UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to __________________
Commission File Number 0-18274
VANTAS Incorporated (f/k/a Executive Office Group, Inc.)
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 13-3353508
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
90 Park Avenue, Suite 3100, New York, New York 10016
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(Address of principal executive offices - Zip code)
(212) 907-6400
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Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
|_| Yes |X| No
As of November 15, 1999, 4,901,868 shares of the registrant's Class A Common
Stock, par value $ .01 per share, were outstanding.
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VANTAS INCORPORATED AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998 (audited)........................................ 3
Consolidated Statements of Operations for the three months
and six months ended June 30, 1999 and 1998 (unaudited)................ 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998 (unaudited)..................................... 5
Notes to the Consolidated Financial Statements (unaudited).............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K...................................19
SIGNATURES
2
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
VANTAS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS: 1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,002,516 $3,615,087
Restricted cash 1,253,371 10,000,000
Accounts receivable, net of allowance for doubtful accounts
of $686,000 at June 30, 1999 and $401,000 at December 31, 1998, respectively 7,730,706 3,821,175
Prepaid expenses and other current assets 6,066,916 5,145,682
Deferred income taxes 1,146,816 174,000
Deferred financing costs 592,356 466,727
------------- -------------
Total current assets 18,792,681 23,222,671
Intangibles, net 179,681,076 81,605,181
Property and equipment, net 49,138,215 23,124,702
Deferred financing costs, net 3,073,098 2,584,418
Security deposits 3,621,132 2,110,952
Other assets, net 3,472,218 1,426,526
------------- -------------
Total assets $257,778,420 $134,074,450
============= =============
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable and accrued expenses $16,096,590 $9,578,807
Capital lease obligations 1,846,903 731,510
Deferred rent payable 1,200,815 727,619
Notes payable - other 6,000,000 --
Notes payable - bank 6,925,000 7,875,000
------------- -------------
Total current liabilities 32,069,308 18,912,936
Notes payable - bank 84,750,000 65,125,000
Acquisitions payable 6,643,864 --
Tenants' security deposits 17,627,847 8,592,948
Deferred rent payable 13,748,316 6,607,771
Deferred income taxes 3,956,016 1,514,000
Capital lease obligations 752,062 602,153
Other liabilities 1,052,518 --
------------- -------------
Total liabilities 160,599,931 101,354,808
------------- -------------
Preferred stock, authorized 30,000,000 shares:
Series A Convertible, $.01 par value, issued and outstanding
7,574,711 shares (liquidation preference $12,900,000) 15,153,241 14,407,957
Series B Convertible, $.01 par value, issued and outstanding
3,222,851 shares (liquidation preference $15,309,000) 16,376,649 15,700,638
Series C Convertible, $.01 par value, issued and outstanding
13,325,424 shares at June 30, 1999 (liquidation preference $63,296,000) 65,714,381 --
------------- -------------
97,244,271 30,108,595
------------- -------------
Stockholders' equity (deficit):
Class A Common stock, $.01 par value, authorized 35,000,000 shares,
issued and outstanding 4,901,868 shares 49,019 49,019
Additional paid-in capital 3,133,608 3,133,608
Retained earnings (deficit) (2,298,409) 378,420
------------- -------------
884,218 3,561,047
Note receivable from issuance of stock (950,000) (950,000)
------------- -------------
Total stockholders' equity (deficit) (65,782) 2,611,047
------------- -------------
Total liabilities and stockholders' equity (deficit) $257,778,420 $134,074,450
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
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VANTAS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Business Center Operations:
Revenues:
Office rentals $30,571,559 $12,997,663 $57,636,857 $23,199,845
Support services 21,767,664 9,390,003 41,289,746 16,158,554
------------ ------------ ------------ ------------
52,339,223 22,387,666 98,926,603 39,358,399
------------ ------------ ------------ ------------
Expenses:
Rent 20,111,485 7,218,146 37,474,431 12,900,533
Support services 7,611,480 3,059,860 14,393,631 5,032,282
Center general and administrative 14,773,359 6,457,771 27,814,947 10,972,444
------------ ------------ ------------ ------------
42,496,324 16,735,777 79,683,009 28,905,259
------------ ------------ ------------ ------------
Contribution from operation of business centers 9,842,899 5,651,889 19,243,594 10,453,140
------------ ------------ ------------ ------------
Other (Expenses) Income:
Corporate general and administrative (2,626,436) (1,527,444) (5,188,818) (2,743,866)
Merger and integration charges (640,527) -- (1,384,981) --
Depreciation and amortization (3,352,770) (1,431,206) (6,253,673) (2,177,424)
Interest expense, net (2,340,570) (1,307,008) (4,245,289) (2,093,442)
Managed center income 214,155 212,294 401,781 341,181
Other income 34,684 21,428 34,684 76,195
------------ ------------ ------------ ------------
(8,711,464) (4,031,936) (16,636,296) (6,597,356)
------------ ------------ ------------ ------------
Income before minority interest and
income taxes 1,131,435 1,619,953 2,607,298 3,855,784
Minority interest in net (income) loss of
consolidated partnerships -- 208,877 -- (331,087)
------------ ------------ ------------ ------------
Income before provision for income taxes 1,131,435 1,828,830 2,607,298 3,524,697
Provision for income taxes (581,000) (730,000) (1,331,000) (1,395,000)
------------ ------------ ------------ ------------
