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EXHIBIT INDEX ON PAGE 45
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
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from To
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Commission File Number: 333-40701
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VORNADO OPERATING COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3569068
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
PARK 80 WEST, PLAZA II, SADDLE BROOK, NEW JERSEY 07663
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (201) 587-1000
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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, 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
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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
February 25, 2000 was approximately $41,741,000.
As of February 25, 2000, 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
31, 2000.
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TABLE OF CONTENTS
ITEM
Page
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PART I............................................................................................................3
ITEM 1. BUSINESS.............................................................................................3
ITEM 2. PROPERTIES...........................................................................................9
ITEM 3. LEGAL PROCEEDINGS....................................................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................10
PART II..........................................................................................................11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...............................11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA................................................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................................................16
PART III. .......................................................................................................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND FINANCIAL
DISCLOSURE (1)......................................................................................31
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (1)..............................................31
ITEM 11. EXECUTIVE COMPENSATION (1)..........................................................................31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (1)..................................31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (1)..................................................31
PART IV..........................................................................................................32
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................................32
SIGNATURES.......................................................................................................33
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(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, 1999, 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 limited operating history; (b) restrictions on the
Company's business and future opportunities; (c) dependence upon Vornado Realty
Trust; (d) the substantial influence of the Company's controlling stockholders
and conflicts of interest; (e) risks associated with potential investments and
ability to manage those investments; (f) competition; (g) the Company's
obligations under the revolving credit facility; (h) AmeriCold Logisitic's
obligations under the lease agreements with Vornado Realty Trust; (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 of one share of
common stock, par value $.01 per share (the "Common Stock"), of Vornado
Operating Company, a Delaware corporation (the "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.
The Company 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 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 investments in
real estate assets. The Company is able to do so because it is taxable as a
regular "C" corporation rather than a REIT.
The Company operates businesses conducted at properties it leases from
Vornado, as contemplated by the agreement, dated as of October 16, 1998, between
the Company and Vornado (the "Vornado Agreement"), referred to below. 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.
The principal executive offices of the Company are located at Park 80
West, Plaza II, Saddle Brook, New Jersey 07663, and its telephone number at that
location is (201) 587-1000.
VORNADO AGREEMENT AND CHARTER PURPOSE CLAUSES
Pursuant to the Vornado Agreement, 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 Investment unless it first offers
Vornado the opportunity to make such investment and Vornado has rejected that
opportunity.
More specifically, the Vornado Agreement requires, subject to certain
terms, that Vornado provide the Company 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 Company 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 Vornado
Agreement, the Company 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 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 Company. 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 Company in
accordance with the procedures specified above prior to offering such Tenant
Opportunity to any other party.
In addition, the Vornado Agreement prohibits the Company 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 Company rejecting the
opportunity within 10 days
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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 Company by the Operating Partnership. The Vornado
Agreement also requires the Company to assist Vornado in structuring and
consummating any such investment which Vornado elects to pursue, on terms
determined by Vornado. In addition, the Company has agreed to notify Vornado of,
and make available to, Vornado investment opportunities developed by the Company
or of which the Company becomes aware but is unable or unwilling to pursue.
Under the Vornado Agreement, Vornado provides the Company with certain
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources and operational services. Also, Vornado makes
available to the Company, at Vornado's office in Saddle Brook, New Jersey, space
for the Company's principal corporate office. 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.
Vornado and the Company each have the right to terminate the Vornado
Agreement if the other party is in material default of the Vornado 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 Vornado Agreement upon
a change in control of the Company.
The Company restated certificate of incorporation specifies that one of
its corporate purposes is to perform the Vornado Agreement and, for so long as
the Vornado Agreement remains in effect, prohibits the Company from making any
real estate investment or other REIT-Qualified Investment without first offering
the opportunity to Vornado in the manner specified in the Vornado Agreement.
VORNADO OPERATING L.P. AND INTERSTATE PROPERTIES
The 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, 1999, owns 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 own, in the aggregate, 7.9% of the Company's Common Stock
(excluding shares underlying stock appreciation rights ("SARs") and options held
by Messrs. Roth and Wight for this purpose) and a 9.9% limited partnership
interest in Company L.P. as of March 1, 2000. Interstate has 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.
TEMPERATURE CONTROLLED LOGISTICS BUSINESS ("AMERICOLD LOGISTICS")
In October 1997, partnerships (the "Vornado/Crescent Partnerships") in
which Vornado has a 60% interest and Crescent Real Estate Equities Company
("Crescent") has a 40% interest acquired each of Americold Company ("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.
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In March 1999, the Company and Crescent Operating Inc. ("Crescent
Operating") formed a new partnership - the "Vornado Crescent Logistics
Operating Partnership" (which does business under the name "AmeriCold
Logistics") that purchased all of the non-real estate assets of the
Vornado/Crescent Partnerships for $48,700,000, of which the Company's share is
$29,200,000. The purchase price was proposed by the Vornado/Crescent
Partnerships (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. To fund its
share of the purchase price, the Company utilized $4,600,000 of cash, borrowed
$18,600,000 under its revolving credit facility with Vornado and paid the
balance of $6,000,000 in March 2000.
AmeriCold Logistics, headquartered in Atlanta, Georgia, has 6,900
employees and operates 104 temperature contolled warehouse facilities nationwide
with an aggregate of approximately 519 million cubic feet of refrigerated,
frozen and dry storage space. Of the 104 warehouses, AmeriCold Logistics leases
89 temperature controlled warehouses with an aggregate of approximately 428
million cubic feet from the Vornado/Cresecnt Partnerships, and manages 15
additional warehouses containing approximately 91 million cubic feet of space.
