<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER: 0-18274
HQ GLOBAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction 75-2880509
of incorporation of organization) (IRS Employer Identification Number)
15950 NORTH DALLAS PARKWAY, SUITE 350 DALLAS, TX 75248
(Address of principal executive office) (Zip code)
(972) 361-8100
(Registrant's telephone number, including area code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
AS OF NOVEMBER 14, 2000, 9,929,697 SHARES OF THE REGISTRANT'S VOTING COMMON
STOCK, PAR VALUE $.01, AND 2,152,988 SHARES OF THE REGISTRANT'S CLASS C
NON-VOTING COMMON STOCK, PAR VALUE $.01 WERE OUTSTANDING.
----------
<PAGE> 2
HQ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999 (unaudited).................................... 3
Consolidated Statements of Operations for the three months and nine
months ended September 30, 2000 and 1999 (unaudited)............. 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited).......................... 5
Consolidated Statement of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficiency) for the nine months ended
September 30, 2000 (unaudited)................................... 6
Notes to the Consolidated Financial Statements (unaudited).......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 18
Item 2. Changes in Securities and Use of Proceeds..................... 18
Item 6. Exhibits and Reports on Form 8-K.............................. 19
SIGNATURES.............................................................. 20
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HQ GLOBAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,898 $ 3,807
Restricted cash 6,689 21,572
Accounts receivable, net of allowance for doubtful accounts of $3,916
and $861 at September 30, 2000 and December 31, 1999, respectively 25,661 8,426
Prepaid expenses and other current assets 20,237 10,853
Deferred income taxes -- 5,155
Deferred financing costs 8,124 909
------------- -------------
Total current assets 76,609 50,722
Intangibles, net 595,680 187,115
Property and equipment, net 207,940 80,064
Deferred financing costs, net 42,138 4,517
Security deposits 6,355 4,401
Other assets, net 31,456 5,638
------------- -------------
Total assets $ 960,178 $ 332,457
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses $ 43,140 $ 38,010
Capital lease obligations 745 1,139
Deferred rent payable 4,131 2,165
Notes payable - Credit Facility 16,575 12,500
Other liabilities 1,708 --
------------- -------------
Total current liabilities 66,299 53,814
Notes payable - Credit Facility 199,575 108,125
Notes payable - Mezzanine Loan 125,000 --
Tenants' security deposits 58,529 20,164
Deferred rent payable 33,462 22,794
Deferred income taxes -- 3,024
Capital lease obligations 2,694 626
Other liabilities 4,361 4,362
------------- -------------
Total liabilities 489,920 212,909
------------- -------------
Redeemable convertible preferred stock:
Series A Convertible Cumulative Preferred Stock, $.01 par value; issued
and outstanding 5,395,858 shares (aggregate liquidation preference $220,000) 165,573 --
Series A through E Convertible Preferred Stock of VANTAS, $.01 par
value; issued and outstanding 29,837,272 shares at December 31, 1999
(aggregate liquidation preference $121,505) -- 154,042
Note receivable from issuance of redeemable preferred stock -- (950)
------------- -------------
Total redeemable convertible preferred stock 165,573 153,092
------------- -------------
Stockholders' equity (deficiency):
Voting common stock, $.01 par value; authorized 75,000,000 shares; issued
and outstanding 9,929,697 shares at September 30, 2000 and 1,814,799 shares
at December 31, 1999 99 18
Nonvoting Class C common stock, $.01 par value; authorized 25,000,000 shares;
issued and outstanding 2,152,988 shares 21 --
Additional paid-in capital 366,616 52
Unearned stock compensation (5,803) --
Notes receivable from issuance of common stock -- (945)
Accumulated other comprehensive income (loss) (1,013) --
Accumulated deficit (55,235) (32,669)
------------- -------------
Total stockholders' equity (deficiency) 304,685 (33,544)
------------- -------------
Total liabilities and stockholders' equity (deficiency) $ 960,178 $ 332,457
============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
HQ GLOBAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BUSINESS CENTER OPERATIONS:
REVENUES:
Workstation revenue $ 97,642 $ 33,703 $ 191,798 $ 91,339
Support services 62,624 24,378 129,655 66,070
------------ ------------ ------------ ------------
160,266 58,081 321,453 157,409
------------ ------------ ------------ ------------
EXPENSES:
Rent 54,703 22,645 114,426 60,119
Support services 24,498 8,431 48,369 22,825
Center general and administrative 27,409 12,828 62,686 34,906
------------ ------------ ------------ ------------
106,610 43,904 225,481 117,850
------------ ------------ ------------ ------------
Contribution from operation of business centers 53,656 14,177 95,972 39,559
------------ ------------ ------------ ------------
OTHER (EXPENSES) INCOME:
Corporate general and administrative (18,811) (6,602) (36,098) (17,493)
Merger and integration charges (1,707) (219) (21,148) (1,604)
Depreciation and amortization (19,069) (4,068) (34,015) (10,322)
Interest expense, net (11,827) (2,888) (22,054) (7,133)
------------ ------------ ------------ ------------
(51,414) (13,777) (113,315) (36,552)
------------ ------------ ------------ ------------
Income (loss) before provision for
Income taxes 2,242 400 (17,343) 3,007
Provision for income taxes (1,984) (864) (2,453) (2,195)
------------ ------------ ------------ ------------
Net income (loss) 258 (464) (19,796) 812
Accretion of preferred stock (7,507) (1,338) (14,194) (5,606)
------------ ------------ ------------ ------------
Net loss applicable to common stock $ (7,249) $ (1,802) $ (33,990) $ (4,794)
============ ============ ============ ============
Per share information:
Basic and diluted net loss per common share $ (.52) $ (.37) $ (3.69) $ (.98)
============ ============ ============ ============
Weighted average number of shares used in
computing basic and diluted net loss per
common share 14,029,583 4,901,868 9,223,791 4,901,868
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
HQ GLOBAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30 SEPTEMBER 30
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (19,796) $ 812
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 34,015 10,322
Provision for doubtful accounts 1,720 749
Amortization of deferred financing costs 2,238 492
Unrealized foreign currency loss, net (1,013) --
Deferred income taxes (603) --
Deferred rent payable 6,105 4,108
Non-cash compensation expense 477 --
Changes in operating assets and liabilities:
Accounts receivable (11,273) (2,764)
Prepaid expenses and other current assets (241) (2,058)
Security deposits and other assets 3,031 (1,942)
Accounts payable and accrued expenses (29,081) 301
Tenants' security deposits 6,983 2,491
Other liabilities 1,249 121
------------ ------------
Net cash (used in) provided by
operating activities (6,189) 12,632
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of net assets of business centers, net of
cash acquired (254,025) (42,029)
Purchases of property and equipment (31,771) (26,644)
Restricted cash 23,322 (21,799)
------------ ------------
Net cash used in investing
activities (262,474) (90,472)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 404,325 65,400
Payments on borrowings (322,493) (14,150)
Payment of deferred financing costs (25,736) (3,054)
Payments on capital leases (2,300) (1,971)
Proceeds from issuance of preferred stock,
net of issuance costs 181,006 29,695
Proceeds from issuance of common stock warrants 64,312 --
Proceeds from exercise of common stock options and
warrants 1,071 --
Purchase and retirement of common stock (21,743) --
Proceeds from collection of stock related notes
receivable 1,939 --
Capital contribution from shareholder 373 --
------------ ------------
Net cash provided by financing
activities 280,754 75,920
------------ ------------
Net increase (decrease) in cash and cash equivalents 12,091 (1,920)
Cash and cash equivalents at beginning of period 3,807 3,615
------------ ------------
Cash and cash equivalents at end of period $ 15,898 $ 1,695
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
