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 March 31, 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.)
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(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.
1
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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 March 31, 1999 (unaudited)
and December 31, 1998 (audited)...................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 (unaudited)............................ 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 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............................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds........................ 16
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.............. 17
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K................................. 17
SIGNATURES
2
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
VANTAS INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS: 1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $5,129,168 $3,615,087
Restricted cash 688,246 10,000,000
Accounts receivable, net of allowance for doubtful accounts
of $484,000 at March 31, 1999 and $401,000 at December 31, 1998 8,232,690 3,821,175
Prepaid expenses and other current assets 4,775,748 5,145,682
Deferred income taxes 1,146,816 174,000
Deferred financing costs 579,219 466,727
------------- -------------
Total current assets 20,551,887 23,222,671
Intangibles, net 157,323,564 81,605,181
Property and equipment, net 39,227,102 23,124,702
Deferred financing costs, net 3,114,673 2,584,418
Security deposits 3,724,217 2,110,952
Other assets, net 1,302,257 1,426,526
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Total assets $225,243,700 $134,074,450
============= =============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $13,846,184 $9,578,807
Capital lease obligations 2,084,771 731,510
Deferred rent payable 798,947 727,619
Notes payable - bank 5,500,000 7,875,000
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Total current liabilities 22,229,902 18,912,936
Notes payable - bank 76,387,500 65,125,000
Tenants' security deposits 16,531,391 8,592,948
Deferred rent payable 8,098,793 6,607,771
Deferred income taxes 3,956,016 1,514,000
Capital lease obligations 743,492 602,153
Other liabilities 555,337 --
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Total liabilities 128,502,431 101,354,808
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Redeemable Preferred stock, authorized 30,000,000 shares:
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) 14,780,599 14,407,957
Series B Convertible, $.01 par value, issued and outstanding
3,222,851 (liquidation preference $15,309,000) 16,032,090 15,700,638
Series C Convertible, $.01 par value, issued and outstanding
13,325,424 shares (liquidation preference $63,296,000) 64,561,680 --
------------- -------------
Total redeemable preferred stock 95,374,369 30,108,595
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Stockholders' equity:
Class A Common stock, $.01 par value, authorized 30,000,000 shares,
issued and outstanding 4,901,868 shares 49,019 49,019
Class B Common stock, $.01 par value, authorized 15,000,000 shares -- --
Additional paid-in capital 3,133,608 3,133,608
Retained earnings (deficit) (865,727) 378,420
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2,316,900 3,561,047
Note receivable from issuance of stock (950,000) (950,000)
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Total stockholders' equity 1,366,900 2,611,047
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Total liabilities and stockholders' equity $225,243,700 $134,074,450
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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VANTAS INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended March 30,
------------------------------------
1999 1998
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<S> <C> <C>
Business Center Operations:
Revenues:
Office rentals $27,065,298 $10,202,182
Support services 19,522,082 6,768,551
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46,587,380 16,970,733
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Expenses:
Rent 17,362,946 5,682,387
Support services 6,782,151 1,972,422
Center general and administrative 13,041,588 4,514,673
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37,186,685 12,169,482
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Contribution from operation of business centers 9,400,695 4,801,251
Other (Expenses) Income:
Corporate general and administrative (2,562,382) (1,216,422)
Merger and integration charges (744,454) --
Depreciation and amortization (2,900,903) (746,218)
Interest expense, net (1,904,719) (786,434)
Managed center income 187,626 128,887
Other income -- 54,767
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(7,924,832) (2,565,420)
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Income before minority interest and income taxes 1,475,863 2,235,831
Minority interest in net income of
consolidated partnerships -- (539,964)
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Income before provision for income taxes 1,475,863 1,695,867
Provision for income taxes (750,000) (665,000)
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Net income $725,863 $1,030,867
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Accretion of preferred stock (1,970,010) (350,337)
