<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
90 PARK AVENUE, SUITE 3100, NEW YORK, NEW YORK 10016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES - ZIP CODE)
(212) 907-6400
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.
<PAGE>
VANTAS INCORPORATED AND SUBSIDIARIES
FORM 10-Q/A
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999 (restated and unaudited)
and December 31, 1998 (restated and audited).......................................................... 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1999 and 1998 (restated and unaudited)............................ 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (unaudited)............................................................... 6
Notes to the Consolidated Financial Statements (restated and unaudited)................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds ......................................................... 17
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders ............................................... 17
Item 5. Other Information ................................................................................. 18
Item 6. Exhibits and Reports on Form 8-K................................................................... 19
SIGNATURES
</TABLE>
2
<PAGE>
THIS FORM 10-Q/A IS BEING FILED TO INCLUDE CERTAIN RESTATED FINANCIAL
STATEMENTS IN PART I, ITEM 1 AND IN THE FINANCIAL DATA SCHEDULE AND THE
RELATED DISCUSSION THEREOF IN PART I, ITEM 2 AND TO UPDATE CERTAIN
INFORMATION IN THE NOTES TO THE FINANCIAL STATEMENTS AND IN PART II, ITEM 5.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VANTAS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS: 1999 1998
------------- ------------
<S> <C> <C>
(Restated and (Restated)
Current assets: Unaudited)
Cash and cash equivalents $ 1,695,314 $ 3,615,087
Restricted cash 32,752,583 10,000,000
Accounts receivable, net of allowance for doubtful accounts
of $795,000 at September 30, 1999 and $401,000 at December 31, 1998 9,195,182 3,821,175
Prepaid expenses and other current assets 8,074,037 5,145,682
Deferred income taxes 1,146,816 174,000
Deferred financing costs 902,956 466,727
------------- ------------
Total current assets 53,766,888 23,222,671
Intangibles, net 187,813,495 81,605,181
Property and equipment, net 62,912,816 23,124,702
Deferred financing costs, net 4,709,596 2,584,418
Security deposits 4,324,762 2,110,952
Other assets, net 7,730,493 1,426,526
------------- ------------
Total assets $ 321,258,050 $ 134,074,450
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current liabilities:
Accounts payable and accrued expenses $ 16,864,959 $ 9,578,807
Capital lease obligations 1,288,499 731,510
Deferred rent payable 1,865,568 727,619
Notes payable-- bank 13,000,000 7,875,000
------------- ------------
Total current liabilities 33,019,026 18,912,936
Notes payable - bank 111,250,000 65,125,000
Acquisitions payable 7,353,378 --
Tenants' security deposits 18,689,123 8,592,948
Deferred rent payable 19,012,798 6,607,771
Deferred income taxes 3,956,016 1,514,000
Capital lease obligations 645,589 602,153
Other liabilities 809,702 --
------------- ------------
Total liabilities 194,735,632 101,354,808
------------- ------------
Redeemable Convertible 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) 33,555,970 33,177,234
Series B Convertible, $.01 par value, issued and outstanding
3,222,851 shares (liquidation preference $15,309,000) 16,728,438 15,700,638
Series C Convertible, $.01 par value, issued and outstanding
13,325,424 shares (liquidation preference $63,296,000) 67,093,512 --
Series D Convertible, $.01 par value, issued and outstanding
5,109,873 shares (liquidation preference $26,827,000) 26,923,664 --
Series E Convertible, $.01 par value, issued and outstanding
604,413 shares (liquidation preference $3,173,000) 3,173,061 --
Note receivable from issuance of redeemable convertible preferred stock (950,000) (950,000)
------------- ------------
Total redeemable convertible preferred stock 146,524,645 47,927,872
------------- ------------
Stockholders' deficiency:
Class A Common stock, $.01 par value, authorized 41,000,000 shares,
issued and outstanding 4,901,868 shares 49,019 49,019
Class B Common stock, $.01 par value, authorized 20,000,000 shares -- --
Additional paid-in capital 3,133,608 3,133,608
Deficit (23,184,854) (18,390,857)
------------- ------------
Total stockholders' deficiency (20,002,227) (15,208,230)
------------- ------------
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
Total liabilities and stockholders' deficiency $ 321,258,050 $134,074,450
------------- ------------
------------- ------------
</TABLE>
4
<PAGE>
VANTAS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (RESTATED AND UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Business Center Operations:
Revenues:
Office rentals $ 33,702,534 $ 14,689,145 $ 91,339,391 $ 37,888,990
Support services 24,151,543 9,745,192 65,441,289 25,903,746
------------ ------------ ------------ ------------
57,854,077 24,434,337 156,780,680 63,792,736
------------ ------------ ------------ ------------
Expenses:
Rent 22,644,701 8,438,141 60,119,132 21,338,674
Support services 8,430,709 3,493,422 22,824,340 8,525,704
Center general and administrative 16,309,554 7,265,777 44,124,501 18,238,221
------------ ------------ ------------ ------------
47,384,964 19,197,340 127,067,973 48,102,599
------------ ------------ ------------ ------------
Contribution from operation
of business centers 10,469,113 5,236,997 29,712,707 15,690,137
------------ ------------ ------------ ------------
Other (Expenses) Income:
Corporate general and administrative (3,091,233) (1,734,738) (8,280,051) (4,478,604)
Merger and integration charges (219,126) -- (1,604,107) --
Depreciation and amortization (4,068,277) (1,206,141) (10,321,950) (3,383,565)
Interest expense, net (2,887,939) (1,226,311) (7,133,228) (3,319,753)
Managed center income 226,611 186,599 628,392 527,780
Other income (29,170) 5,059 5,514 81,254
------------ ------------ ------------ ------------
(10,069,134) (3,975,532) (26,705,430) (10,572,888)
------------ ------------ ------------ ------------
Income before minority interest and
income taxes 399,979 1,261,465 3,007,277 5,117,249
Minority interest in net income of
consolidated partnerships -- -- -- (332,510)
------------ ------------ ------------ ------------
Income before provision for income
taxes 399,979 1,261,465 3,007,277 4,784,739
Provision for income taxes (864,000) (465,000) (2,195,000) (1,860,000)
------------ ------------ ------------ ------------
Net (loss) income $ (464,021) $ 796,465 $ 812,277 $ 2,924,739
------------ ------------ ------------ ------------
Accretion of preferred stock (1,337,971) (6,776,809) (5,606,273) (20,406,298)
------------ ------------ ------------ ------------
Net loss applicable to
common stock $ (1,801,992) $ (5,980,344) $ (4,793,996) $(17,481,559)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Share information:
Basic earnings:
Net loss per common share ($0.37) ($1.21) ($0.98) ($3.48)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding 4,901,868 4,951,868 4,901,868 5,027,024
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted earnings:
Net loss per common share ($0.37) ($1.21) ($0.98) ($3.48)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding 4,901,868 4,951,868 4,901,868 5,027,024
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
5
<PAGE>
VANTAS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 812,277 $ 2,924,739
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 10,321,950 3,383,565
Amortization of deferred financing costs 492,197 283,304
Deferred income taxes -- 1,389,100
Provision for doubtful accounts 749,376 378,399
Minority interest in net income of consolidated partnerships -- 332,510
Deferred rent payable 4,107,676 659,641
Deferred credits (71,170) (222,235)
Non-cash interest expense -- 118,133
Changes in operating assets and liabilities:
Accounts receivable (2,763,938) (921,285)
Prepaid expenses and other current assets (1,988,400) (2,023,964)
Security deposits and other assets (1,941,873) (241,840)
Accounts payable and accrued expenses 104,462 4,153,892
Income taxes payable 196,873 (1,052,755)
Tenants' security deposits 2,491,223 1,478,155
Other liabilities 120,978 --
----------- -----------
Net cash provided by operating activities 12,631,631 10,639,359
----------- -----------
Cash flows from investing activities:
Acquisition of net assets of business centers (50,428,992) (30,600,000)
Proceeds from acquisitions 8,400,000 --
Purchases of property and equipment (26,643,689) (6,452,402)
Restricted cash (21,799,212) --
----------- -----------
Net cash used in investing activities (90,471,893) (37,052,402)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings 65,400,000 29,554,000
Payments on borrowings (14,150,000) (6,676,099)
Deferred financing costs (3,053,604) (593,306)
Payments of capital leases (1,970,643) (716,190)
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 29,694,736 7,874,400
----------- -----------
Net cash provided by financing activities 75,920,489 28,490,908
----------- -----------
Net (decrease) increase in cash (1,919,773) 2,077,865
Cash at beginning of period 3,615,087 2,206,483
----------- -----------
Cash at end of period $ 1,695,314 $ 4,284,348
----------- -----------
----------- -----------
</TABLE>
6
<PAGE>
VANTAS Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Restated)
1. BASIS OF PRESENTATION
The consolidated financial statements for the three and nine month
periods ended September 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.