HQ GLOBAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON
STOCKHOLDERS' EQUITY (DEFICIENCY) (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------
VANTAS HQ HOLDINGS
-------------------------------------------- ------------
NOTE
SHARES AMOUNT RECEIVABLE SHARES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1999 29,837,272 154,042 $ (950) --
Adjustments to retroactively reflect the exchange
ratio in the HQ Merger -- -- -- --
------------ ------------ ------------ ------------
Balances December 31, 1999, as adjusted 29,837,272 154,042 (950) --
Exercise of common stock options and warrants -- -- -- --
Contribution of capital from shareholder -- -- -- --
Issuance of preferred stock of VANTAS 3,885,245 25,318 -- --
Accretion of Series B through Series E
Convertible Preferred Stock of VANTAS -- 4,309 -- --
Transactions relating to the HQ Merger:
Repurchase and cancellation of common stock
held by former stockholders of VANTAS -- -- 950 --
Conversion of Series A through Series E
Redeemable Convertible Preferred Stock of VANTAS (33,722,517) (183,669) -- --
Issuance of Series A Convertible Preferred Stock and warrants
to purchase common stock -- -- -- 4,782,692
Capital contributions by Frontline Capital Group -- -- -- --
Issuance of common stock, warrants and options
in the HQ Merger -- -- -- --
Issuance of warrants to purchase common stock
in connection with the issuance of USBW Loan -- -- -- --
Issuance of Series A Convertible Preferred Stock and warrants
to purchase common stock for cash -- -- -- 613,166
Accretion of Series A Convertible Preferred Stock -- -- -- --
Issuance of restricted stock -- -- -- --
Amortization of unearned stock compensation -- -- -- --
Net loss -- -- -- --
Unrealized foreign currency translation loss, net -- -- -- --
Comprehensive net loss
------------ ------------ ------------ ------------
Balances, Sept 30, 2000 -- $ -- $ -- 5,395,858
============ ============ ============ ============
<CAPTION>
REDEEMABLE CONVERTIBLE
PREFERRED STOCK STOCKHOLDERS' EQUITY
--------------------------- -----------------------------
HQ HOLDINGS VOTING COMMON STOCK
------------ -----------------------------
AMOUNT TOTAL SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1999 -- $ 153,092 7,064,222 $ 70
Adjustments to retroactively reflect the exchange
ratio in the HQ Merger -- -- (5,249,423) (52)
------------ ------------ ------------ ------------
Balances December 31, 1999, as adjusted -- 153,092 1,814,799 18
Exercise of common stock options and warrants -- -- 144,727 1
Contribution of capital from shareholder -- -- -- --
Issuance of preferred stock of VANTAS -- 25,318 -- --
Accretion of Series B through Series E
Convertible Preferred Stock of VANTAS -- 4,309 -- --
Transactions relating to the HQ Merger:
Repurchase and cancellation of common stock
held by former stockholders of VANTAS -- 950 (1,959,526) (19)
Conversion of Series A through Series E
Redeemable Convertible Preferred Stock of VANTAS -- (183,669) 8,675,625 87
Issuance of Series A Convertible Preferred Stock and warrants
to purchase common stock 142,115 142,115 -- --
Capital contributions by Frontline Capital Group -- -- -- --
Issuance of common stock, warrants and options
in the HQ Merger -- -- 1,082,353 10
Issuance of warrants to purchase common stock
in connection with the issuance of USBW Loan -- -- -- --
Issuance of Series A Convertible Preferred Stock and warrants
to purchase common stock for cash 13,574 13,574 -- --
Accretion of Series A Convertible Preferred Stock 9,884 9,884 -- --
Issuance of restricted stock -- -- 171,719 2
Amortization of unearned stock compensation -- -- -- --
Net loss -- -- -- --
Unrealized foreign currency translation loss, net -- -- -- --
Comprehensive net loss
------------ ------------ ------------ ------------
Balances, Sept 30, 2000 $ 165,573 $ 165,573 9,929,697 $ 99
============ ============ ============ ============
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------------------------------------------------
NONVOTING COMMON STOCK ADDITIONAL UNEARNED
---------------------------- PAID-IN STOCK
SHARES AMOUNT CAPITAL COMPENSATION
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1999 $ -- $ -- $ -- $ --
Adjustments to retroactively reflect the exchange
ratio in the HQ Merger -- -- 52 --
------------ ------------ ------------ ------------
Balances December 31, 1999, as adjusted -- -- 52 --
Exercise of common stock options and warrants -- -- 1,114 --
Contribution of capital from shareholder -- -- 373 --
Issuance of preferred stock of VANTAS -- -- -- --
Accretion of Series B through Series E
Convertible Preferred Stock of VANTAS -- -- (1,539) --
Transactions relating to the HQ Merger:
Repurchase and cancellation of common stock
held by former stockholders of VANTAS -- -- (21,723) --
Conversion of Series A through Series E
Redeemable Convertible Preferred Stock of VANTAS -- -- 183,582 --
Issuance of Series A Convertible Preferred Stock and warrants
to purchase common stock -- -- 52,886 --
Capital contributions by Frontline Capital Group -- -- 5,602 --
Issuance of common stock, warrants and options
in the HQ Merger 2,152,988 21 120,024 --
Issuance of warrants to purchase common stock
in connection with the issuance of USBW Loan -- -- 18,425 --
Issuance of Series A Convertible Preferred Stock and warrants
to purchase common stock for cash -- -- 11,426 --
Accretion of Series A Convertible Preferred Stock -- -- (9,884) --
Issuance of restricted stock -- -- 6,278 (6,280)
Amortization of unearned stock compensation -- -- -- 477
Net loss -- -- -- --
Unrealized foreign currency translation loss, net -- -- -- --
Comprehensive net loss
------------ ------------ ------------ ------------
Balances, Sept 30, 2000 2,152,988 $ 21 $ 366,616 $ (5,803)
============ ============ ============ ============
<CAPTION>
STOCKHOLDERS' EQUITY
----------------------------------------------------------------
ACCUMULATED
NOTE OTHER COMPREHENSIVE ACCUMULATED
RECEIVABLE INCOME (LOSS) DEFICIT TOTAL
------------ ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1999 $ (945) $ -- $ (32,669) (33,544)
Adjustments to retroactively reflect the exchange
ratio in the HQ Merger -- -- -- --
------------ ------------ ------------ ------------
Balances December 31, 1999, as adjusted (945) -- (32,669) (33,544)
Exercise of common stock options and warrants (31) -- -- 1,084
Contribution of capital from shareholder -- -- -- 373
Issuance of preferred stock of VANTAS -- -- -- --
Accretion of Series B through Series E
Convertible Preferred Stock of VANTAS -- -- (2,770) (4,309)
Transactions relating to the HQ Merger:
Repurchase and cancellation of common stock
held by former stockholders of VANTAS 976 -- -- (20,766)
Conversion of Series A through Series E
Redeemable Convertible Preferred Stock of VANTAS -- -- -- 183,669
Issuance of Series A Convertible Preferred Stock and warrants
to purchase common stock -- -- -- 52,886
Capital contributions by Frontline Capital Group -- -- -- 5,602
Issuance of common stock, warrants and options
in the HQ Merger -- -- -- 120,055
Issuance of warrants to purchase common stock
in connection with the issuance of USBW Loan -- -- -- 18,425
Issuance of Series A Convertible Preferred Stock and warrants
to purchase common stock for cash -- -- -- 11,426
Accretion of Series A Convertible Preferred Stock -- -- -- (9,884)
Issuance of restricted stock -- -- -- --
Amortization of unearned stock compensation -- -- -- 477
Net loss -- -- (19,796) (19,796)
Unrealized foreign currency translation loss, net -- (1,013) -- (1,013)
------------
Comprehensive net loss (20,809)
------------ ------------ ------------ ------------
Balances, Sept 30, 2000 $ -- $ (1,013) $ (55,235) $ 304,685
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
HQ GLOBAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
On June 1, 2000, VANTAS Incorporated ("VANTAS", formerly ALLIANCE NATIONAL
Incorporated, and, prior to that, Executive Office Group, Inc.), a
majority-owned subsidiary of FrontLine Capital Group ("FLCG"), merged with HQ
Global Workplaces, Inc. ("Old HQ"), an affiliate of CarrAmerica Realty
Corporation ("CarrAmerica"), in a two step merger (the "HQ Merger"). As a result
of the HQ Merger, the combined company became a wholly owned subsidiary of a
newly formed parent corporation, HQ Global Holdings, Inc. ("HQ Global" or the
"Company"), under the name HQ Global Workplaces, Inc. ("HQ"). See Note 2.