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, 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 temperature controlled logistics warehouse properties
(Data in this section represents 100% of AmeriCold Logistics, of which
the Company's share is 60%)
AmeriCold Logistics entered into leases covering the warehouses used in
this business. The leases, which commenced in March 1999, generally 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 Logistics
receives from its customers. Fixed base rent is approximately $130,000,000 per
annum through 2003, $132,000,000 per annum from 2004 through 2008 and
$133,000,000 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 $321,000,000, and the weighted average percentage rate is
approximately 36% for the initial five-year period, approximately 39% for the
period from 2004 through 2008 and approximately 41% for the period from 2009
through February 28, 2014. The aggregate base revenue amount under the sixth
lease is approximately $32,000,000, 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. AmeriCold
Logistics recognized $134,000,000 of rent expense from March 11, 1999
(acquisition date) through December 31, 1999.
AmeriCold Logistics has negotiated amendments to add four new
properties, or expansions to existing properties, which were developed by the
lessor during 1999. The aggregate rentals of the four new properties in the
initial lease year is expected to be approximately $9,400,000.
AmeriCold Logistics is required to pay for 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.
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AmeriCold Logistics has the right to defer the payment of 15% of fixed
base rent and all percentage rent for up to three years beginning on March 11,
1999 to the extent that available cash, as defined in the leases, is
insufficient to pay such rent. Pursuant thereto, $5,400,000 (of which the
Company's share is $3,240,000) was deferred for the period ended December 31,
1999.
The fixed base rent for each of the two five-year renewal options is
equal, generally, to the greater of the then fair market value rent and the
fixed base rent for the immediately preceding lease year plus 5%.
Terms of the Vornado Crescent Logistics Operating Partnership
Vornado is the day-to-day liaison to the management of AmeriCold
Logistics. AmeriCold Logistics pays Vornado an annual fee of $487,000, which is
based on the temperature controlled logistics operating assets acquired by
AmeriCold Logistics on March 11, 1999. The fee increases by an amount equal to
1% of the cost of new acquisitions, including transaction costs. AmeriCold
Logistics will provide financial statement preparation, tax and similar services
to the Vornado/Crescent Partnerships 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
10% per annum return. If the partners fail to reach an 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.
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 the
Vornado/Crescent Partnerships 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") for an aggregate purchase price of
approximately $12,900,000, or $34 per unit. 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. In March 1999, the
Company exercised its option and Vornado acquired the CESCR units from the
Company for $13,200,000.
NEW BUSINESS OPPORTUNITIES
The Company expects to form a new business venture named Transportal
Network ("Transportal") with Crescent Operating, on terms and conditions similar
to its existing partnership arrangements with Crescent, to pursue a
business-to-business Internet opportunity relating to the Temperature Controlled
Logistics business. The Company expects Transportal to provide routing and load
management services and facilitate related purchases over the Internet to
independent truckers, shippers and receivers to enable them to increase
efficiency. The Company's share of start-up costs for Transportal, which relate
to market research, creating a business plan and related matters, was $540,000
for the year ended December 31, 1999. These costs are included in the Company's
consolidated statements of operations as "loss from investment in Transportal
Network" for the year ended December 31, 1999. Transportal has not yet
commenced operations or finalized its business plan. The Company expects
Transportal to incur significant future losses and to require significant equity
investments. The Company expects to
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continue to fund its share, which may be in excess of $3,000,000, of
Transportal's cash needs. Transportal is actively seeking additional equity
investments from third parties, including venture capital firms. Early stage
Internet companies, such as Transportal, with new and unproven business models
frequently encounter significant risks and difficulties and there can be no
assurance that Transportal will be successful or profitable.
EMPLOYEES
As of December 31, 1999, 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. AmeriCold Logistics, in which the Company has a 60% interest, has
6,900 employees.
RISK FACTORS
LIMITED OPERATING HISTORY
The Company was incorporated on October 30, 1997. The Company has
limited operating history upon which investors can evaluate its business. The
Company's operations have incurred losses to date and may continue to do so.
RESTRICTIONS ON THE COMPANY'S BUSINESS AND FUTURE OPPORTUNITIES
The Vornado 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 -- Vornado Agreement and Charter Purpose
Clauses." Because of the provisions of the Vornado Agreement and the Charter,
the nature of the Company's business and the opportunities it may pursue are
significantly restricted.
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 Vornado 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 Vornado
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 Vornado 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, 1999, 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, 17.8% 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 7.9% of the Common Stock of the Company (excluding shares
underlying SARs and options held by Messrs. Roth and Wight for this purpose).
Because of the foregoing, Messrs. Roth, Mandelbaum and Wight
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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 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 $75,000,000 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.
8
9
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 Company'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 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 Vornado Agreement, Vornado has agreed to make available to
the Company, at Vornado's 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
The Company is from time to time involved in legal actions arising in
the ordinary course of its business. In the opinion of management, after
consultation with legal counsel, the outcome of such matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
9
10
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, 1999.
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 58, 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.
Michael D. Fascitelli, age 43, 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 54, 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 55, 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.
10
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.
Quarterly price ranges of the Common Stock for the year ended December
31, 1999 and the period from October 16, 1998 (the initial day of trading of the
Common Stock on the American Stock Exchange) through December 31, 1998 were as
follows:
FOR THE PERIOD
OCTOBER 16, 1998
YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, 1999 OPERATIONS) TO
---------------------------- DECEMBER 31, 1998
QUARTER HIGH LOW HIGH LOW
- ------- ---------- ---------- --------- --------
1st .................................... $ 10.00 $ 5.88 $ -- $ --
2nd .................................... 9.13 5.75 -- --
3rd .................................... 8.38 6.00 -- --
4th .................................... 6.94 5.38 8.50 5.75
The approximate number of record holders of Common Stock of the Company
at December 31, 1999 was 1,100.
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.