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Net (loss) income applicable to common stock ($1,244,147) $680,530
============ ============
Share information:
Basic earnings:
Net (loss) income per common share ($0.25) $0.13
============ ============
Weighted average number of common
shares outstanding 4,901,868 5,073,468
============ ============
Diluted earnings:
Net (loss) income per common share
($0.25) $0.08
============ ============
Weighted average number of common
shares outstanding
common equivalent shares outstanding 4,901,868 13,508,165
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
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ALLIANCE NATIONAL INCORPORATED
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, March 31,
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $725,863 $1,030,867
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,900,903 746,218
Amortization of deferred financing costs 144,694 96,508
Provision for doubtful accounts 203,261 37,131
Minority interest in net income of consolidated partnerships -- 539,964
Deferred rent payable 996,930 222,983
Deferred credits (144,224) (52,927)
Changes in operating assets and liabilities:
Accounts receivable (1,818,051) 496,515
Prepaid expenses and other current assets 545,959 (179,734)
Security deposits and other assets (105,647) (24,771)
Accounts payable and accrued expenses (2,525,246) (118,513)
Income taxes payable 759,819 383,704
Tenants' security deposits 2,044,970 508,919
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Net cash provided by operating activities 3,729,231 3,686,864
------------ ------------
Cash flows from investing activities:
Acquisition of net assets of business centers (22,062,663) (13,844,021)
Proceeds from acquisitions 8,400,000 --
Purchases of property and equipment (5,961,316) (888,631)
Restricted cash 10,000,000 --
------------ ------------
Net cash used in investing activities (9,623,979) (14,732,652)
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 15,950,000 14,969,000
Payments on borrowings (7,062,500) (801,715)
Deferred financing costs (787,441) (24,693)
Payments of capital leases (691,230) (130,774)
Distributions to minority partners -- (558,030)
Proceeds from exercise of common stock options -- 210,000
------------ ------------
Net cash provided by financing activities 7,408,829 13,663,788
------------ ------------
Net increase in cash 1,514,081 2,618,000
Cash at beginning of period 3,615,087 2,206,483
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Cash at end of period $5,129,168 $4,824,483
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
5
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VANTAS Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements for the three month periods ended
March 31, 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 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
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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 $.7
million during the three months ended March 31, 1999, 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 months ended March 31, 1999 has
increased as compared to the comparable period 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 22
business centers, in 4 acquisitions, for an aggregate purchase price of $23.1
million during the three months ended March 31, 1999. For the three months ended
March 31, 1999, all material acquisitions were completed as of the beginning of
the period.
The pro forma financial information set forth below is based upon the
Company's historical consolidated statements of operations for the three months
ended March 31, 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.
Three months ended March 31,
1998
----
Revenues $34,233,000
Net income 2,052,000
Net income applicable to common stock 436,000
Basic income per common share .09
Diluted income per common share .04
7
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3. Earnings Per Share
The following table sets forth the computation of basic and diluted (loss)
income per common share for the three month period ended March 31:
Three Months
1999 1998
------------ ------------
Numerator:
Net income $ 725,863 $ 1,030,867
Accretion of preferred stock (1,970,010) (350,337)
------------ ------------
Numerator for basic (loss) income
per share-(loss) income applicable
to common stock (1,244,147) 680,530
Effect of dilutive securities:
Accretion of preferred stock -- 350,337
------------ ------------
Numerator for diluted (loss) income
per share-(loss) income applicable
to common stock after assumed
conversions $ (1,244,147) $ 1,030,867
Denominator:
Denominator for basic income (loss)
per share-weighted average shares 4,901,868 5,073,468
Effect of dilutive securities:
Stock options -- 504,911
Warrants -- 355,075
Convertible preferred stock -- 7,574,711
------------ ------------
Dilutive potential common shares 4,901,868 8,434,697
Denominator for dilutive income (loss)
per share-adjusted weighted average
shares and assumed conversions 4,901,868 13,508,165
============ ============
Options and warrants to purchase 1,633,456 shares of common stock were
outstanding for the three months ended March 31, 1999 but were not included in
the computation of diluted earnings per share because their effect would be
anti-dilutive. Additionally, 24,122,986 shares of Convertible Preferred Stock
were outstanding for the three months ended March 31, 1999 but were not included
in the computation of diluted earnings per share because their effect would also
be anti-dilutive.
