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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, 1998
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: 333-40701
VORNADO OPERATING COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 22-3569068
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Park 80 West, Plaza II, Saddle Brook, New Jersey 07663
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 587-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, American Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _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 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 voting shares held by non-affiliates of the
registrant, i.e. by persons other than officers and directors of Vornado
Operating Company as reflected in the table in Item 12 of this Form 10-K, as of
March 2, 1999 was $25,837,000.
As of March 2, 1999, there were 4,068,310 shares of the registrant's common
stock, par value $.01 per share, outstanding.
Documents Incorporated by Reference
Part III: Proxy Statement for Annual Meeting of Stockholders to be held on May
19, 1999.
TABLE OF CONTENTS
Item
Page
PART I. ...................................................................3
Item 1. Business...........................................................3
Item 2. Properties........................................................10
Item 3. Legal Proceedings.................................................10
Item 4. Submission of Matters to a Vote of Security Holders...............10
PART II. ..................................................................12
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters...........................................................12
Item 6. Selected Consolidated Financial Data..............................12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........14
Item 8. Financial Statements and Supplementary Data.......................14
Item 9. Changes In and Disagreements With Independent Auditors on
Accounting and Financial Disclosure...............................15
PART III. (1) ..............................................................29
Item 10. Directors and Executive Officers of the Registrant................29
Item 11. Executive Compensation............................................29
Item 12. Security Ownership of Certain Beneficial Owners and Management....29
Item 13. Certain Relationships and Related Transactions....................29
PART IV. ..................................................................30
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..30
SIGNATURES...................................................................31
- - - --------------------
(1) These items are omitted because the Registrant will file a definitive
Proxy Statement pursuant to Regulation 14A involving the election of
directors with the Securities and Exchange Commission not later than 120
days after December 31, 1998, which is incorporated by reference herein.
Information relating to Executive Officers of the Registrant appears on
page 9 of this Annual Report on Form 10-K.
Certain statements contained herein constitute forward-looking statements
as such term is defined in Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Certain factors could cause actual results to
differ materially from those in the forward-looking statements. Factors that
might cause such a material difference include, but are not limited to: (a) the
Company's lack of operating history and operating results; (b) the Company's
lack of operating assets; (c) restrictions on the Company's business and future
opportunities; (d) dependence upon Vornado Realty Trust; (e) the substantial
influence of the Company's controlling stockholders and conflicts of interest;
(f) risks associated with potential investments and ability to manage those
investments; (g) competition; (h) the Company's obligations under the revolving
credit facility; (i) the Company's limited financial resources; (j) dependence
on key personnel; (k) potential antitakeover effects of the Company's charter
documents and applicable law; (l) dependence on dividends and distributions of
subsidiaries; (m) potential costs of compliance with environmental laws; (n)
changes in the general economic climate; and (o) government regulations.
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PART I.
Item 1. Business
General
On October 16, 1998 Vornado Realty L.P. (the "Operating Partnership"), a
subsidiary of Vornado Realty Trust together with its consolidated subsidiaries
and preferred stock affiliates, ("Vornado"), made a distribution (the
"Distribution") of one share of common stock, par value $.01 per share (the
"Common Stock"), of Vornado Operating Company, a Delaware corporation (the
"Corporation"), for 20 units of limited partnership interest of the Operating
Partnership (including the units owned by Vornado) held of record as of the
close of business on October 9, 1998 (the "Record Date"), and Vornado in turn
made a distribution of the Common Stock it received to the holders of its common
shares of beneficial interest. While no Common Stock was distributed in respect
of Vornado's $3.25 Series A Convertible Preferred Shares, Vornado adjusted the
conversion price to take into account the Distribution.
The Corporation was formed on October 30, 1997, as a wholly owned
subsidiary of Vornado. In order to maintain its status as a real estate
investment trust ("REIT") for federal income tax purposes, Vornado is required
to focus principally on investments in real estate assets. Accordingly, Vornado
is prevented from owning certain assets and conducting certain activities that
would be inconsistent with its status as a REIT. The Corporation was formed to
own assets that Vornado could not itself own and conduct activities that Vornado
could not itself conduct. The Corporation is intended to function principally as
an operating company, in contrast to Vornado's principal focus on investments in
real estate assets. The Corporation is able to do so because it is taxable as a
regular "C" corporation rather than a REIT.
The Corporation will seek to become the operator of businesses conducted
at properties it leases from Vornado, as contemplated by the Intercompany
Agreement, dated as of October 16, 1998, between the Corporation and Vornado
(the "Intercompany Agreement"), referred to below. The Corporation expects to
rely exclusively on Vornado to identify business opportunities for the
Corporation, and the Corporation currently expects that those opportunities will
relate in some manner to Vornado and its real estate investments rather than to
unrelated businesses.
The principal executive offices of the Corporation are located at Park 80
West, Plaza II, Saddle Brook, New Jersey 07663, and its telephone number at that
location is (201) 587-1000.
Intercompany Agreement and Charter Purpose Clauses
The Corporation and Vornado have entered into the Intercompany Agreement
pursuant to which, among other things, (a) Vornado will under certain
circumstances offer the Corporation an opportunity to become the lessee of
certain real property owned now or in the future by Vornado (under mutually
satisfactory lease terms) and (b) the Corporation will not make any real estate
investment or other REIT-Qualified Investment unless it first offers Vornado the
opportunity to make such investment and Vornado has rejected that opportunity.
More specifically, the Intercompany Agreement requires, subject to certain
terms, that Vornado provide the Corporation with an opportunity (a "Tenant
Opportunity") to become the lessee of any real property owned now or in the
future by Vornado if Vornado determines in its sole discretion that, consistent
with Vornado's status as a REIT, it is required to enter into a "master" lease
arrangement with respect to such property and that the Corporation is qualified
to act as lessee thereof. In general, a master lease arrangement is an
arrangement pursuant to which an entire property or project (or a group of
related properties or projects) are leased to a single lessee. Under the
Intercompany Agreement, the Corporation and Vornado will negotiate with each
other on an exclusive basis for 30 days regarding the terms and conditions of
the lease in respect of each Tenant Opportunity. If a mutually
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satisfactory agreement cannot be reached within the 30-day period, Vornado may
for a period of one year thereafter enter into a binding agreement with respect
to such Tenant Opportunity with any third party on terms no more favorable to
the third party than the terms last offered to the Corporation. If Vornado does
not enter into a binding agreement with respect to such Tenant Opportunity
within such one-year period, Vornado must again offer the Tenant Opportunity to
the Corporation in accordance with the procedures specified above prior to
offering such Tenant Opportunity to any other party.
In addition, the Intercompany Agreement prohibits the Corporation from
making (i) any investment in real estate (including the provision of services
related to real estate, real estate mortgages, real estate derivatives or
entities that invest in the foregoing) or (ii) any other REIT-Qualified
Investment, unless it has provided written notice to Vornado of the material
terms and conditions of the investment opportunity and Vornado has determined
not to pursue such investment either by providing written notice to the
Corporation rejecting the opportunity within 10 days from the date of receipt of
notice of the opportunity or by allowing such 10-day period to lapse. As used
herein, "REIT-Qualified Investment" means an investment, at least 95% of the
gross income from which would qualify under the 95% gross income test set forth
in Section 856(c)(2) of the Internal Revenue Code of 1986, as amended (the
"Code") (or could be structured to so qualify), and the ownership of which would
not cause Vornado to violate the asset limitations set forth in Section
856(c)(4) of the Code (or could be structured not to cause Vornado to violate
the Section 856(c)(4) limitations); provided, however, that "REIT-Qualified
Investment" does not include an investment in government securities, cash or
cash items (as defined for purposes of Section 856(c)(4) of the Code), money
market funds, certificates of deposit, commercial paper having a maturity of not
more than 90 days, bankers' acceptances or the property transferred to the
Corporation by the Operating Partnership. The Intercompany Agreement also
requires the Corporation to assist Vornado in structuring and consummating any
such investment which Vornado elects to pursue, on terms determined by Vornado.
In addition, the Corporation has agreed to notify Vornado of, and make available
to, Vornado investment opportunities developed by the Corporation or of which
the Corporation becomes aware but is unable or unwilling to pursue.
