 31 DECEMBER 1999 18,111,945 69,632 18,181,577
========== ====== ==========
At 31 December 1998 18,981,052 73,500 19,054,552
========== ====== ==========
</TABLE>
Goodwill arose in 1998 on the acquisition of HQ Holdings Limited for
consideration of (pound)22.5 million.
10 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
GROUP FREEHOLD OFFICE
LAND AND EQUIPMENT MOTOR
BUILDINGS AND FITTINGS VEHICLES TOTAL
(POUND) (POUND) (POUND) (POUND)
<S> <C> <C> <C> <C>
COST:
At 1 January 1999 3,958,500 3,146,826 4,300 7,109,626
Additions in period - 3,992,725 - 3,992,725
--------- --------- ----- ---------
AT 31 DECEMBER 1999 3,958,500 7,139,551 4,300 11,102,351
--------- --------- ----- ---------
DEPRECIATION:
At 1 January 1999 - (148,399) (2,150) (150,549)
Charge for the period - (232,082) (2,150) (234,232)
--------- --------- ----- ---------
At 31 December 1999 - (380,481) (4,300) (384,781)
--------- --------- ----- ---------
NET BOOK VALUE:
AT 31 DECEMBER 1999 3,958,500 6,759,070 - 10,717,570
========= ========= ===== =========
At 31 December 1998 3,958,500 2,998,427 2,150 6,959,077
========= ========= ===== =========
</TABLE>
31 December 1999 10
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES (CONTINUED)
11 INVESTMENTS
<TABLE>
<CAPTION>
COMPANY
<S> <C>
Subsidiary Company - HQ Holdings Ltd at 1 January 1999 22,504,011
Additional consideration and costs in period 84,256
----------
AT 31 DECEMBER 1999 22,588,267
==========
</TABLE>
Details of the investments in which the group or the company holds 20%
or more of the nominal value of any class of share capital are as
follows:
<TABLE>
<CAPTION>
COUNTRY OF PROPORTION NATURE
REGISTRATION OR OF VOTING OF
NAME OF COMPANY INCORPORATION HOLDING RIGHTS BUSINESS
<S> <C> <C> <C> <C>
HQ Holdings Limited England and Wales Ordinary 100 *
HQ Developments
(UK) Limited England and Wales Ordinary 100 *
</TABLE>
* Provision of Executive offices
The aggregate amount of capital and reserves and the results of these
undertakings for the last relevant financial period (12 months ended
31st December 1999) were as follows:
<TABLE>
<CAPTION>
CAPITAL LOSS FOR
AND RESERVES THE PERIOD
(POUND) (POUND)
<S> <C> <C>
HQ Holdings Limited 3,176,172 (978,429)
HQ Developments (UK) Limited (143,009) (143,010)
</TABLE>
<TABLE>
<CAPTION>
GROUP MERCURY EXECUTIVE OTHER TOTAL
OFFICES LIMITED INVESTMENTS
PARTNERSHIP
(pound) (pound) (pound)
<S> <C> <C> <C>
COST:
At 1 January 1999 14,177,432 10,404 14,187,836
Additions 1,160,000 - 1,160,000
---------- ------ ----------
AT 31 DECEMBER 1999 15,337,432 10,404 15,347,836
---------- ------ ----------
NET BOOK VALUE:
AT 31 DECEMBER 1999 15,337,432 10,404 15,347,836
========== ====== ==========
</TABLE>
The company's investment in Mercury Executive Offices Limited Partnership
amounts to 20% of the capital of the partnership. The General Partner, Mercury
Asset Management, is also the Partnership Manager and OmniOffices (UK) Limited
exerts no significant influence over the management of the partnership's
affairs.
31 December 1999 11
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES (CONTINUED)
12 DEBTORS
<TABLE>
<CAPTION>
31 DECEMBER 1999 31 December 1998
GROUP COMPANY Group Company
(POUND) (POUND) (pound) (pound)
<S> <C> <C> <C> <C>
Trade debtors 1,277,605 - 1,213,027 -
Owed by group undertakings - 24,863,917 - 18,000,571
Other debtors 2,490,571 - 1,552,376 -
Prepayments and accrued income 1,635,786 - 1,486,296 160,157
Recoverable ACT 50,389 - 50,389 -
--------- ---------- --------- ----------
5,454,351 24,863,917 4,302,088 18,160,728
========= ========== ========= ==========
</TABLE>
13 CASH AT BANK AND IN HAND
Of the (pound)1,798,470 cash, (pound)573,840 is restricted, being held
separately as security for a rent guarantee issued to a landlord by the
group's bankers.
14 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
31 DECEMBER 1999 31 December 1998
GROUP COMPANY Group Company
(POUND) (POUND) (pound) (pound)
<S> <C> <C> <C> <C>
Trade creditors 1,217,290 - 1,340,633 366,528
Corporation tax 4,420 - 4,420 -
Other taxes and social security 152,790 80,000 207,703 -
Other creditors 2,240,434 15,050 1,340,990 128,805
Accruals and deferred income 1,597,409 72,760 1,452,902 103,454
Deferred purchase consideration 3,240,065 3,240,065 3,503,918 3,503,918
Interest payable to ultimate parent company 2,431,458 2,431,458 - -
--------- ---------- --------- ----------
10,883,866 5,839,333 7,850,566 4,102,705
========== ========= ========= =========
</TABLE>
Deferred purchase consideration relates to amounts remaining payable to the
vendors of HQ Holdings Limited. The full amount is payable in 2000.
