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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 1998 AND
|X| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from July 1, 1998 to December 31, 1998
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 (I.R.S. Employer
incorporation or organization) Identification No.)
90 PARK AVENUE, SUITE 3100 10016
NEW YORK, NY (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code: (212) 907-6400
_________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
_________________
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 |_| No |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. |X|
The number of the Registrant's shares of Class A common stock, par value
$.01 per share, outstanding was 7,064,222 as of December 31, 1999. There is no
established trading market for the Class A common stock.
DOCUMENTS INCORPORATED BY REFERENCE
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None
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM FORM 10-K T
NO. REPORT PAGE
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PART I
<S> <C> <C>
1. Business ................................................................I-1
2. Properties ..............................................................I-6
3. Legal Proceedings .......................................................I-8
4. Submission of Matters to a Vote of Security Holders .....................I-8
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters....II-1
6. Selected Financial Data..................................................II-1
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................II-3
7(A). Quantitative and Qualitative Disclosures about Market Risk ..............II-11
8. Financial Statements and Supplementary Data..............................II-12
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.....................................................II-39
PART III
10. Directors and Executive Officers of the Registrant.......................III-1
11. Executive Compensation...................................................III-4
12. Security Ownership of Certain Beneficial Owners and Management...........III-6
13. Certain Relationships and Related Transactions...........................III-8
PART IV
14. Financial Statements and Schedules, Exhibits and Reports on Form 8-K.....IV-1
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
VANTAS Incorporated ("VANTAS"), previously known as ALLIANCE NATIONAL
INCORPORATED, and prior to that, Executive Office Group, Inc., is the largest
owner-operator of business centers and provider of related business support
services in North America with, as of December 31, 1999, 198 operating business
centers (including 5 centers that are managed for third party owners). As of
December 31, 1999, VANTAS also had entered into leases with respect to the
development of an additional 11 business centers that are not yet opened for
occupancy. VANTAS's operating business centers are located in 26 states, the
District of Columbia, France and Mexico and total over 3.7 million square feet
and approximately 13,000 rentable offices. Business center location is a key
consideration in VANTAS's business plan. VANTAS leases a large percentage of its
business centers in Class A office buildings. VANTAS does not own any real
estate. VANTAS was organized in 1986 as a Nevada corporation.
VANTAS provides a complete outsourced office solution through furnished
and equipped individual offices and multi-office suites available on short
notice with flexible contracts. VANTAS 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. VANTAS also provides similar services for
those businesses and individuals that do not require offices on a full-time
basis. Such products and services enhance the professional appearance of clients
and allow them to immediately focus on their respective businesses while
avoiding the costs and distractions of establishing and managing their own
fully-equipped facility. In most cases, equipment and services provided by
VANTAS are superior to those which clients would otherwise use due to the
ability of VANTAS to spread the expense of acquiring and maintaining such
equipment and services over a larger base of users.
Since 1996, VANTAS has grown through an aggressive acquisition strategy.
As of December 31, 1999, VANTAS had acquired or merged with 37 entities, which
were comprised of 183 business centers at a total cost of approximately $205.7
million.
VANTAS changed its fiscal year end from June 30th to December 31st which
resulted in a six month Transition Period ending December 31, 1998. The decision
to change the fiscal year was made pursuant to the merger agreement discussed
below.
SUBSEQUENT DEVELOPMENTS
In January 1999, two newly formed subsidiaries of VANTAS were merged (the
"Mergers") with and into InterOffice Superholdings 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 VANTAS and the former shareholders
of such entities received 13,325,424 shares of VANTAS's Series C Convertible
Preferred Stock ("Series C Preferred Stock"), and VANTAS 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 approximate 24% equity interest in VANTAS in the form
of Series C Preferred Stock, which it holds through two limited liability
companies (the "RSI LLC's").
VANTAS 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 VANTAS, provided certain third party and "most-favored nation"
conditions are satisfied.
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<PAGE>
In connection with the Mergers, certain of the stockholders of VANTAS,
including the RSI 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
VANTAS (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 VANTAS's annual
operating budget, certain borrowings and capital expenditures by VANTAS, 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
VANTAS (including the holders of VANTAS's Series A Convertible Preferred Stock
("Series A Preferred Stock"), Series B Convertible 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 VANTAS 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
VANTAS.
RSI has entered into agreements with certain shareholders of VANTAS,
including members of VANTAS's senior management and former members of the Board,
relating to the purchase of all or part of such shareholders' securities in
VANTAS, including capital stock related to the exercise of vested stock options
by members of senior management. Under the terms of the agreements with senior
management and former members of the Board, VANTAS 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 VANTAS. Certain of the purchases
contemplated by these agreements have been completed, including the purchases
from VANTAS's senior management and former members of the Board. As of December
31, 1999, RSI owned, directly or indirectly, approximately 63% of the
outstanding capital stock of VANTAS. 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 VANTAS's outstanding
capital stock.
As of the date of filing of this report, the Board was comprised of David
Beale, VANTAS's Chief Executive Officer and President, Scott Rechler, Daniel
DiSano, Christopher George, Jon Halpern, Jeffrey Neumann and Stephen Rathkopf.
Messrs. Rechler, DiSano, George, Neumann and Rathkopf are officers of RSI.
OFFICE OPERATIONS
VANTAS offers its clients various customized office solution plans based
on their particular needs and preferences. The two most popular plans are
OfficePlus(TM) (full-time program) and OfficeAccess(TM) (part-time program).
Details of these services are described below:
OFFICEPLUS(TM) : VANTAS's full-service office program provides clients
with fully furnished and equipped individual offices and suites and a full array
of business support services without substantial investment of time and money,
enabling companies to allocate resources more effectively. In addition to a
fully furnished office and access to such business support services, clients
receive the following additional amenities and benefits:
o Convenient location with a prestigious address and building
directory lobby listing;
o Reception area with a receptionist to greet and announce guests;
o Personalized telephone answering, message services and voice mail;
o Incoming mail and package handling;
o Access to conference rooms equipped with audio visual equipment;
o Kitchen facilities with complimentary coffee and tea service; and
o Specified complimentary use at any of the almost 200 VANTAS
affiliated business center locations worldwide.
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OFFICEACCESS(TM): Certain of VANTAS's clients prefer to maintain a local
presence in a particular market or to access VANTAS's worldwide network and to
utilize many of the services offered by VANTAS, but do not need a full-time
office. As a result, VANTAS offers a part-time plan called the OfficeAccess(TM)
program. Clients receive a prestigious address, building directory lobby
listing, personalized telephone answering, message and voice mail services,
facsimile capabilities, incoming mail handling and limited use of conference
rooms and/or offices on an availability basis. Certain clients may have needs
that are more limited and may use only a portion of these services.
The OfficeAccess(TM) program provides flexibility for VANTAS's clients.
For example, as a client grows, it can transfer into an OfficePlus(TM) program.
Similarly, should an OfficePlus(TM) client need to downsize, it can adjust its
overhead and participate as an OfficeAccess(TM) client in a seamless manner.
SUPPORT SERVICES
VANTAS offers a variety of additional services to its OfficePlus(TM) and
OfficeAccess(TM) clients on an as-needed basis and charges for these services
according to a price schedule. The most widely used services offered by VANTAS
include the following:
TELEPHONE SERVICES AND EQUIPMENT: VANTAS offers a variety of telephone
services and provides related equipment.
SECRETARIAL AND OTHER ADMINISTRATIVE SERVICES: VANTAS offers a variety of
administrative services to its clients who are charged on an hourly basis. Such
services, which are a key determinant in a client's decision to choose a
business center, include word processing and secretarial services, desktop
publishing/graphics design, clerical services (i.e., photocopying, filing,
labeling, concierge services, etc.), and technical support services
(hardware/software).
PHOTOCOPYING SERVICES: VANTAS provides on-site high-speed copying
capabilities to its clients for a base charge per page.
FACSIMILE SERVICES: Incoming and outgoing facsimile services are provided
to clients at per page rates.
BROADBAND INTERNET ACCESS: The Internet has become a powerful medium of
information and communication and has been widely adopted by business people.
VANTAS provides clients with high-speed broadband access to the Internet.
In addition, VANTAS offers additional services such as conference room
rentals, video conferencing services, office supplies, parking and other various
services.
CLIENTS
As of December 31, 1999, VANTAS had approximately 6,000 full-time clients,
representing approximately 17,000 people, and 5,000 part-time clients for a
total of 11,000 clients across all of its business centers. Approximately 60% of
its OfficePlus(TM) clients are regional or national companies, often purchasing
VANTAS services at multiple locations. National and regional firms generally
prefer doing business with a larger, well-capitalized business center operator,
such as VANTAS, in order to ensure longevity and consistency of service, as well
as the ability to contract for multiple locations in multiple markets with a
single provider. In return, the largest business center operators typically
obtain more favorable terms than single site operators who are unable to provide
this level of service. Some of VANTAS's clients include 3Com Corporation,
Microsoft Corp., Gateway, Inc., Netscape Communications Corporation, John
Hancock Mutual Life Insurance Company, Hyperion Solutions Corporation, Fidelity
Investments, Lucent Technologies, Inc., Novell, Inc., GE Capital Corporation,
and Northpoint Communications. No single client accounts for more than 1% of
VANTAS revenues.
SUPPLIERS AND VENDORS
VANTAS's main vendors are its landlords from whom it leases office space.
These landlords include primarily large real estate companies from which VANTAS
leases space at multiple locations. On average, the initial lease terms are 10
years. VANTAS's landlords include Principal Mutual Life Insurance Company,
Reckson Operating Partnership, L.P., Boston Properties, Inc., Duke-Weeks Realty
Corporation, Blue Cross and Blue Shield Association, and NationsBank, N.A. No
single landlord accounts for more than 3.0% of the aggregate annual rental
payments made by VANTAS.
VANTAS also contracts with highly reputable suppliers such as Federal
Express Corporation, Dell Computer Corporation, Staples, Inc., Qwest
Communications International, Inc., and PeopleSoft, Inc. for services including
long distance, shipping, office supplies, and computer equipment. Given VANTAS's
scale and international reach, it typically receives favorable treatment and
generally is able to negotiate volume discounts from suppliers.
I-3
<PAGE>
LEASES AND CLIENT OFFICE SERVICE AGREEMENTS
The initial terms of the agreements pursuant to which VANTAS leases office
space from landlords average approximately 10 years and, in most cases, carry
lease renewal options at 95% to 100% of fair market value. In any given year, a
portion of the leases held in VANTAS's portfolio of leases will be eligible for
renewal. This lease expiration diversity enables VANTAS to manage lease rates on
a portfolio basis. In the years ending December 31, 2000, 2001 and 2002, 4.4%,
11.8% and 11.3% of the leases are scheduled to expire, respectively.
VANTAS provides furnished office space to tenants on short-term notice
with flexible terms. A number of a business center's clients leave a facility
during the course of a year and, therefore, maintaining high occupancy requires
ongoing sales efforts. Despite the short-term nature of the office service
agreements, however, many clients have elected to renew their office service
agreements and have remained clients for longer periods of time. VANTAS
estimates that the historical average length of stay of its clients is
approximately two to three years. At December 31, 1999, VANTAS's average annual
occupancy rate for business centers owned and operated by VANTAS was
approximately 85%. Although VANTAS's occupancy rates vary from one period to
another and is not the only determinant in VANTAS's ability to generate revenues
and profits, the continued profitability of VANTAS is dependent upon
sufficiently high occupancy rates.
COMPUTER SYSTEMS
VANTAS has nearly completed the process of upgrading its information
technology system to enhance functionality and centralize information and
reporting capabilities. The newly developed infrastructure supports future
growth objectives and provides an enhanced organizational structure.
THE INDUSTRY
The Executive Suite Association, the industry's trade association,
estimates that there are currently approximately 4,000 business center locations
in the U.S. generating in excess of $3.0 billion of annual revenues, and 1,500
locations internationally. The industry is highly fragmented with approximately
10% of total business centers owned by the three largest participants, including
VANTAS.
Several trends are driving the increased acceptance and usage of business
centers, including:
o the increasingly widespread use of business centers facilities by
national and regional corporations to support mobile employees;
o the growth in the number of small businesses nationwide requiring
more flexible office space and related services;
o the growth in the number of home-based businesses and free agents
utilizing part-time office facilities for meetings and support
services;
o the continuing trend of corporate downsizing which often results in
the need for temporary office space for former employees seeking new
jobs and/or starting new businesses;
o the growing use and acceptance of enhanced telecommunication and
computer technologies which can help businesses create "virtual
offices" without fixed space requirements; and
o the increased awareness by commercial real estate owners that
business centers can enhance their building's occupancy and
efficiency, provide amenities to existing tenants (such as
conference facilities and offices for visiting executives) and act
as an incubator for future tenants.
Furthermore, the emergence of certain communications technologies has
played an important role in the growth of the industry. Improved telephony
services and Internet applications have become more frequently utilized and
integrated into business centers' service offerings. As the industry continues
to expand, office equipment and communications technology will become an
increasingly competitive factor. Business center operators are likely to face
pressure to invest in technology in order to offer services such as E-mail and
LANs as well as video conferencing. It is believed that higher levels of
investment and technological sophistication will lead to further industry
consolidation. Operators with access to capital and economies of scale, such as
VANTAS, are well positioned to lead this consolidation by providing this
sophisticated technological support to their clients.
I-4
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COMPETITION
VANTAS's largest competitors are Regus Business Corp., a business center
company with a large international presence and a smaller but expanding presence
in the United States, and HQ Global Workplaces Inc., a company which is
controlled by CarrAmerica Realty Corp. and is an owner and franchiser of
business center locations in the U.S. and several countries internationally.
VANTAS may compete with these and other entities in both the search for
attractive business center locations and in attracting and retaining clients in
its business centers as well as skilled managers.
EMPLOYEES
As of December 31, 1999, VANTAS employed approximately 1,200 people. None
of VANTAS's employees are covered by collective bargaining agreements and
management believes its relations with its employees are good. VANTAS is
continually implementing and improving its operating systems, and expanding,
training and managing its employees.
Management compensation consists of base salaries, incentive compensation
based upon Company performance and qualitative discretionary bonuses. In
addition, officers and managers participate in a stock option plan designed to
motivate long-term contribution to VANTAS.
I-5
<PAGE>
ITEM 2. PROPERTIES
VANTAS corporate headquarters is located at 90 Park Avenue, New York, New
York 10016. Management believes that such office space is sufficient to meet its
present needs and does not anticipate any difficulty in securing additional
office space, as needed, on terms acceptable to VANTAS.
CURRENT BUSINESS CENTERS
As of December 31, 1999, VANTAS owns and operates 187 business centers
(including 5 managed centers) in 26 states and the District of Columbia. In
addition, VANTAS owns five business centers in France and six business centers
in Mexico. For the twelve month period ended December 31, 1999, no business
center accounted for more than 2% of VANTAS's revenues. Further, for the
twelve-month period ended December 31, 1999, less than 5% of VANTAS's total
revenues were generated from business centers located outside of the United
States. Business center location is a key consideration in VANTAS's expansion
plan given that convenient locations attract more clients and thus lead to
higher occupancy rates. VANTAS leases all of its facilities and does not own any
real estate.
VANTAS business centers by location as of December 31, 1999:
<TABLE>
<CAPTION>
# OF BUSINESS RENTABLE
LOCATION CENTERS OFFICES
-------- ------- -------
UNITED STATES
<S> <C> <C>
Alabama 2 133
Arizona 5 377
California 48 3,375
Colorado 6 403
District of Columbia 7 501
Florida 5 393
Georgia 10 566
Illinois 11 740
Indiana 1 66
Kansas 1 84
Massachusetts 6 404
Maryland 4 320
Michigan 6 455
Minnesota 3 237
Missouri 2 137
North Carolina 3 225
New Jersey 4 187
New York 19 1,269
Ohio 9 540
Oklahoma 1 53
Oregon 1 20
Pennsylvania 3 195
Tennessee 2 138
Texas 14 1,055
Virginia 10 728
Washington 3 218
Wisconsin 1 51
Total United States 187 12,870
INTERNATIONAL
France 5 167
Mexico 6 228
Total International 11 395
GRAND TOTAL WORLDWIDE 198 13,265
</TABLE>
I-6
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INTERNATIONAL EXPANSION
Management believes that, in today's global marketplace with today's
technology, a global presence is advantageous. In order to continue to develop a
strong international account program, VANTAS is exploring expansion
opportunities in business communities where its clients do business globally.
VANTAS's expansion plans are focused primarily on establishing an international
footprint in Western Europe, Canada and Latin America. VANTAS's international
expansion strategy entails the development of a presence in these markets
through acquisition and new center development.
I-7
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ITEM 3. LEGAL PROCEEDINGS
VANTAS is not presently subject to any material litigation nor, to
VANTAS's knowledge, is any litigation threatened against VANTAS, other than
claims and administrative proceedings arising in the ordinary course of
business, some of which are expected to be covered by liability insurance and
all of which collectively are not expected to have a material adverse effect on
the liquidity, results of operations or business or financial condition of
VANTAS.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 29, 1998, an action by written consent was executed by holders
of 13,550,753 shares of VANTAS's outstanding voting capital stock, representing
86.3% of such outstanding voting capital stock, approving, among other things,
the consummation of the Mergers, the issuance of the Series C Preferred Stock,
and certain amendments to VANTAS's amended and restated articles of
incorporation in order to effectuate the Mergers.
I-8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
VANTAS is owned primarily by RSI and certain officers, directors and
employees of VANTAS. An established public market for the common equity of
VANTAS does not currently exist. Therefore, accurate information as to the
market value of the common equity of VANTAS at any given date is not available.
VANTAS has not paid and does not anticipate the payment of any dividends
on its common stock in the foreseeable future. Payment of dividends on VANTAS's
common stock is prohibited under VANTAS's credit facilities unless approved by
the requisite banks thereunder. The payment of dividends will also be subject to
any limitations imposed by other credit facilities and debt securities that
VANTAS may obtain or issue in the future.
On April 29, 1998, VANTAS issued and sold 1,730,062 shares of Series B
Preferred Stock at a price of $4.75 per share, for an aggregate cash purchase
price of $8,217,795. On August 4, 1998, VANTAS issued and sold 200,000 shares of
Series B Preferred Stock to David Beale, VANTAS's President and Chief Executive
Officer, at a price of $4.75 per share, for a purchase price of $950,000. The
purchase price was paid in the form of an interest-bearing promissory note.
On December 21, 1998 (with an effective date of July 1, 1998), VANTAS
issued 897,789 shares of Series B Preferred Stock, valued at $4.75 per share, to
the limited partners of limited partnerships then managed by VANTAS in exchange
for the limited partnership units held by such persons. VANTAS also made cash
payments in connection with such exchange. The cash payment was financed through
the issuance and sale of 395,000 shares of Series B Preferred Stock to certain
existing shareholders of VANTAS, at a price of $4.75 per share, for an aggregate
cash purchase price of $1,876,250.
VANTAS issued and sold all of the above-referenced securities pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the "Act"), and Rule 506
promulgated thereunder. The offerings were 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 B Preferred Stock provide for (1) automatic
conversion into shares of VANTAS's Class A Common Stock ("Class A Common
Stock"), in the event of an initial public offering of VANTAS'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. The conversion rate is currently one to one, but such
rate is subject to adjustment in the event of certain dilutive events.
In addition, during VANTAS's fiscal year ended June 30, 1998, certain
directors and an officer of VANTAS exercised, in the aggregate, options to
acquire 420,000 shares of the Class A Common Stock, at a per share price of $.50
share. The aggregate cash proceeds received by VANTAS in connection with such
exercises was $210,000. VANTAS issued and sold all of the above-referenced
securities pursuant to Section 4(2) of the Act.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN MILLIONS, EXCEPT PER SHARE DATA)
Set forth below are selected historical consolidated statement of operations
data of VANTAS as of the dates and for the periods presented. The selected
historical consolidated statement of operations data for the years ended June
30, 1996, 1997, 1998, and the six months ended December 31, 1998 and the
selected historical consolidated balance sheet data as of June 30, 1996, 1997,
1998 and December 31, 1998 were derived from the audited Consolidated Financial
Statements of VANTAS, which are included herein. The selected historical
consolidated statement of operations data for the six months ended December 31,
1997 and the selected consolidated balance sheet as of December 31, 1997 were
derived from the unaudited consolidated financial statements which are not
included herein. The selected historical consolidated statements of operations
data for the years ended June 30, 1994 and 1995 and the selected historical
consolidated balance sheet data as of June 30, 1994 and 1995 were derived from
the audited consolidated financial statements of VANTAS, which are not included
herein. The information contained in this table and accompanying notes should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and the accompanying notes thereto appearing elsewhere herein
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<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
------------------ ---------------------
1994 (2) 1995 1996 (3) 1997 (4) 1998 (5) 1997 (6) 1998 (7)
-------- ---- -------- -------- -------- -------- --------
(Restated) (8) (Restated) (8)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 5.9 $ 8.9 $ 12.0 $ 29.1 $ 66.5 $ 27.2 $ 54.1
Net income (loss) (1.0) (0.3) 0.6 2.9 4.1 2.0 1.9
Net income (loss) applicable to common stock (1.0) (0.3) 0.6 2.0 (10.2) 1.3 (5.4)
Basic earnings (loss) per share $ (0.23) $ (0.07) $ 0.12 $ 0.42 $ (2.06) $ 0.27 $ (1.08)
Diluted earnings (loss) per share $ (0.23) $ (0.07) $ 0.12 $ 0.30 $ (2.06) $ 0.16 $ (1.08)
Other Operating Data:
EBITDA (1) $ (0.1) $ 0.2 $ 1.0 $ 2.9 $ 12.4 $ 5.6 $ 9.0
EBITDA as a % of revenues (1.7%) 2.2% 8.8% 10.1% 18.6% 20.6% 16.6%
Cash flows provided by (used in ) operating
activities (0.2) 0.5 (0.1) 4.0 11.5 4.4 7.1
Cash flows used in investing activities (0.1) (0.8) (1.6) (22.5) (38.8) (14.4) (44.2)
Cash flows provided by financing activities 0.6 0.4 1.8 19.4 31.8 10.8 34.7
<CAPTION>
As of June 30, As of December 31,
------------------ -----------------
1994 1995 1996 1997 1998 1997 1998
-------- ---- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficiency) $ (0.6) $ (1.3) $ (1.0) $ 0.5 $ 4.6 $ 1.5 $ 4.3
Total assets 4.1 4.4 6.0 36.1 92.7 52.1 134.1
Long-term debt 0.1 - - 11.5 38.0 23.0 65.1
Other long-term liabilities 2.6 2.8 2.9 5.7 21.6 7.6 17.3
Redeemable convertible preferred stock - - - 12.3 34.5 11.5 47.9
</TABLE>
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(1) Earnings (loss) before interest, income taxes, depreciation and
amortization ("EBITDA") is not intended to represent cash flow in
accordance with generally accepted accounting principles ("GAAP") and does
not represent the measure of cash available for distribution. EBITDA is
presented supplementally because management believes it allows for a more
complete analysis of results of operations. EBITDA is commonly used to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA is not intended as an alternative to earnings from
continuing operations or net income and should not be considered as an
indicator of overall financial performance. EBITDA is not a measurement
under GAAP and may not be comparable with other similarly titled measures
of other companies that do not compute EBITDA in the same manner.
(2) For the year ended June 30, 1994, in 2 unrelated acquisitions, VANTAS
acquired 2 business centers for an aggregate purchase price of $ 1.4
million.
(3) For the year ended June 30, 1996, in 1 acquisition, VANTAS acquired 3
business centers for an aggregate purchase price of $ .8 million.
(4) For the year ended June 30, 1997, in 3 unrelated acquisition, VANTAS
acquired 25 business centers for an aggregate purchase price of $22.8
million.
(5) For the year ended June 30, 1998, in 14 unrelated acquisition, VANTAS
acquired 44 business centers for an aggregate purchase price of $42.8
million.
(6) For the six months ended December 31, 1997, in 4 unrelated acquisitions,
VANTAS acquired 12 business centers for an aggregate purchase price of
$13.5 million.
(7) For the six months ended December 31, 1998, in 6 unrelated acquisitions,
VANTAS acquired 16 business centers for an aggregate purchase price of
$16.5 million. Additionally, VANTAS was the General Partner and manager
for seven limited partnerships (the "Partnerships"), which owned and
operated 9 business centers. These business centers were either acquired
or developed by VANTAS on behalf of the Partnerships. Effective July 1,
1998, VANTAS acquired the remaining interest in these partnerships for
817,353 shares of Series B Preferred Stock and cash of approximately $2.0
million.
(8) See Note 16 to the Consolidated Financial Statements with regard to the
restatements.
II-2
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K for the Transition Period, together with
other statements and information publicly disseminated by VANTAS contain certain
"forward-looking" statements, as that statement is defined in the Private
Securities Litigation Reform Act of 1995. VANTAS 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 VANTAS, 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 VANTAS and (vi) increases in operating costs. Accordingly,
there is no assurance that VANTAS's expectations will be realized.
The following discussion should be read in conjunction with the
accompanying Consolidated Financial Statements and Notes thereto.
As of December 31, 1998, VANTAS owned and operated 98 business centers
throughout the United States and the District of Columbia. This included 6
business centers, which were currently under development, and business centers
that had been open for nine months or less (collectively "Developing Centers").
Additionally, VANTAS manages business centers for unrelated third parties.
