SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
-------------
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 28, 2000
VANTAS INCORPORATED
(Exact name of Registrant as specified in its Charter)
Nevada
(State of Incorporation)
0-18274 13-3353508
(Commission File Number) (IRS Employer Id. Number)
90 Park Avenue
New York, New York 10016
(Address of principal executive offices) (Zip Code)
(212) 907-6400
(Registrant's telephone number, including area code)
Item 5. Other Events
Simultaneously with the execution of the agreement and plan of
merger (the "Merger Agreement") pursuant to which the Company, an
approximately 84% owned subsidiary of Reckson Service Industries, Inc.
("RSI"), will be merged with HQ Global Workplaces, Inc. (the "Merger"), RSI
deposited $35 million in cash to collateralize the Company's obligations under
the Merger Agreement. Subsequently, the Company obtained a $35 million
unconditional letter of credit which was collateralized by 11,299,072 shares
(which shall be increased to 15,057,478 shares on or before March 22, 2000) of
the Company's stock owned by RSI (the "RSI Shares"). Such letter of credit may
be drawn upon by HQ if the Merger fails to close, except under certain limited
circumstances. In the event the letter of credit is drawn upon and the lender
forecloses upon the RSI Shares, the Company is obligated to reimburse RSI in
the form of additional shares of the Company for any loss of the RSI Shares,
provided that such loss was not a result of RSI's gross negligence.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements
VANTAS Incorporated and Subsidiaries
------------------------------------
Report of Independent Auditors - Ernst & Young LLP
Report of Independent Auditors - PricewaterhouseCoopers LLP
Consolidated Balance Sheets of VANTAS as of December 31, 1999
and December 31, 1998
Consolidated Statements of Operations of VANTAS for the years
ended December 31, 1999 and June 30, 1998 and 1997 and
for the period July 1, 1998 to December 31, 1998
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficiency) of VANTAS for
the periods ending December 31, 1999 and 1998 and June
30, 1998 and 1997
Consolidated Statements of Cash Flows of VANTAS for the years
ended December 31, 1999 and June 30, 1998 and 1997 and
for the period July 1, 1998 to December 31, 1998
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders of
VANTAS Incorporated
We have audited the consolidated balance sheet of VANTAS Incorporated and
Subsidiaries as of December 31, 1999, and the related consolidated statements
of operations, redeemable convertible preferred stock and stockholders' equity
(deficiency), and cash flows for the year then ended. We have also audited the
financial statement schedule listed in the index at Item 7(a). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of VANTAS
Incorporated and Subsidiaries at December 31, 1999, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles. Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
. /s/ Ernst & Young LLP
New York, New York
February 22, 2000
<PAGE>
Report of Independent Accountants
The Board of Directors and Stockholders of VANTAS Incorporated:
In our opinion, the consolidated balance sheet as of December 31, 1998, and
the related consolidated statements of operations, of redeemable convertible
preferred stock and stockholders' equity (deficit) and of cash flows for each
of the two years in the period ended June 30, 1998 and for the period July 1,
1998 to December 31, 1998 (appearing in this Current Report of VANTAS
Incorporated on Form 8-K) present fairly, in all material respects, the
financial position, results of operations and cash flows of VANTAS
Incorporated and its subsidiaries at December 31, 1998 and for each of the two
years in the period ended June 30, 1998 and for the period July 1, 1998 to
December 31, 1998, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the supplemental schedule
of valuation and qualifying accounts for each of the two years in the period
ended June 30, 1998 and for the period July 1, 1998 to December 31, 1998
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and the supplemental schedule are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and the supplemental schedule based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the consolidated
financial statements of VANTAS Incorporated for any period subsequent to
December 31, 1998.
/s/ PricewaterhouseCoopers LLP
New York, New York
January 6, 2000
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 3,615,087 $ 3,807,417
Restricted cash 10,000,000 21,571,590
Accounts receivable, net of allowance for doubtful accounts of
$401,000 and $861,000, respectively 3,821,175 8,425,968
Prepaid expenses and other current assets 5,145,682 10,853,205
Deferred income taxes 174,000 5,155,000
Deferred financing costs 466,727 908,602
------------------------------------
Total current assets 23,222,671 50,721,782
Intangibles, net 81,605,181 187,115,028
Property and equipment, net 23,124,702 80,064,180
Deferred financing costs, net 2,584,418 4,516,557
Security deposits 2,110,952 4,400,898
Other assets, net 1,426,526 5,638,755
------------------------------------
Total assets $ 134,074,450 $ 332,457,200
====================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued expenses $ 9,578,807 $ 38,010,112
Capital lease obligations 731,510 1,139,219
Deferred rent payable 727,619 2,164,969
Notes payable 7,875,000 12,500,000
------------------------------------
Total current liabilities 18,912,936 53,814,300
Notes payable 65,125,000 108,125,000
Tenants' security deposits 8,592,948 20,163,962
Deferred rent payable 6,607,771 22,794,388
Deferred income taxes 1,514,000 3,024,000
Capital lease obligations 602,153 625,805
Other liabilities - 4,361,721
------------------------------------
Total liabilities 101,354,808 212,909,176
------------------------------------
</TABLE>
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------------------------------------
<S> <C> <C>
Commitments and contingencies
Redeemable convertible preferred stock, authorized 15,000,000
and 31,000,000 shares, respectively:
Series A Convertible, $.01 par value, issued and outstanding
7,574,711 shares (liquidation preference $12,900,000) 33,177,234 37,949,302
Series B Convertible, $.01 par value, issued and outstanding
3,222,851 (liquidation preference $15,309,000) 15,700,638 17,081,007
Series C Convertible, $.01 par value, issued and outstanding
13,325,424 shares (liquidation preference $63,296,000) - 68,359,428
Series D Convertible, $.01 par value, issued and outstanding
5,109,873 shares (liquidation preference $26,827,000) - 27,474,987
Series E Convertible, $.01 par value, issued and outstanding
604,413 shares (liquidation preference $3,173,000) - 3,176,860
Note receivable from issuance of redeemable preferred stock (950,000) (950,000)
------------------------------------
Total redeemable convertible preferred stock 47,927,872 153,091,584
------------------------------------
Stockholders' deficiency:
Class A common stock, $.01 par value, authorized 35,000,000 and
41,000,000 shares, respectively, issued and outstanding
4,901,868 and 7,064,222 shares, respectively 49,019 70,642
Class B common stock, $.01 par value, authorized 20,000,000
shares - -
Additional paid-in capital 3,133,608 19,392,736
Accumulated deficit (18,390,857) (52,061,866)
------------------------------------
(15,208,230) (32,598,488)
Notes receivable from issuance of common stock - (945,072)
------------------------------------
Total stockholders' deficiency (15,208,230) (33,543,560)
------------------------------------
Total liabilities and stockholders' deficiency $ 134,074,450 $ 332,457,200
====================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Business center operations:
Revenues:
Office rentals $ 17,474,724 $ 39,390,571 $ 31,897,310 $124,564,219
Support services 11,622,891 27,147,060 22,159,876 89,359,785