4. 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.
8
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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 March 31, 1999, the Company acquired 28 business centers, in
8 acquisitions, for an aggregate purchase price of $30.2 million.
As of November 15, 1999, the Company 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.
Reckson Services Industries, Inc. ("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, 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.
9
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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 March 31, 1999, the Company owns and operates 165 business centers
in 26 states, the District of Columbia, and France. This includes 7 business
centers, which were under development and none of which were open for nine
months or less (collectively "Developing Centers") as of March 31, 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 it has acquired or merged with 29 entities, which were
comprised of 155 business centers with a total cost of approximately $175.5
million. During the three months ended March 31, 1999 and 1998, the Company
acquired 61 and 23 business centers with a cost of approximately $81.4 million
and $21.0 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 months ended March 31, 1999, there were 7 Developing
Centers as compared to 2 for the same comparable period 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 MARCH 31, 1999 AND 1998
REVENUES. Total business center revenues for the three months ended March 31,
1999 were $46.6 million representing an increase of $29.6 million or 174.5% from
the corresponding period in 1998.
Business centers that were acquired after January 1, 1998 ("Acquired
Centers") had revenues for the three months ended March 31, 1999 and 1998 of
$30.6 million and $2.0 million, representing an increase of $28.6 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 the
comparable period of the prior year.
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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 March 31, 1999 of $16.0 million, an
increase of $1.4 million, or 9.6%, 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 $.7 million, or
8.0%, is attributable to more favorable office pricing. The increase in support
service revenues of $.7 million, or 12.1%, from the corresponding period in 1998
is partially attributable to an increase in broadband internet access,
information technology support services and administrative support services.
There was no Developing Center revenue for the three months ended March
31, 1999. Developing Center revenues amounted to $.4 million for the three
months ended March 31, 1998. During 1998 there were 2 Developing Centers that
were open.
EXPENSES. Total business center expenses for the three months ended March 31,
1999 were $37.2 million, representing an increase of $25.0 million or 205.6%
from the corresponding period in 1998.
Acquired Center expenses for the three months ended March 31, 1999 and
1998 were $25.4 million and $1.4 million respectively, representing an increase
of $24.0 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 the prior year.
Same Center expenses for the three months ended March 31, 1999 were $11.7
million, an increase of $1.3 million or 12.5% 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 greater support service revenues and higher telecommunication
charges which were partially recovered in subsequent periods.
Developing Center expenses for the three months ended March 31, 1999 were
$.1 million, a decrease of $.3 million from the corresponding period in 1998.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the three months
ended March 31, 1999, COBC was $9.4 million as compared to $4.8 million for the
same period in 1998. The COBC as a percentage of total revenues ("COBC Margin")
was 20.2% for the three months ended March 31, 1999 as compared to 28.3% for the
corresponding period in 1998. The decrease in overall business center COBC
Margin of 8.1% from 1998, is primarily attributable to the significant increase
in Acquired Centers revenue and its associated lower COBC Margin. COBC Margin
from Acquired Centers is 17.0% as compared to Same Center COBC Margins of 26.9%.
Acquired Center COBC was $5.2 million for the three months ended March 31,
1999, an increase of $4.6 million from the corresponding period in 1998. The
COBC Margin from Acquired Centers for the three months ended March 31, 1999 was
17.0% as compared to 30.0% for the same comparable period. The decrease of 13.0%
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 March 31, 1999 as compared to the same period in 1998.
Same Center COBC was $4.3 million for the three months ended March 31,
1999 as compared to $4.2 million for the corresponding period in 1998. The COBC
Margin from Same Centers for the three months ended March 31, 1999 was 26.9% as
compared 28.8% for the
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corresponding period in 1998. The decrease is primarily attributable to higher
rent expense and telecommunication charges which were partially recovered in
subsequent periods.
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 March 31, 1999 of $.1 million.
OTHER EXPENSES, NET. For the three months ended March 31, 1999, other
expenses, net, were $7.9 million, representing an increase of $5.4 million or
208.9% 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 $1.3 million, $2.2 million
and $1.1 million or 110.6%, 288.7% and 142.2%, respectively. Additionally, the
Company incurred merger and integration charges of $.7 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, related office
expansion and consulting fees related to 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 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 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
three months ended March 31, 1998 was $.5 million.