The following table represents certain information relating to business
centers under management as of: JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998
DECEMBER 31, 1997 DECEMBER 31, 1998
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1997 June 30, 1998 December 31, 1997 December 31, 1998
------------- ------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Owned and operating 9 35 80 47 92
Developing Centers 2 2 3 2 6
Managed for unrelated third parties 3 3 5 3 5
Total business centers under management 14 40 88 52 103
</TABLE>
VANTAS has grown through an aggressive acquisition strategy beginning in
1996. Since July 1, 1995, VANTAS had acquired or merged with 24 entities, which
were comprised of 88 business centers with a total purchase price of
approximately $82.9 million.
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<PAGE>
The following table represents a summary of information regarding the
acquisitions of business centers by VANTAS:
<TABLE>
<CAPTION>
I--------- FOR THE YEARS ENDED ------------I I ------- FOR THE SIX MONTHS ENDED ---------I
JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1998 DECEMBER 31,1997 DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C>
Number of business centers 3 25 44 12 16
acquired
Purchase price $.8 $ 22.8 $ 42.8 $13.5 $ 16.5
Number of acquisitions 1 3 14 4 6
</TABLE>
Additionally, VANTAS was the General Partner and manager for seven limited
partnerships (the "Partnerships"), which owned and operated 9 business centers.
These business centers were either acquired or developed by VANTAS on behalf of
the Partnerships. Effective July 1, 1998, VANTAS acquired the remaining interest
in these partnerships for 817,353 shares of Series B Preferred Stock and cash of
approximately $2.0 million.
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 operations, it is expected to have a positive impact on the financial
results of operations of VANTAS.
These activities have had a material impact on the results of operations
and financial position of VANTAS and significantly affect the comparability of
the respective prior periods.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (THE "TRANSITION PERIOD") AND 1997
REVENUES. Total business center revenues for the Transition Period in 1998 were
$54.1 million, an increase of $26.9 million or 98.9% from the corresponding
period in 1997.
Business centers that were acquired after July 1, 1997 ("Acquired
Centers") had revenues for the Transition Period and 1997 of $28.6 million and
$4.2 million, respectively, representing an increase of $24.4 million from the
corresponding period in 1997. This increase in revenues resulted primarily from
an increase in the number of and timing 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 Transition Period of $24.6 million, an increase of $2.1
million, or 9.3% from the corresponding period in 1997. The increase in Same
Center revenues is attributable to an increase in office rental revenues of $1.1
million, or 8.1%, and an increase in support service revenues of $1.0 million,
or 11.2% from 1997. Office rental revenues increased due to more favorable
office pricing as well as an increase in occupancy levels. The increase in
support services is primarily attributable to an increase in OfficeAccess(TM)
and telecommunication revenues.
Developing Center revenues were $ .9 million for the Transition Period, an
increase of $ .4 million, or 80%, from the corresponding period in 1997 is
principally due to an increase in the number of developing centers, from 2 to 6.
EXPENSES. Total business center expenses for the Transition Period were $42.1
million, representing an increase of $21.5 million, or 104.6% from the
corresponding period in 1997.
Acquired Center expenses for the Transition Period and the corresponding
period in 1997 were $23.0 million and $3.0 million, respectively, representing
an increase of $20.0 million from the corresponding period in 1997. This
increase resulted primarily from an increase in the number of and timing of
business centers acquired as compared to those acquired in the comparable period
of the prior year.
II-4
<PAGE>
Same Center expenses for the Transition Period were $17.8 million, an
increase of $ .8 million, or 4.7% from the corresponding period in 1997. This
increase is primarily attributable to higher payroll and related expenses
associated with building a regional infrastructure to accommodate a greater
number of business centers and increased marketing and advertising costs.
Developing Center expenses for the Transition Period were $1.3 million, an
increase of $ .7 million from the corresponding period in 1997 principally due
to an increase in the number of developing centers, from 2 to 6.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the Transition
Period, COBC was $12.0 million as compared to $6.6 million for the same period
in 1997. The COBC as a percentage of total revenues ("COBC Margin") was 22.1%
for the Transition Period as compared to 24.3% for the corresponding period in
1997. The decrease in overall business center COBC Margin of 2.2% from 1997 is
primarily attributable to the significant increase in Acquired Centers and its
associated lower COBC Margin. COBC Margin from Acquired Centers was 19.6% as
compared to Same Center COBC Margin of 27.6% in 1998.
Acquired Center COBC was $5.6 million for the Transition Period, an
increase of $4.4 million from the corresponding period in 1997. The COBC Margin
from Acquired Centers for the Transition Period was 19.6% as compared to 28.6%
for the corresponding period. The decrease in Acquired Center COBC Margin of
9.0% is primarily attributable to 1997 acquisitions of business centers that
were more mature and better managed at the time of acquisitions than those
acquired in 1998. In addition, some of the business centers acquired in 1998
were more strategic to our business plan and had lower COBC margins as a result
of their desirable geographic locations.
Same Center COBC was $6.8 million for the Transition Period as compared to
$5.5 million for the corresponding period in 1997. The COBC Margin from Same
Centers for the Transition Period was 27.6% as compared to 24.4% for the
corresponding period in 1997. The increase in Same Center COBC Margin is
primarily attributable to greater occupancy levels and higher office rental
pricing.
In general, COBC Margins from Acquired Centers are initially lower than
Same Centers. It may take several months for VANTAS to integrate these Acquired
Centers into its existing operations and apply VANTAS's management philosophy,
policies and procedures and maximize VANTAS's concentrated marketing efforts
which are expected to produce greater occupancy and support services revenue.
Developing Centers generated a loss from operations for the Transition
Period of $ .4 million, an increase in losses of $ .3 million from the
corresponding period in 1997.
OTHER (EXPENSES) INCOME. For the Transition Period, other (expenses) income were
$8.6 million, representing an increase of $5.2 million, or 154.2% from the
corresponding period in 1997. This increase is primarily attributable to greater
corporate general and administrative expenses, depreciation and amortization
expense and interest expense of $1.7 million, $1.9 million and $1.8 million or
96.5%, 213.4% and 163.5%, respectively.
The increase in corporate general and administrative expenses was
attributable to increases in corporate office personnel and associated travel
and rent expense due to increased space requirements. These increases were
related to the expansion of the corporate offices associated with VANTAS's
growth. The increase in depreciation and amortization relates to fixed assets
acquired and goodwill associated with VANTAS's acquisitions. It is also
attributable to an increase in capital expenditures associated with technology
and telecommunication infrastructure additions and leasehold improvements for
business centers. Interest expense is primarily related to VANTAS's Credit
Facility. This increase resulted from increased borrowings related to VANTAS's
acquisitions.
INCOME TAXES. VANTAS's effective income tax rate was 42.1% and 40.0% for the
Transition Period and the corresponding period in 1997, respectively. VANTAS's
effective income tax rate for the Transition Period increased primarily as a
result of the impact of state income taxes.
II-5
<PAGE>
NET INCOME. VANTAS had net income for the Transition Period and the
corresponding period in 1997 of $1.9 million and $2.0 million, respectively.
Accretion of the stated return on investment ("Accretion") on VANTAS's
redeemable convertible preferred stock for the Transition Period was $7.3
million, representing an increase of $6.6 million from the corresponding period
in 1997. This increase is primarily the result of the Accretion associated with
the Series A Convertible Redeemable Preferred Stock, which was adjusted for the
increase in the estimated market value of VANTAS's common stock over the
corresponding period in 1997 (See Note 13 of the Notes to Consolidated Financial
Statements).
FISCAL YEARS ENDED JUNE 30, 1998 AND 1997
REVENUES. Total business center revenues for the year ended June 30, 1998 were
$66.5 million, an increase of $37.4 million or 128.7% from the corresponding
period in 1997.
Business centers that were acquired after July 1, 1996 ("Acquired
Centers") had revenues for the years ended June 30, 1998 and 1997 of $49.5
million and $14.3 million, respectively, representing an increase of $35.2
million from the corresponding period in 1997. This increase in revenues
resulted primarily from an increase in the number of and timing 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 year ended June 30, 1998 of $15.7 million, an increase of
$1.5 million, or 10.6% from the corresponding period in 1997. The increase in
Same Center revenues is attributable to an increase in office rental revenues of
$ .8, or 9.1%, and an increase in support service revenues of $ .7 million, or
13.0% from 1997. The increase in office rental revenue was due to more favorable
office pricing partially offset by a small reduction in occupancy levels. The
increase in support services is primarily attributable to an increase in
OfficeAccess(TM) and telecommunication revenues.
Developing Center revenues were $1.3 million for the years ended June 30,
1998, an increase of $.7 million from the corresponding period in 1997.
EXPENSES. Total business center expenses for the year ended June 30, 1998 were
$49.5 million, representing an increase of $26.4 million, or 114.1% from the
corresponding period in 1997.
Acquired Center expenses for the years ended June 30, 1998 and 1997 were
$35.9 million and $10.7 million respectively, representing an increase of $25.2
million from the corresponding period in 1997. This increase resulted primarily
from an increase in the number of and timing of business centers acquired as
compared to those acquired in the comparable period of the prior year.
Same Center expenses for the year ended June 30, 1998 were $12.0 million,
an increase of $.5 million, or 4.3% from the corresponding period in 1997. This
increase is primarily attributable to higher to higher payroll and related
expenses associated with building a regional infrastructure to accommodate a
greater number of business centers and increased marketing and advertising
costs.
Developing Center expenses for the year ended June 30, 1998 were $1.5
million, an increase of $.6 million from the corresponding period in 1997.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the year ended
June 30, 1998, COBC was $17.1 million as compared to $6.0 million for the same
period in 1997. The COBC Margin was 25.6% for the year ended June 30, 1998 as
compared to 20.6% for the corresponding period in 1997. The increase in overall
business center COBC Margin of 5.1% from 1997 is primarily attributable to an
increase in COBC Margin from Acquired Centers and Same Centers of 2.3% and 4.5%,
respectively.
II-6
<PAGE>
Acquired Center COBC was $13.6 million for the year ended June 30, 1998,
an increase of $10.0 million from the corresponding period 1997. The COBC Margin
from Acquired Centers for the years ended June 30, 1998 and 1997 was 27.5% and
25.2%, respectively. The increase in Acquired Centers COBC Margin is primarily
attributable to higher office rental pricing.
Same Center COBC was $3.7 million for the year ended June 30, 1998 as
compared to $2.7 million for the corresponding period in 1997. The COBC Margin
from Same Centers for the year ended June 30, 1998 was 23.6% as compared to
19.0% for the corresponding period in 1997. The increase in Same Centers COBC
Margin is primarily attributable to higher office rental pricing.
Developing Centers generated a loss from operations for the year ended
June 30, 1998 of $ .2 million, a decrease of $ .1 million from the corresponding
period in 1997.
OTHER (EXPENSES) INCOME. For the year ended June 30, 1998, other (expenses)
income, were $10.0 million, representing an increase of $5.6 million, or 128.1%
from the corresponding period in 1997. This increase is primarily attributable
to greater corporate general and administrative expenses, depreciation and
amortization expense and interest expense of $1.7 million, $1.9 million and $2.3
million or 62.5%, 160.9% and 242.6%, respectively. This was partially offset by
an increase in managed center income of $ .3 from the corresponding period in
1997.
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 VANTAS's growth.
The increase in depreciation and amortization relates to fixed assets acquired
and goodwill associated with VANTAS's acquisitions. It is also attributable to
an increase in capital expenditures associated with technology and
telecommunication infrastructure additions and leasehold improvements for
business centers. Interest expense is primarily related to VANTAS's Credit
Facility. This increase resulted from interest expense on borrowings related to
VANTAS's acquisitions.
INCOME TAXES. VANTAS's effective income tax rate was 39.8% and (93.1%) for the
years ended June 30, 1998 and 1997, respectively. VANTAS's effective income tax
rate in 1997 resulted primarily from the income tax benefit associated with the
reversal of the valuation allowance on net deferred tax assets established in
prior years during 1997. VANTAS did not record a valuation allowance as of June
30, 1997 based upon management's projection of taxable income in future periods.
NET INCOME. VANTAS had net income for the years ended June 30, 1998 and 1997 of
$4.1 million and $2.9 million, respectively.
Accretion of the stated return on investment ("Accretion") on VANTAS's
redeemable convertible preferred stock for the year ended June 30, 1998 was
$14.3 million, representing an increase of $13.5 million from the corresponding
period in 1997. This increase is primarily the result of the Accretion
associated with the Series A Convertible Redeemable Preferred Stock, which was
adjusted for the increase in the estimated market value of VANTAS's common stock
over the corresponding period in 1997 (See Note 13 of the Notes to Consolidated
Financial Statements).
FISCAL YEARS ENDED JUNE 30, 1997 AND 1996
REVENUES. Total business center revenues for the year ended June 30, 1997 were
$29.1 million, an increase of $17.1 million, or 143.2% from the corresponding
period in 1996.
Business centers that were acquired after July 1, 1995 ("Acquired
Centers") had revenues for the years ended June 30, 1997 and 1996 of $18.2
million and $1.1 million, respectively, representing an increase of $17.1
million from the corresponding period in 1996. This increase in revenues
resulted primarily from an increase in the number of and timing of business
centers acquired as compared to those acquired in the comparable period of the
prior year.
Business centers, excluding Acquired Centers, that were operating for the
entire comparable period of the prior year ("Same Centers") had revenues for the
year ended June 30, 1997 of $10.3 million, an increase of $0.6 million, or 6.2%
from the corresponding period in 1996. The increase in Same Center revenues is
attributable to an increase in office rental revenues of $ .4, or 6.9%, and an
increase in support service revenues of $ .2 million, or 5.1% from the
corresponding period in 1996. Office rental revenues increased due to more
favorable office pricing as well as an increase occupancy levels. The increase
in support services is primarily attributable to an increase in OfficeAccess(TM)
and telecommunication revenues.
Developing Center revenues were $ .6 million for the years ended June 30,
1997, a decrease of $ .6 million from the corresponding period in 1996.
EXPENSES. Total business center expenses for the year ended June 30, 1997 were
$23.1 million, representing an increase of $13.0 million or 129.3% from the
corresponding period in 1996.
II-7
<PAGE>
Acquired Center expenses for the years ended June 30, 1997 and 1996 were
$14.0 million and $ .9 million, respectively, representing an increase of $13.1
million from the corresponding period in 1996. This increase resulted primarily
from an increase in the number of and timing of business centers acquired as
compared to those acquired in the comparable period of the prior year.
Same Center expenses for the year ended June 30, 1997 were $8.2 million,
an increase of $ .4 million or 5.1% from the corresponding period in 1996. This
increase is primarily attributable to higher rent expense resulting from
inflation adjusted rental increases and annual operating rental passthroughs.
Developing Center expenses for the year ended June 30, 1997 were $ .9
million, a decrease of $ .5 million from the corresponding period in 1996.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the year ended
June 30, 1997, COBC was $6.0 million as compared to $1.9 million for the same
period in 1996. The COBC Margin was 20.6% for the year ended June 30, 1997 as
compared to 15.7% for the corresponding period in 1996. The increase in overall
business center COBC Margin of 4.8% from 1996 is primarily attributable to the
significant increase in Acquired Center COBC Margin over the corresponding
period.
Acquired Center COBC was $4.2 million for the year ended June 30, 1997, an
increase of $4.0 million from the corresponding period in 1996. The COBC Margin
from Acquired Centers for the year ended June 30, 1997 were 23.1%. There were
minimal acquisitions completed during the year ended June 30, 1996.
Same Center COBC was $2.1 million for the year ended June 30, 1997 as
compared to $1.9 million for the corresponding period in 1996. The COBC Margin
from Same Centers for the year ended June 30, 1997 was 20.4% as compared to
19.6% for the corresponding period in 1996.
OTHER EXPENSES, NET. For the year ended June 30, 1997, other expenses, net, were
$4.4 million, representing an increase of $3.2 million or 258.2% from the
corresponding period in 1996. This increase is primarily attributable to greater
corporate general and administrative expenses, depreciation and amortization
expense and interest expense of $1.8 million, $ .6 million and $ .9 million or
181.0%, 106.0% and 1,602.9%, respectively.
The increase in corporate general and administrative expenses was attributable
to increases in corporate office personnel and related placement fees and
consulting fees associated with VANTAS's growth. The increase in depreciation
and amortization expense relates to fixed assets acquired and goodwill
associated with VANTAS's acquisitions. It is also attributable to an increase in
capital expenditures associated with technology and telecommunication
infrastructure additions and leasehold improvements for Developing and Same
Centers. Interest expense is primarily related to VANTAS's Credit Facility. This
increase resulted from increased borrowings related to VANTAS's acquisitions.
INCOME TAXES. VANTAS's effective income tax rate was (93.1%) and 33.2% for the
years ended June 30, 1997 and 1996, respectively. VANTAS's effective income tax
rate in 1997 resulted primarily from the income tax benefit associated with the
reversal of a the valuation allowance on net deferred tax assets established in
prior years during 1997. VANTAS did not record a valuation allowance as of June
30, 1997 based upon management's projection of taxable income in future periods.
NET INCOME. VANTAS had net income for the years ended June 30, 1997 and 1996 of
$2.9 million and $ .6 million, respectively.
II-8
<PAGE>
Accretion of the stated return on investment on VANTAS's redeemable
preferred stock for the year ended June 30, 1997 was $ .8 million, representing
an increase of $ .8 million from the corresponding period in 1996. This increase
is the result of VANTAS's issuance of Series A Convertible Preferred Stock in
the fiscal year 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, VANTAS 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
VANTAS's operations effectively.
As of December 31, 1998, VANTAS had borrowed $73.0 million against its
$100.0 million credit facility (the "Facility"). In addition, VANTAS had
outstanding letters of credit of approximately $1.5 million, which reduced
available borrowings under the Facility. Interest on the Facility ranged from
LIBOR plus 3.00% (8.56% at December 31, 1998) to LIBOR plus 3.50% (9.06% at
December 31, 1998).
VANTAS had working capital of $4.3 million at December 31, 1998 as
compared to working capital of $4.6 million at June 30, 1998. As of December 31,
1998, working capital included restricted cash of $10.0 million, which was made
available upon the completion of the Mergers.
Cash flows generated from operating activities for the Transition Period
were $7.1 million, representing an increase of $2.8 million from the
corresponding period in 1997. This increase is attributable to VANTAS's growth
through acquisitions during the period.
Cash used in investing activities for the year ended December 31, 1998 was
$44.2 million, an increase of $29.8 million from the corresponding period in
1997. The increase is attributable to VANTAS's acquisition and development of
business centers, and the deployment of resources to expand the technology base
at its business centers and its corporate offices. In addition, as noted above,
VANTAS was required to deposit the funded portion of its Facility into a
restricted cash account.
Cash provided by financing activities for the Transition Period was $34.7
million, representing an increase of $24.0 million from the corresponding period
in 1997. During the Transition Period, VANTAS completed various equity
transactions whereby it raised $2.3 million in net proceeds by selling shares of
VANTAS's convertible preferred stock to accredited investors. Net proceeds from
borrowings and repayments of borrowings during the Transition Period amounted to
$34.5 million as compared to $11.5 million for the corresponding period in 1997.
II-9
<PAGE>
SUBSEQUENT EVENT. On August 3, 1999, VANTAS 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% (9.50% at December 31, 1999) to LIBOR plus 3.75%
(10.25% at December 31, 1999) for a one, three or nine month period at the
election of VANTAS. VANTAS pays a commitment fee of 1/2 of 1.0% per annum on the
unused portion of the Credit Facility. Borrowings under the Credit Facility are
formula based and available up to the maximum amount of the Credit Facility.
VANTAS 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, VANTAS 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 VANTAS
to continue its growth strategy, through the acquisition and development of
business centers.
EFFECTS OF INFLATION
Certain of the Company's leases include increases in annual rent based on
changes in the consumer price index or similar inflation indices. The Company's
contracts with its clients generally range from six to twelve months in
duration. Accordingly, the Company has the ability to pass on its increased
costs at the time of renewal of such contracts.
Interest on the Company's borrowings under the Facility is based on
floating interest rates. The Company periodically evaluates its exposure to
short-term interest rates and will, from time to time, enter into interest rate
protection agreements, that mitigate, but do not eliminate, the effect of
changes in interest rates on its floating-rate indebtedness under the Facility.
These rates of interest will be influenced by changes in short-term rates and
are sensitive to inflation and other factors.
A significant increase in interest rates may have a negative impact on the
earnings of the Company due to the variable interest rates under the Facility.
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.
As of the date of this filing, total costs related to the Year 2000 issue
were approximately $3.7 million.
As of the date of this filing, VANTAS has not experienced any material
adverse effects to its business or operations as a result of the Year 2000
issue.
II-10
<PAGE>
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing VANTAS is interest rate risk on its
Facility. The Facility bears interest ranging from LIBOR plus 3.0% to LIBOR plus
3.50% for a one, three or six month period at the election of VANTAS. The rate
of interest on the Facility will be influenced by changes in short term rates
and is sensitive to inflation and other economic factors. As significant
increase in interest rates may have a negative impact on the earnings of VANTAS
due to the variable interest under the Facility.
Based on variable rate debt levels, a 10% change in market interest rates
as of December 31, 1998 (56 basis points on a weighted average) would have an
approximate 6.3% impact on VANTAS' interest expense, net for the Transition
Period.
VANTAS has not, and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes. As of December 31, 1998, VANTAS
had no other material exposure to market risk.
II-11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
II-12
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
VANTAS Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of VANTAS Incorporated and Subsidiaries, previously known as
ALLIANCE NATIONAL Incorporated, at June 30, 1997 and 1998 and December 31, 1998,
and the results of their operations and their cash flows for each of the three
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 financial statement
schedule listed in the index appearing under Item 14(a)(2) 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 financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and the financial statement 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 audits 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.
As described in Note 16, the financial statements have been restated to classify
redeemable convertible preferred stock outside of permanent equity and to record
accretion to the full redemption amount of the preferred stock.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 26, 1999, except as to Note 16
for which the date is January 6, 2000.
