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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 December 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
Commission File Number 0-30162
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FRONTLINE CAPITAL GROUP
(Exact name of registrant as specified in its charter)
DELAWARE 11-3383642
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1350 AVENUE OF THE AMERICAS 10019
NEW YORK, NY
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 931-8000
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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. [ ]
The aggregate market value of the shares of common stock held by
non-affiliates was approximately $1.0 billion based on the closing price on the
NASDAQ for such shares on March 20, 2000.
The number of the Registrant's shares of common stock outstanding was
32,025,230 as of March 20, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Shareholder's
Meeting to be held in June 2000 are incorporated by reference into Part III.
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TABLE OF CONTENTS
ITEM FORM 10-K
NO. REPORT PAGE
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PART I
1. Business .................................................................... I-1
2. Properties .................................................................. I-11
3. Legal Proceedings ........................................................... I-11
4. Submission of Matters to a Vote of Security Holders ......................... I-11
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters ....... II-1
6. Selected Financial Data ..................................................... II-2
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................. II-3
7a. Quantitative and Qualitative Disclosures about Market Risk .................. II-10
8. Financial Statements and Supplementary Data ................................. II-11
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .................................................................. II-11
PART III
10. Directors and Executive Officers of the Registrant .......................... III-1
11. Executive Compensation ...................................................... III-1
12. Security Ownership of Certain Beneficial Owners and Management .............. III-1
13. Certain Relationships and Related Transactions .............................. III-1
PART IV
14. Financial Statements and Schedules, Exhibits and Reports on Form 8-K ........ IV-1
PART I
ITEM 1. BUSINESS
THE COMPANY
FrontLine Capital Group, formerly Reckson Service Industries, Inc.,
("FrontLine" or the "Company"), was formed on July 15, 1997. FrontLine is a
publicly traded operating company that acquires interests in and develops a
network of business-to-business ("B2B") e-commerce and e-services Internet
companies (the "Partner Companies") focused on serving small and medium-sized
enterprises ("SMEs"), including independent professionals, entrepreneurs, and
the mobile workforces of larger companies.
SMEs account for approximately 51% of the U.S. gross domestic product.
Internet-based solutions can provide SME owners with the ability to operate
their businesses more efficiently and affordably, allowing them to
realistically compete with larger corporations. As of March 24, 2000, the
Company has invested approximately $316.8 million in 13 Partner Companies,
including the organic development of one Partner Company.
The Company acquires significant, long-term ownership stakes in targeted
Partner Companies and integrates them into a collaborative network of
companies, seeking to accelerate their growth and increase their likelihood of
long-term success. FrontLine has developed an extensive e-Cooperative platform
that allows its Partner Companies to gain access to the growing customer base
of its existing and future Partner Companies and to benefit from its
operational and management resources. The e-Cooperative consists of the
following elements:
o enterprise Development Group or eDG -- eDG offers strategic planning,
project management and functional expertise in the areas of
organizational design, recruiting, finance and technology strategy.
o Advisory Board -- a group of recognized business and academic leaders
provides strategic insight, expertise, relationships and access to new
opportunities and potential alliances for the Company and its Partner
Companies.
o Network of Partner Companies -- facilitates learning and collaboration
among all Partner Companies and provides access to the customer base,
resources and relationships of the entire network. It also facilitates
business partnerships among Partner Companies, including cross-selling
and cross-marketing opportunities.
o Click and Mortar -- Global workplace solutions provider which offers the
Partner Companies the ability to access the virtual and physical global
infrastructure as well as a distribution network to a customer base of
SMEs.
FrontLine endeavors to understand the needs of SMEs and build a network of
companies that deliver a suite of Internet applications, services and
infrastructure to help SMEs streamline operations, outsource key business
processes and focus on their core competencies.
INDUSTRY OVERVIEW
The growth in the B2B e-commerce and e-services sector is attributable to
several favorable trends, including the growth of the Internet due to the
increased access to broadband connectivity, the proliferation of effective
Internet-based applications and outsourced solutions and the growth of small
and medium-sized enterprises, or SMEs.
GROWTH OF THE INTERNET
Forrester Research estimates that the B2B e-commerce market will grow from
$43 billion in 1998 to more than $1.3 trillion by 2003 and that the B2B
e-services market will grow from $2.8 billion in 1998 to approximately $220
billion in 2003. Further, Forrester Research estimates that by 2003 B2B
e-commerce will account for approximately 93% of all Internet commerce.
Although still in early phases, a number of factors are converging that are
contributing to the rapid acceleration of B2B e-commerce and e-services.
I-1
The first factor is increasing Internet access, particularly access to
broadband connectivity. According to Forrester Research, over 2.5 million U.S.
businesses, or 35% of all enterprises, have access to the Internet today. In
addition, the proliferation of broadband solutions is enabling functionality
and service levels previously unavailable, particularly to SMEs. According to
Forrester Research, the percentage of enterprises with broadband access will
grow from 7% in 1998 to 30% in 2003. FrontLine believes that as network
reliability and performance improve, businesses will increasingly rely and
depend upon Internet-based solutions.
The second factor is the adoption of standardized platforms, applications
and protocols that allows for a more cost-effective deployment of applications
and services to a wide and diverse group of users. Historically, B2B e-commerce
has occurred through electronic data interchange over proprietary networks,
which are costly and available only to a limited number of participants. Today,
a number of standardized component applications have been developed which
dramatically reduce the cost and time of building e-commerce systems.
The third and most compelling reason for the rapid acceleration of B2B
e-commerce solutions is the return on investment ("ROI") for adopters.
Businesses use the Internet as a means to enhance the operating performance of
their businesses. With the increase in global competition and the increasing
speed of business adaptation, companies are becoming increasingly reliant on
the Internet to obtain a competitive advantage.
GROWTH OF SMES
SMEs represent approximately 51% of the U.S. gross domestic product.
Internet-based solutions can provide SME owners with the ability to operate
their businesses more efficiently and affordably, allowing them to effectively
compete with larger corporations.
Today, the Internet enables SMEs to communicate with their suppliers and
customers as well as to purchase and sell products/services in geographically
diverse markets. It also allows them to reduce transaction costs, improve
service and react more quickly to changing market conditions. According to
International Data Corporation, Internet penetration will steadily increase
among SMEs through the year 2002. Nearly 70% of SMEs will have Internet access
in 2002. Today, over 31% of SMEs in the United States use the Internet to
conduct commerce. International Data Corporation also estimates that SMEs will
generate 30% of worldwide Internet commerce revenue by 2003, an increase from
17% in 1997.
As SMEs have become more competitive, many larger companies have responded
to this threat by moving their workforces closer to their customers, suppliers
and markets. As a result, the workforce of these larger companies has become
more mobile. According to Dataquest, there will be an estimated 36 million
mobile workers by 2003. When operating in a mobile environment, these workers
need access to the resources typically available at the corporate office.
Internet-based and outsourced solutions are likely to provide many of these
services.
INVESTMENT CRITERIA AND APPROACH
The Company has developed an investment strategy targeted at acquiring
interests in B2B companies that serve the SME market, including independent
professionals, entrepreneurs and the mobile workforces of larger companies.
FrontLine's investment philosophy focuses on actively researching emerging
industry sectors, seeking opportunities in the customer base of its Partner
Companies, and examining market segments that are complimentary to the existing
partner network. FrontLine seeks to take significant long-term ownership
interests in its Partner Companies. In order to take an active role in the
affairs of a new Partner Company, FrontLine generally requires board of
director and board committee representation. In this manner, the Company can
better integrate the new Partner Company into its e-Cooperative network.
I-2
FrontLine primarily targets three types of B2B e-commerce and e-services
companies:
o Internet-based outsourcing: companies that utilize the Internet to enable
the outsourcing of non-core business functions;
o e-Commerce and infrastructure: companies that deliver or enable the
delivery of goods and services over the Internet; and
o Virtual brick and mortar: companies that combine a physical
infrastructure with an Internet-enabled model to enhance the delivery of
their services.
The Company applies a disciplined analysis when it evaluates whether to
acquire an interest in an e-commerce or e-services company. In this review
process, the following factors are considered:
Industry Related Criteria:
o Market Size and Growth. FrontLine seeks to invest in markets that can
sustain significant growth rates for at least five years or large markets
that have the potential for consolidation or evolution.
o Inefficiency. FrontLine considers whether the industry is information
intensive and suffers from inefficiencies in information distribution
that may be alleviated by improving the delivery mechanism through
e-commerce and e-services.
o Barriers and Margins. FrontLine considers the ability to maintain margins
within an industry by recognizing barriers to entry created by physical
assets, customer relationships and switching costs, and the relative
value proposition of new models.
o Competition. FrontLine evaluates the amount of competition that a
potential Partner Company faces from e-commerce, e-services and
traditional businesses.
Company Related Criteria:
o Industry Leader Potential. FrontLine considers the ability of a company
to become a leader in its market based on the business model, management
team and competitive landscape.
o Compelling value/service proposition. FrontLine evaluates the ability of
a new or evolving business model to have a significant impact on its
industry by offering a compelling value proposition to the user or
increasing the level of service provided. The new model must present a
clearly demonstrable ROI to the user.
o Customer Targets. FrontLine is focused on companies that service SMEs,
the mobile workforce, as well as professional individuals and
organizations.
FrontLine Related Criteria:
o Significant Ownership. The Company considers whether it will be able to
acquire a significant ownership interest in the potential Partner
Company, influence the strategic direction of the company, and actively
develop a long-term partnership with the company.
o e-Cooperative Value Added. The Company considers the extent to which it
can add value to the Partner Company through the eDG, Advisory Board,
e-Cooperative network and customer base.
o Network Synergy Gained. The Company considers the degree to which a
potential Partner Company will add value to its Partner Company network.
This is based on the ability of the Partner Company to offer product and
service synergies and to expand the customer base.
Based on the Company's strategy of acquiring significant ownership
interests in and adding value to its Partner Companies, it generally targets
early stage B2B e-commerce companies. These early stage companies benefit from
FrontLine's operating and strategic support and provide it with the opportunity
to share significantly from the potential value creation FrontLine provides.
The Company also considers investments in later stage companies if they provide
significant network synergies.
I-3
OPERATING STRATEGY
FrontLine's operating strategy is focused on securing small to medium
sized companies, including professionals, entrepreneurs and mobile workforces
of large corporations, through its network of B2B e-commerce and e-services
Internet companies. FrontLine seeks to accelerate growth opportunities and
increase the likelihood of success of its Partner Companies by utilizing the
resources of the e-Cooperative. These collective resources enable Partner
Companies to reduce their time to market without sacrificing the development of
infrastructure that is required for long-term success.
The e-Cooperative consists of the eDG and Advisory Board as well as the
collaborative network of Partner Companies. Through eDG, which currently
consists of 12 experienced professionals, FrontLine offers Partner Companies
access to substantial management resources in areas such as strategic planning,
project management and functional expertise in the areas of organizational
design, sales and marketing, human resources and organizational design,
recruiting, finance and technology. To augment internal resources, FrontLine
has developed, and will continue to enhance, an Advisory Board with expertise
in such areas as strategic management, marketing and technology. Currently, the
Advisory Board is comprised of seven members and active discussions are
continuing with others. The Advisory Board offers management guidance to
Partner Companies and provides the Company with new business and acquisition
opportunities.
In addition to assisting individual Partner Companies, FrontLine
facilitates collaboration among its Partner Companies to foster strategic
relationships, cross selling, and knowledge sharing across the entire network.
As a Partner Company is added to the network, the Partner Company has the
ability to accelerate its growth by accessing the collective customer base.
This customer base is especially valuable because its members have similar
needs and the propensity to use Internet-based solutions.
In addition to assisting Partner Companies, the Company may use the
resources of the eDG and the Advisory Board to organically develop new Partner
Companies. If FrontLine is unable to identify a potential Partner Company that
satisfies its acquisition criteria in industry sectors that FrontLine views as
attractive, the Company may seek to organically develop a Partner Company. In
order to internally develop a Partner Company, FrontLine will formulate a
business plan, act as interim management, identify a dedicated management team,
and actively support the development of the Partner Company through the
resources of the eDG.
EDG AND THE ADVISORY BOARD
Based on the rapid pace of development of B2B e-commerce, the value of
"first mover" advantage, and the incremental value realized by market leaders,
FrontLine seeks to accelerate the time to market of its Partner Companies and
increase their likelihood of success. To do so, FrontLine provides strategic
guidance to its Partner Companies regarding market positioning, business model
development and market trends. In addition, the Company advises Partner Company
management on day-to-day matters. The Company also provides significant support
through active involvement in ongoing operational issues and, where necessary,
act as interim management for its Partner Companies.
FrontLine assists its Partner Companies by providing access to the skilled
managers within the eDG who guide its Partner Companies in the following areas:
o Strategic Guidance. FrontLine's management team works with the senior
management of Partner Companies to enhance their business strategies,
refine their business models and develop effective execution plans.
o Business Development. B2B e-commerce and e-services companies may be
involved in evaluating, structuring and negotiating joint ventures,
strategic alliances, joint marketing agreements, acquisitions or other
transactions. The Company's management team, Advisory Board, strategic
investors and other Partner Companies will provide assistance in these
areas.
o Sales and Marketing. The Company's management team provides guidance to
Partner Companies in their sales, marketing, product positioning and
advertising efforts.
I-4
o Executive Recruiting and Human Resources. FrontLine's management team
assists Partner Companies in recruiting key executive talent. In
providing this assistance, the Company leverages the contacts developed
by its network of Partner Companies, eDG and Advisory Board.
o Technology. FrontLine's management team provides Partner Companies with
guidance in technology strategy and assists in the resolution of
technology development issues. In addition, FrontLine is a Global Client
Partner of iXL Enterprises, which enables it to provide its Partner
Companies with preferential access to world-class service offered by iXL.
This relationship provides its Partner Companies with access and a
service level typically available only to Fortune 500 companies.
o Finance. The Company is dedicated to providing financial guidance to
Partner Companies in areas such as corporate finance, financial
reporting, accounting and treasury operations. In providing these
services, the Company leverages the skills and experience of its internal
finance and accounting group, as well as the Partner Company network.
o Customer Research and Knowledge. FrontLine continues to build substantial
knowledge of the collective customer base of its Partner Companies
through customer surveys, focus groups and other research. Through this
knowledge and close customer relationships, FrontLine can anticipate new
investment opportunities and assist Partner Companies in developing and
launching new products and services.
COLLABORATIVE NETWORK OF PARTNER COMPANIES -- SELF-REINFORCING MODEL
One of the Company's principal goals is to form a Partner Company network
that can rapidly increase the value of each individual Partner Company. This is
achieved by encouraging each company in the network to leverage the strengths
and resources of the other Partner Companies. As individual Partner Companies
grow into leadership positions, the network will become stronger. As the value
of the network grows, the Company will seek to attract an increasing number of
quality Partner Companies. The Company refers to this as the self-reinforcing
model.
To accomplish this self-reinforcing model, FrontLine facilitates
collaboration among its Partner Companies by assisting them in forming
strategic alliances and in the sharing of knowledge relating to the common
customer base. These strategic alliances offer the Partner Companies access to
a large customer base with similar needs and the ability to deliver enhanced
product and service offerings. FrontLine encourages these relationships through
its networking events and Partner Company forums. FrontLine also provides
resources to encourage the sharing of knowledge and best practices between
Partner Companies. This information sharing occurs both through the interaction
of its management as well as through its Knowledge On-Line system ("KOL") and
its Customer Knowledge Program. KOL is an intranet and extranet available to
each Partner Company. The system is intended to contain best practices and
lessons learned by the Partner Companies as well as general industry
information and tools (e.g., standard legal agreements, employee handbooks,
legal and accounting guides).
The Company also utilizes the collective resources of the network to
provide its Partner Companies with access to a comprehensive set of
professional and business resources. A primary mission of its business
development group is to form significant business relationships with
organizations that provide critical resources to Partner Companies and assure a
level of service they could not achieve on their own. These relationships
include services such as legal, accounting, public relations, banking, real
estate and technology. A particular problem for early stage e-commerce
companies is accessing the resources of the leading web development and
technology firms. To provide FrontLine's Partner Companies with preferential
access to such service, FrontLine has become a Global Client Partner of iXL
Enterprises which enables it to provide its Partner Companies with access to
world-class service typically available only to Fortune 1000 companies.
FrontLine will continue to establish such relationships with other value added
service and product providers.
REPORTABLE SEGMENTS OVERVIEW
FrontLine's financial statements include the effect of consolidating
VANTAS Incorporated ("VANTAS") and OneXstream.com, Inc. ("OneXstream") in 1999.
The reportable segments are Executive Office Suites and Virtual Office
Services, e-Businesses and Other Operations. Executive Office
I-5
Suites and Virtual Office Services includes the effect of consolidating VANTAS
for the year ended December 31, 1999 and the effect of the equity method of
accounting for InterOffice SuperHoldings Corporation and Reckson Executive
Centers, LLC for the year ended December 31, 1998. e-Businesses includes the
effect of transactions and other events incidental to the ownership interests
in FrontLine's Partner Companies, excluding VANTAS. Other Operations represents
the expenses of providing strategic and operational support to the Partner
Companies, the administrative costs related to these expenses and FrontLine's
operations in general.
Financial information about the Company's industry segments may be found
in Note 13 to the Company's consolidated financial statements presented in Item
8 of this Annual Report on Form 10-K.
CURRENT PARTNER COMPANIES
As of March 24, 2000, FrontLine owns stakes in the following Partner
Companies:
FUTURE
INVESTED % COMMITTED RESULTING RESULTING
CAPITAL OWNED CAPITAL % OWNED % OWNED
PARTNER COMPANY (MM) (BASIC) (MM) (BASIC) (DILUTED)
- -------------------------- ---------------- --------- ----------- ----------- -----------
OnSite Access, Inc. ...... $ 46.0 (1) 37% -- 37% 22%
VANTAS Incorporated....... 211.5 (2) 84% $ 1.3 84% 76%
UpShot.com ............... 16.0 20% -- 20% 18%
EmployeeMatters, Inc...... 10.0 53% 5.0 53% 45%
LiveCapital.com .......... 7.5 4% -- 4% 4%
RealtyIQ.com ............. 13.7 (3) 68% 4.6 68% 54%
CommerceInc 4.9 31% 7.1 31% 26%
Corporation .............