INCOME TAXES. The Company's effective income tax rate was 50.8% during the three
months ended March 31, 1999 as compared to 39.3% at March 31, 1998. This
increase is attributable to the effect 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 March 31, 1999 was $.7
million as compared to $1.0 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 March 31, 1999 was $2.0 million,
representing an increase of $1.6 million or 462.3% from the corresponding period
in 1998. This increase is primarily the result of the Company's issuance of
Series C Convertible Preferred Stock in January 1999. This activity coupled with
the compounded growth of previous issuances of preferred stock accounted for the
total increase over the comparable period in 1998.
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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 $1.7 million at March 31,
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 $9.3 million of its restricted cash to fund permitted acquisitions
in accordance with the terms of its credit facility.
Cash provided by operating activities remained consistent at $3.7 million
for the three months ended March 31, 1999 and 1998.
Cash used in investing activities for the three months ended March 31,
1999 and 1998 was $9.6 and $14.7 million, respectively, a decrease of $5.1
million for the 1999 period. This decrease is attributable to the restricted
cash permitted to be drawn upon, partially offset by the deployment of resources
to expand the technology base at its business centers and its corporate offices.
Cash provided by financing activities for the three months ended March 31,
1999 was $7.4 million, representing a decrease of $6.2 million from the
corresponding period in 1998. This decrease is attributable to principal
payments required to be made under the credit facility in 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 March 31, 1999, there were $81.9 million in borrowings and $1.6 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 March
31, 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 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 in its growth strategy, through the acquisition and
development of business centers.
13
<PAGE>
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.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the three months ended March 31,
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
14
<PAGE>
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 March 31, 1999, the Company hedged 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 March 31, 1999,
the Company had no other material exposure to market risk.
15
<PAGE>
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On January 9, 1999, the Company increased the authorized shares of its
common stock from 35 million to 45 million, of which 30 million and 15 million
are designated as Class A Common Stock and Class B Common Stock, respectively.
(b) None.
(c) On January 9, 1999, the Company issued 13,325,424 shares of Series C
Convertible Preferred Stock (the "Series C Preferred Stock") in connection with
the mergers of InterOffice Superholdings Corporation and Reckson Executive
Centers with and into wholly owned subsidiaries of the Company. The shares were
issued to the former shareholders of such entities as consideration in
connection with the mergers. The Company issued these securities pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and Rule 506
promulgated thereunder. The issuance was made to a limited number of persons,
all of whom
16
<PAGE>
were accredited investors (as defined in Rule 501 promulgated under the Act).
The terms of the Series C Preferred provide for (1) automatic conversion into
shares of the Company's Class A Common Stock ("Class A Common Stock") or, in
certain cases the Company's Class B Common Stock ("Class B Common Stock"), in
the event of an initial public offering of the Company's capital stock and (2)
conversion at the option of the holder, in whole or in part, at any time into
Class A Common Stock or, in certain cases, Class B Common Stock. The conversion
rate is currently one to one, but such rate is subject to adjustment in the
event of certain dilutive events.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 9, 1999, an action by written consent was executed by holders
of 25,302,966 shares of the Company's outstanding voting capital stock,
representing 82.2% of such outstanding voting capital stock, pursuant to which
the following persons were elected as the Company's Board of Directors: David
Beale, G. Lee Bohs, Arnold Cohen, Jon Halpern, Louis Perlman, William Phillips,
Scott Rechler, David Warnock, Arnold Widder and Henry Wilson.
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 W. Beale
10.3 Employment Agreement with Alan Langer
10.4 Employment Agreement with T.J. Tison
10.5 Employment Agreement with Stephen Fowler
- ----------
(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.
17
<PAGE>
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
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, and
Principal Accounting Officer
18
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<LEGEND>
Financial Data Schedule information has been extracted from the Registrant's
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the Condensed Consolidated Statement of Income for the three months then ended.
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<PERIOD-END> MAR-31-1999
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