Net income $550,435 $1,098,830 $1,276,298 $2,129,697
------------ ------------ ------------ ------------
Accretion of preferred stock (1,983,117) (538,652) (3,953,127) (888,989)
------------ ------------ ------------ ------------
Net (loss) income applicable to common stock ($1,432,682) $ 560,178 ($2,676,829) $1,240,708
============ ============ ============ ============
Share information:
Basic earnings:
Net (loss) income per common share ($0.29) $0.11 ($0.55) $0.24
============ ============ ============ ============
Weighted average number of common
shares outstanding 4,901,868 4,960,735 4,901,868 5,064,601
============ ============ ============ ============
Diluted earnings:
Net (loss) income per common share ($0.29) $0.06 ($0.55) $0.14
============ ============ ============ ============
Weighted average number of common
shares outstanding 4,901,868 14,621,155 4,901,868 14,058,612
============ ============ ============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
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VANTAS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,276,298 $2,129,697
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,253,673 2,177,424
Amortization of deferred financing costs 290,553 211,304
Deferred income taxes -- 1,389,100
Provision for doubtful accounts 211,358 274,012
Minority interest in net income of consolidated partnerships -- 331,087
Deferred rent payable 2,469,589 472,861
Deferred credits 53,742 (135,790)
Non-cash interest expense -- 118,133
Changes in operating assets and liabilities:
Accounts receivable (1,026,730) (753,836)
Prepaid expenses and other current assets (684,312) (572,752)
Security deposits and other assets 61,672 (132,120)
Accounts payable and accrued expenses (35,747) 1,291,732
Income taxes payable 591,695 (484,477)
Tenants' security deposits 1,930,155 768,510
------------ ------------
Net cash provided by operating activities 11,391,946 7,084,885
------------ ------------
Cash flows from investing activities:
Acquisition of net assets of business centers (40,456,146) (19,705,312)
Proceeds from acquisitions 8,400,000 --
Purchases of property and equipment (13,310,664) (4,691,695)
Restricted cash 10,000,000 --
------------ ------------
Net cash used in investing activities (35,366,810) (24,397,007)
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 35,200,000 21,529,000
Repayments on borrowings (10,525,000) (6,551,099)
Deferred financing costs (904,862) (546,625)
Payments of capital leases (1,294,630) (338,186)
Distributions to minority partners -- (745,980)
Proceeds from exercise of common stock options -- 210,000
Purchase and retirement of common and preferred stock -- (415,917)
Proceeds from issuance of preferred stock, net of issuance costs -- 7,874,400
Preferred stock issuance costs (113,215) --
------------ ------------
Net cash provided by financing activities 22,362,293 21,015,593
------------ ------------
Net (decrease) increase in cash (1,612,571) 3,703,471
Cash at beginning of period 3,615,087 2,206,483
------------ ------------
Cash at end of period $2,002,516 $5,909,954
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
<PAGE>
VANTAS Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements for the three and six month periods
ended June 30, 1999 and 1998 have been prepared by VANTAS Incorporated and
Subsidiaries (the "Company") (formerly ALLIANCE NATIONAL Incorporated, and,
prior to that, Executive Office Group, Inc.) and, in the opinion of management,
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial position, operating results
and cash flows for each period presented. The December 31, 1998 consolidated
balance sheet was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
These consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's December 31,
1998 Transition Report. Results for interim periods are not necessarily
indicative of results for a full year.
Certain prior period amounts have been reclassified to conform to the
current year presentation.
2. Acquisitions
Effective January 1, 1999, two newly formed subsidiaries of the Company
were merged (the "Mergers") with and into InterOffice Superholding Corporation
("InterOffice") and Reckson Executive Centers, Inc. ("REC"), respectively.
InterOffice and REC collectively owned 39 business centers. As a result of the
Mergers, InterOffice and REC became wholly-owned subsidiaries of the Company and
the former shareholders of such entities received 13,325,424 shares of the
Company's Series C Convertible Preferred Stock ("Series C Preferred Stock") and
the Company received $8.4 million in cash.
In connection with the Mergers, the Company authorized 15,000,000 shares
of Series C Preferred Stock, which ranks on parity with the Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock ("Series A Preferred
Stock" and "Series B Preferred Stock", respectively). In connection with the
issuance of the Series C Preferred Stock, the terms of the Series A Preferred
Stock and Series B Preferred Stock were modified in certain respects, including
with respect to the
6
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elimination of redemption rights. Except for certain class voting rights and
except for the conversion feature described below, the Series C Preferred Stock
has substantially identical terms as the Series A Preferred Stock and Series B
Preferred Stock. If the original holders of the Series C Preferred Stock or
certain of their permitted transferees are the holders of the Series C Preferred
Stock at the time of conversion thereof, the Series C Preferred Stock will be
converted into Class B Common Stock ("Class B Common Stock") which will have
identical terms and conditions as the Company's Class A Common Stock ("Class A
Common Stock") (formerly the Common Stock), except that such Class B Common
Stock will carry the right to elect a specified number of directors, not to
exceed four, following an initial public offering.