AdOutlet.com ............. 2.0 12% -- 12% 10%
DigitalWork, Inc. ........ 2.0 <1% -- <1% <1%
NeoCarta Ventures ........ 2.0 4% 8.0 4% 4%
Opus360 Corporation ...... 1.0 <1% -- <1% <1%
GiftCertificates.com ..... 0.2 <1% -- <1% <1%
OneXstream, Inc. ......... -- 93% -- 93% 80%
PARTNER COMPANY DESCRIPTION
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OnSite Access, Inc. ...... A building-centric, integrated communications services provider
VANTAS Incorporated....... A virtual and physical office solutions provider
UpShot.com ............... Web-based sales management solutions for SMEs
EmployeeMatters, Inc...... A fully-integrated Internet-based employee benefits and human resource
administration outsourcing company
LiveCapital.com .......... Marketplace through which SMEs may acquire financing
RealtyIQ.com ............. Web-based provider of comprehensive commercial real estate information
CommerceInc
Corporation ............. Web-based infomediary focused on B2B e-commerce
AdOutlet.com ............. Marketplace for advertising space and time across all media
DigitalWork, Inc. ........ A B2B portal for SMEs providing a platform to complete a range of
business tasks
NeoCarta Ventures ........ Strategic investment into venture capital fund
Opus360 Corporation ...... Marketplace for knowledge workers and project opportunities
GiftCertificates.com ..... A leading e-commerce provider of gift certificates
OneXstream, Inc. ......... Business portal that will offer e-services of FrontLine Partner Companies
to SMEs
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(1) Includes $23.6 million in FrontLine common stock.
(2) Includes $58.0 million in FrontLine common stock.
(3) Includes $2.1 million in FrontLine common stock.
VANTAS Incorporated ("VANTAS"). The Company entered into a merger
agreement in January 2000 pursuant to which VANTAS Incorporated, a company in
which it owns an approximate 84% interest, will be merged with HQ Global
Workplaces, Inc. ("HQ"). The merger will create the world's largest virtual
workplace solutions provider and comprehensive e-fulfillment enterprise. The
new company, HQ Global Workplaces, will serve approximately 43,000 customers
through 463 owned, managed or franchised centers in 17 countries. The merger is
scheduled to close by April 30, 2000 and will be financed through the issuance
of new equity of HQ Global Workplaces and approximately $350 million of HQ
Global Workplaces debt. VANTAS has posted a letter of credit in the amount of
$35 million to secure the obligations under the merger agreement. The Company
has pledged approximately 15 million shares of VANTAS stock to secure its
nonrecourse guarantee of the letter of credit. In the event the letter of
credit is drawn upon and the lender forecloses upon the Company's shares of
VANTAS, VANTAS is obligated to reimburse the Company in the form of additional
shares of VANTAS for any loss of the Company's shares of VANTAS provided that
such loss was not a result of the Company's gross negligence. FrontLine has
obtained commitments for the debt financing and is in negotiations to obtain
the equity financing. However, no assurance can be given that the Company will
be successful in obtaining the equity financing required under the merger
agreement such that the merger will be consummated on its current terms or that
the merger will not be consummated for any other reason.
I-6
HQ Global Workplaces will provide a unique component of FrontLine's
e-Cooperative. FrontLine believes the formation of HQ Global Workplaces creates
the potential to add significant value to its Partner Company network by:
o Enabling Partner Companies. By utilizing the centers, its Partner
Companies will gain access to local points of presence for service
delivery, sales, and customer support. Obtaining fully operational office
space typically involves a lengthy and burdensome process including
finding suitable space, negotiating lease terms, building out of the
space, selecting staff, and developing technology and operating
infrastructure. FrontLine is and will continue to utilize the over 463
VANTAS/HQ Global Workplace centers to provide its Partner Companies with
a rapid deployment platform and turnkey infrastructure including
technology, operations, and staffing. As an example, EmployeeMatters,
Inc. plans to locate sales people in VANTAS centers to provide a local
point of contact with its customers. Additionally, it is contemplated
that Opus360 will enter into a national agreement with VANTAS to provide
the independent contractors served by Opus360 with executive and virtual
office services. The Company will continue to form such beneficial
relationships with Partner Companies.
o Broadband Connected Community. By providing the Partner Companies with
access to a broadband connected community throughout the HQ Global
Workplaces centers, FrontLine will enable them to effectively design,
test and launch new Internet-based business services. Optimizing the
functionality of many emerging B2B e-commerce services will require
access to high bandwidth connectivity. Through the HQ Global Workplace
centers, the Company will provide broadband access to approximately
43,000 customers.
o Incubators. HQ Global Workplaces will provide an in-place facility to
foster the development of seed stage and early stage B2B e-commerce
companies. A portion of certain HQ Global Workplaces centers will be
dedicated exclusively to seed stage and early stage B2B e-commerce
companies. The Company will offer these companies physical office space,
the business support services currently provided by HQ Global Workplaces,
plus a host of other services to support their growth and development.
The Company believes that its ability to offer these services
distinguishes it from other providers of incubators. These services will
be provided by the eDG, an operational team dedicated to the incubator
centers, and by third parties. The eDG and incubator team will provide
services similar to those provided to the Partner Companies. In addition,
FrontLine is developing programs with a number of third parties to
provide assistance in the areas of technology, finance and accounting,
and legal, among others. The Company also intends to provide seed and
follow on capital to the companies it incubates. FrontLine plans to
pursue the development of numerous new e-commerce and e-services Partner
Companies through these centers.
o Providing Proprietary Deal Flow. Today approximately 40% of VANTAS' and
HQ's customers are technology and telecommunications companies. FrontLine
intends to develop systems and marketing programs to actively source
acquisition opportunities from this base of members.
Executive suites are a cost-effective alternative to traditional office
space offering flexible, fully furnished and staffed offices, which are
immediately available for varying lengths of time. Thus, executive suites are
able to accommodate the needs of businesses ranging from individual
entrepreneurs to branches of Fortune 500 firms. Although cost is one motivation
of utilizing an executive suite, the ability to access a full service turnkey
solution has become increasingly important. VANTAS also leverages its
infrastructure to provide virtual office services to over 4,000 customers who
do not maintain an office in a VANTAS center.
The Executive Suite Association estimates there are 80 million square feet
of available serviced workspace in the United States, representing 3% of the
total office market. The U.S. executive suite industry generates an estimated
$3 billion in sales per year.
VANTAS' Management team includes David Rupert, Chief Operating Officer and
interim Chief Executive Officer, who previously was President of the Business
Services division of Pitney Bowes. Scott
I-7
Rechler, FrontLines' Chief Executive Officer, serves as the chairman of the
Board of Directors of VANTAS and will serve as the Chairman of HQ Global
Workplaces upon the consummation of the merger. Certain other senior members of
the Company's management team serve on the Board of Directors of VANTAS.
In connection with the merger, the Company has agreed to enter into a
stockholders agreement with certain of the holders of HQ who will continue to
hold a $120 million common stock investment in HQ Global Workplaces which will
provide the holders with a right to put their shares of HQ Global Workplaces to
FrontLine at various times during the two years subsequent to the merger if an
initial public offering of the common stock of HQ Global Workplaces satisfying
certain criteria has not occurred. The put right provides that up to $20
million of the holders' shares may be put to FrontLine in November 2000, up to
50% of the holders' shares may be put to FrontLine in December 2001 and any
remaining shares of the holders may be put to FrontLine in July 2002. The put
is payable in cash or the Company's common stock (valued at the time of closing
under the put) at its option.
The Stockholders Agreement also provides for participation rights,
tag-along rights, board representation and a limited right of first offer to
the HQ Holders and contains certain tax-related provisions. The Stockholders
Agreement also grants FrontLine a right of first offer with respect to the HQ
Holders' Surviving Corporation Shares. The Company has filed additional
information regarding this transaction with the SEC in Current Reports on Form
8-K which are incorporated into this document by reference.
OnSite Access, Inc. ("OnSite"). OnSite is an integrated communications
provider offering SMEs a range of voice and data services, including high speed
Internet access and enhanced services. OnSite's "building centric" model is
based on partnering with owners of multi-tenant office buildings throughout the
United States. By aggregating the usage of several small and medium sized
tenants, OnSite is able to provide cost-effective access to high-bandwidth,
high-availability digital telecommunications, high-speed Internet access and
data network services through the use of fiber-optic and DSL technology, which
would otherwise be cost prohibitive to most SMEs.
FrontLine initially invested in OnSite in February 1998, and subsequently
orchestrated a second round financing with a private equity investor group that
included Spectrum Equity Investors, Crosspoint Venture Partners, J.P. Morgan
Capital, AT&T Ventures and Veritech Ventures. The Board of Directors of OnSite
consists of seven members, two of which are elected by FrontLine. The Company
also has the right to representation on committees of the Board.
On December 15, 1999, OnSite filed a registration statement on Form S-1
with the Securities and Exchange Commission covering the initial public
offering of its common stock. On February 16, 2000, Winstar Communications
filed a lawsuit in New York state court against an OnSite executive, Howard
Taylor, alleging breach of Mr. Taylor's non-compete agreement with Winstar and
the alleged use of Winstar's confidential information. No assurance can be
given as to the impact, if any, on OnSite of the Winstar litigation. In
addition, there can be no assurance that the OnSite initial public offering
will be consummated or, if consummated, the timing of such offering.
EmployeeMatters, Inc.("EmployeeMatters"). EmployeeMatters is an
Internet-based employee benefits and human resources administration outsourcing
company.
EmployeeMatters' objective is to be the dominant provider of
Internet-based, fully integrated employee administration and human resources
outsourcing services to SMEs in white collar sectors. EmployeeMatters seeks to
provide products and services in the areas of payroll processing, 401(k) plan
administration, insurance, financial services, group purchasing and other
services. EmployeeMatters' initial target market includes two million companies
and 10 million employees nationally. EmployeeMatters' strategy is to enable
these companies to increase their profitability by reducing time and resources
spent on non-revenue producing activities, assisting clients in attracting and
retaining high-quality employees, and reducing the costs and risks of human
resource and employee administration.
EmployeeMatters' management includes co-founders Elliot Cooperstone, Chief
Executive Officer, and H. Thach Pham, Chief Financial Officer. Mr. Cooperstone
was previously Executive Vice President of Payroll Transfers, Inc., one of the
nation's largest professional employer organizations and Executive
I-8
Vice President and Chief Administrative Officer of Alexander & Alexander
Services, Inc., a $1.3 billion global insurance brokerage and human resources
consulting firm. Mr. Pham was, until recently, a Vice President in the Mergers
and Acquisitions Department of Morgan Stanley Dean Witter. Previously, he was a
founding partner of Grauer & Wheat, Inc., a private merchant bank, and the
Chief Financial Officer of Pinnacle Brands, Inc., a Grauer & Wheat Portfolio
Company.
The Board of Directors of EmployeeMatters consists of five members, two of
which are elected by FrontLine and one of which is an independent director. The
Company also has the right to representation on committees of the Board.
OneXstream. The Company is actively developing a portal that will bring
together a suite of services and applications to create a virtual workplace.
The portal will integrate the products and services of its Partner Companies
plus a number or proprietary services, as well as products and services
provided through strategic alliances with third parties. The Company
anticipates that the portal will provide customers with a host of business
resources in the areas of office support (i.e., virtual administrative
assistants, human resource and bookkeeping, call center outsourcing, etc.),
workflow support (i.e., tools tailored for specific users including sales force
automation and project management), technology support (i.e., hosted e-commerce
web sites, data back-up, conferences call services, etc.) and purchasing
support (i.e., purchasing of office supplies and equipment, communications
products and services, marketing services, etc.).
Through OneXstream, FrontLine is creating an integrated resource for SMEs
to purchase a wide variety of business services. In addition, through strategic
alliances and co-branding, FrontLine anticipates that the portal will enhance
the value of its Partner Companies by increasing their exposure and potential
customer base.
RealtyIQ.com ("RealtyIQ"). RealtyIQ develops, owns and manages a
proprietary database of comprehensive commercial real estate information
targeted at real estate professionals. Through its service, RealtyIQ provides
commercial real estate brokers, owners, and asset managers easy, affordable
access to comprehensive data on office, industrial, flex, research and
development and retail buildings.
RealtyIQ was founded in October 1991 by two former real estate
professionals and a software engineer to develop a comprehensive, up-to-date
database for commercial properties in Manhattan. Today, its service has become
an industry standard for commercial real estate information. RealtyIQ maintains
a national database of property data that it intends to use as the foundation
for a comprehensive commercial real estate portal.
CommerceInc Corporation ("CommerceInc"). CommerceInc is an "infomediary"
on the world wide web specifically focused on enabling the B2B e-commerce
marketplace. CommerceInc maintains an 11 million record database of detailed
information on SMEs which it compiles by integrating and enhancing a number of
databases.
CommerceInc compiles and presents data on SMEs via the Internet to allow
buyers to make informed supplier choices and allows suppliers to better target
potential customers. CommerceInc has agreements with Dunn & Bradstreet ("D&B"),
American Express and others providing it access to its initial base of business
profiles ("Supplier Cards"). CommerceInc combines this data with data from
other databases to produce an enhanced data set. CommerceInc's end product is a
detailed Supplier Card that includes a complete overview of each company
including: products and services, supplier description, location, contact
information, customers, credit information and other relevant information.
CommerceInc primarily distributes its products through its own web site
and through distribution agreements with other web sites, particularly portals.
The distribution agreements allow CommerceInc to maintain the new and refreshed
data, and also reach many more suppliers and customers. Today, CommerceInc has
distribution agreements with Excite's small business web site and Business
Week's small business web site (and other McGraw Hill companies). CommerceInc
is currently negotiating significant content and distribution agreements with
potential partners.
UpShot.com. UpShot.com based in Mountain View, California, was launched in
January 1997 to build, sell, and support a family of Web-based sales solutions
that allows companies to track leads, close
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business faster, and forecast sales more accurately in an affordable,
web-based, hassle-free, and secure environment. Today, UpShot has more than
35,000 subscribers and has won numerous industry awards, including awards from
Microsoft and others.
LiveCapital.com. LiveCapital.com is a leading on-line business financing
center for SMEs. Businesses visiting LiveCapital.com can comparison shop for,
apply for, and secure loans, lines of credit, credit cards, equipment leases,
and more from reputable financial institutions. Loan offerings include
SBA-backed loans of up to $2.5 million. In less than five minutes, visitors can
complete one short application, have it screened against the lending criteria
of multiple leading financial institutions, and instantly secure multiple
financing options. LiveCapital.com's proprietary technology provides a unique
functionality where applicants are offered decisions from multiple lenders
within seconds of submitting an application.
LiveCapital.com now receives more than 500 daily applications, and, since
launching in June 1999, has offered SMEs more than $500 million in financing to
become one of the country's top 20 originators of small business financing. In
the last two months alone, LiveCapital.com has tripled its lender base,
developing a network of 25 leading financial institutions that businesses
seeking financing can access. LiveCapital.com's lending partners include
American Express, Union Bank of California and Heller Financial.
AdOutlet.com. AdOutlet.com is an on-line marketplace for the buying and
selling of advertising providing a B2B e-commerce solution to meet the growing
demands of media buyers and media suppliers. AdOutlet.com is headquartered in
New York, New York and has offices in Columbus, Ohio, Chicago, Illinois, Los
Angeles, California and will soon establish an office in San Francisco,
California.
NeoCarta Ventures. NeoCarta Ventures is a limited partnership fund that
invests in e-commerce companies. The Fund was sponsored by principals of Kelso
& Company, a private equity firm, Bert Ellis, the Chairman and Chief Executive
Officer of iXL Enterprises and a member of FrontLine's Advisory Board and
others. This investment provides FrontLine with an expanded network of
relationships and access to additional deal flow.
Other Ownership Stakes. Opus360 Corporation ("Opus360") provides a suite
of services across the spectrum of a project-based workforce. These web-based
services enable organizations to manage their internal resources, their
vendors' resources, as well as the largest virtual workforce and most diverse
group of independent consultants and freelancers through FreeAgent.com. Opus360
is a private company backed by a consortium of investors including Safeguard
Scientifics, Crosspoint Ventures and MSD Capital. Opus360 and VANTAS are
negotiating a national service agreement to provide office suite and virtual
office services to Opus360's free agents. Based on the anticipated value of
this relationship FrontLine was able to make an investment into this highly
sought after company after the financing round had been closed.
The Company also has interests in Digitalwork.com and
Giftcertificates.com. Digitalwork.com is an on-line "do-it-yourself" business
agency that provides entrepreneurs with a suite of easy to use on-line services
organized into workshops, enabling them to complete routine business tasks,
including marketing, human resources and financial services, easily and
effectively. Giftcertificates.com is a destination site that offers branded
gift certificates for the nation's leading retailers, restaurants and hotels.
In addition to FrontLine's Partner Company Network, it is also a managing
member of a $300 million venture capital vehicle ("Reckson Strategic") which
invests in real estate operating companies and offers these companies capital
and strategic guidance to aid in their development. Reckson Strategic targets
companies that are well positioned to capitalize upon positive demographic and
socio-economic trends. Reckson Strategic is funded with a $200 million
commitment from Paine Webber Real Estate Securities, Inc. and a $100 million
commitment from the Company.
Potential Partner Company Acquisitions. Having established a solid
foundation of Partner Companies, the Company has grown its Partner Company
network and has significantly increased its pipeline of acquisition
opportunities. Within the next quarter, it is anticipated that FrontLine will
commit
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to acquire interests in several additional Partner Companies. Over the next
year, FrontLine anticipates making a significant investment into new Partner
Companies. FrontLine anticipates that these acquisitions will consist mainly of
significant stakes in Partner Companies that will benefit from the full
resources of its e-Cooperative. In addition, FrontLine may selectively acquire
smaller stakes in a number of companies to solidify strategic relationships.
The Company's future acquisitions are dependent upon its continued access to
capital as well as its ability to identify attractive Partner Company
acquisition opportunities.
The Company's executive offices are located at 1350 Avenue of the
Americas, New York, New York 10019, and its telephone number at that location
is (212) 931-8000. At December 31, 1999, the Company had approximately 26
employees.
ITEM 2. PROPERTIES
The Company's principal office is located at 1350 Avenue of the Americas,
New York, New York, 10019.
VANTAS Incorporated, a consolidated subsidiary, leases its principal
offices at 90 Park Avenue, New York, New York, 10016. In addition, VANTAS
leases space for 201 business centers that are primarily located in the United
States. See Note 10 to the financial statements for a summary of the associated
commitments.
Management believes that such properties are sufficient to meet their
present needs and does not anticipate any difficulty in securing additional
space, as needed, on terms acceptable to the Company.
ITEM 3. LEGAL PROCEEDINGS
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 routine actions for negligence or other 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 significant adverse effect on the Company's financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter of the year ended December 31, 1999.