15 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
31 DECEMBER 1999 31 December
1998
GROUP COMPANY Group and company
(POUND) (POUND) (pound)
<S> <C> <C> <C>
Notes payable to ultimate parent
Company 23,218,692 23,218,692 19,131,019
Deferred income 465,263 - -
---------- ---------- ----------
23,683,955 23,218,692 19,131,019
========== ========== ==========
</TABLE>
31 December 1999 12
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES (CONTINUED)
16 CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
AUTHORISED ALLOTTED, CALLED UP
AND FULLY PAID
NO (POUND) NO (POUND)
<S> <C> <C> <C> <C>
Class A ordinary shares of 1p each 200,000 2,000 105,582 1,056
Class B ordinary shares of 1p each 3,800,000 38,000 2,006,066 20,060
Class C redeemable preference shares of 1p each 1 - 1 -
Class D redeemable preference shares of 1p each 1 - 1 -
--------- ------ --------- ------
4,000,000 40,000 2,111,650 21,116
========= ====== ========= ======
</TABLE>
The class C and the class D redeemable preference shares may be
redeemed by the company at any time after the holders cease to also
hold loan notes issued by the company and in any event they are
redeemable on 19th May 2008 if they have not been previously redeemed.
The amount payable upon redemption shall be the paid up amount thereon.
17 RECONCILIATION OF SHAREHOLDERS' FUNDS AND MOVEMENTS ON RESERVES
<TABLE>
<CAPTION>
GROUP SHARE PROFIT
SHARE PREMIUM AND LOSS
CAPITAL ACCOUNT ACCOUNT TOTAL
(POUND) (POUND) (POUND) (POUND)
<S> <C> <C> <C> <C>
At 1 January 1999 17,241 18,389,223 (196,899) 18,209,565
Issued during period 3,875 4,131,515 - 4,135,390
Retained loss for the period - - (5,412,972) (5,412,972)
------ ---------- ---------- ----------
AT 31 DECEMBER 1999 21,116 22,520,738 (5,609,871) 16,931,983
====== ========== ========== ==========
COMPANY SHARE PROFIT
SHARE PREMIUM AND LOSS
CAPITAL ACCOUNT ACCOUNT TOTAL
(POUND) (POUND) (POUND) (POUND)
At 1 January 1999 17,241 18,389,223 (828,438) 17,578,026
Issued during the period 3,875 4,131,515 - 4,135,390
Retained loss for the period - - (3,338,273) (3,338,273)
------ ---------- ---------- ----------
AT 31 DECEMBER 1999 21,116 22,520,738 (4,166,711) 18,375,143
====== ========== ========== ==========
</TABLE>
31 December 1999 13
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES (CONTINUED)
18 FINANCIAL COMMITMENTS
GROUP AND COMPANY
Annual commitments under non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
LAND AND OTHER
BUILDINGS
<S> <C> <C>
GROUP AND COMPANY
Expiring between two and five years - 985,664
Expiring in over five years 4,604,559 -
--------- -------
4,604,559 985,664
========= =======
CAPITAL COMMITMENTS
12 MONTHS 9 months
31 DECEMBER 31 December
1999 1998
(POUND) (pound)
Capital expenditure that has been contracted for
but not provided in the financial statements 852,500 1,035,000
======= =========
</TABLE>
19 NOTES TO THE GROUP STATEMENT OF CASH FLOWS
(a) Reconciliation of operating loss to net cash inflow from
operating activities:
<TABLE>
<CAPTION>
(pound)
<S> <C>
Operating loss (2,250,555)
Depreciation 234,232
Amortisation 3,868
Increase in debtors (1,152,263)
Increase in creditors 5,739,552
---------
Net cash inflow from operating activities 2,574,834
=========
</TABLE>
(b) ANALYSIS OF DEBT
<TABLE>
<CAPTION>
At 31 Cash Other AT 31
December flow changes DECEMBER
1998 1999
(pound) (pound) (pound) (POUND)
<S> <C> <C> <C> <C>
Cash at bank and in hand 687,597 1,110,873 - 1,798,470
Debt due after one year (18,900,511) - (4,318,181) (23,218,692)
----------- --------- ---------- -----------
(18,212,914) 1,110,873 (4,318,181) (21,420,222)
=========== ========= ========== ===========
</TABLE>
31 December 1999 14
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES (CONTINUED)
20 POST BALANCE SHEET EVENT
On 21 January 2000, CarrAmerica Realty Corporation announced a merger
agreement between affiliate HQ Global Workplaces, Inc and Vantas
Incorporated, the executive office suites subsidiary of FrontLine
Capital Group. It is expected that following the merger FrontLine
Capital Group will own up to an 81% interest in the company, with
CarrAmerica owning the remaining 19%. The transaction is scheduled to
close on or before 30 April 2000.
21 RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE
UNITED STATES
The Group prepares its consolidated accounts in accordance with
generally accepted accounting principles (GAAP) in the United Kingdom
which differ in certain material respects from US GAAP. The significant
differences relate principally to the following items and the
adjustments necessary to restate net income (loss) and shareholders'
equity in accordance with US GAAP are shown below.
(a) Deferred taxation
Under UK GAAP a provision is made for deferred taxation only when there is a
reasonable probability that the liability will arise in the foreseeable
future. Under US GAAP, deferred taxation is provided on a full liability basis
on all temporary differences, as defined in SFAS 109, Accounting for Income
Taxes.