The Company incurred merger and integration costs of approximately $ .6
million and $1.4 million during the three and six months ended June 30, 1999,
respectively, in connection with the Mergers. Such charges consist primarily of
severance payments and other transaction related costs.
The Company's effective tax rate (which is the provision for income taxes
as a percentage of pre-tax income) for the three and six months ended June 30,
1999 has increased as compared to the comparable periods of the prior year,
primarily due to the effect of non-deductible goodwill amortization associated
with the Mergers and certain of the Company's other acquisitions during 1999.
In addition to the Mergers described above, the Company acquired 39
business centers, in 7 acquisitions, for an aggregate purchase price of $44.8
million during for the six month period ended June 30, 1999.
The pro forma financial information set forth below is based upon the
Company's historical consolidated statements of operations for the six months
ended June 30, 1999 and 1998, adjusted to give effect to the Mergers and the
acquisitions noted above as of January 1, 1998.
The pro forma financial information is presented for informational
purposes only and may not be indicative of what actual results of operations
would have been had the acquisitions occurred on January 1, 1998, nor does it
purport to represent the results of operations for future periods.
Six months ended June 30,
1999 1998
---- ----
Revenues $ 106,257,000 $ 85,024,000
Net income 826,000 4,622,000
Net (loss) income applicable to common stock (3,127,127) 1,201,180
Basic (loss) income per common share (.64) .24
Diluted (loss) income per common share (.64) .14
7
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3. Earnings Per Share
The following table sets forth the computation of basic and diluted income
(loss) per common share for the periods ended June 30:
<TABLE>
<CAPTION>
Three Months Six Months
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 550,435 $ 1,098,830 $ 1,276,298 $ 2,129,697
Accretion of preferred stock (1,983,117) (538,652) (3,953,127) (888,989)
------------ ------------ ------------ ------------
Numerator for basic (loss) income
per share-(loss) income applicable
to common stock $ (1,432,682) $ 560,178 $ (2,676,829) $ 1,240,708
Effect of dilutive securities:
Accretion of preferred stock -- 350,338 -- 700,675
------------ ------------ ------------ ------------
Numerator for diluted (loss) income
per share-(loss) income applicable
to common stock after assumed
conversions $ (1,432,682) $ 910,516 $ (2,676,829) $ 1,941,383
Denominator:
Denominator for basic income (loss)
per share-weighted average shares 4,901,868 4,960,735 4,901,868 5,064,601
Effect of dilutive securities:
Stock options -- 1,220,542 -- 804,728
Warrants -- 865,167 -- 614,572
Convertible preferred stock -- 7,574,711 -- 7,574,711
------------ ------------ ------------ ------------
Dilutive potential common shares -- 9,660,420 -- 9,994,011
Denominator for dilutive income (loss)
per share-adjusted weighted average
shares and assumed conversions 4,901,868 14,621,155 4,901,868 14,058,612
============ ============ ============ ============
</TABLE>
Options and warrants to purchase 5,775,706 and 137,130 shares of common
stock were outstanding for the three and six months ended June 30, 1999 and
1998, respectively, but were not included in the computation of diluted earnings
per share because their effect would be anti-dilutive. Additionally, 24,122,986
and 3,222,851 shares of Convertible Preferred Stock were outstanding for the
three and six months ended June 30, 1999 and 1998, respectively, but were not
included in the computation of diluted earnings per share because their effect
would also be anti-dilutive.
4. Note Payable - Other
In June 1999, the Company entered into a $6.0 million Subordinated
Promissory Note payable to Reckson Services Industries, Inc. ("RSI"or the "RSI
Note"), a related party. Such note bore interest at the rate of 15.0% per annum.
8
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The RSI Note was fully satisfied from proceeds raised through the issuance
of the Company's Series D Convertible Preferred Stock described below (See Note
5).
5. Subsequent Events
On July 19, 1999, the Company increased the authorized shares of its
common stock from 45 million to 61 million, of which 41 million and 20 million
are designated Class A Common Stock and Class B Common Stock, respectively.
Effective August 3, 1999, the Company increased its $100 million credit
facility (the "Credit Facility") with various lending institutions to
approximately $158 million. The Credit Facility provides for a $5 million
acquisition loan commitment, $128 million in term loans, and a $25 million
revolving loan commitment, including a sub-limit of $15 million for letters of
credit. Interest on each commitment ranges from LIBOR plus 3.0% to LIBOR plus
3.75% for one, three or six month periods at the election of the Company. The
Credit Facility provides for a commitment fee of 1/2 of 1.0% per annum on the
unused portion thereof.