I-11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading over-the-counter ("OTC") on June
29, 1998 under the symbol "RSII"and is traded on the NASDAQ National Market
("NASDAQ") under the symbol "RSII". The following table sets forth the
quarterly high and low closing bid prices per share of the common stock
reported for each respective quarter. These OTC and NASDAQ market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not necessarily represent actual transactions. Since inception, the
Company has not paid any dividends to its shareholders. Under the terms of the
Company's credit facilities, as long as there are outstanding advances under
such facilities, the Company is prohibited from paying dividends on any shares
of its capital stock.
HIGH LOW
----------- -----------
June 29, 1998 ............... $ 4.063 $ 3.625
June 30, 1998 ............... $ 3.750 $ 3.125
September 30, 1998 .......... $ 4.500 $ 2.000
December 31, 1998 ........... $ 4.625 $ 1.688
March 31, 1999 .............. $ 5.718 $ 3.500
June 30, 1999 ............... $ 17.125 $ 4.062
September 30, 1999 .......... $ 19.625 $ 12.500
December 31, 1999 ........... $ 68.312 $ 15.250
The approximate number of shareholders of the Company's common stock as of
March 3, 2000 was 437.
From January 26, 2000, and February 28, 2000, the Company completed
convertible preferred stock offerings to Warburg Dillon Read, LLC of 26,000
shares of 8.875% Cumulative Convertible Preferred Stock, with net proceeds of
$24.6 million. These shares are convertible into the Company's common stock at
prices ranging from $66.30 to $75.08.
On March 7, 2000, Gotham Partners Management Co., LLC ("Gotham"), an
investment partnership that invests in public and private companies in a wide
range of industries and stages of development, invested $30 million to purchase
1.5 million warrants for FrontLine's common stick for $20 per warrant. The
warrant's have an exercise price of $70 per share and a term of 3.25 years. The
Company utilized approximately half of these proceeds to reduce the Credit
Facility and the remaining portion will be utilized for acquisitions of
interests in Partner Companies and working capital purposes.
UNREGISTERED SALES OF SECURITIES
In connection with its acquisitions of ownership interests in VANTAS from
November 1999 through February 2000, the Company issued 3,122,202 shares of its
common stock in transactions exempt from registration under Section 4(2) of the
Securities Act of 1933 ("Section 4(2)").
In connection with its acquisitions of ownership interests in OnSite in
October 1999, the Company issued 1,731,597 shares of its common stock in
transactions exempt from registration under Section 4 (2).
In connection with its amendments of the FrontLine and Reckson Strategic
Facilities in November 1999, the Company issued 176,186 shares of its common
stock in a transaction exempt from registration under Section 4 (2).
In connection with its acquisitions of ownership interests in RealtyIQ.com,
in December 1999 the Company issued 52,578 shares of its common stock in a
transaction exempt from registration under Section 4 (2).
In connection with its acquisitions of ownership interests in
EmployeeMatters, Inc., in December 1999, the Company issued warrants to purchase
200,000 shares of its common stock in transactions exempt from registration
under Section 4 (2).
II-1
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED JULY 15, 1997 TO
DECEMBER 31, 1999(2) DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ------------------- ------------------
OPERATIONS SUMMARY:
Operating revenues .......................... $215,376 $ 336 $ --
Partner Company operating income ............ 27,927 336 --
Corporate general and administrative ........ (9,509) (2,613) (479)
Equity in earnings (loss) of Partner
Companies and other ownership interest..... (10,599) (3,966) 223
Net loss .................................... $(39,847) $(8,147) $ (258)
PER SHARE DATA: (1)
Basic and diluted net loss .................. $ (1.56) $ (0.56) $ --
BALANCE SHEET DATA (PERIOD END):
Cash and cash equivalents ................... $ 32,740 $ 2,026 $ 130
Working capital ............................. 11,559 132 11
Ownership interests in and advances to
Partner Companies ......................... 61,207 30,277 325
Other ownership interest .................... 36,626 15,561 5,520
Intangible assets ........................... 239,412 -- --
Total assets ................................ 541,983 58,843 7,519
Credit facilities ........................... 166,255 40,981 --
Notes payable ............................... 108,125 -- --
Total shareholders' equity .................. $114,109 $15,968 $4,222
- ----------
(1) Based on 25,600,985 and 14,522,513 weighted average shares of common stock
outstanding for the years ended December 31, 1999 and 1998, respectively.
(2) Reflects the Company's acquisition and consolidation of a majority
ownership interest in VANTAS Incorporated in 1999.
No dividends were paid in any of the periods presented.
II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
accompanying Financial Statements of FrontLine Capital Group, formerly Reckson
Service Industries, Inc., ("FrontLine" or the "Company") and related notes
thereto.
The Company considers certain statements set forth to be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, with respect
to the Company's expectations for future periods. Certain forward-looking
statements, including, without limitation, statements relating to the ability
to identify and acquire interests in commercial service companies, the
financing of the Company's and Partner Companies' operations, the timing and
success of such acquisitions and the ability to integrate and manage
effectively its various acquisitions, involve certain risks and uncertainties.
Although the Company believes that the expectation reflected in such
forward-looking statements is based on reasonable assumptions, the actual
results may differ materially from those set forth in the forward-looking
statements and the Company and Partner Companies can give no assurance that its
expectations will be achieved. Certain factors that might cause the results of
the Company and Partner Companies to differ materially from those indicated by
such forward-looking statements include, among other factors, general economic
conditions, a lack of attractive business opportunities or suitable
acquisitions, the Company's dependence upon financing from Reckson Operating
Partnership, L.P. ("Reckson"), conflicts of interest of management, competition
for targeted acquisitions and the ability to otherwise finance business
opportunities. Consequently, such forward-looking statements should be regarded
solely as reflections of the Company's and Partner Companies' current operating
and development plans and estimates. These plans and estimates are subject to
revision from time to time as additional information becomes available, and the
Company undertakes no obligation to update these plans and estimates.
OVERVIEW AND BACKGROUND
FrontLine was formed on July 15, 1997 and is a publicly-traded operating
company that identifies, acquires interests in, and develops a network of
business-to-business ("B2B") e-commerce and e-service companies (the "Partner
Companies") that service small and medium sized enterprises ("SMEs"),
independent professionals and the mobile workforce of larger companies.
The Company's goal is to acquire significant, long-term stakes in targeted
Partner Companies, which will be incorporated into a collaborative network of
e-commerce and e-services companies, in an effort to accelerate their growth
and increase their likelihood of success. FrontLine has developed an extensive
e-Cooperative platform that allows its Partner Companies to benefit from its
operational and management resources and experience and the Company's extensive
customer base as well as gain significant synergies from other existing and
future Partner Companies. The e-Cooperative consists of the:
o enterprise Development Group or eDG -- eDG offers strategic planning,
project management and functional expertise in the areas of
organizational design, recruiting, finance and technology strategy.
o Advisory Board -- a group of recognized business and academic leaders
provides strategic insight, expertise, relationships and access to new
opportunities and potential alliances for the Company and its Partner
Companies.
o Network of Partner Companies -- facilitates learning and collaboration
among all Partner Companies and provides access to the customer base,
resources and relationships of the entire network. It also facilitates
business partnerships among Partner Companies, including cross-selling
and cross-marketing opportunities.
o Click and Mortar -- Global workplace solutions provider which offers the
Partner Companies the ability to access the virtual and physical global
infrastructure as well as a distribution network to a customer base of
SMEs.
II-3
The Company's strategy is to continue to expand its network of Partner
Companies and its e-Cooperative platform by pursuing additional acquisitions
that complement and enhance the overall network. FrontLine seeks to add
significant value to its Partner Companies with the goal of creating industry
leaders that have the potential to become public companies, act as industry
consolidators or merge with the proper strategic partners. FrontLine targets
early stage companies that can benefit from FrontLine's entire franchise and
therefore have the potential to create significant value for FrontLine.
FrontLine seeks to focus its future acquisitions in the Internet sector by
targeting three types of B2B e-commerce and e-services companies:
o e-Commerce and infrastructure: companies that deliver or enable the
delivery of goods and services over the Internet;
o Virtual brick and mortar: companies that combine a physical
infrastructure with an Internet-enabled model to enhance the delivery of
their services; and
o Internet-based outsourcing: companies that utilize the Internet to enable
the outsourcing of non-core business functions.
Although the Company refers to the companies in which it has acquired an
equity and cost ownership interest as its "Partner Companies" and that it has a
"partnership" with these companies, it does not act as an agent or legal
representative for any of these companies, it does not have the power or
authority to legally bind any of its Partner Companies and it does not have the
types of liabilities in relation to its Partner Companies that a general
partner of a partnership would have.
Because FrontLine acquires significant interests in B2B e-commerce
companies, many of which generate net losses, FrontLine has experienced, and
expects to continue to experience, significant volatility in the quarterly
results. Management does not know if the Company will report net income in any
period, and expects to report net losses for the foreseeable future. While most
Partner Companies have consistently reported losses, the Company may experience
significant volatility from period to period due to one-time transactions and
other events incidental to the ownership interests in and advances to Partner
Companies. On a continuous basis, but no less frequently than at the end of
each quarterly reporting period, management evaluates the carrying value of the
ownership interests in and advances to each of the Partner Companies for
possible impairment based on achievement of business plan objectives and
milestones, the fair value of each ownership interest and advance in the
Partner Company relative to carrying value, the financial condition and
prospects of the Partner Company, and other relevant factors. The business plan
objectives and milestones that are taken into consideration include, among
others, those related to financial performance such as achievement of planned
financial results or completion of capital raising activities, and those that
are more operational in nature such as the launching of a web site or the
hiring of key employees. The fair value of the ownership interests in and
advances to privately held Partner Companies is generally determined based on
the value at which independent third parties have invested or have committed to
invest in Partner Companies.
The presentation and content of the Company's financial statements is
largely a function of the presentation and content of the financial statements
of the Partner Companies. As a result, to the extent Partner Companies change
the presentation or content of their financial statements, as may be required
by the Securities and Exchange Commission or changes in accounting literature,
the presentation and content of the Company's financial statements may also
change.
EFFECT OF VARIOUS ACCOUNTING METHODS ON RESULTS OF OPERATIONS
The various interests that FrontLine acquires in Partner Companies are
accounted for under one of three methods: consolidation, equity method and cost
method. The applicable accounting method is generally determined based on the
Company's voting interest in a Partner Company.
Consolidation. Partner Companies in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities and controls
the board of directors are generally accounted for under the consolidation
method of accounting. Under this method, a Partner Company's results of
operations are reflected within the Company's Consolidated Statements of
Operations. In the fourth quarter 1999,
II-4
the Company acquired control of VANTAS Incorporated ("VANTAS") (See Note 3 to
the Consolidated Financial Statements). Additionally, the Company consolidates
OneXstream.com, Inc. with FrontLine's financial statements. Participation of
other Partner Company shareholders in the earnings or losses of a consolidated
Partner Company is reflected in a caption "Minority interest" in the
Consolidated Statements of Operations. Minority interest adjusts the
consolidated net results of operations to reflect only FrontLine's share of the
earnings or losses of the consolidated Partner Company.
The effect of a Partner Company's results of operations on FrontLine's
results of operations is generally the same under either the consolidation
method of accounting and the equity method of accounting, because under each of
these methods only FrontLine's share of the earnings or losses of a Partner
Company is reflected in the results of operations in the Consolidated
Statements of Operations.
Equity Method. Partner Companies whose results are not consolidated, but
over whom the Company exercises significant influence, are generally accounted
for under the equity method of accounting. Whether or not the Company exercises
significant influence with respect to a Partner Company depends on an
evaluation of several factors; including, among others, representation on the
Partner Company's board of directors and ownership level, which is generally a
20% to 50% interest in the voting securities of the Partner Company, including
voting rights associated with the Company's holdings in common, preferred and
other convertible instruments in the Partner Company. Under the equity method
of accounting, a Partner Company's accounts are not reflected within the
Company's Consolidated Statements of Operations; however, FrontLine's share of
the earnings or losses of the Partner Company is reflected in the caption
"Equity in earnings (loss) of Partner Companies and other ownership interest"
in the Consolidated Statements of Operations.
Partner Companies accounted for under the equity method of accounting
included:
PARTNER VOTING OWNERSHIP ON BASIC BASIS VOTING OWNERSHIP ON DILUTED BASIS
COMPANY --------------------------------------- ---------------------------------------
SINCE DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 1998
-------- ------------------- ------------------- ------------------- ------------------
CommerceInc. Corporation ......... 1999 31% N/A 26% N/A
EmployeeMatters, Inc. ............ 1999 53% N/A 45% N/A
OnSite Access, Inc. .............. 1997 37% 1% 22% 1%
RealtyIQ.com ..................... 1999 68% N/A 54% N/A
UpShot.com ....................... 2000 *20% N/A *18% N/A
VANTAS Incorporated .............. 1998 N/A 21% N/A 21%
- ----------
* Ownership interest acquired in February 2000.
FrontLine has representation on the board of directors of all of the above
Partner Companies, and as of December 31, 1999, generally owned voting
convertible preferred stock in all of them. Most of FrontLine's equity method
Partner Companies are in a very early stage of development and have not
generated significant revenues. In addition, equity method Partner Companies
have incurred substantial losses since their inception and are expected to
continue to incur substantial losses in 2000.
Cost Method. Partner Companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, the Company's share of the
earnings or losses of these companies is not included in the Consolidated
Statements of Operations.
II-5
Partner Companies accounted for under the cost method of accounting
included:
VOTING OWNERSHIP VOTING OWNERSHIP
PARTNER ON BASIC BASIS ON DILUTED BASIS
COMPANY ------------------- ------------------
SINCE DECEMBER 31, 1999 DECEMBER 31, 1999
-------- ------------------- ------------------
AdOutlet.com ................. 1999 12% 10%
DigitalWork.com .............. 1999 <1% <1%
Giftcertificates.com ......... 1999 <1% <1%
LiveCapital.com .............. 2000 *4% *4%
NeoCarta Ventures ............ 1999 4% 4%
Opus 360 Corporation ......... 1999 <1% <1%
- ----------
* Ownership interest acquired in February 2000.
The cost method Partner Companies are in a very early stage of development
and have not generated significant revenues. In addition, FrontLine's cost
method Partner Companies incurred substantial losses since their inception and
are expected to continue to incur substantial losses in 2000.
EFFECT OF CONSOLIDATION ON THE PRESENTATION OF FRONTLINE'S FINANCIAL STATEMENTS
The presentation of FrontLine's financial statements may differ from
period to period primarily due to whether or not the consolidation method of
accounting or the equity method of accounting is applied. For example, previous
to the fourth quarter of 1999, VANTAS was accounted for under the equity method
of accounting; however, due to the acquisition of additional interests
resulting in voting control VANTAS was subsequently consolidated during the
fourth quarter of 1999.
To understand the Company's results of operations and financial position
without the effect of the consolidation of VANTAS, Note 4 to the consolidated
financial statements summarizes the Company's Statements of Operations and
Balance Sheets treating the ownership interest in VANTAS as if it were
accounted for under the equity method of accounting for all periods presented.
FrontLine's share of VANTAS' losses is included in "Equity in earnings (loss)
of Partner Companies and other ownership interest."
RESULTS OF OPERATIONS
The Company commenced operations on July 15, 1997 and primarily incurred
startup costs through December 31, 1998. Therefore, the following periods, the
years ended December 31, 1999 and 1998, respectively, are not comparable.
FrontLine's financial statements include the effect of consolidating
VANTAS and OneXstream.com, Inc. in 1999. The reportable segments are Executive
Office Suites and Virtual Office Services, e-Businesses and Other Operations.
Executive Office Suites and Virtual Office Services includes the effect of
consolidating the operations of VANTAS for the year ended December 31, 1999 and
the effect of the equity method of accounting for Interoffice SuperHoldings
Corporation ("InterOffice") and Reckson Executive Centers, LLC for the year
ended December 31, 1998. e-Businesses includes the effect of transactions and
other events incidental to the ownership interest in FrontLine's Partner
Companies, excluding VANTAS. Other Operations represents the expenses of
providing strategic and operational support to the Partner Companies, the
administrative costs related to these expenses and FrontLine's operations in
general.
EXECUTIVE OFFICE SUITES AND VIRTUAL OFFICE SERVICES
VANTAS was formed in January 1999 as a result of a merger of Interoffice,
Reckson Executive Centers, LLC and Alliance National Incorporated.
A significant portion of FrontLine's operating revenues and all of its
operating expenses for the year ended December 31, 1999 were attributable to
VANTAS. The following is a discussion of VANTAS' results of operations for the
year ended December 31, 1999.
II-6
VANTAS' executive office suite income for the year ended December 31, 1999
was approximately $124.6 million. Executive office suite income was primarily
derived from rental income for newly acquired and existing executive office
suites in 1999. Support service and other revenues of approximately $90.8
million for the year ended December 31, 1999 was primarily attributable to
broadband Internet access, information technology support services and
administrative support services.
VANTAS' operating expenses were approximately $187.4 million, representing
87% of operating revenues. Approximately $175.5 million of operating expenses
consisted of the costs of operating the executive office suite centers.
Approximately $82.7 million of the costs represented rent expense for the
office suites, approximately $31.1 million was related to the cost of providing
support services to tenants and approximately $61.7 million was related to
center general and administrative costs. Operating expenses of approximately
$12.0 million of general and administrative expense was primarily related to
the increase of the corporate staff and related office space associated with
the Company's growth during the year ended December 31, 1999.
VANTAS incurred merger and integration costs of approximately $26.7
million for the year ended December 31, 1999 in connection with mergers and
one-time costs related to agreements with shareholders of VANTAS to purchase a
portion of the shareholders' securities in VANTAS.
For the year ended December 31, 1999, VANTAS incurred interest expense of
approximately $10.3 million. Interest expense was primarily related to
borrowings under VANTAS' credit facility for funding acquisitions during 1999
and prior periods.
At December 31, 1999, VANTAS recognized an income tax benefit of
approximately $2.8 million, net of an applicable valuation allowance on
deferred tax assets.
For the year ended December 31, 1998, the Company's share of Interoffice's
income was less than $.1 million under the equity method of accounting. The
Company's share of losses for Reckson Executive Centers, LLC was approximately
$.1 million.