HQ is the largest provider of flexible officing solutions in the world. As
of September 30, 2000, HQ owned, operated, or franchised 469 business centers in
17 countries. This included 19 business centers open for nine months or less.
Also included are 6 business centers managed by the Company for unrelated third
parties and 9 international joint-venture business centers with which the
Company, through its European subsidiary, HQ Holdings Limited, is a joint
venture partner with Merrill Lynch Asset Management (f/k/a Mercury Asset
Management). The Company's wholly owned subsidiary, HQ Network Systems, Inc., is
the franchiser of 46 domestic and 30 international business centers for
unrelated franchisees. The Company provides a complete outsourced office
solution through furnished and equipped individual offices and multi-office
suites available on short notice with flexible contracts. The Company also
provides business support and information services including:
telecommunications; broadband Internet access; mail room and reception services;
high-speed copying, faxing and printing services; secretarial, desktop
publishing and IT support services and various size conference facilities, with
multi-media presentation and, in certain cases, video teleconferencing
capabilities. The Company also provides similar services for those businesses
and individuals that do not require offices on a full-time basis.
FLCG currently owns approximately 57% of the outstanding shares of common
stock of HQ Global ("Common Stock"), assuming the exercise of outstanding stock
options and Series A Warrants to purchase Common Stock at a nominal exercise
price. See Note 5. Such ownership percentage does not take into account shares
of Common Stock issuable upon conversion of the Series A Preferred Stock (due to
the fact that the number of such shares is dependent upon the timing of the
conversion and other factors). On a diluted basis, assuming the Series A
Preferred Stock converts at the merger conversion price, and assuming the Series
B Warrants become exercisable, FLCG would own approximately 38% of the common
stock of HQ Global.
The consolidated financial statements include the accounts of HQ Global and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. In the opinion of
management, the consolidated financial statements for the three and nine month
periods ended September 30, 2000 and 1999, reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
financial position, operating results and cash flows for each period presented.
Results for interim periods are not necessarily indicative of results for a full
year. The December 31, 1999 consolidated balance sheet was derived from audited
financial statements of VANTAS, but does not include all disclosures required by
generally accepted accounting principles. These consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Annual Report on Form 10-K of VANTAS for the
year ended December 31, 1999.
The accompanying financial statements have been prepared using the local
currency as the functional currency. Foreign currency exchange gains and losses
resulting from the translation of financial statements denominated in local
currencies into U.S. dollars are included as a component of stockholders'
equity.
Certain prior period amounts have been reclassified to conform to the
current year presentation.
2. MERGER OF VANTAS INCORPORATED AND HQ GLOBAL WORKPLACES, INC.
As described in Note 1, on June 1, 2000, VANTAS merged with Old HQ pursuant
to the HQ Merger. As a result of the HQ Merger, the combined company became a
wholly owned subsidiary of HQ Global, under the name HQ Global Workplaces, Inc.
During the three months ended March 31, 2000, VANTAS issued 2,072,745 shares
of Series E Convertible Preferred Stock ("Series E Preferred Stock") at $5.25
per share for net proceeds of approximately $10.9 million. Immediately prior to
the HQ Merger, VANTAS issued 1,812,500 shares of Series E Convertible Preferred
Stock to FLCG at $8.00 per share for net proceeds of approximately $14.5
million.
7
<PAGE> 8
In connection with the HQ Merger, (i) each share of the Class A Common Stock
of VANTAS ("VANTAS Common Stock") was converted into the right to receive $8.00
per share in cash, (ii) each option and warrant to purchase the common stock of
VANTAS was converted into the right to receive a per share cash amount equal to
$8.00, less the exercise price for such options or warrants, except for certain
VANTAS options which were converted into options to purchase 12,310 shares of
Common Stock, and (iii) each share of the convertible preferred stock of VANTAS
outstanding was converted into .2569 shares of Voting Common Stock of HQ Global
("Voting Common Stock"). The payment to cancel the outstanding options held by
officers and employees was charged to merger and integration expenses in the
three months ended June 30, 2000. The holders of the VANTAS preferred stock
received an aggregate of 8,675,625 shares of Voting Common Stock upon conversion
of the preferred stock.
In the HQ Merger, CarrAmerica and certain other stockholders of Old HQ
received approximately $151.1 million in cash and 1,076,009 shares of Voting
Common Stock and 2,152,988 shares of Nonvoting Common Stock of HQ Global in
exchange for the 7,359,527 shares of Old HQ they held. In addition, options to
purchase shares of Old HQ common stock and stock units were cancelled for
approximately $10.8 million in cash, warrants to purchase 101,000 shares of Old
HQ common stock at an exercise price of $20 per share were converted into
warrants to purchase an equal number of shares of Common Stock with the same
terms, and options to purchase 14,000 shares of Old HQ common stock were
converted into 6,344 shares of Common Stock.
Because the former VANTAS stockholders received approximately 66% of the
outstanding shares of Common Stock, the HQ Merger has been accounted for as a
purchase of Old HQ by VANTAS. As a result, the consolidated financial statements
of HQ Global include the assets and liabilities of VANTAS at their respective
historical carrying amounts and include the results of its operations for all
periods presented. All historical share and per share information has been
retroactively adjusted based on an effective conversion rate of one share of
VANTAS Common Stock into .2569 shares of Common Stock.
HQ Global also acquired the interests of CarrAmerica in OmniOffices (UK)
Limited and OmniOffices (Lux) 1929 Holding Company S.A. (collectively
"OmniOffices UK"), two companies engaged in the executive office suites business
outside of the United States, for approximately $90.2 million in cash. The
aggregate cost of the HQ Merger and the acquisition of OmniOffices UK consisted
of the following (dollars in thousands):
<TABLE>
<S> <C>
Cash paid to former Old HQ shareholders $ 151,058
Cash paid to former Old HQ option and stock unit holders 10,754
Cash paid to acquire OmniOffices 90,176
3,235,341 shares of Common Stock issued to Old HQ
shareholders and option holders 118,381
Warrants to purchase 101,000 shares of Common
Stock issued to Old HQ warrant holders 1,676
Investment advisor, legal, accounting, and other
professional fees and other expenses 20,076
----------
$ 392,121
==========
</TABLE>
The costs of the HQ Merger and the acquisition of OmniOffices have been
allocated to the respective assets acquired and liabilities assumed of Old HQ
and OmniOffices, with the remainder recorded as goodwill, based on preliminary
estimates of fair values as follows (dollars in thousands):
<TABLE>
<S> <C>
Working capital $ (14,841)
Favorable operating leases 22,900
Property and equipment 107,047
Goodwill 396,404
Other assets 32,504
Other liabilities (13,200)
Notes payable (138,693)
----------
$ 392,121
</TABLE>
The estimates of fair value were determined by the Company's management
based on information furnished by the management of Old HQ and OmniOffices. The
goodwill recorded in the HQ Merger is being amortized over a 20-year period
based on management's assessment of the significant barriers to entry due to the
rapid consolidation in the executive suites business and the lack of exposure to
technological obsolescence in the global officing solutions business. The
Company engages in lease commitments ranging from 10-15 years, typically with 5
year renewal options. The results of operations of Old HQ and OmniOffices are
included in the consolidated results of HQ Global for periods subsequent to June
1, 2000.