II-13
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS: June 30, June 30, December 31,
1997 1998 1998
------------- ------------- -------------
(Note 1)
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,432,304 $ 5,909,954 $ 3,615,087
Restricted cash -- -- 10,000,000
Accounts receivable, net of allowance for doubtful accounts of
$257,000, $266,000 and $401,000, respectively 1,086,792 3,299,434 3,821,175
Prepaid expenses and other current assets 1,088,314 2,183,162 5,145,682
Deferred income taxes 823,900 86,000 174,000
Deferred financing costs 382,638 564,000 466,727
------------- ------------- -------------
Total current assets 4,813,948 12,042,550 23,222,671
Intangibles, net 19,717,414 61,046,547 81,605,181
Property and equipment, net 8,418,380 15,118,895 23,124,702
Deferred financing costs, net 1,435,171 1,411,563 2,584,418
Deferred income taxes 670,200 -- --
Security deposits 998,483 1,391,669 2,110,952
Other assets, net -- 1,673,276 1,426,526
------------- ------------- -------------
Total assets $ 36,053,596 $ 92,684,500 $ 134,074,450
============= ============= =============
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable and accrued expenses $ 3,036,841 $ 5,581,351 $ 9,578,807
Income taxes payable 98,118 -- --
Capital lease obligations 388,432 829,888 731,510
Deferred rent payable 225,646 543,861 727,619
Notes payable 532,099 500,000 7,875,000
------------- ------------- -------------
Total current liabilities 4,281,136 7,455,100 18,912,936
Notes payable 11,500,000 37,960,000 65,125,000
Acquisitions payable -- 8,430,534 --
Tenants' security deposits 2,982,520 6,630,533 8,592,948
Deferred rent payable 2,086,284 5,319,174 6,607,771
Deferred income taxes -- 701,000 1,514,000
Capital lease obligations 589,517 474,515 602,153
------------- ------------- -------------
Total liabilities 21,439,457 66,970,856 101,354,808
------------- ------------- -------------
Minority interest 1,682,179 821,673 --
------------- ------------- -------------
Commitments and contingencies
Redeemable convertible preferred stock, authorized 15,000,000 shares:
Series A Convertible, $.01 par value, issued and outstanding
7,574,711 shares (liquidation preference $12,900,000) 12,324,047 26,435,741 33,177,234
Series B Convertible, $.01 par value, issued and outstanding
1,730,062 shares at June 30, 1998; 3,222,851 shares at
December 31, 1998 (liquidation preference $15,309,000) -- 8,062,714 15,700,638
Note receivable from issuance of redeemable convertible
preferred stock -- -- (950,000)
------------- ------------- -------------
12,324,047 34,498,455 47,927,872
------------- ------------- -------------
Stockholders' equity (deficit):
Common stock, $.01 par value, authorized 35,000,000 shares, issued and
outstanding 4,843,468, 4,951,868 and 4,901,868,
shares, respectively 48,435 49,519 49,019
Additional paid-in capital 3,375,609 3,370,608 3,133,608
Deficit (2,816,131) (13,026,611) (18,390,857)
------------- ------------- -------------
Total stockholders' equity (deficit) 607,913 (9,606,484) (15,208,230)
------------- ------------- -------------
Total liabilities and stockholders' equity (deficit) $ 36,053,596 $ 92,684,500 $ 134,074,450
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
II-14
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Transition
Years Ended June 30, Period Ended
-------------------------------------------- December 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
(Note 1)
(Restated) (Restated)
<S> <C> <C> <C> <C>
Business Center Operations:
Revenues:
Office rentals $ 7,280,400 $ 17,474,724 $ 39,390,571 $ 31,897,310
Support services 4,683,977 11,622,891 27,147,060 22,159,876
------------ ------------ ------------ ------------
11,964,377 29,097,615 66,537,631 54,057,186
------------ ------------ ------------ ------------
Expenses:
Rent 4,358,251 10,394,622 21,737,973 18,765,386
Support services 1,842,885 4,846,502 8,998,258 7,788,189
Center general and administrative 3,880,039 7,871,511 18,743,683 15,556,730
------------ ------------ ------------ ------------
10,081,175 23,112,635 49,479,914 42,110,305
------------ ------------ ------------ ------------
Contribution from operation of
business centers 1,883,202 5,984,980 17,057,717 11,946,881
------------ ------------ ------------ ------------
Other (expenses) income:
Corporate general and administrative (985,739) (2,769,544) (4,501,361) (3,452,021)
Depreciation and amortization (569,291) (1,172,594) (3,058,729) (2,762,348)
Interest expense, net (54,648) (930,598) (3,188,126) (2,884,300)
Managed center income 210,801 377,743 692,408 454,105
Other income 177,821 121,405 78,604 47,106
------------ ------------ ------------ ------------
(1,221,056) (4,373,588) (9,977,204) (8,597,458)
------------ ------------ ------------ ------------
Income before minority interest and
income taxes 662,146 1,611,392 7,080,513 3,349,423
Minority interest in net loss (income) of
consolidated partnerships 174,641 (118,880) (290,985) --
------------ ------------ ------------ ------------
Income before income taxes 836,787 1,492,512 6,789,528 3,349,423
(Provision) benefit for income taxes (278,000) 1,389,100 (2,700,000) (1,410,000)
------------ ------------ ------------ ------------
Net income $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
------------ ------------ ------------ ------------
Accretion of preferred stock -- (846,437) (14,300,008) (7,303,669)
------------ ------------ ------------ ------------
Net income (loss) applicable to
common stock $ 558,787 $ 2,035,175 $(10,210,480) $ (5,364,246)
============ ============ ============ ============
Share information:
Basic earnings (loss):
Net income (loss) per common share $ 0.12 $ 0.42 $ (2.06) $ (1.08)
============ ============ ============ ============
Average shares outstanding 4,491,026 4,835,029 4,954,035 4,951,325
============ ============ ============ ============
Diluted earnings (loss):
Net income (loss) per common share $ 0.12 $ 0.30 $ (2.06) $ (1.08)
============ ============ ============ ============
Average shares outstanding 4,491,026 9,498,068 4,954,035 4,951,325
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
II-15
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Redeemable Convertible Preferred Stock
---------------------------------------------------------------------------
Series A Series B Note
------------ ------------ ------------ ------------ Receivable from
Shares Amount Shares Amount Stockholder
------------ ------------ ------------ ------------ ---------------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1995 -- -- -- -- --
Exercise of common stock options -- -- -- -- --
Issuance of common stock -- -- -- -- --
Adjustment to outstanding common stock -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1996 -- -- -- -- --
Issuance of common stock -- -- -- -- --
Issuance of Series A preferred stock, net 7,574,711 $ 11,477,610 -- -- --
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 stock, net -- -- 1,730,062 $ 7,874,400 --
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 stock, net -- -- 1,298,089 6,150,923 --
Note receivable from stockholder for the
issuance of Series B preferred stock -- -- 200,000 950,000 $ (950,000)
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 $ (950,000)
============ ============ ============ ============ ============
<CAPTION>
Stockholders' Equity (Deficit)
------------------------------------------------------------------------------
Common Stock Additional Retained Total
---------------------------- Paid-in Earnings Stockholders'
Shares Amount Capital (Deficit) Equity (Deficit)
------------ ------------ ------------ ------------ ---------------
(Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Balance, July 1, 1995 4,364,700 $ 43,647 $ 3,265,759 $ (5,410,093) $ (2,100,687)
Exercise of common stock options 407,000 4,070 -- -- 4,070
Issuance of common stock 30,000 300 -- -- 300
Adjustment to outstanding common stock 6,768 68 -- -- 68
Net income -- -- -- 558,787 558,787
------------ ------------ ------------ ------------ ------------
Balance, June 30, 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)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
II-16
<PAGE>
VANTAS Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Transition
Years Ended June 30, Period Ended
-------------------------------------------- December 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
(Note 1)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 569,291 1,172,594 3,058,729 2,762,348
Amortization of deferred financing costs -- 145,845 404,144 175,505
Deferred income taxes -- (1,494,100) 2,109,100 725,000
Provision for doubtful accounts 11,100 203,200 387,900 250,672
Minority interest in net income (loss) of
consolidated partnerships (174,641) 118,880 290,985 --
Deferred rent payable 70,442 527,835 823,170 491,047
Deferred credits -- -- (213,940) (211,675)
Non-cash interest expense -- 110,200 118,133 62,522
Changes in operating assets and liabilities:
Accounts receivable (253,506) (221,538) (1,708,163) (555,361)
Prepaid expenses and other assets (416,934) (393,572) (893,165) (776,122)
Security deposits (123,461) (141,569) (167,531) (767,581)
Accounts payable and accrued expenses (486,366) 1,127,311 1,972,993 2,467,215
Income taxes payable 278,000 (179,882) (1,822) (847,942)
Other liabilities (312,655) -- -- --
Tenants' security deposits 220,999 132,002 1,195,375 1,420,640
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (58,944) 3,988,818 11,465,436 7,135,691
------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of net assets of business centers (675,000) (20,496,983) (33,901,325) (28,397,887)
Purchases of property and equipment (918,516) (1,960,313) (4,860,373) (5,781,922)
Restricted cash -- -- -- (10,000,000)
------------ ------------ ------------ ------------
Net cash used in investing activities (1,593,516) (22,457,296) (38,761,698) (44,179,809)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 779,099 12,912,500 33,229,000 34,665,000
Repayments on borrowings (139,335) (1,846,005) (6,801,099) (125,000)
Deferred financing costs -- (1,963,654) (561,898) (1,251,087)
Payments of capital leases (112,964) (356,714) (609,083) (543,108)
Contributions by minority partners 1,600,000 -- -- --
Distributions to minority partners (353,909) (642,276) (1,151,491) --
Proceeds from exercise of common stock options -- -- 210,000 --
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
------------ ------------ ------------ ------------
Net cash provided by financing activities 1,772,891 19,361,461 31,773,912 34,749,251
------------ ------------ ------------ ------------
Net increase (decrease) in cash 120,431 892,983 4,477,650 (2,294,867)
Cash at beginning of period 418,890 539,321 1,432,304 5,909,954
------------ ------------ ------------ ------------
Cash at end of period $ 539,321 $ 1,432,304 $ 5,909,954 $ 3,615,087
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 65,000 $ 653,000 $ 2,457,000 $ 2,865,000
============ ============ ============ ============
Cash paid during the period for income taxes $ 3,000 $ 285,000 $ 561,000 $ 1,425,200
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
II-17
<PAGE>
Vantas Incorporated and Subsidiaries
Consolidated Statements of Cash Flows, Continued
Supplemental disclosures of non-cash activities:
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
(see Note 15), 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.
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.
During fiscal 1996, the Company acquired three business centers for $675,000
in cash, issuance of a $100,000 interest bearing note and the assumption
of $173,000 in liabilities.
During fiscal 1996, the Company entered into capital lease obligations
approximating $94,000.
II-18
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies:
Business
VANTAS Incorporated and Subsidiaries (the "Company"), previously known as
ALLIANCE NATIONAL Incorporated, operate 98 business centers in 24 states
and the District of Columbia and manage 5 others for unrelated property
owners, as of December 31, 1998. 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 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.
The Company has 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".
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, 1996, 1997 and
1998 (see Note 2). All significant intercompany balances and transactions
have been eliminated in consolidation.
Income 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.
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.
Leasehold improvements are amortized over the lesser of the term of the
related lease or the estimated useful lives of the assets.
If there is an event or a change in circumstances that indicates that the
basis of the Company's long-lived assets 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
over its remaining useful life, on an undiscounted basis, to the carrying
amount of the asset. Such carrying amount would be adjusted, if necessary,
to reflect an impairment in the value of the assets.
II-19
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Intangible Assets
Intangible assets consist 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.
If there is an event or change in circumstances that indicates that the
basis of the Company's long-lived 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
business center for which the intangible relates over its remaining useful
life, on an undiscounted basis, to the carrying amount of the intangible.
Such carrying amount would be adjusted, if necessary, to reflect an
impairment in the value of the intangible assets.
Deferred Financing Costs
The Company amortizes deferred financing costs over the term of the
related debt. As of June 30, 1997 and 1998 and December 31, 1998,
accumulated amortization was approximately $146,000, $500,000 and
$675,000, 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
limited credit evaluations of its clients and generally requires at least
two months' rent as a security deposit. The Company's facilities are
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, 1996,
1997, 1998 and the Transition Period exceeded actual rental payments by
approximately $70,000, $528,000, $823,000 and $491,000, respectively.
II-20
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
As of June 30, 1998 and December 31, 1998, the deferred rent liability
includes approximately $2,728,000 and $3,709,000 of deferred credits
relating to tenant improvements, which are reimbursed or paid by landlords
and amortized against rent expense over the lives of the leases,
respectively.
Income Taxes
The Company accounts for income taxes under the deferral 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 (see Note 8).
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
("SFAS 128"), became effective for the year ended June 30, 1998. In
accordance with SFAS 128, 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. All periods prior to June 30, 1998 have been
restated to conform with the requirements of SFAS 128.
Recently Issued Pronouncements
In fiscal 1998, the Company adopted the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). The adoption of SFAS 130 did not have
any impact on the Company's financial statements as there are no elements
of comprehensive income other than net income. Accordingly, comprehensive
income equals net income for all periods presented.
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 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.
II-21
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
2. Acquisitions:
During the Transition Period, in 6 unrelated acquisitions, the Company
acquired 16 business centers for an aggregate purchase price of $17.4
million (see Note 13).
Effective July 1, 1998, the Company acquired the remaining interests in
all of its 7 controlled partnerships, representing 9 business centers, for
817,853 shares of Series B Convertible Preferred Stock and cash of
approximately $2.0 million.
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 year ended
June 30, 1998 and the Transition Period ended December 31, 1998, adjusted
to give effect to these acquisitions as of July 1, 1997.
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 July 1, 1997,
nor does it purport to represent the results of operations for future
periods.
Transition
Period Ended
June 30, December 31,
1998 1998
-------------- -------------
Revenues $ 105,465,000 $ 57,233,000
Net income 6,973,000 2,098,000
Basic loss per common share (Restated) (1.54) (1.05)
Diluted loss per common share (Restated) (1.54) (1.05)
II-22
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
3. Property and Equipment:
Property and equipment consists of:
<TABLE>
<CAPTION>
Depreciable June 30, June 30, December 31,
life 1997 1998 1998
---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Office equipment, furniture and
fixtures 5 - 7 years $ 7,964,902 $ 13,851,209 $ 21,649,976
Leasehold improvements Shorter of
lease term or
useful life 2,525,067 4,982,545 6,663,780
------------ ------------ ------------
10,489,969 18,833,754 28,313,756
Less: Accumulated depreciation and
amortization (2,071,589) (3,714,859) (5,189,054)
------------ ------------ ------------
$ 8,418,380 $ 15,118,895 $ 23,124,702
============ ============ ============
</TABLE>
Office equipment, furniture and fixtures include approximately $1,452,000,
$2,387,870 and $3,003,680 of office equipment under capital leases, net of
accumulated depreciation of $210,819, $581,223 and $824,664 at June 30,
1997 and 1998 and December 31, 1998, respectively.
4. Intangibles:
Intangible assets consist of:
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1997 1998 1998
------------ ------------- ------------
<S> <C> <C> <C>
Goodwill $ 20,396,422 $ 63,159,485 $ 84,295,771
Less: Accumulated amortization (679,008) (2,112,938) (2,690,590)
------------ ------------- ------------
$ 19,717,414 $ 61,046,547 $ 81,605,181
============ ============= ============
</TABLE>
II-23
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
5. 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 $40 million with various 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.
Effective April 15, 1998, the Company increased the $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 provides for a $23 million acquisition loan commitment, $70
million term loans, and a $7 million revolving loan commitment, including
letters of credit. Interest on each commitment ranges from LIBOR plus
3.00% (8.56% at December 31, 1998) to LIBOR plus 3.50% (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 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.
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.
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, 1998, 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, 2000
and are based upon percentages of the amount borrowed as follows:
Repayment
Period Percentage
----------------------------------------------------- ---------------
December 2000 - September 2001 2.5% quarterly
December 2001 - September 2002 10% quarterly
December 2002 - June 2003 12.5% quarterly
November 2003 12.5%
II-24
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Term Loan:
The $40 million Term Loan A outstanding at December 31, 1998 requires
quarterly principal payments of $1,000,000 from March 31, 1999 through
September 30, 1999, $1,625,000 from December 31, 1999 through September
30, 2000, $2,000,000 from December 31, 2000 through September 30, 2001,
$2,625,000 from December 31, 2001 through September 30, 2002, $3,000,000
from December 31, 2002 through June 30, 2003 and $3,000,000 on November 6,
2003.
The $30 million Term Loan B outstanding at December 31, 1998 requires
quarterly principal payments of $62,500 from March 31, 1999 through June
30, 2003, $125,000 on September 30, 2003, $3,250,000 from December 31,
2003 through September 30, 2004, $3,937,500 from December 31, 2004 through
June 30, 2005 and $3,937,500 on November 6, 2005.
At December 31, 1998, $10 million of the Term Loan was funded into a cash
collateral account that the Company was not permitted to utilize until the
completion of the merger with InterOffice Superholding Corporation and
Reckson Executive Centers, Inc. (see Note 15).
Revolving Loan Commitment:
The $7 million revolving loan commitment, which expires on November 6,
2003, had $3 million outstanding at December 31, 1998.
At December 31, 1998, the Company had outstanding letters of credit of
approximately $1,486,000 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
June 30, 1997 and 1998 and December 31, 1998.
The total future principal repayments as of December 31, 1998 for each of
the next five fiscal years and in the aggregate are:
1999 $ 7,875,000
2000 7,125,000
2001 8,875,000
2002 11,125,000
2003 12,500,000
Thereafter 25,500,000
------------
$ 73,000,000
============
6. Capital Leases:
The Company is the lessee of office equipment under a number of capital
leases expiring at various dates through 2002.
II-25
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Minimum future lease payments under capital leases as of December 31, 1998
for each of the next four years are approximately:
1999 $ 839,000
2000 421,000
2001 202,000
2002 56,000
-----------
Total minimum lease payments 1,518,000
Less: Amount representing interest (184,337)
-----------
Present value of minimum lease payments $ 1,333,663
===========
7. 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 2012. Certain of these noncancellable operating
leases provide for renewal options.
Minimum future rental payments under these noncancellable operating leases
as of December 31, 1998 for each of the next five years and in the
aggregate are approximately:
1999 $ 39,111,000
2000 38,871,000
2001 36,377,000
2002 32,185,000
2003 29,003,000
Thereafter 77,548,000
------------
$253,095,000
============
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 Contract
The Company has an employment contract with a key executive which expires
in 2002 and includes automatic one-year renewal options. This contract
provides for a minimum annual salary of $250,000 with annual increases
based upon the Consumer Price Index for New York City, a performance bonus
and an incentive plan.
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
$740,000, $918,000 and $1,036,000 at June 30, 1997 and 1998 and December
31, 1998, respectively.
II-26
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, 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.
8. Income Taxes:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Transition
Years Ended June 30, Period Ended
----------------------------------------- December 31,
1996 1997 1998 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $ 255,834 $ 65,000 $ 260,000 $ 521,000
State and local 22,166 40,000 330,900 164,000
----------- ----------- ----------- -----------
278,000 105,000 590,000 685,000
----------- ----------- ----------- -----------
Deferred:
Federal -- (1,269,985) 1,792,735 566,000
State and local -- (224,115) 316,365 159,000
----------- ----------- ----------- -----------
-- (1,494,100) 2,109,100 725,000
----------- ----------- ----------- -----------
Total provision (benefit) $ 278,000 $(1,389,100) $ 2,700,000 $ 1,410,000
=========== =========== =========== ===========
</TABLE>
The following is a reconciliation of the income tax expense (benefit)
computed using the statutory federal income tax rate to the actual income
tax expense (benefit) and its effective income tax rate:
<TABLE>
<CAPTION>
Transition
Years Ended June 30, Period Ended
----------------------------------------- December 31,
1996 1997 1998 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income tax expense at
federal statutory rate $ 284,508 $ 507,454 $ 2,308,440 $ 1,138,804
State and local income taxes, net of
federal income tax benefit 14,630 26,400 427,195 213,393
Reduction in valuation allowance (142,900) (2,001,200) -- --
Impact of tax settlement 58,893 56,000 -- --
Other, net 62,869 22,246 (35,635) 57,803
----------- ----------- ----------- -----------
$ 278,000 $(1,389,100) $ 2,700,000 $ 1,410,000
=========== =========== =========== ===========
</TABLE>
II-27
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
The deferred tax effects of temporary differences as of June 30, 1997 and
1998 and December 31, 1998 are as follows:
June 30, June 30, December 31,
1997 1998 1998
----------- ----------- -----------
Deferred tax assets:
Accounts receivable allowance $ 76,600 $ 86,000 $ 174,000
Deferred rent payable 27,300 694,000 969,000
Net operating losses 1,730,200 -- --
----------- ----------- -----------
1,834,100 780,000 1,143,000
Deferred tax liabilities:
Fixed assets (159,700) (704,000) (429,000)
Intangibles (177,900) (687,000) (2,054,000)
Other (2,400) (4,000) --
----------- ----------- -----------
(340,000) (1,395,000) (2,483,000)
Net deferred tax asset (liability) $ 1,494,100 $ (615,000) $(1,340,000)
=========== =========== ===========
9. EBITDA:
The following table sets forth the computation of earnings before interest
expense (net), provision (benefit) for income taxes, depreciation and
amortization expense ("EBITDA") for each of the periods presented:
<TABLE>
<CAPTION>
Transition
Years Ended June 30, Period Ended
---------------------------------------------- December 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 11,964,377 $ 29,097,615 $ 66,537,631 $ 54,057,186
============ ============ ============ ============
Net income $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
Interest expense, net 54,648 930,598 3,188,126 2,884,300
Provision (benefit) for income taxes 278,000 (1,389,100) 2,700,000 1,410,000
Depreciation and amortization 569,291 1,172,594 3,058,729 2,762,348
Minority interest in EBITDA
of consolidated partnerships (413,207) (662,041) (667,490) --
------------ ------------ ------------ ------------
EBITDA $ 1,047,519 $ 2,933,663 $ 12,368,893 $ 8,996,071
============ ============ ============ ============
EBITDA as a percentage of revenues 9% 10% 19% 17%
============ ============ ============ ============
</TABLE>
II-28
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
10. Earnings Per Share:
The following table sets forth the computation of basic and diluted
earnings per common share:
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------- December 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Numerator:
Net income $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
Accretion of preferred stock -- (846,437) (14,300,008) (7,303,669)
------------ ------------ ------------ ------------
Numerator for basic earnings per
share-income applicable to common stock $ 558,787 $ 2,035,175 $(10,210,480) $ (5,364,246)
Effect of dilutive securities:
Accretion of preferred stock -- 846,437 -- --
------------ ------------ ------------ ------------
Numerator for diluted earnings
per share-income applicable to
common stock after assumed conversions $ 558,787 $ 2,881,612 $(10,210,480) $ (5,364,246)
Denominator:
Denominator for basic earnings per
share-Weighted average shares 4,491,026 4,835,029 4,954,035 4,951,325
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 4,491,026 9,498,068 4,954,035 4,951,325
============ ============ ============ ============
</TABLE>
Options and warrants to purchase 1,000,000, 3,653,119, 4,158,706 and
4,288,706 shares of common stock were outstanding as of June 30, 1996,
1997, 1998 and the Transition Period Ended December 31, 1998,
respectively, but were not included in the computation of diluted earnings
per share because their effect would be anti-dilutive. Additionally,
9,304,773 and 10,797,562 shares of Convertible Preferred Stock were
outstanding as of December 31, 1998, but were not included in the
computation of diluted earnings per share because their effect would also
be anti-dilutive.
II-29
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
11. Stock Option Plan:
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 may be granted at prices
determined by the Company's Board of Directors, but in no case shall such
price be 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. Under
certain conditions, these options may vest on an accelerated basis.
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, 1998, 1,375,250 options were outstanding under this
plan and no further options were available for grant.
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 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.
The following is a summary of the non-qualified stock options activity for
the years ended June 30, 1996, 1997, 1998 and the Transition Period Ended
December 31, 1998:
<TABLE>
<CAPTION>
June 30, June 30, June 30, December 31,
1996 1997 1998 1998
----------------------- --------------------- ---------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period 677,000 $0.53 1,000,000 $1.16 2,725,000 $1.68 2,525,250 $1.98
Granted 1,207,000 0.88 1,725,000 2.00 220,750 2.86 200,000 6.00
Exercised (407,000) 0.01 -- -- (420,000) 0.50 -- --
Expired (70,000) 1.00 -- -- -- -- -- --
Retired (407,000) 0.50 -- -- (500) 2.00 (70,000) 2.98
---------- ---------- ---------- ----------
Options
outstanding,
end of period 1,000,000 $1.16 2,725,000 $1.68 2,525,250 $1.98 2,655,250 $2.26
========== ========== ========== ==========
Options
exercisable,
end of period 670,000 $0.75 1,280,000 $1.34 1,092,500 $1.81 1,186,583 $1.82
========== ========== ========== ==========
Options
available for
grant, end of
period -- 245,000 24,250 --
========== ========== ========== ==========
Weighted-average
fair value of
options
granted
during the
period $ 0.08 $ 0.22 $ 0.61 $ 0.11
========== ========== ========== ==========
</TABLE>
II-30
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
During fiscal 1996, a key executive was granted a reduction in the
exercise price of 407,000 stock options from $0.50 to $0.01.
The exercise prices for options outstanding as of December 31, 1998 range
from $0.50 to $6.00 per share. The weighted average remaining contractual
life for options outstanding as of December 31, 1998 is approximately 6
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 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, 1996, 1997, and 1998
and the Transition Period Ended December 31, 1998, the Company's net
income and earnings per share would have been as follows :
<TABLE>
<CAPTION>
June 30, June 30, June 30, December 31,
1996 1997 1998 1998
------------ ------------ ------------- -------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Net income as reported $ 558,787 $ 2,881,612 $ 4,089,528 $ 1,939,423
Net income - pro forma 525,797 2,752,612 4,049,598 1,909,131
Basic earnings (loss) per common share - as
reported 0.12 0.42 (2.06) (1.08)
Basic earnings (loss) per common share - pro
forma 0.11 0.39 (2.07) (1.09)
Diluted earnings (loss) per common share - as
reported 0.12 0.30 (2.06) (1.08)
Diluted earnings(loss) per common share - pro
forma 0.11 0.29 (2.07) (1.09)
</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 in fiscal 1996,
1997, 1998 and the Transition Period, respectively: no dividend yield;
expected volatility of 0%, risk free interest rates of 6.3%, 6.2%, 5.7%
and 5.3%; and expected lives approximating 5 years.
12. 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 $17,000, $21,000, $95,000 and $86,000 to the Plan in fiscal
1996, 1997, 1998 and the Transition Period, respectively.
II-31
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
13. Redeemable Convertible Preferred Stock:
During the Transition Period, the Company issued 817,853 shares of Series
B Convertible Preferred Stock ("Series B") to acquire the remaining
interests in all of its 7 controlled partnerships (see Note 2). Concurrent
with this transaction, the Company issued 480,236 shares of Series B for
net proceeds of $2,266,121 (net of issuance costs of $15,000). The Company
also issued 200,000 shares of Series B 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 for net proceeds of $7,874,400 (net of
issuance costs of $343,395). In connection with the Series B offering, the
Company issued 54,380 warrants to purchase the Company's common stock. The
warrants are exercisable at $4.75 per share and expire on April 30, 2003.
During fiscal 1997, the Company amended its Articles of Incorporation to
increase the authorized shares of its common stock from 12.5 million to 35
million and its preferred stock from 2.5 million to 15 million. In
addition, the Company reduced the par value of its preferred stock from $4
per share to $0.01 per share.
During fiscal 1997, the Company authorized and issued 7,574,711 shares of
Series A Convertible Preferred Stock ("Series A") 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
offering, the Company issued 1,488,119 warrants to purchase the Company's
common stock. The warrants are exercisable at $1.70 per share and expire
in November 2001.
The Series A and Series B (collectively, the "Preferred Stock") rank on a
parity with each other and senior to the Company's common stock (the
"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 Preferred Stock are convertible, in whole
or in part, at any time prior to November 15, 2004 at the option of the
holder thereof into an equivalent number of shares of Common Stock
(subject to adjustments for certain dilutive events). Mandatory conversion
of such shares into Common Stock will occur at the conversion rate
described in the preceding sentence upon an initial public offering
meeting certain quantitative standards.
The outstanding shares of the Preferred Stock must be redeemed by the
Company on November 15, 2004 at a price per share equal to $1.7041 (in the
case of the Series A) or $4.75 (in the case of the Series B) 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 (see
Note
II-32
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
15). The redemption price is payable either in cash or Common Stock, at
the Company's election. Upon the occurrence of certain liquidation events,
the holders of Preferred Stock shall be entitled to receive an amount per
share equal to the respective redemption amounts set forth above. 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) or $4.75 (in the case of the Series B) 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, and (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 Preferred Stock and is subject to the consent of the
Company's senior lender.