E-BUSINESSES
A significant portion of FrontLine's net loss is derived from corporations
in which it holds a significant minority ownership interest accounted for under
the equity method of accounting. Equity income (loss) fluctuates with the
number of Partner Companies accounted for under the equity method, FrontLine's
voting ownership percentage in these companies, the amortization of goodwill
related to newly acquired equity method Partner Companies, and the results of
operations of these companies. As of December 31, 1999, FrontLine accounted for
four of its Partner Companies under this method as compared to two Partner
Companies during the year ended December 31, 1998. All four of these companies
incurred losses for the year ended December 31, 1999. Under this method, the
results of operations of these entities are not consolidated within the
Consolidated Statements of Operations; however, FrontLine's share of these
companies' losses is reflected in the caption "Equity in earnings (loss) of
Partner Companies and other ownership interest" in the Consolidated Statements
of Operations.
OTHER OPERATIONS
FrontLine's Other Operations consist primarily of general and
administrative cost for compensation office costs, and outside services such as
legal, accounting and travel related costs. As the number of FrontLine's
employees grow to support its operations and those of its Partner Companies,
its general and administrative costs will increase. As a result of the increase
in the number of employees and the increase in the acquisition of interests in
Partner Companies, general and administrative costs for the year ended December
31, 1999 was approximately $9.5 million compared to approximately $2.6 million
for the year ended December 31, 1998 and approximately $.5 million for the 1997
period. FrontLine plans to continue to increase the number of new employees and
build its overall infrastructure. These costs are expected to continue to be
higher compared to historical periods. During the year ended December 31, 1999,
the Company recorded compensation costs of approximately $8.5 million in
connection with incentive stock awards to management.
II-7
FrontLine's interest expense, before the consolidation of VANTAS, for the
year ended December 31, 1999 was approximately $8.1 million compared to
approximately $0.6 million for the year ended December 31, 1998 and less than
$0.1 million for the 1997 period. The increase is due to an increase in the
amounts advanced under the Company's existing credit facilities and the secured
credit facility.
Included in Other Operations is FrontLine's ownership interest in RSVP
Holdings, LLC. For the year ended December 31, 1999, FrontLine's share of RSVP
Holdings, LLC's income was approximately $0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
FrontLine has funded operations and investing activities through a
combination of borrowings under various credit facilities and issuances of the
Company's common stock.
FrontLine funded approximately $132.6 million in cash and issued $59.1
million of the Company's common stock to acquire interests in or make advances
to new and existing Partner Companies during the year ended December 31, 1999.
These companies include: AdOutlet.com, CommerceInc. Corporation,
DigitalWork.com, EmployeeMatters, Inc. Giftcertificates.com, NeoCarta Ventures,
OnSite Access, Inc., Opus360 Corporation, RealtyIQ.com and VANTAS Incorporated.
Prior to 1999, the Company established a credit facility with Reckson in
the amount of $100 million ("FrontLine Facility"). Additionally, Reckson
Strategic Venture Partners, LLC ("Reckson Strategic") has established a $100
million facility with Reckson to fund Reckson Strategic investments. Note 8 to
the consolidated financial statements summarizes the outstanding amounts and
terms of the FrontLine and Reckson Strategic Facilities. The Company had
approximately $79.5 million outstanding under the FrontLine Facility at
December 31, 1999. Borrowings were primarily used to fund acquisitions of
ownership interests in Partner Companies and general operations. Approximately
$42.3 million was outstanding under the Reckson Strategic Facility at December
31, 1999. These borrowings were utilized to fund Reckson Strategic investments
and general operations. At December 31, 1999, $39.0 million was available on
these Facilities.
In November 1999, the Board of Directors of FrontLine approved amendments
to the credit facilities with Reckson necessary in order for FrontLine to
proceed with certain proposed acquisition financings. As consideration for such
approvals, FrontLine paid a fee to Reckson in the form of 176,186 shares of
FrontLine's common stock which were valued at $20.31 per share.
On November 30, 1999, the Company entered into a $60 million credit
facility ("Credit Facility") with a significant financial institution to fund
transactions to acquire additional ownership interests in Partner Companies.
The Credit Facility prohibits the Company from borrowing from third parties
without consent of the lender. Note 5 to the consolidated financial statements
summarizes the terms of the Credit Facility. As of December 31, 1999, the total
available on the Credit Facility was approximately $15.6 million. In March
2000, the Credit Facility was amended to permit the Company to use proceeds
from certain equity offerings for general corporate purposes in lieu of
repayment to the Credit Facility.
VANTAS has a credit agreement with various lending institutions for $157.9
million. The credit agreement provides for a $5 million acquisition loan
commitment, $127.9 million term loans and a $25 million revolving loan
commitment, including letters of credit. As of December 31, 1999, $21.5 million
of the term loan was funded into a cash collateral account that VANTAS will be
permitted to utilize in connection with permitted acquisitions. There were no
borrowings outstanding under the acquisition and revolving loan commitment.
VANTAS had outstanding letters of credit of approximately $10.1 million for
landlord security deposits which reduced the borrowing available under the
revolving loan commitment. Note 6 to the consolidated financial statements
summarizes the terms of VANTAS' credit agreement and outstanding balances
thereunder.
II-8
On February 22, 2000, VANTAS and the lenders entered into an amendment to
the credit facility whereby certain of the financial covenants contained in the
credit facility were amended. VANTAS has obtained a commitment letter for the
provision of a new credit facility, subject to satisfaction of various
conditions, which would replace the credit facility upon consummation of the HQ
Global Workplaces Merger. There can be no assurance that the HQ Global
Workplaces Merger will occur or that, if the HQ Global Workplace Merger does not
occur, VANTAS will be able to meet certain of the financial covenants contained
in the credit facility for fiscal quarters subsequent to December 31, 1999.
FrontLine also funded investments of ownership interests in Partner
Companies through the issuance of FrontLine's common stock. During the year
ended December 31, 1999, the Company issued approximately $59.1 million of
FrontLine's common stock to acquire interests in Partner Companies.
On December 16, 1999, the Company issued 1,437,500 shares of its common
stock in a public offering at $47.25 per share for an aggregate consideration
of approximately $63.9 million. Proceeds of the public offering were primarily
used for purchases of additional ownership interests in Partner Companies.
Subsequent to December 31, 1999, the Company funded approximately $78.6
million in cash and issued $24.6 million of common stock to acquire interests
in or make advances to new and existing Partner Companies. New Partner
Companies include LiveCapital.com and UpShot.com.
On January 21, 2000, the Company entered into a merger agreement pursuant
to which VANTAS will be merged with HQ Global Workplaces, Inc. The merger is
scheduled to close by April 30, 2000 and requires FrontLine to obtain and will
be financed through the issuance of new equity of HQ Global Workplaces and
approximately $350 million of HQ Global Workplaces debt. VANTAS has posted a
letter of credit in the amount of $35 million to secure the obligations under
the merger agreement. The Company has pledged approximately 15 million shares
of VANTAS stock to secure its nonrecourse guarantee of the letter of credit. In
the event the letter of credit is drawn upon and the lender forecloses upon the
Company's shares of VANTAS, VANTAS is obligated to reimburse the Company in the
form of additional shares of VANTAS for any loss of the Company's shares of
VANTAS provided that such loss was not a result of the Company's gross
negligence. FrontLine has obtained commitments for the debt financing which are
subject to certain conditions and is in negotiations to obtain the equity
financing. However, no assurance can be given that the Company will be
successful in obtaining the equity financing required under the merger
agreement such that the merger will be consummated on its current terms or that
the merger will not be consummated for any other reason.
The Company also funded investing activities subsequent to December 31,
1999 with net proceeds of approximately $24.6 million from the completion of
26,000 shares of privately placed Convertible Preferred Stock.
On March 7, 2000, Gotham Partners ("Gotham"), an investment partnership
that invests in public and private companies in a wide range of industries and
stages of development, and certain affiliates of Gotham, invested $30 million
to purchase 1.5 million warrants to acquire FrontLine's common stock at an
exercise price of $70 per share for $20 per warrant. The warrants have a term
of 3.25 years. The Company utilized approximately half of these proceeds to
reduce the Credit Facility and the remaining portion will be utilized for
acquisitions of interest in Partner Companies and working capital purposes.
Currently, the Company has two short-term letters of credit totaling $7.7
million, which have been utilized as deposits for future acquisitions of
ownership interests in Partner Companies.
FrontLine's operations do not require intensive capital expenditures.
There were no significant capital expenditure commitments as of December 31,
1999.
FrontLine will continue to evaluate acquisition opportunities and expects
to acquire additional ownership interests in new and existing Partner Companies
in the next 12 months, all of which will make it necessary for the Company to
raise additional funds. The existing secured credit facility matures in May
2000; although it contains a three-month potential extension, the Company may
not be able to renew this facility or obtain additional bank or other financing
beyond this period, and may be required to repay the amounts borrowed under the
Credit Facility at times when it does not have sufficient internal funds, or
may only be able to do so on terms not favorable or acceptable to the Company.
If additional funds are
II-9
raised through the issuance of equity securities, existing shareholders may
experience significant dilution. Although management believes that it will
continue to have access to the public markets, the availability and amount of
funds from these markets is subject to numerous factors including some that are
beyond the Company's control, and therefore is not assured.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature of the progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation of testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company expensed approximately $.1 million during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the Year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
INFLATION
The Credit Facilities generally bear interest at variable rates. These
rates will be influenced by changes in the prime rate and is sensitive to
inflation and other economic factors. A significant increase in interest rates
may have a negative impact on the earnings of the Company due to the variable
interest rate under the Credit Facilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk facing the Company is interest rate risk on its
Credit Facilities. The Company does not hedge interest rate risk using
financial instruments. The Credit Facilities bear interest at the greater of
the prime rate plus 2% or 12% (with interest on balances outstanding more than
one year increasing by 4% of the previous years rate). The rate of interest on
the Credit Facilities will be influenced by changes in the prime rate and is
sensitive to inflation and other economic factors. A significant increase in
interest rates may have a negative impact on the earnings of the Company due to
the variable interest rate under the Credit Facilities.
The following table sets forth the Company's Credit Facilities
obligations, principal cash flows by scheduled maturity, weighted average
interest rates and estimated fair market value ("FMV") at December 31, 1999 (in
thousands).
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FMV
------------ ------ -------- ------------- ------ ------------ ------------- -----------
Variable rate ......... $ 44,407 $ -- $ --- $ 121,848 $ -- $ -- $ 166,255 $166,255
Average interest
rate ................. 8.56% -- -- 12.01% -- -- 11.09% --
The primary market risk facing VANTAS is interest rate risk on its credit
agreement. The credit agreement bears interest ranging from LIBOR plus 3.0% to
LIBOR plus 3.75% for a one, three or six month period at the election of
VANTAS. The rate of interest on the credit agreement 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 credit
agreement.
Based on variable rate debt levels, a 10% increase in market interest
rates throughout 1999 (approximately 50 basis points on a weighted average
basis) would have an approximate 5.3% impact on VANTAS' interest expense, net
for the year ended December 31, 1999.
II-10
VANTAS has not, and does not plan to, enter into any derivative financial
instruments for trading or speculative purposes. As of December 31, 1999,
VANTAS had no other material exposure to market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained in the section captioned "Proposal I: Election
of Directors" of the Company's definitive proxy statement for the 2000 annual
meeting of shareholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section captioned "Executive
Compensation" of the Company's definitive proxy statement for the 2000 annual
meeting of shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section captioned "Principal and
Management Stockholders" of the Company's definitive proxy statement for the
2000 annual meeting of shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section captioned "Certain Relationships
and Related Transactions" of the Company's definitive proxy statement for the
2000 annual meeting of the shareholders is incorporated herein by reference.
III-1
PART IV
ITEM 14. FINANCIAL STATEMENTS AND SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) (1 and 2) Financial Statements and Schedules
The following consolidated financial information is included as a separate
section of this annual report on Form 10-K:
PAGE
------
Report of Independent Auditors .............................................. IV-6
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998 ... IV-7
Consolidated Statements of Operations for the years ended December 31, 1999,
December 31, 1998 and the period July 15, 1997 (commencement of operations)
to December 31, 1997 ...................................................... IV-8
Consolidated Statements of Shareholders' Equity for the years ended December
31, 1999, December 31, 1998 and the period July 15, 1997 (commencement of
operations) to December 31, 1997 .......................................... IV-9
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
December 31, 1998 and the period July 15, 1997 (commencement of operations)
to December 31, 1997. ..................................................... IV-10
Notes to Consolidated Financial Statements .................................. IV-11
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
IV-1
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ---------- ---------------------------------------------------------------------------------------------------------------------
3.1(1) Certificate of Incorporation
3.2 Amended and Restated By-Laws of Registrant
3.3(6) Amended and Restated Certificate of Incorporation
4.1(1) Specimen Share Certificate of Common Stock
4.2 Specimen Warrant W-1, dated December 7, 1999, in the name Elliot S. Cooperstone to purchase 100,000 shares of common
stock
4.3 Specimen Warrant W-2, dated December 7, 1999, in the name H. Thach Pham to purchase 100,000 shares of common stock
4.4 Specimen Option O-1, dated December 7, 1999, in the name of Reckson Service Industries, Inc. to purchase 394,737
shares of common stock of
eSourceOne, Inc. owned by Elliot S. Cooperstone
4.5 Specimen Option O-2, dated December 7, 1999, in the name of Reckson Service Industries, Inc. to purchase 394,737
shares of common stock of
eSourceOne, Inc. owned by H. Thach Pham
4.9(14) Certificate of Designations Establishing and Fixing the Rights of Series A-1 Cumulative Preferred Stock
4.10(14) Certificate of Designations Establishing and Fixing the Rights of Series A-2 Cumulative Preferred Stock
4.11(14) Certificate of Designations Establishing and Fixing the Rights of Series A-3 Cumulative Preferred Stock
4.12(14) Certificate of Designations Establishing and Fixing the Rights of Series A-4 Cumulative Preferred Stock
4.13(14) Certificate of Designations Establishing and Fixing the Rights of Series A-5 Cumulative Preferred Stock
4.14(14) Certificate of Designations Establishing and Fixing the Rights of Series A-6 Cumulative Preferred Stock
4.16(14) Specimen Warrant W-1, dated March 7, 2000, in the name Gorham Partners, L.P. to purchase 1,000,000 shares of common stock
4.17(14) Specimen Warrant W-2, dated March 7, 2000, in the name Gorham Partners III, L.P. to purchase 30,000 shares of common
stock
4.18(14) Specimen Warrant W-3, dated March 7, 2000, in the name Gorham Partners International, Inc. to purchase 50,000 shares
of common stock
10.0 Subscription Agreement as of February 7, 2000, by and between Reckson Service Industries, Inc. and VANTAS
Incorporated
10.1(6) Intercompany Agreement between Reckson Operating Partnership, L.P. and Reckson Service Industries, Inc. dated May
13, 1998
10.2A Amended and Restated Credit Agreement between Reckson Operating Partnership, L.P. and Reckson Service Industries,
Inc. relating to the operations of
Reckson Strategic Venture Partners, LLC dated August 4, 1999
10.2B Amended and Restated Credit Agreement between Reckson Operating Partnership, L.P. and Reckson Service Industries,
Inc. relating to the operations of
Reckson Service Industries, Inc. dated August 4, 1999
10.2C(12) Amendment to Amended and Restated Credit Agreements between Reckson Operating Partnership, L.P. and Reckson Service
Industries dated November
30, 1999
10.3(1) Limited Liability Company Agreement of OnSite Ventures, LLC
10.4(1) Limited Liability Company of RSVP Holdings, LLC
10.5A(1) Operating Agreement of Reckson Strategic Venture Partners, LLC
10.5B(1) Supplemental Agreement to Operating Agreement of Reckson Strategic Venture Partners, LLC
10.6(1) Registration Rights Agreement between Reckson Service Industries, Inc. and certain affiliates thereof dated May 13,
1998
10.7(6) Loan Agreement regarding On-Site Convertible Loans
10.8A(1) Stock Option Plan
10.8B(6) 1998 Employee Stock Option Plan
10.8C(7) 1999 Stock Option Plan
10.8D 2000 Employee Stock Option Plan
10.9(1) Employment Agreement of Steven H. Shepsman
10.10(1) Employment Agreement of Seth B. Lipsay
10.11(1) Limited Liability Company Agreement of Interoffice Superholdings, LLC by and among Interoffice Superholdings, LLC,
RSI I/O Holdings, Inc., JAH I/O,
LLC and Rieger I/O LLC
10.12 Fifth Amended and Restated Stockholders' Agreement, dated by and among VANTAS Incorporated and certain
securityholders identified therein
10.13(2) Letter Agreement dated November 9, 1998 by and between JAH I/O LLC and Reckson Management Group, Inc., Reckson
Service Industries, Inc., RSI I/O
Holdings, Inc., and Reckson Office Centers, LLC
10.14(2) Letter Agreement by and between Reckson Service Industries, Inc., and RFIA, LLC
10.15(3) Amended and Restated Operating Agreement of Assisted Living Investments LLC
10.16(4) Operating Agreement of Dominion Venture Group LLC
10.17(5) Agreement and Plan of Merger by and among Alliance National Incorporated, Alliance Holding Inc., Interoffice
Superholdings Corporation and Interoffice
Superholdings, LLC
10.18(5) Agreement and Plan of Merger by and among Alliance National Incorporated, ANI Holdings, Inc., Reckson Executive
Centers, Inc., and Reckson Office
Centers, LLC
10.19(6) $44 million Senior Secured Promissory Note of On-Site Ventures, LLC
10.20(8) Investor Rights Agreement, by and among OnSite Access, Inc. and certain investors and individuals within management
10.21(8) Voting Agreement, by and among OnSite Access, Inc. and certain investors
10.22(8) Purchase Agreement regarding Series B, Series C and Series D Preferred Stock of OnSite Access, Inc.
10.23(9) Series D Convertible Preferred Stock Securities Purchase Agreement, dated as of July 29, 1999 by and among VANTAS
Incorporated and several
Purchasers
10.24(10) Stock Purchase Agreement, dated as of August 10, 1999, by and among eSourceOne, Inc., Reckson Service Industries,
Inc. and RSI ESO, Inc.
10.25(10) Registration Rights Agreement, dated as of August 10, 1999, by and among eSourceOne, Inc., Reckson Service
Industries, Inc., RSI ESO, Inc., Elliott S.