See also Note 7 with regard to the restatement.
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 Preferred Stock 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 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.
On July 19, 1999, the Company increased the authorized shares of its
common stock from 45 million to 64 million, of which 44 million and 20 million
are designated Class A Common Stock and Class B Common Stock, respectively.
The Company incurred merger and integration costs of approximately $ .2
million and $1.6 million during the three and nine months ended September 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 nine months ended
September 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.
7
<PAGE>
In addition to the Mergers described above, the Company acquired 50
business centers, in 12 acquisitions, for an aggregate purchase price of $53.3
million during the nine months ended September 30, 1999.
The pro forma financial information set forth below is based upon the
Company's historical consolidated statements of operations for the nine months
ended September 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.
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
------------ ------------
<S> <C> <C>
Revenues $164,600,000 $137,945,000
Net income 1,424,000 6,474,000
Net loss applicable to common stock (4,182,274) (13,932,298)
Basic loss per common share (0.85) (2.77)
Diluted loss per common share (0.85) (2.77)
</TABLE>
See also Note 7 with regard to the restatement.
3. PER SHARE INFORMATION:
Options and warrants to purchase 6,211,706 and 4,358,707 shares of
common stock were outstanding for the three and nine months ended September 30,
1999 and 1998, respectively, but were not included in the computation of diluted
earnings per share because their effect would have been anti-dilutive.
Additionally, 29,837,272 and 2,747,915 shares of Redeembale Convertible
Preferred Stock were outstanding for the three and nine months ended September
30, 1999 and 1998, respectively, but were not included in the computation of
diluted earnings per share because there effect would also be dilutive.
See also Note 7 with regard to the restatement.
4. REDEEMABLE PREFERRED STOCK
During the nine months ended September 30, 1999, the Company authorized
5,200,000 shares and issued 5,109,873 shares of Series D Convertible Preferred
Stock ("Series D Preferred Stock") 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.
During the nine months ended September 30, 1999, the Company authorized
1,000,000 shares and issued 604,413 shares of Series E Preferred Stock 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.
5. NOTES PAYABLE
8
<PAGE>
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 June 1999, the Company entered into a $6.0 million Subordinated
Promissory Note payable to Reckson Services Industries, Inc. ("RSI"), a related
party. Such note bore interest at the rate of 15.0% per annum and was fully
satisfied from proceeds raised by the issuance of the Series D Preferred Stock.
6. SUBSEQUENT EVENTS
As a result of certain transactions, all of the Company's outstanding
stock options issued under the 1996 Stock Option Plan became fully vested
subsequent to December 31, 1998. Options and warrants to purchase 1,564,360
and 597,994 shares, respectively, of the Company's common stock were exercised
subsequent to December 31, 1998.
Reckson Service Industries, Inc. ("RSI") entered into agreements with
certain shareholders of the Company, including members of the Company's senior
management and former members of the Board, relating to the purchase of all or
part of such shareholders' securities in the Company, including common stock
related to the exercise of vested stock options by members of senior
management. Under the terms of the agreements, the Company is obligated to
remit applicable withholding taxes related to the compensation expense
associated with the exercise of such options, subject to certain
qualifications relating to those individuals remaining in the employ of the
Company. The Company incurred cash compensation expense and non-cash
compensation expense charges of approximately $10.9 million and $12.5 million,
respectively. These charges will be included in merger and integration expense
during the fourth quarter of 1999. Certain of the purchases contemplated by
these agreements have been completed, including the purchases from the
Company's senior management and former members of the Board. As of December
31,1999, RSI owned, directly or indirectly, approximately 63% of the
outstanding common and preferred stock of the Company. Upon consummation of
all of the purchases contemplated by these agreements, which is currently
expected to occur in January, 2000, RSI is expected to own approximately 86%
of the Company's outstanding common and preferred stock.
7. RESTATEMENT:
The Company has restated its financial statements as of December 31,
1998 and September 30, 1999 and for the three and nine months ended
September 30, 1999 and 1998 to record additional accretion to account for the
full redemption amount of the Series A Preferred Stock equal to higher
estimated appraised value of the common stock into which the Series A
Preferred Stock is convertible under the redemption price formula.