In connection with the HQ Merger, HQ Global issued 4,782,692 shares of
Series A Convertible Cumulative Preferred Stock ("Series A Preferred"), warrants
to purchase up to 1,445,358 shares of Common Stock exercisable at a price of
$.01 per share (the "Series A Warrants"), and warrants to purchase up to 697,964
shares of Common Stock exercisable at a price of $.01 per share under certain
conditions (the "Series B Warrants") for a total consideration of $195 million.
See Notes 4 and 5.
8
<PAGE> 9
Merger and integration costs related to the HQ Merger incurred and charged
to expense during the nine month period ended September 30, 2000 include the
following (in thousands):
<TABLE>
<S> <C>
Payments to cancel options to purchase VANTAS common stock
held by officers and employees $ 11,382
Severance, retention incentives and other benefits 7,548
Professional fees and other expenses 2,218
----------
$ 21,148
==========
</TABLE>
Of the total merger and integration costs incurred through September 30,
2000 of $21.1 million, approximately $19.4 million required cash outlays. At
September 30, 2000, the remaining balance to be paid totaled approximately $1.7
million, relating to employee severance, retention incentives and other
benefits, and relocation costs.
In connection with the HQ Merger, HQ Global is consolidating and relocating
the former headquarters of VANTAS and Old HQ in New York, New York and Atlanta,
Georgia, respectively, into a new corporate headquarters in Dallas, Texas. Due
to the HQ Merger and pending relocations, VANTAS and Old HQ entered into
incentive bonus agreements with certain key executives and employees, which
bonuses will be earned as long as such executives and employees remain with the
Company through a specified date. Relocation costs and retention incentives are
being charged to expense as incurred.
3. NOTES PAYABLE
On May 31, 2000, the Company completed a transaction which increased its
$157.9 million credit facility (the amended and restated "Credit Facility") to
$275.0 million. The Credit Facility provides for $219.4 million under four term
loans, all of which are repayable in various quarterly installments through
November 2005. The Credit Facility also provides for borrowings up to $55.6
million in two revolving loan commitments. Availabilities under the revolving
portion of the Credit Facility are formula based. As of September 30, 2000,
there was $216.2 million in outstanding borrowings under the term loans and no
borrowings outstanding under either revolver. As of September 30, 2000, the
Company had letters of credit outstanding in the aggregate amount of $28.5
million, against which the Company pledged $5.7 million in cash and $22.8
million were supported by the two revolving loan commitments, leaving $32.8
million available for additional borrowings.
Borrowings under the Credit Facility bear interest ranging from LIBOR plus
3.25% to 4.0% or PRIME plus 2.25% to 3.00% for a one, three or nine month period
at the election of the Company. The Company's weighted average interest rate on
borrowings under the term loans at September 30, 2000 was approximately 11.04%.
The Company pays a commitment fee of 1/2 of 1.0% per annum on the unused portion
of the Credit Facility. As of September 30, 2000, the Company had hedged the
interest rates on approximately $93.0 million of its credit facility using
various instruments with various expiration dates through July 31, 2002. These
instruments lock in the maximum underlying 30 day LIBOR rate at levels between
7.93% and 9.00%. The Credit Facility contains certain financial covenants
related to interest coverage, leverage ratios and other limitations. At
September 30, 2000, the Company was in compliance with these covenants.
Maturities of borrowings outstanding under the Credit Facility subsequent to
September 30, 2000 are as follows:
Twelve months ending September 30 (in millions):
<TABLE>
<S> <C>
2001 $ 16.6
2002 24.1
2003 25.2
2004 56.4
2005 74.4
Thereafter 19.5
--------
Total $ 216.2
========
</TABLE>
On May 31, 2000, the Company entered into a Senior Subordinated Credit
Facility (the "USBW Loan") of $125.0 million provided by UBS Warburg LLC
("USBW"). The USBW Loan carried an interest rate of LIBOR plus 6.5% and matured
on May 31, 2007. Pursuant to a commitment from USBW, on August 11, 2000, the
Company replaced the USBW Loan with a $125.0 million Senior Subordinated Note
Agreement (the "Mezzanine Loan") with a group of lenders arranged by USBW. The
Mezzanine Loan bears interest at 13.5% per annum and matures on May 31, 2007.
The Mezzanine Loan contains certain financial covenants related to interest
coverage, leverage ratios and other limitations. At September 30, 2000, the
Company was in compliance with these covenants.
The Mezzanine Loan lenders received 503,545 Series A Warrants and 227,163
Series B Warrants. See Note 5. The fair value of the Series A Warrants to
purchase Common Stock issued to the lenders was recorded as debt issuance costs
and is being amortized over the terms of the related loan. No value will be
assigned to the Series B Warrants until such time as it becomes probable the
Series B Warrants will become exercisable by the holders.
9
<PAGE> 10
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In connection with the HQ Merger, all issued and outstanding shares of
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series D Convertible Preferred Stock and
Series E Convertible Preferred Stock of VANTAS were converted into an aggregate
of 8,663,315 shares of Voting Common Stock on June 1, 2000 (Note 2).
The Company has authorized 7,500,000 shares of $0.01 par value preferred
stock, of which 5,395,858 shares have been designated as Series A Convertible
Cumulative Preferred Stock.
To finance a portion of the cash requirements of the HQ Merger, the
Company issued 4,782,692 shares Series A Preferred, 1,445,358 Series A Warrants
and 697,964 Series B Warrants for a total consideration of $195.0 million. On
August 11, 2000, the Company issued 613,166 additional shares of Series A
Preferred, 312,274 Series A Warrants and 164,902 Series B Warrants for a total
consideration of $25.0 million.
Holders of the shares of Series A Preferred are entitled to receive
dividends, when, as and if authorized by the Board of Directors, equal to the
dividend rate, as defined, multiplied by the liquidation amount per share of
Series A Preferred. The initial dividend rate is 13.5% per annum, increasing by
0.50% per annum on May 31, 2001 and on each annual anniversary date thereafter
until November 30, 2007 or earlier redemption, conversion or liquidation.
Dividends on the Series A Preferred are cumulative from May 31, 2000 and are
payable semiannually in arrears on May 31 and November 30 of each year,
commencing November 30, 2000. Payment of all such dividends occurs on each
dividend payment date through an increase in the liquidation preference of each
share. Holders of the Series A Preferred are also entitled to additional
dividends if dividends in the form of cash or other consideration are declared
on the Common Stock or other equity securities junior to the Series A Preferred.
On or after May 31, 2004, HQ Global may redeem shares of the Series A
Preferred, in whole or in part, from time to time, for cash at a redemption
price per share which is initially equal to 105% of the liquidation preference,
declining ratably on each anniversary of May 31, 2004 until reaching 100% of the
liquidation preference on May 31, 2007. All of the outstanding shares of Series
A Preferred must be redeemed in cash on November 30, 2007 ("Mandatory Redemption
Date"), at a redemption price equal to 100% of the liquidation preference per
share.
Upon the consummation of a Qualified Initial Public Offering or Qualified
Merger, as defined, each share of Series A Preferred automatically converts into
shares of Common Stock at the Conversion Rate (the liquidation preference
divided by the applicable conversion price). Upon the occurrence of certain
other events (Conversion Option Event), holders of the Series A Preferred have
the option to convert shares of Series A Preferred into Common Stock at the
Conversion Rate. In the event that a Qualified Merger, a Qualified Initial
Public Offering or a Conversion Option Event has not occurred prior to the close
of business on the last business day immediately preceding the Mandatory
Redemption Date, holders of the Series A Preferred have the right to convert
their shares into shares of Common Stock on the Mandatory Redemption Date at the
Conversion Rate. Assuming the conversion price was equal to the value of the
Common Stock utilized to record the Mergers, the Series A Preferred Stock would
be convertible into 6,015,860 shares of Common Stock at September 30, 2000.
In general, holders of the Series A Preferred vote together with the holders
of Common Stock as a single class on an as converted basis. In addition, prior
to a Qualified IPO or a Qualified Merger, the consent of the holders of at least
62.5% of the outstanding shares of Series A Preferred are required for certain
corporate actions, including sales or purchases of certain assets or businesses,
mergers, liquidation, and the incurrence of certain indebtedness.