Under the asset and liability method of SFAS 109, deferred assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
The income tax benefit under US GAAP for the year ended December 31, 1999 was
a deferred benefit resulting primarily from net operating loss carryforward
benefits generated in 1999. No income tax benefit was generated in 1998. The
tax benefit differs from the amounts computed by applying the UK statutory
rate of 30 percent to pretax US adjusted income as a result of the following:
1999 1998
Computed expected tax benefit 1,618,800) (197,400)
Nondeductibility of goodwill 192,000 120,600
Increase in valuation allowance 1,097,100 59,100
Nondeductible US GAAP adjustments 89,700 17,700
------------- -------------
Total (240,000) -
============= =============
Net deferred tax asset at 31 December 1999 for US GAAP totaled (pound)240,000,
net of a total valuation allowance of (pound)1,156,200. There is no net
deferred tax asset for US GAAP purposes for 1998. Management believes that the
Company will have sufficient future taxable income to make it more likely than
not that the net deferred tax asset will be realized.
(b) Goodwill
Under UK GAAP, following the adoption of FRS 10 - "Goodwill and Intangible
Assets" in the current financial year, goodwill arising after 31 March 1998 is
capitalized and amortized through the profit and loss account over periods,
not exceeding 20 years, considered acceptable under UK GAAP. For UK GAAP the
Group has amortized goodwill over 20 years.
Under US GAAP goodwill is capitalized and amortized by charges against income
over a period not exceeding 40 years. Consistent with the accounting policies
of the Group's Parent CarrAmerica Realty Corporation ("Parent") and based on
an assessment of the useful live of the goodwill at the time of acquisition by
the Group's parent, goodwill is amortized over 30 years for both 1998 and 1999
for US GAAP purposes. Under US GAAP, Parent and the Group evaluate the
recoverability of goodwill annually. In making such evaluation, the parent and
the Group compares certain financial indicators such as expected undiscounted
future revenues and net cash flows to the carrying amount of goodwill.
Impairment losses, if any, are measured as the excess of the carrying amount
of goodwill over estimated fair market value. The Group has recognized no
impairment losses in 1999 or 1998.
Goodwill amortization under UK GAAP at 31 December 1999 is (pound)953,000 and
under US GAAP is (pound)637,000, the difference has an effect of increasing
reported income by (pound)316,000 (1998 - decrease in reported net income of
(pound)402,000).
31 December 1999 15
<PAGE>
OmniOffices (UK) Limited
Non-Statutory Financial Statements
31 December 1999
NOTES (CONTINUED)
21 RECONCILIATION TO GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN THE
UNITED STATES (CONTINUED)
The following is a reconciliation for the net income as shown in the
financial statements to net loss according to generally accepted
accounting principles in the United States.
<TABLE>
<CAPTION>
FOR THE YEAR For the 9 months
ENDED 31 ended 31
DECEMBER 1999 December 1998
(POUND) (pound)
<S> <C> <C>
Net loss as shown in the financial statements (5,413,000) (197,000)
Description of items having the effect of increasing reported
income
Provision for deferred income tax benefit 240,000 -
Goodwill amortisation (increased life from 20 to 30 years
for US GAAP) 316,000 -
Description of items having the effect of decreasing reported
income
Amortisation of goodwill - (402,000)
Depreciation of buildings (132,000) (59,000)
Straight-line rent adjustment (167,000) -
---------- --------
Net loss according to generally accepted accounting principles in
the United States (5,156,000) (658,000)
========== ========
</TABLE>
The following is a reconciliation of the Stockholders' equity as shown
in the financial statements to Stockholders' equity according to
generally accepted accounting principles in the United States.
<TABLE>
<CAPTION>
AS OF 31 As of 31
DECEMBER 1999 December 1998
(POUND) (pound)
<S> <C> <C>
Shareholders' funds 16,931,983 18,209,565
Provision for deferred income tax benefit 240,000 -
Goodwill amortisation (86,000) (402,000)
Depreciation of buildings (191,000) (59,000)
Straight-line rent adjustments (167,000) -
Shareholders' equity according to generally accepted accounting
principles in the United States 16,727,983 17,748,565
========== ==========
</TABLE>
(e) Cash flow statement
Under UK GAAP, the consolidated cash flow statements are presented in
accordance with UK Financial Reporting Standards No. 1 (FRS 1). The statement
prepared under FRS 1 present substantially the same information as that
required under SFAS No. 95. Under US GAAP, however, there are certain
differences from UK GAAP with regard to classification of items within the
cash flow statement and with regard to the definition of cash.
Under SFAS No. 95 cash and cash equivalents include cash and short-term
investments with original maturities of three months or less. Under FRS 1,
cash comprises cash in hand and at bank and overnight deposits, net of bank
overdrafts.
Under FRS 1, cash flows are presented separately for operating activities,
returns on investments and servicing of finance, taxation, capital
expenditures and financial investments, acquisitions and disposals, dividends
paid to the company's shareholders, management of liquid resources and
financing. SFAS No. 95 cash flows are reported as results from operating,
investing and financing activities.
Cash flows under FRS 1 in respect of interest received, interest paid and
taxation would be included within operating activities under SFAS No. 95.