Under the Intercompany Agreement, Vornado has agreed to provide the
Corporation with certain administrative, corporate, accounting, financial,
insurance, legal, tax, data processing, human resources and operational
services. For these services, the Corporation will compensate Vornado in an
amount determined in good faith by Vornado as the amount an unaffiliated third
party would charge the Corporation for comparable services and will reimburse
Vornado for certain costs incurred and paid to third parties on behalf of the
Corporation.
Vornado and the Corporation each have the right to terminate the
Intercompany Agreement if the other party is in material default of the
Intercompany Agreement or upon 90 days written notice to the other party at any
time after December 31, 2003. In addition, Vornado has the right to terminate
the Intercompany Agreement upon a change in control of the Corporation.
The Corporation's restated certificate of incorporation (the "Charter")
specifies that one of its corporate purposes is to perform the Intercompany
Agreement and, for so long as the Intercompany Agreement remains in effect,
prohibits the Corporation from making any real estate investment or other
REIT-Qualified Investment without first offering the opportunity to Vornado in
the manner specified in the Intercompany Agreement.
Vornado Operating L.P. and the Interstate Exchange
The Corporation holds its assets and conducts its business through Vornado
Operating L.P., a Delaware limited partnership ("Company L.P."). The Corporation
is the sole general partner of, and as of December 31, 1998 owned a 90.1%
partnership interest in, Company L.P. All references to the Company refer to
Vornado Operating Company and its subsidiaries including the Company L.P.
Interstate Properties, a New Jersey general partnership ("Interstate"),
and its three partners -- Steven Roth (Chairman of the Board and Chief Executive
Officer of Vornado and the Company), David Mandelbaum (a trustee of Vornado) and
Russell B. Wight, Jr. (a trustee of Vornado and a director of the Company) --
beneficially owned, in the aggregate, 17.0% of the Company's Common Stock
immediately after the Distribution (excluding shares underlying stock
appreciation rights ("SARs") and options held by Messrs. Roth and Wight for this
purpose).
4
Under applicable provisions of the Code, Vornado will not continue to
be treated as a REIT unless it satisfies, among other things, requirements
relating to the sources of its gross income. Rents received or accrued by
Vornado from the Company will not be treated as qualifying rent for purposes of
these requirements if Vornado is treated, either directly or under the
applicable attribution rules, as owning 10% or more of the Common Stock of the
Company. Vornado will be treated as owning, under the applicable attribution
rules, 10% or more of the Common Stock at any time that Interstate and its
partners own, directly or under the applicable attribution rules, (a) Vornado
shares with a value equal to 10% or more of the total value of Vornado's
outstanding shares and (b) 10% or more of the Common Stock of the Company. Thus,
in order to enable rents received or accrued by Vornado from the Company to be
treated as qualifying rent for purposes of the REIT gross income requirements
and to achieve certain other purposes, pursuant to the Exchange Agreement, dated
as of October 16, 1998, between the Company and Interstate, (i) Interstate
exchanged 447,017 shares of Common Stock for a 9.9% undivided interest in all of
the Company's assets and (ii) Interstate and the Company contributed all of
their interests in such assets to Company L.P. and in return Interstate received
a 9.9% limited partnership interest and the Company received a 90.1% partnership
interest therein. At any time after October 16, 1999, Interstate will have the
right to have its limited partnership interest in Company L.P. redeemed by
Company L.P. either (a) for cash in an amount equal to the fair market value, at
the time of redemption, of 447,017 shares of Common Stock or (b) for 447,017
shares of Common Stock, in each case as selected by the Company and subject to
customary anti-dilution adjustments.
The Cold Storage Companies
On October 31, 1997, partnerships (the "Vornado/Crescent Partnerships") in
which affiliates of Vornado have a 60% interest and affiliates of Crescent Real
Estate Equities Company ("Crescent") have a 40% interest acquired each of
Americold Corporation ("Americold") and URS Logistics, Inc. ("URS"). In June
1998, Vornado/Crescent Partnerships acquired the assets of Freezer Services,
Inc. and in July 1998 acquired the Carmar Group (Americold, URS, Freezer
Services, Inc. and the Carmar Group, collectively, the "Cold Storage
Companies").
On March 12, 1999, the Company and Crescent Operating Inc. ("Crescent
Operating") formed a new partnership that has purchased all of the non-real
estate assets of the Cold Storage Companies which do business under the name
"AmeriCold Logistics" encompassing the operations of the cold storage business
for approximately $48 million from the Vornado/Crescent Partnership. The new
partnership leases 88 cold storage warehouses used in this business from the
Vornado/Crescent Partnership, which continues to own the real estate. In
addition to the leased warehouses, AmeriCold Logistics manages 13 additional
warehouses containing approximately 80 million cubic feet of space.
To fund its share of the purchase price, the Company utilized $4.6 million
of cash and borrowed $18.6 million under its revolving credit facility with
Vornado. Further, the Company will pay $6 million to close the warehousing
operation of one of the leased facilities.
The purchase price of the cold storage operating assets was proposed by
the partnership of Vornado and Crescent (the Sellers). The Board of Directors of
both the Company and Crescent Operating reviewed and approved the transaction
after concluding that the price was fair market value at the time of the
transaction.
The acquired business has 5,500 employees and operates 101 warehouse
facilities nationwide with an aggregate of approximately 530 million cubic feet
of refrigerated, frozen and dry storage space under the name AmeriCold
Logistics. AmeriCold Logistics has its headquarters in Atlanta, Georgia.
AmeriCold Logistics provides the frozen food industry with refrigerated
warehousing and transportation management services. Refrigerated warehouses are
comprised of production and distribution facilities. Production facilities
typically serve one or a small number of customers, generally food processors,
located nearby. These customers store large quantities of processed or partially
processed products in the facility until they are shipped to the next stage of
production or distribution. Distribution facilities primarily warehouse a wide
variety of customers' finished products until future shipment to end-users. Each
distribution facility primarily services the surrounding regional market.
AmeriCold Logistics offers transportation management services including freight
routing, dispatching,
5
freight rate negotiation, backhaul coordination and distribution channel
assessment. AmeriCold Logistics temperature-controlled logistics expertise and
access to both frozen food warehouses and distribution channels enable its
customers to respond quickly and efficiently to time-sensitive orders from
distributors and retailers.
AmeriCold Logistics customers consist primarily of national, regional and
local frozen food manufacturers, distributors, retailers and food service
organizations including Con-Agra, Inc., Tyson Foods, H.J. Heinz & Co., McCain
Foods, Pillsbury, Sara Lee, Philip Morris, J.R. Simplot, Farmland Industries and
Unilever.
AmeriCold Logistics faces national, regional and local competition.
Breadth of service, warehouse locations, customer mix, warehouse size, service
performance and price are major competitive factors.
Leases for the cold storage warehouse properties
------------------------------------------------
AmeriCold Logistics entered into six leases covering the warehouses used
in this business. The leases have a 15-year term with two-five year renewal
options and provide for the payment of fixed base rent and percentage rent based
on revenues AmeriCold receives from its customers. Fixed rent is approximately
$123 million per annum through 2003, $126 million per annum from 2004 through
2008 and $130 million per annum from 2009 through 2014. Percentage rent for each
lease is based on a specified percentage of revenues in excess of a specified
base amount. The aggregate base revenue amount under five of the six leases is
approximately $321 million, and the weighted average percentage rate is 36.5%
for the initial five-year period, 39.1% for the period from 2004 through 2008
and 40.7% for the period from 2009 through February 28, 2014. The aggregate base
revenue amount under the sixth lease is approximately $32 million, and the
percentage rate is 24% for the initial two-year period, 37.5% for the period
from 2002 through 2006, 40% from 2007 through 2011 and 41% from 2012 through
February 28, 2014. Fixed base rent and percentage rent for the initial year are
projected to be approximately $151,000,000.
AmeriCold Logistics has the right to defer the payment of 15% of fixed
rent and all percentage rent for up to three years beginning on March 12, 1999
to the extent that available cash, as defined in the leases, is insufficient to
pay such rent.
The fixed rent for each of the two five-year renewal options is equal to
the greater of the then fair market value rent and the fixed rent for the
immediately preceding lease year plus 5%.