11
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
For the Period
October 16, 1998
(Commencement of
Year Ended Operations) to
December 31, 1999 December 31, 1998
----------------- -----------------
Revenues:
Interest income ........................................................... $ 421,690 $ 261,948
----------- -----------
Expenses:
General and administrative ................................................ 1,094,773 271,698
Organization costs ........................................................ 359,643 971,959
----------- -----------
Total expenses ................................................................. 1,454,416 1,243,657
----------- -----------
(1,032,726) (981,709)
Loss from investment in AmeriCold Logistics .................................... (5,546,400) --
Loss from investment in Transportal Network .................................... (540,000) --
Gain on sale of investment in Charles E. Smith
Commercial Realty L.P. .................................................... 280,000 --
Interest and debt expense to Vornado Realty Trust .............................. (1,216,628) --
----------- -----------
Loss before minority interest .................................................. (8,055,754) (981,709)
Minority interest .............................................................. 797,520 97,189
----------- -----------
Net loss ....................................................................... $(7,258,234) $ (884,520)
=========== ===========
Net loss per share - basic and diluted ......................................... $ (1.78) $ (.22)
=========== ===========
December 31, 1999 December 31, 1998
----------------- -----------------
Balance Sheet Data:
Total assets ................................................................... $20,832,706 $25,226,674
Stockholder's equity ........................................................... 14,357,089 21,653,923
AmeriCold, URS, Freezer Services, Inc. and the Carmar Group,
collectively, are considered predecessors of the Company. The net equity in
income (loss) of the predecessors was $2,922,000 from January 1, 1999 to March
11, 1999 (acquisition date), $10,193,000 in 1998, $(11,209,000) in 1997,
$(2,206,000) in 1996 and $(5,780,000) in 1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company had a net loss of $7,258,234 for the year ended December
31, 1999 and a net loss of $884,520 for the period from October 16, 1998
(commencement of operations) to December 31, 1998.
Revenues of $421,690 and $261,948 for the year ended December 31, 1999
and the period October 16, 1998 (commencement of operations) to December 31,
1998 consisted solely of interest income, which decreased on an annualized basis
as a result of lower average invested balances.
Expenses were comprised of (i) general and administrative expenses of
$1,094,773 and $271,698 for the year ended December 31, 1999 and the period
October 16, 1998 (commencement of operations) to December 31, 1998, including
reimbursements paid to Vornado for certain administrative and other services
provided to the Company, directors fees, insurance, legal and accounting fees
and (ii) additional organization costs of $359,643 for the year ended December
31, 1999.
12
13
The Company owned AmeriCold Logistics from March 11, 1999. The
Company's loss from this investment in 1999 was $5,546,400 as compared to the
full year pro forma loss of $7,400,000 discussed below.
AMERICOLD LOGISTICS PRO FORMA RESULTS OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 1999
The following are discussions of the pro forma results of operations of
AmeriCold Logistics, the Company's Temperature Controlled Logistics business -
see page 4 for a discussion of this business. The data below relates to 100% of
this business of which the Company owns 60%. For the purpose of the discussions
below, "Leased Operations" refer to operations at warehouses leased by AmeriCold
Logistics and "Other Operations" refer to (i) warehouses managed by AmeriCold
Logistics for the accounts of customers, (ii) Transportation Management Services
and (iii) Quarry Operations. The data below is pro forma because (i) certain of
the businesses were acquired in 1998 and (ii) the real estate assets were
separated from the remainder of the business in March 1999.
In 1999, revenue increased $81.2 million or 13.5% to $682.4
million. Revenue from Leased Operations increased $43.4 million or
10.4% to $462.3 million while revenue from Other Operations
increased $37.8 million or 20.8% to $220.1 million.
Margin percentage for Leased Operations declined by 1.0%
resulting in a decline in operating income of approximately $4.2
million. As a result of the increased volume offset by the margin
percentage decline, margin dollars increased by $12.6 million.
Operating income from Other Operations was $15.0 million, an
increase of $1.7 million from the prior year.
Rent expense increased by $14.9 million to $167.6 million
resulting from percentage rent caused by the increase in revenue
from Leased Operations.
General and administrative expenses increased by $3.3 million
resulting from increased staffing for long-term growth strategies.
Depreciation and amortization expense declined by $2.0
million. Interest expense, net of other income, decreased by $1.2
million. These decreases were the result of changes in purchase
price allocation and related financing.
As a result of the aforementioned factors, the pro forma net
loss for 1999 increased approximately $0.7 million to $12.4
million. The Company's share of this loss would have been $7.4
million.
Loss from investment in Transportal Network was $540,000, which
consisted of initial start-up and organization costs for the period ended
December 31, 1999.
Interest and debt expense $1,216,628 for the year ended December 31,
1999 is comprised of interest on the outstanding balance on the Company's
revolving credit facility from Vornado and the fee on the unused portion of the
facility.
Gain on sale of investment in partnership of $280,000 results from the
exercise of our option to require Vornado to repurchase its investment in
Charles E. Smith Commercial Realty L.P. See "Item 1. Business -- Acquisition and
Disposition of Interest in Charles E. Smith Commercial Realty L.P."
LIQUIDITY AND CAPITAL RESOURCES
As part of its formation, the Company obtained a $75,000,000 unsecured
revolving credit facility from Vornado which expires on December 31, 2004.
Borrowings under the Revolving Credit Agreement bear interest at LIBOR plus 3%
(9.09% at December 31, 1999). The Company pays Vornado a commitment fee equal to
1% per annum on the average daily unused portion of the facility pursuant
thereto; for the year ended December 31, 1999
13
14
the Company paid $697,425 to Vornado. 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 $75,000,000). At December 31, 1999, $4,586,896 is outstanding.
Principal payments are not required under the Revolving Credit Agreement during
its term. 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.
The Company would have incurred a pro forma net loss of $9,211,000 for
the year ended December 31, 1999 if the acquisition of AmeriCold logistics had
occurred on January 1, 1999. Such pro forma net loss includes $4,673,000 of
non-cash expenses and $686,000 of non-recurring expense. Non-cash expenses
include (i) depreciation of $3,578,000 and (ii) the effect of straight-lining of
rent expense of $2,107,000, offset by minority interest of $1,012,000.