Cooperstone and H. Thach Pham
10.26(10) Stockholders' Agreement, dated as of August 10, 1999, by and among eSourceOne, Inc. and certain stockholders
10.27(11) Stock Purchase Agreement, dated as of August 19, 1999, among Reckson Service Industries, Inc., RSI I/O Holdings,
Inc., Cahill, Warnock Strategic Partners
Fund L.P., Strategic Associates, L.P. and David L. Warnock
10.28(11) Letter Agreement, dated as of September 23, 1999, among Reckson Service Industries, Inc., RSI I/O Holdings, Inc.,
RSI-OnSite Holdings LLC, RSI-OSA
Holdings, Inc., JAH Realties, L.P., Veritech Ventures LLC and JAH I/O LLC
10.29(11) Letter of Amendment to Letter Agreement, dated as of September 23, 1999, among Reckson Service Industries, Inc., RSI
I/O Holdings, Inc., RSI-OnSite
Holdings LLC, RSI-OSA Holdings, Inc., JAH Realties, L.P., Veritech Ventures LLC and JAH I/O LLC
IV-2
EXHIBIT
NUMBER DESCRIPTION
- ------------ -------------------------------------------------------------------------------------------------------------------
10.30(12) Credit Agreement, dated November 30, 1999, by and among Reckson Service Industries, Inc. and Warburg Dillon Read,
LLC and UBS AG, Stamford
Branch
10.31(12) Equity Interest Pledge and Security Agreement, dated November 30, 1999, by and among the parties therein and UBS
AG, Stamford Branch
10.32(12) Interest Rate Cap Agreement, Pledge and Security Agreement, dated November 30, 1999, among Reckson Service
Industries, Inc. and Warburg Dillon
Read, LLC and UBS AG, Stamford Branch
10.33(12) November 30, 1999 Promissory Note for $60,000,000 to the order of UBS AG, Stamford Branch
10.34(13) Agreement and Plan of Merger by and among HQ Global Workplaces, Inc. and CarrAmerica Realty Corporation and VANTAS
Incorporated and Reckson
Service Industries, Inc., dated as of January 20, 2000
10.35(13) Stock Purchase Agreement between CarrAmerica Realty Corporation and Reckson Service Industries, Inc., dated as of
January 20, 2000
10.36(13) Stock Purchase Agreement among CarrAmerica Realty Corporation, OmniOffices (UK) Limited and OmniOffices (Lux) 1929
Holding Company S.A. and
VANTAS Incorporated and Reckson Service Industries, Inc., dated as of January 20, 2000
10.37(8) Certificate of Designation of Series A, Series B, Series C and Series D Preferred Stock of OnSite Access, Inc.
10.38(13) Form of Stockholders Agreement by and among HQ Global Workplaces, Inc., Reckson Service Industries, Inc.,
CarrAmerica Realty Corporation and
certain other stockholders of HQ Global Workplaces, Inc.
10.39 Amended and Restated Credit Agreement among VANTAS, Various Banks, and Paribas, as agent, dated as of January 16,
1997, as amended and restated
as of November 6, 1998 and August 3, 1999
10.40 Exchange Agreement, dated December 7, 1999, by and among Reckson Service Industries, Inc., Elliot S. Cooperstone
and H. Thach Pham
10.41 Warrant Registration Rights Agreement, dated December 7, 1999, by and among Reckson Service Industries, Inc.,
Elliot S. Cooperstone and H. Thach
Pham
10.42(14) Warrant Registration Rights Agreement, dated as of March 7, 2000 between Reckson Service Industries, Inc., and
Gotham Partners, L.P., Gotham Partners,
III, L.P. and Gotham Partners International, Ltd.
12.1 Statement of Ratios of Earnings to Fixed Charges
21.1 Statement of Subsidiaries of Reckson Service Industries, Inc.
23.0 Consent of Independent Accountants
24.1 Powers of Attorney (included in Part IV of this Form 10-K)
27.0 Financial Data Schedule
- ----------
(1) Previously filed as an exhibit to Registration Statement on Form S-1 (No.
333-44419) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on January 25, 1999 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on September 8, 1998 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on September 11, 1998 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on December 1, 1998 and incorporated herein by reference.
(6) Previously filed as an exhibit to the Company's Form 10-K filed with the
SEC on March 31, 1999 and incorporated herein by reference.
(7) Previously filed as an exhibit to Registration Statement on Form S-8 filed
with the SEC on July 29, 1999 and incorporated herein by reference.
(8) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on July 16, 1999 and incorporated herein by reference.
(9) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on August 31, 1999 and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on September 1, 1999 and incorporated herein by reference.
(11) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on October 12, 1999 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on December 13, 1999 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on January 25, 2000 and incorporated herein by reference.
(14) Previously filed as an exhibit to the Company's Form 8-K filed with the
SEC on March 28, 2000 and incorporated herein by reference.
IV-3
(3) Exhibits
(b) Reports on Form 8-K
On October 12, 1999, the Company filed a report on Form 8-K with respect to a
stock purchase agreement with Cahill, Warnock Strategic Partners Fund, L.P.,
Strategic Associates, L.P., and David L. Warnock to purchase VANTAS
Incorporated stock.
On October 14, 1999, the Company filed a report on Form 8-K announcing the
lapse of a right of first refusal of certain VANTAS shareholders pursuant to
the terms of a stockholder's agreement.
On October 28, 1999, the Company filed a report on Form 8-K with respect to the
purchase of an entity which indirectly owns shares of OnSite Access, Inc., from
a certain affiliate.
On December 13, 1999, the Company filed a report on Form 8-K announcing a
secured credit facility with Warburg Dillon Read, LLC, as Arranger and UBS AG,
Stamford Branch as Administrative Agent.
On December 13, 1999, the Company filed a report on Form 8-K relating to the
filing of proforma financial statements with respect to the purchase of shares
to increase the Company's ownership interest in VANTAS Incorporated.
On December 29, 1999, the Company filed a report on Form 8-K relating to the
underwritten public offering on December 16, 1999.
IV-4
SIGNATURES
Pursuant to the requirements 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 March 29, 2000.
FRONTLINE CAPITAL GROUP
By: /s/ Scott Rechler
-------------------------------------
(Scott Rechler)
President, Chief Executive Officer
and Director
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and directors
of FrontLine Capital Group, hereby severally constitute Scott H. Rechler,
Mitchell D. Rechler and Michael Maturo, 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 FrontLine Capital Group 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.
NAME TITLE DATE
- -------------------------- ------------------------------------------------------- ---------------
/s/ Scott H. Rechler President, Chief Executive Officer and Director March 29, 2000
- ---------------------
(Scott H. Rechler)
/s/ Michael Maturo Executive Vice President, Chief Financial Officer and March 29, 2000
- ---------------------
Director (Principal Financial Officer and Accounting
(Michael Maturo)
Officer)
/s/ Donald J. Rechler Chairman of the Board and Director March 29, 2000
- ---------------------
(Donald J. Rechler)
/s/ Roger M. Rechler Member of Management Advisory Committee and March 29, 2000
- ---------------------
Director
(Roger M. Rechler)
/s/ Mitchell d.. Rechler Secretary, Member of Management Advisory March 29, 2000
- ---------------------
Committee and Director
(Mitchell D. Rechler)
/s/ Gregg M.. Rechler Member of Management Advisory Committee and March 29, 2000
- ---------------------
Director
(Gregg M. Rechler)
/s/ Paul Amoruso Independent Director March 29, 2000
- ---------------------
(Paul Amoruso)
/s/ Ronald Cooper Independent Director March 29, 2000
- ---------------------
(Ronald Cooper)
IV-5
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Reckson Service Industries, Inc.
We have audited the accompanying consolidated balance sheets of Reckson
Service Industries, Inc. and Subsidiaries (d/b/a FrontLine Capital Group) as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years ended December
31, 1999 and 1998 and for the period for July 15, 1997 (commencement of
operations) to December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Reckson
Service Industries, Inc. and Subsidiaries (d/b/a FrontLine Capital Group) as of
December 31, 1999 and 1998, and the consolidated results of their operations
and their cash flows for the years ended December 31, 1999 and 1998 and for the
period from July 15, 1997 (commencement of operations) to December 31, 1997, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New York, New York
February 22, 2000
IV-6
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
----------------------------
1999 1998
------------- ------------
ASSETS:
Current Assets:
Cash and cash equivalents ...................................... $ 32,740 $ 2,026
Restricted cash (Notes 2 and 6) ................................ 21,572 --
Accounts receivable, net of allowance for doubtful accounts of
$861 in 1999................................................... 8,426 --
Other current assets ........................................... 16,008 --
--------- --------
Total Current Assets ........................................ 78,746 2,026
Ownership interests in and advances to Partner Companies
(Note 3) ...................................................... 61,207 30,277
Other ownership interest (Note 9) .............................. 36,626 15,561
Intangible assets (net) (Note 2) ............................... 239,412 --
Property and equipment (net) (Note 2) .......................... 80,425 100
Other assets (net) (Notes 2 and 8) ............................. 45,567 10,879
--------- --------
TOTAL ASSETS ................................................ $ 541,983 $ 58,843
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Accounts payable and accrued expenses .......................... $ 51,383 $ 1,894
Current portion of notes payable (Note 6) ...................... 12,500 --
Deferred rent payable (Note 10) ................................ 2,165 --
Other current liabilities ...................................... 1,139 --
--------- --------
Total Current Liabilities ................................... 67,187 1,894
Credit facilities with related parties (Note 8) ................ 121,848 40,981
Secured credit facility (Note 5) ............................... 44,407 --
Notes payable (Note 6) ......................................... 108,125 --
Deferred rent payable (Note 10) ................................ 22,794 --
Other liabilities .............................................. 28,175 --
--------- --------
TOTAL LIABILITIES ........................................... 392,536 42,875
--------- --------
MINORITY INTEREST .............................................. 35,338 --
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 10) ................. -- --
SHAREHOLDERS' EQUITY: (NOTES 1 AND 7)
Preferred stock, $.01 par value 25,000,000 shares authorized,
none issued ................................................... -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
30,672,794 and 24,685,514 shares issued and outstanding, at
December 31, 1999 and December 31, 1998, respectively ......... 307 247
Additional paid in capital ..................................... 162,054 24,126
Accumulated deficit ............................................ (48,252) (8,405)
--------- --------
TOTAL SHAREHOLDERS' EQUITY 114,109 15,968
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................. $ 541,983 $ 58,843
========= ========
(See accompanying notes to consolidated financial statements)
IV-7
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
FOR THE PERIOD
JULY 15, 1997
FOR THE FOR THE (COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) TO
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------- ------------------
OPERATING REVENUES:
Executive office suite income ......................... $ 124,564 $ -- $ --
Support services and other (Note 8) ................... 90,812 336 --
----------- ----------- ------
TOTAL OPERATING REVENUES ............................. 215,376 336 --
----------- ----------- ------
OPERATING EXPENSES:
Cost of revenue ....................................... 175,454 -- --
Partner Company general and administrative expenses. 11,995 -- --
----------- ----------- ------
TOTAL OPERATING EXPENSES ............................. 187,449 -- --
----------- ----------- ------
PARTNER COMPANY OPERATING INCOME ..................... 27,927 336 --
----------- ----------- ------
OTHER INCOME ( EXPENSES):
Merger and integration costs (Note 2) ................. (26,730) -- --
Corporate general and administrative expenses ......... (9,509) (2,613) (479)
Depreciation and amortization ......................... (15,680) (1,260) (8)
Amortization of deferred charges (Note 7) ............. (8,455) -- --
Interest (expense) income (Note 8) .................... (18,432) (644) 6
----------- ----------- --------
LOSS BEFORE BENEFIT FOR INCOME TAXES, MINORITY INTEREST
AND EQUITY IN EARNINGS (LOSS) OF PARTNER COMPANIES
AND OTHER OWNERSHIP INTEREST ......................... (50,879) (4,181) (481)
Benefit for income taxes .............................. 2,841 -- --
----------- ----------- --------
LOSS BEFORE MINORITY INTEREST AND EQUITY IN EARNINGS
(LOSS) OF PARTNER COMPANIES AND OTHER OWNERSHIP
INTEREST ............................................. (48,038) (4,181) (481)
Minority interest ..................................... 18,790 -- --
Equity in earnings (loss) of Partner Companies and
other ownership interest (Note 3) .................... (10,599) (3,966) 223
----------- ----------- --------
NET LOSS .............................................. $ (39,847) $ (8,147) $ (258)
=========== =========== ========
Basic and diluted net loss per weighted average
common share ......................................... $ (1.56) $ (.56) $ --
=========== =========== ========
Basic and diluted weighted average common shares
outstanding .......................................... 25,600,985 14,522,513 --
=========== =========== ========
(See accompanying notes to consolidated financial statements)
IV-8
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
TOTAL
COMMON ADDITIONAL PAID IN ACCUMULATIVE SHAREHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
-------- -------------------- -------------- --------------
Initial capitalization, July 15, 1997 .............. $ -- $ 4,480 $ -- $ 4,480
Net Loss ........................................... -- -- (258) (258)
---- -------- --------- ---------
Shareholders' equity, December 31,1997 ............. -- 4,480 (258) 4,222
Distribution of shares ............................. 41 -- -- 41
Proceeds from rights offering, net of costs of
$1,296............................................. 206 19,646 -- 19,852
Net loss ........................................... -- -- (8,147) (8,147)
---- -------- --------- ---------
Shareholders' equity, December 31, 1998 ............ 247 24,126 (8,405) 15,968
Issuance of common stock ........................... 44 71,923 -- 71,967
Proceeds from the exercise of employee options. 2 274 -- 276
Issuance of Warrants (Note 3) ...................... -- 2,172 -- 2,172
Proceeds from public offering, net of costs of
$4,348............................................. 14 63,559 -- 63,573
Net loss ........................................... -- -- (39,847) (39,847)
---- -------- --------- ---------
Shareholders' equity, December 31, 1999 ............ $307 $162,054 $ (48,252) $ 114,109
==== ======== ========= =========
(See accompanying notes to consolidated financial statements)
IV-9
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE PERIOD
JULY 15, 1997
FOR THE YEAR FOR THE YEAR (COMMENCEMENT OF
ENDED ENDED OPERATIONS) TO
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .................................................... $ (39,847) $ (8,147) $ (258)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Amortization and depreciation .............................. 15,680 39 8
Equity in (earnings) loss of Partner Companies and
other ownership interest ................................. 10,599 3,966 (223)
Minority interest .......................................... (18,790) -- --
Benefit for income taxes ................................... (2,841) -- --
Non-cash compensation ...................................... 18,000 -- --
Changes in operating assets and liabilities:
Accounts receivable, net ................................... (1,329) -- --
Other assets ............................................... (6,532) (1,453) (30)
Equipment .................................................. (341) (115) --
Deferred rent .............................................. 4,889 -- --
Organization and pre-acquisition costs ..................... -- 658 (690)
Accounts payable and accrued expenses ...................... 32,762 1,774 119
Other liabilities .......................................... 88 -- --
Affiliates receivables ..................................... 7,427 (11,741) 2,345
---------- --------- --------
Net cash provided by (used in) operating activities ......... 19,765 (15,019) 1,271
---------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of Executive Office Suite Centers ............. (88,870) -- --
Restricted cash ............................................ (10,318) -- --
Acquisition of ownership interests and advances to
Partner Companies ........................................ (111,572) (30,077) (325)
Other ownership interest ................................... (20,760) (13,882) (1,674)
---------- --------- --------
Net cash used in investing activities ....................... (231,520) (43,959) (1,999)
---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock, net .............................. 69,911 -- --
Capital contributions ...................................... -- -- 857
Deferred financing costs ................................... (4,398) -- --
Costs of capital ........................................... (457) -- --
Net proceeds from credit facilities with related
parties .................................................. 128,492 40,982 --
Capital leases ............................................. (2,226) -- --
Exercise of options ........................................ 3,125 -- --
Net proceeds from secured credit facility .................. 44,407 -- --
Net proceeds from rights offering .......................... -- 19,893 --
---------- --------- --------
Net cash provided by financing activities .................. 238,854 60,875 857
---------- --------- --------
CASH AND CASH EQUIVALENTS:
Net increase ............................................... 27,099 1,897 129
Beginning of year .......................................... 5,641 129 --
---------- --------- --------
End of year ................................................ $ 32,740 $ 2,026 $ 129
========== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ..................... $ 14,253 $ 816 $ --
========== ========= ========
Cash paid during the year for income taxes ................. $ 2,009 $ -- $ --
========== ========= ========
(See accompanying notes to consolidated financial statements)
IV-10
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. DESCRIPTION OF THE COMPANY
Reckson Service Industries, Inc. and Subsidiaries d/b/a FrontLine Capital
Group ("FrontLine" or the "Company"), was formed on July 15, 1997. FrontLine is
a publicly-traded operating company that identifies, acquires interests in, and
develops a network of business-to-business ("B2B") e-commerce and e-service
companies (the "Partner Companies") that service small and medium sized
enterprises, independent professionals and the mobile workforce of larger
companies.
The Company acquires significant, long-term stakes in targeted Partner
Companies, which it incorporates into a collaborative network of e-commerce and
e-services companies, seeking to accelerate their growth and increasing their
likelihood of success. FrontLine has developed an extensive e-Cooperative
platform that allows its Partner Companies to benefit from its operational and
management resources and experience, the Company's extensive customer base as
well as gain significant synergies from other existing and future Partner
Companies. The e-Cooperative consists of the:
o enterprise Development Group ("eDG") -- eDG offers strategic guidance,
organizational design, human resources, recruiting and technology
assistance to its Partner Companies,
o Collaborative network of Partner Companies -- Enables Partner Companies
to share collective knowledge and benefit from cross-selling and
cross-marketing business development opportunities,
o Advisory Board -- The Advisory Board of independent industry
professionals will supplement FrontLine's eDG by providing management
guidance to Partner Companies and sourcing new business opportunities.
The Company's strategy is to continue to expand its network of Partner
Companies and its e-Cooperative platform by pursuing additional acquisitions
that complement and enhance the overall network. FrontLine seeks to add
significant value to its Partner Companies with the goal of creating industry
leaders that have the potential to become public companies, act as industry
consolidators or merge with the proper strategic partners. FrontLine targets
early stage companies that can benefit from FrontLine's entire franchise and
therefore have the potential to create significant value for FrontLine.
FrontLine seeks to focus its future acquisitions in the Internet sector by
targeting three types of B2B e-commerce and e-services companies:
o Internet-based outsourcing (i.e. companies that utilize the Internet to
enable the outsourcing of non-core business functions),
o e-commerce and infrastructure (i.e. companies that primarily deliver or
enable the delivery of goods and services over the Internet),
o Virtual office solutions (i.e. companies that combine a physical
infrastructure with an Internet enabled model to enhance the delivery of
their services).
Although the Company refers to the companies in which it has acquired an equity
and cost ownership interest as its "Partner Companies" and that it has a
"partnership" with these companies, it does not act as an agent or legal
representative for any of these companies, it does not have the power or
authority to legally bind any of its Partner Companies and it does not have the
types of liabilities in relation to its Partner Companies that a general
partner of a partnership would have.