In connection with the Put, 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, 1998 was $22,450,114.
14. Transition Period Comparative Data:
Six Months Ended
December 31,
1998 1997
------------ ------------
(Reatated) (Restated and
Unaudited)
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 income (loss) applicable to
common stock $ (5,364,246) $ 1,290,736
============ ============
II-33
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1997
---------------- ----------------
(Unaudited)
(Restated) (Restated)
<S> <C> <C>
Share information:
Basic earnings:
Net income (loss) per common share $ (1.08) $ 0.27
================ ================
Average shares outstanding 4,951,325 4,843,468
================ ================
Diluted earnings:
Net income (loss) per common share $ (1.08) $ 0.16
================ ================
Average shares outstanding 4,951,325 12,591,972
================ ================
</TABLE>
15. Subsequent Events:
A. On January 8, 1999, two newly formed subsidiaries of the Company
were merged (the "Mergers") with and into InterOffice Superholding
Corporation ("InterOffice") and Reckson Executive Centers, Inc.
("Reckson"), respectively. InterOffice and Reckson collectively
owned 48 business centers, which generated revenues of approximately
$52.7 million (unaudited) and contribution from operation of
business centers of approximately $11.4 million (unaudited) for the
twelve months ended December 31, 1998. As a result of the Mergers,
InterOffice and Reckson 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") and the Company received $8.4 million in cash.
In connection with the Mergers, the Company authorized 15,000,000
shares of Series C, which will rank on a parity with the Series A
and Series B. In connection with the issuance of the Series C, the
Series A and Series B were modified in certain respects, including
the elimination of redemption rights. Except for certain class
voting rights and except for the conversion feature described below,
the Series C will have substantially identical terms as the Series A
and Series B. If the original holders of the Series C or certain of
their permitted transferees are the holders of the Series C at the
time of conversion thereof, the Series C will be converted into
Class B Common Stock which will have identical terms and conditions
as the Company's 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.
B. (Unaudited) 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 subsequent to December 31, 1998.
II-34
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
Subsequent to December 31, 1998, the Company increased the
authorized shares of its common stock to 63,500,000, of which
43,500,000 and 20,000,000 are designated Class A Common Stock and
Class B Common Stock, respectively, and its preferred stock to
33,500,000.
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.
Effective August 3, 1999, the Company increased its $100 million
credit agreement with various lending institutions to approximately
$158 million. The credit agreement 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.
Subsequent to December 31, 1998, 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.
Subsequent to December 31, 1998, the Company authorized 3,500,000
shares and issued 2,677,158 shares of Series E Preferred Stock for
net proceeds of approximately $14.1 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.
II-35
<PAGE>
VANTAS Incorporated and Subsidiaries
Notes to Consolidated Financial Statements, Continued
- --------------------------------------------------------------------------------
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.
16. Restatements:
The Company has restated its financial statements as of June 30, 1997 and
as of and for the periods ended June 20, 1998 and December 31, 1998 to
classify its Series A and Series B redeemable convertible preferred stock
outside of permanent equity and to record additional accretion in the
periods ended June 30, 1998 and December 31, 1998 to account for the full
redemption amount of the Series A Preferred Stock equal to the higher
estimated appraised value of the common stock into which the Series A
Preferred Stock is convertible under the redemption price formula.
As discussed in Note 13, 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 June 30, 1997 was
a decrease to stockholders' equity of $12,324,047. The effect of the
restatement on the balance sheet as of June 30, 1998 and December 31, 1998
was a decrease to retained earnings of $12,740,501 and $18,769,277,
respectively, and a decrease to stockholders' equity of $34,498,455 and
$47,927,872, respectively.
II-36
<PAGE>
The following represents the impact of the restatement on the statements
of income:
<TABLE>
<CAPTION>
Transition Period
Year Ended Ended
June 30, 1998 December 31, 1998
-------------------------------- -------------------------------
(as reported) (restated) (as reported) (restated)
<S> <C> <C> <C> <C>
Net income $ 4,089,528 $ 4,089,528 $ 1,939,423 $ 1,939,423
Accretion of preferred stock (1,559,507) (14,300,008) (1,274,893) (7,303,669)
------------ ------------ ------------ ------------
Net income (loss) applicable to
common stock $ 2,530,021 $(10,210,480) $ 664,530 $ (5,364,246)
============ ============ ============ ============
Share information:
Basic earnings (loss):
Net income (loss) per common share $0.51 ($2.06) $0.13 ($1.08)
============ ============ ============ ============
Diluted earnings (loss):
Net income (loss) per common share $0.28 ($2.06) $0.10 ($1.08)
============ ============ ============ ============
</TABLE>
II-37
<PAGE>
VANTAS Incorporated and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------- ------------ --------------------------- ------------- ----------
Additions
--------------------
Description Balance at Charged to Charged to Deductions - Balance at
beginning costs and other describe(1) end of
of period expenses accounts period
receivable
<S> <C> <C> <C> <C> <C>
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
--------- --------- ------ ---------- ---------
Year ended June 30, 1996
Allowance for doubtful accounts $ 28,000 $ 95,730 $ - $ 68,730 $ 55,000
--------- --------- ------ ---------- ---------
</TABLE>
(1) Accounts written off
II-38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 3, 1999, VANTAS discharged PricewaterhouseCoopers LLP as its
independent accountants and retained Ernst & Young LLP. For further information
see VANTAS's Form 8-K filed on December 10, 1999.
II-39
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors of VANTAS consists of ten members elected annually.
Currently, there are seven directors and three vacant board seats.
The following table sets forth certain information with respect to the
executive officers and directors of VANTAS as of December 31, 1999, based upon
information furnished to VANTAS by each director and executive officer.
<TABLE>
<CAPTION>
NAME TITLE AGE TERM AS OFFICER/DIRECTOR
DIRECTOR EXPIRES SINCE
<S> <C> <C> <C> <C>
David W. Beale President, Chief Executive 39 2000 1986
Officer and Director
Alan M. Langer Executive Vice President 48 1994
and Chief Financial Officer
David Rupert Executive Vice President 51 1999
and Chief Operating Officer
T.J. Tison Executive Vice President 51 1999
and Chief Investment
Officer
Daniel DiSano Director 31 2000 1999
Christopher George Director 32 2000 1999
Jon Halpern Director 37 2000 1999
Jeffrey D. Neumann Director 37 2000 1999
Stephen M. Rathkopf Director 56 2000 1999
Scott H. Rechler Chairman of the Board 32 2000 1999
</TABLE>
DAVID W. BEALE, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr. Beale
was a founder and Director of Corporate Planning Services, Inc. ("CPS") from
1984 to 1990. CPS was a holding company that operated an NASD registered
broker-dealer and a financial software company as well as owned a controlling
interest in VANTAS. From March 1983 to June 1984, Mr. Beale was a Director for
Marketing of COAP Planning Corp., a wholesaler of financial products and
services. Prior to March 1983, Bristol-Myers & Co. employed him in various
marketing capacities. Mr. Beale holds a BS degree in both management and
marketing from CW Post College/Long Island University. From 1989 to 1994, Mr.
Beale was a member of the Board of Directors and the Financial Standards
Committee of the Executive Suite Association, the business center's industry
trade association.
ALAN M. LANGER, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER. Mr.
Langer joined VANTAS in July 1994. From 1986 to 1994, Mr. Langer served as Chief
Financial Officer of Charivari, a high fashion retailer and wholesaler of men
and women's apparel. Prior to 1986, Mr. Langer was Senior Audit Manager for the
New York and London offices of Coopers & Lybrand (now PricewaterhouseCoopers LLP
("PWC")). While at PWC, he specialized in retail, banking, communications, and
mergers and acquisitions reviews. Mr. Langer holds a BBA degree from Baruch
College. He is a member of the American Institute of Certified Public
Accountants and the New York Society of Certified Public Accountants.
DAVID RUPERT, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER. Mr.
Rupert joined VANTAS in September 1999. Previously, Mr. Rupert was President of
Pitney Bowes Business Services, a division of Pitney Bowes, Inc. This $600
million global unit serves clients in more than 1,000 locations. Under Mr.
Rupert's leadership, the Business Services unit was the fastest growing division
of the company, providing a variety of outsourced services, among them mail,
copy center and fax management, records and information management and document
services. Mr. Rupert earned a Bachelor of Arts Degree from Georgetown University
and a Masters Degree in Management from Yale University.
III-1
<PAGE>
T.J. TISON, EXECUTIVE VICE PRESIDENT AND CHIEF INVESTMENT OFFICER. Prior
to the Mergers, Mr. Tison served as Chief Investment Officer of InterOffice,
where he led the expansion and acquisition team in the U.S. and abroad. Before
joining InterOffice in September 1998, Mr. Tison was President and Chief
Executive Officer of HQ Business Centers Network, a company he served for
fourteen years. Mr. Tison is credited with building HQ from 21 executive suite
centers in 1984 to 202 centers in 1997, operating in 20 countries, with $200
million in revenues. Before joining HQ, he was with United Technologies
Corporation, serving as Chief Operating Officer of its executive suite division.
McDonald's Corporation employed Mr. Tison for nine years, where he had regional
responsibility for domestic and international sales development and management.
Mr. Tison received both a BS and a MBA from the University of Illinois. He is a
decorated Vietnam veteran.
DANIEL DISANO, DIRECTOR. Mr. DiSano serves as a Director on VANTAS's
Strategic Steering Committee. He is Senior Vice President of Operations of RSI,
a high growth business to business service provider. Mr. DiSano was the first
full-time employee of RSI, helping spin off the company from Reckson Associates
Realty Corp., and significantly grow RSI's market value in its first year as a
public company. Prior to joining RSI, Mr. DiSano was a consultant with
Booz-Allen Hamilton, a leading management consulting firm. Mr. DiSano worked on
several strategic and operational issues including several growth strategy
engagements. Prior to joining Booz-Allen Hamilton, Mr. DiSano was a consultant
and Staff Manager with Charles River Associates, a leading economic consulting
firm. Mr. DiSano has founded the Lorraine I. DiSano Cancer Foundation to raise
funds for innovative cancer research. Mr. DiSano graduated from Clark University
with a BA in Economics and earned an MBA from MIT Sloan School of Management.
CHRISTOPHER GEORGE, DIRECTOR. Mr. George serves as a Director of VANTAS.
He is Senior Vice President of Strategic Investments at RSI. Prior to joining
RSI in 1998, Mr. George was a Managing Director in the Equity Research
Department of Bear, Stearns & Co. Inc. where he was involved in building a
top-tier real estate research and investment banking franchise, and published
the Bear, Stearns US Real Estate Almanac. Mr. George holds a Bachelor of Arts
degree from the University of Michigan and an MBA in Finance from New York
University Stern School of Business.
JON HALPERN, DIRECTOR. Mr. Halpern serves as a Director of VANTAS, and
serves on the Board's Executive and Strategic Steering Committees. Pursuant to a
letter agreement dated September 23, 1999, RSI has agreed, for a period of three
years after the closing of the sale to RSI of JAH I/O LLC (described in Note 6
of "Item 12 -- Security Ownership of Certain Beneficial Owners and Managers"),
to cause Mr. Halpern to be elected a director and named Vice Chairman of the
board of directors of VANTAS. He is the sole stockholder, Chairman & CEO of JLH
Realty Management Service, Inc., the General Partner of JAH Realties, L.P., a
partnership with investments in, in addition to VANTAS, telecommunications, the
Internet, and real estate. In connection with these investments, Mr. Halpern
serves as a board observer of OnSite Access, Inc. ("OnSite") a leader in
building-centric Internet service and telephony. He is also Co-Chairman of
Summit Aviation, a high-end executive jet charter and transportation company. In
addition, Mr. Halpern is the Managing Director of Halpern Real Estate
Development, LLC, a full-service real estate organization. He serves as a Member
of the Board of Directors and Executive Committee of the Westchester Medical
Center. From 1997 through 1998, Mr. Halpern was a Director and Executive Vice
President of Reckson Associates Realty Corp. and President of its Westchester
Division. Mr. Halpern has a Bachelor of Science Degree from the School of
Business at the University of Colorado.
JEFFREY D. NEUMANN, DIRECTOR. Mr. Neumann serves as a Director of VANTAS.
He is Executive Vice President of Investments at RSI and is responsible for all
investments and acquisitions for the company. Prior to joining RSI in 1998, Mr.
Neumann was a Vice President in GE Capital's private equity investment
subsidiary. While at GE Capital, Mr. Neumann participated in numerous
investments in both public and private companies. Previously, Mr. Neumann was
the President of a manufacturing company and of a health care company. He
started his career with the investment banking firm of Bear, Stearns & Co. Inc.
in New York. Mr. Neumann is a Director of OnSite and eSourceOne, Inc.
("eSourceOne"). Mr. Neumann holds an MBA in Finance from New York University
Stern School of Business and a Bachelor of Arts from Ithaca College.
III-2
<PAGE>
STEPHEN M. RATHKOPF, DIRECTOR. Mr. Rathkopf serves as a Director of
VANTAS. He is Senior Vice President and Legal Counsel at RSI, where he is
involved in the structuring and negotiation of RSI's investments as well as
assisting partner companies. Prior to joining RSI, Mr. Rathkopf was a Managing
Partner of Herrick, Feinstein LLP, a 100 attorney New York City law firm, where
he was also the Chairman of the Corporate Department and head of the firm's
Business Development Committee. While at Herrick, Mr. Rathkopf headed up the
corporate team in a wide variety of corporate transactions, mergers,
acquisitions, joint ventures and private equity investments and also originated
numerous transactions for the firm's clients. He holds a JURIS DOCTOR from New
York University School of Law and a Bachelor of Arts from City College of New
York.
SCOTT H. RECHLER, CHAIRMAN OF THE BOARD. Mr. Rechler is Chairman of the
Board of Directors and serves on the Board's Executive, Audit and Compensation
Committee. He is President and Co-Chief Executive Officer of Reckson Associates
Realty Corp. (NYSE), one of the premier commercial real estate operating
companies in the Northeast. Mr. Rechler was the architect of Reckson's
successful initial public offering in June 1995. He has overseen over $1.3
billion in acquisitions and developments since joining Reckson in 1989.
Subsequent to Reckson's initial public offering, its size quadrupled to over 21
million square feet with a total market capitalization in excess of $1.0
billion. Mr. Rechler also serves as President, Chief Executive Officer and a
director of RSI and serves on the boards of OnSite and eSourceOne. Mr. Rechler
is a frequent lecturer among his peers, addressing organizations such as the
Real Estate Lenders Association, New York Society of Security Analysts, and
National Association of Industrial and Office Properties. He has spoken at the
nation's leading universities, among them the University of Pennsylvania's
Wharton School of Business and New York University. Mr. Rechler is an active
fund-raiser for a number of charities, including the Long Island Children's
Museum, where he is a chairman of the Corporate Committee and a member of the
Board of Directors. Mr. Rechler is a graduate of Clark University. He received a
Master of Finance Degree from New York University.
III-3
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding the compensation
awarded for services rendered during the six months ended December 31, 1998 and
the fiscal year ended June 30, 1998 ("Fiscal - December 1998" and "Fiscal - June
1998", respectively) to the Chief Executive Officer, the two other executive
officers of VANTAS and two additional employees of the Company (collectively,
the "Named Executive Officers") whose base salary, on an annualized basis,
exceeded $100,000 during the six months ended December 31, 1998. In October
1998, the Board of Directors approved the change in VANTAS's fiscal year from
June 30 to December 31, commencing December 31, 1998. As a result, the
information in the table for Fiscal - December 1998 reflects only the six month
period of July 1, 1998 through December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER RESTRICTED
NAME AND PRINCIPAL BASE ANNUAL STOCK LONG TERM ALL
POSITION PERIOD SALARY($) BONUSES($) COMPENSATION GRANTS OPTIONS OTHER($)
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Beale Fiscal - Dec 1998 137,812 232,500 - - 200,000 -
Chief Executive Officer Fiscal - June 1998 262,500 533,000 - - - -
Alan M. Langer Fiscal - Dec 1998 100,000 58,125 - - - -
Executive Vice President Fiscal - June 1998 150,000 125,000 - - - -
and Chief Financial
Officer
Jerry Daniels (1) Fiscal - Dec 1998 125,000 58,125 - - - -
Executive Vice President Fiscal - June 1998 225,000 100,000 - - - -
and Chief Operating
Officer
Mitchell Knecht Fiscal - Dec 1998 88,750 13,973 - - - -
Senior Vice President, Fiscal - June 1998 93,750 22,917 - - - -
Technology
Laura Kozelouzek Fiscal - Dec 1998 59,167 39,736 - - - -
Senior Vice President, Fiscal - June 1998 99,583 47,317 - - - -
Eastern Region
</TABLE>
(1) Jerry Daniels left the employ of VANTAS in March, 1999.
OPTION/SAR GRANTS FOR SIX MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF COMMON
OPTIONS GRANTED EXERCISE PRICE STOCK PRICE APPRECIATION
OPTIONS TO EMPLOYEES PER SHARE OF FOR OPTION TERM(2)
NAME GRANTED FOR FISCAL YEAR COMMONSTOCK(1) EXPIRATION DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C> <C>
David W. Beale 200,000 100% $6.00 8/4/03 $331,538 $732,612
Jerry Daniels 0 - - - -
Alan M. Langer 0 - - - -
Mitchell Knecht 0 - - - -
Laura Kozelouzek 0 - - - -
</TABLE>
III-4
<PAGE>
(1) All options are granted with an exercise price equal to the fair market
value of the Common Stock on the date of grant and have a term of not more
than five years from the date of grant. The options granted for the six
months ended December 31, 1998 were vested on the date of grant.
(2) In accordance with the rules of the Securities and Exchange Commission,
these amounts are the hypothetical gains of "option spreads" that would
exist for the respective options based on assumed rates of annual compound
share price appreciation of 5% and 10% from the date the options were
granted over the full option term. No gain to the optionee is possible
without an increase in the price of Common Stock, which would benefit all
shareholders.
No options were exercised by the Named Executive Officers in the six
months ended December 31, 1998. The following table sets forth the value of
options at the end of 1998 by VANTAS's Named Executive Officers.
AGGREGATED FISCAL - DEC. 1998 YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SHARES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL - DEC.
OPTIONS AT FISCAL - DEC. 1998 1998
YEAR-END(#) YEAR-END($)(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
David W. Beale........... 735,000/540,000 $1,621,250/$1,485,000
Alan M. Langer........... 128,500/76,500 $353,375/$210,375
Jerry Daniels............ 15,000/135,000 $41,250/$371,250
Mitchell Knecht.......... 2,500/22,500 $6,875/$61,875
Laura Kozelouzek......... 106,000/54,000 $321,500/$148,500
</TABLE>
(1) The value of unexercised in-the-money options at Fiscal - Dec. 1998
year-end, based on the fair market value for Common Stock of $4.75 per
share, as of December 31, 1998.
DIRECTOR COMPENSATION
Each of the non-employee directors of VANTAS receives an annual director's
fee of $5,000.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has an employment contract with Mr. Beale that expires on June
30, 2002. Pursuant to the contract, Mr. Beale is currently receiving an annual
salary of $500,000. The contract also provides for a performance bonus and an
incentive plan. In addition, the contract provides that if Mr. Beale is
terminated without Cause (as defined therein) or resigns in the event of certain
substantial management changes, then Mr. Beale is entitled to severance benefits
including lump sum payments of salary and bonus for the periods specified in the
contract and the vesting and/or repurchase of certain equity interests in the
Company. The contract also contains non-competition and non-disclosure
provisions applicable to Mr. Beale. Messrs. Langer, Rupert and Tison have
entered into similar agreements with the Company providing for differing
compensation levels and expiring on December 31, 2001 (including automatic six
month renewal options), September 7, 2002 (including automatic six month renewal
options), and May 13, 2001, respectively.
III-5
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common Stock
for (i) each stockholder of VANTAS holding more than a 5% beneficial interest in
VANTAS, (ii) each executive officer and director of VANTAS and (iii) the
directors and executive officers of VANTAS as a group. Unless otherwise noted,
the address of the holder is the address of VANTAS.
<TABLE>
<CAPTION>
Shares of Common Stock Beneficially
OWNED AS OF DECEMBER 31, 1999(1)
NAME OF BENEFICIAL OWNERS NUMBER PERCENT OF TOTAL(2)
- ------------------------- ------ -------------------
<S> <C> <C>
Reckson Service Industries, Inc.(3)............................... 29,689,589 85.8%
David W. Beale (4)................................................ 2,239,698 27.5%
Alan M. Langer (5)................................................ 392,984 5.3%
David Rupert...................................................... 0 0
T.J. Tison........................................................ * *
Daniel DiSano..................................................... 0 0
Christopher George................................................ 0 0
Jon Halpern (6)................................................... 0 0
Jeffrey D. Neumann................................................ 0 0
Stephen M. Rathkopf............................................... 0 0
Scott H. Rechler.................................................. 0 0
All directors and executive officers as a group (10 persons)...... 2,632,682 31.2%
</TABLE>
III-6
<PAGE>
* Less than one percent.
(1) All information has been determined as of December 31, 1999. For purposes
of this table a person is deemed to have "beneficial ownership" of the
number of shares of Common Stock that person has the right to acquire
pursuant to the exercise of stock options or warrants or the conversion of
a security within 60 days. See "Executive Compensation" for a discussion
of the vesting of stock options granted to directors and officers.
(2) For purposes of computing the percentage of outstanding shares of Common
Stock held by each person, any shares of Common Stock which such person
has the right to acquire pursuant to the exercise of stock options or
warrants or the conversion of a security within 60 days is deemed to be
outstanding, but is not deemed to be outstanding for the purposes of
computing the percent ownership of any other person.
(3) The address of this holder is 10 East 50th Street, New York, New York
10022. In addition to shares held directly by RSI, these shares include
the interests of Arnold Widder, RSI I/O Holdings, Inc., Reckson Office
Centers LLC and Interoffice Superholdings LLC attributable to RSI pursuant
to Rule 13d-3 under the Securities Exchange Act of 1934. The shares deemed
to be owned by this holder include 2,164,354 shares of common stock,
7,041,840 shares of Series A Preferred Stock, 1,667,051 shares of Series B
Preferred Stock, 13,325,424 shares of Series C Preferred Stock, 5,109,873
shares of Series D Preferred Stock, and 381,047 shares of Series E
Preferred Stock held directly and through the other entities named above.
(4) Includes 1,173,653 shares of Common Stock, 200,000 shares of Series B
Preferred Stock and options to purchase 866,045 shares of Common Stock.
(5) Includes 80,000 shares of Common Stock, 76,287 shares of Series A
Preferred Stock, 95,825 shares of Series B Preferred Stock, options to
purchase 133,244 shares of Common Stock and warrants to purchase 7,628
shares of Common Stock.
(6) Mr. Halpern is the sole stockholder of JLH Realty Management Service,
Inc., which is the general partner of JAH Realties, L.P. ("JAH LP"). JAH
LP is the sole member of JAH I/O, LLC, which is a member of Interoffice
Superholdings LLC (see Note 3). On September 23, 1999, JAH LP entered into
an agreement under which it has agreed to sell all of its interests in JAH
I/O, LLC to RSI.
III-7
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
VANTAS is tenant under nine leases with Reckson Operating Partnership,
L.P., an affiliate of RSI. For the twelve month period ended December 31, 1999,
VANTAS paid approximately $3.3 million, in the aggregate, for rent and other
charges under such leases.
For the twelve month period ended December 31, 1999, VANTAS paid OnSite,
an affiliate of RSI, approximately $346,000 in respect of the provision of
internet access and telephony services.
III-8
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS AND SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(A) INDEX TO FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
EXHIBITS
The financial statements, financial statement schedule and exhibits are
listed below and are filed as part of this report.
(1) FINANCIAL STATEMENTS
Included in Part II of this report:
PAGE
Report of Independent Auditors....................................... 1
Consolidated Balance Sheets as of December 31, 1998
and June 30, 1998 and 1997 (Restated) .......................... 2
Consolidated Statements of Income for the transition
period ended December 31, 1998 and for the years ended
June 30, 1998, 1997 and 1996 (Restated) ........................ 3
Consolidated Statements of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit) for the transition period
ended December 31, 1998 and for the years ended June 30, 1998,
1997 and 1996 (Restated) ..................................... 4
Consolidated Statements of Cash Flows for the transition
period ended December 31, 1998 and for the years
ended June 30, 1998, 1997 and 1996.............................. 5-6
Notes to Consolidated Financial Statements (Restated)................ 7-26
(2) FINANCIAL STATEMENTS SCHEDULES
Included in Part II of this report:
Schedule II - Valuation and Qualifying Accounts
Other financial statement schedules are omitted because they are not
required, or the information is presented in the consolidated
financial statements or notes thereto.