In March 2000, the Company funded a $6,000,000 contribution to
AmeriCold Logistics to complete its share of the March 1999 purchase of the
non-real estate assets from the Vornado/Crescent Partnerships.
The Company expects to form a new business venture named Transportal
Network ("Transportal") with Crescent Operating, on terms and conditions similar
to its existing partnership arrangements with Crescent, to pursue a
business-to-business Internet opportunity relating to the Temperature Controlled
Logistics business. The Company expects Transportal to provide routing and load
management services and facilitate related purchases over the Internet to
independent truckers, shippers and receivers to enable them to increase
efficiency. The Company's share of start-up costs for Transportal, which relate
to market research, creating a business plan and related matters, was $540,000
for the year ended December 31, 1999. These costs are included in the Company's
consolidated statement of operations as "loss from investment in Transportal
Network" for the year ended December 31, 1999. Although Transportal has not
commenced operations or finalized its business plan, the Company expects
Transportal to incur significant future losses and to require significant equity
investments. The Company expects to continue to fund its share, which may be in
excess of $3,000,000, of Transportal's cash needs. Transportal is actively
seeking additional equity investments from third parties, including venture
capital firms. Early stage Internet companies, such as Transportal, with new and
unproven business models frequently encounter significant risks and difficulties
and there can be no assurance that Transportal will be successful or profitable.
In the aggregate, the Company's investments do not generate sufficient
cash flow to pay all of their expenses. The Company estimates that it has
additional borrowing capacity under its revolving credit facility to meet its
cash requirements.
Cash Flows Year Ended December 31, 1999
Cash flows used in operating activities of $2,963,096 was comprised of
(i) net loss of $7,258,234 and (ii) the net change in operating assets and
liabilities of $719,592, offset by adjustments for non-cash and non-operating
items of $5,014,730. The adjustments for non-cash and non-operating items are
comprised of (i) loss from investment in AmeriCold Logistics of $5,546,400, (ii)
loss from investment in Transportal Network of $540,000 and (iii) non-cash
compensation of $5,850, offset by (i) minority interest of $797,520 and (ii)
gain on sale of investment in Charles E. Smith Commercial Realty L.P. of
$280,000.
Net cash used in investing activities of $10,158,891 was comprised of
investment in AmeriCold Logistics of $23,358,891, offset by proceeds from the
sale of investment in Charles E. Smith Commercial Realty L.P. of $13,200,000.
Net cash provided by financing activities of $4,548,296 was comprised
primarily of proceeds from borrowings of $18,586,896, offset by repayments of
borrowings under its revolving credit facility with Vornado Realty Trust of
$14,000,000.
14
15
Year 2000 Issues
Vornado provides the Company with certain administrative, corporate,
accounting, financial, insurance, legal, tax, data processing, human resources
and operational services. Vornado has advised the Company that it has completed
its Year 2000 remediation plan, which addressed all mission critical systems.
Vornado is not aware of any adverse effects of Year 2000 issues including the
inability of a significant vendor to provide services to the Company.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Because the Company does not currently utilize derivatives or engage in
significant hedging activities, management does not anticipate that
implementation of this statement will have a material effect on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101). SAB 101 provides clarification in
applying generally accepted accounting principles to revenue recognition in
financial statements including contingent rentals under leases. Management does
not anticipate that implementation of SAB 101 will have a material effect on the
Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, the Company had $4,586,896 of variable rate debt
outstanding bearing interest at LIBOR plus 3.00% (9.09% at December 31, 1999). A
one percent increase for one year in the base used to determine the interest
rate of the variable rate debt would result in a $41,328 increase in the
Company's annual net loss ($0.01 per basic and diluted share).
15
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.............................................................................. 17
Consolidated Balance Sheets at December 31, 1999 and 1998................................................. 18
Consolidated Statements of Operations for the year ended December 31, 1999 and the period
October 16, 1998 (Commencement of Operations) to December 31, 1998.................................... 19
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1999 and the period
October 16, 1998 (Commencement of Operations) to December 31, 1998.................................... 20
Consolidated Statements of Cash Flows for the year ended December 31, 1999 and the period
October 16, 1998 (Commencement of Operations) to December 31, 1998.................................... 21
Notes to Consolidated Financial Statements................................................................ 22
16
17
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Vornado Operating Company
Saddle Brook, New Jersey
We have audited the accompanying consolidated balance sheets of Vornado
Operating Company as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1999 and 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 audits.
We conducted our audits 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 audits provide 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 at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for the year ended December 31, 1999 and 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 7, 2000
17
18
VORNADO OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents ................................................................ $ 3,257,870 $ 11,831,561
Investment in AmeriCold Logistics ........................................................ 17,272,491 --
Investment in Transportal ................................................................ -- --
Investment in Charles E. Smith Commercial Realty L.P. .................................... -- 12,920,000
Prepaid insurance ........................................................................ 302,345 475,113
------------ ------------
$ 20,832,706 $ 25,226,674
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable to Vornado Realty Trust ..................................................... $ 4,586,896 $ --
Due to Vornado Realty Trust .............................................................. 90,000 1,066,451
Accrued expenses ......................................................................... 216,956 127,015
------------ ------------
Total liabilities ........................................................................ 4,893,852 1,193,466
------------ ------------
Minority interest ........................................................................ 1,581,765 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 40,683
Additional paid-in capital ............................................................... 22,459,160 22,497,760
Deficit .................................................................................. (8,142,754) (884,520)
------------ ------------
Total stockholders' equity .......................................................... 14,357,089 21,653,923
------------ ------------
$ 20,832,706 $ 25,226,674
============ ============
See notes to consolidated financial statements.