The holders of the Preferred Stock have the right, under certain
circumstances, to require the Company to repurchase the Preferred Stock at the
greater of the original purchase price plus an accrued unpaid return or the
appraised value of the common stock into which the Preferred Stock is
convertible. Such repurchase right may be exercised in the event that there has
not been an initial public offering or a merger involving the Company, in each
case meeting certain standards, by November 15, 2001.
The effect of the restatement on the balance sheet as of December 31,
1998 and September 30, 1999 was a decrease to retained earnings of $18,769,277
and $18,030,087, respectively.
The following represents the impact of the restatement on the
statements of income:
<TABLE>
<CAPTION>
Three months ended September 30, 1999 Three months ended September 30, 1998
-------------------------------------- -------------------------------------
(as reported) (restated) (as reported) (restated)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net (loss) income $ (464,023) $ (464,021) $ 796,465 $ 796,465
------------ ----------- ------------ -----------
Accretion of preferred stock (2,392,337) (1,337,971) (629,014) (6,776,809)
------------ ----------- ------------ -----------
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net (loss) income applicable to common stock $ (2,856,360) $(1,801,992) $ 167,451 $(5,980,344)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Share information:
Basic earnings (loss):
Net (loss) income per common share ($0.58) ($0.37) $0.03 ($1.21)
------------ ----------- ------------ -----------
Diluted earnings (loss):
Net loss per common share ($0.58) ($0.37) $0.03 ($1.21)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1999, Nine months ended September 30, 1998
------------------------------------- ------------------------------------
(as reported) (restated) (as reported) (restated)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 812,275 $ 812,277 $ 2,926,162 $ 2,924,739
------------ ----------- ------------ -----------
Accretion of preferred stock (6,345,464) (5,606,274) (1,518,003) (20,406,298)
------------ ----------- ------------ -----------
Net (loss) income applicable to common stock $ (5,533,189) $(4,793,997) $ 1,408,159 $(17,481,559)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
Share information:
Basic earnings (loss):
Net (loss) income per common share ($1.13) ($0.98) $0.28 ($3.48)
------------ ----------- ------------ -----------
Diluted earnings (loss):
Net loss per common share ($1.13) ($0.98) $0.17 ($3.48)
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
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 September 30, 1999, the Company owns and operates 203 business
centers in 27 states, the District of Columbia, France and Mexico. This includes
11 business centers which are currently under development and 6 business centers
which have been open for nine months or less (collectively "Developing
Centers"). 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 37 entities, which
were comprised of 183 business centers with a total cost of approximately $205.7
million. During the three months ended September 30, 1999 and 1998, the Company
acquired 11 and 4 business centers with a cost of approximately $8.5 million and
$5.0 million, respectively. During the nine months ended September 30, 1999 and
1998, the Company acquired 89 and 36 centers with a cost of approximately $116.6
million and $34.3 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 nine months ended September 30, 1999, there were 17
Developing Centers as compared to 3 for the same periods in 1998.
10
<PAGE>
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 SEPTEMBER 30, 1999 AND 1998
REVENUES. Total business center revenues for the three months ended September
30, 1999 were $57.9 million, an increase of $33.4 million or 136.8% from the
corresponding period in 1998.
Business centers that were acquired after July 1, 1998 ("Acquired
Centers") had revenues for the three months ended September 30, 1999 and 1998 of
$32.8 million and $ .5 million, respectively, representing an increase of $32.3
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 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 September 30, 1999 of $24.7 million, an
increase of $1.4 million, or 6.0% 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 $ .3 million, or
2.1%, was due to more favorable office pricing. The increase in support service
revenues of $1.1 million, or 11.8% from 1998 is partially attributable to an
increase in broadband internet access, information technology support services
and administrative support services.
Developing Center revenues were $ .4 million for the three months ended
September 30, 1999, a decrease of $ .3 million from the corresponding period in
1998. For the three months ended September 30, 1999 and 1998 there were 6 and 3
Developing Centers that were open, respectively.
EXPENSES. Total business center expenses for the three months ended September
30, 1999 were $47.4 million, representing an increase of $28.2 million or 146.8%
from the corresponding period in 1998.
Acquired Center expenses for the three months ended September 30, 1999
and 1998 were $27.1 million and $ .4 million respectively, representing an
increase of $26.7 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 September 30, 1999 were
$18.9 million, an increase of $ .8 million or 4.4% from the corresponding period
in 1998. This increase is primarily attributable to higher rent expense
resulting from inflation adjusted rental increases and support service expenses
associated with increased greater support service revenues.