AmeriCold Logistics is required to pay all costs arising from the
operation, maintenance and repair of the properties, including all real estate
taxes and assessments, utility charges, permit fees and insurance premiums, as
well as property capital expenditures in excess of $5,000,000 annually.
Terms of the new partnership
----------------------------
Vornado is the day-to-day liaison to the management of AmeriCold
Logistics. The new partnership will pay Vornado an annual fee of $487,000, which
is based on the cold storage operating assets acquired by the new partnership on
March 12, 1999. The fee increases by an amount equal to 1% of the cost of new
acquisitions, including transaction costs. The new partnership will provide
financial statement preparation, tax and similar services to the
Vornado/Crescent real estate partnership (the lessor of the Cold Storage
warehouse properties) for an annual fee of $250,000 increasing 2% each year.
The Company must obtain Crescent Operating's approval for specified
matters involving AmeriCold Logistics, including approval of the annual budget,
requiring specified capital contributions, entering into specified new leases or
amending existing leases, selling or acquiring specified assets and any sale,
liquidation or merger of AmeriCold Logistics. If the partners fail to reach
agreement on certain matters prior to October 30, 2000, the Company will be
entitled to buy Crescent Operating's interest in the partnership at cost plus a
10% per annum return. If the partners fail to reach agreement on such matters
during the period from November 1, 2000 through October 30, 2007, the Company
may set a price at which it commits to either buy Crescent Operating's
investment, or sell its own, and Crescent Operating will decide whether to buy
or sell at that price. If the partners fail to reach agreement on such matters
after October 30, 2007, either party may set a price at which it commits to
either buy the other party's investment, or sell its own, and the other party
will decide whether to buy or sell at that price.
6
Neither partner may transfer its rights or interest in the partnership
without the consent of the other partner. The partnership will continue for a
term through October 30, 2027, except as the partners may otherwise agree.
The senior management of AmeriCold Logistics consists of the same individuals
who were the senior management of this business before the new partnership
acquired it. Daniel F. McNamara, the Chief Executive Officer of AmeriCold
Logistics, was Chief Executive Officer since October 1997, when partnerships of
Vornado and Crescent Real Estate acquired the business. From March 1996 to
October 1997, Mr. McNamara was Chief Executive Officer of URS Logistics, Inc.
(one of the predecessors to AmeriCold Logistics). Before March 1996, Mr.
McNamara was Executive Vice President and Chief Operating Officer of Value
Rent-A-Car, a wholly-owned subsidiary of Mitsubishi Motors.
Acquisition and Disposition of Interest in Charles E. Smith Commercial
Realty L.P.
On December 31, 1998, the Company purchased from a subsidiary of Vornado
approximately 1.7% of the outstanding partnership units of Charles E. Smith
Commercial Realty L.P. ("CESCR"), a Delaware limited partnership that owns
interests in and manages approximately 10.7 million square feet of office
properties in Crystal City, Arlington, Virginia, a suburb of Washington, D.C.,
and manages an additional 14.6 million square feet of office and other
commercial properties in the Washington, D.C. area, for an aggregate purchase
price of approximately $12.9 million, or $34 per unit (which is the price at
which CESCR issued partnership units in October 1998 in connection with a
significant "roll-up" transaction). The purchase price was funded out of the
Company's working capital. In connection with this purchase, the Company was
granted an option to require Vornado to repurchase all of the CESCR units at the
price at which the Company purchased the CESCR units from Vornado, plus a
cumulative return on such amount at a rate of 10% per annum. This option may be
exercised at any time prior to December 31, 1999. On March 4, 1999, the Company
exercised such option and Vornado acquired the CESCR units from the Company for
$13.2 million.
Employees
As of December 31, 1998, the Company had no employees. The Company expects
that, when it acquires specific assets and business operations, the subsidiaries
of the Company making such acquisitions will have their own employees.
Risk Factors
Lack of Operating History and Operating Results; No Operating Assets
The Company was incorporated on October 30, 1997. The Company owns no
operating assets and has not yet entered into any agreement to lease or purchase
operating assets.
Restrictions on the Company's Business and Future Opportunities
The Intercompany Agreement and the Charter prohibit the Company from
making any real estate investment or other REIT-Qualified Investment unless it
first offers Vornado the opportunity to make such investment and Vornado has
rejected that opportunity. See "Item 1. Business -- Intercompany Agreement and
Charter Purpose Clauses." Because of the provisions of the Intercompany
Agreement and the Charter, the nature of the Company's business and the
opportunities it may pursue are significantly restricted.
7
Dependence upon Vornado
The Company expects to rely exclusively on Vornado to identify business
opportunities for the Company, and the Company currently expects that those
opportunities will relate in some manner to Vornado and its real estate
investments rather than to unrelated businesses. There is no assurance that
Vornado will identify opportunities for the Company or that any opportunities
that Vornado identifies will be within the Company's financial, operational or
management parameters. Vornado is required under the Intercompany Agreement to
provide the Company with an opportunity to become the lessee of real property
acquired by Vornado only if Vornado determines in its sole discretion that,
consistent with Vornado's status as a REIT, it is required to enter into a
master lease arrangement with respect to such property and that the Company is
qualified to act as lessee thereof. Moreover, the Company is entitled to enter
into such a master lease arrangement with Vornado only if the Company and
Vornado are able to agree on mutually satisfactory lease terms.
If in the future Vornado should fail to qualify as a REIT and thereafter
acquired a property, Vornado would have the right under the Intercompany
Agreement to lease the property to any person or entity pursuant to any type of
lease (including a master lease arrangement) or to operate the property itself,
in either case without offering the Company an opportunity to become a lessee
thereof. The Company, however, would remain subject to all of the limitations on
its operations contained in the Charter and the Intercompany Agreement.
Accordingly, if Vornado should fail to qualify as a REIT, that failure could
have a material adverse effect on the Company.
If in the future Vornado should sell any property which is leased to the
Company, it is possible that the new owner might refuse to renew the lease upon
the expiration of its term.
Substantial Influence of Controlling Stockholders; Conflicts of
Interest
As of December 31, 1998, Interstate and its three partners -- Steven Roth
(Chairman of the Board and Chief Executive Officer of Vornado and the Company),
David Mandelbaum (a trustee of Vornado) and Russell B. Wight, Jr. (a trustee of
Vornado and a director of the Company) -- beneficially owned, in the aggregate,
18.1% of the outstanding Vornado Common Shares (excluding shares issuable on
conversion of units of the Operating Partnership for this purpose) and
beneficially owned, in the aggregate, a 9.9% limited partnership interest in
Company L.P. and 7.8% of the Common Stock (excluding shares underlying SARs and
options held by Messrs. Roth and Wight for this purpose). Because of the
foregoing, Messrs. Roth, Mandelbaum and Wight and Interstate (collectively, the
"Interstate Parties") have substantial influence on the Company and Vornado and
on the outcome of any matters submitted to the Company's Stockholders or
Vornado's shareholders for approval.
Four of the members of the Company's Board (including Messrs. Roth and
Fascitelli) are members of Vornado's Board, and certain members of senior
management of the Company holds a corresponding position with Vornado. Members
of the Company's Board and senior management may have different percentage
equity interests in the Company and in Vornado. Moreover, the Interstate Parties
engage in a wide variety of activities in the real estate business. Thus,
members of the Board and senior management of the Company and Vornado and the
Interstate Parties may be presented with conflicts of interest with respect to
certain matters affecting the Company, such as determination of which of such
entities or persons, if any, may take advantage of potential business
opportunities, decisions concerning the business focus of such entities
(including decisions concerning the types of properties and geographic locations
in which such entities make investments), potential competition between business
activities conducted, or sought to be conducted, by such entities or persons
(including competition for properties and tenants), possible corporate
transactions (such as acquisitions) and other strategic decisions affecting the
future of such parties.