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19
VORNADO OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD
OCTOBER 16, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
Revenues:
Interest income ...................................................... $ 421,690 $ 261,948
----------- -----------
Expenses:
General and administrative ........................................... 1,094,773 271,698
Organization costs ................................................... 359,643 971,959
----------- -----------
Total expenses ............................................................ 1,454,416 1,243,657
----------- -----------
(1,032,726) (981,709)
Loss from investment in AmeriCold Logistics ............................... (5,546,400) --
Loss from investment in Transportal Network ............................... (540,000) --
Interest and debt expense to Vornado Realty Trust ......................... (1,216,628) --
Gain on sale of investment in Charles E. Smith
Commercial Realty L.P. ............................................... 280,000 --
----------- -----------
Loss before income tax benefit and
minority interest .................................................... (8,055,754) (981,709)
Income tax benefit ........................................................ -- --
----------- -----------
Loss before minority interest ............................................. (8,055,754) (981,709)
Minority interest ......................................................... 797,520 97,189
----------- -----------
Net loss .................................................................. $(7,258,234) $ (884,520)
=========== ===========
Net loss per share -- basic and diluted ................................... $ (1.78) $ (.22)
=========== ===========
See notes to consolidated financial statements.
19
20
VORNADO OPERATING COMPANY
CONSOLIDATED STATEMENTS 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
Costs incurred to register securities
for stock option plan ................................ -- (38,600) -- (38,600)
Net loss ................................................... -- -- (7,258,234) (7,258,234)
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 ................................. $ 40,683 $22,459,160 $(8,142,754) $14,357,089
=========== =========== =========== ===========
See notes to consolidated financial statements.
20
21
VORNADO OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD
OCTOBER 16, 1998
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (7,258,234) $ (884,520)
Adjustments to reconcile net loss to net cash used in
operations:
Minority interest ............................................................ (797,520) (97,189)
Loss from investment in AmeriCold Logistics ................................. 5,546,400 --
Loss from investment in Transportal Network ................................. 540,000 --
Non-cash compensation ....................................................... 5,850 42,015
Gain on sale of investment in Charles E. Smith
Commercial Realty L.P. .................................................. (280,000) --
Changes in operating assets and liabilities:
Prepaid insurance ....................................................... 172,768 (475,113)
Accrued expenses ........................................................ 84,091 85,000
Due to Vornado Realty Trust ............................................. (976,451) 1,066,451
------------ ------------
Net cash used in operating activities ............................................ (2,963,096) (263,356)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in AmeriCold Logistics ........................................... (23,358,891) --
Proceeds from sale of (investment in) Charles E. Smith
Commercial Realty L.P. .................................................. 13,200,000 (12,920,000)
------------ ------------
Net cash used in investing activities ............................................ (10,158,891) (12,920,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings .................................................... 18,586,896 --
Repayments on borrowings .................................................... (14,000,000) --
Other ....................................................................... (38,600) --
Initial capital contribution ................................................ -- 25,000,000
Additional equity contribution .............................................. -- 14,917
------------ ------------
Net cash provided by financing activities ........................................ 4,548,296 25,014,917
------------ ------------
Net (decrease) increase in cash and cash equivalents ............................. (8,573,691) 11,831,561
Cash and cash equivalents at beginning of period ................................. 11,831,561 --
------------ ------------
Cash and cash equivalents at end of period ....................................... $ 3,257,870 $ 11,831,561
============ ============
NON-CASH TRANSACTIONS:
Non-cash compensation ....................................................... $ 5,850 $ 42,015
============ ============
Exchange with Interstate Properties ......................................... $ -- $ 2,476,474
============ ============
See notes to consolidated financial statements.
21
22
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Vornado Operating Company, a Delaware Company, 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" Company 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 (the "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.
The 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, 1999 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 AND CASH EQUIVALENTS: Cash and cash equivalents consists of highly
liquid investments purchased with original maturities of three months or less.
EQUITY INVESTEES: Equity interest in partially-owned entities include
partnerships and joint ventures and are accounted for under the equity method of
accounting as the Company exercises significant influence. These investments are
recorded initially at cost and subsequently adjusted for net equity in income
(loss) and cash contributions and distributions.
FAIR VALUE OF FINANCIAL INSTRUMENTS: All financial instruments of the
Company are reflected in the accompanying consolidated balance sheets at amounts
which, in management's estimation, based upon an interpretation of available
market information and valuation methodologies are considered appropriate, and
reasonably approximate their fair values. Such fair value estimates are not
necessarily indicative of the amounts that would be realized upon disposition of
the Company's financial instruments.
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.
-22-
23
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 loss 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 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. In addition, costs incurred in connection with registering such
securities that would be issued upon exercise are a reduction of stockholders'
equity.
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
Temperature Controlled Logistics Business ("AmeriCold Logistics")
In October 1997, partnerships (the "Vornado/Crescent Partnerships") in
which Vornado have a 60% interest and Crescent Real Estate Equities Company have
a 40% interest acquired each of Americold Corporation and URS Logistics, Inc. In
June 1998, Vornado/Crescent Partnerships acquired the assets of Freezer
Services, Inc. and in July 1998 acquired the Carmar Group.
In March 1999, the Company and Crescent Operating Inc. ("Crescent
Operating") formed a new partnership (which does business under the name
"AmeriCold Logistics") that purchased all of the non-real estate assets of the
Vornado/Crescent Partnerships for $48,700,000. AmeriCold Logistics leases 89
temperature controlled warehouses from the Vornado/Crescent Partnerships, which
continue to own the real estate. The leases, which commenced in March 1999,
generally 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 customer revenues.
AmeriCold Logistics is required to pay for all costs arising from the operation,
maintenance and repair of the properties, as well as property capital
expenditures in excess of $5,000,000 annually. AmeriCold Logistics recognized
$134,000,000 of rent expense from March 11, 1999 (acquisition date) through
December 31, 1999. AmeriCold Logistics has the right to defer the payment of 15%
of fixed base rent and all percentage rent for up to three years beginning on
March 11, 1999 to the extent that available cash, as defined in the leases, is
insufficient to pay such rent, pursuant thereto $5,400,000 (of which the
Company's share is $3,240,000) was deferred for the period ended December 31,
1999. In addition to the leased warehouses, AmeriCold Logistics manages 15
additional warehouses.