Developing Center expenses for the three months ended September 30,
1999 were $1.4 million, an increase of $ .7 million from the corresponding
period in 1998. This increase is due to the fact that there were 17 Developing
Centers during the three months ended September 30, 1999 compared to only 3
Developing Centers during the three months ended September 30, 1998.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the three months
ended September 30, 1999, COBC was $10.5 million as compared to $5.3 million for
the same period in 1998. The COBC as a percentage of total revenues ("COBC
Margin") was 18.1% for the three months ended September 30, 1999 as compared to
21.4% for the corresponding period in 1998. The decrease in overall business
center COBC Margin of 3.3% from 1998, is primarily attributable to the
significant increase in Acquired Center revenue and its associated lower COBC
Margin. COBC Margin from Acquired Centers was 17.4% as compared to Same Center
COBC Margin of 23.5%.
Acquired Center COBC was $5.7 million for the three months ended
September 30, 1999, an increase of $5.6 million from the corresponding period
1998. The COBC Margin from Acquired Centers for the three months ended
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September 30, 1999 was 17.4%. There were minimal acquisitions completed during
the three months ended September 30, 1998, and, as a result, the COBC Margin
from Acquired Centers during this period had no material impact on COBC.
Same Center COBC was $5.8 million for the three months ended September
30, 1999 as compared to $5.2 million for the corresponding period in 1998. The
COBC Margin from Same Centers for the three months ended September 30, 1999 was
23.5% as compared to 22.3% for the corresponding period in 1998. The increase in
Same Centers COBC Margin is primarily attributable to greater support service
revenues, which traditionally have a higher margin than rental revenues,
partially offset by higher rent expense.
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, 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 September 30, 1999 of $1.0 million, an increase of $1.0 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 operation.
OTHER EXPENSES, NET. For the three months ended September 30, 1999, other
expenses, net, were $10.1 million, representing an increase of $6.1 million or
153.3% 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 $1.4 million, $2.9 million
and $1.7 million or 78.2%, 237.3% and 135.5%, respectively.
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.
INCOME TAXES. The Company's effective income tax rate was adjusted to 73% for
the nine months ended September 30, 1999, based upon the revised projected
income before provision for income taxes for fiscal 1999, as compared to the
previous estimate as of June 30, 1999. As a result of this change in estimate,
the effective income tax rate for the three months ended September 30, 1999 was
216.0% as compared to 36.9% for the three months ended September 30, 1998. The
Company's effective income tax rate for the three and nine months ended
September 30, 1999 is greater than the federal and state statutory rates,
primarily due to the effect of non-deductible goodwill amortization associated
with the Mergers and certain of the Company's other acquisitions during 1999.
NET (LOSS) INCOME. The Company incurred a net loss for the three months ended
September 30, 1999 of $( .5) million compared to net income of $ .8 million for
the same period in 1998.
Accretion of the stated return on investment ("Accretion") on VANTAS's
redeemable convertible preferred stock for the three months ended September 30,
1999 was $1.3 million, representing a decrease of $5.4 million from the
corresponding period in 1998. This decrease is primarily the result of $6.5
million of Accretion in the Series A Convertible Redeemable Preferred Stock
resulting from an increase in the estimated market value in VANTAS's common
stock in 1998 as compared to no significant change in the estimated value in the
corresponding period in 1999. (See Note 7 of the Notes to Consolidated Financial
Statements). This decrease was partially offset by the Accretion relating to the
issuance of Series C, D and E Convertible Preferred Stock throughout 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES. Total business center revenues for the nine months ended September 30,
1999 were $156.8 million, representing an increase of $93.0 million or 145.8%
from the corresponding period in 1998.
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Acquired Centers revenue for the nine months ended September 30, 1999
and 1998 were $106.9 million and $16.2 million, respectively, representing an
increase of $90.7 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 the
prior year.
Same Centers revenues for the nine months ended September 30, 1999 were
$49.4 million, an increase of $3.2 million or 6.9% 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 $1.6 million or 5.9% is due to more favorable office pricing. The
increase in support service revenues of $1.6 million or 8.4% from 1998 is
partially attributable to an increase in broadband internet access, information
technology support services and administrative support services.
Developing Center revenues were $ .5 million for the nine months ended
September 30, 1999, a decrease of $ .9 million from the corresponding period in
1998. At September 30, 1999 and 1998 there were 6 and 3 Developing Centers that
were open, respectively.
EXPENSES. Total business center expenses for the nine months ended September 30,
1999 were $127.1 million, representing an increase of $79.0 million or 164.2%
from the corresponding period in 1998.