Risks Associated with Potential Investments and Ability to Manage
Those Investments; Competition
Although the Company currently expects that the opportunities it pursues
will relate in some manner to Vornado and its real estate investments rather
than to unrelated businesses, it is possible that they will not. In addition,
whether or not such opportunities relate in some manner to Vornado and its real
estate investments, the businesses in which it engages may require a wide range
of skills and qualifications, and there is no assurance that
8
the Company management or employees will have, or that the Company will be able
to hire and retain employees with, such skills and qualifications. There also is
no assurance that the opportunities the Company pursues will be integrated,
perform as expected or contribute significant revenues or profits to the
Company, and there is a risk that the Company may realize substantial losses
with respect thereto. The industries in which the Company will compete may be
subject to government regulation and restrictions, some of which may be
significant and burdensome. The businesses with which it will compete may be
better capitalized or have other features that will make it difficult for the
Company to compete effectively.
Obligations under Revolving Credit Facility; Limited Financial
Resources
The Company has entered into a $75 million Revolving Credit Agreement with
Vornado (the "Revolving Credit Agreement"). See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Although only interest and commitment fees will be payable
under the Revolving Credit Agreement until it expires, there can be no assurance
that the Company will be able to satisfy all of its obligations under the
Revolving Credit Agreement.
The Company expects that its cash on hand and borrowings under the
Revolving Credit Agreement will be used to support future acquisitions of assets
by the Company and other cash requirements. There is no assurance that the
Company will have sufficient working capital to finance future acquisitions or
pursue additional opportunities. The Company expects to be able to access
capital markets or to seek other financing, including financing from Vornado,
but there is no assurance that it will be able to do so at all or in amounts or
on terms acceptable to the Company. Under certain circumstances it may be deemed
desirable by the Company and Vornado to offer and sell Common Stock and Vornado
Common Shares under a common plan of distribution. There is no assurance that
the timing, terms and manner of such an offering will be as favorable to the
Company as the timing, terms and manner of an offering of Common Stock made
independently of Vornado. Neither Vornado nor any other person is obligated to
provide any additional funds to the Company, to offer securities under a common
plan of distribution or to assist it in obtaining additional financing.
Absence of Dividends on Common Stock
The Company intends to use its available funds to pursue investment and
business opportunities and, therefore, does not anticipate the payment of any
cash dividends on the Common Stock in the foreseeable future. Payment of
dividends on the Common Stock is prohibited under the Revolving Credit Agreement
until all amounts outstanding thereunder have been paid in full and the
commitment thereunder is terminated, and will also be subject to such
limitations as may be imposed by any other credit facilities that the Company
may obtain from time to time.
Dependence on Key Personnel
The Company is dependent on the efforts of Steven Roth, the Chairman and
Chief Executive Officer of the Company, and Michael D. Fascitelli, the President
of the Company. While the Company believes that it could find replacements for
these key personnel, the loss of their services could have an adverse effect on
the operations of the Company.
Potential Antitakeover Effects of Charter Documents and Applicable Law
The Charter and By-laws and applicable sections of the Delaware General
Corporation Law (the "DGCL") contain provisions that may make more difficult the
acquisition of control of the Company without the approval of the Company's
Board.
Dependence on Dividends and Distributions of Subsidiaries
Substantially all of the Corporation's assets consist of its partnership
interests in Company L.P., of which the Company is the sole general partner.
Substantially all of Company L.P. properties and assets are expected to be held
through subsidiaries. Any right of the Company's stockholders to participate in
any distribution of the assets of any
9
indirect subsidiary of the Company upon the liquidation, reorganization or
insolvency of such subsidiary (and any consequent right of the Company's
securityholders to participate in those assets) will be subject to the claims of
the creditors (including trade creditors) and preferred holders of equity, if
any, of Company L.P. and such subsidiary, except to the extent the Company has a
recognized claim against such subsidiary as a creditor of such subsidiary. In
addition, in the event that claims of the Company as a creditor of a subsidiary
are recognized, such claims would be subordinate to any security interest in the
assets of such subsidiary and any indebtedness of such subsidiary senior to that
held by the Company.
Potential Costs of Compliance with Environmental Laws
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate (including, e.g., the
Company as lessee of real estate) may be required to investigate and clean up
certain hazardous substances released at a property, and may be held liable to a
governmental entity or to third parties for property damage or personal injuries
and for investigation and clean-up costs incurred in connection with the
contamination. Such laws often impose liability without regard to whether the
owner or operator knew of, or was responsible for, the release of such hazardous
substances. The presence of contamination or the failure to remediate
contamination may adversely affect the owner's ability to sell or lease real
estate or to borrow using the real estate as collateral or the operator's
ability to sell or finance the operations. Other federal, state and local laws,
ordinances and regulations require abatement or removal of certain
asbestos-containing materials in the event of demolition or certain renovations
or remodeling and also govern emissions of and exposure to asbestos fibers in
the air. The operation and subsequent removal of certain underground storage
tanks are also regulated by federal and state laws. In connection with the
ownership, operation and management of its properties, including the properties
it expects to lease from Vornado or others, the Company could be held liable for
the costs of remedial action with respect to such regulated substances or tanks
or related claims.
Item 2. Properties
Under the Intercompany Agreement, Vornado has agreed to make available to
the Company, at Vornado's principal office in Saddle Brook, New Jersey, space
for the Company's principal corporate office, for which the Company compensates
Vornado in an amount determined in good faith by Vornado as the amount an
unaffiliated third party would charge the Company for comparable space. The
Company believes that such facilities will be adequate to meet its expected
requirements for the coming year.
Item 3. Legal Proceedings
There are no pending legal proceedings to which the Company is a party or
to which any of its properties are subject.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
Executive Officers of the Registrant
The following is a list of the names, ages, principal occupations and
positions with the Company of the executive officers of the Company and the
position held by such officers since the Company was incorporated. Officers are
appointed by and serve at the discretion of the Board of Directors.
Steven Roth, age 57, is Chairman of the Board and Chief Executive
Officer of the Company. Mr. Roth has been Chairman of the Board and Chief
Executive Officer of Vornado since May 1989 and Chairman of the Executive
Committee of the Board of Vornado since April 1980. Since 1968, he has been
the managing general partner of Interstate. On March 2, 1995, he became
Chief Executive Officer of Alexander's, Inc. ("Alexander's"). Mr. Roth is
also a director of Alexander's and of Capital Trust.
10
Michael D. Fascitelli, age 42, is President and a director of the
Company. Mr. Fascitelli has been President and a trustee of Vornado, and a
director of Alexander's, since December 2, 1996. From December 1992 to
December 1996, Mr. Fascitelli was a partner at Goldman, Sachs & Co. in
charge of its real estate practice.
Joseph Macnow, age 53, is Executive Vice President - Finance and
Administration of the Company. Mr. Macnow has been Executive Vice President -
Finance and Administration of Vornado since January 1998. From 1985 to January
1998, Mr. Macnow was Vice President and Chief Financial Officer of Vornado.
Irwin Goldberg, age 54, is Vice President - Chief Financial Officer of
the Company. Mr. Goldberg has been Vice President - Chief Financial Officer
of Vornado since January 1998. From 1978 to January 1998, Mr. Goldberg was a
partner at Deloitte & Touche LLP.
Neither Mr. Roth nor any other member of management is committed to
spending a particular amount of time on the Company's affairs, nor will any of
them devote his full time to the Company. Because of their other time
commitments and because the Company does not yet own any operating assets, Mr.
Roth and the other members of management anticipate that they will initially not
be devoting a significant amount of time to the activities of the Company. Once
the Company acquires material operating assets, Mr. Roth and the other members
of management anticipate that they will devote such time and efforts as they
deem reasonably necessary to conduct the operations of the Company while
continuing to devote a material amount of their time and efforts to the
management and properties of Vornado.
11
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company is listed on the American Stock Exchange
under the symbol "VOO". The Transfer Agent and Registrar for the Common Stock is
First Union National Bank, Charlotte, North Carolina.
The high and low sale prices of the Common Stock for the period from
October 16, 1998 (the initial day of trading of the Common Stock on the American
Stock Exchange) through December 31, 1998, was $5.75 to $8.50.
The approximate number of record holders of Common Stock as of December
31, 1998, was 1,200.
No cash dividends have been declared or paid in respect of the Common
Stock. The Company intends to use its available funds to pursue investment and
business opportunities and, therefore, does not anticipate the payment of any
cash dividends on the Common Stock in the foreseeable future. Payment of
dividends on the Common Stock is prohibited under the Revolving Credit Agreement
until all amounts outstanding thereunder are paid in full and the commitment
thereunder is terminated, and will also be subject to such limitations as may be
imposed by any other credit facilities that the Company may obtain from time to
time. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." The declaration
of dividends will be subject to the discretion of the Board.