-----------------------------------------------------------------
29,097,615 66,537,631 54,057,186 213,924,004
-----------------------------------------------------------------
Expenses:
Rent 10,394,622 21,737,973 18,765,386 82,664,161
Support services 4,846,502 8,998,258 7,788,189 31,060,745
Center general and administrative 7,871,511 18,743,683 15,556,730 61,728,648
-----------------------------------------------------------------
23,112,635 49,479,914 42,110,305 175,453,554
-----------------------------------------------------------------
Contribution from operation of business 5,984,980 17,057,717 11,946,881 38,470,450
centers
Other (expenses) income:
Corporate general and administrative (2,769,544) (4,501,361) (3,452,021) (11,995,937)
Merger and integration charges - - - (26,730,312)
Depreciation and amortization (1,172,594) (3,058,729) (2,762,348) (14,857,760)
Interest expense, net (930,598) (3,188,126) (2,884,300) (10,264,996)
Managed center income 377,743 692,408 454,105 947,313
Other income 121,405 78,604 47,106 171,458
-----------------------------------------------------------------
(Loss) income before minority interest and
income taxes 1,611,392 7,080,513 3,349,423 (24,259,784)
Minority interest in net income of
consolidated partnerships (118,880) (290,985) - -
-----------------------------------------------------------------
(Loss) income before benefit (provision)
for income taxes 1,492,512 6,789,528 3,349,423 (24,259,784)
Benefit (provision) for income taxes 1,389,100 (2,700,000) (1,410,000) 2,840,638
-----------------------------------------------------------------
Net (loss) income 2,881,612 4,089,528 1,939,423 (21,419,146)
Accretion of preferred stock (846,437) (14,300,008) (7,303,669) (12,251,863)
-----------------------------------------------------------------
Net (loss) income applicable to common stock $ 2,035,175 $(10,210,480) $ (5,364,246) $(33,671,009)
=================================================================
Share information:
Basic earnings:
Net (loss) income per common share $ 0.42 $ (2.06) $ (1.08) $ (6.55)
=================================================================
Weighted average number of common
shares outstanding 4,835,029 4,954,035 4,951,325 5,141,996
=================================================================
Diluted earnings (loss):
Net (loss) income per common share and
common equivalent share $ 0.30 $ (2.06) $ (1.08) $ (6.55)
=================================================================
Weighted average number of common and
common equivalent shares outstanding 9,498,068 4,954,035 4,951,325 5,141,996
=================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
-----------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 - - - - - -
Issuance of common stock - - - - - -
Issuance of Series A preferred 7,574,711 $11,477,610 - - - -
stock, net
Accretion of preferred stock - 846,437 - - - -
Net income - - - - - -
-----------------------------------------------------------------------------------
Balance, June 30, 1997 7,574,711 12,324,047 - - - -
Exercise of common stock options - - - - - -
Tax benefit from exercise of common
stock options - - - - - -
Purchase and retirement of common
stock - - - - - -
Issuance of Series B preferred - - 1,730,062 $ 7,874,400 - -
stock, net
Accretion of preferred stock - 14,111,694 - 188,314 - -
Net income - - - - - -
-----------------------------------------------------------------------------------
Balance, June 30, 1998 7,574,711 26,435,741 1,730,062 8,062,714 - -
Purchase and retirement of common
stock - - - - - -
Purchase and retirement of Series B
preferred stock - - (5,300) (25,175) - -
Issuance of Series B preferred - - 1,298,089 6,150,923 - -
stock, net
Note receivable from stockholder
for the issuance of Series B - - 200,000 950,000 - -
preferred stock
Accretion of preferred stock - 6,741,493 - 562,176 - -
Net income - - - - - -
-----------------------------------------------------------------------------------
Balance, December 31, 1998 7,574,711 33,177,234 3,222,851 15,700,638 - -
Exercise of common stock options - - - - - -
Tax benefits from exercise of
common stock options - - - - - -
Exercise of common stock warrants - - - - - -
Issuance of Series C preferred - - - - 13,325,424 $63,295,764
stock, net
Issuance of Series D preferred - - - - - -
stock, net
Issuance of Series E preferred - - - - - -
stock, net
Accretion of preferred stock - 4,772,068 - 1,380,369 - 5,063,664
Net loss - - - - - -
-----------------------------------------------------------------------------------
Balance, December 31, 1999 7,574,711 $37,949,302 3,222,851 $17,081,007 13,325,424 $68,359,428
===================================================================================
(table continued)
-----------------------------------------------------------------------------------
NOTE TOTAL
RECEIVABLE REDEEMABLE
SERIES D SERIES E FROM PREFERRED
SHARES AMOUNT SHARES AMOUNT STOCKHOLDER STOCK
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 - - - -
Issuance of common stock - - - -
Issuance of Series A preferred - - - $11,477,610
stock, net
Accretion of preferred stock - - - 846,437
Net income - - - -
-----------------------------------------------------------------------------------
Balance, June 30, 1997 - - - 12,324,047
Exercise of common stock options - - - -
Tax benefit from exercise of common
stock options - - - - - -
Purchase and retirement of common
stock - - - - - -
Issuance of Series B preferred - - - 7,874,400
stock, net
Accretion of preferred stock - - - 14,300,008
Net income - - - -
-----------------------------------------------------------------------------------
Balance, June 30, 1998 - - - 34,498,455
Purchase and retirement of common
stock - - - - - -
Purchase and retirement of Series B
preferred stock - - - - - (25,175)
Issuance of Series B preferred - - - 6,150,923
stock, net
Note receivable from stockholder
for the issuance of Series B - - - - $ (950,000) -
preferred stock
Accretion of preferred stock - - - 7,303,669
Net income - - - -
-----------------------------------------------------------------------------------
Balance, December 31, 1998 - - - - (950,000) 47,927,872
Exercise of common stock options - - - - - -
Tax benefits from exercise of
common stock options - - - - - -
Exercise of common stock warrants - - - - - -
Issuance of Series C preferred - - - - - 63,295,764
stock, net
Issuance of Series D preferred 5,109,873 $26,542,384 - - - 26,542,384
stock, net
Issuance of Series E preferred - - 604,413 $ 3,073,701 - 3,073,701
stock, net
Accretion of preferred stock - 932,603 - 103,159 - 12,251,863
Net loss - - - - - -
-----------------------------------------------------------------------------------
Balance, December 31, 1999 5,109,873 $27,474,987 604,413 $ 3,176,860 $ (950,000)$ 153,091,584
===================================================================================
(table continued) STOCKHOLDERS' EQUITY (DEFICIENCY)
------------------------------------------------------------------------------------
NOTES TOTAL
ADDITIONAL RECEIVABLE STOCKHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED FROM EQUITY
SHARES AMOUNT CAPITAL DEFICIT STOCKHOLDERS (DEFICIENCY)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1996 4,808,468 $ 48,085 $ 3,265,759 $(4,851,306) - $(1,537,462)
Issuance of common stock 35,000 350 109,850 - - 110,200
Issuance of Series A preferred - - - - - -
stock, net
Accretion of preferred stock - - - (846,437) - (846,437)
Net income - - - 2,881,612 - 2,881,612
------------------------------------------------------------------------------------
Balance, June 30, 1997 4,843,468 48,435 3,375,609 (2,816,131) - 607,913
Exercise of common stock options 420,000 4,200 205,800 - - 210,000
Tax benefit from exercise of common
stock options - - 202,000 - - 202,000
Purchase and retirement of common
stock (311,600) (3,116) (412,801) - - (415,917)
Issuance of Series B preferred - - - - - -
stock, net