31 December 1999 16
Unaudited Pro Forma Consolidated Financial Statements
The following unaudited pro forma financial statements are presented for
illustrative purposes only and are not indicative of the financial position or
results of operations of future periods or the results that actually would
have been realized had (i) RSI purchased an additional 21% interest in VANTAS
Incorporated ("VANTAS") from third parties for approximately $43 million in
cash and issuance of approximately 1.3 million shares of RSI common stock
valued at $19 per share. As a result RSI's basic beneficial ownership in
VANTAS increased to 84% The debt financing of this transaction is assumed to
be approximately $16 million from the Company's UBS credit facility,
approximately $12 million under the Company's $100 million credit facility
with Reckson Operating Partnership L.P. ("RSI Facility"), and approximately
$15 million from the Company's $63.9 million common stock offering completed
on December 16, 1999 and (ii) VANTAS merged with HQ Global Workplaces Inc.
("HQ") with the new merged entity retaining the name HQ Global Workplaces
("HQ-NEWCO"). The remaining VANTAS common shareholders will receive
approximately $33.4 million to redeem their 16% interest in VANTAS. As part of
the transaction CarrAmerica Realty Corporation ("Carr") the parent of HQ, will
receive approximately $237 million in cash as redemption for their shares and
approximately 19% of equity in HQ-NEWCO. RSI and a minority shareholder will
own approximately 50% and 31%, respectively, of HQ-NEWCO. This transaction is
expected to be funded with approximately $350 million in bank debt and $187.4
million in third party equity. Simultaneously with the execution of the merger
agreement, RSI deposited $35 million letter of credit to collateralize
VANTAS's obligation under the merger agreement. Such amount is payable to Carr
if the merger fails to close for certain specified reasons, and VANTAS and RSI
will have no further obligations in connection with the transactions. VANTAS
is obligated to reimburse RSI in form of additional shares in VANTAS for any
loss of the deposit. The pro forma financial statements, including the notes
thereto, are qualified in their entirety by reference to, and should be read
in conjunction with, the historical financial statements of RSI as filed on
Form 8-K on March 2, 2000 for the year ended December 31, 1999, the
historical financial statements of VANTAS as filed on Form 8-K on March 2,
2000 for the year ended December 31,1999, and the historical financial
statements of HQ as filed in this Form 8-K for the year ended December 31,
1999.
The following pro forma financial statements of RSI give effect to increase in
the beneficial ownership percentage and the effect of the VANTAS, HQ merger.
The pro forma financial statements are based on the historical financial
statements and the notes thereto of RSI, VANTAS and HQ. The pro forma
adjustments are preliminary and based on management's estimates of the value
of the tangible and intangible assets acquired.
The pro forma balance sheet of RSI assumes that the purchases of the
additional 21% interest in VANTAS and that the VANTAS, HQ merger occurred on
December 31, 1999. The pro forma statement of operations of RSI for the year
ended December 31, 1999 assume that the purchase of the additional 21%
interest in VANTAS and that the VANTAS, HQ merger occurred as of January 1,
1999.
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(Dollars in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
HQ-NEWCO
RSI VANTAS UNAUDITED PRO FORMA RSI
HISTORICAL HISTORICAL (10) PRO FORMA (2),(4) ADJUSTMENTS ELIMINATIONS (2) PRO FORMA
-------------- --------------------------------------------------------------------------
ASSETS
- ------
<S> <C> <C> <C> <C> <C> <C>
Cash $ 32,740 $ (3,807) $ 21,836 $ (15,707)(1) $ - $ 35,062
Restricted cash 21,572 (21,572) 32,151 - - 32,151
Accounts receivables 8,426 (8,426) 36,541 - - 36,541
Other current assets 16,008 - - - 16,008
-------------- ------------ -------------- ------------ ------------- -------------
Total Current Assets 78,746 (33,805) 90,528 (15,707) - 119,762
Ownership interests and advances
to Partner Companies 61,207 - - 21,735 (3) - 82,942
Other ownership interest 36,626 - - - 36,626
Investment in VANTAS - - - 67,889 (1) (67,889) -
Intangible assets, net 239,412 (187,115) 622,321 - (77,410) 597,208
Property and equipment, net 80,425 (80,064) 180,342 - - 180,703
Other assets, net 45,567 (31,473) 74,013 - - 88,107
-------------- ------------ -------------- ------------ ------------- -------------
TOTAL ASSETS $ 541,983 $ (332,457) $ 967,204 $ 73,917 $ (145,299) $1,105,348
============== ============ ============== ============ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses $ 51,383 $ (38,010) $ 62,880 $ - $ - $ 76,253
Current portion of notes payable 12,500 (12,500) 12,500 - - 12,500
Deferred rent payable 2,165 (2,165) 2,165 - - 2,165
Other current liabilities 1,139 (1,139) 45,053 - - 45,053
-------------- ------------ -------------- ------------ ------------- -------------
Total Current Liabilities 67,187 (53,814) 122,598 - - 135,971
Credit facilities with related parties 121,848 - - 27,593 (1) - 149,441
Secured credit facility 44,407 - 44,407
Notes Payable 108,125 (108,125) 335,459 - - 335,459
Deferred rent payable 22,794 (22,794) 22,794 - - 22,794
Other liabilities 28,175 (28,175) 28,250 - - 28,250
-------------- ------------ -------------- ------------ ------------- -------------
TOTAL LIABILITIES 392,536 (212,908) 509,101 27,593 - 716,322
-------------- ------------ -------------- ------------ ------------- -------------
MINORITY INTEREST 35,338 - - - 193,255 (5) 228,593