Item 6. Selected Consolidated Financial Data
For the Period
October 16,
1998
(Commencement
of Operations) to
December 31, 1998
-----------------
Revenues:
Interest income.................. $ 261,948
---------
Expenses:
General and administrative....... 271,698
Organization costs............... 971,959
---------
Total expenses...................... 1,243,657
---------
Loss before income tax benefit and
minority interest................... (981,709)
Income tax benefit.................. --
---------
Loss before minority interest....... (981,709)
Minority interest................... 97,189
---------
Net loss............................ $(884,520)
=========
Net loss per share - basic and diluted $ (.22)
=========
December 31, 1998
-----------------
Balance Sheet Data:
Total assets........................ $25,226,674
Stockholder's equity................ 21,653,923
AmeriCold Logistics is considered a predecessor of the Company. The
Company will account for its investment in the partnership which acquired the
non-real estate assets of Americold Logistics on the equity method. The net
equity in income (loss) of the predecessor was $10,193,000 in 1998,
$(11,209,000) in 1997, $(2,206,000) in 1996, $(5,780,000) in 1995 and $1,750,000
in 1994.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company was incorporated on October 30, 1997, as a wholly-owned
subsidiary of Vornado. The Company was formed to own assets that Vornado could
not itself own and conduct activities that Vornado could not itself conduct. The
Company is intended to function principally as an operating company, in contrast
to Vornado's principal focus on investment in real estate assets. The Company is
able to do so because it is taxable as a regular corporation rather than a REIT.
The Company will seek to become the operator of businesses conducted at
properties it leases from Vornado, as contemplated by the Intercompany
Agreement. The Company expects to rely exclusively on Vornado to identify
business opportunities for the Company, and the Company currently expects that
those opportunities will relate in some manner to Vornado and its real estate
investments rather than to unrelated businesses.
On October 16, 1998, the Operating Partnership distributed all of the
shares of Common Stock then owned by the Operating Partnership to its limited
partners, and Vornado in turn distributed all of the shares of Common Stock it
received from the Operating Partnership to the common shareholders of Vornado.
See "Item 1. Business -- General."
Results of Operations
The Company had a net loss of $884,520 for the period from October 16,
1998 to December 31, 1998. Revenues of $261,948 consisted solely of interest
income. Expenses were comprised of (i) organization costs, primarily
professional fees, of $971,959 and (ii) general and administrative expenses of
$271,698, including reimbursements paid to Vornado for certain administrative
and other services provided to the Company, directors fees, insurance and legal
and accounting fees. The Company had no other operations (except for the
investment in CESCR discussed above). See "Item 1. Business -- Intercompany
Agreement and Charter Purpose Clauses" and "Item 2. Property."
Year 2000 Readiness Disclosure
The Company is managed by Vornado. Vornado has advised the Company that
Vornado initiated its Year 2000 compliance programs and information systems
modifications in early 1998 to ensure that its systems and key processes will
remain functional. Vornado expects this objective to be achieved either by
modifying present systems using existing internal and external programming
reousrces or by installing new systems, and by monitoring supplier and other
third-party interfaces. In certain cases, Vornado will be relying on statements
from outside vendors as to the Year 2000 readiness of its systems.
The Company is not aware of any operational systems within its control
that are not Year 2000 compliant. In the event that a third-party service is
interrupted due to a Year 2000 issue, the Company will seek to obtain such
service from another third-party provider.
13
Liquidity and Capital Resources
Vornado initially capitalized the Company with an equity contribution of
$25 million of cash. On December 31, 1998, the Company purchased from Vornado
approximately 1.7% of the outstanding partnership units of CESCR for an
aggregate purchase price of approximately $12.9 million. The purchase price was
funded out of the Company's working capital. See "Item 1. Business - Acquisition
and Disposition of Interest in Charles E. Smith Commercial Realty L.P." As of
December 31, 1998, the Company had approximately $11.8 million of cash.
As part of its formation, the Company obtained a $75 million unsecured
five-year revolving credit facility from Vornado. Borrowings under the Revolving
Credit Agreement bear interest at a floating rate per annum equal to LIBOR plus
3%. Commencing January 1, 1999, the Company pays Vornado a commitment fee equal
to 1% per annum on the average daily unused portion of the facility. Amounts may
be borrowed under the Revolving Credit Agreement, repaid and reborrowed from
time to time on a revolving basis (so long as the principal amount outstanding
at any time does not exceed $75 million). Only interest and commitment fees are
payable under the Revolving Credit Agreement until it expires. The Revolving
Credit Agreement prohibits the Company from incurring indebtedness to third
parties (other than certain purchase money debt and certain other exceptions)
and prohibits the Company from paying dividends. Debt under the Revolving Credit
Agreement is fully recourse against the Company. The Company expects that
borrowings under the Revolving Credit Agreement will be used to support future
acquisitions of assets by the Company and other cash requirements. The Company
has no external sources of financing except for the Revolving Credit Agreement.
On March 12, 1999, the Company and Crescent Operating Inc. ("Crescent
Operating") formed a new partnership that has purchased all of the non-real
estate assets of AmeriCold Logistics encompassing the operations of the cold
storage business for approximately $48 million from the Vornado/Crescent
Partnership. The new partnership leases 88 cold storage warehouses used in this
business from the Vornado/Crescent Partnership, which continues to own the real
estate. In addition to the leased warehouses AmeriCold Logistics manages 13
additional warehouses containing approximately 80 million cubic feet of space.
To fund its share of the purchase price, the Company utilized $4.6 million
of cash and borrowed $18.6 million under its revolving credit facility with
Vornado. Further, the Company will pay $6 million to close the warehousing
operation of one of the leased facilities.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company had no material exposure to market risk sensitive instruments
as of December 31, 1998.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Report.................................................16
Consolidated Balance Sheet at December 31, 1998..............................17
Consolidated Statement of Operations for the period October 16, 1998
(Commencement of Operations) to December 31, 1998...........................18
Consolidated Statement of Stockholders' Equity for the period October 16,
1998 (Commencement of Operations) to December 31, 1998.....................19
Consolidated Statement of Cash Flows for the period October 16, 1998
(Commencement of Operations) to December 31, 1998..........................20
Notes to Consolidated Financial Statements...................................21
14
Item 9. Changes In and Disagreements With Independent Auditors on Accounting
and Financial Disclosure
Not applicable.
15
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Vornado Operating Company
Saddle Brook, New Jersey
We have audited the accompanying consolidated balance sheet of Vornado
Operating Company and Subsidiary as of December 31, 1998 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period October 16, 1998 (commencement of operations) to December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Vornado Operating Company and
Subsidiary at December 31, 1998, and the results of their operations and their
cash flows for the period October 16, 1998 (commencement of operations) to
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 24, 1999
16
VORNADO OPERATING COMPANY
CONSOLIDATED BALANCE SHEET
December 31, 1998
-----------------
ASSETS
Cash......................................................... $11,831,561
Investment in partnership.................................... 12,920,000
Prepaid insurance............................................ 475,113
-----------
$25,226,674
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to Vornado Realty Trust.................................. $ 1,066,451
Accrued expenses............................................. 127,015
-----------
Total liabilities............................................ 1,193,466
-----------
Minority interest............................................ 2,379,285
-----------
Commitments and contingencies
Stockholders' equity:
Common stock: par value $.01 per share;
authorized, 40,000,000 shares; issued and
outstanding, 4,068,310 shares............................. 40,683
Additional paid-in capital................................... 22,497,760
Deficit...................................................... (884,520)
-----------
Total stockholders' equity................................ 21,653,923
-----------
$25,226,674
===========
See notes to consolidated financial statements.
17
VORNADO OPERATING COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period
October 16,
1998
(Commencement
of Operations)
to December 31, 1998
--------------------
Revenues:
Interest income.................. $ 261,948
----------
Expenses:
General and administrative....... 271,698
Organization costs............... 971,959
----------
Total expenses...................... 1,243,657
----------
Loss before income tax benefit and
minority interest................ (981,709)
Income tax benefit.................. --
----------
Loss before minority interest....... (981,709)
Minority interest................... 97,189
----------
Net loss............................ $ (884,520)
==========
Net loss per share -- basic and diluted $ (.22)
==========
See notes to consolidated financial statements.