In August 1999, the Company authorized 5,200,000 shares of Series D
Convertible Preferred Stock ("Series D Preferred Stock"). The Company has issued
5,109,873 shares for net proceeds of approximately $26.8 million. The Series D
Preferred Stock was issued at $5.25 per share, subject to adjustment up to $6.25
per share based upon the Company's cumulative third and fourth quarter EBITDA,
as adjusted. The Series D Preferred Stock has a liquidation preference of $5.25
per share, which is also subject to adjustments based on the Company's
cumulative third and fourth quarter EBITDA, as adjusted. The Series D Preferred
Stock ranks pari passu with the Company's Series E Convertible Preferred Stock
("Series E Preferred Stock"), and senior to the Series A Preferred Stock, Series
B Preferred Stock and Series C Preferred Stock, with respect to liquidation. The
Series D Preferred Stock is convertible into the Company's Class B Common Stock
on a one-for-one basis, or at the election of the shareholder into the Company's
Class A Common Stock, subject to the EBITDA adjustment described above.
In August 1999, the Company authorized 1,000,000 shares of Series E
Preferred Stock. The Company has issued 604,413 shares for net proceeds of
approximately $3.1 million. The Series E Preferred Stock was issued at $5.25 per
share, subject to adjustment up to $6.25 per share based upon the Company's
cumulative third and fourth quarter EBITDA, as adjusted. The Series E Preferred
Stock has a liquidation preference of $5.25 per share, and is also subject to
adjustments based on the Company's cumulative third and fourth quarter EBITDA,
as adjusted. The Series E Preferred Stock ranks pari passu with the Company's
Series D Preferred Stock, and senior to the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, with respect to liquidation. The
Series E Preferred Stock is convertible into the Company's Class A Common Stock
on a one-for-one basis, subject to the EBITDA adjustment described above.
Subsequent to June 30, 1999, the Company acquired 11 business centers, in
5 acquisitions, for an aggregate purchase price of $8.5 million.
As of November 15, 1999 the Company currently has executed letters of
intent and definitive agreements to acquire 2 business centers for an aggregate
purchase price of approximately $1.5 million. These transactions will be
accounted for under the purchase method of accounting.
RSI, a holder of approximately 35.0% of the Company's outstanding capital
stock, has entered into agreements with certain shareholders of the Company,
including members of the Company's senior management and former members of the
Company's Board of Directors,
9
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relating to the purchase of all or part of such shareholders' capital stock in
the Company. Upon consummation of the purchases contemplated by these
agreements, which is currently expected to occur between November, 1999 and
February, 2000, RSI is expected to own between 67% and 87% of the Company's
outstanding capital stock.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements and Notes thereto.
As of June 30, 1999, the Company owns and operates 186 business centers in
27 states, the District of Columbia, and France. This includes 7 business
centers which were under development and 3 open business centers which were open
for nine months or less (collectively "Developing Centers") as of June 30, 1999.
Additionally, the Company manages 5 business centers for unrelated third
parties. The Company provides a complete outsourced office solution through
furnished and equipped individual offices and multi-office suites available on
short notice with flexible contracts. The Company also provides business support
and information services including: telecommunications; broadband internet
access; mail room and reception services; high-speed copying, faxing and
printing services; secretarial, desktop publishing and IT support services and
various size conference facilities, with multi-media presentation and, in
certain cases, video teleconferencing capabilities. The Company also provides
similar services for those businesses and individuals that do not require
offices on a full-time basis.
The Company has grown through an aggressive acquisition strategy beginning
in 1996, whereby, as of June 30, 1999, it has acquired or merged with 32
entities, which were comprised of 172 business centers with a total cost of
approximately $197.2 million. During the three months ended June 30, 1999 and
1998, the Company acquired 17 and 9 business centers with a cost of
approximately $21.7 million and $8.3 million, respectively. During the six
months ended June 30, 1999 and 1998, the Company acquired 78 and 32 centers with
a cost of approximately $108.1 million and $29.3 million, respectively.
In the early stages of development of a Developing Center, expenses are
incurred with minimal corresponding revenues. Once a Developing Center reaches
occupancy levels above 70%, generally within nine to twelve months of its
initial start, it is expected to have a positive impact on the results of the
Company. For the three and six months ended June 30, 1999, there were 10
Developing Centers as compared to 3 for the same periods in 1998.
These activities have had a material impact on the results of operations
and financial position of the Company and significantly affect the comparability
of the respective prior periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Total business center revenues for the three months ended June 30,
1999 were $52.3 million representing an increase of $29.9 million or 133.8% from
the corresponding period in 1998.
Business centers that were acquired after April 1, 1998 ("Acquired
Centers") had revenues for the three months ended June 30, 1999 and 1998 of
$30.5 million and $.9 million, respectively, representing an increase of $29.6
million from the corresponding period in 1998.
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<PAGE>
This increase in revenues resulted primarily from an increase in the number of
business centers acquired as compared to those acquired in the comparable period
of the prior year.
Business centers, excluding Acquired and Developing Centers, that were
operating for the entire comparable period of the prior year ("Same Centers")
had revenues for the three months ended June 30, 1999 of $21.7 million, an
increase of $.7 million or 3.3% from the corresponding period in 1998. While
office occupancy levels remained relatively stable at approximately 89% for the
comparable periods, the increase in office rental revenue of $ .5 million, or
4.1%, was due to more favorable office pricing. The increase in support service
revenues of $ .2 million, or 2.3%, from the corresponding period in 1998 is
primarily attributable to an increase in broadband internet access, information
technology support services, and administrative support services.
Developing Center revenues were $ .1 million for the three months ended
June 30, 1999, a decrease of $ .4 million from the corresponding period in 1998.