The fair value of the Series A Warrants issued to the holders of the Series
A Preferred has been recorded as an increase in additional paid-in capital with
on offsetting reduction in the carrying value of the Series A Preferred Stock.
No value will be assigned to the Series B Warrants until such time as it becomes
probable the Series B Warrants will become exercisable by the holders.
The carrying value of the Series A Preferred Stock is being accreted to its
liquidation value on November 30, 2007, including accrued dividends, using the
effective interest rate method, resulting in an effective dividend rate of
20.4%.
10
<PAGE> 11
5. COMMON STOCKHOLDERS' EQUITY
General
The Company has authorized 100 million shares of $0.01 common stock of which
75 million shares have been designated as Voting Common Stock and 25 million
shares have been designated as Nonvoting Class C Common Stock ("Nonvoting Common
Stock"). Each share of Voting Common Stock has one vote on each matter submitted
to a vote of the stockholders. Each share of Nonvoting Common Stock does not
have any vote on such matters, except as required by law. The Nonvoting Common
Stock will convert into Voting Common Stock upon i) the transfer by the holder
to another person or entity (other than an entity in which such holder directly
or indirectly owns more than 9.9% of the voting securities) or ii) January 1,
2001.
Warrants
At September 30, 2000, the Series A Warrants can be exercised at any time to
purchase 2,261,176 shares of Common Stock at an exercise price of $0.01 per
share. The Series B Warrants only become exercisable if a Qualified Initial
Public Offering has not occurred prior to dates specified in the warrant
agreements. If exercisable, the Series B Warrants could be exercised to purchase
1,090,029 shares of Common Stock at an exercise price of $0.01 per share. The
Series A and Series B Warrants expire on various dates in 2010 and 2011.
In the HQ Merger, the Company assumed warrants to purchase 101,000 shares of
common stock at an exercise price of $20 per share.
Stock Plans
In the HQ Merger, all existing options to purchase the common stock of
VANTAS were converted to the right to receive cash, except for certain VANTAS
options, which were converted into options to purchase 12,310 shares of Common
Stock. All existing options to purchase the common stock of Old HQ were
cancelled in exchange for cash payments except for 14,000 options, which were
converted to 6,344 shares of Common Stock of HQ Global. See Note 2.
Effective June 1, 2000, the Company adopted the HQ Global Holdings, Inc.
2000 Stock Option and Restricted Stock Plan (the "Plan") which provides for
grants of incentive stock options, nonqualified stock options, and restricted
stock to be granted to officers and key employees. HQ has reserved 800,000
shares of Common Stock for issuance upon exercise of options granted pursuant to
the Plan. The Board of Directors establishes the terms of each option granted
under the Plan. Through September 2000, options to purchase 541,242 shares of
Common Stock at an exercise price of $ 36.57 have been granted to officers and
employees. The options vest over 4 years and expire 10 years from date of grant.
Effective June 1, 2000, the Company also granted shares of Common Stock to
certain officers and employees which vest over a four year period, with 37.5%
vesting 18 months from the date of grant and 12.5% vesting each six months
thereafter. As of September 30, 2000, the Company has granted 171,719 shares of
restricted common stock resulting in aggregate deferred stock compensation
expense of $6.3 million, which is being recognized over the vesting period.
6. CHANGE IN ACCOUNTING ESTIMATE
In connection with the HQ Merger, the Company reassessed the estimated life
of goodwill resulting from acquisitions of businesses and business centers. As a
result, the amortization period for goodwill was reduced from 30 years to 20
years, resulting in additional amortization expense of $915,285 and $1,220,380
for the three and nine months ended September 30, 2000, respectively.
7. INCOME TAXES
The tax provision for the three and nine months ended September 30, 2000
consists principally of state and foreign income taxes. As of September 30,
2000, the Company's deferred tax assets have been fully reserved because of the
uncertainty of the timing and amount of future taxable income.
8. CONTINGENCIES
Other than as previously disclosed in the Company's public filings, the
Company is not presently subject to any material litigation nor, to the
Company's knowledge, is any litigation threatened against the Company, other
than claims and administrative proceedings arising in the ordinary course of
business or which are otherwise subject to indemnification, some of which are
expected to be covered by liability insurance (subject to policy deductibles and
limitations of liability) 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 HQ Global Holdings, Inc.
11
<PAGE> 12
9. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing income
(loss) applicable to common stock by the weighted average number of common
shares outstanding during each period and the weighted average number of common
shares issuable upon the exercise of Series A Warrants at a nominal purchase
price (Note 5). Diluted earnings (loss) applicable to common stockholders is
computed by dividing income (loss) applicable to common stockholders by the
weighted average number of common shares outstanding during each period in
common equivalent shares consisting of preferred stock, stock options, warrants,
and restricted common stock subject to repurchase rights.
The following table sets forth the computation of the weighted average
number of shares included in the computation of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
------------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 11,910,966 4,901,868 8,299,047 4,901,868
Weighted average number of common shares
issuable upon exercise of the Series A
Warrants at a nominal exercise price 2,118,617 -- 924,744 --
------------ ------------ ------------ ------------
14,029,583 4,901,868 9,223,791 4,901,868
============ ============ ============ ============
</TABLE>
Shares of Common Stock issuable upon the conversion of convertible
preferred stock, the exercise of stock options and warrants (other than the
Series A Warrants and the Series B Warrants) and pursuant to unvested restricted
stock awards have been excluded from the computations of diluted earnings (loss)
per share, because the effects were antidilutive. Shares of Common Stock
issuable upon the exercise of the Series B Warrants have also been excluded from
such computations, as the conditions required for these warrants to become
exercisable have not occurred. See Notes 4 and 5.
10. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1999, SFAS No. 137 was issued, amending SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", which extended the required
date of adoption of FAS 133 for fiscal years beginning after June 15, 2000.
Accordingly, the Company will adopt the new statement effective January 1, 2001.
The Company does not anticipate that the adoption of this Statement will have a
material effect on its results of operations or financial position.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the accompanying
Consolidated Financial Statements and Notes thereto. As of September 30, 2000,
HQ Global Holdings, Inc. ("HQ Global" or the "Company") as successor to VANTAS
Incorporated ("VANTAS") from the two step merger (the "HQ Merger") with the HQ
Global Workplaces, Inc. ("Old HQ") and an affiliate of Carr America Realty
Corporation effective June 1, 2000, owned, operated, or franchised 469 business
centers in 17 countries. This included 19 business centers open for nine months
or less. Also included are 6 business centers managed by the Company for
unrelated third parties and 9 international joint-venture business centers with
which the Company, through its European subsidiary, HQ Holdings Limited, is a
joint venture partner with Merrill Lynch Asset Management (f/k/a Mercury Asset
Management). The Company's wholly owned subsidiary, HQ Network Systems, Inc., is
the franchiser of 46 domestic and 30 international business centers for
unrelated franchisees. The Company provides a complete outsourced office
solution through furnished and equipped individual offices and multi-office
suites available on short notice with flexible contracts. The Company also
provides business support and information services including:
telecommunications; broadband Internet access; mail room and reception services;
high-speed copying, faxing and printing services; secretarial, desktop
publishing and IT support services and various size conference facilities, with
multi-media presentation and, in certain cases, video teleconferencing
capabilities. The Company also provides similar services for those businesses
and individuals that do not require offices on a full-time basis.
The Company has grown through an aggressive acquisition strategy beginning
in 1996, whereby it has acquired or merged with 38 entities, which were
comprised of 363 business centers with a total cost of approximately $609.6
million. During the nine months ended September 30, 2000 and 1999, the Company
acquired 182 and 87 business centers, with a cost of approximately $392.9
million and $115.3 million, respectively.