TOTAL REDEEMABLE PREFERRED STOCK - (153,092) - - 153,092 -
-------------- ------------ -------------- ------------ ------------- --------------
SHAREHOLDERS' EQUITY
- --------------------
Preferred Stock, $.01 par value - - - 1 (3) - 1
Common Stock, $.01 par value 307 (71) 185 13 (1) (114) 320
Additional paid in capital 162,054 (18,448) 509,980 24,575 (1) (491,532) 208,364
21,735 (3)
Retained earnings (deficit) (48,252) 52,062 (52,062) - - (48,252)
-------------- ------------ -------------- ------------ ------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 541,983 $ (332,457) $ 967,204 $ 73,917 $ (145,299) $ 1,105,348
============== ============ ============== ============ ============= ==============
</TABLE>
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
RSI VANTAS PRO FORMA PRO FORMA
HISTORICAL HISTORICAL (10) HQ-NEWCO (4) ADJUSTMENTS PRO FORMA
-------------------------------------------------------------------------------
REVENUES
- --------
<S> <C> <C> <C> <C> <C>
Executive office suite income $ 124,564 $ (124,564) $ 377,808 $ - $ 377,808
Support services and other 90,812 (90,479) 95,452 - 95,785
-------------- ------------- ------------- -------------- --------------
TOTAL OPERATING REVENUES 215,376 (215,043) 473,260 - 473,593
-------------- ------------- ------------- -------------- --------------
OPERATING EXPENSES
Cost of revenue 175,454 (175,454) 243,428 - 243,428
Partner Company general and administrative
expenses 11,995 (11,996) 150,451 - 150,450
-------------- ------------- ------------- -------------- --------------
Total operating expenses 187,449 (187,450) 393,879 - 393,878
-------------- ------------- ------------- -------------- --------------
Partner Company Operating income 27,927 (27,593) 79,381 - 79,715
-------------- ------------- ------------- -------------- --------------
OTHER INCOME (EXPENSES)
- ----------------------
Merger and integration costs (26,730) 26,730 (26,730) - (26,730)
Corporate general and administrative expenses (9,509) - - - (9,509)
Depreciation and amortization (15,680) 14,858 (42,762) 2,580 (8) (41,004)
Amortization of deferred charges (8,455) 10,265 (57,251) - (55,441)
Interest income (expense) (18,432) - (12,635) (1,440)(7) (33,949)
(1,442)(7)
-------------- ------------- ------------- -------------- --------------
Loss Before minority interest, income tax benefit
(expense) equity in loss of Partner Companies
and other ownership interest and dividends to
preferred shareholders (50,879) 24,260 (59,997) (302) (86,918)
-------------- ------------- ------------- -------------- --------------
Income tax benefit (expense) 2,841 (2,841) 3,450 - 3,450
Loss Before minority interest, equity in loss
of Partner Companies and other ownership interest
and dividends to preferred shareholders (48,038) 21,419 (56,547) (302) (83,468)
-------------- ------------- ------------- -------------- --------------
Minority Interest 18,790 (18,790) - 28,217 (5) 28,217
Dividend to preferred shareholders - - - (2,041)(9) (2,041)
Equity in loss of Partner Companies and other
ownership interest (10,599) - - - (10,599)
-------------- ------------- ------------- -------------- --------------
NET INCOME (LOSS) $ (39,847) $ 2,629 $ (56,547) $ 25,874 $ (67,891)
============== ============= ============= ============== ==============
Basic and diluted net loss per weighted
average common share ($1.56) ($2.52)
============== ==============
Basic and diluted weighted average common
shares outstanding 25,600,985 (1) 26,895,088
============== ==============
</TABLE>
Notes to Unaudited Pro Forma Consolidated Financial Statements:
(1) Subsequent to January 1, 2000, in conjunction with existing "tag along"
rights RSI purchased an additional 21% of VANTAS from third parties for
approximately $43 million in cash and the issuance of approximately 1.3
million shares of RSI common stock valued at $19 per share. These pro
forma consolidated financial statements assume that RSI completed the
approximate $68 million purchase through the use of proceeds of
approximately $16 million from the Company's UBS credit facility,
approximately $12 million from the RSI Facility and approximately $15
million from the Company's $63.9 million common stock offering completed
on December 16, 1999. The remaining proceeds of approximately $48.9
million from the December 16, 1999 common stock offering were used for
corporate purposes, including additional investments.
(2) On January 21, 2000, VANTAS agreed to merge with HQ. This transaction is
expected to be funded with approximately $350 million in bank debt and
$187.4 million of third party equity. As part of the transaction Carr
will receive approximately $237 million in cash and approximately 19% of
equity in HQ-NEWCO. RSI and the third party equity will own
approximately 50% and 31%, respectively, of HQ-NEWCO. The remaining
VANTAS common shareholders will receive approximately $33.4 million to
redeem their 16% interest in VANTAS. Simultaneously with the merger
approximately $142.9 million of existing HQ debt and approximately
$108.95 million of existing VANTAS debt will be retired. The terms of
the merger agreement allow for RSI to appoint seven of the eleven
directors of HQ-NEWCO board and control the operations of HQ-NEWCO. At
this point VANTAS has yet to raise the equity needed to close this
transaction, therefore it assumed that if RSI will need to borrow
additional high yield debt which would have a ($0.45) on RSI's earnings
per share for the year ended December 31, 1999. As a result, RSI's pro
forma condensed consolidated balance sheet and statements of operations
have reflected and accounted for its investment in HQ-NEWCO under the
consolidated method of accounting. All the necessary eliminations have
been recorded.