Accretion of preferred stock - - - (14,300,008) - (14,300,008)
Net income - - - 4,089,528 - 4,089,528
------------------------------------------------------------------------------------
Balance, June 30, 1998 4,951,868 49,519 3,370,608 (13,026,611) - (9,606,484)
Purchase and retirement of common
stock (50,000) (500) (237,000) - - (237,500)
Purchase and retirement of Series B
preferred stock - - - - -
Issuance of Series B preferred - - - - -
stock, net
Note receivable from stockholder
for the issuance of Series B - - - - -
preferred stock
Accretion of preferred stock - - - (7,303,669) (7,303,669)
Net income - - - 1,939,423 1,939,423
------------------------------------------------------------------------------------
Balance, December 31, 1998 4,901,868 49,019 3,133,608 (18,390,857) (15,208,230)
Exercise of common stock options 597,994 5,980 999,092 - $ (945,072) 60,000
Tax benefits from exercise of
common stock options - - 12,492,372 - - 12,492,372
Exercise of common stock warrants 1,564,360 15,643 2,767,664 - - 2,783,307
Issuance of Series C preferred - - - - - -
stock, net
Issuance of Series D preferred - - - - - -
stock, net
Issuance of Series E preferred - - - - - -
stock, net
Accretion of preferred stock - - - (12,251,863) - (12,251,863)
Net loss - - - (21,419,146) - (21,419,146)
------------------------------------------------------------------------------------
Balance, December 31, 1999 7,064,222 $ 70,642 $19,392,736 $(52,061,866) $ (945,072)$ (33,543,560)
====================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ 2,881,612 $ 4,089,528 $ 1,939,423 $ (21,419,146)
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization 1,172,594 3,058,729 2,762,348 14,857,760
Amortization of deferred financing
costs 145,845 404,144 175,505 719,115
Deferred income taxes (1,494,100) 2,109,100 725,000 (3,540,638)
Provision for doubtful accounts 203,200 387,900 250,672 1,291,485
Minority interest in net income of
consolidated partnerships 118,880 290,985 - -
Deferred rent payable 527,835 823,170 491,047 6,023,573
Deferred credits - (213,940) (211,675) (1,134,576)
Broker referral fees - - - 909,988
Non-cash compensation expense - - - 12,492,372
Non-cash interest expense 110,200 118,133 62,522 161,609
Changes in operating assets and
liabilities:
Accounts receivable (221,538) (1,708,163) (555,361) (2,619,683)
Prepaid expenses and other
current assets (393,572) (893,165) (776,122) (3,582,533)
Security deposits and other assets (141,569) (167,531) (767,581) (1,890,018)
Accounts payable and accrued
expenses 1,127,311 1,972,993 2,467,215 21,266,384
Income taxes payable (179,882) (1,822) (847,942) (1,448,265)
Other liabilities - - - 88,359
Tenants' security deposits 132,002 1,195,375 1,420,640 2,439,072
--------------------------------------------------------------------
Net cash provided by operating
activities 3,988,818 11,465,436 7,135,691 24,614,858
--------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of net assets of business
centers, net of cash proceeds (20,496,983) (33,901,325) (28,397,887) (47,329,087)
Purchases of property and equipment (1,960,313) (4,860,373) (5,781,922) (41,540,642)
Restricted cash - - (10,000,000) (10,318,219)
--------------------------------------------------------------------
Net cash used in investing activities (22,457,296) (38,761,698) (44,179,809) (99,187,948)
--------------------------------------------------------------------
</TABLE>
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
--------------------------------------------------------------------
FINANCING ACTIVITIES
<S> <C> <C> <C> <C>
Proceeds from borrowings 12,912,500 33,229,000 34,665,000 68,400,000
Repayments on borrowings (1,846,005) (6,801,099) (125,000) (20,775,000)
Deferred financing costs (1,963,654) (561,898) (1,251,087) (3,093,129)
Payments of capital leases (356,714) (609,083) (543,108) (2,225,843)
Distributions to minority partners (642,276) (1,151,491) - -
Proceeds from exercise of common stock
options and warrants - 210,000 - 2,843,307
Purchase and retirement of common and
preferred stock - (415,917) (262,675) -
Proceeds from issuance of preferred
stock, net of issuance costs 11,257,610 7,874,400 2,266,121 29,616,085
--------------------------------------------------------------------
Net cash provided by financing
activities 19,361,461 31,773,912 34,749,251 74,765,420
--------------------------------------------------------------------
Net increase (decrease) in cash 892,983 4,477,650 (2,294,867) 192,330
Cash and cash equivalents at
beginning of period 539,321 1,432,304 5,909,954 3,615,087
--------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 1,432,304 $ 5,909,954 $ 3,615,087 $ 3,807,417
====================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for $ 653,000 $ 2,457,000 $ 2,865,000 $ 9,639,000
interest
====================================================================
Cash paid during the period for income
taxes $ 285,000 $ 561,000 $ 1,425,200 $ 2,009,000
====================================================================
</TABLE>
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
During the year ended December 31, 1999, the Company, through a merger, obtained
forty-five business centers and received cash of $8,400,000 in exchange for the
issuance of 13,325,424 shares of Series C Convertible Preferred Stock,
$1,589,627 in cash and the assumption of $4,624,897 in transaction related
liabilities, $2,104,829 of capital lease obligations, $5,517,979 in tenants'
security deposits, $3,850,747 in other long term liabilities. Net assets
acquired included net accounts receivable of $2,283,473, prepaid expenses and
other assets of $565,513, security deposits of $544,309, deferred income taxes
of $972,816 and restricted cash of $1,253,371.
During the year ended December 31, 1999, the Company acquired forty-two business
centers for $44,905,906 in cash and the assumption of $2,462,548 in transaction
related liabilities, $552,375 of capital lease obligations, $3,613,963 in
tenants' security deposits and $422,615 in other long term liabilities. Net
assets acquired included net accounts receivable of $993,122, prepaid expenses
and other assets of $776,922 and security deposits and other assets of
$1,186,664.
During the year ended December 31, 1999, the Company recorded compensation
expense of $12,492,372 related to an agreement with certain employees of the
Company and a principal shareholder, whereby such principal shareholder
purchased a portion of such employees' securities in the Company. In connection
with this agreement, certain shareholders exercised vested stock options for
which the Company received promissory notes in the amount of $945,072, in
respect of the aggregate exercise price for such options.
During the year ended December 31, 1999, the Company recorded deferred credits
of $11,825,000 related to tenant improvements, which are reimbursed by landlords
and amortized against rent expense over the life of the leases.
During the Transition Period, the Company acquired twenty-five business centers
(including the remaining interests in all of its seven controlled partnerships),
for $22,471,168 in cash and issued 817,853 shares of Series B Convertible
Preferred Stock and the assumption of $993,277 in transaction related
liabilities, $572,368 of capital lease obligations, and $541,775 in tenants'
security deposit liabilities. Net assets acquired included net accounts
receivable of $217,052, prepaid expenses and other assets of $102,704 and
security deposits of $85,523.
During the Transition Period, the Company capitalized $1,076,328 in transaction
costs relating to mergers which occurred on January 8, 1999, of which $536,964
is included in accounts payable at December 31, 1998.
During the Transition Period, the Company recorded deferred credits of
approximately $1,243,000 related to tenant improvements which are reimbursed by
landlords and amortized against rent expense over the life of the leases.