During 1999 and 1998 there were 3 and 2 Developing Centers that were open,
respectively.
EXPENSES. Total business center expenses for the three months ended June 30,
1999 and 1998 were $42.5 million and $16.8 million, representing an increase of
$25.7 million or 153.9% from the corresponding period in 1998.
Acquired Center expenses for the three months ended June 30, 1999 and 1998
were $25.6 million and $.7 million respectively, representing an increase of
$24.9 million from the corresponding period in 1998. This increase resulted
primarily from an increase in the number of business centers acquired as
compared to the comparable period of the prior year.
Same Center expenses for the three months ended June 30, 1999 were $16.2
million, an increase of $ .6 million, or 3.8%, from the corresponding period in
1998. This increase is primarily attributable to higher rent expense resulting
from inflation adjusted rent increases and support service expenses associated
with increased support service revenues.
Developing Center expenses for the three months ended June 30, 1999 were
$.7 million, an increase of $ .2 million from the corresponding period in 1998.
This increase is due to the fact that there were 10 Developing Centers during
the three months ended June 30, 1999 compared to only 3 business centers during
the three months ended June 30, 1998.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the three
months ended June 30, 1999, COBC was $9.8 million as compared to $5.6 million
for the same period in 1998. The COBC as a percentage of total revenues ("COBC
Margin") was 18.8% for the three months ended June 30, 1999 as compared to 25.2%
for the corresponding period in 1998. The decrease in overall business center
COBC Margin of 6.4% from 1998 is primarily attributable to the significant
increase in Acquired Center revenue and its associated lower COBC Margin. COBC
Margin from Acquired Centers is 16.0% as compared to Same Center COBC Margin of
25.3%.
Acquired Center COBC was $4.9 million for the three months ended June 30,
1999, an increase of $4.7 million from the corresponding period in 1998. The
COBC Margin from Acquired Centers for the three months ended June 30, 1999 was
16.0% as compared to 22.2% for the comparable period. The decrease of 6.2% in
COBC Margin from 1998 is primarily attributable to lower occupancy levels
associated with the greater number of recently developed centers acquired during
the three months ended June 30, 1999 as compared to the same period in 1998.
12
<PAGE>
Same Center COBC was $5.5 million for the three months ended June 30, 1999
as compared to $5.4 million for the corresponding period in 1998. The COBC
Margin from Same Centers for the three months ended June 30, 1999 remainded
relatively consistent, at 25.3% as compared 25.7% for the corresponding period
in 1998.
In general, COBC Margins from Acquired Centers are initially lower than
Same Centers. It may take several months for the Company to integrate these
Acquired Centers into its existing operations and apply the Company's management
philosophy, policies and procedures, and maximize the Company's concentrated
marketing efforts which should produce greater occupancy and support services
revenue.
Developing Centers generated a loss from operations for the three months
ended June 30, 1999 of $ .6 million, an increase in loss of $ .6 million from
the corresponding period in 1998. This increase reflects greater Developing
Centers activity than in the prior year. Losses are generally incurred on
Developing Centers during their first nine to twelve months of operation.
OTHER EXPENSES, NET. For the three months ended June 30, 1999, other expenses,
net, were $8.7 million, representing an increase of $4.7 million or 116.1% from
the corresponding period in 1998. This increase is primarily attributable to
greater corporate general and administrative expenses, depreciation and
amortization and interest expense of $1.1 million, $1.9 million and $1.0 million
or 71.9%, 134.3% and 79.1%, respectively. Additionally, the Company incurred
merger and integration charges of $ .6 million related to one-time costs
associated with the Mergers.
The increase in corporate general and administrative expenses was
attributable to increases in corporate office personnel and associated travel,
related office expansion, and consulting fees associated with the Company's
growth. The increase in depreciation and amortization relates to fixed assets
acquired and goodwill associated with the Mergers and the Company's other
acquisitions. It is also attributable to an increase in capital expenditures
associated with technology infrastructure additions and leasehold improvements
for Developing and Same Centers. Interest expense is primarily related to the
Company's Credit Facility. This increase resulted from interest expense on
borrowings related to the Company's acquisitions.
MINORITY INTEREST. Prior to July 1, 1998, the Company acted as general partner
and manager for seven partnerships that collectively owned nine business
centers. Effective July 1, 1998, the Company acquired the remaining interest in
such partnerships. Prior to this acquisition, the Company consolidated the
partnerships' results of operations and recorded minority interest net income or
loss. Minority interest in the net loss of the consolidated partnerships for the
three months ended June 30, 1998 was $ .2 million.
INCOME TAXES. The Company's effective income tax rate was 51.4% during the three
months ended June 30, 1999 as compared to 39.9% at June 30, 1998. This increase
is attributable to the effects of non-deductible goodwill amortization
associated with the Mergers and certain of the Company's other acquisitions
during 1999.
NET INCOME. Net income for the three months ended June 30, 1999 was $ .6 million
as compared to $1.1 million for the same period in 1998.