In the early stages of development of a developing center, expenses are
incurred with minimal corresponding revenues. Once a developing center reaches
stabilization, generally within nine to twelve months of its initial start, it
is expected to have a positive impact on the results of the Company. Business
centers open less than nine months as of the beginning of the periods under
comparison ("Developing Centers") are generally in maturation process during the
period. For the nine months ended September 30, 2000, there were 29 Developing
Centers as compared to 13 for the same period in 1999.
These activities have had a material impact on the results of operations and
financial position of the Company and significantly affect the comparability of
the respective prior periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Total business center revenues for the three months ended September
30, 2000 were $160.3 million, an increase of $102.2 million or 175.9% from the
corresponding period in 1999. Included in revenues was $4.6 and $.2 million of
management, franchise, and joint venture fees for the three month periods ended
on September 30, 2000 and 1999, respectively.
Business centers that were acquired with effective dates after July 1, 1999
("Acquired Centers") had revenues for the three months ended September 30, 2000
of $87.6 million, an increase of $87.6 million from the corresponding period in
1999. This increase in revenues resulted from the acquisition of business
centers during the 12 months ended September 30, 2000. The Acquired Centers
include all the Old HQ business centers.
Business centers, excluding Acquired and Developing Centers, that were
operating for the entire comparable period of the prior year ("Same Centers"),
had revenues for the three months ended September 30, 2000 of $65.3 million, an
increase of $8.3 million, or 14.5% from the corresponding period in 1999. While
average office occupancy levels have elevated to 91%, an increase of 2% from the
corresponding period in 1999, the increase in workstation revenue of $4.9
million, or 14.8%, was primarily due to more favorable office pricing. The
increase in support service revenues of $3.4 million, or 14.1% from 1999 is
partially attributable to an increase in broadband Internet access, information
technology support services and administrative support services.
Developing Center revenues were $7.4 million for the three months ended
September 30, 2000, an increase of $6.3 million from the corresponding period in
1999. For the three months ended September 30, 2000 and 1999, there were 21 and
9 Developing Centers that were open, respectively. This increase is primarily
due to the greater number of Developing Centers open during the three months
ended September 30, 2000.
13
<PAGE> 14
EXPENSES. Total business center expenses for the three months ended September
30, 2000 were $106.6 million, representing an increase of $62.7 million or
142.8% from the corresponding period in 1999.
Acquired Center expenses for the three months ended September 30, 2000 were
$54.8 million, an increase of $54.8 million from the corresponding period in
1999. This increase resulted from the acquisition of business centers during the
12 months ended September 30, 2000. The Acquired Centers include all the Old HQ
business centers.
Same Center expenses for the three months ended September 30, 2000 were
$45.8 million, an increase of $3.9 million or 9.4% from the corresponding period
in 1999. This increase is primarily attributable to higher rent expense and
support service expenses associated with increased support service revenues.
Developing Center expenses for the three months ended September 30, 2000
were $5.9 million, an increase of $3.9 million from the corresponding period in
1999. This increase is due to a total of 26 Developing Centers during the three
months ended September 30, 2000 as compared to 9 Developing Centers during the
three months ended September 30, 1999.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the three months
ended September 30, 2000, COBC was $53.7 million as compared to $14.2 million
for the same period in 1999. The COBC as a percentage of total revenues ("COBC
Margin") was 33.5% for the three months ended September 30, 2000 as compared to
24.4% for the corresponding period in 1999.
Acquired Center COBC was $32.8 million for the three months ended September
30, 2000, an increase of $32.8 million from the corresponding period in 1999.
The COBC Margin from Acquired Centers for the three months ended September 30,
2000 was 37.4%. The Acquired Centers include all the Old HQ business centers
which contributed to the increase in the COBC margin, as a result of more
favorable office pricing.
Same Center COBC was $19.5 million for the three months ended September 30,
2000 as compared to $15.1 million, an increase of 28.8% over the corresponding
period in 1999. The COBC Margin from Same Centers for the three months ended
September 30, 2000 was 29.8% as compared to 26.5% for the corresponding period
in 1999.
Developing Centers COBC for the three months ended September 30, 2000 was
$1.5 million, an increase of $2.4 million from the corresponding period in 1999.
This increase is due to the increase in developing centers and the maturity of
those centers for the three months ended September 30, 2000 as compared to the
developing centers during the three months ended September 30, 1999. Of these,
21 and 9 centers were open for occupancy as of September 30, 2000 and 1999,
respectively.
OTHER EXPENSES. For the three months ended September 30, 2000, other expenses
were $51.4 million, representing an increase of $37.6 million or 273.2% from the
corresponding period in 1999. This increase is primarily attributable to greater
corporate general and administrative expenses, merger and integration expenses,
depreciation and amortization and interest expense of $12.2 million, $1.5
million, $15.0 million and $8.9 million or 185.0%, 678.8%, 368.7% and 309.5%,
respectively.
The increase in corporate general and administrative expenses was
attributable to increases in the corporate personnel infrastructure and its
associated travel and related expenses, related office expansion, and
professional and consulting fees associated with the Company's growth. The
increase in corporate general and administration expenses were also attributed
to the corporate general and administration expenses of Old HQ. The increase in
merger and integration expenses is attributable to the HQ Merger. The increase
in depreciation and amortization relates to fixed assets acquired and goodwill
associated with the Company's acquisitions. It is also attributable to an
increase in capital expenditures associated with leasehold improvements for
Developing Centers and technology infrastructure additions. Interest expense is
primarily related to the Company's Credit Facility. This increase resulted from
interest expense on borrowings related to the Company's acquisitions as well as
increases in interest rates.
INCOME TAXES. The Company's effective income tax rate for the three months ended
September 30, 2000 was 88.5% as compared to 216.0% for the three months ended
September 30, 1999. Tax expense is recognized primarily due to international tax
obligations, state and local tax obligations, and non-deductible goodwill
amortization.
NET (LOSS) INCOME. The Company generated net income for the three months ended
September 30, 2000 of $0.3 million compared to net loss of $0.5 million for the
same period in 1999.
Accretion of the Company's redeemable convertible preferred stock for the
three months ended September 30, 2000 was $7.5 million, representing an increase
of $6.2 million from the corresponding period in 1999. This increase is
primarily the result of the issuance of Series E convertible preferred stock
during the period from January 1, 2000 through May 31, 2000, and the issuance of
Series A convertible preferred stock.
14
<PAGE> 15
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Total business center revenues for the nine months ended September 30,
2000 were $321.5 million, an increase of $164.0 million or 104.2% from the
corresponding period in 1999. Included in revenues was $6.2 and $0.6 million of
management, franchise, and joint venture fees for the nine month periods ended
on September 30, 2000 and 1999, respectively.
Business centers that were acquired with effective dates after January 1,
1999 ("Acquired Centers") had revenues for the nine months ended September 30,
2000 of $149.6 million, an increase of $131.8 million from the corresponding
period in 1999. This increase in revenues resulted primarily from the
acquisition of business centers during the nine months ended September 30, 2000.
The Acquired Centers include all the Old HQ business centers.
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 nine months ended September 30, 2000 of $154.6 million, an
increase of $18.6 million, or 13.7% from the corresponding period in 1999. While
average office occupancy levels have grown to 90%, an increase of 1% from the
corresponding period in 1999, the increase in workstation revenue of $9.7
million, or 12.5%, was primarily due to more favorable office pricing. The
increase in support service revenues of $8.8 million, or 15.2% from 1999 is
partially attributable to an increase in broadband Internet access, information
technology support services and administrative support services.
Developing Center revenues were $17.3 million for the nine months ended
September 30, 2000, an increase of $13.6 million from the corresponding period
in 1999. For the nine months ended September 30, 2000 and 1999, there were 24
and 12 Developing Centers that were open, respectively. This increase is
primarily due to the greater number of Developing Centers open during the nine
months ended September 30, 2000.