During the Transition Period, the Company issued 200,000 shares of Series B
Convertible Preferred Stock to a key executive, for a note receivable of
$950,000.
During fiscal 1998, the Company acquired forty-three business centers for
$42,159,702 in cash and related acquisitions payable and the assumption of
$571,517 in transaction related liabilities, $583,479 of capital lease
obligations, and $2,452,638 in tenants' security deposit liabilities. Net assets
acquired included net accounts receivable of $892,379, prepaid expenses and
other assets of $255,672 and security deposits of $225,655.
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Statements of Cash Flows (continued)
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES (CONTINUED)
During fiscal 1998, options for shares of common stock were exercised by certain
directors and an officer. A tax benefit of $202,000 was recorded as an increase
in additional paid-in capital and a reduction to income taxes payable.
During fiscal 1998, the Company recorded deferred credits of approximately
$2,940,000 related to tenant improvements, which are reimbursed by landlords and
amortized against rent expense over the life of the leases.
During fiscal 1998, the Company entered into capital lease obligations
approximating $352,000.
During fiscal 1997, the Company acquired twenty-five business centers for
$20,496,983 in cash and the assumption of a $308,508 interest bearing note,
$925,468 in transaction related liabilities, $756,357 of capital lease
obligations and $1,630,673 in tenants' security deposit liabilities. Net assets
acquired included net accounts receivable of $690,574, prepaid expenses of
$142,647 and security deposits of $138,095.
During fiscal 1997, notes payable to directors of $220,000 were converted to
approximately 129,100 shares of Series A convertible preferred stock, $.01 par
value.
During fiscal 1997, the Company recorded interest expense of $110,200 related to
the issuance of 65,000 shares of common stock, 30,000 of which were issued on
June 30, 1996, to a financial institution.
During fiscal 1997, the Company entered into capital lease obligations
approximating $380,490.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
1. BASIS OF PRESENTATION
BUSINESS
VANTAS Incorporated and Subsidiaries (the "Company"), previously known as
ALLIANCE NATIONAL Incorporated, operate 201 business centers in 27 states and
the District of Columbia, Mexico and France, and manage 5 others for unrelated
property owners, as of December 31, 1999. The Company provides fully furnished
individual offices and suites and a full range of telecommunication and
business support services to its clients that generally require 2,000 square
feet or less of traditional office space. The Company does not own the real
estate in which the business centers are located. The Company, through its
OfficeAccess(TM) plan, also provides full-time telephone answering and mail
room services with access to conference room facilities for businesses and
individuals that do not require offices on a full-time basis.
In 1998, the Company changed its fiscal year end from June 30 to December 31.
For clarity of presentation herein, the period from July 1, 1998 to December 31,
1998 is referred to as the "Transition Period Ended December 31, 1998" or
"Transition Period."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of VANTAS
Incorporated and its wholly-owned subsidiaries. The minority interest
represented the minority partners' proportionate share of the net equity of the
Company's consolidated partnerships as of June 30, 1997 and 1998. All
significant intercompany balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
Office rental revenue and support services revenue are recognized as the related
services are provided.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with maturities of
three months or less to be cash equivalents.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets, which range
from 5-7 years. The Enterprise Resource System is being amortized over 7 years.
Leasehold improvements are amortized over the lesser of the term of the related
lease or the estimated useful lives of the assets.
In March 1998, the Accounting Standards Executive Committee of the AICPA issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. The SOP, which was adopted by the
Company as of January 1, 1999 in connection with the development of their
Enterprise Resource System, requires the capitalization of certain costs
incurred in connection with developing or obtaining internal use software.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill which is the excess of the
purchase price over the net assets of acquired companies and is being amortized
on the straight-line method primarily over 30 years.
IMPAIRMENT OF LONG-LIVED ASSETS
If there is an event or change in circumstances that indicates that the basis of
the Company's long-lived assets or intangibles may not be recoverable, the
Company's policy is to assess any impairment in value by making a comparison of
the current and projected operating cash flows of the asset or the business
center for which the intangible relates over its remaining useful life, on an
undiscounted basis, to the carrying amount of the asset or intangible. Such
carrying amount would be adjusted, if necessary, to reflect an impairment in the
value of the assets or intangibles.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
The Company amortizes deferred financing costs over the term of the related
debt. As of December 31, 1998 and 1999, accumulated amortization was
approximately $675,000 and $1,394,000, respectively.
RECEIVABLES AND CONCENTRATION OF CREDIT RISK
The Company leases office space and provides support services to clients in
various industries, ranging in size from small entrepreneurial entities to local
offices of international corporations. The Company performs credit evaluations
of its clients and generally requires at least two months' rent as a security
deposit. The Company's facilities are primarily located throughout the United
States which limits the Company's exposure to certain economic risks, based upon
local economic conditions.
Cash balances are held primarily at one financial institution and may, at times,
exceed insurable amounts. The Company believes it mitigates its risk by
investing in or through a major financial institution. Recoverability is
dependent upon the performance of the institution.
RENT EXPENSE
Generally accepted accounting principles require that rent expense be recognized
on a straight-line basis over the term of the related lease. The difference
between the rent expense recognized for financial reporting purposes and the
actual payments made in accordance with the lease agreement is recognized as a
deferred rent liability.
Rent expense charged to operations for the years ended June 30, 1997, 1998, the
Transition Period and the year ended December 31, 1999 exceeded actual rental
payments by approximately $528,000, $823,000, $491,000 and $5,969,000,
respectively.
As of December 31, 1998 and 1999, the deferred rent liability includes
approximately $3,709,000 and $14,400,000, respectively, of deferred credits
relating to tenant improvements, which are reimbursed or paid by landlords and
amortized against rent expense over the life of the leases.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method which requires
recognition of deferred tax assets and liabilities based upon the expected
future tax consequences of events included in the Company's financial statements
and tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," basic earnings per share are computed by dividing net
income applicable to common stock by the weighted average number of common
shares outstanding. Diluted earnings per share are computed by dividing net
income by the sum of the weighted average number of common shares outstanding
and the dilutive effects of options, warrants and convertible securities.
RECENTLY ISSUED PRONOUNCEMENTS
In fiscal 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
The Company has no significant "other comprehensive income" to report for any of
the periods presented.
In fiscal 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. The Company operates and manages its
business in one segment, providing business outsourcing services.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. The most significant assumptions and estimates
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ESTIMATES (CONTINUED)
relate to depreciable lives and recoverability of long-lived assets and
intangibles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
period presentation.
3. 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 forty-five 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 addition to the Mergers described above, the Company acquired 42 business
centers, in 11 acquisitions, for an aggregate purchase price of $43.6 million
during the year ended December 31, 1999.
All acquisitions are recorded under the purchase method of accounting.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma financial information set forth below is based upon the Company's
historical consolidated statements of income for the years ended December 31,
1998 and 1999, adjusted to give effect to these acquisitions 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.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. ACQUISITIONS (CONTINUED)
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1999
--------------------------------------
<S> <C> <C>
Revenues $ 210,053,788 $ 224,350,663
Net (loss) income 13,342,557 (14,453,823)
Net loss applicable to common stock (40,598,976) (26,705,686)
Basic loss per common share (8.20) (5.19)
Diluted loss per common share (8.20) (5.19)
</TABLE>
4. MERGER AND INTEGRATION CHARGES
The Company incurred merger and integration charges of approximately $26.7
million during the year ended December 31, 1999, in connection with the Mergers
and certain transactions with Reckson Service Industries ("RSI"), the Company's
principal shareholder. Such charges consisted primarily of compensation expense
pursuant to the RSI transactions of $23.7 million (see below) and professional
fees, business process reengineering and other integration costs related to the
Mergers, which aggregated approximately $3.0 million.