(3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
3.1* Amended and Restated Articles of Incorporation
3.2 Certificate of Amendment/Designation to Amended and
Restated Articles of Incorporation
3.3* By-laws and Amendments
4.1* Fifth Amended and Restated Certificate of Designation
of Series A Convertible Preferred Stock
4.2* Seconded Amended and Restated Certificate of
Designation of Series B Convertible Preferred Stock
4.3* Amended and Restated Certificate of Designation of
Series C Convertible Preferred Stock
4.4* Certificate of Designation of Series D Convertible
Preferred Stock
4.5* Amended and Restated Certificate of Designation of
Series E Convertible Preferred Stock
4.6 Certificate of Amendment/Designation to Amended and
Restated Certificate of Designation of Series E
Convertible Preferred Stock
4.7* Fifth Amended and Restated Stockholders Agreement
10.1* Amended and Restated Credit Agreement by and among
VANTAS, Various Banks and Paribas
10.2* Employment Agreement with David Beale
10.3* Employment Agreement with Alan Langer
10.4 Employment Agreement with David Rupert
10.5* Employment Agreement with T.J. Tison
10.6* Employment Agreement with Stephen Fowler
10.7* Agreement, dated as of October 29, 1999, by and among
David Beale, Reckson Service Industries, Inc. and
VANTAS
10.8* Agreement, dated as of October 29, 1999, by and among
Alan Langer, Reckson Service Industries, Inc. and
VANTAS
10.9* Agreement, dated as of October 29, 1999, by and among
Mitchell Knecht, Reckson Service Industries, Inc. and
VANTAS
10.10* Promissory Note of David Beale
10.11* 1999 Stock Option Plan
10.12* 1996 Stock Option Plan
10.13 Intercompany Agreement dated as of January 8, 1999 by
and between VANTAS (then known as Alliance National
Incorporated) and Reckson Service Industries, Inc.
10.14 Agreement dated December 30, 1999 among VANTAS,
Reckson Service Industries, Inc. and the VANTAS
employees listed as signatories thereto.
27 Financial Data Schedules
----------
* Previously filed as an exhibit to VANTAS's Form 10-Q
report filed with the SEC on November 15, 1999 and
incorporated herein by reference.
(B) REPORTS ON FORM 8-K
VANTAS did not file any reports on Form 8-K in the periods covered by this
annual report on Form 10-K.
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15 (d) 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 on January 18, 2000.
VANTAS INCORPORATED
By: /s/ David W. Beale
-------------------------------------
David W. Beale
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of VANTAS Incorporated, hereby severally constitute David W. Beale and
Alan M. Langer, and each of them singly, our true and lawful attorneys with full
power to them, and each of them singly, to sign for us and in our names in the
capacities indicated below, the Form 10-K filed herewith and any and all
amendments to said Form 10-K, and generally to do all such things in our names
and in our capacities as officers and directors to enable VANTAS Incorporated to
comply with the provisions of the Securities Exchange Act of 1934, and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorneys, or any of
them, to said Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ David W. Beale President, Chief Executive Officer and January 18, 2000
- --------------------------- Director (Principal Executive Officer)
(David W. Beale)
/s/ Alan M. Langer Executive Vice President, Treasurer and January 18, 2000
- --------------------------- Chief Financial Officer (Principal
(Alan M. Langer) Financial Officer and Principal
Accounting Officer)
/s/ Daniel DiSano Director January 18, 2000
- ---------------------------
(Daniel DiSano)
/s/ Christopher George Director January 18, 2000
- ---------------------------
(Christopher George)
Director
- ---------------------------
(Jon Halpern)
/s/ Jeffrey D. Neumann Director January 18, 2000
- ---------------------------
(Jeffrey D. Neumann)
/s/ Stephen M. Rathkopf Director January 18, 2000
- ---------------------------
(Stephen M. Rathkopf)
/s/ Scott H. Rechler Director January 18, 2000
- ---------------------------
(Scott H. Rechler)
</TABLE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT/DESIGNATION
TO
AMENDED AND RESTATEDARTICLES OF INCORPORATION
OF
VANTAS INCORPORATED
(To Increase the Number of Authorized Shares of
Common Stock and Preferred Stock)
Pursuant to Chapter 78 of the Nevada Revised Statutes, VANTAS
Incorporated, a Nevada corporation (the "Corporation"), does hereby certify as
follows:
1. The name of the Corporation is VANTAS Incorporated.
2. The following resolutions (which set forth amendments to, and provide
for the amendment of, the Amended and Restated Articles of Incorporation of the
Corporation filed May 27, 1988, as amended by Certificate filed July 31, 1991,
as further amended by Certificate of Amendment filed April 24, 1996, as further
amended by Articles of Amendment filed November 15, 1996, as further amended by
Articles of Amendment filed November 15, 1996, as further amended and restated
by Amended and Restated Articles of Incorporation filed January 8, 1999, and as
further amended and restated by Amended and Restated Articles of Incorporation
filed July 23, 1999 (the "Amended and Restated Articles of Incorporation")),
were duly adopted by the Board of Directors of the Corporation as of January 3,
2000:
RESOLVED, that subject to the approval of the holders of a majority
of the issued and outstanding shares of common and preferred stock of the
Corporation, the Amended and Restated Articles of Incorporation be amended
as set forth as Exhibit A to this resolution (the "Certificate of
Amendment") to (i) increase the total authorized capital of the
Corporation from 92,000,000 shares, of which 61,000,000 shares are Common
Stock with a par value of $.01 per share and 31,000,000 shares are
Preferred Stock with a par value of $.01 per share, to 97,000,000 shares,
of which 63,500,000 shares are Common Stock with a par value of $.01 per
share and 33,500,000 shares are Preferred Stock with a par value of $.01
per share (as set forth in Article IV, Paragraph 1 of the Amended and
Restated Articles of Incorporation as amended by the Certificate of
Amendment), and (ii) to increase the number of shares of Common Stock
which are designated as Class A Common Stock from 41,000,000 shares of
Class A Common Stock with a par value of $.01 per share, to 43,500,000
shares of Class A Common Stock with a par value of $.01 per share (as set
forth in Article IV, Paragraph 2(a) of the Amended and Restated Articles
of Incorporation as amended by the Certificate of Amendment); and be it
further
RESOLVED, that the Certificate of Amendment be submitted to the
stockholders of the Corporation for approval, and upon the receipt of the
approval of the holders of a majority of the issued and outstanding shares
of common and preferred stock of the Corporation, the officers of this
Corporation be, and they hereby are, authorized and empowered to execute
and file with the Secretary of State of Nevada, the Certificate of
Amendment.
3. The number of shares of common stock outstanding at the time of the
adoption of this Certificate of Amendment was 5,961,738 shares. The total number
of shares of common stock entitled to vote thereon was 5,961,738 shares. The
number of shares of preferred stock outstanding at the time of the adoption of
this Certificate of Amendment was 29,837,272 shares. The total number of shares
of preferred stock entitled to vote thereon was 29,837,272 shares.
4. The number of shares of common stock voting for the adoption of this
Certificate of Amendment was 3,246,728 shares and voting against was zero
shares. The number of shares of preferred stock voting for the adoption of this
Certificate of Amendment was 27,257,117 shares and voting against was zero
shares. Accordingly, the written consent to the adoption of this Certificate of
Amendment to the Amended and Restated Articles of Incorporation of the
stockholders of the Corporation holding a majority of the voting power has been
obtained in accordance with the provisions of NRS Section 78.320.
5. This Certificate of Amendment is effective January 3, 2000.
<PAGE>
We, the undersigned President and Assistant Secretary, respectively, of
the Corporation, for the purpose of amending the Articles of Incorporation of a
corporation formed under the laws of the State of Nevada, do hereby make, file
and record this Certificate of Amendment to the Amended and Restated Articles of
Incorporation, and do hereby certify that the facts herein stated are true and
we have accordingly hereunto set our hands this 3rd day of January, 2000.
/s/ David W. Beale
-------------------------------------
David W. Beale
President and Chief Executive Officer
ATTEST:
/s/ Steven M. Cooperman
- ----------------------------------
Steven M. Cooperman
Assistant Secretary, Senior
Vice President and General Counsel
STATE OF NEW YORK )
) SS.
COUNTY OF NEW YORK )
On the 3rd day of January, 2000, personally appeared before me David
W. Beale, the President and Chief Executive Officer of the Corporation, and
Steven M. Cooperman, the Assistant Secretary, Senior Vice President and General
Counsel of the Corporation, and who acknowledged that they executed this
Certificate of Amendment to the Amended and Restated Articles of Incorporation.
/s/ Barbara DiMartino
----------------------------
Notary Public
<PAGE>
Exhibit A
ARTICLE IV, Paragraph 1 and ARTICLE IV, Paragraph 2(a) of the Amended and
Restated Articles of Incorporation of the Corporation are hereby amended and
restated in their entirety as follows:
"ARTICLE IV: 1. The total number of shares of all classes of capital stock
which the Corporation is authorized to issue is 97,000,000, of which 63,500,000
shares shall be Common Stock with a par value of $.01 per share and 33,500,000
shares shall be Preferred Stock with a par value of $.01 per share."
* * * *
"2. A description of the different classes of capital stock of the
Corporation, a statement of the relative rights of the holders of stock of such
classes, and a statement of the voting powers and the designations, preferences,
participating, optional or other special rights, and the qualifications,
limitations and restrictions thereof, of the various classes of stock are as
follows:
(a) The authorized common stock shall be divided into two classes,
Class A Common Stock of which there shall be 43,500,000 shares authorized, and
Class B Common Stock of which there shall be 20,000,000 shares authorized. All
of the shares of common stock issued and outstanding on the date of the filing
of these Amended and Restated Articles of Incorporation shall be designated as
Class A Common Stock. All shares of Class A Common Stock and Class B Common
Stock shall be identical in all respects, and each outstanding share of common
stock shall be entitled to one vote on each matter submitted to a vote at a
meeting of stockholders, provided, that prior to issuance of any shares of Class
B Common Stock, the Board of Directors shall, in a resolution or resolutions
providing for the issuance of such shares of Class B Common Stock adopted by the
Board of Directors, grant such special rights of the Class B Common Stock to
vote for Directors and to provide for conversion into Class A Common Stock upon
certain events as set forth in the Appendix which is attached to the Amended and
Restated Certificate of Designation of the Corporation's Series C Convertible
Preferred Stock, dated as of July 20, 1999, and to the Certificate of
Designation of the Corporation's Series D Convertible Preferred Stock, dated as
of July 20, 1999, and filed with the Nevada Secretary of State on July 23,
1999."
Exhibit 4.6
CERTIFICATE OF AMENDMENT/DESIGNATION
TO
AMENDED AND RESTATED
CERTIFICATE OF DESIGNATION
OF
VANTAS INCORPORATED
SERIES E CONVERTIBLE PREFERRED STOCK
Pursuant to Chapter 78 of the Nevada Revised Statutes, VANTAS
Incorporated, a Nevada corporation (the "Corporation"), does hereby certify as
follows:
1. The Amended and Restated Certificate of Designation for the
Corporation's Series E Convertible Preferred Stock dated September 17, 1999, and
filed with the Nevada Secretary of State on September 24, 1999, is hereby
amended to affix the Appendix (attached hereto) referenced in Section 8 of
Exhibit A (page 15) thereto, which was inadvertently omitted from that filing.
All necessary shareholder and director approvals were previously obtained.
2. The following resolutions were duly adopted by the Board of
Directors of the Corporation as of January 3, 2000:
RESOLVED, that pursuant to Article IV of the Amended and Restated
Articles of Incorporation of this Corporation dated July 20, 1999, as
amended by Certificate of Amendment dated January 3, 2000, the Corporation
hereby amends and restates in its entirety Section 1 of the Amended and
Restated Certificate of Designation for the Corporation's Series E
Convertible Preferred Stock dated September 17, 1999, and filed with the
Nevada Secretary of State on September 24, 1999 (the "Series E Certificate
of Designation"), as set forth on Exhibit B annexed hereto (the
"Certificate of Amendment to Series E Certificate of Designation"), to
increase the number of shares of preferred stock, par value $.01 per
share, of the Company designated as "Series E Convertible Preferred Stock"
from 1,000,000 shares to 3,500,000 shares; and be it further
RESOLVED, that the officers of this Corporation be, and they hereby
are, authorized and empowered to execute and file with the Secretary of
State of Nevada, the Certificate of Amendment to Series E Certificate of
Designation.
3. Set forth as Exhibit A is a true and correct copy of the
Certificate of Amendment to Series E Certificate of Designation.
4. All required approvals of the shareholders of the Corporation
have been obtained.
5. This Certificate is effective January 3, 2000.
<PAGE>
IN WITNESS WHEREOF, VANTAS Incorporated has caused this Certificate of
Amendment to be signed by its President and Assistant Secretary as of January 3,
2000.
By: /s/ David W. Beale
--------------------------
David W. Beale, President
Chief Executive Officer
ATTEST:
/s/ Steven M. Cooperman
- -----------------------------------
Steven M. Cooperman, Assistant Secretary,
Senior Vice President and General Counsel
STATE OF NEW YORK )
) SS.
COUNTY OF NEW YORK )
On the 3rd day of January 2000, personally appeared before me David
W. Beale, the President and Chief Executive Officer of the Corporation, and
Steven M. Cooperman, the Assistant Secretary, Senior Vice President and General
Counsel of the Corporation, and who acknowledged that they executed the above
Certificate of Amendment.
/s/ Barbara DiMartino
-----------------------------
Notary Public
<PAGE>
EXHIBIT A
Section 1 of the Certificate of Designation for the Corporation's Series E
Convertible Preferred Stock is hereby amended and restated in its entirety as
follows:
"1. DESIGNATION AND NUMBER OF SHARES. The designation of this series of
Three Million Five Hundred (3,500,000) shares of Preferred Stock, par value $.01
per share, created by the Board of Directors of the Corporation pursuant to the
authority granted to it by the Articles of Incorporation of the Corporation is
"Series E Convertible Preferred Stock," which is hereinafter referred to as the
"Series E Preferred Stock." In the event that the Corporation does not issue the
maximum number of shares of Series E Preferred Stock, the Corporation may, from
time to time, by resolution of the Board of Directors, reduce the number of
shares of Series E Preferred Stock authorized, provided, that no such reduction
shall reduce the number of authorized shares to a number which is less than the
number of shares of Series E Preferred Stock then issued or reserved for
issuance. The number of shares by which the Series E Preferred Stock is reduced
shall have the status of authorized but unissued shares of Preferred Stock,
without designation as to series until such stock is once more designated as
part of a particular series by the Corporation's Board of Directors. The Series
E Preferred Stock, the Corporation's Series A convertible preferred stock, par
value $.01 per share (the "Series A Preferred Stock"), the Corporation's Series
B convertible preferred stock, par value $.01 per share (the "Series B Preferred
Stock"), the Corporation's Series C convertible preferred stock, par value $.01
per share (the "Series C Preferred Stock"), and the Corporation's Series D
convertible preferred stock, par value $.01 per share (the "Series D Preferred
Stock" and, together with the Series A Preferred Stock, the Series B Preferred
Stock, Series C Preferred Stock and the Series E Preferred Stock, the "Preferred
Stock"), shall be pari passu, and without distinction as to class or series,
except as otherwise set forth herein or as the context otherwise requires, and
with respect to dividend rights and rights on liquidation, dissolution, or
winding up, shall rank senior to the Corporation's Class A common stock, par
value $.01 per share (the "Class A Common Stock"), and the Corporation's Class B
common stock, par value $.01 per share (the "Class B Common Stock" and, together
with the Class A Common Stock, the "Common Stock")."
Exhibit 10.4
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of September 7, 1999, between VANTAS Incorporated,
a Nevada corporation (the "Company"), and David J. Rupert ("Executive").
In consideration of the mutual covenants and conditions provided herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Executive agree as follows:
1. Term of Employment. The Company hereby employs Executive, and Executive
hereby accepts employment with the Company, for the period commencing as of
September 7, 1999 (the "Commencement Date") and ending on September 7, 2002 (the
"Term"), on the terms and conditions set forth in this Agreement. Executive and
the Company explicitly acknowledge and agree that such employment is terminable
prior to the end of the Term with notice given by either party in accordance
with the provisions of Paragraph 7. The Term of this Agreement shall
automatically be extended for successive six month periods thereafter unless at
least six months prior to the commencement date of any six month period, either
party shall have given written notice to the other party that the term of this
Agreement will not be extended for such extension period.
2. Duties of Executive.
(a) Title; Position. Executive is hereby employed as Executive Vice
President and Chief Operating Officer, reporting to the Chief Executive Officer
and as the Board of Directors may direct. Executive will render services to the
Company in this capacity, and in such other suitable and comparable executive
and administrative capacities normally attendant to such responsibilities and as
the Company may reasonably assign to him from time to time.
(b) No Other Employment. Executive shall devote his entire business
time, attention and energies to the business of the Company and shall diligently
and faithfully serve the Company in such capacity during the term of this
Agreement, provided, that this provision shall not prevent Executive from
serving on civic and charitable boards or managing his and his immediate
family's investments, in each case, however, subject to the Company's policies
and only to the extent that such activities do not interfere with Executive's
performance of his duties under this Agreement.
3. Annual Payment. The Company shall pay to Executive (i) a fixed salary
during the Term at an annual rate of $300,000 per year (the "Annual Salary"),
and (ii) in addition to the Annual Salary, a fixed payment at an annual rate of
$50,000 (the "Covenant Payment" and, together with the Annual Salary, the
"Annual Payment") as separate consideration for the Executive's covenants and
agreements contained in Paragraph 8. Each of the Annual Salary and the Covenant
Payment (i) shall be increased effective September 7, 2000, over the Annual
Salary and the Covenant Payment, respectively, in effect for the previous twelve
months, by the percentage increase from the Consumer Price Index (New
York-Northern New Jersey-Long Island, NY-NJ-CT-PA; All Items; 1982-84=100; NSA)
(the "CPI") for July 1999 to the CPI for July 2000, and (ii) shall be increased
effective September 7 of each subsequent year during which the Term of this
Agreement shall be in effect, over the Annual Salary and the Covenant Payment,
respectively, in effect for the previous twelve months, by the percentage
increase in the CPI over the previous twelve months (which for this purpose
shall be measured as of each respective July during the Term of the Agreement).
The Annual Payment shall be payable in such installments as is customary for
executives of the Company.
4. Performance Bonus. Executive shall be eligible to receive a performance
bonus (the "Performance Bonus") for each calendar year during the Term with a
target amount of $150,000, or, in the case of any calendar year during the Term
where Executive is employed by the Company for only a portion of such calendar
year, a pro-rata amount thereof. The target amount of the Performance Bonus
shall be increased annually based on the CPI in the same manner as the Annual
Salary and the Covenant Payment. The Performance Bonus shall be determined and
paid as follows:
(a) With respect to calendar year 1999, the Performance Bonus shall
be qualitative and the actual amount shall be based on an evaluation by the
Company's CEO of Executive's performance during the year, with the approval of
the Company's Board of Directors (the "Board").
(b) With respect to each subsequent calendar year during the Term,
the Performance Bonus will be allocated between objective measures (tied to the
Company's financial performance and determined using the same formulas or
evaluation methods as are used in determining performance bonuses for such years
for other senior executives of the Company who do not have written employment
contracts)(the "Objective Component") and subjective factors (tied to
Executive's individual performance and based upon the achievement of specific
milestones that have been agreed to in advance of each calendar year by the CEO
and Executive)(the "Subjective Component"). The allocation of the Performance
Bonus shall be as follows: (1) not less than 50% and not more than 66 2/3% shall
be allocated to the Objective Component and (2) not less than 33 2/3% and not
more than 50% shall be allocated to the Subjective Component. The actual
allocation shall be determined in advance of each calendar year by the CEO with
the approval of the Board.
(c) The Performance Bonus will be paid within 30 days after the
issuance of the Company's audited financial statements for the applicable year.
5. Special Bonus. If Executive remains an employee of the Company on the
sixth month anniversary of the Commencement Date, he shall receive a bonus in
the amount of $95,000. If Executive remains an employee of the Company on the
first anniversary of the Commencement Date, he shall receive an additional bonus
in the amount of $95,000 (such payments are collectively referred to as the
"Special Bonus"). The Special Bonus shall be subject to all applicable
withholding requirements.
6. Benefits; Expenses.
(a) Executive shall be entitled to paid vacation each calendar year
in accordance with the Company's written policy. Executive shall be entitled to
participate in employee benefit plans, policies and programs, including health,
disability and life insurance plans, on the same terms and conditions made
available to other senior executives of the Company (except that the Company
shall pay the premiums for health insurance coverage for Executive's immediate
family).
(b) The Company shall maintain during the Term a policy or policies
of term life insurance in an aggregate face amount of $4,000,000 (which amount
shall include the face amount of any life insurance made available to the
Executive pursuant to Paragraph 6(a) hereof), with proceeds payable to a
beneficiary designated by Executive, and the Company shall pay the premiums due
thereunder.
(c) Executive shall be entitled to reimbursement of expenses
incurred in connection with his duties on behalf of the Company in accordance
with Company policy.
7. Termination of Employment.
(a) Definitions. The following terms shall have the following
meanings:
(i) "Cause" shall mean any of the following conditions:
(A) Executive has engaged in conduct which either (1)
resulted in a conviction of or plea of guilty or no contest to a misdemeanor
involving moral turpitude or involving the property of the Company, or (2)
resulted in a conviction of or plea of guilty or no contest to a felony under
the laws of the United States or any state or political subdivision thereof;
(B) Executive commits or engages in (1) a breach of his
fiduciary duty to the Company or any of its affiliates, (2) gross negligence or
willful misconduct in connection with his employment with the Company, or (3)
any transaction which Executive knows or should have known would constitute
self-dealing or conflict of interest between Executive and the Company and in
which Executive does or would receive any direct or indirect material economic
or pecuniary benefit without prior disclosure of such transaction to the Company
and receipt of prior approval from the Company;
(C) Executive violates the internal procedures or
policies of the Company of which he has been given notice in a manner which has
or reasonably may be expected to have a material adverse effect on the
reputation, business or prospects of the Company (and for this purpose, conduct
constituting employment discrimination or sexual harassment shall be
conclusively presumed to have a material adverse effect);
(D) Material default or other material breach by
Executive of Executive's obligations hereunder and failure to remedy such breach
within thirty (30) days after notice thereof; or
(E) Failure by Executive to perform diligently and
competently his duties hereunder, after written notice from the Company of such
failure and a reasonable period of time to remedy the deficiency described in
such notice.
(ii) "Disability" means Executive's physical or mental
incapacity which (A) in the reasonable good faith determination of the Company,
has rendered Executive incapable of performing the essential functions of his
job as contemplated by this Agreement, to the extent required hereunder prior to
the commencement of such Disability, for a total of 90 days in a 180 day period,
or (B) in the opinion of a physician selected by the Company and reasonably
acceptable to Executive, is anticipated to render Executive incapable of
performing the essential functions of his job as contemplated by this Agreement,
to the extent required hereunder prior to the commencement of such Disability,
for a total of 90 days in a 180 day period. The effective date of termination of
employment by reason of Disability shall be the earlier of the date of the
determination by the Company under clause (A) above, or the date the opinion of
the physician is rendered under clause (B) above.
(iii) "Good Reason" means any of the following: (A) the
failure to pay in a timely manner any Annual Payments, Performance Bonus or
Special Bonus due to Executive hereunder that the Company fails to remedy within
thirty (30) days after notice thereof by Executive; (B) a material breach by the
Company of any provision of this Agreement that the Company fails to remedy or
cease within thirty (30) days after notice thereof by Executive; (C) a material
reduction in Executive's duties provided in this Agreement that is so
substantial that it would reasonably be construed to change his position with
the Company; or (D) a reduction in the amount of the Annual Payments.
(b) Termination of Employment. The employment of Executive may be
terminated at any time:
(i) upon the death of Executive; or
(ii) upon the Disability of Executive; or
(iii) by the Company, immediately for Cause (provided that any
termination of Executive's employment for Cause pursuant to any of clause (B),
(C), (D), or (E) of Paragraph 7(a)(1) of this Agreement shall be based on a good
faith determination by the Company of the facts and circumstances which the
Company deems relevant after giving Executive notice and an opportunity to
present a defense to the charges which are the basis of the proposed termination
for Cause); or
(iv) by the Company, upon 15 days written notice of
termination of Executive's employment without Cause (for purposes of this
Agreement, a notice by the Company pursuant to Paragraph 1 that the Term of the
Agreement is not extended beyond any then scheduled expiration of the Term shall
not be deemed a termination of Executive's employment without Cause); or
(v) by Executive, upon 15 days written notice of voluntary
termination of employment for Good Reason; or
(vi) by Executive, upon 15 days written notice of voluntary
termination of employment without Good Reason (for purposes of this Agreement, a
notice by the Company pursuant to Paragraph 1 that the Term of the Agreement is
not extended beyond any then scheduled expiration of the Term shall not be
deemed a termination of Executive's employment without Cause).
(c) Compensation on Termination of Employment. Upon termination of
Executive's employment with the Company, his right to compensation or other
benefits following such termination shall be determined exclusively as follows:
(i) If Executive's employment is terminated by reason of death
or Disability, Executive (or his legal representative) shall be entitled (A) to
receive any Annual Payments accrued and unpaid up to the date of termination and
any portion of the Special Bonus which remains unpaid, (B) to be considered for
payment of a Performance Bonus determined in the manner provided in this
Agreement, but prorated for the period up to the date of termination of
employment; provided, however, that, with respect to the Subjective Component of
the Performance Bonus, Executive shall receive an amount not less than the
amount of the Subjective Component of the Performance Bonus awarded to Executive
for the previous full calendar year (pro-rated for the period up to date of
termination of employment), (C) in the case of Disability, to continue to
receive payments of Annual Payments for a period of 90 days following the
effective date of termination by reason of Disability, but in no event beyond
the date that payments under the Company's long-term disability policy commence,
such payments of Annual Payments to be at the rate in effect on the effective
date of such termination of employment by reason of Disability, and (D) to be
paid such disability or death benefits as are provided under any Company benefit
plans in which Executive is a participant. Except as set forth in Paragraph
7(d), Executive shall not be entitled to any other or further compensation after
the date of any such termination of employment.