AmeriCold Logistics has negotiated amendments to add four new
properties, or expansions to existing properties, which were developed by the
lessor during 1999. The aggregate rentals of the four new properties in the
initial lease year is expected to be approximately $9,400,000.
The Company owns 60% of AmeriCold Logistics through Company L.P., and
Crescent Operating indirectly owns 40% of the Partnership. The Company accounts
for this investment under the equity method of accounting as Crescent Operating
has "substantive participating rights" as defined in accounting literature.
-23-
24
To fund its share of the purchase price, the Company utilized
$4,600,000 of cash, borrowed $18,600,000 under its revolving credit facility
with Vornado and paid the balance of $6,000,000 in March 2000.
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
$12,900,000, or $34 per unit from Vornado. No distributions were received by the
Company on this investment in 1999. 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. In March 1999, the Company exercised its
option and Vornado acquired the CESCR units from the Company for $13,200,000.
PRO FORMA INFORMATION
The unaudited pro forma condensed consolidated operating results for
the Company for the twelve months ended December 31, 1999 are presented as if
the acquisitions and dispositions described above and the financing attributable
thereto had occurred on January 1, 1999.
Condensed Consolidated Pro Forma Operating Results
Pro Forma
Twelve Months Ended
December 31, 1999
-------------------
Revenues....................................................................... $ 422,000
Expenses....................................................................... (1,454,000)
------------
(1,032,000)
Loss from investment in AmeriCold Logistics.................................... (7,464,000)
Loss from investment in Transportal Network.................................... (540,000)
Interest and debt expense...................................................... (1,467,000)
Gain on sale of investment in Charles E. Smith Commercial Realty LP Realty 280,000
Minority interest.............................................................. 1,012,000
------------
Net loss....................................................................... $ (9,211,000)
============
Net loss per share - basic and diluted......................................... $ (2.26)
========
-24-
25
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INVESTMENTS IN PARTNERSHIPS
The Company's investments in partnerships, summarized financial data
for AmeriCold Logistics and loss recognized from such investments are as
follows:
Total Partners'
Company's Investment Total Assets Total Debt Capital
------------------------------------- -------------- ------------ ----------------
December 31, 1999 December 31, 1998 1999 1999 1999
----------------- ----------------- -------------- ------------ ----------------
AmeriCold Logistics (60% interest)........ $ 17,272,491 $ -- $ 153,512,000 $ -- $ 29,479,000
Transportal Network (1)................... -- --
Charles E. Smith Commercial Realty L.P.... -- 12,920,000
--------------- ----------------
$ 17,272,491 $ 12,920,000
=============== ================
Loss from Investments
in Partnerships
---------------------
Twelve Months Ended
December 31, 1999
---------------------
AmeriCold Logistics (60% interest)........ $ (5,546,400)
Transportal Network (1)................... (540,000)
----------------
$ (6,086,400)
================
The following condensed operating data presents the income statements
of the AmeriCold Logistics (100%):
For the Period
March 11, 1999
(Acquisition Date) to
December 31, 1999
--------------------
Revenues............................................... $ 557,708,000
Expenses............................................... 566,757,000
----------------
Operating loss......................................... (9,049,000)
Other income, net...................................... 339,000
Interest expense....................................... (534,000)
----------------
Net loss............................................... $ (9,244,000)
================
(1) The Company expects to form a new business venture named Transportal
Network ("Transportal") with Crescent Operating, on terms and conditions similar
to its existing partnership arrangements with Crescent, to pursue a
business-to-business Internet opportunity relating to the Temperature Controlled
Logistics business. The Company expects Transportal to provide routing and load
management services and facilitate related purchases over the Internet to
independent truckers, shippers and receivers to enable them to increase
efficiency. The Company's share of start-up costs for Transportal, which relate
to market research, creating a business plan and related matters, was $540,000
for the year ended December 31, 1999. These costs are included in the Company's
consolidated statement of operations as "loss from investment in Transportal
Network" for the year ended December 31, 1999. Although Transportal has not
commenced operations or finalized its business plan, the Company expects
Transportal to incur significant future losses and to require significant equity
investments. The Company expects to continue to fund its share, which may be in
excess of $3,000,000, of Transportal's cash needs. Transportal is actively
seeking additional equity investments from third parties, including venture
capital firms. Early stage Internet companies, such as Transportal, with new and
unproven business models frequently encounter significant risks and difficulties
and there can be no assurance that Transportal will be successful or profitable.
-25-
26
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. 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 (i) the net
operating loss carryforward as reflected on the Company's tax return and (ii)
the write-off of organization costs in 1999 and 1998 for financial reporting
purposes and the amortization of such costs 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, 1999 and 1998 are as follows:
December 31, 1999 December 31, 1998
----------------- -----------------
Deferred assets (liabilities):
Organization costs........................................ $ 415,200 $ 372,600
Accrued compensation...................................... 19,100 16,800
Minority interest (taxed directly to Limited Partners).... 319,000 --
Net operating loss carryforward........................... 2,847,000 3,300
Loss on Transportal Network............................... 216,000 --
Depreciation.............................................. (186,700) --
------------ ------------
3,629,600 392,700
Valuation allowance.......................................... (3,629,600) (392,700)
------------ ------------
Net deferred tax asset....................................... $ -- $ --
============ ============
Because the Company has only a limited 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
Year Ended Operations) to
December 31, 1999 December 31, 1998
----------------- -----------------
Loss before income taxes and minority interest..... $ 8,055,800 $ 981,700
Statutory federal income tax rate.................. 34% 34%
------------ ------------
2,739,000 333,800
Expected state income tax benefit.................. 483,300 58,900
------------ -----------
3,222,300 392,700
Change in valuation allowance...................... (3,222,300) (392,700)
------------ --------
Income taxes....................................... $ -- $ --
============ ===========
6. REVOLVING CREDIT FACILITY
As part of its formation, the Company obtained a $75,000,000 unsecured
revolving credit facility from Vornado which expires on December 31, 2004.