Acquired Center expenses for the nine months ended September 30, 1999
and 1998 were $89.6 million and $13.4 million respectively, an increase of $76.2
million or 568.6% 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.
Same Center expenses for the nine months ended September 30, 1999 were
$35.2 million, an increase of $2.0 million or 6.0% from the corresponding period
in 1998. This increase is primarily attributable to higher rent expense
resulting from inflation adjusted rental increases and support service expenses
associated with increased support service revenues.
Developing Center expenses for the nine months ended September 30, 1999
were $2.3 million, an increase of $ .8 million from the corresponding period in
1998. This increase is due to the fact that there were 17 Development Centers
during the nine months ended September 30, 1999 compared to only 3 Development
Centers during the nine months ended September 30, 1998.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the nine months
ended September 30, 1999, COBC was $29.7 million as compared to $15.7 million
for the same period in 1998. The COBC as a percentage of total revenues ("COBC
Margin") was 19.0% for the nine months ended September 30, 1999 as compared to
24.6% for 1998. The decrease in overall business center COBC Margin of 5.6% 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 was 16.3% as compared to Same Center COBC Margin of 28.7%.
Acquired Center COBC was $17.3 million for the nine months ended
September 30, 1999, an increase of $14.5 million from $2.8 million in the
corresponding period in 1998. The COBC Margin from Acquired Centers for the nine
months ended September 30, 1999 was 16.3% as compared to 17.3% in the
corresponding period in 1998. This decrease of 1.0% in COBC Margin is primarily
attributable to lower occupancy levels associated with the greater number of
recently developed centers acquired during the nine months ended September 30,
1999 as compared to the same period in the corresponding period in 1998.
Same Center COBC was $14.2 million for the nine months ended September
30, 1999 as compared to $13.0 million, an increase of $1.2 million, or 9.2% from
the corresponding period in 1998. The COBC Margin from Same Centers for the nine
months ended September 30, 1999 remained relatively consistent at 28.7% as
compared to 28.1% for 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
13
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management philosophy, policies and procedures, 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 nine months
ended September 30, 1999 of $1.8 million, an increase of $1.7 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 operation.
OTHER EXPENSES, NET. For the nine months ended September 30, 1999, other
expenses, net, were $26.7 million, representing an increase of $16.1 million or
152.6% 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 $3.8 million, $6.9 million
and $3.8 million or 84.9%, 205.1% and 114.9%, respectively. Additionally, the
Company incurred merger and integration charges of $1.6 million related to
one-time costs associated with the Mergers during the nine months ending
September 30, 1999.
The increase in corporate general and administrative expenses was
related to the increase in corporate office staff and related office space
associated with the Company's growth. 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
nine months ended September 30, 1998 was $.3 million.
INCOME TAXES. The Company's effective income tax rate was 73.0% at September 30,
1999 as compared to 38.9% at September 30, 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 nine months ended September 30, 1999 was $ .8
million as compared to $2.9 million for the same period in 1998.
Accretion of the stated return on investment ("Accretion") on VANTAS's
redeemable convertible preferred stock for the nine months ended September 30,
1999 was $5.6 million, representing a decrease of $14.8 million from the
corresponding period in 1998. This decrease is primarily the result of $20.0
million of Accretion in the Series A Convertible Redeemable Preferred Stock
resulting from an increase in the estimated market value in VANTAS's common
stock in 1998 as compared to no significant change in the estimated value in the
corresponding period in 1999. (See Note 7 of the Notes to Consolidated Financial
Statements). This decrease was partially offset by the Accretion relating to the
issuance of Series C, D and E Convertible Preferred Stock throughout 1999.
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.
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 nine month period at the election of
the Company. The Company pays a commitment fee of 1/2 of 1.0% per
14
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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 September 30, 1999, there were $124.3 million in borrowings and
$8.7 million in standby letters of credit outstanding under the Credit Facility.
As of September 30, 1999, the Company had $16.3 million and $5.0 million
available from its revolving and acquisition loan portion of the Credit
Facility, respectively. 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 September 30, 1999, the Company was in compliance with all of
its financial covenants.
The Company had working capital of $20.7 million at September 30, 1999
as compared to working capital of $4.3 million at December 31, 1998. This
increase in working capital arose principally from the increase in restricted
cash recorded as a result of the closing of the Credit Facility. Restricted cash
may only be utilized to fund permitted acquisitions in accordance with the
Credit Facility. The Company intends to utilize the aforementioned restricted
cash to fund permitted acquisitions over the next year. This increase is
partially offset by a $5.1 million increase in current maturities of notes
payable.