Accretion of the stated return on investment on the Company's redeemable
preferred stock for the three months ended June 30, 1999 was $2.0 million,
representing an increase of $1.4 million or 268.2% from the corresponding period
in 1998. This increase is primarily the result of the Company's issuance of
Series C Preferred Stock in 1999. This activity coupled with the
13
<PAGE>
compounded growth of previous issuances of preferred stock accounted for the
total increase over the comparable period in 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Total business center revenues for the six months ended June 30, 1999
were $98.9 million, representing an increase of $59.5 million or 151.3% from the
corresponding period in 1998.
Acquired Centers had revenues for the six months ended June 30, 1999 and
1998 of $66.2 million and $8.2 million respectively, representing an increase of
$58.0 million from the corresponding period in 1998. This increase in revenues
resulted primarily from an increase in the number of business centers acquired
as compared to those acquired in the comparable period of 1998.
Same Centers revenues for the six months ended June 30, 1999 were $32.6
million, an increase of $2.2 million or 7.2% from the corresponding period in
1998. While office occupancy levels remained relatively stable at approximately
89% for the comparable periods, the increase in office rental revenue of $1.3
million, or 7.3%, was due to more favorable office pricing. The increase in
support service revenues of $ .9 million, or 7.1%, from the corresponding period
in 1998, is partially attributable to an increase in broadband internet access,
information technology support services and administrative support services.
Developing Center revenues amounted to $ .1 million for the six months
ended June 30, 1999, a decrease of $ .7 million from the corresponding period in
1998. At June 30, 1999 and 1998 there were 3 and 2 Developing Centers that were
open, respectively.
EXPENSES. Total business center expenses for the six months ended June 30, 1999
were $79.7 million, representing an increase of $50.8 million or 175.7% from the
corresponding period in 1998.
Acquired Center expenses for the six months ended June 30, 1999 were $55.6
million, an increase of $49.3 million from the corresponding period in 1998.
This increase resulted primarily from an increase in the number of business
centers acquired as compared to those acquired in the comparable period of 1998.
Same Center expenses for the six months ended June 30, 1999 were $23.3
million, an increase of $1.5 million or 6.9% from the corresponding period in
1998. This increase is primarily attributable to higher rent expense resulting
from inflation adjusted rent increases and support service expenses associated
with increased support service revenues.
Developing Center expenses for the six months ended June 30, 1999 and 1998
were $ .8 million for both periods.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the six
months ended June 30, 1999, COBC was $19.2 million as compared to $10.5 million
for the same period in 1998. The COBC as a percentage of total revenues ("COBC
Margin") was 19.5% for the six months ended June 30, 1999 as compared to 26.6%
for 1998. The decrease in overall business center COBC Margin of 7.1% from 1998,
is primarily attributable to the significant increase in Acquired Center revenue
and its associated lower COBC Margin. COBC Margin from the Acquired Centers is
16.0% as compared to Same Center COBC Margin of 28.5%.
14
<PAGE>
Acquired Center COBC was $10.6 million for the six months ended June 30,
1999, an increase of $8.7 million from the corresponding period in 1998. The
COBC Margin from Acquired Centers for the six months ended June 30, 1999 was
16.0%, as compared to 23.2% in the comparable period in 1998. The decrease of
7.2% in COBC Margin from 1998 is primarily attributable to lower occupancy
levels associated with the greater number of recently developed centers acquired
during the six months ended June 30, 1999 as compared to the same period in
1998.
Same Center COBC was $9.3 million for the six months ended June 30, 1999
as compared to $8.6 million for the corresponding period in 1998. The COBC
Margin from Same Centers for the six months ended June 30, 1999 remained
relatively consistent at 28.5% as compared to 28.3% for the corresponding period
in 1998.
Developing Centers generated a loss from operations for the six months
ended June 30, 1999 of $ .7 million, an increase of $ .7 million from the
corresponding period in 1998. This increase reflects greater Developing Center
activity than in the prior year. Losses are generally incurred from Developing
Centers during their first nine to twelve months of operations.
OTHER EXPENSES, NET. For the six months ended June 30, 1999, other expenses,
net, were $16.6 million, representing an increase of $10.0 million or 152.2%
from the corresponding period in 1998. The increase is primarily attributable to
an increase in corporate general and administrative expenses, depreciation and
amortization and interest expense of $2.4 million, $4.1 million and $2.1 million
or 89.1%, 187.2% and 102.8%, respectively. Additionally, the Company incurred
merger and integration charges of $1.4 million related to one-time costs
associated with the Mergers during the six months ended June 30, 1999.
The increase in corporate general and administrative expenses was related
to the increase in corporate office staff, related office space and consulting
fees associated with the selection of the Company's new enterprise resource
program. The increase in depreciation and amortization relates to fixed assets
acquired and goodwill associated with acquisitions in addition to an increase in
capital expenditures associated with technology infrastructure additions and
leasehold improvements to Developing and Same Centers. Interest expense is
primarily related to borrowings under the Company's Credit Facility. This
increase resulted from interest expense incurred as the Company continued to
fund its acquisitions.
MINORITY INTEREST. Prior to July 1, 1998, the Company acted as general partner
and manager for seven partnerships that collectively owned nine business
centers. Effective July 1, 1998, the Company acquired the remaining interest in
such partnerships. Prior to this acquisition, the Company consolidated the
partnerships' results of operations and recorded minority interest net income.