18
VORNADO OPERATING COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Additional Total
Common Paid-in Stockholders'
Stock Capital Deficit Equity
---------- ----------- ---------- ------------
Cash contribution for 1,000 shares
on October 16, 1998................. $ 10 $24,999,990 $ -- $25,000,000
Additional stock issued in
connection with the distribution,
4,514,327 shares.................... 45,143 (45,143) -- --
Additional equity contribution........ -- 14,917 -- 14,917
Exchange with Interstate Properties,
447,017 shares...................... (4,470) (2,472,004) -- (2,476,474)
Net loss.............................. -- -- (884,520) (884,520)
------- ----------- --------- -----------
Balance, December 31, 1998............ $40,683 $22,497,760 $(884,520) $21,653,923
======= =========== ========= ===========
See notes to consolidated financial statements.
19
VORNADO OPERATING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period
October 16, 1998
(Commencement
of Operations)
to December 31, 1998
--------------------
Cash Flows from Operating Activities:
Net loss............................................... $ (884,520)
Adjustments to reconcile net loss to net cash provided
by operations:
Minority interest................................... (97,189)
Non-cash compensation............................... 42,015
Changes in operating assets and liabilities:
Prepaid insurance................................... (475,113)
Accrued expenses.................................... 85,000
Due to Vornado Realty Trust......................... 1,066,451
-----------
Net cash used in operating activities..................... (263,356)
-----------
Cash Flows from Investing Activities:
Investment in partnership.............................. (12,920,000)
-----------
Net cash used in investing activities..................... (12,920,000)
-----------
Cash Flows from Financing Activities:
Initial capital contribution........................... 25,000,000
Additional equity contribution......................... 14,917
-----------
Net cash provided by financing activities................. 25,014,917
-----------
Net increase in cash and cash equivalents, and balance, at
December 31, 1998......................................... $11,831,561
===========
Non-Cash Transactions:
Non-cash compensation ................................. $ 42,015
Exchange with Interstate Properties.................... 2,476,474
See notes to consolidated financial statements.
20
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business
Vornado Operating Company, a Delaware corporation, was incorporated on
October 30, 1997, as a wholly owned subsidiary of Vornado Realty Trust together
with its consolidated subsidiaries and preferred stock affiliates ("Vornado").
In order to maintain its status as a real estate investment trust ("REIT") for
federal income tax purposes, Vornado is required to focus principally on
investments in real estate assets. Accordingly, Vornado is prevented from owning
certain assets and conducting certain activities that would be inconsistent with
its status as a REIT. Vornado Operating Company was formed to own assets that
Vornado could not itself own and conduct activities that Vornado could not
itself conduct. Vornado Operating Company is intended to function principally as
an operating company, in contrast to Vornado's principal focus of investment in
real estate assets. Vornado Operating Company is able to do so because it is
taxable as a regular "C" corporation rather than a REIT.
On October 16, 1998, Vornado Realty L.P. (the "Operating Partnership"), a
subsidiary of Vornado, made a distribution (the "Distribution") of one share of
common stock, par value $.01 per share ("Common Stock"), of Vornado Operating
Company for 20 units of limited partnership interest of the Operating
Partnership (including the units owned by Vornado) held of record as of the
close of business on October 9, 1998 (the "Record Date"), and Vornado in turn
made a distribution of the Common Stock it received to the holders of its common
shares of beneficial interest, par value $.04 per share ("Vornado Common
Shares"). While no Common Stock was distributed in respect of Vornado's $3.25
Series A Convertible Preferred Shares, Vornado adjusted the conversion price to
take into account the Distribution.
Vornado Operating Company holds its assets and conducts its business
through Vornado Operating L.P., a Delaware limited partnership ("Company L.P.").
The Company is the sole general partner of, and as of December 31, 1998 owned a
90.1% partnership interest in, Company L.P. All references to the "Company"
refer to Vornado Operating Company and its subsidiaries including the Company
L.P.
2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying consolidated financial statements
are prepared in conformity with generally accepted accounting principles and
include the accounts of the Company and Company L.P. Management has made
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Cash: Cash consists of highly liquid investments purchased with
original maturities of three months or less.
Income Taxes: Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related primarily to differences between the treatment
of certain items for financial statement purposes and the treatment of those
items for corporation tax purposes. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled.
The net basis of the Company's assets and liabilities for tax purposes
approximates the amount reported for financial statement purposes.
Amounts Per Share: Basic and diluted earnings per share exclude the
effects of options, warrants and convertible securities as they are
anti-dilutive.
Stock Options: The Company accounts for stock-based compensation using the
intrinsic value method. Under the intrinsic value method compensation cost is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the exercise price of the option granted.
Compensation cost for stock
21
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
options, if any, is recognized ratably over the vesting period. The Company's
policy is to grant options with an exercise price equal to the quoted market
price of the Company's stock on the grant date. Accordingly, no compensation
cost has been recognized for the Company's stock option plans.
Organization Costs: Costs incurred in connection with the organization of
Company were expensed in accordance with the American Institute of Certified
Public Accountant's Statement of Position 98-5 -- "Reporting on the Costs of
Start-up Activities" which the Company adopted in December 1998.
3. Acquisition and Disposition
Charles E. Smith Commercial Realty L.P. ("CESCR")
On December 31, 1998, the Company purchased approximately 1.7% of the
outstanding partnership units of CESCR for an aggregate price of approximately
$12.9 million, or $34 per unit from Vornado. No distributions were received by
the Company on this investment in 1998. CESCR owns interests in and manages
office properties in Crystal City, Arlington, Virginia, a suburb of Washington,
D.C., and manages additional office and other commercial properties in the
Washington, D.C. area. In connection with this purchase, the Company was granted
an option to require Vornado to repurchase all of the CESCR units at the price
at which the Company purchased the CESCR units from Vornado, plus a cumulative
return on such amount at a rate of 10% per annum. This option may be exercised
at any time prior to December 31, 1999. On March 4, 1999, the Company exercised
its option and Vornado acquired the CESCR units from the Company for $13.2
million.
4. Income Taxes
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, specifically the
write-off of organization costs for financial reporting purposes in the current
period and the amortization of organization cost over 60 months for tax
reporting purposes. The tax effects of significant items comprising the
Company's net deferred tax asset as of December 31, 1998 are as follows:
December 31, 1998
-----------------
Deferred assets:
Organization costs..................... $372,600
Accrued compensation................... 16,800
Net operating loss carryforward........ 3,300
--------
392,700
Valuation allowance...................... (392,700)
--------
Net deferred tax asset................... $ --
========
22
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Because the Company does not have any operating history, a valuation
allowance has been established for its deferred tax assets. The need for this
allowance will be reassessed as the Company obtains operating assets.
A reconciliation of income taxes to the expected income tax benefit is as
follows:
For the Period
October 16, 1998
(Commencement
of Operations)
to December 31, 1998
--------------------
Loss before income taxes...... $981,700
Statutory federal income tax
rate.......................... 34%
--------
Expected federal income tax
benefit....................... 333,800
Expected state income tax
benefit....................... 58,900
--------
392,700
Change in valuation allowance. (392,700)
--------
Income taxes.................. $ --
========
5. Revolving Credit Facility
As part of its formation, the Company obtained a $75 million unsecured
five-year revolving credit facility from Vornado. Borrowings under the Revolving
Credit Agreement bear interest at a floating rate per annum equal to LIBOR plus
3%. Commencing January 1, 1999 the Company pays Vornado a commitment fee equal
to 1% per annum on the average daily unused portion of the facility. Amounts may
be borrowed under the Revolving Credit Agreement, repaid and reborrowed from
time to time on a revolving basis (so long as the principal amount outstanding
at any time does not exceed $75 million). Only interest and commitment fees are
payable under the Revolving Credit Agreement until it expires. The Revolving
Credit Agreement prohibits the Company from incurring indebtedness to third
parties (other than certain purchase money debt and certain other exceptions)
and prohibits the Company from paying dividends.