On October 29, 1999, 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 a portion of such
shareholders' securities in the Company, including common stock related to the
exercise of vested stock options by members of senior management.
The employee shares were sold simultaneously with the exercise of options by
senior management and RSI satisfied its purchase obligation with shares of its
common stock. The Company received promissory notes from each of the employees
in the aggregate amount of $945,072 in respect of the exercise price of their
options. These notes are included as a reduction to stockholders' equity. The
difference between the fair market value of the RSI shares received by the
employees and the cost of the Company's common stock amounted to approximately
$12.5 million and was recorded as compensation expense and an increase to
additional paid-in capital. In addition, under the terms of the agreements, the
Company was obligated to pay applicable income taxes of approximately $339,000
related to the compensation expense associated with the exercise
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. MERGER AND INTEGRATION CHARGES (CONTINUED)
of such options, subject to certain qualifications relating to those individuals
remaining in the employ of the Company. The Company recorded approximately $10.9
million in compensation expense for income taxes to be paid on behalf of the
employees. These charges are included in accrued expenses as of December 31,
1999 and in Merger and Integration charges for the year ended December 31, 1999.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------------------------------------
<S> <C> <C>
Office equipment, furniture and fixtures $ 21,649,976 $ 63,351,649
Enterprise Resource System - 5,510,469
Leasehold improvements 6,663,780 25,129,065
------------------------------------
28,313,756 93,991,183
Less: accumulated depreciation and amortization (5,189,054) (13,927,003)
------------------------------------
$ 23,124,702 $ 80,064,180
====================================
</TABLE>
Office equipment, furniture and fixtures include approximately $3,003,680 and
$5,649,710 of office equipment under capital leases, net of accumulated
depreciation of $824,664 and $1,240,410 as of December 31, 1998 and 1999,
respectively.
6. INTANGIBLES
Intangible assets consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------------------------------------
<S> <C> <C>
Goodwill and other intangibles $ 84,295,771 $ 195,944,403
Less: accumulated amortization (2,690,590) (8,829,375)
--------------------------------------
$ 81,605,181 $ 187,115,028
======================================
</TABLE>
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. NOTES PAYABLE
On January 16, 1997, the Company entered into a $20 million credit agreement
with a lending institution, which was amended on June 24, 1997 to increase the
amount of the facility to $40 million and to add additional lending
institutions. The credit agreement provided for a $26 million acquisition loan
commitment, a $12 million term loan, and a $2 million revolving loan commitment,
including letters of credit. The Company also issued 90,958 warrants to the
lenders to acquire the Company's common stock at $1.70 per share during the year
ended June 30, 1997. All of these warrants were exercised during 1999.
Effective April 15, 1998, the Company increased its existing $40 million credit
agreement with various lending institutions to $55 million. The credit agreement
provided for a $38 million acquisition loan commitment, a $12 million term loan,
and a $5 million revolving loan commitment, including letters of credit.
Effective November 6, 1998, the Company increased the $55 million credit
agreement with various lending institutions to $100 million. The credit
agreement provided for a $23 million acquisition loan commitment, $70 million
term loans, and a $7 million revolving loan commitment, including letters of
credit.
Effective August 3, 1999, the Company increased the $100 million credit
agreement with various lending institutions to $157.9 million. The credit
agreement provides for a $5 million acquisition loan commitment, $127.9 million
term loans, and a $25 million revolving loan commitment, including letters of
credit.
During 1999, interest on each commitment ranged from LIBOR plus 3.00% (9.5% at
December 31, 1999) to LIBOR plus 3.75% (10.25% at December 31, 1999) for a one,
three or six month period, at the election of the Company. During 1998, interest
on each commitment ranged from LIBOR plus 3.00% (8.56% at December 31, 1998) to
LIBOR plus 3.5% (9.06% at December 31, 1998) for a one, three or six month
period, at the election of the Company.
The credit agreement contains certain covenants, one of which requires the
Company to not exceed a defined maximum ratio of consolidated indebtedness to
consolidated earnings before interest, income taxes, depreciation and
amortization. In addition, there are also other covenants pertaining to
financial ratios and limitations on capital expenditures. Certain of the
covenants were amended for the quarter ended December 31, 1999.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. NOTES PAYABLE (CONTINUED)
Pursuant to the credit agreement, the lending institutions have an assignment of
leases and rents associated with the Company's business centers to collateralize
the notes payable.
On January 20, 2000, the Company executed an agreement and plan of merger
pursuant to which the Company will merge with and into HQ Global Workplaces,
Inc. ("HQ") and has obtained long-term financing from an investment group to
finance the merger. As part of this financing, the $157.9 million credit
agreement will be replaced with this new facility.
ACQUISITION LOAN COMMITMENT
The credit agreement provides the Company with an acquisition loan commitment
which allows the Company to make acquisitions subject to certain terms and
conditions. As of December 31, 1999, the Company had no borrowings outstanding
under the acquisition loan commitment. In accordance with the credit agreement,
the Company cannot borrow under the acquisition loan commitment after November
6, 2000. Principal repayments under the acquisition loan commitment shall
commence on December 31, 2001 and are based upon percentages of the amount
borrowed as follows:
REPAYMENT
PERIOD PERCENTAGE
--------------------------------- ---------------------------
December 2001 - September 2002 2.5% quarterly
December 2002 - September 2003 10% quarterly
November 2003 50%
TERM LOANS
The $38,000,000 Term Loan A had $31,000,000 outstanding at December 31, 1999
which requires quarterly principal payments. The final principal payment is due
on June 30, 2002.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. NOTES PAYABLE (CONTINUED)
TERM LOANS (CONTINUED)
The $89,875,000 Term Loan B had $89,625,000 outstanding at December 31, 1999
which requires quarterly principal payments. The final principal payment is due
on November 6, 2005.
At December 31, 1999, $21,571,590 of the Term Loan was funded into a cash
collateral account that the Company will be permitted to utilize in connection
with permitted acquisitions.
The total future principal repayments as of December 31, 1999, for the Term
Loans for each of the next five fiscal years are as follows:
<TABLE>
<CAPTION>
TERM A TERM B TOTAL
-----------------------------------------------------------
<S> <C> <C> <C> <C>
2000 $ 12,000,000 $ 500,000 $ 12,500,000
2001 14,300,000 500,000 14,800,000
2002 4,700,000 15,250,000 19,950,000
2003 - 19,500,000 19,500,000
2004 - 23,751,000 23,751,000
Thereafter - 30,124,000 30,124,000
-----------------------------------------------------------
$ 31,000,000 $ 89,625,000 $ 120,625,000
===========================================================
</TABLE>
REVOLVING LOAN COMMITMENT
The $25,000,000 revolving loan commitment, which expires on November 6, 2003,
had no outstanding balance at December 31, 1999.
At December 31, 1999, the Company had outstanding letters of credit of
approximately $10,125,000 for landlord security deposits which reduced the
borrowings available under the revolving loan commitment.