(3) In January and February 2000 RSI issued 23,000 shares of 8.875% Series A
Convertible Cumulative Preferred Stock at a price of $1,000 per share
for an aggregate consideration of approximately $21.735 million net of
approximately $1.3 million in offering costs. Proceeds from the offering
were for corporate purposes, including additional investments.
(4) Represents HQ-NEWCO unaudited pro forma balance sheet as of December 31,
1999, the HQ-NEWCO pro forma financial statements are based upon the
December 31, 1999 historical financial statements of HQ and VANTAS, as
adjusted for the impact of completed and pending acquisitions and the
merger.
(5) Represents the minority interest of HQ-NEWCO at 49.9%, as a result of
RSI's consolidation of HQ-NEWCO.
(6) The RSI unaudited pro forma results of operations for the year ended
December 31,1999 assume that (i) RSI increased its beneficial ownership
in VANTAS to 84% and (ii) VANTAS merger with HQ, both assumed to have
occurred on January 1,1999. As noted above, the merger assumes that the
remaining 16% of VANTAS held by non-RSI shareholders is redeemed by
VANTAS for $33.4 million. The HQ-NEWCO unaudited pro forma results of
operations for the year ended December 31,1999 were based on historical
results of operations of VANTAS and HQ as adjusted for the impact of
completed and pending acquisitions and the merger.
(7) To record interest expense associated with the additional draws of
approximately $16 million under the UBS credit facility at an interest
rate of 9.25% and approximately $12 million under the RSI facility at an
interest rate of 12%.
(8) Amortization expense on goodwill associated with (i) the purchase of the
additional 21% interest in VANTAS by RSI and (ii) VANTAS and HQ merger,
as if the purchase and merger both occurred on January 1,1999. Goodwill
is being amortized over a 30 year period based on RSI's assessment of
the significant barriers to entry due to the rapid consolidation in the
executive suites business and the continuing value of the HQ trademark.
The goodwill adjustment represents amortization for twelve months which
was not included in the historical results.
(9) Represents the minority interest of HQ-NEWCO at 49.9%, as a result of
RSI's consolidation of HQ-NEWCO.
(10) Represents elimination of VANTAS historical balance sheet as of December
31, 1999 and statement of operations for the year ended December 31,
1999, which have been included in RSI's historical amounts. As a result
of the HQ merger, VANTAS will first be consolidated into HQ-NEWCO and
then to RSI.
HQ-NEWCO
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(Dollars in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
VANTAS HQ HQ (UK) TRANSACTION HQ-NEWCO
HISTORICAL HISTORICAL HISTORICAL FINANCING (1) ELIMINATIONS (1) PRO FORMA
-------------- --------------- --------------- --------------------------------------------
ASSETS
- ------
<S> <C> <C> <C> <C> <C> <C>
Cash $ 3,807 $ 57 $ 2,907 $ 15,065 $ - $ 21,836
Restricted cash 21,572 10,579 - - - 32,151
Accounts receivables 8,426 19,298 8,817 - - 36,541
Intangible assets, net 187,115 206,518 29,391 - 199,297 622,321
Property and equipment, net 80,064 82,953 17,325 - - 180,342
Other assets, net 31,473 17,730 24,810 - - 74,013
-------------- --------------- --------------- ------------ ------------ --------------
TOTAL ASSETS $ 332,457 $ 337,135 $83,250 $ 15,065 $ 199,297 $ 967,204
============== =============== =============== ============ ============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Accounts payable and accrued expenses $ 38,010 $ 7,276 $ 17,594 $ - $ - $ 62,880
Current portion of notes payable 12,500 - - - - 12,500
Deferred rent payable 2,165 - - - - 2,165
Other current liabilities 1,139 43,914 - - - 45,053
-------------- --------------- --------------- ------------ ------------ --------------
Total current liabilities 53,814 51,190 17,594 - - 122,598
Notes payable 108,125 141,524 38,285 350,000 - 335,459
(142,900) -
(108,950) -
(50,625)
Deferred rent payable 22,794 - - - - 22,794
Other liabilities 28,175 75 - - - 28,250
-------------- --------------- --------------- ------------ ------------ --------------
TOTAL LIABILITIES 212,908 192,789 55,879 47,525 - 509,101
-------------- --------------- --------------- ------------ ------------ --------------
TOTAL REDEEMABLE PREFERRED STOCK 153,092 - - - (153,092) -
-------------- --------------- --------------- ------------ ------------ --------------
SHAREHOLDERS' EQUITY
- --------------------
Common Stock, $.01 par value 71 74 34 - 6 185
Additional paid in capital 18,448 147,473 36,405 187,400 (183,878) 509,980
(237,100) 202,792
(33,385) 321,200 (2)
50,625
Retained earnings (deficit) (52,062) (3,201) (9,068) - 12,269 (52,062)
-------------- --------------- --------------- ------------ ------------ --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 332,457 $ 337,135 $ 83,250 $ 15,065 $ 199,297 $ 967,204