EXPENSES. Total business center expenses for the nine months ended September
30, 2000 were $225.5 million, representing an increase of $107.6 million or
91.3% from the corresponding period in 1999.
Acquired Center expenses for the nine months ended September 30, 2000 and
1999 were $99.0 million and $13.4 million respectively, representing an increase
of $85.5 million from the corresponding period in 1999. This increase resulted
primarily from the acquisition of business centers during the nine months ended
September 30, 2000. The Acquired Centers include all the Old HQ business
centers.
Same Center expenses for the nine months ended September 30, 2000 were
$109.6 million, an increase of $10.8 million or 10.9% from the corresponding
period in 1999. This increase is primarily attributable to higher rent expense
and support service expenses associated with increased support service revenues.
Developing Center expenses for the nine months ended September 30, 2000 were
$16.9 million, an increase of $11.3 million from the corresponding period in
1999. This increase is due to a total of 29 Developing Centers during the nine
months ended September 30, 2000 as compared to 13 Developing Centers during the
nine months ended September 30, 1999.
CONTRIBUTION FROM OPERATION OF BUSINESS CENTERS ("COBC"). For the nine months
ended September 30, 2000, COBC was $96.0 million as compared to $39.6 million
for the same period in 1999. The COBC as a percentage of total revenues ("COBC
Margin") was 29.9% for the nine months ended September 30, 2000 as compared to
25.1% for the corresponding period in 1999.
Acquired Center COBC was $50.6 million for the nine months ended September
30, 2000, an increase of $46.3 million from the corresponding period in 1999.
The COBC Margin from Acquired Centers for the nine months ended September 30,
2000 and 1999 was 33.8% and 24.0%, respectively. The Acquired Centers include
all the Old HQ business centers which contributed to the increase in the COBC
margin, as a result of more favorable office pricing.
Same Center COBC was $45.0 million for the nine months ended September 30,
2000 as compared to $37.2 million, an increase of 21.0% over the corresponding
period in 1999. The COBC Margin from Same Centers for the nine months ended
September 30, 2000 was 29.1% as compared to 27.4% for the corresponding period
in 1999.
Developing Centers generated COBC for the nine months ended September 30,
2000 of $0.4 million, an increase of $2.3 million from the corresponding period
in 1999. This increase is primarily due to the maturity of Developing Centers
during the nine months ended September 30, 2000 as compared to Developing
Centers during the nine months ended September 30, 1999. Of these, only 24 and
12 centers were open for occupancy as of September 30, 2000 and 1999,
respectively.
15
<PAGE> 16
OTHER EXPENSES. For the nine months ended September 30, 2000, other expenses
were $113.3 million, representing an increase of $76.8 million or 210.0% from
the corresponding period in 1999. This increase is primarily attributable to
greater corporate general and administrative expenses, merger and integration
expenses, depreciation and amortization and interest expense of $18.6 million,
$19.5 million, $23.7 million, and $14.9 million or 106.4%, 1,218.4%, 229.5% and
209.2%, respectively.
The increase in corporate general and administrative expenses was
attributable to increases in the corporate personnel infrastructure and its
associated travel and related expenses, related office expansion, and
professional and consulting fees associated with the Company's growth. The
increase in corporate general and administration expenses were also attributed
to the corporate general and administration expenses of Old HQ. The increase in
merger and integration expenses is attributable to the HQ Merger. The increase
in depreciation and amortization relates to fixed assets acquired and goodwill
associated with the Company's acquisitions. It is also attributable to an
increase in capital expenditures associated with leasehold improvements for
Developing Centers and technology infrastructure additions. Interest expense is
primarily related to the Company's Credit Facility. This increase resulted from
interest expense on borrowings related to the Company's acquisitions as well as
increases in interest rates.
INCOME TAXES. The Company's effective income tax rate for the nine months ended
September 30, 2000 reflects tax expense and also a book pre-tax loss. Tax
expense is recognized primarily due to international tax obligations, state and
local tax obligations, and non-deductible goodwill amortization. The effective
tax rate for the nine months ended September 30, 1999 was 73.0%.
NET (LOSS) INCOME. The Company incurred a net loss for the nine months ended
September 30, 2000 of ($19.8) million compared to net income of $0.8 million for
the same period in 1999 primarily attributable to merger and integration charges
of $21.1 million discussed above.
Accretion of the Company's redeemable convertible preferred stock for the
nine months ended September 30, 2000 was $14.2 million, representing an increase
of $8.6 million from the corresponding period in 1999. This increase is
primarily the result of the issuance of Series E convertible preferred stock
during the period from January 1, 2000 through May 31, 2000, and the issuance of
Series A convertible preferred stock. See Note 4 to Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has primarily relied upon cash flows generated
from operations, borrowings from its lenders and sales of its securities to
satisfy its liquidity and capital requirements. Principal liquidity needs have
included the acquisition and development of new business centers, debt service
requirements and other capital expenditures necessary to maintain existing
business centers as well as upgrade and build the corporate infrastructure to
manage the Company's operations effectively.
On May 31, 2000, the Company completed a transaction which increased its
$157.9 million credit facility (the amended and restated "Credit Facility") to
$275.0 million. The Credit Facility provides for $219.4 million under four term
loans, all of which are repayable in various quarterly installments through
November 2005. The Credit Facility also provides for borrowings up to $55.6
million in two revolving loan commitments. Availabilities under the revolving
portion of the Credit Facility are formula based. As of September 30, 2000,
there was $216.2 million in outstanding borrowings under the term loans and no
borrowings outstanding under either revolver. As of September 30, 2000, the
Company had letters of credit outstanding in the aggregate amount of $28.5
million, again which the Company pledged $5.7 million in cash and $22.8 million
were supported by the two revolving loan commitments, leaving $32.8 million
available for additional borrowings.
Borrowings under the Credit Facility bear interest ranging from LIBOR plus
3.25% to 4.0% or PRIME plus 2.25% to 3.00% for a one, three or nine month period
at the election of the Company. The Company's weighted average interest rate on
borrowings under the term loans at September 30, 2000 was approximately 11.04%.
The Company pays a commitment fee of 1/2 of 1.0% per annum on the unused portion
of the Credit Facility. As of September 30, 2000, the Company had hedged the
interest rates on approximately $93.0 million of its credit facility using
various instruments with various expiration dates through July 31, 2002. These
instruments lock in the maximum underlying 30 day LIBOR rate at levels between
7.93% and 9.00%. The Credit Facility contains certain financial covenants
related to interest coverage, leverage ratios and other limitations. At
September 30, 2000, the Company was in compliance with all of these covenants.
On May 31, 2000, the Company entered into a Senior Subordinated Credit
Facility (the "USBW Loan") of $125.0 million provided by UBS Warburg LLC
("USBW"). The USBW Loan carried an interest rate of LIBOR plus 6.5% and matured
on May 31, 2007. Pursuant to a commitment from USBW, on August 11, 2000, the
Company replaced the USBW Loan with a $125.0 million Senior Subordinated Note
Agreement (the "Mezzanine Loan") with a group of lenders arranged by USBW. The
Mezzanine Loan bears interest at 13.5% per annum and matures on May 31, 2007.
16
<PAGE> 17
To finance a portion of the cash requirements of the HQ Merger, the Company
issued 4,782,692 shares Series A Preferred, 1,445,358 Series A Warrants and
697,964 Series B Warrants for a total consideration of $195.0 million. On August
11, 2000, the Company issued 613,166 additional shares of Series A Preferred,
312,274 Series A Warrants and 164,902 Series B Warrants for a total
consideration of $25.0 million.
The Company had working capital of $10.3 million at September 30, 2000 as
compared to a working capital deficit of $3.1 million at December 31, 1999. This
increase in working capital of $13.4 million is primarily attributable to
balances of cash and cash equivalents, accounts receivable, and other current
assets.
Cash flows used in operating activities for the nine months ended September
30, 2000 were $6.2 million, representing a decrease of $18.8 million from the
corresponding period in 1999. This decrease is attributable to $19.4 million of
cash used to reduce accrued expenses associated with merger and integration
activities.