Minority interest in the net income of the consolidated partnerships for the six
months ended June 30, 1998 was $ .3 million.
INCOME TAXES. The Company's effective income tax rate was 51.0% during the six
months ended June 30, 1999 as compared to 39.6% for the corresponding period
in 1998. This increase is attributable to the effects of non-deductible goodwill
amortization associated with the Mergers and certain of the Company's other
acquisitions during 1999.
NET INCOME. Net income for the six months ended June 30, 1999 was $1.3 million
as compared to $2.1 million for the same period in 1998.
Accretion of the stated return on investment on the Company's redeemable
preferred stock for the six months ended June 30, 1999 was $4.0 million,
representing an increase of $3.1 million or 344.4% over the comparable period
in 1998. This increase is primarily the result of the
15
<PAGE>
Company's issuance of Series C Preferred Stock in 1999. This activity, coupled
with the compounded growth of previous issuances of preferred stock, accounts
for the increase over the comparable period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has primarily relied upon cash flows generated
from operations, borrowings from its lenders and sales of its securities to
satisfy its liquidity and capital requirements. Principal liquidity needs have
included the acquisition and development of new business centers, debt service
requirements and other capital expenditures necessary to maintain existing
business centers and upgrade and build the corporate infrastructure to manage
the Company's operations effectively.
The Company had a working capital deficit of $13.3 million at June 30,
1999 as compared to working capital of $4.3 million at December 31, 1998. This
decrease in working capital arose principally from the Company utilizing
approximately $8.8 million of its restricted cash to fund permitted acquisitions
in accordance with the terms of its Credit Facility and a bridge loan in the
amount of $6.0 million from a related party to finance certain acquisitions.
Cash flows generated from operating activities for the six months ended
June 30, 1999 were $11.4 million, representing an increase of $4.3 million from
the corresponding period in 1998. This increase is primarily attributable the
Company's growth through acquisitions during the period.
Cash used in investing activities for the six months ended June 30, 1999
was $35.4 million, an increase of $11.0 million from the corresponding period in
1998. The increase is attributable to the Company's acquisition and development
strategy and the deployment of resources to expand the technology base at its
business centers and its corporate offices.
Cash provided by financing activities for the six months ended June 30,
1999 was $22.4 million, representing an increase of $1.3 million from the
corresponding period in 1998. Net proceeds from borrowings and repayments of
borrowings amounted to $24.7 million for the six months ended June 30, 1999.
On August 3, 1999, the Company completed a transaction which increased its
$100.0 million credit facility (the amended and restated "Credit Facility") to
$157.9 million. Borrowings under the Credit Facility bear interest ranging from
LIBOR plus 3.0% (8.4375% at November 15, 1999) to LIBOR plus 3.75% (9.1875% at
November 15, 1999) for a one, three or six month period at the election of the
Company. The Company pays a commitment fee of 1/2 of 1.0% per annum on the
unused portion of the Credit Facility. Borrowings under the Credit Facility are
formula based and available up to the maximum amount of the Credit Facility. As
of June 30, 1999 when the facility was $100.0 million, there were $90.8 million
in borrowings and $4.8 million in standby letters of credit outstanding under
the Credit Facility. The Credit Facility also contains certain financial
covenants, one of which requires the Company not to exceed a maximum ratio of
consolidated indebtedness to consolidated earnings before interest, income
taxes, depreciation and amortization. In addition, there are also other
covenants pertaining to additional financial ratios and limitations on capital
expenditures. At June 30, 1999, the Company was in compliance with all of its
covenants.
The Company anticipates that cash flows from operations will continue to
provide adequate capital to fund its operating and administrative expenses and
regular debt service obligations. In
16
<PAGE>
addition, the Company anticipates that cash on hand, availability under its
Credit Facility, issuance of equity, as well as other debt alternatives, will
provide the necessary capital required by the Company to continue its growth
strategy, through the acquisition and development of business centers.
IMPACT OF YEAR 2000
The Year 2000 issue concerns the inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000.
The following information is as of November 15, 1999. The Company has
completed the inventory, assessment and, except as described below, necessary
modifications or replacements of all of its informational systems (such as
accounting, billing and payroll) and operational systems (such as telephone and
voicemail systems, personal computers, copiers and fax machines located at the
Company's business centers) for the purpose of ensuring that such systems are
Year 2000 compliant. Except as described below, the Company has completed
testing on all of its informational systems and substantially all of its
operational systems. As a result of these efforts, the Company believes that
such systems are Year 2000 compliant. The Company is in the process of modifying
or replacing, as necessary, and testing of certain of its operational systems
relating to its international operations. The completion of the remaining items
of the Company's Year 2000 project is expected to occur in December, 1999, which
is prior to any anticipated impact on the Company's operational systems.
The Company has sought assurances from its third party suppliers and
vendors (e.g., landlords where business centers are located) that the
informational and operational systems of such third parties are also Year 2000
compliant. During the course of November 1999, the Company will have further
communications with those third parties who have not responded or who responded
that they were not yet Year 2000 compliant. However, the Company cannot
guarantee that such third parties' systems will be Year 2000 compliant.