============== =============== =============== ============ ============ ==============
</TABLE>
HQ-NEWCO
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA HQ-NEWCO
VANTAS (3) HQ (4) ADJUSTMENTS PRO FORMA
------------------ ------------------- ----------------- ------------------
REVENUES
- --------
<S> <C> <C> <C> <C>
Office rentals $ 132,081 $ 245,727 $ - $ 377,808
Support services and other income 95,452 - - 95,452
------------------ ------------------- ----------------- ------------------
TOTAL REVENUES 227,533 245,727 - 473,260
------------------ ------------------- ----------------- ------------------
EXPENSES
- --------
Cost of revenue 119,748 123,680 - 243,428
General and administrative expense 64,684 102,547 (16,780)(8) 150,451
------------------ ------------------- ----------------- ------------------
Total operating expenses 184,432 226,227 (16,780) 393,879
OTHER INCOME (EXPENSES)
- ----------------------
Merger and intergration (26,730) - - (26,730)
Depreciation and amortization (15,487) (20,632) (6,643)(7) (42,762)
Interest income (expense) (11,263) (12,228) 10,193 (5) (57,251)
(21,375)(6)
(16,250)(6)
(6,328)(6)
Corporate general and administrative expense (12,635) - - (12,635)
------------------ ------------------- ----------------- ------------------
TOTAL EXPENSES 250,547 259,087 23,623 533,257
------------------ ------------------- ----------------- ------------------
Income (loss) before income tax benefit (expense) (23,014) (13,360) (23,623) (59,997)
------------------ ------------------- ----------------- ------------------
Income tax benefit 2,333 1,117 - 3,450
------------------ ------------------- ----------------- ------------------
NET INCOME (LOSS) $ (20,681) $ (12,243) $ (23,623) $ (56,547)
================== =================== ================= ==================
</TABLE>
Notes to Unaudited Pro Forma Consolidated Financial Statements:
(1) On January 21, 2000, VANTAS agreed to merge with HQ. This transaction is
expected to be funded with approximately $350 million in bank debt and
$187.4 million of third party equity. As part of the transaction Carr
will receive approximately $237 million in cash and approximately 19% of
equity in HQ-NEWCO. RSI and the third party equity will own
approximately 50% and 31%, respectively, of HQ-NEWCO, once the remaining
VANTAS common shareholders will receive approximately $33.4 million for
the redemption of their 16% interest in VANTAS. Simultaneously with the
merger approximately $142.9 million of existing HQ debt and
approximately $108.95 million of existing VANTAS debt will be retired.
As a result of the merger, HQ-NEWCO pro forma balance sheet and
statements of operations reflects the consolidation of VANTAS and HQ.
All necessary eliminations have been recorded.
(2) Represents the ownership value in HQ-VANTAS of Carr (19%) and the
minority shareholder (31%) of approximately $133.8 million and $187.4
million, respectively.
(3) The VANTAS pro forma results of operations for the year ended December
31, 1999 were based on historical results of operations of VANTAS as
adjusted for acquisitions. See Schedule I for more detail.
(4) The HQ pro forma results of operations for the year ended December 31,
1999 were based on historical results of operations of HQ as adjusted
for acquisitions. See Schedule II for more detail.
(5) Elimination of interest expense associated with approximately $142.9
million of existing HQ debt and approximately $108.95 million of
existing VANTAS debt that will be retired.
(6) To record interest expense associated with the new debt obtained of
approximately $225 million at an interest rate of LIBOR +350 basis
points (9.5%) and approximately $125 million at an interest rate of 13%.
Additionally as part of the obatining debt financing the HQ-NEWCO will
issue warrants valued at approximately $50.6 million, which are being
amortized into interest expense over the eight year debt term.
(7) Amortization expense on goodwill associated with VANTAS and HQ merger,
as if the merger occurred on January 1,1999. Goodwill is being amortized
over a 30 year period based on HQ-NEWCO's assessment of the significant
barriers to entry due to the rapid consolidation in the executive suites
business and the continuing value of the HQ trademark. The goodwill
adjustment represents amortization for the year which were not included
in the historical results.
(8) Adjustment reflects a reduction in general and administrative expenses.
In connection with the merger HQ-NEWCO management believes it will
realize cost savings related to (a) a reduction in the number of (i)
VANTAS corporate administrative and support employees, (ii) termination
of area district managers and client service specialists, (b) the
combination of overlapping support and administrative systems as well as
the elimination of rent, marketing, travel and entertainment expenses.