6. Employees' Stock Option Plan and Stock Appreciation Rights
Under the 1998 Omnibus Stock Plan (the "Plan"), various officers and key
employees of Vornado were granted incentive stock options and non-qualified
options to purchase Common Stock of the Company prior to the Distribution.
Options granted are at prices equal to 100% of the market price of the Common
Stock at the date of grant. Shares vest ratably, becoming fully vested 36 months
after grant. All options expire ten years after grant.
If compensation cost for Plan awards had been determined based on fair
value at the grant dates, net income and income per share would have been
reduced to the pro-forma amounts below, for the period October 16, 1998
(commencement of operations) to December 31, 1998:
Net loss:
As reported...................................... $(884,520)
Pro-forma........................................ $(988,182)
Net loss per share:
Basic and diluted:
As reported................................ $ (.22)
Pro-forma.................................. $ (.24)
23
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of each option grant is estimated on the date of grant
using the Binomial option-pricing model with the following weighted-average
assumptions used for grants:
Expected volatility............................... 71%
Expected life..................................... 5 years
Risk-free interest rate........................... 4.6%
Expected dividend yield........................... --
A summary of the Plan's status and changes are presented below:
Exercise
Shares Price
--------- -------------
Granted on October 9, 1998..................... 426,809 $ 5.54
Exercised...................................... -- --
Cancelled...................................... (210) 5.54
-------
Outstanding at December 31, 1998............... 426,599 $ 5.54
=======
Options exercisable at December 31, 1998....... --
=======
Fair value of options granted (per option)..... $ 3.43
=======
The following table summarizes information about options outstanding under
the Plan at December 31, 1998:
Options Outstanding Options Exercisable
- - - ---------------------------------------- ------------------------------
Number
Outstanding at
at Remaining Number
Exercise December 31, Contractual Exercisable at Exercise
Price 1998 Life December 31, 1998 Price
- - - --------- ---------------- ----------- ----------------- --------
$5.54 426,599 9.8 Years -- --
Shares available for future grant at December 31, 1998 were 573,401.
Stock appreciation rights ("SARs") were granted to an officer of the
Company prior to the Distribution. SARs are granted at 100% of the market price
of the Common Stock at the date of grant. SARs vest ratably, becoming fully
vested 36 months after grant. SARs issued at the Distribution and outstanding at
December 31, 1998 were 130,000, with an exercise price of $5.54. No SARs were
exercisable at December 31, 1998. The Company charged $42,015 to compensation
expense in the current period related to this grant.
7. Intercompany Agreement
The Company and Vornado have entered into an Intercompany Agreement
("Intercompany Agreement") pursuant to which, among other things, (a) Vornado
will under certain circumstances offer the Company an opportunity to become the
lessee of certain real property owned now or in the future by Vornado (under
mutually satisfactory lease terms) and (b) the Company will not make any real
estate investment or other REIT-Qualified
24
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Investment unless it first offers Vornado the opportunity to make such
investment and Vornado has rejected that opportunity.
Under the Intercompany Agreement, Vornado has agreed to provide the
Company with certain administrative, corporate, accounting, financial,
insurance, legal, tax, data processing, human resources and operational
services. For these services, the Company will compensate Vornado in an amount
determined in good faith by Vornado as the amount an unaffiliated third party
would charge the Company for comparable services and will reimburse Vornado for
certain costs incurred and paid to third parties on behalf of the Company. Also
under the Intercompany Agreement, Vornado makes available to the Company, at
Vornado's principal office in Saddle Brook, New Jersey, space for the Company's
principal corporate office, for which the Company compensates Vornado in an
amount determined in good faith by Vornado as the amount an unaffiliated third
party would charge the Company for comparable space. For the period October 16,
1998 (commencement of operations) to December 31, 1998, the Company incurred
approximately $50,000 for such services.
Vornado and the Company each have the right to terminate the Intercompany
Agreement if the other party is in material default of the Intercompany
Agreement or upon 90 days written notice to the other party at any time after
December 31, 2003. In addition, Vornado has the right to terminate the
Intercompany Agreement upon a change in control of the Company.
8. Minority Interest
Minority interest represents limited partnership interests in Company L.P.
not owned by the Company. On October 16, 1998, (i) Interstate Properties, a New
Jersey general partnership ("Interstate"), exchanged 447,017 shares of Common
Stock for a 9.9% undivided interest in all of the Company's assets and (ii)
Interstate and the Company contributed all of their interests in such assets to
Company L.P. and in return Interstate received a 9.9% limited partnership
interest and the Company received the 90.1% sole general partnership interest
therein. At any time after October 16, 1999, Interstate will have the right to
have its limited partnership interest in Company L.P. redeemed by Company L.P.
either (a) for cash in an amount equal to the fair market value, at the time of
redemption, of 447,017 shares of Common Stock or (b) for 447,017 shares of
Common Stock, in each case as selected by the Company and subject to customary
anti-dilution adjustments.
No distributions were made to Interstate for the period October 16, 1998
(commencement of operations) to December 31, 1998.
9. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the period October 16, 1998 (commencement of operations)
to December 31, 1998:
Numerator:
Net loss..................................................... $(884,520)
=========
Denominator:
Denominator for basic earnings per share-weighted average 4,068,310
shares.......................................................
Effect of dilutive securities:
Employee stock options.................................... --
---------
Denominator for diluted earnings per share-adjusted weighted 4,068,310
=========
Net loss per share-basic and diluted............................ $ (.22)
=========
25
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10.Subsequent Event
On March 12, 1999, the Company and Crescent Operating Inc. ("Crescent
Operating") formed a new partnership that has purchased all of the non-real
estate assets of the cold storage companies which do business under the name of
AmeriCold Logistics encompassing the operations of the cold storage business for
approximately $48 million from the Vornado/Crescent Partnership. The new
partnership leases 88 cold storage warehouses used in this business from the
Vornado/Crescent Partnership, which continues to own the real estate. In
addition to the leased warehouses AmeriCold Logistics manages 13 additional
warehouses containing approximately 80 million cubic feet of space.
The Company owns 60% of the new partnership through Company L.P. and
Crescent Operating indirectly owns 40% of the new partnership. The Company is
the sole general partner of, and owns a 90.1% partnership interest in, Company
L.P.
To fund its share of the purchase price, the Company utilized $4.6 million
of cash and borrowed $18.6 million under its revolving credit facility. Further,
the Company will pay $6 million to close the warehousing operation of one of the
leased facilities.
The following unaudited data presents the combination of the historical
income statements of the separate component companies of AmeriCold Logistics as
follows: (1) AMERICOLD CORPORATION year ended December 31, 1998, URS Logistics,
Inc. year ended December 31, 1998, the Freezer Services Companies (acquired
6/12/98) and The Carmar Group of Companies (acquired 7/1/98), (2) AMERICOLD
CORPORATION ten months ended December 31, 1997 and URS Logistics, Inc. year
ended December 31, 1997 and (3) AMERICOLD CORPORATION year ended February 28,
1997 and URS Logistics, Inc. year ended December 31, 1996. Such companies are
considered to be predecessors.
COMBINED STATEMENT OF INCOME
(amounts in thousands) For the Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ----------- -----------
Revenues........................... $ 567,867 $ 414,280 $ 454,996
Expenses:
Cost of services ............. 411,874 286,314 323,693
General & administrative ..... 26,877 39,957 45,086
Depreciation & amortization .. 59,337 37,151 17,080
Compensation expense ......... -- 12,115 --
------------- ----------- -----------
Total Expenses .................... 498,088 375,537 385,859
------------- ----------- -----------
Operating income .................. 69,779 38,743 69,137
Interest expense .................. (45,828) (63,263) (74,715)
Other income (expense) ............ 2,275 3,210 1,125
------------- ----------- -----------
Income (loss) before income tax ... 26,226 (21,310) (4,453)
Income taxes (benefit) ............ 9,238 (7,278) (777)
------------- ----------- -----------
Income (loss) before extraordinary
item .............................. 16,988 (14,032) (3,676)
Extraordinary item ................ -- (4,649) --
------------- ----------- -----------
Net income (loss) ................. $ 16,988 $(18,681) $ (3,676)
============= =========== ===========
26
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following unaudited proforma Balance Sheet as of December 31, 1998
presents the Company on a historical basis and reflects proforma adjustments for
the purchase of the non-real estate assets of AmeriCold Logistics and the
disposition of the Company's interest in CESCR.