IV-11
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED )
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements present the
consolidated financial position of the Company and its majority owned
subsidiaries, VANTAS Incorporated ("VANTAS") and OneXstream.com, Inc. at
December 31, 1999 and 1998 and the results of their operations and their cash
flows for the years ended December 31, 1999 and 1998 and for the period July
15, 1997 to December 31, 1997. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
CHANGE IN ACCOUNTING PRINCIPLE
In 1999, the Company changed its balance sheet presentation to a
classified balance sheet. The balance sheet in prior years, beginning in 1998,
was presented as unclassified. The new method was adopted in conjunction with
the consolidation of VANTAS, a service company, and has been applied to the
prior year's balance sheet to conform to the 1999 presentation. The change has
no effect on the consolidated statement of operations.
ACCOUNTING FOR OWNERSHIP INTERESTS IN PARTNER COMPANIES AND OTHER OWNERSHIP
INTEREST
The interests that FrontLine acquires in its Partner Companies and other
ownership interest are accounted for under one of three methods: consolidation,
equity method and cost method. The applicable accounting method is generally
determined based on the Company's voting interest and rights in a Partner
Company.
Consolidation. Partner Companies in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities are
generally accounted for under the consolidation method of accounting. Under
this method, a Partner Company's results of operations are reflected within the
Company's Consolidated Statements of Operations. All significant inter-company
accounts and transactions have been eliminated. Participation of other Partner
Company shareholders in the earnings or losses of a consolidated Partner
Company are reflected in the caption "Minority interest" in the Company's
Consolidated Statements of Operations. Minority interest adjusts the Company's
consolidated results of operations to reflect only the Company's share of the
earnings or losses of the consolidated Partner Company.
Equity Method. Partner Companies and other ownership interests whose
results are not consolidated, but over whom the Company exercises significant
influence, are accounted for under the equity method of accounting. Whether or
not the Company exercises significant influence with respect to a Partner
Company or other ownership interest depends on an evaluation of several factors
including, among others, representation on the Partner Company's or other
ownership interest's Board of Directors and ownership level, which is generally
a 20% to 50% interest in the voting securities of the Partner Company and other
ownership interests, including voting rights associated with the Company's
holdings in common, preferred and any other convertible instruments in the
Partner Company and other ownership interests. Under the equity method of
accounting, a Partner Company's or other ownership interest's accounts are not
reflected within the Company's Consolidated Statements of Operations; however,
FrontLine's share of the earnings or losses of the Partner Company or other
ownership interest is reflected in the caption "Equity in earnings (loss) of
Partner Companies and other ownership interests" in the Consolidated Statements
of Operations.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of Partner Companies or other ownership interests
accounted for under the consolidation or equity method of accounting is
amortized on a straight-line basis over 30 years which adjusts the Company's
share of the Partner Company's or other ownership interest's earnings or
losses.
IV-12
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Cost Method. Partner Companies not accounted for under the consolidation
or the equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations.
The Company also recognizes income from dividends on distributed earnings of
its Partner Companies. However, cost method impairment charges are recognized
in the Consolidated Statement of Operations with the new cost basis not
written-up if circumstances suggest that the value of the Partner Company has
subsequently recovered.
The Company records its ownership interest in debt securities of Partner
Companies accounted for under the cost method at cost as it has the ability and
intent to hold these securities until maturity. The Company records its
ownership interests in equity securities of Partner Companies accounted for
under the cost method at cost, unless these securities have readily
determinable fair values based on quoted market prices, in which case these
interests would be classified as available-for-sale securities or some other
classification in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". In addition to the Company's investments in voting and non-voting
equity and debt securities, it also periodically makes advances to its Partner
Companies in the form of promissory notes which are accounted for in accordance
with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan".
The Company continually evaluates the carrying value of its ownership
interests in and advances to each of its Partner Companies for possible
impairment based on achievement of business plan objectives and milestones, the
value of each ownership interest in the Partner Company relative to carrying
value, the financial condition and prospects of the Partner Company, and other
relevant factors. The business plan objectives and milestones the Company
considers include, among others, those related to financial performance such as
achievement of planned financial results or completion of capital raising
activities, and those that are not primarily financial in nature such as the
launching of a web site, business development activities, or the hiring of key
employees. The fair value of the Company's ownership interests in and advances
to privately held Partner Companies is generally determined based on the value
at which independent third parties have invested or have committed to invest in
the Partner Companies.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
RESTRICTED CASH
VANTAS has restricted cash of approximately $21.6 million that was held at
December 31, 1999 for future acquisitions of executive office suite centers.
REVENUE RECOGNITION
The Company's operating revenues for the year ended December 31, 1999 were
primarily attributable to VANTAS. VANTAS' revenue is derived primarily from the
operation of their executive office suites and the range of telecommunication
and business support services provided to clients, and are recognized as the
related services are provided.
RECEIVABLES AND CONCENTRATION OF CREDIT RISK
VANTAS performs credit evaluations of its clients and generally requires
at least two months' rent as a security deposit. VANTAS facilities are located
primarily throughout the United States, which limits VANTAS' exposure to
certain economic risks, based upon local economic conditions.
IV-13
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
VANTAS' cash balances are held primarily at one financial institution and
may, at times, exceed insurable amounts. VANTAS believes it mitigates its risk
by investing in or through a major financial institution. Recoverability would
be dependent upon the performance of the institution.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets which
range from five to seven years. Leasehold improvements are amortized over the
lesser of the term of the related lease or the estimated useful lives of the
assets. As of December 31, 1999, accumulated depreciation was approximately
$14.0 million.
If there is an event or a change in circumstance 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.
DEFERRED FINANCING COSTS
The Company has amortized deferred financing costs over the term of the
related debt. As of December 31, 1999, accumulated amortization was
approximately $2.0 million.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill which is the excess of the
purchase price over the net assets of acquired companies by FrontLine and is
being amortized on the straight-line method primarily over 30 years. As of
December 31, 1999 accumulated amortization was approximately $9.0 million.
If there is an event or change in circumstances that indicates that the
basis of FrontLine's long-lived intangibles may not be recoverable, FrontLine'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.
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.
MERGER AND INTEGRATION COSTS
VANTAS incurred merger and integration costs during the year ended
December 31, 1999 in connection with its merger with FrontLine. Such charges
consisted primarily of compensation expense, professional fees, business
process re-engineering and other integration costs.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options and grants because
the alternative fair value accounting provided for under Financial Accounting
Standard Board ("FASB") Statement No. 123, "Accounting for Stock-Based
Compensation," ("FAS 123") requires the use of option valuation models that
were not developed for use in valuing employee stock options.
IV-14
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES
At inception, the Company adopted SFAS No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which prescribes an asset and liability method of
accounting for income taxes. Under SFAS 109, deferred tax assets are recognized
for temporary differences that will result in deductible amounts in future
years. A valuation allowance is recognized if it is more likely than not that
some portion of the deferred asset will not be recognized. The Company has
recognized a deferred tax asset of $9.9 million attributable to VANTAS at
December 31, 1999. The remaining deferred tax assets at December 31, 1999 and
1998 have been reserved for 100% due to the uncertainty as to whether these
assets will have benefit in future periods.
VANTAS accounts for income taxes under the liability method which requires
recognition of deferred tax assets and liabilities based upon the expected
future tax consequences of events included in VANTAS' 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. At December 31, 1999, VANTAS
recognized a current income tax benefit of approximately $2.8 million.
EARNINGS PER SHARE
In 1997, the FASB issued Statement No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented to conform to the SFAS 128
requirements.
COMPREHENSIVE INCOME
In 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income
("SFAS 130") which is effective for fiscal years beginning after December 15,
1997. SFAS 130 established standards for reporting comprehensive income and its
components in a full set of general-purpose financial statements. SFAS 130
requires that all components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The adoption of this standard had no impact on the Company's
financial position or results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments"
requires FrontLine to disclose the estimated fair values of its financial
instrument assets and liabilities. The carrying amounts approximate fair value
for cash and cash equivalents because of the short maturity of those
instruments. For the loans payable to affiliates and others, the estimated fair
value approximates the recorded balance.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In 1997, the FASB issued Statement No. 131 "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131") which is effective for
fiscal years beginning after December 15, 1997. SFAS 131 establishes standards
for reporting information about operating segments in annual financial
statements and in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The adoption of this standard had no impact on the Company's
financial position or results of operations, but did effect the disclosure of
segment information, see Note 13.
IV-15
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1999, the FASB issued Statement No.137, amending Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
extended the required date of adoption in the years beginning after June 15,
2000. The Statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Company expects to adopt the new Statement
effective January 1, 2001. The Company does not anticipate that the adoption of
this Statement will have any effect on its results of operations or financial
position.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES
Partner Companies at December 31, 1999 and December 31, 1998 included:
VOTING OWNERSHIP ON A BASIC VOTING OWNERSHIP ON A DILUTED
BASIS BASIS
----------------------------- ----------------------------
PARTNER APPLICABLE
COMPANY ACCOUNTING DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
SINCE METHOD 1999 1998 1999 1998
--------- --------------- -------------- -------------- -------------- -------------
AdOutlet.com .................... 1999 Cost 12% N/A 10% N/A
CommerceInc. Corporation ........ 1999 Equity 31% N/A 26% N/A
DitigalWork.com ................. 1999 Cost <1% N/A <1% N/A
EmployeeMatters, Inc. ........... 1999 Equity 53% N/A 45% N/A
Giftcertificates.com ............ 1999 Cost <1% N/A <1% N/A
LiveCapital.com ................. 2000 Cost **4% N/A **4% N/A
Neo Carta Ventures .............. 1999 Cost 4% N/A 4% N/A
OneXstream.com, Inc. ............ 1998 Consolidation 93% 59% 80% 59%
OnSite Access, Inc. ............. 1997 Equity 37% 1% 22% 1%
Opus360 Corporation ............. 1999 Cost <1% N/A <1% N/A
RealtyIQ.com .................... 1999 Equity 68% N/A 54% N/A
UpShot.com ...................... 2000 Equity **20% N/A **18% N/A
VANTAS Incorporated ............. 1998 Consolidation *84% 21% *76% 21%
- ----------
* Included additional ownership interest acquired in January 2000.
** Ownership interest acquired in February 2000.
The Company's ownership interests in Partner Companies are classified
according to the applicable accounting method utilized at December 31, 1999 and
1998. The carrying value represents the Company's acquisition cost less any
impairment charges, plus or minus the Company's share of such Partner
Companies' income or loss. The cost basis represents the Company's acquisition
costs less any impairment charges in such Partner Companies. The Company's
ownership interests in and advances to Partner Companies accounted for under
the equity method or cost method of accounting are as follows (in thousands):
IV-16
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES - (CONTINUED)
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------- ------------------------------
CARRYING VALUE COST BASIS CARRYING VALUE COST BASIS
---------------- ------------ ---------------- -----------
Equity Method ......... $54,807 $65,741 $30,277 $30,402
Cost Method ........... 6,400 6,400 -- --
------- -------
$61,207 $30,277
======= =======
The following are the Company's summarized earnings/(losses) on ownership
interests in Partner Companies (in thousands):
FOR THE PERIOD
JULY 15, 1997
(COMMENCEMENT OF
FOR THE YEAR ENDED FOR THE YEAR ENDED OPERATIONS) TO
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- -------------------- ------------------
VANTAS and predecessor entities ......... $ -- $ (95) $ --
OnSite Access, Inc. and predecessor
entity ................................. (8,137) (30) --
EmployeeMatters,Inc. .................... (2,230) -- --
CommerceInc. Corporation ................ (526) -- --
RealtyIQ.com ............................ (11) -- --
Other ownership interests ............... -- 119 223
--------- ----- -----
Net income (loss) on ownership interests
in Partner Companies ................... $ (10,904) $ (6) $ 223
========= ===== =====
The Company's ownership interests in Partner Companies are summarized as
follows:
EXECUTIVE OFFICE SUITES AND VIRTUAL OFFICE SERVICES
- ---------------------------------------------------
VANTAS AND PREDECESSOR ENTITIES
On January 8, 1999, InterOffice Superholdings Corporation ("InterOffice")
(36 executive office suite centers) and Reckson Executive Centers, Inc.
("Reckson Executive") (8 executive office suite centers) merged with Alliance
National Incorporated, a holding company which owned and operated approximately
90 nationally located executive office suite centers (the "Merger"). To
effectuate the merger, the Company contributed approximately $21.4 million of
assets. The merged entity changed its name to VANTAS Incorporated ("VANTAS").
The stockholders of InterOffice and Reckson Executive received convertible
Series C Preferred Stock of VANTAS representing approximately 40% of the equity
interest in VANTAS of which approximately 23% of VANTAS was owned by the
Company as of the merger.
As of December 31, 1999, VANTAS operates 201 business centers in 27
states, the District of Columbia, France and Mexico and manages 5 others for
unrelated property owners. VANTAS 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. VANTAS does not own the real estate in which the business centers
are located.
During the third quarter of 1999, the Company increased its ownership in
VANTAS to approximately 35% on a basic basis and 29% on a diluted basis through
an additional $23.0 million equity ownership interest as a part of a $30.0
million financing by VANTAS.
IV-17
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES - (CONTINUED)
Subsequently, the Company entered into a number of stock purchase
agreements with other VANTAS stockholders to increase its ownership to
approximately 84% on a basic basis and 76% on a diluted basis. The terms to
acquire these VANTAS shares were generally to pay 70% of the purchase price in
cash and the remaining 30% in FrontLine stock, which at the time had a value of
$19.00 per share. The closings for these transaction have been taking place
periodically since November 30, 1999 and are anticipated to be completed by
March 31, 2000. As of December 31, 1999, the Company had expended approximately
$59.8 million in cash and issued 1,828,099 shares of its common stock. In
closings subsequent to December 31, 1999, the Company has paid approximately
$42.0 million in cash and issued 1,294,103 shares of its common stock. One
final closing remains, at which time the Company will pay a balance of
approximately $1.3 million in cash.
As a result of this stepped acquisition during 1999 of a controlling
interest in VANTAS, the Company changed the accounting method for its
investment in VANTAS from the equity method to consolidation during the fourth
quarter of 1999.
E-BUSINESSES
- ------------
ONSITE ACCESS
In 1998, the Company had owned a 1% interest on a basic and diluted basis
in On-Site Ventures, LLC, ("On-Site"), a company that provides advanced
telecommunications systems and services within commercial buildings and/or
building complexes. The Company had also advanced On-Site $6.5 million through
December 31, 1998 to fund operating costs under the terms of a 12% subordinated
convertible note.
On April 16, 1999, the Company contributed approximately $5.25 million to
On-Site as part of a $60.0 million private equity financing agreement (the
"Financing Transaction") which included FrontLine and several strategic third
party private equity investors. The equity agreement required the Company to
fund up to $15 million. On July 1, 1999, On-Site merged into OnSite Access,
Inc. ("OnSite Access"), a Delaware corporation whereby, closings were completed
for approximately $20.5 million of additional equity in connection with the
Financing Transaction. The investors, including FrontLine, in the Financing
Transaction were committed to invest the remaining $39.5 million, subject only
to satisfaction of the conditions of the Financing Transaction and the
corporation's call for funds. In addition, in connection with the merger, the
principal and accrued interest outstanding under the $6.5 million subordinated
FrontLine loan was converted into 5,869,000 shares of Preferred Stock issued to
FrontLine. On October 15, 1999, the Company increased its ownership in OnSite
Access by 7% to 36% on a basic basis by issuing 1,731,597 shares of common
stock valued at $13.63 per share to another OnSite Access shareholder. At
December 31, 1999, FrontLine had funded its entire capital commitment and owns
approximately 37% and 22% of OnSite Access on a basic and diluted basis,
respectively.
IV-18
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES - (CONTINUED)
Summarized financial information and a summary of the Company's investment in
and advances to OnSite Access and FrontLine's share of its loss is as follows
(in thousands):
BALANCE SHEET
DECEMBER 31, 1999
------------------
Current assets ........................................................ $ 25,535
Property and equipment (net) .......................................... 20,052
Intangibles (net) ..................................................... 25,055
Other assets .......................................................... 4,132
---------
Total Assets .......................................................... $ 74,774
=========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities ................................................... $ 13,702
Other Liabilities ..................................................... 1,913
---------
Total Liabilities .................................................. 15,615
---------
REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT):
Non FrontLine preferred and common stock .............................. 104,274
Stockholders' loans for restricted stock .............................. (2,471)
Deferred equity compensation .......................................... (24,878)
Accumulated deficit ................................................... (40,732)
---------
FrontLines' net investment in OnSite Access ........................... 39,017
Add: Net loss allocation .............................................. 8,137
Less: Payment to OnSite shareholder ................................... (23,593)
Less: Excess acquisition costs ........................................ (595)
---------
FrontLine preferred and common stock in OnSite Access ................. 22,966
---------
Total Redeemable Preferred Stock and Stockholders' Equity (deficit) 59,159
---------
Total Liabilities and Stockholders' Equity (deficit) ............... $ 74,774
=========
IV-19
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
3. OWNERSHIP INTERESTS IN PARTNER COMPANIES - (CONTINUED)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 1999
-------------------
Revenues ..................................... $ 3,646
---------
Expenses:
Direct costs of revenue ..................... 3,090
Selling, general and administrative ......... 29,361
Depreciation and amortization ............... 2,838
Interest expense (net) ...................... 899
---------
Total operating expenses ..................... 36,188
Net loss ..................................... (32,542)
---------
Other interests, share of net loss ........... (24,405)
---------
FrontLines' share of net loss ................ $ (8,137)
=========
OTHER E-BUSINESSES
On August 11, 1999, FrontLine acquired a 53% on a basic basis and 45%
noncontrolling interest on a fully diluted basis in EmployeeMatters, Inc.
("EmployeeMatters") for a purchase price of $15.0 million. At the time, $5
million was paid in cash and $10 million was in the form of a note.
EmployeeMatters is an Internet-based employee benefits and human administration
outsourcing company targeting small and medium-size businesses.
FrontLine acquired Series A Preferred Stock of EmployeeMatters which is
convertible into shares of common stock of EmployeeMatters. The Preferred Stock
will convert automatically in the event EmployeeMatters completes an initial
public offering within certain parameters. FrontLine is also committed to
invest an additional $7.5 million in connection with a future equity funding.
FrontLine also entered into a Stockholders' Agreement and a Registration Rights
Agreement in respect of certain governance, voting and stockholder rights,
including rights with respect to board representation, rights of first offer
with respect to their EmployeeMatters stock, pre-emptive rights, registration
rights and other matters.