(ii) If Executive's employment is terminated by the Company
for Cause, or is voluntarily terminated by Executive without Good Reason,
Executive shall be entitled to receive any Annual Payments accrued up to the
date of termination which remains unpaid. Executive shall not be entitled to any
other or further compensation after the date of any such termination of
employment.
(iii) If Executive's employment is terminated by the Company
without Cause, or is voluntarily terminated by Executive for Good Reason,
Executive shall be entitled (A) to receive any Annual Payments accrued and
unpaid up to the date of termination and any portion of the Special Bonus which
remains unpaid, (B) to be considered for payment of a Performance Bonus for the
calendar year of termination of employment, determined in the manner provided in
this Agreement, but prorated for the period up to the date of termination of
employment; provided, however, that, with respect to the Subjective Component of
the Performance Bonus, Executive shall receive an amount not less than the
amount of the Subjective Component of the Performance Bonus awarded to Executive
for the previous full calendar year (pro-rated for the period up to date of
termination of employment), (C) to receive a severance payment equal to the
greater of (x) the aggregate of Annual Payments and Performance Bonus paid to
Executive for the calendar year preceding the calendar year in which employment
terminates, or (y) the amount of Annual Payments which would have been due
during the balance of the Term (if employment had not terminated), calculated at
the rate of Annual Payments in effect immediately prior to such termination,
such severance payment to be paid in twelve equal monthly installments
commencing on the first day of the calendar month following termination, and (D)
to be maintained by the Company, at its cost, under its health, disability and
life insurance plans as in effect at the time of termination of employment, for
a period equal to the greater of one year, or the balance of the Term (if
employment had not terminated). Except as set forth in Paragraph 7(d), Executive
shall not be entitled to any other benefits or further compensation after the
date of any such termination of employment. Notwithstanding the foregoing, if
the Term of this Agreement has been extended beyond September 6, 2002 pursuant
to the last sentence of Paragraph 1, then (1) instead of the amount of the
severance payment calculated under clause (C) above, the severance payment shall
be equal to the aggregate of the Annual Payments paid to Executive for the last
six months of the calendar year preceding the calendar year in which employment
terminates plus one half of the Performance Bonus paid to Executive for such
preceding calendar year, such severance payment to be paid in six equal monthly
installments commencing on the first day of the calendar month following
termination, and (2) instead of the insurance provided under clause (D) above,
Executive shall be entitled to be maintained by the Company, at its cost, under
its health, disability and life insurance plans as in effect at the time of
termination of employment, for a period equal to six months after termination of
employment.
(iv) If Executive's employment terminates by reason of the
expiration of the Term of this Agreement, Executive shall be entitled (A) to
receive any Annual Payments accrued up to the date of termination which remain
unpaid, and (B) to be considered for payment of a Performance Bonus determined
in the manner provided in this Agreement for the period through the end of the
Term; provided, however, that, with respect to the Subjective Component of the
Performance Bonus, Executive shall receive an amount not less than the amount of
the Subjective Component of the Performance Bonus awarded to Executive for the
previous full calendar year (pro-rated for the period up to date of termination
of employment). Executive shall not be entitled to any other or further
compensation under this Agreement after the date of any such termination of
employment.
(d) Life Insurance. Upon any termination of employment of Executive,
the Company shall take such steps as are necessary to cause the policies of life
insurance provided for in Paragraph 6(b) to be transferred to Executive or his
designee. The Company shall continue to pay the premiums on such life insurance
policy which are due during any period for which payments of Annual Payments
continue to be made after termination of employment pursuant to Paragraph 7(c).
8. Restrictive Covenants. In consideration of the agreement of the Company
to employ Executive in accordance with the terms of this Agreement, Executive
agrees as follows:
(a) Definitions. For purposes of this Paragraph 8, the following
terms shall have the following meanings:
(i) "Affiliate" means, with respect to a Person, any Person
that (a) directly or indirectly controls, is controlled by or is under common
control with such Person or (b) is an executive officer or director of such
Person.
(ii) "Client" means a customer, subtenant or licensee of a
Person engaged in an Executive Office Suite Business.
(iii) "Company Employee" means any Person who is an employee
of the Company or any of its Affiliates, at any time during the six month period
preceding the date that Executive ceases to be an employee of the Company or any
of its Affiliates.
(iv) "Executive Office Suite Business" means the business of
the outsourcing of office operations, both on an on-site and off-site basis, and
the outsourcing of business support services to customers or clients of the
Company which purchase any of the Company's products or services.
(v) "Person" means any individual, proprietorship,
partnership, corporation, limited liability company, trust, estate, or other
form of entity.
(b) Non-Competition. During the period beginning on the effective
date of this Agreement and ending two years after Executive ceases to be an
employee of the Company or any of its Affiliates, Executive will not directly or
indirectly engage in the business of, or own or control any interest in, or act
as a director, officer, managing member, or partner of, or consultant to, or be
connected in any manner with, as an employee or otherwise, (i) if Executive's
employment is terminated for Disability or for Cause, any Person directly or
indirectly engaged in an Executive Office Suite Business in the United States,
or within a 25 mile radius of any existing executive office suite of the Company
or its subsidiaries located outside of the United States (including executive
office suites managed for other Persons) as of the date of termination of
employment, or (ii) if Executive's employment is terminated without Cause or
Executive voluntarily terminates his employment with Good Reason, any of HQ
Global Workplaces, Inc., Regus Business Center Corp., Omni Offices U.K., or any
other Person which (together with its Affiliates) owns, operates, maintains or
manages 30 or more executive office suite locations. The foregoing shall not
prohibit Executive from owning less than 1% of any class of outstanding voting
securities of any Person whose voting securities are listed on a national
securities exchange or regularly traded in the over-the-counter market.
(c) Non-Solicitation. During the period beginning on the effective
date of this Agreement and ending two years after Executive ceases to be an
employee of the Company or any of its Affiliates (the "Non-Solicitation
Period"), neither Executive, nor any Person of which he may act as a director,
officer, managing member, partner, or consultant, or of which he may own,
directly or indirectly, 1% or more of the outstanding voting securities, will
(i) employ or solicit for employment, or encourage, assist, facilitate or
participate in the employment or solicitation for employment of, any Company
Employee, or (ii) directly or indirectly, solicit, or encourage, assist,
facilitate or participate in the solicitation of, any Person that at any time
during the Non-Solicitation Period is a Client of the Company or any of its
Affiliates, to become a Client of any other Person engaged in an Executive
Office Suite Business.
(d) Non-Disclosure. Executive recognizes and acknowledges that he
will have access to certain confidential and proprietary information
("Proprietary Information") of the Company which is a valuable, special and
unique asset of the Company's business. Proprietary Information includes, but is
not limited to, the following: business methods of the Company or any of the
trade or business secrets of the Company, including but not limited to,
operating procedures, pricing information, customer or client lists or accounts,
market research and development procedures, marketing strategies, investment or
acquisition opportunities and strategies, and information or lists concerning
the current, future or proposed business of the Company, or the costs associated
therewith and/or any other business related information. Accordingly, Executive
covenants and agrees that during, or at any time after the term of, this
Agreement he will not use for himself or reveal to anyone any part of the
Proprietary Information, and he will take all reasonable precautions to
safeguard the confidential nature of the Proprietary Information and prevent
inadvertent disclosure thereof. The obligations of Executive pursuant to this
Paragraph 8(d) shall not apply to any particular portion of the Proprietary
Information which Executive can document (and satisfy the burden of proof) (i)
was in the public domain at the time Executive received knowledge of it, or (ii)
entered the public domain through no fault of Executive subsequent to the time
Executive received knowledge of it, or (iii) was in Executive's possession free
of any obligation of confidence at the time Executive received knowledge of it.
(e) Savings Provision. If any provision of this Paragraph 8 shall be
adjudicated to be invalid or unenforceable because it is held to be excessively
broad as to duration, geographic scope, activity or subject, then such provision
shall be deemed amended by limiting and reducing it so as to be valid and
enforceable to the maximum extent compatible with the applicable laws and public
policies of the jurisdiction in which such adjudication is made or such
provision is sought to be enforced, such amendment only to apply with respect to
the operation of such provision in the jurisdiction in which such adjudication
is made or such provision is sought to be enforced.
(f) Injunctive and Other Equitable Remedies. Executive understands
and agrees that the Company will suffer immediate, irreparable harm in the event
Executive fails to comply with any of Executive's obligations under this
Paragraph 8, that monetary damages will be inadequate to compensate the Company
for such breach and that the Company shall be entitled to injunctive relief as a
remedy for any such breach. Such remedy shall not be deemed to be the exclusive
remedy in the event of breach of this Paragraph 8 by Executive, but shall be in
addition to all other remedies available to the Company at law or in equity.
Executive hereby waives, to the extent he may legally do so, any requirement for
security or the posting of any bond or other surety in connection with any
temporary or permanent award of injunctive or other equitable relief, and
further waives, to the extent he may legally do so, the defense in any action
for specific performance or other equitable remedy that a remedy at law would be
adequate. Notwithstanding anything to the contrary contained in this Agreement,
in the event the Executive violates his obligations under this Paragraph 8,
then, in addition to all other rights and remedies available to the Company, the
Company shall have no further obligation to pay Executive any money or to
provide Executive with any rights or benefits to which Executive would have been
entitled pursuant to this Agreement had Executive not breached this Paragraph 8.
9. Executive Representations. Executive hereby represents and warrants to
the Company that his performance of all of the terms of this Agreement and as an
employee of the Company does not and will not breach any agreement to keep in
confidence proprietary information, knowledge or data acquired by him in
confidence or in trust prior to his employment with the Company. Executive
agrees that he will not disclose and has not disclosed to the Company any
confidential or proprietary information of any third party.
10. Miscellaneous.
(a) Notices. All notices, requests, demands, acceptances and other
communications which are required or permitted under this Agreement shall be in
writing and shall be deemed to have been duly given (a) when delivered
personally, or (b) when sent by fax if received on a business day prior to 5:00
P.M. local time at the place of receipt, or on the following business day if
received after 5:00 P.M. or on a non-business day, or (c) on the day following
delivery to a courier service if sent by next day delivery via a recognized
international courier service, or (d) five (5) days after the date when mailed
by registered or certified mail, return receipt requested, postage prepaid. All
such notices, requests, demands, acceptances and other communications shall be
addressed to the parties as follows, or at such other address as shall be
specified by like notice:
If to the Company: VANTAS Incorporated
90 Park Avenue
Suite 3100
New York, NY 10016
Att: David W. Beale, President
Fax: (212) 907-6444
If to Executive: David J. Rupert
2 Rustic Lane
Westport, CN 06880
Fax: (203) XXX-XXXX
(b) Waivers. Either party hereto may, at its or his option, by
written notice to the other, (a) extend the time for the performance of any of
the obligations or other actions of the other, (b) waive compliance with any of
the terms, conditions or covenants required to be complied with by the other
hereunder; and (c) waive or modify performance of any of the obligations of the
other hereunder. The waiver by any party hereto of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any other or
subsequent breach.
(c) Amendment. No change, amendment or modification of any provision
of this Agreement shall be valid unless set forth in a written instrument signed
by the party to be bound thereby.
(d) Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof, and
supercedes all prior written or oral negotiations or agreements with respect
thereto.
(e) Binding Effect; Benefits. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective permitted
successors and assigns. Nothing in this Agreement, express or implied, is
intended to confer on any person other than the parties hereto or their
respective permitted successors and assigns, any rights, remedies, obligations
or liabilities.
(f) Assignment. This Agreement is personal in nature and neither of
the parties hereto shall, without the written consent of the other, assign or
transfer this Agreement or any rights or obligations hereunder. In the event of
merger, consolidation, transfer or sale of all or substantially all of the
assets of the Company, the successor or transferee corporation's continued
performance of this Agreement shall not be deemed an assignment.
(g) Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
(h) Governing Law. The interpretation and performance of this
Agreement shall be governed by and construed in accordance with the laws of the
State of New York without regard to such State's conflicts of laws principles.
(i) Jurisdiction, Venue. EACH PARTY TO THIS AGREEMENT HEREBY
IRREVOCABLY AGREES THAT ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK
OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND
HEREBY EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH COURTS
FOR THE PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE AND
ANY CLAIM THAT SUCH COURTS ARE AN INCONVENIENT FORUM. EACH PARTY HEREBY
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF
BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN
PARAGRAPH 10(a), SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.
(j) Headings. Headings of the paragraphs in this Agreement are for
reference purposes only and shall not be deemed to have any substantive effect.
(k) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall be deemed to be one and the same instrument.
(l) Facsimile Signatures. This Agreement may be signed by facsimile
copy and shall be valid and binding upon delivery of a signed copy by facsimile.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
VANTAS INCORPORATED
By: /s/ David W. Beale
-----------------------------
Name: David W. Beale
Title: President
/s/ David J. Rupert
----------------------------
David J. Rupert
Exhibit 10.13
INTERCOMPANY AGREEMENT
THIS AGREEMENT (the "Agreement"), dated as of January 8, 1999, by
and between ALLIANCE National Incorporated, a Nevada corporation having its
principal office at 90 Park Avenue, Suite 3100, New York, New York 10016
(together with the Subsidiaries specified in Section 8 hereof, "Alliance"), and
Reckson Service Industries, Inc., a Delaware corporation having its principal
office at 225 Broadhollow Road, Melville, New York 11747 ("RSI").
WHEREAS, RSI indirectly owns shares of Series C Convertible
Preferred Stock of Alliance as a result of a merger transaction, effective as of
the date of this Agreement (the "Merger"), pursuant to which RSI and certain
other persons combined their respective executive office suite businesses with
the business of Alliance; and
WHEREAS, the parties hereto deem it in their respective best
interests to provide for the provision of products and services by RSI to
Alliance, which Alliance will then offer to its Customers (as defined below),
subject to and in accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, the parties agree as follows:
1. Definitions Used in This Agreement.
(a) "Adjusted Fully Diluted Capitalization" shall have
the meaning given such term in the Fourth Amended and Restated Stockholders'
Agreement, dated as of January 8, 1999, by and among Alliance and the security
holders listed therein.
(b) "Affiliate" of a Person shall mean any (i) Person
which directly or indirectly controls, is controlled by, or is under common
control with such Person, (ii) executive officer or director of such Person,
(iii) immediate family member (spouse, child or parent) of such Person, or (iv)
trust of which such Person is either a beneficiary or a trustee. For this
purpose, "executive officer" shall have the meaning given to such term in Rule
501 promulgated under the Securities Act of 1933, as amended.
(c) "Alliance Business" shall mean the executive office
suite business in which Alliance is engaged at the time of determination, taken
as a whole and including (i) on-site and off-site operations and (ii) any
Product which is part of the executive office suite business and is being
actively pursued for development by Alliance management and which has been
presented to the Executive Committee of Alliance and not been rejected thereby
(provided that if such Product has been rejected and thereafter been taken to
the Board and not been rejected, such Product shall be considered part of the
Alliance Business). The time of determination shall be the time of any
development of a business or the making of any investment in question under
Section 5(b) by any of the Persons subject to the restrictions in Section 5(b).
(d) "Board" shall mean the Board of Directors of
Alliance.
(e) "Computer and Technology Services" shall mean
computer consulting services, information technology support services, sales of
hardware and software to Customers, and development of software for Customers.
(f) "Confidential Information" shall mean any and all
information concerning the business of any party hereto or its Affiliates
provided in connection with the transactions contemplated hereby, including,
without limitation, any information concerning Products or the development
thereof, business plans and strategies, sales and marketing information,
financial information and Customer data.
(g) "Control" shall mean the power, through voting
control, contract or otherwise, to direct the management and policies of the
Person controlled. The terms "Controlled" and Controlling" shall have
correlative meanings.
(h) "Controlled Affiliate" of a Person shall mean any
Affiliate of such Person other than a Non-Controlled Affiliate of such Person.
(i) "Customers" shall mean subtenants, customers,
clients, licensees or other Persons which are users of the executive office
suites of Alliance or its Subsidiaries and other clients or customers of
Alliance or its Subsidiaries which purchase one or more Products from Alliance
or its Subsidiaries.
(j) "Dispute" shall mean any dispute regarding the
application of the provisions of this Agreement to any particular set of facts
or circumstances, including, without limitation, any dispute as to whether (i) a
Product to be provided by an RSI Entity satisfies the General Outsourced Product
Conditions or the RSI Reserved Outsourced Product Conditions, as the case may
be, (ii) a Product is being supplied on Most Favored Nation Terms (if required)
or (iii) a proposed investment by any person that is subject to the restrictions
set forth in Section 5 hereof would violate such restrictions.
(k) "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended.
(l) "Financial Services" shall mean the provision,
sales, distribution, marketing and related services regarding any of credit
cards, health, life or other types of insurance, small business loans,
commercial banking, investment banking, securities brokerage (including online
brokerage), payroll management and other professional employee organization
services (such as employee leasing and back office employee related services),
equipment leasing, money management, financial planning and factoring. Financial
Services shall not include consulting services with respect to human resources
matters, including, without limitation, providing Customers with a package of
human resource and benefit services for their businesses except to the extent
that the specific products or services included in the package would customarily
be outsourced by businesses (which, for this purpose, shall mean businesses that
are large enough to have in-house administrators handling human resources
functions) to a third party.
(m) "General Outsourced Product" shall mean any Product,
other than an RSI Reserved Outsourced Product, (i) that Alliance does not elect
to supply itself or through a Subsidiary, but instead elects to procure from
another Person (including any RSI Entity) for resale by Alliance to its
Customers, or (ii) on which Alliance is entitled to earn a fee in connection
with the sale of such Product to the Customers by a Person other than Alliance
or a Subsidiary of Alliance. Subject to the term of any Product Agreement then
in effect, nothing herein shall prohibit Alliance from determining to supply any
then General Outsourced Product itself or through a Subsidiary.
(n) "General Outsourced Product Conditions" as used with
respect to the provision of General Outsourced Products by an RSI Entity to
Alliance shall mean (i) the pricing and other material terms (taken in the
aggregate and accounting for all relevant factors such as distribution and
delivery costs and the volume of the Product to be provided) on which such
Product will be furnished by such RSI Entity at the date of determination are
then no less favorable than the pricing and other material terms (taken in the
aggregate and accounting for all relevant factors such as distribution and
delivery costs and the volume of the Product to be provided) for such Product
which are then available to Alliance from a Third Party with the capacity and
willingness to deliver such Product in accordance with the offered terms, and
(ii) the quality of such Product (as measured under a Reasonably Prudent
Business Person Standard) furnished to Alliance by such RSI Entity at the date
of determination are then at least equal to the quality of alternatives for such
Product (as measured under a Reasonably Prudent Business Person Standard) which
are then available to Alliance from Third Parties with the capacity and
willingness to deliver such Products in accordance with the offered terms.
(o) "Internet Services" shall mean all services related
to the Internet, including, without limitation, (i) the provision of an
electronic commerce platform, including without limitation, infrastructure
hardware and software, network connectivity, and transaction software processes
and outclearing, and (ii) the design of a user interface acceptable to Alliance
and including "Pointcast" type channels with certain permanent button channels
dedicated to RSI and/or certain of its Affiliates (including OnSite Ventures
LLC, and OnSite Commerce and Content LLC, collectively "OnSite") and with
certain portions of the "desktop" that may be modified only by RSI or its
Affiliates (it being understood that the Product Agreement relating to Internet
Services shall address the development, ownership and revenue allocation for (x)
Products, and products of OnSite, to be distributed or sold through the Internet
to Customers, and (y) Products and products of OnSite in which Alliance has
participated in the development thereof, to be distributed or sold through the
Internet to customers of OnSite).
(p) "Most Favored Nation Terms" shall mean, with respect
to the provision of any Product by an RSI Entity to Alliance, that such Product
shall be provided by such RSI Entity to Alliance on at least as low a price and
on at least as favorable a set of other material terms and conditions (in each
case, taken in the aggregate and accounting for all relevant factors such as
distribution and delivery costs, the volume of the Product to be provided and
the geographic area where the Product to be provided) as are then made available
to any other purchaser of such Product provided by the RSI Entity.
(q) "Non-Controlled Affiliate" of a Person shall mean an
Affiliate of such Person which is not Controlled by such Person.
(r) "Person" means any individual, proprietorship,
partnership, corporation, limited liability company, trust, estate, or other
form of entity.
(s) "Product" shall mean any product or service, whether
offered by Alliance, an RSI Entity or any Third Party.
(t) "Product Agreement" shall mean any agreement that is
entered into by Alliance and an RSI Entity with respect to the provision of a
specific Product.
(u) "Reasonably Prudent Business Person Standard" shall
mean the evaluation process that would be applied by a reasonably prudent
business person who is not an Affiliate of, and is neutral with respect to,
Alliance or any RSI Entity or any of their respective Affiliates.
(v) "Reckson Affiliates" means Reckson Associates Realty
Corp. and Reckson Management Group, Inc. and their respective Controlled
Affiliates, but, with respect to any such entity, only for so long as such
entity is an Affiliate of RSI.
(w) "RSI Entity" and "RSI Entities" shall mean,
individually and collectively, as the case may be, RSI and any Affiliates of RSI
which may offer Products.
(x) "RSI Reserved Outsourced Product" shall mean any of
the following Products: construction or property management; day care;
transportation; courier services; logistics; travel services; temporary staffing
or employee leasing at locations other than executive office suite centers owned
or managed by Alliance; Financial Services; waste management or carting;
cleaning services; security services; vending machines; catering or food
service; computer hardware and software (but, subject to the immediately
following sentence, excluding Computer and Technology Services); Internet
Services, Telecommunications Services; extended stay lodging; office supplies;
management consulting; storage and warehousing of documents in tangible (as
opposed to electronic) form at locations other than executive office suite
centers owned or managed by Alliance; and concierge services. In the event that
Alliance determines to outsource any Computer and Technology Services
(including, without limitation, any determination by Alliance to purchase (as
opposed to manufacture or develop itself) hardware and software for resale to
Customers), any such Computer and Technology Service shall be deemed to be an
RSI Reserved Outsourced Product for purposes of this Agreement, subject, in each
case, to Alliance's right to subsequently determine to supply any such Computer
and Technology Services itself or through a Subsidiary.
(y) "RSI Reserved Outsourced Product Conditions" as used
with respect to the provision of RSI Reserved Outsourced Products by an RSI
Entity to Alliance shall mean (i) the pricing and other material terms (taken in
the aggregate and accounting for all relevant factors such as distribution and
delivery costs and the volume of the Product to be provided) on which such RSI
Reserved Outsourced Product will be furnished by such RSI Entity at the date of
such determination are then no less favorable than the pricing and other
material terms (taken in the aggregate and accounting for all relevant factors
such as distribution and delivery costs and the volume of the Product to be
provided) for such RSI Reserved Outsourced Product which are then available to
Alliance from a Third Party with the capacity and willingness to deliver the
applicable Product or Products in accordance with the offered terms, and (ii)
the quality of such RSI Reserved Outsourced Product (as measured under a
Reasonably Prudent Business Person Standard) furnished to Alliance by such RSI
Entity at the date of such determination are then reasonably comparable (but not
necessarily equal or better) to the quality of other alternatives for such RSI
Reserved Outsourced Product (as measured under a Reasonably Prudent Business
Person Standard) which are then available to Alliance from Third Parties with
the capacity and willingness to deliver such Products in accordance with the
offered terms.
(z) "Subsidiary" of a Person means a Person (other than
an individual) of which a majority of the outstanding voting power, other voting
equity interests or economic interests are owned or Controlled, directly or
indirectly, by such Person.
(aa) "Telecommunications Services" shall mean all
telecommunications services, excluding, however, the ownership and management of
an individual executive office suite center's PBX, voice mail, message center
and call collection and charge-back systems, PBX-related end-user telephone,
end-user data communications equipment such as modems and NICs, and related
technical support services provided at executive office suite centers.
(bb) "Third Party" means any Person not a party hereto
or an Affiliate of any party hereto and not having any direct or indirect
material "pecuniary interest" (as such term is defined in Rule 16a-1 promulgated
under the Exchange Act and used with reference to securities of a Person) in any
party hereto or a Controlled Affiliate of any party hereto.
2. RSI's Rights to Supply RSI Reserved Outsourced Products and
General Outsourced Products to Alliance.
(a) If an RSI Entity desires to supply to Alliance an
RSI Reserved Outsourced Product, such RSI Entity and Alliance shall negotiate
the pricing and other terms on which such RSI Entity is prepared to supply such
RSI Reserved Outsourced Product to Alliance, and such RSI Entity shall have the
right, but not the obligation, to supply such RSI Reserved Outsourced Product to
Alliance, on and subject to the following terms and conditions:
(i) The RSI Reserved Outsourced Product and the terms on
which it is supplied must satisfy the RSI Reserved Outsourced Product
Conditions.