The carrying value of the notes payable approximates its fair value as of
December 31, 1998 and 1999.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. CAPITAL LEASES
The Company is the lessee of office equipment under a number of capital leases
expiring at various dates through 2003.
Minimum future lease payments under capital leases as of December 31, 1999 for
each of the next four years are approximately:
2000 $ 1,298,480
2001 458,563
2002 195,453
2003 29,388
------------------
Total minimum lease payments 1,981,884
Less: amount representing interest (216,860)
------------------
Present value of minimum lease payments $ 1,765,024
==================
9. TRANSACTIONS WITH AFFILIATES
In addition to the RSI transaction described in Note 4, the Company also is a
tenant under nine leases with Reckson Operating Partnership, L.P., an affiliate
of RSI. For the year ended December 31, 1999, the Company paid approximately
$3.4 million, in the aggregate, for rent and other charges under such leases.
For the year ended December 31, 1999, the Company paid OnSite Access, Inc., an
affiliate of RSI, approximately $346,000 for providing internet access and
telecommunication services.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company and its subsidiaries lease certain business center facilities and
their corporate offices under noncancellable operating leases expiring at
various dates through 2014. Certain of these noncancellable operating leases
provide for renewal options.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES (CONTINUED)
Minimum future rental payments under these noncancellable operating leases for
each of the next five years and in the aggregate as of December 31, 1999, are
approximately:
2000 $ 87,933,000
2001 86,677,000
2002 79,617,000
2003 75,162,000
2004 67,324,000
Thereafter 215,484,000
--------------------
$ 612,197,000
====================
The Company is also generally obligated to reimburse the lessor for its
proportionate share of operating expenses, which are not included in the above
amounts.
EMPLOYMENT CONTRACTS
The Company has employment contracts with several executive and non-executive
employees which expire at various times through 2002 and include in some cases
automatic renewal options. These contracts provide for minimum annual base
salaries with annual increases and performance bonuses. The minimum annual base
salary under the employment contracts in the aggregate are as follows:
2000 $ 1,678,802
2001 1,402,894
2002 543,598
--------------------
$ 3,625,294
====================
CUSTODIAL ACCOUNTS
The Company acts as a trustee in connection with business centers that it
manages for unrelated property owners. The cash held in trust and not reflected
on the accompanying consolidated balance sheets approximated $1,036,000 and
$1,910,000 as of December 31, 1998 and 1999, respectively.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER
There are pending claims and litigation against the Company arising in the
ordinary course of business. Management believes, after consultation with
counsel, that these actions will not have a material adverse effect on the
Company's results of operations.
11. INCOME TAXES
The (benefit) provision for income taxes consists of the following:
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ 65,000 $ 260,000 $ 521,000 $ -
Foreign - - - 100,000
State and local 40,000 330,900 164,000 600,000
------------------------------------------------------------------------------
105,000 590,900 685,000 700,000
Deferred:
Federal (1,269,985) 1,792,735 566,000 (3,291,289)
State and local (224,115) 316,365 159,000 (249,349)
------------------------------------------------------------------------------
(1,494,100) 2,109,100 725,000 (3,540,638)
------------------------------------------------------------------------------
Total (benefit) provision $ (1,389,100) $ 2,700,000 $ 1,410,000 $ (2,840,638)
==============================================================================
</TABLE>
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
The following is a reconciliation of the income tax (benefit) expense computed
using the statutory federal income tax rate to the actual income tax (benefit)
expense and its effective income tax rate:
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income tax (benefit) expense at
federal statutory rate $ 507,454 $ 2,308,440 $ 1,138,804 $ (8,248,119)
State and local income taxes, net
of federal income tax benefit 26,400 427,195 213,393 (35,870)
Valuation allowance - - - 4,515,000
Nondeductible goodwill - 17,074 62,222 928,428
Reduction in valuation
allowance (2,001,200) - - -
Impact of tax settlement 56,000 - - -
Other, net 22,246 (52,709) (4,419) (77)
--------------------------------------------------------------------------
$ (1,389,100) $ 2,700,000 $ 1,410,000 $ (2,840,638)
==========================================================================
</TABLE>
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. INCOME TAXES (CONTINUED)
The deferred tax effects of temporary differences as of December 31, 1998 and
1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1999
------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance $ 174,000 $ 332,000
AMT credit carryforward - 252,000
Deferred rent payable 969,000 3,532,000
Net operating losses - 10,302,000
------------------------------------
1,143,000 14,418,000
Less: valuation allowance - (4,515,000)
------------------------------------
1,143,000 9,903,000
------------------------------------
Deferred tax liabilities:
Fixed assets (429,000) (4,665,000)
Intangibles (2,054,000) (2,966,000)
Other - (141,000)
------------------------------------
(2,483,000) (7,772,000)
------------------------------------
Net deferred tax asset (liability)
after valuation allowance $ (1,340,000) $ 2,131,000
====================================
</TABLE>
FAS Statement 109 requires a valuation allowance to be recorded to reduce the
deferred tax assets reported if, based on the weight of the evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Accordingly, a $4,515,000 valuation allowance is required at December
31, 1999.
At December 31, 1999, the Company has available unused net operating loss
carryforwards of approximately $26 million, which principally expire in fiscal
year 2019.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share:
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
-----------------------------------------------------------------
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) $ 2,881,612 $ 4,089,528 $ 1,939,423 $ (21,419,146)
Accretion of preferred stock (846,437) (14,300,008) (7,303,669) (12,251,863)
-----------------------------------------------------------------
Numerator for basic earnings per share-
income (loss) applicable to common stock $ 2,035,175 $(10,210,480) $ (5,364,246) $ (33,671,009)
Effect of dilutive securities:
Accretion of preferred stock 846,437 - - -
-----------------------------------------------------------------
Numerator for diluted earnings per
share-income (loss) applicable to common
stock after assumed conversions $ 2,881,612 $(10,210,480) $ (5,364,246) $ (33,671,009)
=================================================================
Denominator:
Denominator for basic earnings per
share-weighted average shares 4,835,029 4,954,035 4,951,325 5,141,996
Effect of dilutive securities:
Stock options 314,170 - - -
Warrants - - - -
Convertible preferred stock 4,348,869 - - -
-----------------------------------------------------------------
Dilutive potential common shares 4,663,039 - - -
-----------------------------------------------------------------
Denominator for diluted earnings per
share-adjusted weighted average shares
and assumed conversions 9,498,068 4,954,035 4,951,325 5,141,996
=================================================================
</TABLE>
Options and warrants to purchase 3,653,119, 4,158,706, 4,288,706 and 4,050,352
shares of common stock were outstanding as of June 30, 1997, June 30, 1998,
December 31, 1998 and December 31, 1999, respectively, but were not included in
the computation of diluted earnings per share because their effect would have
been anti-dilutive. Additionally, 10,797,562 and 29,837,272 shares of
convertible preferred stock were outstanding as of December 31, 1998 and 1999,
respectively, but were not included in the computation of diluted earnings per
share because their effect would also have been anti-dilutive.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. STOCK OPTION PLANS
During the year ended December 31, 1999, the Company's Board of Directors
approved the adoption of the 1999 Stock Option Plan ("1999 Plan"). The 1999 Plan
provides for the issuance of either incentive or non-qualified stock options to
key employees, directors and consultants. Under the 1999 Plan, options may be
granted at prices, terms and vesting to be determined by the Company's Board of
Directors. Incentive stock options shall not have an exercise price less than
the fair market value of the Company's common stock on the date of the grant.