In December 1999, the Company issued warrants to purchase 200,000 shares
of the Company's common stock to the executive officers of EmployeeMatters in
exchange for options to purchase 789,474 shares of EmployeeMatters. The fair
market value of these warrants is approximately $2.2 million, as determined by
the Black-Scholes valuation pricing model. This value is included in the
Company's investment in EmployeeMatters at December 31, 1999.
In 1999, the Company has invested approximately $15.5 million and issued
approximately 53,000 shares of its common stock for non-controlling interests
in seven other e-business Partner Companies.
Subsequent to December 31, 1999, the Company has invested approximately
$23.5 million to purchase ownership interests in two other e-business
companies.
IV-20
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED )
4. PARENT COMPANY FINANCIAL INFORMATION
The Company's consolidated financial statements reflect VANTAS accounted
for under the consolidation method of accounting for the year ended December
31, 1999 and VANTAS under the equity method of accounting for the year ended
December 31, 1998.
Parent company financial information is provided to present the financial
position and results of operations of the Company as if VANTAS was accounted
for under the equity method of accounting for all years presented. The
Company's share of VANTAS losses is included in "Equity in earnings (loss)
Partner Companies and other ownership interests" in the Parent Company
Statements of Operations for all years presented based on the Company's
ownership percentage of in each period.
PARENT COMPANY BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- ------------------
ASSETS
Current assets ....................................... $ 28,933 $ 2,026
Ownership interests in and advances to Partner
Companies .......................................... 197,859 30,277
Other assets ......................................... 67,089 26,540
--------- --------
TOTAL ASSETS ....................................... $ 293,881 $ 58,843
========= ========
Liabilities and Shareholders' Equity
Current liabilities .................................. $ 13,372 $ 1,894
Non-current liabilities .............................. 166,255 40,982
Shareholders' equity ................................. 114,254 15,967
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......... $ 293,881 $ 58,843
========= ========
FOR THE PERIOD
JULY 15, 1997
FOR THE YEAR FOR THE YEAR (COMMENCEMENT OF
ENDED ENDED OPERATIONS) TO
PARENT COMPANY STATEMENTS OF OPERATIONS DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
(IN THOUSANDS) ------------------- ------------------- ------------------
Revenues ................................ $ 333 $ 336 $ --
---------- --------- ------
Operating expenses ...................... (9,509) (2,613) (479)
Other expenses .......................... (9,130) (1,260) (8)
Interest (expense) income ............... (8,167) (644) 6
---------- --------- --------
Total expenses .......................... 26,806 4,517 (481)
---------- --------- --------
Loss before equity in earnings income
(loss) of Partner Companies ............ (26,473) (4,181) (481)
Equity in earnings (loss) of Partner
Companies and other ownership
interests .............................. (13,228) (3,966) 223
---------- --------- --------
Net loss ................................ $ (39,701) $ (8,147) $ (258)
========== ========= ========
IV-21
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED )
5. SECURED CREDIT FACILITY
On November 30, 1999, the Company entered into a $60 million credit
facility (the "Credit Facility") with a significant financial institution. The
Credit Facility matures on May 30, 2000, and provides for a three month
extension provision. FrontLine's ability to borrow under the Credit Facility is
subject to the satisfaction of certain financial covenants. Borrowings under
the Credit Facility are secured directly or indirectly by 17,452,876 shares of
VANTAS and 21,837,184 shares of OnSite Access. As of December 31, 1999, the
total outstanding on the Credit Facility was approximately $44.4 million. The
balance of the facility was drawn subsequent to year end.
6. NOTES PAYABLE
VANTAS currently has a credit agreement with various lending institutions
for $157.9 million. The credit agreement provides for a $5 million acquisition
loan commitment, $127.9 million term loans, and a $25 million revolving loan
commitment, including letters of credit. The credit agreements contain certain
covenants dealing with debt to equity ratios.
During 1999, interest on each commitment ranged from LIBOR plus 3.00%
(9.5% at December 31, 1999) to LIBOR plus 3.75% (10.25% at December 31, 1999)
for a one, three or six month period, at the election of VANTAS. During 1998,
interest on each commitment ranged from LIBOR plus 3.00% (8.56% at December 31,
1998) to LIBOR plus 3.5% (9.06% at December 31, 1998) for a one, three or six
month period, at the election of VANTAS.
Pursuant to the credit agreement, the lending institutions have an
assignment of leases and rents associated with VANTAS' business centers to
collateralize the notes payable.
ACQUISITION LOAN COMMITMENT
The credit agreement provides VANTAS with an acquisition loan commitment
which allows VANTAS to make acquisitions subject to certain terms and
conditions. As of December 31, 1999, VANTAS had no borrowings outstanding under
the acquisition loan commitment. In accordance with the credit agreement,
VANTAS cannot borrow under the acquisition loan commitment after November 6,
2000. Principal repayments under the acquisition loan commitment shall commence
on December 31, 2001 and are based upon percentages of the amount borrowed as
follows:
PERIOD REPAYMENT PERCENTAGE
- ------------------------------------- ---------------------
December 2001-September 2002 2.5% quarterly
December 2002-September 2003 10% quarterly
November 2003 50%
TERM LOANS
The $38 million Term Loan A had $31 million outstanding at December 31,
1999 which requires quarterly principal payments. The final principal payment
is due on June 30, 2002.
The $89.9 million Term Loan B had $89.6 million outstanding at December
31, 1999 which requires quarterly principal payments. The final principal
payment is due on November 6, 2005.
At December 31, 1999, $21.5 million of the Term Loan was funded into a
cash collateral account that VANTAS will be permitted to utilize in connection
with permitted acquisitions.
IV-22
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
6. NOTES PAYABLE - (CONTINUED)
The total future principal repayments as of December 31, 1999 for the Term
Loans of VANTAS for each of the next five fiscal years are (in thousands):
TERM A TERM B TOTAL
---------- ---------- -----------
2000 ..................... $12,000 $ 500 $ 12,500
2001 ..................... 14,300 500 14,800
2002 ..................... 4,700 15,250 19,950
2003 ..................... -- 19,500 19,500
2004 ..................... -- 23,751 23,751
Thereafter ............... -- 30,124 30,124
------- ------- --------
$31,000 $89,625 $120,625
======= ======= ========
REVOLVING LOAN COMMITMENT
The $25 million revolving loan commitment, which expires on November 6,
2003, had no outstanding balance at December 31, 1999.
At December 31, 1999, VANTAS had outstanding letters of credit of
approximately $10.1 million for landlord security deposits which reduced the
borrowings available under the revolving loan commitment.
The carrying value of the notes payable approximates its fair value as of
December 31, 1999.
7. SHAREHOLDERS EQUITY
The Company has established the 1998 stock option plan, 1998 "broad based"
stock option plan and 1999 stock option plan (the "Plans") for the purpose of
attracting and retaining directors, executive officers, other key employees and
advisory board members. As of December 31, 1999, 3,700,376, 100,000 and
1,750,000 of the Company's authorized shares have been reserved for issuance
under the 1998 stock option plan, 1998 "broad based" stock option plan and 1999
stock option plan, respectively.
The following table sets forth the outstanding options and their
corresponding exercise price per share:
OPTIONS EXERCISE PRICE RANGE
----------- ---------------------
GRANTED FROM TO
----------- --------------------- -----------
1998 Stock Option Plan ..................... 3,700,376 $ 1.04 $ 2.00
1998 Broad Based Stock Option Plan ......... 100,000 $ 2.00 $ 2.00
1999 Stock Option Plan ..................... 1,643,500 $ 4.63 $ 55.00
Other Options .............................. 171,165 $ 2.00 $ 28.69
---------
Total ...................................... 5,615,041
=========
Options granted to officers under the 1998 stock option plan were fully
vested on January 1, 1999. Options granted to new employees vest in three equal
installments on the first, second and third anniversaries of the date of the
grant.
Pursuant to the 1999 stock option plan, 550,000 shares of the 1,750,000
shares reserved were issued in August 1999. At December 31, 1999, the Company
has recorded deferred compensation of approximately $3.9 million, net of
amortization.
IV-23
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
7. SHAREHOLDERS EQUITY - (CONTINUED)
ADVISORY BOARD
In December 1999, the Company formed an advisory board to provide its
Partner Companies with strategic guidance and be actively involved in their
development. As of December 31, 1999, the advisory board consists of six
members. These members were granted a total of 120,000 options under the 1999
stock option plan with exercise prices ranging from $26.72 to $28.69. These
options vest in three equal installments on the first, second and third
anniversaries of the date of the grant. In accordance with FAS 123, the Company
is amortizing into compensation expense over three years the fair values of
these options determined by the Black-Scholes option valuation model.
STOCK OPTION PLANS
Options granted under the Plans are exercisable at the market price on the
date of the grant and, subject to termination of employment, expire ten years
from date of the grant, are not transferable other than on death.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of FAS 123. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999 and 1998, risk-free interest rate of 5%, no expected
dividend yield, a volatility factor of the expected market price of the
Company's common stock of 1.367 and 1.723, respectively, and a weighted-average
expected life of the option of 7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. For the years
ended December 31, 1999 and 1998 the Company's pro forma information follows:
1999 1998
------------- -------------
Pro forma net loss (in thousands) $ (43,474) $ (11,495)
--------- ---------
Basic and diluted net loss per share $ (1.70) $ (.79)
--------- ---------
A summary of the Company's stock option activity, and related information is as
follows:
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE FAIR VALUE
------------ ------------------ -----------------
Outstanding -- December 31, 1997 ......... -- $ -- $ --
Granted ................................. 3,731,541 1.16 1.15
Exercised ............................... -- -- --
Forfeited ............................... -- -- --
--------- ------- -------
Outstanding -- December 31, 1998 ......... 3,731,541 $ 1.16 $ 1.15
Granted ................................. 1,883,500 14.59 13.23
Exercised ............................... (210,000) 1.31 1.24
Forfeited ............................... -- -- --
--------- -------- --------
Outstanding -- December 31, 1999 ......... 5,405,041 $ 15.78 $ 14.35
========= ======== ========
IV-24
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
7. SHAREHOLDERS EQUITY - (CONTINUED)
As part of the Company's ongoing investment in organizational
infrastructure and the retention of high quality senior management, certain
incentive stock option awards were granted on March 24, 1999 when the closing
stock price was $4.625. These incentive compensation awards were subject to
stockholder approval of the 1999 Stock Option Plan which occurred on June 24,
1999, when the closing stock price was $14.9375. Pursuant to financial
accounting guidelines the date for measuring compensation costs would be June
24, 1999. These awards vest over various periods ranging from six months to
three years and include tax loans which will be forgiven one year thereafter.
During the year ended December 31, 1999, results include approximately $8.5
million or $0.33 per basic and diluted share, associated with these awards, the
majority, of which is non-cash in nature.
On December 16, 1999, the Company issued 1,437,500 shares of it's common
stock in a public offering at $47.25 per share for an aggregate consideration
of approximately $63.9 million.
Subsequent to December 31, 1999, the Company completed preferred stock
offerings of 23,000 shares of 8.875% Cumulative Convertible Preferred Stock, at
a price of $1,000 per share with net proceeds of $21.7 million. These shares
are convertible into the Company's common stock at prices ranging from $66.30
to $75.08.
In January 2000, the Board of Directors for the Company approved the 2000
stock option plan and reserved 2,500,000 shares of common stock for issuance.
8. TRANSACTIONS WITH RELATED PARTIES
On June 15, 1998, the Company established a credit facility with Reckson
Operating Partnership, L.P. ("Reckson") in the amount of $100 million
("FrontLine Facility") for their service sector operations and other general
corporate purposes. Reckson has advanced the Company approximately $79.5
million at December 31, 1999. These advances bear interest at 12% per annum.
Additionally, FrontLine established a $100 million RSVP Facility with Reckson
for funding the Reckson Strategic investments. As of December 31, 1999, Reckson
has advanced FrontLine approximately $42.3 million under the RSVP Facility and
has invested approximately $24.8 million under the facility in joint ventures
with Reckson Strategic. The total outstanding at December 31, 1999, owed by
FrontLine under both credit facilities was approximately $121.8 million.
Interest accrued on these facilities at December 31, 1999, was approximately
$5.5 million. Both of the FrontLine and RSVP facilities expire in June 2003.
Currently, the Company has two short term open letters of credit totaling $7.7
million, which have been utilized as consideration for future FrontLine
investment acquisitions. These letters of credit decrease the availability
under the FrontLine Facility.
In November 1999, the Board of Directors of both FrontLine and Reckson
approved amendments to the credit facilities necessary in order for FrontLine
to proceed with certain short-term financings for proposed acquisitions. As
consideration for such approvals, FrontLine paid a fee to Reckson in the form
of 176,186 shares of FrontLine common stock which have been valued at $20.31
per share. The fee of approximately $3.6 million has been included in deferred
financing costs and is generally being amortized over the estimated nine month
benefit period.
The Company is entitled to a cumulative annual management fee of $2
million with respect to Reckson Strategic, of which $1.5 million is subordinate
to Paine Webber receiving an annual minimum rate of return of 16% and a return
of its capital. The unsubordinated amounts for the years ended December 31,
1999 and 1998 were approximately $.5 million and $.4 million, respectively.
The Company reimburses Reckson with respect to general and administrative
expenses (including payroll expenses) incurred by Reckson for the benefit of
the Company. These services include payroll, human resources and accounting
services. During 1999 and 1998, the Company reimbursed approximately $.5
million and $.4 million, respectively, for such activities.
IV-25
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED )
9. OTHER OWNERSHIP INTEREST
Reckson Strategic Venture Partners, LLC ("Reckson Strategic") was formed
on March 5, 1998 to invest in operating companies with experienced management
teams in real estate and real estate related market sectors which are in the
early stages of their growth cycle or offer unique circumstances for attractive
investments, as well as platforms for future growth. Through RSVP Holdings, LLC
("Holdings"), the Company is a managing member and 100% owner of the common
equity of Reckson Strategic. New World Realty, LLC, an entity owned by two
individuals retained by Holdings, (the "RSVP Managing Directors"), acts as a
managing member of Holdings, and have a carried interest which provides for the
RSVP Managing Directors to receive a share in the profits of Reckson Strategic
after the Company and Paine Webber Real Estate Securities, Inc., ("Paine
Webber") have received certain minimum returns and a return of capital. Paine
Webber is a non-managing member and preferred equity owner who has committed
$200 million in capital (the "Preferred Equity Facility") and shares in profits
and losses of Reckson Strategic with the Company, subject to a maximum internal
rate of return of 16% of invested capital. On April 24, 1998, Paine Webber
assigned 25% of its preferred equity interest in Reckson Strategic,
representing an unfunded capital commitment of $50 million to Stratum Realty
Fund, L.P. ("Stratum"). The assignment provided Stratum with similar rights and
priorities. On March 17, 1999, Paine Webber transferred all of its rights,
title and interest in its initial invested capital to Stratum. This transfer
included the right to distributions based upon the amount of funded capital
contributions. As a result of this transfer, Stratum has funded its entire $50
million commitment as of December 31, 1999.
Summarized financial information and a summary of the Company's investment
in, advances to Holdings and FrontLine's share of loss at December 31, 1998 is
as follows (in thousands):
DECEMBER 31, 1998
------------------
BALANCE SHEET
ASSETS:
Investment in Dominion Venture Group, LLC ........................ $ 29,289
Other equity investments ......................................... 5,971
Other assets ..................................................... 9,491
--------
TOTAL ASSETS ..................................................... $ 44,751
========
LIABILITIES AND MEMBERS' EQUITY
Total Liabilities ................................................ $ 2,988
--------
Minority interest ................................................ 31,202
Preferred capital offering costs ................................. (5,000)
FrontLine ownership interest in and advances to Holdings ......... 15,561
--------
TOTAL LIABILITIES AND MEMBERS' EQUITY ............................ $ 44,751
========
IV-26
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
9. OTHER OWNERSHIP INTEREST - (CONTINUED)
FOR THE PERIOD FROM
FEBRUARY 26, 1998 TO
DECEMBER 31, 1998
---------------------
STATEMENT OF OPERATIONS
Revenues .......................................... $ 646
Net loss on equity investments .................... (3,747)
Expenses .......................................... 7,122
---------
Net loss .......................................... (10,223)
Minority interest share of loss ................... (6,264)
---------
FrontLine's share of net loss of Holdings ......... $ (3,959)
=========
In 1998, the Company made a non-cash contribution of approximately $1.9 million
to Reckson Strategic.
In 1999, the operating results for Reckson Strategic were not significant.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
VANTAS and its subsidiaries lease certain business center facilities and
their corporate offices under noncancellable operating leases expiring at
various dates through 2014. Certain of these noncancellable operating leases
provide for renewal options.
Minimum future rental payments under these noncancellable operating leases
as of December 31, 1999 for each of the next five years and in the aggregate
are approximately, (in thousands):
2000 .................... $ 87,933
2001 .................... 86,677
2002 .................... 79,617
2003 .................... 75,162
2004 .................... 67,324
Thereafter .............. 215,484
--------
$612,197
========
VANTAS is also generally obligated to reimburse the lessor for its
proportionate share of operating expenses, which are not included in the above
amounts.
OTHER
From time-to-time, legal actions are brought against the Company and its
Partner Companies in the ordinary course of business. Management believes such
matters will not have a significant adverse effect on the Company's financial
position.
11. SUPPLEMENTAL DISCLOSURES OF VANTAS NON-CASH ACTIVITIES
During the year ended December 31, 1999, VANTAS, through a merger,
obtained 45 business centers and received cash of $8.4 million in exchange for
the issuance of 13,325,424 shares of Series C Convertible Preferred Stock,
approximately $1.6 million in cash and the assumption of approximately $4.6
million in transaction related liabilities, approximately $2.1 million of
capital lease obligations, approximately $5.5 million in tenants' security
deposits, approximately $3.8 million in other long term
IV-27
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
11. SUPPLEMENTAL DISCLOSURES OF VANTAS NON-CASH ACTIVITIES- (CONTINUED)
liabilities. Net assets acquired included net accounts receivable of
approximately $2.3 million prepaid expenses and other assets of approximately
$.5 million, security deposits of approximately $.5 million, deferred income
taxes of approximately $.9 million and restricted cash of $1.3 million.
During the year ended December 31, 1999, VANTAS acquired 42 business
centers for approximately $44.9 million in cash and the assumption of
approximately $2.5 million in transaction related liabilities, approximately
$.5 million of capital lease obligations, approximately $3.6 million in
tenants' security deposits and approximately $.4 million in other long term
liabilities. Net assets acquired included net accounts receivable of
approximately $.9 million, prepaid expenses and other assets of approximately
$.8 million and security deposits and other assets of approximately $1.2
million.