(ii) The RSI Entity supplying the RSI Reserved
Outsourced Product shall be entitled to be the exclusive supplier to Alliance of
such Product, subject to the following:
(A) with respect to courier services, Alliance
shall be entitled to offer its Customers any such services offered by Federal
Express, UPS, Airborne, DHL or the United States Postal Service;
(B) with respect to any particular geographic
market, the RSI Entity proposing to supply an RSI Reserved Outsourced Product on
an exclusive basis shall be able to meet the reasonable and actual demands of
Alliance for such Product (it being agreed and understood that the inability of
any RSI Entity to meet the reasonable and actual demands of Alliance for such
Product in any particular geographic market shall not affect such RSI Entity's
right to be the exclusive supplier in any other geographic market where it is
otherwise entitled to be the exclusive supplier);
(C) where an RSI Entity is acting as an exclusive
supplier of an RSI Reserved Outsourced Product, if from time to time such RSI
Entity is not able to timely meet the reasonable and actual demands of Alliance
with respect to such RSI Reserved Outsourced Product (after Alliance has given
the RSI Entity reasonable notice and the reasonable opportunity to supply the
Product in the specific instance, in each case, in light of the circumstances
with respect to such actual and reasonable demands, and, after such notice, the
RSI Entity is unable to timely do so), Alliance shall be entitled to utilize one
or more Third Parties to supplement the capabilities of the RSI Entity in
question when necessary;
(D) with respect to catering and food service,
Alliance shall be entitled to use local suppliers for incidental food service to
its Customers within its executive office suite centers (it being agreed and
understood that Alliance will use commercially reasonable efforts to endorse and
promote the RSI Entity Product);
(E) with respect to concierge services, Alliance
shall be entitled to use its receptionists at its executive office suite centers
(including at new centers which it may acquire or develop) for incidental
concierge services for its Customers of the type and the scope of such
incidental concierge services provided as of the date of this Agreement;
(F) with respect to Financial Services, Alliance
shall be entitled to be a licensed broker, sales agent, associated person or
other licensed person for purposes of reoffering insurance or securities
brokerage services to Customers; provided, however, that if an RSI Entity is
then offering any such insurance or securities brokerage services, then, subject
to the other terms and conditions contained in this Section 2, Alliance shall
not reoffer to Customers any equivalent insurance or securities brokerage
services that are offered by a Third Party; and
(G) with respect to any particular RSI Reserved
Outsourced Product, the Product Agreement related to such RSI Reserved
Outsourced Product, if a Product Agreement has been entered into, (i) has not
been terminated by Alliance in accordance with the terms thereof (including,
without limitation, the dispute resolution procedures contained therein) as a
result of a breach by the RSI Entity in question, or (ii) provides as a remedy
for any breach thereof that RSI or the RSI Entity shall not be entitled to be
the exclusive supplier.
(iii) Except for courier services, the RSI Reserved
Outsourced Product shall be supplied on Most Favored Nation Terms.
(iv) The supply of the RSI Reserved Outsourced Product
shall be subject to the additional terms and conditions contained in Section 4
hereof.
(v) In the event of any Dispute regarding the
satisfaction of the RSI Reserved Outsourced Product Conditions or Most Favored
Nations Terms (if applicable), Alliance shall be prohibited from entering into
any agreement with a Third Party supplier for the supply of the RSI Reserved
Outsourced Product that is the subject of the Dispute until the earlier to occur
of (i) the expiration of the 45 day period commencing on the date that the Board
meeting relating to the resolution of such Dispute has been held, and (ii) the
final resolution of the Dispute in accordance with Section 3 hereof (if such
Dispute is finally resolved in favor of Alliance).
(vi) Nothing contained in this Agreement shall require
Alliance to terminate any agreement with any Third Party relating to the supply
of any product that is the same or similar Product as an RSI Reserved Outsourced
Product if the execution, delivery and performance of such agreement by Alliance
is not prohibited by this Agreement so long as the agreement with such Third
Party was entered into on customary and commercially reasonable terms.
(vii) Alliance shall keep RSI fully apprised on a
current basis of all of its current and planned needs for RSI Reserved
Outsourced Products, and shall notify RSI of its intention to enter into any
agreements with a Third Party for the provision of any RSI Reserved Outsourced
Product.
(b) Alliance shall keep RSI fully apprised on a current basis
of all of its current and planned General Outsourced Products and, in connection
therewith, shall promptly respond to RSI's reasonable inquiries related thereto.
An RSI Entity shall have the right, but not the obligation, to be a supplier to
Alliance of any General Outsourced Product for which the pricing and other terms
on which such RSI Entity is prepared to supply such General Outsourced Product
to Alliance, and the quality of such General Outsourced Product, satisfy the
General Outsourced Product Conditions, subject to the additional terms and
conditions contained in Section 4 hereof. During a period of 45 days commencing
on the earlier of (i) the date that an RSI Entity notifies Alliance in writing
that it desires to become a supplier of a specific General Outsourced Product,
or (ii) the date that Alliance notifies RSI in writing that it is seeking bids
from potential suppliers of a specific General Outsourced Product, such RSI
Entity and Alliance shall negotiate the pricing and other terms on which such
RSI Entity is prepared to supply such General Outsourced Product to Alliance,
and Alliance shall not enter into or renew any agreement with any Third Party
relating to the provision by such Third Party to Alliance of such General
Outsourced Product; provided, however, that Alliance shall not be prohibited
during such 45 day period from (x) entering into negotiations with a Third Party
with respect to the pricing and other terms on which such Third Party is
prepared to supply such General Outsourced Product to Alliance, or (y) procuring
such General Outsourced Product from a Third Party (who has the capacity and is
willing to deliver the General Outsourced Product in question and is reasonably
likely to provide the Product on the terms offered), whether pursuant to an
existing supply agreement or otherwise, if Alliance is then offering such
Product to its Customers. After the expiration of such 45 day period, Alliance
shall be entitled to enter into or renew an agreement with a Third Party (who
has the capacity and is willing to deliver the General Outsourced Product in
question and is reasonably likely to provide the Product on the terms offered)
for the supply of such General Outsourced Product, whether or not Alliance has
reached agreement with the RSI Entity for the supply of such General Outsourced
Product.
(c) If Alliance determines in its judgment (subject, in the
case of quality determinations, to the Reasonably Prudent Business Person
Standard) that the pricing and other terms on which an RSI Entity is prepared to
provide a General Outsourced Product or the quality of such Product do not
satisfy the General Outsourced Product Conditions, or that the pricing and other
terms on which an RSI Entity is prepared to provide an RSI Reserved Outsourced
Product or the quality of such Product do not satisfy the RSI Reserved
Outsourced Product Conditions or (if applicable) are not on Most Favored Nation
Terms, as the case may be, then Alliance shall promptly so notify RSI and
specify in reasonable detail the basis for such determination, including, if
applicable, identifying a bona fide Third Party supplier and its Product which
Alliance can obtain (and which such Third Party supplier has the capacity and is
willing to deliver the Product in question and is reasonably likely to provide
the Product on the terms offered) on more favorable pricing or other terms, or
with better quality, and a description of such more favorable pricing, other
terms or better quality. Such RSI Entity may then propose modifications to its
proposed provision of the Product and resubmit the Product proposal and, if such
RSI Entity and Alliance agree that such modified proposal would satisfy the
General Outsourced Product Conditions, or the RSI Reserved Outsourced Product
Conditions or Most Favored Nation Terms, as the case may be, then such RSI
Entity shall be a supplier for such Product in accordance with the terms hereof.
If the parties do not agree as to whether the General Outsourced Product
Conditions, or the RSI Reserved Outsourced Product Conditions or Most Favored
Nation Terms, as the case may be, are satisfied with respect to the Product,
then the provisions of Section 3 hereof shall be utilized to resolve such
Dispute.
(d) If an RSI Entity desires to supply to Alliance a Product,
other than a General Outsourced Product or an RSI Reserved Outsourced Product,
it shall notify Alliance and, thereafter, the parties shall enter into good
faith discussions with respect to the provision of such Product to Alliance. Any
such discussions shall include, without limitation, the terms and conditions on
which such RSI Entity would be willing to supply such Product to Alliance,
whether the anticipated financial and/or strategic benefits to Alliance from the
offer of such Product reasonably justifies such offer and whether such Product
is a Product that is generally sought in the marketplace by businesses.
(e) In the event of any termination of any Product Agreement,
whether pertaining to an RSI Reserved Outsourced Product or a General Outsourced
Product, in accordance with the terms thereof (including, without limitation,
the dispute resolution procedures contained therein) as a result of a breach by
the RSI Entity in question, then, no RSI Entity shall be entitled to be a
supplier to Alliance of the Product in question for the six-month period
commencing on the date of the termination of such Product Agreement. If Alliance
and an RSI Entity enter into a Product Agreement (a "Second Product Agreement")
with respect to any Product that was the subject of a Product Agreement that
previously was terminated by Alliance in the manner contemplated by the
immediately preceding sentence and the Second Product Agreement is terminated in
accordance with the terms thereof (including, without limitation, the dispute
resolution procedures contained therein) as a result of a breach by such RSI
Entity, then following termination of such Second Product Agreement (i) no RSI
Entity shall be entitled to be a supplier of the Product in question, and (ii)
if applicable, such Product shall no longer be an RSI Reserved Outsourced
Product for purposes of Section 5(a) hereof.
3. Dispute Resolution.
(a) Any Dispute and the facts and circumstances related
thereto shall be presented to the Board. If a majority of the members of the
Board present and voting with respect to such Dispute shall agree with the RSI
Entity's position with respect to such Dispute, such determination shall be
final and binding on the parties. If less than a majority of the members of the
Board present and voting with respect to such Dispute agree with the RSI Entity
position with respect to such Dispute, then the parties shall submit such
Dispute, other than Disputes arising under Section 5, to binding arbitration in
accordance with Section 3(b) hereof. Notwithstanding anything to the contrary
contained herein, the Board shall not have the authority to award damages to any
party in connection with the resolution of any Dispute.
(b) Except for Disputes arising under Section 5, any (i)
Dispute which has not been resolved by the parties or by the Board and (ii) any
claim for breach of this Agreement and any damages related thereto shall be
settled by arbitration in accordance with the Expedited Procedures of the
Commercial Arbitration Rules of the American Arbitration Association (the "AAA")
then in effect except as modified below. The arbitration shall be held in New
York, New York. Any such Dispute or claim for breach shall be determined by a
panel of three arbitrators with each party to be provided a list of no less than
ten possible arbitrators and to be permitted no more than four strikes, and if
three arbitrators are not selected on the basis of the first list then provided,
another list of no less than ten possible arbitrators shall be provided for the
selection of any additional arbitrators needed, with each party again receiving
no more than four strikes, and this process shall continue until a full panel is
selected. The AAA shall be requested to include on its lists, to the extent it
finds reasonably possible, potential arbitrators with at least 5 years business
experience at a senior management level in outsourcing in the business services
sector or the closest equivalent experience. The decision of the arbitrators
shall be final and binding upon the parties. Judgment upon the award may be
entered in any court having jurisdiction. This Agreement and the rights and
obligations of the parties shall remain in full force and effect pending the
determination in any arbitration proceeding hereunder. The arbitrators shall (i)
award to the prevailing party, if any, all of its costs and fees, which shall
include all reasonable pre-determination expenses of the arbitration, including
the arbitrators' fees, administrative fees, travel expenses, out-of-pocket
expenses, court costs, and attorneys' fees and (ii) have the power to grant
injunctive relief.
(c) In the event that either party believes that any proposed
investment or business by any of the Persons subject to the restrictions set
forth in Section 5 would violate such restrictions, it shall so notify the other
party within six months after the date the party alleging such breach first
receives written notice from the other party of such investment or business. The
failure of a party to so notify the other party within such six-month period
shall constitute an irrevocable waiver by the party receiving notice of such
investment or business to contest such investment or business. Any Dispute
arising under Section 5 shall be resolved by a court of competent jurisdiction
located in the State of New York as set forth in Section 16 hereof.
(d) Except as provided in Section 3(c), the provisions of this
Section 3 shall be the exclusive means of resolving any controversy or claim
arising out of this Agreement or the transactions contemplated hereby.
4. Terms and Conditions Regarding Provision of Products. The
provision of Products by an RSI Entity to Alliance and the offer of such
Products by Alliance to the Customers shall in all cases be subject to the
following additional terms and conditions:
(a) With respect to each such Product to be supplied by an RSI
Entity (whether a General Outsourced Product or an RSI Reserved Outsourced
Product), Alliance shall devise as promptly as is reasonably possible an
execution plan for the sales, marketing and distribution of such Product to its
Customers, including the advertising and promotion of such Product to the
Customers, the timing of commencement of offering the Product and how it is
rolled out (e.g. distributed and marketed) through Alliance's executive office
suite centers, the pricing of the Product to Customers, and the content of any
marketing or advertising materials relating to the Product (it being agreed and
understood that in no event shall Alliance delay the production of an execution
plan for purposes of delaying the offering of any General Outsourced Product or
RSI Reserved Outsourced Product). In devising such execution plan, Alliance
shall consult with the RSI Entity that will be supplying such Product. All sales
of the Product by the RSI Entity shall be made in accordance with the execution
plan. If, with respect to any Product, Alliance advises the RSI Entity that
Alliance does not desire to control the marketing of the Product to the
Customers by means of an execution plan, the RSI Entity shall be entitled to
directly market such Product to the Customers and Alliance shall cooperate with
such RSI Entity's reasonable requests in connection therewith. In its marketing
efforts to its Customers, Alliance shall (i) use commercially reasonable efforts
to endorse and promote the Products that are the subject of any Product
Agreement, and will cooperate with the RSI Entity in co-marketing efforts,
solicitation of Customers, and providing to RSI marketing data (including the
identity of Customers) relevant to the Product in question, and (ii) subject to
clause (i) of this sentence, in the case of the same or substantially similar
Products that are supplied to Alliance by an RSI Entity and any other Third
Party supplier, Alliance shall endorse and promote the RSI Entity Product to the
same extent (or, in Alliance's sole discretion, to a greater extent) as it
endorses and promotes the Product of such Third Party supplier.
(b) Alliance and an RSI Entity shall enter into a mutually
satisfactory Product Agreement for the provision of each Product which such RSI
Entity will provide to Alliance pursuant to this Agreement. Each Product
Agreement shall contain the provisions set forth in Exhibit 1 hereto, as well as
such additional terms and conditions as the parties may negotiate. If, pending
the execution of any such Product Agreement, either such RSI Entity or Alliance
employs any printed form of purchase order or order confirmation with respect to
such Product, unless otherwise agreed by the parties in writing, the printed
terms and conditions thereof will not apply to the purchase and sale of any
Product during the term of this Agreement to the extent that any such term or
condition is in conflict with a provision of this Agreement.
(c) If (i) Alliance and an RSI Entity have agreed in any
Product Agreement that such RSI Entity shall be the exclusive supplier of any
Product (whether pursuant to Section 2(a) or otherwise) or (ii) any Product
provided by an RSI Entity to Alliance accounts for 75% or more of Alliance's
gross revenues from such Product in any trailing six month period, then the
Product Agreement relating to the Product in question (whether the initial
Product Agreement for a Product or, in the event that the test specified in
clause (ii) of this paragraph has been met, in the renewal or new Product
Agreement entered into after such test has been met) shall provide for Most
Favored Nation Terms. In connection with the execution or renewal of any Product
Agreement, the RSI Entities shall keep Alliance apprised of the terms and
conditions pursuant to which such RSI Entities are offering to any Third Party
the Product that is the subject of the Product Agreement and, in connection
therewith, shall promptly respond to Alliance's reasonable inquiries related
thereto.
(d) The RSI Entity in question shall be entitled to supply the
Product in question during the term of the Product Agreement, subject, in each
case, to the termination provisions contained therein. Without limiting the
provisions of Section 4(e) hereof and subject to the right of Alliance to
terminate any Product Agreement in accordance with the terms thereof, nothing
contained in this Agreement shall require any RSI Entity to modify the terms or
conditions of any Product Agreement during the term thereof in the event that
the General Outsourced Product Conditions or the RSI Reserved Outsourced Product
Conditions, as the case may be, shall fail to continue to be satisfied or in the
event that such terms or conditions are no longer Most Favored Nations Terms.
Alliance and RSI acknowledge and agree that for purposes of this Agreement (and
without limiting the provisions of any Product Agreement) the General Outsourced
Product Conditions, the RSI Reserved Outsourced Product Conditions and Most
Favored Nation Terms shall be measured only at the time of each initial
determination as to whether an RSI Entity shall be entitled to supply a Product
to Alliance and at the time of the expiration of any Product Agreement or during
any negotiations with respect to the renewal thereof.
(e) If, at the time of expiration of any Product Agreement or
at the time of negotiations with respect to the renewal thereof, Alliance
determines in its judgment (subject in the case of quality determinations, to
the Reasonably Prudent Business Person Standard) that the General Outsourced
Product Conditions, the RSI Reserved Outsourced Product Conditions, or Most
Favored Nation Terms, as the case may be, are not then met with respect to any
Product, then Alliance shall so notify the applicable RSI Entity and specify in
reasonable detail the basis for such determination, including, if applicable,
identifying a bona fide Third Party supplier and its Product which Alliance can
obtain (and which such Third Party supplier has the capacity and is willing to
deliver the Product in question and is reasonably likely to provide the Product
on the terms offered) on more favorable terms or conditions or with better
quality and a description of such more favorable pricing, other terms and better
quality. The RSI Entity may then propose modifications to its provision of the
Product in a manner that such RSI Entity and Alliance agree would result in the
satisfaction of the General Outsourced Product Conditions, the RSI Reserved
Outsourced Product Conditions, or Most Favored Nation Terms, as the case may be.
If the parties still do not agree as to whether the General Outsourced Product
Conditions, the RSI Reserved Outsourced Product Conditions, or Most Favored
Nation Terms, as the case may be, are satisfied with respect to the Product,
then the provisions of Section 3 hereof shall be utilized to resolve such
Dispute.
5. Non-Competition.
(a) Alliance shall not, and shall cause its Controlled
Affiliates not to, directly or indirectly, (i) engage in the business of, or act
as a manager, managing member, general partner, director, officer, employee of
or consultant to any Person directly or indirectly engaged in the business of,
offering any RSI Reserved Outsourced Product other than through an RSI Entity
or, solely to the extent permitted pursuant to Section 2(a) hereof, a Third
Party, or (ii) knowingly own or control any voting securities or other
securities convertible into voting securities, interest in any Person that
offers any RSI Reserved Outsourced Product. Notwithstanding the foregoing,
Alliance and its Affiliates shall be permitted to make an investment in any
Person that offers any RSI Reserved Outsourced Product provided that within 9
months after the consummation of the investment, such Person ceases to offer any
RSI Reserved Outsourced Products. If such Person ceases to offer such RSI
Reserved Outsourced Products through the divestiture of any business lines,
Alliance shall use, and shall cause each of its Controlled Affiliates to use,
its reasonable good faith efforts to cause such Person to offer RSI the first
opportunity to acquire such business lines. The prohibitions set forth in this
Section 5(a) shall not apply to any existing or future investments made by
Cahill, Warnock Strategic Partners Fund, L.P., Strategic Associates, L.P.,
Cahill, Warnock & Company, LLC, Northwood Ventures LLC, Northwood Capital
Partners LLC, Paribas, any investment entity that is an Affiliate of any such
Persons, or to any other Non-Controlled Affiliate of Alliance. RSI shall be
entitled to injunctive relief as a remedy for any breach of the provisions of
this Section 5(a). Such remedy shall not be deemed to be the exclusive remedy in
the event of any such breach, but shall be in addition to all other remedies
that may be available to RSI at law or in equity.
(b) RSI shall not, and shall (x) cause each of its Controlled
Affiliates and (y) use reasonable good faith efforts to cause the Reckson
Affiliates, not to, directly or indirectly, (i) "Compete" with Alliance, or act
as a manager, managing member, general partner, director, officer, consultant
to, or as an employee of, any Person that directly or indirectly Competes with
Alliance, or (ii) knowingly own or control any voting securities or other
securities convertible into voting securities in any Person that Competes with
Alliance. A Person shall be deemed to "Compete" with Alliance, for purposes of
this Section 5(b), if a business conducted by such Person is materially
competitive with the Alliance Business. In determining whether a business
conducted by a Person is materially competitive with the Alliance Business, the
factors to be considered shall include, without limitation, the respective
customer base and distribution channels of such Person and the Alliance Business
with respect to the specific Products which compete with each other.
Notwithstanding the foregoing, a Person shall not be deemed to Compete with
Alliance if it offers for sale one or more Products which are part of the
Alliance Business so long as the provision of any such Products taken in the
aggregate are not materially competitive with the Alliance Business.
Notwithstanding the foregoing, each of RSI, its Affiliates and the
Reckson Affiliates shall be permitted to make an investment in any Person whose
business Competes with Alliance, provided that within 9 months after the
consummation of such investment, such Person ceases to engage in the business
which Competes with Alliance provided, that if there is a Dispute with respect
to whether an investment Competes, then any required divestiture shall not be
required until nine (9) months after the date of final determination of such
Dispute adverse to RSI or any RSI Entity. If such Person ceases to engage in the
business which Competes with Alliance through the divestiture of the competing
business lines (including any divestiture following a final determination
described below), RSI shall (i) use and cause each of its Controlled Affiliates
to use and (ii) use reasonable good faith efforts to cause the Reckson
Affiliates to use, its reasonable good faith efforts to cause such Person to
offer Alliance the first opportunity to acquire such business lines which it is
divesting.
Nothing in this Section 5(b) shall limit the right of any of RSI,
its Affiliates or the Reckson Affiliates to (i) offer any RSI Reserved
Outsourced Product, or (ii) own not more than 4.9% of the outstanding shares of
a corporation or other entity whose shares or other equity or debt interests are
listed on any United States national or regional securities exchange or reported
by NASDAQ or any successor thereto. The prohibitions set forth in this Section
5(b) shall not apply to a Person if such Person is both a Non-Controlled
Affiliate of RSI and is not a Reckson Affiliate. In the event of a final
determination by a court of competent jurisdiction that any of RSI, its
Controlled Affiliates or the Reckson Affiliates has breached the covenants in
this Section 5(b), then in addition to Alliance's right to recover the profits
(taking into account the consideration set forth in the last sentence of this
paragraph) to RSI and its Affiliates derived from the operations of the business
or investment that has been determined to Compete with Alliance for the period
commencing on the notification of a Dispute with respect to such business or
investment pursuant to Section 3(c) hereof and ending on the earlier to occur of
(i) the date of divestiture of the business line that Competes with Alliance or
(ii) the date of termination of this Agreement pursuant to this Section 5 (which
right to recover such profits (taking into account the consideration set forth
in the last sentence of this paragraph) shall be Alliance's sole and exclusive
remedy at law and in equity for such breach other than Alliance's right to
terminate this Agreement pursuant to this Section 5(b) and other than Alliance's
rights under the Stockholders' Agreement, dated as of _______, 1998, by and
among Alliance and certain of its Securityholders), this Agreement shall
automatically terminate on the 30th day following the final determination that
there has been a breach of this Section 5(b), provided, however, that this
Agreement shall not terminate if, during such 30-day period, RSI at its option,
delivers written notice to Alliance that the business line which Competes with
Alliance will be divested, and such divestiture is actually completed within
nine months after the date of such final determination. If a breach of the
covenant contained in this Section 5(b) arises out of an investment in an entity
that is not a wholly owned subsidiary of RSI or its Affiliates (an "Acquired
Competing Party"), then, for purposes of the immediately preceding sentence, the
profits referred to therein shall include only those profits that RSI or its
Affiliates (other than the Acquired Competing Party and its Controlled
Affiliates) shall have received and the portion of the profits of the Acquired
Competing Party as to which RSI or its Affiliates (other than the Acquired
Competing Party and its Controlled Affiliates) would be entitled by virtue of
their proportionate ownership in the Acquired Competing Party (whether or not
such profits have been distributed to RSI or its Affiliates).
It is acknowledged and agreed that no provision of this Section 5(b)
shall require RSI, its Controlled Affiliates or any RSI Entity to divest or
refrain from conducting any investment or business (a "Pre-Existing Business")
which it acquired or developed prior to the time that, as a result of
developments of or modifications to the Alliance Business, such Pre-Existing
Business taken as a whole Competes with Alliance. However, the restrictions set
forth in Section 5(b) shall apply to such Pre-Existing Business if, as a result
of developments of or modifications to such Pre-Existing Business, such
Pre-Existing Business taken as a whole then Competes with Alliance.
6. Term. Subject to earlier termination as provided in Section 7
hereof, the term of this Agreement shall commence on the date of this Agreement
and shall continue for a period of five (5) years thereafter. This Agreement
shall automatically be extended for an additional five (5) year term if, upon
expiration of the initial term referred to in the immediately preceding
sentence, RSI and its Controlled Affiliates "beneficially own" (as such term is
defined in Rule 13d-3 promulgated under the Exchange Act), in the aggregate, at
least 15% of the Adjusted Fully Diluted Capitalization. Except as may be
provided in any Product Agreement, any termination of this Agreement shall not
affect any Product Agreement then in effect, including, without limitation, any
provisions contained in such Product Agreement that may be incorporated by
reference from this Agreement.
7. Termination. This Agreement may be terminated at any time:
(a) by the mutual written consent of Alliance and RSI;
(b) by Alliance, pursuant to Section 5(b);
(c) by Alliance, in the event that RSI and its Controlled
Affiliates fail to continue to "beneficially own," in the aggregate, at least
15% of the Adjusted Fully Diluted Capitalization; or
(d) by Alliance, in the event that any of (w) CarrAmerica, (x)
HQ Omni, or (y) Regus, so long as any of such Persons named in clauses (w), (x)
or (y) are then engaged in the executive suite business, or (z) any other Person
which owns or operates 50 or more executive office suite centers as its primary
business (any of the foregoing persons, a "Disqualified Transferee") acquires
Control of RSI (provided that for this purpose no presumption of Control shall
arise solely from ownership of any specific percentage of equity securities of
RSI); unless prior to or substantially contemporaneously with such acquisition,
beneficial ownership of the equity securities of Alliance held by RSI shall have
been transferred to a Person that is (1) Controlled by the executive officers of
RSI immediately prior to such acquisition and (2) not an Affiliate of RSI or the
Disqualified Transferee following such acquisition.