Cash flows generated from operating activities for the nine months
ended September 30, 1999 were $12.6 million, representing an increase of $2.0
million from the corresponding period in 1998. This increase is attributable the
Company's growth through acquisitions during the period.
Cash used in investing activities for the nine months ended September
30, 1999 was $90.5 million, an increase of $53.4 million from the corresponding
period in 1998. The increase is attributable to the Company's acquisition and
development, and the deployment of resources to expand the technology base at
its business centers and its corporate offices. In addition, as noted above, the
Company was required to deposit the funded portion of its Credit Facility into a
restricted cash account.
Cash provided by financing activities for the nine months ended
September 30, 1999 was $75.9 million, representing an increase of $47.4 million
from the corresponding period in 1998. During the three months ended September
30, 1999, the Company completed various equity transactions whereby it raised
$29.7 million in net proceeds by selling shares of the Company's convertible
preferred stock to accredited investors. Net proceeds from borrowings and
repayments of borrowings amounted to $51.3 million.
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 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.
15
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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 nine months ended September
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 September 30, 1999, the Company hedged interest rate risk
using financial instruments for a limited amount of its outstanding debt. 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 September 30,
1999, the Company had no other material exposure to market risk.
16
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On July 23, 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.
(b) None.
(c) On July 29, 1999, the Company issued and sold 3,347,961
shares of Series D Convertible Preferred Stock (the "Series D Preferred Stock"),
at a price of $5.25 per share, for an aggregate cash purchase price of
approximately $17.6 million. On August 4, 1999, the Company issued and sold
1,486,921 shares of Series D Preferred Stock and 352,380 shares of Series E
Convertible Preferred Stock (the "Series E Preferred Stock "), in each case at a
price of $5.25 per share, for an aggregate cash purchase price of approximately
$9.7 million. On September 14, 1999, the Company issued and sold 274,991 shares
of Series D Preferred Stock and 252,033 shares of Series E Preferred Stock, in
each case at a price of $5.25 per share, for an aggregate cash purchase price of
approximately $2.8 million. The Company issued and sold these securities
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Act"),
and Rule 506 promulgated thereunder. The offering was made to a limited number
of offerees, all of whom were accredited investors (as defined in Rule 501
promulgated under the Act). The terms of the Series D Preferred Stock and Series
E Preferred Stock 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.
(d) None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 19, 1999, an action by written consent was executed by
holders of 23,041,524 shares of the Company's outstanding voting capital stock,
representing 67.3% of such outstanding voting capital stock, pursuant to which
Jason Barnett and Jeffrey Neumann were appointed as directors of the Company in
lieu of two directors who had resigned. Following this consent, David W. Beale,
Arnold Cohen, Dan DiSano, Jon Halpern, Louis Perlman, Stephen Rathkopf, Scott
Rechler and Henry Wilson comprised the other members of the Board of Directors.
On July 29, 1999, an action by written consent was executed by holders
of 28,261,332 shares of the Company's outstanding voting capital stock,
representing 87.3% of such outstanding voting capital stock, pursuant to which
Stephen Rathkopf was appointed as a director of the Company in lieu of a
director who had resigned. Following this consent, David Beale, G. Lee Bohs,
Arnold Cohen, Dan DiSano, Jon Halpern, Louis Perlman, Scott Rechler, David
Warnock and Henry Wilson comprised the other members of the Board of Directors.
On July 22, 1999, an action by written consent was executed by holders
of 23,863,442 shares of the Company's outstanding voting capital stock,
representing 82.2% of such outstanding voting capital stock, pursuant to which
the Company's 1999 Stock Option Plan was approved and adopted.
On July 19, 1999, an action by written consent was executed by holders
of 23,863,442 shares of the Company's outstanding voting capital stock,
representing 82.5% of such outstanding voting capital stock, pursuant to which
the Company's Amended and Restated Articles of Incorporation were approved and
adopted. The Amendment and Restatement related to (1) the change of the
Company's name to VANTAS Incorporated, and (2) and increase in the Company's
authorized capital stock and the creation of the Series D Preferred Stock and
the Series E Preferred Stock.
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ITEM 5. OTHER INFORMATION
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 Preferred Stock ("Series C Preferred Stock"), and the Company
received $8.4 million in cash.