Cash used in investing activities for the nine months ended September 30,
2000 was $262.5 million, an increase of $172.0 million from the corresponding
period in 1999. This increase is attributable to an increase in the Company's
acquisitions of business centers, an increase in purchases of property and
equipment and a reduction in restricted cash which was used to make certain debt
and interest payments.
Cash provided by financing activities for the nine months ended September
30, 2000 was $280.8 million, an increase of $204.9 million from the
corresponding period in 1999. During the nine months ended September 30, 2000,
the Company completed equity transactions whereby it raised $181.0 million in
net proceeds from the issuance of the Company's convertible preferred stock to
accredited investors and $64.3 million from the issuance of warrants. Also, in
connection with the HQ Merger, the Company increased borrowings by $81.8
million, and incurred an increase in related deferred financing costs of $25.7
million.
The Company anticipates that cash flows from operations and amounts
available under the revolving loan portion of the Credit Facility will continue
to provide adequate capital to fund its operating and administrative expenses
and regular debt service obligations in addition to the necessary capital
required to sustain its current operations.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in these materials are forward-looking statements
within the meaning of the federal securities laws. Although we believe that the
expectations reflected in such forward-looking statements, including the future
operating performance of the Company are based upon reasonable assumptions, we
can give no assurance that these expectations will be achieved. Factors that
could cause actual results to differ materially from our expectations include
negative changes in the executive office suites industry, changes in the market
valuation or growth rate of comparable companies in the office suites industry,
a downturn in general economic conditions, increases in interest rates, a lack
of capital availability, competition, reduced demand or decreases in rental
rates for executive office suites and other real estate-related risks such as
the timely completion of projects under development, our dependence upon our key
personnel and other risks detailed in our reports and other filings made with
the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk on the
Credit Facility. The Company mitigates this risk by entering into hedging
instruments on a portion of its outstanding balances. In addition, the Company
may elect to enter into LIBOR contracts on portions of the Credit Facility,
which locks in the Company's interest rate on those portions for 30, 60 or 90
day periods. The Credit Facility bears interest ranging from either 3.25% to
4.00% over applicable LIBOR, or alternatively 2.25% to 3.00% over PRIME,
generally at the Company's election. As of September 30, 2000, the Company had
hedged the interest rates on approximately $93.0 million of its credit facility
using various instruments with various expiration dates through July 31, 2002.
These instruments lock in the maximum underlying 30 day LIBOR rate at levels
between 7.93% and 9.00%.
An increase in interest rates will have a negative impact on the net income
of the Company due to the variable interest component of the Credit Facility.
Based on current interest rate levels, a 10% increase in underlying interest
rates will have approximately a 6.3% increase in interest expense, ignoring the
short-term impact of remaining terms under current LIBOR hedge contracts.
Following the HQ Merger, the Company is conducting more of its operations in
foreign currencies, primarily the British Pound. Due to the nature of foreign
currency markets, there is potential risk for foreign currency losses as well as
gains.
The Company has not, and does not plan to, enter into any derivative
financial instruments for trading or speculative purposes. As of September 30,
2000, the Company had no other material exposure to market risk.
17
<PAGE> 18
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as previously disclosed in the Company's public filings, the
Company is not presently subject to any material litigation nor, to the
Company's knowledge, is any litigation threatened against the Company, other
than claims and administrative proceedings arising in the ordinary course of
business or which are otherwise subject to indemnification, some of which are
expected to be covered by liability insurance (subject to policy deductibles and
limitations of liability) 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 HQ Global Holdings, Inc.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) On August 11, 2000, the Company issued 613,166 additional shares of
Series A Preferred, 312,274 Series A Warrants and 164,902 Series B
Warrants for a total consideration of $25.0 million to institutional
investors at a price of $40.77 per share. The Company issued and sold
the Series A Preferred pursuant to Section 4(2) of the Securities Act of
1933, as amended (the "33 Act"). The terms of the Series A Preferred
provide for: (1) automatic conversion into shares of the Company's
voting common stock in the event of a Qualified IPO or a Qualified
Merger (each as defined) and (2) conversion at the option of the holder,
in whole or in part, upon the occurrence of a merger or initial public
offering that does not meet the qualifications to require automatic
conversion. The conversion rate is determined in accordance with a
formula whereby the liquidation preference amount (currently $40.77) is
divided by the fair market value of the Company's voting common stock
and is subject to adjustment in the event of certain dilutive events.
The terms of the Series A and Series B warrants are identical to those
already issued outstanding to Series A Preferred holders. The Series A
warrants are exercisable at the option of the holder at any time and
Series B warrants are exercisable on or after March 1, 2002, but only in
the event that a Qualified Initial Public Offering (as defined in the
Purchase Agreements) has not occurred prior to that date. The exercise
price is $.01 per share.
In connection with the Mezzanine Loan, warrants to purchase up to 5% of
the Company's voting common stock were issued to institutional investors
on August 11, 2000.
(d) None.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
3.1* Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 Amended and Restated Certificate of Designations
4.2 Amended and Restated Stockholders Agreement by and among Frontline
Capital Group, HQ Global Holdings, Inc. and certain holders of Series A
Preferred Stock of HQ Global Holdings, Inc. named therein, dated as of
August 11, 2000
10.1 Note Purchase Agreement, dated as of August 11, 2000 among HQ Global
Workplaces, Inc., HQ Global Holdings, Inc., Chase Equity Associates,
L.P., CT Mezzanine Partners I LLC, Ares Leveraged Investment Fund,
L.P., Ares Leveraged Investment Fund II, L.P., Highbridge International
LLC, Blackstone Mezzanine Partners L.P., and Blackstone Mezzanine
Holdings L.P.
10.2 Form of Purchase Agreement dated as of August 11, 2000 by and among
FrontLine Capital Group, HQ Global Holdings, Inc. and the Series A
Preferred Stock investors named therein
10.3 Employment Agreement for William S. McCalmont effective October 1, 2000
27 Financial Data Schedules
----------
* Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q filed with the SEC on August 15, 2000 and incorporated herein
by reference.
(b) Reports on Form 8-K
HQ Global Holdings, Inc. filed a report on Form 8-K/A on August 15, 2000,
containing Item 7 information.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HQ Global Holdings, Inc.
November 14, 2000 /s/ Gary Kusin
------------------------------ --------------------------------------
Date Gary Kusin
Chief Executive Officer
November 14, 2000 /s/ William S. McCalmont
------------------------------ --------------------------------------
Date William S. McCalmont
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
November 14, 2000 /s/ John D. Bailey
------------------------------ --------------------------------------
Date John D. Bailey
Vice President, Accounting
(Principal Accounting Officer)
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1* Certificate of Incorporation
3.2 Amended and Restated Bylaws
4.1 Amended and Restated Certificate of Designations
4.2 Stockholders Agreement by and among Frontline Capital
Group, HQ Global Holdings, Inc. and certain holders of
Series A Preferred Stock of HQ Global Holdings, Inc.
named therein, dated as of August 11, 2000.
10.1 Note Purchase Agreement, dated as of August 11, 2000
among HQ Global Workplaces, Inc., HQ Global Holdings,
Inc., Chase Equity Associates, L.P., CT Mezzanine
Partners I LLC, Ares Leveraged Investment Fund, L.P.,
Ares Leveraged Investment Fund II, L.P., Highbridge
International LLC, Blackstone Mezzanine Partners L.P.,
and Blackstone Mezzanine Holdings L.P.
10.2 Form of Purchase Agreement dated as of August 11, 2000
by and among FrontLine Capital Group, HQ Global
Holdings, and the Series A Preferred Stock investors
named therein.
10.3 Employment Agreement for William S. McCalmont, dated
October 1, 2000
27 Financial Data Schedules
</TABLE>
----------
* Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q report filed with the SEC on August 15, 2000 and incorporated
herein by reference.