Borrowings under the Revolving Credit Agreement bear interest at LIBOR plus 3%
(9.09% at December 31, 1999). The Company pays Vornado a commitment fee equal to
1% per annum on the average daily unused portion of the facility pursuant
thereto; for the year ended December 31, 1999 the Company paid $697,425 to
Vornado. 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 $75,000,000). At December 31,
1999, $4,586,896 is outstanding. Principal payments are not required under the
Revolving Credit Agreement during its term. The Revolving Credit Agreement
prohibits the
-26-
27
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company from incurring indebtedness to third parties (other than certain
purchase money debt and certain other exceptions) and prohibits the Company from
paying dividends.
7. 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
Year Ended Operations) to
December 31, 1999 December 31, 1998
----------------- -----------------
Net loss:
As reported......................................................... $ (7,258,234) $ (884,520)
Pro forma........................................................... $ (7,806,539) $ (1,002,772)
Net loss per share:
Basic and diluted:
As reported................................................ $ (1.78) $ (.22)
Pro forma.................................................. $ (1.92) $ (.25)
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:
For the Period
October 16, 1998
(Commencement of
Year Ended Operations) to
December 31, 1999 December 31, 1998
----------------- -----------------
Expected volatility......................... 67% 71%
Expected life............................... 5 Years 5 Years
Risk-free interest rate..................... 6.4% 4.6%
Expected dividend yield..................... -- --
-27-
28
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the Plan's status and changes are presented below:
For the Period
October 9, 1998
(Grant Date) to
December 31, 1999 December 31, 1998
------------------------------- -----------------------------
Shares Exercise Price Shares Exercise Price
----------- ------------------ ----------- ---------------
Outstanding at January 1 .................................. 486,599 $ 5.54 -- $ --
Granted ................................................... -- -- 486,809 5.54
Exercised ................................................. -- -- -- --
Cancelled.................................................. (7,280) 5.54 (210) 5.54
-------- --------
Outstanding at December 31 ................................ 479,319 $ 5.54 486,599 $ 5.54
======== ========
Options exercisable at December 31 ........................ 162,868 --
======== ========
Fair value of options granted during the
year ended December 31 (per option) .................... $ -- $ 3.43
======== ========
The following table summarizes information about options outstanding
under the Plan at December 31, 1999:
Options Outstanding Options Exercisable
- ----------------------------------------------------------- --------------------------------------------
Number
Outstanding at Remaining Number
Exercise December 31, Contractual Exercisable at
Price 1999 Life December 31, 1999 Exercise Price
----- ---- ---- ----------------- --------------
$5.54 479,319 8.8 Years 162,868 $5.54
Shares available for future grant at December 31, 1999 were 520,681.
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, 1999 were 130,000, with an exercise price of $5.54. 43,300 SARs
were exercisable at December 31, 1999. The Company accrued $5,850 to
compensation expense in the current period related to this grant.
8. VORNADO AGREEMENT
The Company and Vornado have entered into an agreement ("Vornado
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 Investment unless it first offers Vornado the
opportunity to make such investment and Vornado has rejected that opportunity.
-28-
29
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Under the Vornado Agreement, Vornado provides the Company with certain
administrative, corporate, accounting, financial, insurance, legal, tax, data
processing, human resources and operational services. Also, Vornado makes
available to the Company, at Vornado's office in Saddle Brook, New Jersey, space
for the Company's principal corporate office. 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. For the year ended December 31, 1999 and the
period October 16, 1998 (commencement of operations) to December 31, 1998, the
Company incurred approximately $330,000 and $50,000, respectively, for such
services.
Vornado and the Company each have the right to terminate the Vornado
Agreement if the other party is in material default of the Vornado 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 Vornado Agreement upon
a change in control of the Company.
9. 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 year ended December
31, 1999 and the period October 16, 1998 (commencement of operations) to
December 31, 1998.
-29-
30
VORNADO OPERATING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. LOSS PER SHARE
The following table sets forth the computation of basic and diluted
loss per share:
For the Period
October 16, 1998
(Commencement of
Year Ended Operations) to
December 31, 1999 December 31, 1998
----------------- -----------------
Numerator:
Net loss ........................................................... $ (7,258,234) $ (884,520)
============== ==============
Denominator:
Denominator for basic loss per share-weighted average shares ....... 4,068,310 4,068,310
Effect of dilutive securities:
Employee stock options ......................................... -- --
-------------- --------------
Denominator for diluted loss per share-adjusted weighted ........... 4,068,310 4,068,310
============== ==============
Net loss per share-basic and diluted .................................... $ (1.78) $ (.22)
============== ==============
11. SUMMARY OF QUARTERLY RESULTS (UNAUDITED):
NET LOSS
PER SHARE
REVENUE NET LOSS (BASIC AND DILUTED
------- -------- ------------------
(amounts in thousands, except share amounts)
1999
March 31....................................... $ 178,804 $ (147,397) $ (.04)
June 30........................................ 145,748 (2,065,188) (.51)
September 30................................... 48,316 (2,579,313) (.63)
December 31.................................... 48,822 (2,466,336) (.60)
1998
March 31....................................... $ -- $ -- $ --
June 30........................................ -- -- --
September 30................................... -- -- --
October 16 (Commencement of Operations) to
December 31................................. 261,948 (884,520) (.22)
-30-
31
PART III.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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, 1999, 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.
-31-
32
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.
The following financial statement schedules should be read in
conjunction with the financial statements included in Item 8 of this Annual
Report on Form 10-K.