December 31, 1998
----------------------------------------
(amounts in thousands)
Proforma
Historical Adjustments Proforma
---------- ----------- --------
Assets:
Cash .......................... $ 11,832 $ (4,647)(1) $20,105
12,920 (2)
Investment in partnership -
AmeriCold .................... 23,234 (1) 23,234
Investment in partnership -
CESCR ........................ 12,920 (12,920)(2)
Prepaid insurance ............. 475 475
-------- ----------- -------
$ 25,227 $ 18,587 $43,814
======== =========== =======
Liabilities and Stockholders'
Equity:
Due to Vornado Realty Trust ... $ 1,067 $ 1,067
Debt .......................... $ 18,587 18,587
Accrued expenses .............. 127 127
Minority interest ............. 2,379 2,379
Commitments and contingencies..
Stockholders' equity .......... 21,654 21,654
-------- ----------- -------
Total stockholders' equity. $ 25,227 $ 18,587 $43,814
======== =========== =======
(1) Purchase of 60% of the non-real estate assets of AmeriCold Logistics
(2) Put of investment in CESCR to Vornado
The following unaudited proforma income data reflects the purchase of the
non-real estate assets of AmeriCold Logistics as if it had occurred on January
1, 1998:
December 31, 1998
------------------------------------------
(amounts in thousands)
Proforma
Historical Adjustments Proforma
---------- ----------- --------
Revenues $567,867 $ 44,458 (3) $612,325
Expenses:
Cost of services .............. 411,874 27,775 (3) 439,649
Rent expense .................. -- 146,568 (4) 146,568
General & administrative ...... 26,877 2,404 (3) 29,281
Depreciation and amortization . 59,337 (51,371)(5) 7,966
-------- -------- -------
Total expenses .................... 498,088 125,376 623,464
-------- -------- -------
Operating income (loss) ........... 69,779 (80,918) (11,139)
Interest expense .................. (45,828) 42,304 (6) (3,524)
Other income (expense) ............ 2,275 -- 2,275
-------- -------- -------
Income (loss) before income tax ... 26,226 (38,614) (12,388)
Income taxes (benefit) ............ 9,238 (9,238)(7) --
-------- -------- -------
Net income ........................ $ 16,988 $ (29,376) $(12,388)
======== ======== =======
The Company's share of net
income (60%) ................... $ 10,193 $ (7,433)
======== =======
Footnotes 3-7 are explained on the following page.
27
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) To reflect operations of Freezer Services Inc. and the Carmar Group prior
to their respective dates of acquisition (June 12, 1998 and July 1, 1998)
(4) To record rent expense under leases with the Vornado/Crescent Partnership.
(5) To adjust (i) depreciation expense for assets not acquired and (ii)
amortization of the purchase price over a period of 20 years. Valuations
and other studies are not yet complete. Accordingly, they are subject to
change as such information is finalized.
(6) To reflect (i) interest for debt under the revolving credit agreement of
$18,587 at LIBOR plus 3% per annum (currently 8.02%), (ii) elimination
of interest on historical debt not asummed and (iii) reduced interest
income for cash portion of the purchase price ($4,657 at 5% per annum).
(7) Tax effect of proforma adjustments.
28
PART III.
Item 10. Directors and Executive Officers of the Registrant
Information relating to directors of the Company will be contained in a
definitive Proxy Statement involving the election of directors which the Company
will file with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934 not later than 120 days after December
31, 1998, and such information is incorporated herein by reference. For
information on the executive officers of the Company, see "Item 4. Submission of
Matters to a Vote of Security Holders - Executive Officers of the Registrant" in
Part I of this Annual Report on Form 10-K.
Item 11. Executive Compensation
Information relating to executive compensation will be contained in the
Proxy Statement referred to above in "Item 10. Directors and Executive Officers
of the Registrant," and such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information relating to security ownership of certain beneficial owners
and management will be contained in the Proxy Statement referred to in "Item 10.
Directors and Executive Officers of the Registrant," and such information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information relating certain relationships and related transactions will
be contained in the Proxy Statement referred to in "Item 10. Directors and
Executive Officers of the Registrant," and such information is incorporated
herein by reference.
29
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. The consolidated financial statements are set forth in Item 8
of this Annual Report on Form 10-K.
2. Financial Statement Schedules (not applicable).
3. The following exhibits listed on the Exhibit Index are filed
with this Annual Report on Form 10-K.
Exhibit No.
3.1 Restated Certificate of Incorporation of Vornado Operating
Company (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-11 (File No.
333-40701) filed with the Commission on September 28, 1998)
3.2 Bylaws of Vornado Operating Company (incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form
S-11 (File No. 333-40701) filed with the Commission on October
13, 1998)
4.1 Specimen stock certificate (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form
S-11 (File No. 333-40701) filed with the Commission on January
23, 1998)
10.1 Intercompany Agreement, dated as of October 16, 1998,
between Vornado Operating Company and Vornado Realty Trust
10.2 Credit Agreement, dated as of January 1, 1999, between Vornado
Operating Company and Vornado Realty L.P., together with
related form of Line of Credit Note
10.3 1998 Omnibus Stock Plan of Vornado Operating Company
10.4 Agreement of Limited Partnership of Vornado Operating L.P.
13 Annual Report to Stockholders for the year ended December
31, 1998 (to be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1998).
(Except for the pages and information thereof expressly
incorporated by reference in this Form 10-K, the Annual Report
to Stockholders will be provided solely for the information of
the Securities and Exchange Commission and is not to be deemed
"filed" as part of this Form 10-K.)
21 Subsidiaries of Vornado Operating Company
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
30
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.
VORNADO OPERATING COMPANY
By: /s/ Irwin Goldberg
------------------------------------
Irwin Goldberg, Vice President-
Chief Financial Officer
Date: March 24, 1999
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.
Signature Title Date
By: /s/Steven Roth Chairman of the Board of March 24, 1999
-------------------------- Directors (Principal
(Steven Roth) Executive Officer)
By: /s/Michael D. Fascitelli President and Director March 24, 1999
--------------------------
(Michael D. Fascitelli)
By: /s/Irwin Goldberg Vice President-- March 24, 1999
-------------------------- Chief Financial Officer
(Irwin Goldberg) (Principal Financial and
Accounting Officer)
By: /s/Douglas H. Dittrick Director March 24, 1999
--------------------------
(Douglas H. Dittrick)
By: /s/Martin N. Rosen Director March 24, 1999
--------------------------
(Martin N. Rosen)
By: /s/Richard R. West Director March 24, 1999
--------------------------
(Richard R. West)
By: /s/Russell B. Wight, Jr. Director March 24, 1999
--------------------------
(Russell B. Wight, Jr.)
31
Exhibit Index
Exhibit No.
3.1 Restated Certificate of Incorporation of Vornado Operating
Company (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-11 (File No.
333-40701) filed with the Commission on September 28, 1998)
3.2 Bylaws of Vornado Operating Company (incorporated by reference
to Exhibit 3.2 of the Company's Registration Statement on Form
S-11 (File No. 333-40701) filed with the Commission on October
13, 1998)
4.1 Specimen stock certificate (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form
S-11 (File No. 333-40701) filed with the Commission on January
23, 1998)
10.1 Intercompany Agreement, dated as of October 16, 1998,
between Vornado Operating Company and Vornado Realty Trust
10.2 Credit Agreement, dated as of January 1, 1999, between Vornado
Operating Company and Vornado Realty L.P., together with
related form of Line of Credit Note
10.3 1998 Omnibus Stock Plan of Vornado Operating Company
10.4 Agreement of Limited Partnership of Vornado Operating L.P.
13 Annual Report to Stockholders for the year ended December
31, 1998 (to be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1998).
(Except for the pages and information thereof expressly
incorporated by reference in this Form 10-K, the Annual Report
to Stockholders will be provided solely for the information of
the Securities and Exchange Commission and is not to be deemed
"filed" as part of this Form 10-K.)
21 Subsidiaries of Vornado Operating Company
27 Financial Data Schedule
32