During the year ended December 31, 1999, VANTAS recorded compensation
expense of approximately $12.5 million related to an agreement with certain
shareholders of VANTAS and a principal shareholder, relating to the purchase of
a portion of such shareholders' securities in VANTAS. In connection with this
agreement, certain shareholders exercised vested stock options for which VANTAS
received notes receivable of approximately $.9 million, in respect of the
aggregate exercise price for such options.
During the year ended December 31, 1999, VANTAS recorded deferred credits
of approximately $11.8 million related to tenant improvements, which are
reimbursed by landlords and amortized against rent expense over the lives of
the leases.
12. SUBSEQUENT EVENTS
On January 21, 2000, the Company executed an agreement and plan of merger
of two executive suites companies (the "Merger"), HQ Global Workplaces, and
VANTAS. The merged company will retain the name HQ Global Workplaces ("HQ
Global") and will become the world's largest virtual and physical workplace
solutions provider.
In connection with the Merger, (i) each share of the common stock of
VANTAS will be converted into the right to receive $8.00 per share in cash and
(ii) each share of the convertible preferred stock of VANTAS that is
outstanding will be converted into the right to receive that number of shares
of the surviving corporation that equal to the product of the number of shares
of the common stock of VANTAS that such stockholder would have been entitled to
receive had it converted its shares immediately prior to the Merger and the
Conversion Ratio (as defined in the Merger Agreement), subject, in each case,
to adjustment as provided in the Merger Agreement. In connection with the
Merger, VANTAS established a $35 million letter of credit as a deposit. In the
event the Merger is not consummated under certain circumstances; this letter of
credit is collateralized by 15,057,487 shares of VANTAS that are owned by
FrontLine and guaranteed by FrontLine on a nonrecourse basis.
As part of the transaction, the owners of HQ Global Workplaces will
receive $380 million in cash (inclusive of the repayment of indebtedness of
HQ's credit facility) and approximately 19 percent of the equity in HQ Global.
It is anticipated that FrontLine will own approximately 50 percent of HQ
Global. This transaction is expected to be funded with bank debt of HQ Global
and equity. The transaction is anticipated to close in April 2000. As a result
of the Merger, it is anticipated that HQ Global will be consolidated into
FrontLine.
13. SEGMENT DISCLOSURE (UNAUDITED)
Each of the segments has a managing director who reports directly to the
Board of Directors/Executive Committees, who have been identified as the Chief
Operating Decision Makers ("CODM") because of their final authority over
resource allocation decisions and performance assessment.
IV-28
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED)
13. SEGMENT DISCLOSURE (UNAUDITED) - (CONTINUED)
The CODM evaluates the operating performance of these segments based on
sectors.
FrontLine's governance and control rights are generally exercised through
Board of Directors seats and through representation on the executive committees
of the various segment entities.
The following table sets forth the Company's segments and their revenues
and expenses and other related disclosures as required by SFAS 131 for the
years ended December 31,1999 and 1998 (in thousands).
DECEMBER 31, 1999
----------------------------------------------------------------------------
EXECUTIVE OFFICE SUITES
AND OTHER
VIRTUAL OFFICE SERVICES E-BUSINESSES OPERATIONS TOTAL
------------------------- -------------- -------------- --------------
TOTAL ASSETS ................ $ 332,457 $ 61,207 $ 148,319 $ 541,983
--------- ---------- ---------- ----------
TOTAL OPERATING
REVENUES ................... 215,043 -- 333 215,376
--------- ---------- ---------- ----------
TOTAL OPERATING
EXPENSES ................... 187,449 -- -- 187,449
--------- ---------- ---------- ----------
OTHER INCOME
(EXPENSES), BENEFIT FOR
INCOME TAXES, AND
MINORITY INTEREST .......... (30,223) -- (26,952) (57,175)
--------- ---------- ---------- ----------
EQUITY IN EARNINGS
(LOSS) OF PARTNER
COMPANIES AND OTHER
OWNERSHIP INTEREST ......... -- (10,904) 305 (10,599)
--------- ---------- ---------- ----------
NET INCOME (LOSS) ........... $ (2,629) $ (10,904) $ (26,314) $ (39,847)
--------- ---------- ---------- ----------
DECEMBER 31, 1998
-------------------------------------------------------------------------
EXECUTIVE OFFICE SUITES
AND OTHER
VIRTUAL OFFICE SERVICES E-BUSINESSES OPERATIONS TOTAL
------------------------- -------------- ------------ -------------
TOTAL ASSETS ................ $ 23,176 $ 7,101 $ 28,566 $ 58,843
-------- ------- --------- ---------
TOTAL OPERATING
REVENUES ................... -- -- 336 336
-------- ------- --------- ---------
TOTAL OPERATING
EXPENSES ................... -- -- -- --
-------- ------- --------- ---------
OTHER INCOME
(EXPENSES), BENEFIT FOR
INCOME TAXES, AND
MINORITY INTEREST .......... -- -- (4,517) (4,517)
-------- ------- --------- ---------
EQUITY IN EARNINGS
(LOSS) OF PARTNER
COMPANIES AND OTHER
OWNERSHIP INTEREST ......... (95) (30) (3,841) (3,966)
-------- ------- --------- ---------
NET INCOME (LOSS) ........... $ (95) $ (30) $ (8,022) $ (8,147)
-------- ------- --------- ---------
IV-29
RECKSON SERVICE INDUSTRIES, INC. AND SUBSIDIARIES
(D/B/A FRONTLINE CAPITAL GROUP)
DECEMBER 31, 1999 AND 1998 - (CONTINUED )
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summary represents the Company's results of operations for
each quarter during 1999 and 1998 (in thousands, except share amounts):
FIRST SECOND THIRD FOURTH
1999 QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------- ------------- ------------- -------------- -------------
Revenues reported by the Company .................. $ 83 $ 83 $ 83 $ 83
Revenues reported by VANTAS ....................... 46,775 52,588 58,081 57,600
----------- ----------- ----------- -----------
Total revenues .................................... 46,858 52,671 58,164 57,683
Expenses reported by the Company .................. 1,667 8,755 6,846 9,684
Expenses reported by VANTAS ....................... 46,049 52,038 58,545 79,830
----------- ----------- ----------- -----------
Total expenses .................................... 47,716 60,793 65,391 89,514
Minority interest ................................. (466) (322) 398 19,180
Loss on ownership interests ....................... (631) (1,392) (4,911) (3,665)
----------- ----------- ----------- -----------
Net loss .......................................... $ (1,955) $ (9,836) $ (11,740) $ (16,316)
=========== =========== =========== ===========
Basic and diluted net loss per weighted average
common share ..................................... $ (0.08) $ (0.40) $ (0.47) $ (0.59)
=========== =========== =========== ===========
Basic and diluted weighted average common
shares outstanding ............................... 24,686,042 24,712,383 25,163,301 27,812,667
=========== =========== =========== ===========
FIRST SECOND THIRD FOURTH
1998 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------- ------------- ------------- ------------- -------------
Total revenues ................................ $ 47 $ 205 $ 495 $ 595
---------- ---------- ---------- ----------
Total expenses ................................ 400 595 1,004 3,525
---------- ---------- ---------- ----------
Loss on ownership interests ................... (424) (26) (735) (2,780)
---------- ---------- ---------- ----------
Net loss ...................................... $ (777) $ (416) $ (1,244) $ (5,710)
========== ========== ========== ==========
Basic and diluted net loss per weighted average
common share ................................. $ (0.20) $ (0.09) $ (0.05) $ (0.23)
========== ========== ========== ==========
Basic and diluted weighted average common
shares outstanding ........................... 3,864,573 4,513,975 24,685,514 24,685,514
========== ========== ========== ==========
The above quarterly information for 1998 has been restated to reflect the
Company's early adoption of SOP 98-5.
IV-30
Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ---------- ----------------------------------------------------------------------------------------------------------------------
3.1(1) Certificate of Incorporation
3.2 Amended and Restated By-Laws of Registrant
3.3(6) Amended and Restated Certificate of Incorporation
4.1(1) Specimen Share Certificate of Common Stock
4.2 Specimen Warrant W-1, dated December 7, 1999, in the name Elliot S. Cooperstone to purchase 100,000 shares of common
stock
4.3 Specimen Warrant W-2, dated December 7, 1999, in the name H. Thach Pham to purchase 100,000 shares of common stock
4.4 Specimen Option O-1, dated December 7, 1999, in the name of Reckson Service Industries, Inc. to purchase 394,737
shares of common stock of eSourceOne,
Inc. owned by Elliot S. Cooperstone
4.5 Specimen Option O-2, dated December 7, 1999, in the name of Reckson Service Industries, Inc. to purchase 394,737
shares of common stock of eSourceOne,
Inc. owned by H. Thach Pham
4.9(14) Certificate of Designations Establishing and Fixing the Rights of Series A-1 Cumulative Preferred Stock
4.10(14) Certificate of Designations Establishing and Fixing the Rights of Series A-2 Cumulative Preferred Stock
4.11(14) Certificate of Designations Establishing and Fixing the Rights of Series A-3 Cumulative Preferred Stock
4.12(14) Certificate of Designations Establishing and Fixing the Rights of Series A-4 Cumulative Preferred Stock
4.13(14) Certificate of Designations Establishing and Fixing the Rights of Series A-5 Cumulative Preferred Stock
4.14(14) Certificate of Designations Establishing and Fixing the Rights of Series A-6 Cumulative Preferred Stock
4.16(14) Specimen Warrant W-1, dated March 7, 2000, in the name Gorham Partners, L.P. to purchase 1,000,000 shares of common stock
4.17(14) Specimen Warrant W-2, dated March 7, 2000, in the name Gorham Partners III, L.P. to purchase 30,000 shares of common
stock
4.18(14) Specimen Warrant W-3, dated March 7, 2000, in the name Gorham Partners International, Inc. to purchase 50,000 shares
of common stock
10.0 Subscription Agreement as of February 7, 2000, by and between Reckson Service Industries, Inc. and VANTAS
Incorporated
10.1(6) Intercompany Agreement between Reckson Operating Partnership, L.P. and Reckson Service Industries, Inc. dated May
13, 1998
10.2A Amended and Restated Credit Agreement between Reckson Operating Partnership, L.P. and Reckson Service Industries,
Inc. relating to the operations of
Reckson Strategic Venture Partners, LLC dated August 4, 1999
10.2B Amended and Restated Credit Agreement between Reckson Operating Partnership, L.P. and Reckson Service Industries,
Inc. relating to the operations of
Reckson Service Industries, Inc. dated August 4, 1999
10.2C(12) Amendment to Amended and Restated Credit Agreements between Reckson Operating Partnership, L.P. and Reckson Service
Industries dated November 30,
1999
10.3(1) Limited Liability Company Agreement of OnSite Ventures, LLC
10.4(1) Limited Liability Company of RSVP Holdings, LLC
10.5A(1) Operating Agreement of Reckson Strategic Venture Partners, LLC
10.5B(1) Supplemental Agreement to Operating Agreement of Reckson Strategic Venture Partners, LLC
10.6(1) Registration Rights Agreement between Reckson Service Industries, Inc. and certain affiliates thereof dated May 13,
1998
10.7(6) Loan Agreement regarding On-Site Convertible Loans
10.8A(1) Stock Option Plan
10.8B(6) 1998 Employee Stock Option Plan
10.8C(7) 1999 Stock Option Plan
10.8D 2000 Employee Stock Option Plan
10.9(1) Employment Agreement of Steven H. Shepsman
10.10(1) Employment Agreement of Seth B. Lipsay
10.11(1) Limited Liability Company Agreement of Interoffice Superholdings, LLC by and among Interoffice Superholdings, LLC,
RSI I/O Holdings, Inc., JAH I/O, LLC
and Rieger I/O LLC
10.12 Fifth Amended and Restated Stockholders' Agreement, dated by and among VANTAS Incorporated and certain
securityholders indentified therein
10.13(2) Letter Agreement dated November 9, 1998 by and between JAH I/O LLC and Reckson Management Group, Inc., Reckson
Service Industries, Inc., RSI I/O
Holdings, Inc., and Reckson Office Centers, LLC
10.14(2) Letter Agreement by and between Reckson Service Industries, Inc., and RFIA, LLC
10.15(3) Amended and Restated Operating Agreement of Assisted Living Investments LLC
10.16(4) Operating Agreement of Dominion Venture Group LLC
10.17(5) Agreement and Plan of Merger by and among Alliance National Incorporated, Alliance Holding Inc., Interoffice
Superholdings Corporation and Interoffice
Superholdings, LLC
10.18(5) Agreement and Plan of Merger by and among Alliance National Incorporated, ANI Holdings, Inc., Reckson Executive
Centers, Inc., and Reckson Office Centers,
LLC
10.19(6) $44 million Senior Secured Promissory Note of On-Site Ventures, LLC
10.20(8) Investor Rights Agreement, by and among OnSite Access, Inc. and certain investors and individuals within management
10.21(8) Voting Agreement, by and among OnSite Access, Inc. and certain investors
10.22(8) Purchase Agreement regarding Series B, Series C and Series D Preferred Stock of OnSite Access, Inc.
10.23(9) Series D Convertible Preferred Stock Securities Purchase Agreement, dated as of July 29, 1999 by and among VANTAS
Incorporated and several Purchasers
10.24(10) Stock Purchase Agreement, dated as of August 10, 1999, by and among eSourceOne, Inc., Reckson Service Industries,
Inc. and RSI ESO, Inc.
10.25(10) Registration Rights Agreement, dated as of August 10, 1999, by and among eSourceOne, Inc., Reckson Service
Industries, Inc., RSI ESO, Inc., Elliott S.
Cooperstone and H. Thach Pham
10.26(10) Stockholders' Agreement, dated as of August 10, 1999, by and among eSourceOne, Inc. and certain stockholders
10.27(11) Stock Purchase Agreement, dated as of August 19, 1999, among Reckson Service Industries, Inc., RSI I/O Holdings,
Inc., Cahill, Warnock Strategic Partners Fund
L.P., Strategic Associates, L.P. and David L. Warnock
10.28(11) Letter Agreement, dated as of September 23, 1999, among Reckson Service Industries, Inc., RSI I/O Holdings, Inc.,
RSI-OnSite Holdings LLC, RSI-OSA
Holdings, Inc., JAH Realties, L.P., Veritech Ventures LLC and JAH I/O LLC
10.29(11) Letter of Amendment to Letter Agreement, dated as of September 23, 1999, among Reckson Service Industries, Inc., RSI
I/O Holdings, Inc., RSI-OnSite
Holdings LLC, RSI-OSA Holdings, Inc., JAH Realties, L.P., Veritech Ventures LLC and JAH I/O LLC
10.30(12) Credit Agreement, dated November 30, 1999, by and among Reckson Service Industries, Inc. and Warburg Dillon Read,
LLC and UBS AG, Stamford Branch
IV-31
EXHIBIT
NUMBER DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------------------------
10.31(12) Equity Interest Pledge and Security Agreement, dated November 30, 1999, by and among the parties therein and UBS
AG, Stamford Branch
10.32(12) Interest Rate Cap Agreement, Pledge and Security Agreement, dated November 30, 1999, among Reckson Service
Industries, Inc. and Warburg Dillon Read,
LLC and UBS AG, Stamford Branch
10.33(12) November 30, 1999 Promissory Note for $60,000,000 to the order of UBS AG, Stamford Branch
10.34(13) Agreement and Plan of Merger by and among HQ Global Workplaces, Inc. and CarrAmerica Realty Corporation and VANTAS
Incorporated and Reckson
Service Industries, Inc., dated as of January 20, 2000
10.35(13) Stock Purchase Agreement between CarrAmerica Realty Corporation and Reckson Service Industries, Inc., dated as of
January 20, 2000
10.36(13) Stock Purchase Agreement among CarrAmerica Realty Corporation, OmniOffices (UK) Limited and OmniOffices (Lux) 1929
Holding Company S.A. and
VANTAS Incorporated and Reckson Service Industries, Inc., dated as of January 20, 2000
10.37(8) Certificate of Designation of Series A, Series B, Series C and Series D Preferred Stock of OnSite Access, Inc.
10.38(13) Form of Stockholders Agreement by and among HQ Global Workplaces, Inc., Reckson Service Industries, Inc.,
CarrAmerica Realty Corporation and certain
other stockholders of HQ Global Workplaces, Inc.
10.39 Amended and Restated Credit Agreement among VANTAS, Various Banks, and Paribas, as agent, dated as of January 16,
1997, as amended and restated as
of November 6, 1998 and August 3, 1999
10.40 Exchange Agreement, dated December 7, 1999, by and among Reckson Service Industries, Inc., Elliot S. Cooperstone
and H. Thach Pham
10.41 Warrant Registration Rights Agreement, dated December 7, 1999, by and among Reckson Service Industries, Inc.,
Elliot S. Cooperstone and H. Thach Pham
10.42(14) Warrant Registration Rights Agreement, dated as of March 7, 2000 between Reckson Service Industries, Inc., and
Gotham Partners, L.P., Gotham Partners III, L.P. and Gotham Partners International, Ltd.
12.1 Statement of Ratios of Earnings to Fixed Charges
21.1 Statement of Subsidiaries of Reckson Service Industries, Inc.
23.0 Consent of Independent Accountants
24.1 Powers of Attorney (included in Part IV of this Form 10-K)
27.0 Financial Data Schedule
1 Previously filed as an exhibit to Registration Statement on Form S-1 (No.
333-44419) and incorporated herein by reference.
2 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on January 25, 1999 and incorporated herein by reference.
3 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on September 8, 1998 and incorporated herein by reference.
4 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on September 11, 1998 and incorporated herein by reference.
5 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on December 1, 1998 and incorporated herein by reference.
6 Previously filed as an exhibit to the Company's Form 10-K filed with the SEC
on March 31, 1999 and incorporated herein by reference.
7 Previously filed as an exhibit to Registration Statement on Form S-8 filed
with the SEC on July 29, 1999 and incorporated herein by reference.
8 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on July 16, 1999 and incorporated herein by reference.
9 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on August 31, 1999 and incorporated herein by reference.
10 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on September 1, 1999 and incorporated herein by reference.
11 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on October 12, 1999 and incorporated herein by reference.
12 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on December 13, 1999 and incorporated herein by reference.
13 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on January 25, 2000 and incorporated herein by reference.
14 Previously filed as an exhibit to the Company's Form 8-K filed with the SEC
on March 28, 2000 and incorporated herein by reference.
IV-32