As of September 30, 1999, total costs related to the Year 2000 issue were
approximately $3.3 million. The Company estimates that it will incur
approximately $ .4 million in additional costs in the final quarter of 1999.
In a "worst case" scenario, the Company believes that failure of
operational systems, such as building management and mechanical systems, would
result in inconveniences to the Company's clients which might include no
elevator service, lighting, entry or egress and the generating of invoices. This
may be alleviated in certain cases by manual overrides of such systems by
building management. Further, the failure of telephony service provided by third
parties could result in disruption to the client's ability to transact business.
Lastly, if any of the Company's information systems were to become temporarily
disabled, the Company would be required to process transactions manually until
the systems were fixed.
The Company has developed contingency plans designed to identify possible
alternatives which could be used in the event of a disruption in the delivery of
essential services and to minimize the effect of such a disruption.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the six months ended June 30, 1999,
together with other statements and information publicly disseminated by the
Company contain certain "forward-looking" statements, as that statement is
defined in the Private Securities Litigation Reform Act of 1995. The Company
cautions investors that there can be no assurance that the actual results or
business conditions will not differ materially from those projected or suggested
in such forward-looking statements as a result of various factors. These factors
are subject to risks and uncertainties, many of which are outside the control of
the Company, including but not limited to, (i) general economic conditions, (ii)
financing risks, such as the inability to obtain equity or debt financing on
favorable terms, (iii) changes in governmental laws and regulations, (iv) the
level and volatility of interest rates, (v) the availability of suitable
acquisition and development opportunities and the effective integration of those
business centers within the overall operations of the Company and (vi) increases
in operating costs. Accordingly, there is no assurance that the Company's
expectations will be realized.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk on its
Credit Facility. As of June 30, 1999, the Company currently hedges interest rate
risk using financial instruments for a limited amount of its outstanding debt.
Pursuant to the August 1999 amendments, the Credit Facility bears interest
ranging from LIBOR plus 3.0% to LIBOR plus 3.75% for a one, three or six month
period at the election of the Company. The rate of interest on the Credit
Facility will be influenced by changes in short term rates and is sensitive to
inflation and other economic factors. A significant increase in interest rates
may have a negative impact on the earnings of the Company due to the variable
interest under the Credit Facility.
Based on variable rate debt levels, a 10% change in market interest rates
(54 basis points on a weighted average) would have an approximate 6% impact on
the Company's interest expense, net.
The Company has not, and does not plan to, enter into any derivative
financial instruments for trading or speculative purposes. As of June 30, 1999,
the Company had no other material exposure to market risk.
18
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-K
(a) Exhibits(1)
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation
3.2 Fifth Amended and Restated Certificate of Designation of
Series A Convertible Preferred Stock
3.3 Second Amended and Restated Certificate of Designation
of Series B Convertible Preferred Stock
3.4 Amended and Restated Certificate of Designation of
Series C Convertible Preferred Stock
3.5 Certificate of Designation of Series D Convertible
Preferred Stock
3.6 Amended and Restated Certificate of Designation of
Series E Convertible Preferred Stock
3.7 By-laws and Amendments
4.1 Fifth Amended and Restated Stockholders Agreement
10.1 Amended and Restated Credit Agreement by and among the
Company, Various Banks and Paribas
10.2 Employment Agreement with David Beale
10.3 Employment Agreement with Alan Langer
10.4 Employment Agreement with T.J. Tison
10.5 Employment Agreement with Stephen Fowler
10.6 Agreement, dated as of October 29, 1999, by and among
David Beale, Reckson Service Industries, Inc. and the
Company
10.7 Agreement, dated as of October 29, 1999, by and among
Alan Langer, Reckson Service Industries, Inc. and the
Company
10.8 Agreement, dated as of October 29, 1999, by and among
Mitchell Knecht, Reckson Service Industries, Inc. and
the Company
10.9 Promissory Note of David Beale
10.10 1999 Stock Option Plan
10.11 1996 Stock Option Plan
27 Financial Data Schedules
(b) Reports on Form 8-K
- ----------
(1) All exhibits other than Exhibit 27 were previously filed as exhibits to the
Company's Form 10-Q for the period ended September 30, 1999 filed with the
Securities and Exchange Commission on November 15, 1999 and are incorporated
herein by reference.
19
<PAGE>
None.
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.
VANTAS Incorporated
November 15, 1999 /s/ David W. Beale
- -------------------- --------------------------------------
Date David W. Beale
President, Chief Executive Officer
November 15, 1999 /s/ Alan Langer
- -------------------- --------------------------------------
Date Alan Langer
Executive Vice President, Chief
Financial Officer,
Principal Accounting Officer
17
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<ARTICLE> 5
<LEGEND>
Financial Data Schedule information has been extracted from the Registrant's
Condensed Consolidated Balance Sheet (non-classified) as of June 30, 1999 and
the Condensed Consolidated Statement of Income for the six months then ended.
</LEGEND>
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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<ALLOWANCES> 686,000
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<CURRENT-ASSETS> 18,792,681
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<TOTAL-ASSETS> 257,778,420
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<COMMON> 49,019
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