Options granted under this plan expire ten years from the date of grant and vest
over a three-year period. Under certain conditions, these options may vest on an
accelerated basis. The maximum aggregate number of shares of Class A Common
Stock available for award under the 1999 Plan shall be 2,851,000, subject to
adjustment for stock splits, dividends or otherwise. During 1999, non-qualified
stock options to purchase 2,214,000 shares were granted under this plan. There
were no incentive stock options granted in 1999. At December 31, 1999,
non-qualified options to purchase 2,075,000 shares were outstanding under the
plan after the reduction of 139,000 forfeitures during 1999. None of such shares
were vested at December 31, 1999. There were 776,000 option shares available for
grant at December 31, 1999.
During the Transition Period, options were granted by the Company's Board of
Directors to a key executive, to acquire 200,000 shares of common stock. The
options vested immediately and expire five years from the date of grant.
During fiscal 1997, the Company's Board of Directors approved the adoption of
the 1996 Stock Option Plan ("1996 Plan"). The 1996 Plan provided for the
issuance of non-qualified stock options to key employees, directors and
consultants. Under the 1996 Plan, options were granted at prices determined by
the Company's Board of Directors, but in no case were priced less than $2.00 per
share. Options granted under this plan expire ten years from the date of grant
and vest over a ten-year period. As a result of certain transactions during
1999, all of the Company's outstanding stock options issued under the 1996 Stock
Option Plan became fully vested. Options granted during fiscal 1997 and 1998 to
acquire 1,225,000 and 220,750 shares of common stock, respectively, were granted
under this plan. At December 31, 1999, 766,256 options were outstanding and
fully vested under the 1996 Plan and no further options were available for
grant.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. STOCK OPTION PLANS (CONTINUED)
Certain options, granted in 1996 and 1997, prior to the adoption of the 1996
Plan, generally vested immediately, expire five years from the date of grant and
are exercisable at prices that in the Board's opinion were equal to or exceeded
the fair market value of the Company's common stock on the date of grant.
Certain options granted in 1996, to acquire 440,000 shares of common stock
expire seven years from the date of grant and vest over a three-year period. At
December 31, 1999, 940,000 of such options were outstanding and fully vested.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. STOCK OPTION PLANS (CONTINUED)
The following is a summary of the non-qualified stock options activity for the
years ended June 30, 1997 and 1998, the Transition Period Ended December 31,
1998 and the year ended December 31, 1999:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, TRANSITION PERIOD ENDED YEAR ENDED
1997 1998 DECEMBER 31, 1998 DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISED EXERCISED EXERCISED EXERCISED
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 1,000,000 $ 1.16 2,725,000 $ 1.68 2,525,250 $ 1.98 2,655,250 $ 2.26
Granted 1,725,000 2.00 220,750 2.86 200,000 6.00 2,214,000 6.00
Exercised - - (420,000) 0.50 - - (597,994) 1.68
Forfeited - - - - - - (139,000) 6.00
Retired - - (500) 2.00 (70,000) 2.98 (151,000) 2.02
------------- ------------ ----------- ------------
Options outstanding, end of period 2,725,000 $ 1.68 2,525,250 $ 1.98 2,655,250 $ 2.26 3,981,256 $ 4.30
============= ============ =========== ============
Options exercisable, end of period 1,280,000 $ 1.34 1,092,500 $ 1.81 1,186,583 $ 1.82 1,906,256 $ 2.46
============= ============ =========== ============
Options available for grant, end of
period 245,000 24,250 - 776,000
============= ============ =========== ============
Weighted-average fair value of
options granted during the period $ 0.22 $ 0.61 $ 0.11 $ 0.02
============== ============ ============= =========
</TABLE>
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. STOCK OPTION PLANS (CONTINUED)
The exercise prices for options outstanding as of December 31, 1999 range from
$2.00 to $6.00 per share. The weighted average remaining contractual life for
options outstanding as of December 31, 1999 is approximately 7 years.
The Company has elected to adopt the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized with regard
to options granted under the Plan in the accompanying consolidated financial
statements. If stock-based compensation costs had been recognized based on the
estimated fair values at the dates of grant for options awarded during the years
ended June 30, 1997 and 1998, the Transition Period Ended December 31, 1998 and
the year ended December 31, 1999, the Company's net income and earnings per
share would have been as follows :
<TABLE>
<CAPTION>
TRANSITION
PERIOD ENDED YEAR ENDED
YEARS ENDED JUNE 30, DECEMBER 31, DECEMBER 31,
1997 1998 1998 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income as reported $ 2,881,612 $ 4,089,528 $ 1,939,423 $ (21,419,146)
Net (loss) income - pro forma 2,752,612 4,049,598 1,909,131 (21,547,146)
Basic (loss) earnings per
common share - as reported 0.42 (2.06) (1.08) (6.55)
Basic (loss) earnings per
common share - pro forma 0.39 (2.07) (1.09) (6.57)
Diluted (loss) earnings per
common share - as reported 0.30 (2.06) (1.08) (6.55)
Diluted (loss) earnings per
common share - pro forma 0.29 (2.07) (1.09) (6.57)
</TABLE>
The weighted average fair value of each option has been estimated on the date of
grant using the Black-Scholes options pricing model with the following weighted
average assumptions used for grants for the years ended June 30, 1997 and 1998,
the Transition Period Ended December 31, 1998 and the year ended December 31,
1999, respectively: no dividend yield; expected volatility of 0%, risk free
interest rates of 6.2%, 5.7%, 5.3% and 5.4%, respectively; and expected lives
approximating 5 years.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. BENEFIT PLAN
The Company has a 401(k) voluntary savings and investment plan (the "Plan") open
to all employees who meet certain minimum requirements. The Company can make
voluntary contributions to the Plan not to exceed 6% of eligible participant
compensation. Participants vest 100% in Company contributions after 3 years of
service. The Company contributed approximately $21,000, $95,000, $86,000 and
$507,000 to the Plan for the years ended June 30, 1997 and 1998, the Transition
Period Ended December 31, 1998 and the year ended December 31, 1999,
respectively.
15. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the Mergers, the Company authorized 15,000,000 shares of
Series C Preferred Stock, which ranks on parity with the Company's Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock ("Series A
Preferred Stock" and "Series B Preferred Stock", respectively). 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.
During the year ended December 31, 1999, the Company authorized 5,200,000 shares
and issued 5,109,873 shares of Series D Convertible Preferred Stock ("Series D
Preferred Stock") at $5.25 per share for net proceeds of approximately $26.5
million (net of issuance costs of $284,450). The Series D Preferred Stock has a
liquidation preference of $5.25 per share.
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, Series C Preferred Stock and
Common 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.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
During the year ended December 31, 1999, the Company authorized 1,000,000 shares
and issued 604,413 shares of Series E Preferred Stock at $5.25 per share for net
proceeds of approximately $3.1 million (net of issuance costs of $99,467). The
Series E Preferred Stock has a liquidation preference of $5.25 per share. 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,
Series C Preferred Stock and Common 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.