8. Effect on Subsidiaries of Alliance. As used herein, the term
"Alliance" shall mean Alliance and each of its Subsidiaries. Alliance shall
cause each of such Subsidiaries, as applicable under the circumstances, to abide
by the provisions contained in this Agreement as if such Subsidiary were a party
hereto.
9. Notices. All notices, requests, demands, acceptances and other
communications which are required or permitted under this Agreement shall be in
writing and shall be deemed to have been duly given (a) when delivered
personally, or (b) when sent by fax if sent on a business day prior to 5:00 P.M.
local time at the place of receipt, or on the following business day if sent
after 5:00 P.M. or on a non-business day, or (c) on the day following delivery
to a courier service if sent by next day delivery via a recognized international
courier service, or (d) five (5) days after the date when mailed by registered
or certified mail, return receipt requested, postage prepaid. All such notices,
requests, demands, acceptances and other communications shall be addressed to
the parties as follows, or at such other address as shall be specified by like
notice:
If to RSI, to:
Reckson Service Industries, Inc.
225 Broadhollow Road
Melville, New York 11747
Attention: Scott H. Rechler and
Jason Barnett, Esq.
Fax: 516-622-6788
with a copy to:
Herrick, Feinstein LLP
2 Park Avenue
New York, New York 10016
Attention: Stephen M. Rathkopf, Esq. and
Richard M. Morris, Esq.
Fax: 212-889-7577
If to Alliance to:
ALLIANCE National Incorporated
90 Park Avenue
Suite 3100
New York, New York 10016
Attention: David W. Beale, President
Fax: 212-907-6444
with a copy to:
Morrison Cohen Singer & Weinstein, LLP
750 Lexington Avenue
New York, New York 10022
Attention: Lawrence B. Rodman, Esq.
Fax: 212-735-8708
10. Waivers. Either party hereto may, at its option, by written
notice to the other, (a) extend the time for the performance of any of the
obligations or other actions of the other, (b) waive compliance with any of the
terms, conditions or covenants required to be complied with by the other
hereunder; and (c) waive or modify performance of any of the obligations of the
other hereunder. The waiver by any party hereto of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any other or
subsequent breach.
11. Entire Agreement. This Agreement (together with any Product
Agreement with respect to a specific Product) constitutes the entire agreement
between the parties with respect to the subject matter hereof. No provision
hereof may be amended or modified except in writing, executed by all parties
hereto against which enforcement of such modification or amendment is sought.
12. Binding Effect; Benefits. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective permitted
successors and assigns. Except as set forth in the following provisions of this
Section 12, nothing in this Agreement, express or implied, is intended to confer
on any person other than the parties hereto and the other RSI Entities or their
respective permitted successors and assigns, any rights, remedies, obligations
or liabilities. Subject to the terms and conditions of this Agreement, OnSite
shall be the exclusive supplier with respect to the provision to Alliance of
Internet Services and Telecommunications Services, provided that such services
shall be provided pursuant to a Product Agreement mutually acceptable to
Alliance and OnSite. Alliance and OnSite hereby agree to use their good faith
efforts to negotiate, execute and deliver Product Agreements with respect to
Internet Services and Telecommunications Services within 90 days after the date
of this Agreement. The parties expressly acknowledge their intent that OnSite be
a third party beneficiary of this Agreement.
13. Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned or delegated by any party
hereto (whether by operation of law or otherwise) without the prior written
consent of the other party; provided, however, that RSI may assign its rights
and interest hereunder without the prior written consent of Alliance to any
Subsidiary or, if applicable, to any parent company of RSI, or to a Person
which, by reason of merger, consolidation, sale of stock or sale of assets,
succeeds to substantially all of the business of RSI. No such assignment shall
relieve RSI of any of its obligations hereunder.
14. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
15. Governing Law. The interpretation and performance of this
Agreement shall be governed by and construed in accordance with the laws of the
State of New York without regard to such State's conflicts of laws principles.
16. Jurisdiction. SUBJECT TO THE AGREEMENT OF THE PARTIES TO
ARBITRATE AS SET FORTH IN SECTION 3 HEREOF, EACH PARTY TO THIS AGREEMENT HEREBY
IRREVOCABLY AGREES THAT THE ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (INCLUDING,
WITHOUT LIMITATION, ANY ACTION TO ENFORCE THE AWARD PURSUANT TO AN ARBITRATION
AS PROVIDED BY SECTION 3 HEREOF) MAY BE BROUGHT IN THE COURTS OF THE STATE OF
NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW
YORK AND HEREBY EXPRESSLY SUBMITS TO THE PERSONAL JURISDICTION AND VENUE OF SUCH
COURTS FOR THE PURPOSES THEREOF AND EXPRESSLY WAIVES ANY CLAIM OF IMPROPER VENUE
AND ANY CLAIM THAT SUCH COURTS ARE AN INCONVENIENT FORUM. EACH PARTY HEREBY
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF
BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN
SECTION 9, SUCH SERVICE TO BECOME EFFECTIVE 10 DAYS AFTER SUCH MAILING.
17. Confidentiality. (a) All Confidential Information furnished by a
party to the other party pursuant hereto shall be treated as the sole property
of the furnishing party and each party receiving information shall promptly
return (and in any event no later than 10 business days after any request) to
the furnishing party all of such written information and all documents, notes,
summaries or other materials containing, reflecting or referring to, or derived
from, such information. Each party receiving Confidential Information shall keep
confidential all such information, and shall not directly or indirectly use such
information for any competitive or other commercial purpose, other than as
specifically contemplated by this Agreement.
(b) The obligation to keep Confidential information as such
shall not apply to (i) any information which (A) was already in the receiving
party's possession on a non-confidential basis prior to the disclosure thereof
by the furnishing party; (B) was then generally known to the public other than
as a result of disclosure by the receiving party in violation of the provisions
hereof; or (C) was disclosed to the receiving party by a third party not bound
by any obligation of confidentiality or (ii) disclosures made as required by
law. If the receiving party is requested or required (by oral question or
request for information or documents in legal proceedings, interrogatories,
subpoena, civil investigative demand or similar process) to disclose any
information concerning the receiving party, the receiving party will promptly
notify the furnishing party of such request or requirement so that the
furnishing party may seek an appropriate protective order and/or waive the
receiving party's compliance with the provisions or this Agreement. It is
further agreed that, if in the absence of a protective order or the receipt of a
waiver hereunder the receiving party is nonetheless, in the opinion of its
counsel, compelled to disclose information concerning the furnishing party to
any tribunal or governmental body or agency or else stand liable for contempt or
suffer other censure or penalty, the receiving party may disclose such
information to such tribunal or governmental body or agency to the extent
necessary to comply with such order as advised by counsel without liability
hereunder.
(c) Without limiting the foregoing, no receiving party shall
disclose any Confidential Information other than to senior officers of such
party who need to know such information. In the event any furnishing party is
required to provide any Confidential Information, such party will be deemed to
have satisfied its obligations by making such information available at its
principal executive offices during reasonable business hours. No receiving party
shall make any copies of any Confidential Information without the furnishing
party's written consent, which consent shall not be unreasonably withheld or
delayed.
(d) Each receiving party understands and agrees that the
furnishing party will suffer immediate, irreparable harm in the event such
receiving party fails to comply with any of its obligations of confidentiality
under this Agreement, that monetary damages will be inadequate to compensate the
furnishing party for such breach and that such furnishing party shall be
entitled to specific performance as a remedy for any such breach. Such remedy
shall not be deemed to be the exclusive remedy in the event of breach of this
Agreement by any receiving party, but shall be in addition to all other remedies
available to the furnishing party at law or in equity.
18. Headings. Headings of the Sections in this Agreement are for
reference purposes only and shall not be deemed to have any substantive effect.
19. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall be deemed to be one and the same instrument.
20. Facsimile Signatures. This Agreement may be signed by facsimile
copy and shall be valid and binding upon delivery of a signed copy by facsimile.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered as of the day and year first above written.
ALLIANCE NATIONAL INCORPORATED
By: /s/ David Beale
---------------------------------
Name: David Beale
Title: Chief Executive Officer
RECKSON SERVICE INDUSTRIES, INC.
By: /s/ Scott Rechler
---------------------------------
Name: Scott Rechler
Title: President and Chief Executive
Officer
[SIGNATURE PAGE TO INTERCOMPANY AGREEMENT]
<PAGE>
EXHIBIT 1 TO
INTERCOMPANY AGREEMENT
Form of Product Agreement
Exhibit 10.14
AGREEMENT
Agreement dated December 30, 1999 ("Agreement") among VANTAS
Incorporated, a Nevada corporation ("VANTAS"), Reckson Service Industries, Inc.,
a Delaware corporation ("RSI"), and each of the individuals (collectively, the
"Employees") listed as a signatory to this Agreement. Unless otherwise defined,
capitalized terms shall have the meaning ascribed to such terms in the Exchange
Agreements (as hereinafter defined).
W I T N E S S E T H :
WHEREAS, each Employee is party to an agreement dated as of October
29, 1999 (collectively, the "Exchange Agreements" and each individually, an
"Exchange Agreement") with VANTAS and RSI; and
WHEREAS, the parties to the Exchange Agreements desire enter into
this Agreement to resolve certain disagreements which have arisen under the
Exchange Agreements upon the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and the covenants,
agreements and undertakings contained in this Agreement, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Amount of Additional Compensation. The aggregate amount of the
Additional Compensation for all purposes of the Exchange Agreements is Ten
Million Eight Hundred Eighty-One Thousand Nine Hundred and Nine Dollars
($10,881,909.00). At the Exchange Closing, the Employees, in lieu of receiving
the checks contemplated by the last sentence of Section 2(b) of their Exchange
Agreements, shall, subject to the proviso contained in Section 3(a) and the
provisions of Section 3(c) of their Exchange Agreements, have withheld the
applicable taxes which need to be paid in connection with the Exchange Closing,
which amount for all Employees is acknowledged by the Employees to be Ten
Million Eight Hundred Eighty-One Thousand Nine Hundred and Nine Dollars
($10,881,909.00). Such amount shall be allocated to the Employees in the amount
set forth opposite their names (the "Employee's Tax Share") on Schedule I
attached hereto. With respect to each Employee, any tax liabilities of any kind
in connection with the Exchange Closing which exceed such Employee's Tax Share
shall be the sole responsibility of such Employee. Each of the Employees hereby
covenants and agrees to indemnify and hold harmless each of VANTAS and RSI from
and against any tax liability (including, without limitation, interest,
penalties and reasonable attorneys' fees and disbursements related thereto)
incurred by VANTAS or RSI or their respective affiliates relating to (i) the
Exchange Closing in excess of his or her Employee's Tax Share and (ii) any loans
made by VANTAS under the Program.
2. Exchange Closing Deliveries. The Exchange Closing shall be held
at the offices of Herrick, Feinstein LLP, 2 Park Avenue, New York, New York at
11:00 a.m., (New York City time) on December 30, 1999. At the Exchange Closing,
each Employee shall deliver to RSI that number of Exchange Securities set forth
opposite his or her name on Schedule II attached hereto in exchange for that
number of RSI Shares set forth opposite his or her name on Schedule II attached
hereto. All Exchange Securities delivered by the Employees at the Exchange
Closing shall be Option Shares.
3. Remaining Exchange Closing. Notwithstanding anything to the
contrary contained in the Exchange Agreements, with respect to the balance of
each Employee's VANTAS securities not delivered to RSI at the Exchange Closing,
which balances are set forth opposite such Employee's name on Schedule III
attached hereto (the "Remaining Closing Securities"), each Employee shall
exchange at the Remaining Exchange Closing (as hereinafter defined) his or her
Remaining Closing Securities for the number of RSI Shares not delivered at the
Exchange Closing (the "Remaining RSI Shares") in the amounts set forth opposite
his or her name on Schedule III attached hereto. The closing for such exchange
("Remaining Exchange Closing") shall be held at the offices of Herrick,
Feinstein LLP, 2 Park Avenue, New York, New York at the earlier of five (5)
business days of receipt by RSI of a written notice to close issued by all of
the Employees who have not yet engaged in a Remaining Exchange Closing (which
written notice shall in no event be delivered prior to January 1, 2000 nor later
than June 30, 2000) or five (5) business days after June 30, 2000 in which event
RSI will close with all Employees who have delivered notice to close and with
such other Employees as RSI shall determine; provided, however, that if at any
time during the period commencing on January 1, 2000 and terminating on June 30,
2000, any of four (4) or more of the Employees shall have delivered written
notice to RSI to close with such Employees, then RSI shall engage in a Remaining
Exchange Closing with such Employees no later than five (5) business days after
receipt of such notice. In the event that any Employee shall fail to engage in a
Remaining Exchange Closing by June 30, 2000, RSI shall have the right, but not
the obligation, upon five (5) business days' written notice to the Employee, to
require the Employee to make arrangements to pay the requisite taxes and to
exchange his or her Remaining Closing Securities for the Remaining RSI Shares
or, in the alternative, at any time after June 30, 2000, declare the Exchange
Agreement for such Employee and this Agreement as it relates to such Employee to
be deemed to have been fully performed on the part of VANTAS and RSI for all
purposes. Notwithstanding anything to the contrary contained in the Exchange
Agreements, the Remaining Closing Securities do not need to be Option Shares and
shall consist of Employee Securities selected by the Employee in his or her sole
discretion. Each Employee hereby covenants and agrees that, at or prior to the
effective time of his or her Remaining Exchange Closing, he or she shall have
paid the total dollar amount of the tax liability associated with his or her
exchange of Remaining Closing Securities for Remaining RSI Shares; provided,
however, that such obligation shall not extend to any capital gains tax
liability personal to such Employee and which the Employee covenants to pay when
due. RSI shall have no obligation to exchange the Remaining RSI Shares for the
Remaining Closing Securities of any Employee, unless such Employee shall have
made the payment contemplated by the immediately preceding sentence. Each of the
Employees hereby covenants and agrees to indemnify and hold harmless each of
VANTAS and RSI from and against any tax liability (including, without
limitation, interest, penalties and reasonable attorneys' fees and disbursements
related thereto) incurred by VANTAS or RSI or their respective affiliates
relating to the exchange of his or her Remaining Closing Securities for
Remaining RSI Shares.
4. Remaining Exchange Closing Procedures. At each Remaining Exchange
Closing, (i) RSI shall deliver to the Employee participating therein the stock
certificates evidencing the Remaining RSI Shares registered in the name of such
Employee and (ii) the Employee participating therein shall deliver to RSI the
stock certificate(s) evidencing the Remaining Closing Securities, duly endorsed
in blank or accompanied by stock powers duly executed in blank in proper form
for transfer and with all required stock transfer stamps attached, free and
clear of any title defect, objection, security interest, pledge, encumbrance,
mortgage, lien, charge, claim, option, preferential arrangement or restriction
of any kind, including, but not limited to, any restriction on the use, voting,
transfer, receipt of income or other exercise of any attributes of ownership
(collectively, "Liens"), other than those Liens, if any, existing under the
Stockholders' Agreement.
5. Non-Applicability of Preemptive Right. Each of the Employees
hereby irrevocably acknowledges and agrees that the preemptive right provisions
contained in Section 7.1 of the Stockholders' Agreement do not apply to the
financing transaction VANTAS will engage in to raise the Additional Compensation
amount covered by Section 1 hereof.
6. Miscellaneous.
(a) Each of the parties hereto hereby acknowledges and agrees that
the usage of the term "Exchange Closing" herein and in the Exchange Agreements
shall mean the closing referenced in Section 2 hereof as the "Exchange Closing"
occurring on December 30, 1999 and not the Remaining Exchange Closing.
Accordingly, and without limitation, the provisions contained in Sections 2(d)
and 2(f) of the Exchange Agreement to which David W. Beale is a signatory shall
become effective and otherwise operative immediately upon consummation of the
Exchange Closing. This Agreement and the Exchange Agreements contain, and are
intended as, a complete statement of all of the terms of the arrangements and
understandings among the parties with respect to the matters provided for herein
and therein, and supersede any previous agreements and understandings among the
parties with respect to those matters. No Employee has relied on any statement,
promise or understanding not expressly set forth in this Agreement, the Exchange
Agreements or the VANTAS Incorporated Employee Loan Plan. Except as expressly
modified by this Agreement, all of the terms and conditions of the Exchange
Agreement shall remain in full force and effect. As a result of this Agreement,
all parties hereto irrevocably acknowledge and agree that each Exchange
Agreement is being fully and duly performed in accordance with all of its terms
and conditions. In the event of any inconsistency between the terms of this
Agreement and the Exchange Agreements, this Agreement shall prevail.
(b) This Agreement shall be governed by, and construed and enforced
in accordance with the laws of the State of New York without regard to its
principles of conflicts of law. All actions and proceedings arising out of, or
relating to, this Agreement shall be heard and determined in any state or
federal court sitting in New York, New York. In the event of any dispute as to
the terms of this Agreement, the prevailing party in any litigation or other
proceeding shall be entitled to its reasonable attorneys' fees, costs and
expenses in connection therewith.
(c) All notices and other communications under this Agreement shall
be in writing and shall be hand delivered, mailed by registered or certified
mail, return receipt requested (with a copy simultaneously by ordinary mail), or
recognized overnight delivery service to the parties in the manner and with the
effect provided for in the Exchange Agreements.
(d) No provision of this Agreement may be amended or modified except
by an instrument or instruments in writing signed by the parties hereto. The
failure of a party at any time or times to require performance of any provision
hereof shall in no manner be deemed to affect the party's right at a later time
to enforce the same. No waiver by any party of the breach of any term contained
in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be or construed as a further or continuing waiver
of any such breach or of the breach of any other term or provision of this
Agreement.
(e) This Agreement shall be binding on, and shall inure to the
benefit of, the parties hereto and their respective successors and permitted
assigns. The rights and obligations of any party hereto may not be assigned or
transferred without the prior written consent of the other parties hereto.
(f) From and after the date hereof, each of the parties hereto
agrees to execute and deliver such further documents and instruments and to do
such other acts and things any of them, as the case may be, may reasonably
request in order to effectuate the transactions contemplated by this Agreement.
(g) Any word or term used in this Agreement in any form shall be
masculine, feminine, neuter, singular or plural, as proper reading requires.
(h) Time shall be of the essence with respect to all notices
required to be given, all payments and other deliveries required to be made and
all conditions required to be satisfied under this Agreement.
(i) The obligations of the Employees hereunder are not joint but
rather are several as to themselves.
IN WITNESS WHEREOF, the parties hereto have executed and delivered,
or caused the execution and delivery of, this Agreement on the date first
written above.
VANTAS INCORPORATED
By: /s/ David W. Beale
----------------------------------
Name: David W. Beale
Title: Chief Executive Officer
RECKSON SERVICE INDUSTRIES, INC.
By: /s/ Jason Barnett
----------------------------------
Name: Jason Barnett
Title: Executive Vice President
/s/ David W. Beale
-------------------------------------
David W. Beale
/s/ Alan M. Langer
-------------------------------------
Alan M. Langer
/s/ Kelly G. Besecker
-------------------------------------
Kelly G. Besecker
/s/ Laura Kozelouzek
-------------------------------------
Laura Kozelouzek
/s/ Edward M. Caravalho
-------------------------------------
Edward M. Caravalho
/s/ Linda V.B. Harris
-------------------------------------
Linda V.B. Harris
/s/ Bonnie L. Deininger
-------------------------------------
Bonnie L. Deininger
/s/ Mitchell Barry Knecht
-------------------------------------
Mitchell Barry Knecht
/s/ Carol Whalin
-------------------------------------
Carol Whalin
SCHEDULE I
Employee Additional Compensation Amount
David W. Beale $ 7,789,418
Alan M. Langer 1,343,987
Kelly G. Besecker 451,808
Laura Kozelouzek 744,025
Edward M. Caravalho 90,272
Linda V. B. Harris 135,689
Bonnie L. Deininger 148,710
Mitchell Barry Knecht --
Carol Whalin 178,000
-----------
$10,881,909
SCHEDULE II
Employee Exchange Securities RSI Shares
David W. Beale 408,955 157,316
Alan M. Langer 71,756 27,603
Kelly G. Besecker 23,392 8,998
Laura Kozelouzek 34,822 13,395
Edward M. Caravalho 4,819 1,854
Linda V. B. Harris 6,602 2,540
Bonnie L. Deininger 8,106 3,118
Mitchell Barry Knecht - -
Carol Whalin 9,542 3,671
--------- ---------
567,994 218,495
<PAGE>
SCHEDULE III
Remaining Remaining
Employee Closing Securities RSI Shares
David W. Beale 385,641 149,448
Alan M. Langer 67,666 28,825
Kelly G. Besecker 22,058 6,837
Laura Kozelouzek 32,836 12,042
Edward M. Caravalho 4,544 1,884
Linda V. B. Harris 6,226 2,477
Bonnie L. Deininger 7,644 2,432
Mitchell Barry Knecht 10,800 4,099
Carol Whalin 8,998 2,149
--------- ---------
546,413 210,193
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,615,087
<SECURITIES> 0
<RECEIVABLES> 4,222,175
<ALLOWANCES> 401,000
<INVENTORY> 0
<CURRENT-ASSETS> 23,222,671
<PP&E> 28,313,758
<DEPRECIATION> 5,189,056
<TOTAL-ASSETS> 134,074,450
<CURRENT-LIABILITIES> 18,912,936
<BONDS> 0
47,927,872
0
<COMMON> 49,019
<OTHER-SE> (15,257,249)
<TOTAL-LIABILITY-AND-EQUITY> 134,074,450
<SALES> 0
<TOTAL-REVENUES> 54,057,186
<CGS> 0
<TOTAL-COSTS> 42,110,305
<OTHER-EXPENSES> 5,402,486
<LOSS-PROVISION> 250,672
<INTEREST-EXPENSE> 2,884,300
<INCOME-PRETAX> 3,349,423
<INCOME-TAX> 1,410,000
<INCOME-CONTINUING> 1,939,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,939,423
<EPS-BASIC> (1.08)
<EPS-DILUTED> (1.08)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Jun-30-1998
<CASH> 5,909,954
<SECURITIES> 0
<RECEIVABLES> 3,565,434
<ALLOWANCES> 266,000
<INVENTORY> 0
<CURRENT-ASSETS> 12,042,550
<PP&E> 18,833,757
<DEPRECIATION> 3,714,862
<TOTAL-ASSETS> 92,684,500
<CURRENT-LIABILITIES> 7,455,100
<BONDS> 0
34,498,455
0
<COMMON> 49,519
<OTHER-SE> (9,656,003)
<TOTAL-LIABILITY-AND-EQUITY> 92,684,500
<SALES> 0
<TOTAL-REVENUES> 66,537,631
<CGS> 0
<TOTAL-COSTS> 9,914
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 387,900
<INTEREST-EXPENSE> 3,188,126
<INCOME-PRETAX> 7,080,513
<INCOME-TAX> 2,700,000
<INCOME-CONTINUING> 4,089,528
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,089,528
<EPS-BASIC> (2.06)
<EPS-DILUTED> (2.06)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1997
<PERIOD-START> Jul-01-1996
<PERIOD-END> Jun-30-1997
<CASH> 1,432,304
<SECURITIES> 0
<RECEIVABLES> 1,343,792
<ALLOWANCES> 257,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,813,948
<PP&E> 10,489,969
<DEPRECIATION> 2,071,589
<TOTAL-ASSETS> 36,053,596
<CURRENT-LIABILITIES> 4,281,136
<BONDS> 0
12,324,047
0
<COMMON> 48,435
<OTHER-SE> 559,478
<TOTAL-LIABILITY-AND-EQUITY> 36,053,596
<SALES> 0
<TOTAL-REVENUES> 29,097,615
<CGS> 0
<TOTAL-COSTS> 23,112,635
<OTHER-EXPENSES> 3,239,790
<LOSS-PROVISION> 203,200
<INTEREST-EXPENSE> 930,598
<INCOME-PRETAX> 1,611,392
<INCOME-TAX> 1,389,100
<INCOME-CONTINUING> 2,881,612
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,881,612
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.30
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jun-30-1996
<PERIOD-START> Jul-01-1995
<PERIOD-END> Jun-30-1996
<CASH> 539,321
<SECURITIES> 0
<RECEIVABLES> 432,880
<ALLOWANCES> 55,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,469,295
<PP&E> 4,249,393
<DEPRECIATION> 1,730,969
<TOTAL-ASSETS> 6,009,027
<CURRENT-LIABILITIES> 2,443,567
<BONDS> 0
0
0
<COMMON> 48,085
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,009,077
<SALES> 0
<TOTAL-REVENUES> 11,964,377
<CGS> 0
<TOTAL-COSTS> 10,081,176
<OTHER-EXPENSES> 1,155,808
<LOSS-PROVISION> 11,100
<INTEREST-EXPENSE> 54,649
<INCOME-PRETAX> 836,787
<INCOME-TAX> 278,000
<INCOME-CONTINUING> 558,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 558,787
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