A summarization of these savings is outlined below for the years ended
December 31, 1999 (in thousands):
HQ-NEWCO
Employees Cost Pro Forma
Terminated (a) Savings (b) Adjustment
-------------- ----------- ----------
Salaries and related benefits $ (12,150) $ - $ (12,150)
Rent expense - (1,840) (1,840)
Marketing and promotion - (1,490) (1,490)
Travel and entertainment - (1,300) (1,300)
---------------------------------------------
$ (12,150) $ (4,630) $ (16,780)
=============================================
Schedule I
VANTAS INCORPORATED AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
VANTAS PRO FORMA VANTAS
HISTORICAL ADJUSTMENTS (1) PRO FORMA
-------------------- ----------------------- ---------------------
REVENUES
- --------
<S> <C> <C> <C>
Office rentals $ 124,564 $ 7,517 $ 132,081
Support services and other income 90,479 4,973 95,452
-------------------- ----------------------- ---------------------
TOTAL REVENUES 215,043 12,490 227,533
-------------------- ----------------------- ---------------------
EXPENSES
- --------
Cost of revenue 113,725 6,023 119,748
General and administrative expense 61,729 2,955 64,684
-------------------- ----------------------- ---------------------
Total operating expenses 175,454 8,978 184,432
OTHER INCOME (EXPENSES)
- ----------------------
Merger and intergration (26,730) - (26,730)
Depreciation and amortization (14,858) (629) (15,487)
Interest income (expense) (10,265) (998) (11,263)
Corporate general and administrative expense (11,996) (639) (12,635)
-------------------- ----------------------- ---------------------
TOTAL EXPENSES 239,303 11,244 250,547
-------------------- ----------------------- ---------------------
Income (loss) before income tax benefit (expense) (24,260) 1,246 (23,014)
-------------------- ----------------------- ---------------------
Income tax benefit (expense) 2,841 (508) 2,333
-------------------- ----------------------- ---------------------
NET INCOME (LOSS) $ (21,419) $ 738 $ (20,681)
==================== ======================= =====================
</TABLE>
(1) Pro forma adjustments reflects the results of operations of business
centers acquired for the periods which are not included in the historical
results. These adjustments also include: additional depreciation expense on
fixed assets acquired as well as amortizartion expense on goodwill associated
with the purchase of the business centers by VANTAS as if the acquisitions had
occured on January 1, 1999. Additionally, interest expense relating to
borrowings on VANTAS' loan facility to finance the purchases has also been
reflected.
Schedule II
HQ GLOBAL WORKPLACE , INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
HQ HQ (UK) PRO FORMA HQ
HISTORICAL HISTORICAL ADJUSTMENTS (1) PRO FORMA
------------------ ------------------- ------------------- ----------------------
REVENUES
- --------
<S> <C> <C> <C> <C>
Business center revenue $ 216,316 $ 20,011 $ 9,400 $ 245,727
------------------ ------------------- ------------------- ----------------------
TOTAL REVENUES 216,316 20,011 9,400 245,727
------------------ ------------------- ------------------- ----------------------
EXPENSES
- --------
Business center expenses 116,585 2,931 4,164 123,680
General and administrative expenses 76,754 21,542 4,251 102,547
Interest expense, net 7,680 1,541 3,007 12,228
Depreciation and amortization 18,797 2,719 (884) 20,632
------------------ ------------------- ------------------- ----------------------
TOTAL EXPENSES 219,816 28,733 10,538 259,087
------------------ ------------------- ------------------- ----------------------
Loss before
Income tax benefit (3,500) (8,722) (1,138) (13,360)
------------------ ------------------- ------------------- ----------------------
Income tax benefit 504 389 224 1,117
------------------ ------------------- ------------------- ----------------------
NET LOSS $ (2,996) $ (8,333) $ (914) $ (12,243)
================== =================== =================== ======================
</TABLE>
(1) Pro forma adjustment represents adjustments to the
operations of the entities acquired during fiscal 1998
and fiscal 1999 and also HQ UK and HQ Europe to show
the operations as if the acquisitions were effective
at January 1, 1999. These adjustments include the
following: adjustment in rent expense to conform with
Generally Accepted Accounting Principles ("GAAP"),
adjustments in goodwill amortization arising from the
allocation of purchase price (goodwill is amortized
straight-line over its estimated useful life of 30
years), adjustment in depreciation expense to conform
with GAAP, compensation expense associated with the
vesting of restricted stock units and income tax
effects of pro forma adjustments.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RECKSON SERVICE INDUSTRIES, INC.
By: /s/ Michael Maturo
------------------------------------
Michael Maturo
Executive Vice President,
Chief Financial Officer and Treasurer
Date: February 28, 2000
Exhibit 23.1
The Board of Directors
HQ Global Workplaces, Inc.
We consent to the incorporation by reference in the registration statement on
Form S-3 of Reckson Service Industries, Inc. of our report dated February 18,
2000 with respect to the consolidated balance sheets of HQ Global Workplaces,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the years ended December 31, 1999 and 1998 and the period from August 25,
1997 (inception) to December 31, 1997, which report appears in the Form 8-K of
Reckson Service Industries, Inc. expected to be filed February 28, 2000.
/s/ KPMG LLP
Atlanta, Georgia
February 25, 2000
Exhibit 23.2
Independent Auditors' Consent
The Board of Directors
OmniOffices (UK) Limited
We consent to the incorporation by reference in the registration statement on
Form S-3 of Reckson Service Industries, Inc. of our report dated February 28,
2000, with respect to the group balance sheets of OmniOffices (UK) Limited as
of December 31, 1999 and 1998, and the related group profit and loss account,
and group cash flows for the year ended December 31, 1999 and the nine months
ended December 31, 1998, which report appears in the Form 8-K of Reckson
Service Industries, Inc. filed on March 1, 2000.
/s/ KPMG LLP
Atlanta, Georgia
March 1, 2000
Exhibit 23.3
Consent of Independent Certified Public Accountants
Reckson Service Industries, Inc.
New York, New York
We hereby consent to the incorporation by reference in the Registration
Statements (Form S-3 No. 333-84353), (Forms S-8 No. 333-85827, No. 333-84013,
No. 333-77427) and related Prospectus of Reckson Service Industries, Inc. of
our report dated February 13, 1998 with respect to the consolidated statements
of operations, shareholders' equity, and cash flows of OmniOffices Group, Inc.
for the period from January 1, 1997 to August 25, 1997 included in this
Current Report on Form 8-K.
/s/ BDO Seidman, LLP
Atlanta, Georgia
February 24, 2000