During the Transition Period, the Company issued 817,853 shares of Series B
Preferred Stock to acquire the remaining interests in all of its seven
controlled partnerships. Concurrent with this transaction, the Company issued
480,236 shares of Series B Preferred Stock for net proceeds of $2,266,121 (net
of issuance costs of $15,000). The Company also issued 200,000 shares of
Series B Preferred Stock to a key executive in exchange for a recourse note of
$950,000, due on August 4, 2001, bearing interest at the rate of 5.48%,
payable annually.
During fiscal 1998, the Company authorized 3,500,000 shares and issued 1,730,062
shares of Series B Preferred Stock for net proceeds of $7,874,400 (net of
issuance costs of $343,395). In connection with the Series B Preferred Stock
offering, the Company issued 54,380 warrants to purchase the Company's common
stock. The warrants are exercisable at $4.75 per share and the 15,810 remaining
outstanding warrants expire on April 30, 2003.
During fiscal 1997, the Company authorized and issued 7,574,711 shares of Series
A Preferred Stock for net proceeds of $11,257,610 (net of issuance costs of
$1,430,455) and the conversion of $220,000 in notes payable to directors. In
connection with the Series A Preferred Stock offering, the Company issued
1,488,119 warrants to purchase the Company's common stock.
The Series A and Series B Preferred Stock rank on a parity with each other and
with the Series C Preferred Stock and senior to the Company's common stock with
respect to payment of dividends and liquidation preferences. The holders of
Preferred Stock are entitled to non-cumulative cash dividends when and as
declared by the Company's Board of Directors in an amount equal to any
equivalent per share cash dividend declared on the common stock. The shares of
the Series A Preferred Stock and Series B Preferred Stock
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
are convertible, in whole or in part, at any time prior to November 15, 2004, at
the option of the holder, into an equivalent number of shares of Class A Common
Stock (subject to adjustments for certain dilutive events). Mandatory conversion
of such shares into Class A Common Stock will occur at the conversion rate
described in the preceding sentence upon an initial public offering meeting
certain quantitative standards.
Upon the occurrence of certain liquidation events, the holders of Preferred
Stock shall be entitled to receive an amount per share equal to $1.7041 (in
the case of the Series A Preferred Stock), $4.75 (in the case of the Series B
Preferred Stock and Series C Preferred Stock) or $5.25 (in the case of Series
D Preferred Stock and Series E Preferred Stock), plus a cumulative return
computed on each such amount at the rate of 8% per annum for the period for
which such shares were outstanding less the aggregate amount of all declared
and paid cash dividends on such shares, if any. The holders of Preferred Stock
are entitled to vote, on any matter requiring shareholder vote, equivalent to
the number of shares of common stock into which such shares are convertible.
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 holders of the outstanding shares of the preferred stock may require
the Company to repurchase (the "Put") such shares at a price per share equal
to the greater of (i) $1.7041 (in the case of the Series A Preferred Stock),
$4.75 (in the case of the Series B Preferred Stock and Series C Preferred
Stock), and $5.25 (in the case of Series D Preferred Stock and Series E
Preferred Stock) plus a cumulative return computed on each such amount at the
rate of 8% per annum for the period for which such shares were outstanding
less the aggregate amount of all declared and paid cash dividends on such
shares, if any, or (ii) the appraised value of the common stock into which the
Preferred Stock is then convertible. The exercise of the Put requires
participation by 66-2/3% of the then outstanding series of Preferred Stock and
is subject to the consent of the Company's senior lender.
In connection with the Put, at each balance sheet date the Company is
accreting the difference between the carrying value of the preferred stock and
the estimated maximum repurchase price as a reduction in retained earnings.
The aggregate reduction as of December 31, 1999, was $34,701,977.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. TRANSITION PERIOD COMPARATIVE DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1998 1997
-------------------------------
(UNAUDITED)
<S> <C> <C>
Revenues $ 54,057,186 $ 27,179,231
===============================
Contribution from operation of business centers $ 11,946,881 $ 6,605,804
===============================
Income before income taxes $ 3,349,423 $ 3,266,256
Provision for income taxes 1,410,000 1,305,000
-------------------------------
Net income $ 1,939,423 $ 1,961,256
===============================
Net (loss) income applicable to
common stock $ (5,364,246) $ 1,290,736
===============================
Share information:
Basic earnings:
Net (loss) income per common share $ (1.08) $ 0.27
===============================
Average shares outstanding 4,951,325 4,843,468
===============================
Diluted earnings:
Net (loss) income per common share $ (1.08) $ 0.16
===============================
Average shares outstanding 4,951,325 12,591,972
===============================
</TABLE>
17. SUBSEQUENT EVENTS
On January 5, 2000, the Company issued 2,072,745 shares of Series E Convertible
Preferred Stock to RSI at a price of $5.25 per share. In connection with the
offering, the Company increased the authorized preferred stock to 33.5 million
shares and the authorized common stock to 63.5 million shares, of which 41.0
million shares are designated as Class A Common Stock and 22.5 million shares
are designated as Class B Common Stock.
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. SUBSEQUENT EVENTS (CONTINUED)
On January 20, 2000, the Company executed an agreement and plan of merger (the
"HQ Merger Agreement") pursuant to which the Company will be merged (the "HQ
Merger") with and into HQ Global Workplaces, Inc. ("HQ").
In connection with the HQ Merger, (i) each share of the common stock of the
Company will be converted into the right to receive $8.00 per share in cash;
(ii) each share of the convertible preferred stock of the Company that is
outstanding will be converted into the right to receive that number of shares of
the surviving corporation that equal to the product of the number of shares of
the common stock of the Company that such shareholder would have been entitled
to receive had it converted its shares immediately prior to the HQ Merger and
the Conversion Ratio (as defined in the HQ Merger Agreement); and (iii) each
option and warrant to purchase the common stock of the Company, other than
options under the 1996 Plan, will be converted into the right to receive a per
share cash amount equal to $8.00, less the exercise price for such options or
warrants, as the case may be, subject, in each case, to adjustment as provided
in the HQ Merger Agreement. In connection with the HQ Merger, the Company
established a $35 million letter of credit as a deposit to HQ in the event the
HQ Merger is not consummated under certain circumstances.
Effective January 2000, a wholly-owned subsidiary of the Company acquired the
stock of an entity that owned a business center for a cash purchase price of
$779,000.
<PAGE>
Supplemental Schedule
<PAGE>
VANTAS Incorporated And Subsidiaries
Schedule II - Valuation And Qualifying Accounts
<TABLE>
<CAPTION>
ADDITIONS
------------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS DEDUCTIONS - END OF
DESCRIPTION PERIOD EXPENSES RECEIVABLE DESCRIBE (1) PERIOD
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999 $ 401,000 $ 1,291,485 $ - $ 831,485 $ 861,000
================================================================================
Transition period ended December 31, 1998
Allowance for doubtful accounts $ 266,000 $ 250,672 $ - $ 115,672 $ 401,000
================================================================================
Year ended June 30, 1998
Allowance for doubtful accounts $ 257,000 $ 387,900 $ - $ 378,900 $ 266,000
================================================================================
Year ended June 30, 1997
Allowance for doubtful accounts $ 55,000 $ 205,688 $ - $ 3,688 $ 257,000
================================================================================
(1) Accounts written off.
</TABLE>
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
By:/s/ David Rupert
--------------------------
David Rupert
Chief Executive Officer
Date: February 28, 2000