Prior to the Mergers, REC and InterOffice were majority-owned
subsidiaries of Reckson Service Industries, Inc. ("RSI"). Pursuant to the terms
of the Mergers, RSI received an approximately 24% equity interest in the Company
in the form of Series C Preferred Stock of the Company, which it holds through
two limited liability companies ( the "LLC's"). Pursuant to the Mergers and the
issuance of securities described in Item 2, RSI currently owns directly or
indirectly approximately 35% of the capital stock of the Company.
The Company and RSI also entered into an intercompany agreement
pursuant to which RSI has the opportunity to be the exclusive provider of
certain business services to the Company, provided certain third party and
"most-favored nation" conditions are satisfied.
In connection with the Mergers, the stockholders of the Company,
including the LLC's, entered into a stockholders' agreement (the "Stockholders'
Agreement") pursuant to which holders of Series C Preferred Stock have the right
to nominate four of the ten members of the board of directors of the Company
(the "Board"), including the Chairman of the Board. A significant number of
items presented to the Board will require the separate approval of a majority of
the representatives of the Series C Preferred Stock on the Board, including
significant acquisitions, sale or leasing of assets, approval of the Company's
annual operating budget, certain borrowings and capital expenditures by the
Company, the hiring or termination of certain executives and other matters. The
holders of Series C Preferred Stock also have the right to appoint half of the
members of the executive and audit committees of the Board. The preferred
stockholders of the Company (including the holders of the Company's Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock) were
granted super-majority voting rights with respect to certain corporate actions,
including the issuance of equity securities, mergers, changes to the charter
documents of the Company and other matters. In addition, the Stockholder's
Agreement contains non-competition provisions applicable to RSI, as well as
provisions limiting the rights of the Series C Preferred Stock in the event RSI
is acquired by certain competitors of the Company.
RSI 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, including capital
stock related to the exercise of vested stock options by members of senior
management. Under the terms of the agreements, the Company is obligated to
remit applicable withholding taxes related to the compensation expense
associated with the exercise of such options, subject to certain
qualifications relating to those individuals remaining in the employ of the
Company. The Company incurred cash compensation expense and non-cash
compensation expense charges of approximately $10.9 million and $12.5
million, respectively. These charges will be included in merger and
integration expense during the fourth quarter of 1999. Certain of the
purchases contemplated by these agreements have been completed, including the
purchases from the Company's senior management and former members of the Board
of Directors. Upon consummation of the purchases contemplated by these
agreements, which is currently expected to occur in January, 2000, RSI is
expected to own approximately 86% of the Company's outstanding capital stock.
As of November 15, 1999, the Board was comprised of David Beale, Scott
Rechler, Dan DiSano, Chris George, Jon Halpern, Jeffrey Neumann and Stephen
Rathkopf. Messrs. Rechler, DiSano, George, Neumann and Rathkopf are officers of
RSI.
The consummation of the purchases by RSI of other shareholders' capital
stock of the Company described above will result in the vesting of the
outstanding stock options issued under the Company's 1996 stock option plan.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
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
</TABLE>
(b) Reports on Form 8-K
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
1/16/00 /s/ David W. Beale
---------- ----------------------------
Date David W. Beale
President, Chief Executive Officer
1/16/00 /s/ Alan Langer
---------- ----------------------------
Date Alan Langer
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
FINANCIAL DATA SCHEDULE INFORMATION HAS BEEN EXTRACTED FROM THE REGISTRANT'S
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS THEN ENDED.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,695,314
<SECURITIES> 0
<RECEIVABLES> 9,990,182
<ALLOWANCES> 795,000
<INVENTORY> 0
<CURRENT-ASSETS> 53,766,888
<PP&E> 74,025,171
<DEPRECIATION> 11,112,355
<TOTAL-ASSETS> 321,258,050
<CURRENT-LIABILITIES> 33,019,026
<BONDS> 0
146,524,645
0
<COMMON> 49,019
<OTHER-SE> (20,051,246)
<TOTAL-LIABILITY-AND-EQUITY> 321,258,050
<SALES> 0
<TOTAL-REVENUES> 156,780,680
<CGS> 0
<TOTAL-COSTS> 127,067,973
<OTHER-EXPENSES> 18,822,827
<LOSS-PROVISION> 749,377
<INTEREST-EXPENSE> 7,133,228
<INCOME-PRETAX> 3,007,275
<INCOME-TAX> 2,195,000
<INCOME-CONTINUING> 812,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 812,277
<EPS-BASIC> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