Pages in this
Annual Report
on Form 10-K
------------
Vornado Crescent Logistics Operating Partnership and Subsidiary:
Independent Auditors' Report 34
Consolidated Balance Sheet at December 31, 1999 35
Consolidated Statement of Operations for the Period from
March 11, 1999 (Date of Inception) to December 31, 1999 36
Consolidated Statement of Partners' Capital for the Year
Ended December 31, 1999 37
Consolidated Statement of Cash Flows for the Period from
March 11, 1999 (Date of Inception) to December 31, 1999 38
Notes to Financial Statements 39
Schedules other than those listed above are omitted because they are
not applicable or the information required is included in the consolidated
financial statements or the notes thereto.
3. Exhibits
See Exhibit Index on page 45.
(b) Reports on Form 8-K.
None.
-32-
33
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 8, 2000
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 8, 2000
---------------------------------------- Directors (Principal
(Steven Roth) Executive Officer)
By: /s/ Michael D. Fascitelli President and Director March 8, 2000
----------------------------------------
(Michael D. Fascitelli )
By: /s/ Irwin Goldberg Vice President-- March 8, 2000
---------------------------------------- Chief Financial Officer
(Irwin Goldberg) (Principal Financial and
Accounting Officer)
By: /s/ Douglas H. Dittrick Director March 8, 2000
----------------------------------------
(Douglas H. Dittrick)
By: /s/ Martin N. Rosen Director March 8, 2000
----------------------------------------
(Martin N. Rosen)
By: /s/ Richard R. West Director March 8, 2000
----------------------------------------
(Richard R. West)
By: /s/ Russell B. Wight, Jr. Director March 8, 2000
----------------------------------------
(Russell B. Wight, Jr.)
-33-
34
INDEPENDENT AUDITORS' REPORT
To the Partners
Vornado Crescent Logistics Operating Partnership and Subsidiary:
We have audited the accompanying consolidated balance sheet of Vornado Crescent
Logistics Operating Partnership and Subsidiary (the "Partnership") as of
December 31, 1999, and the related consolidated statements of operations,
partners' capital, and cash flows for the period from March 11, 1999 (date of
inception) to December 31, 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these 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 financial statements present fairly, in all material
respects, the consolidated financial position of Vornado Crescent Logistics
Operating Partnership and Subsidiary at December 31, 1999, and its consolidated
results of operations and cash flows for the period from March 11, 1999 (date of
inception) to December 31, 1999 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 2, 2000
(March 8, 2000 as to Note 6)
-34-
35
VORNADO CRESCENT LOGISTICS OPERATING
PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,988
Restricted cash 16,887
Trade accounts receivable, net of allowance for doubtful
accounts of $2,036 77,010
Other current assets 7,891
Working capital to be collected on behalf of Real Estate Companies (12,951)
----------
96,825
PROPERTY, PLANT, AND EQUIPMENT:
Land 18,442
Buildings and improvements 1,517
Machinery and equipment 33,127
----------
53,086
Less accumulated depreciation (4,230)
----------
Property, plant, and equipment, net 48,856
OTHER ASSETS 7,831
----------
$ 153,512
==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $ 28,350
Accrued expenses 44,570
Unearned revenue 9,630
Due to Real Estate Companies 29,232
----------
Total current liabilities 111,782
DEFERRRED RENT OBLIGATIONS TO REAL ESTATE COMPANIES 5,400
OTHER LIABILITIES 6,851
----------
Total liabilities 124,033
COMMITMENTS
PARTNERS' CAPITAL 29,479
----------
$ 153,512
==========
See notes to consolidated financial statements.
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VORNADO CRESCENT LOGISTICS OPERATING
PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 11, 1999
(DATE OF INCEPTION) TO DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
REVENUES $ 557,708
OPERATING EXPENSES:
Cost of operations 399,615
Rent expense on leases with Real Estate Companies 135,811
General and administrative 26,542
Depreciation and amortization 4,789
----------
Total operating expenses 566,757
----------
OPERATING LOSS (9,049)
OTHER INCOME (EXPENSE):
Interest expense (534)
Other income 339
----------
NET LOSS $ (9,244)
==========
See notes to consolidated financial statements.
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37
VORNADO CRESCENT LOGISTICS OPERATING PARTNERSHIP
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
FOR THE PERIOD FROM MARCH 11, 1999
(DATE OF INCEPTION) TO DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
PARTNERS' ACCUMULATED
CAPITAL DEFICIT TOTAL
Capital contribution $ 38,723 $ - $ 38,723
Net loss - (9,244) (9,244)
---------- ---------- ----------
BALANCE - December 31, 1999 $ 38,723 $ (9,244) $ 29,479
========== ========== ==========
See notes to consolidated financial statements.
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38
VORNADO CRESCENT LOGISTICS OPERATING
PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 11, 1999
(DATE OF INCEPTION) TO DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (9,244)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Provision for bad debts 1,685
Depreciation and amortization 4,789
Deferral of rent expense 5,400
Gain on settlement and curtailment of benefit plan (1,363)
Changes in assets and liabilities, net of acquisitions:
Trade accounts receivable 239
Other assets (6,420)
Accounts payable and accrued expenses (1,493)
Due to Real Estate Companies 29,232
Other liabilities 3,078
----------
Net cash provided by operating activities 25,903
INVESTING ACTIVITIES:
Purchase of non-real estate assets (38,723)
Additions to property, plant, and equipment (9,666)
----------
Net cash used in investing activities (48,389)
FINANCING ACTIVITIES:
Repayment of due to Real Estate Companies (8,249)
Capital contributions 38,723
----------
Net cash provided by financing activities 30,474
----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,988
CASH AND CASH EQUIVALENTS:
Beginning of period -
----------
End of period $ 7,988
==========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 331
==========
SUPPLEMENTAL INFORMATION ABOUT NONCASH
ACTIVITIES:
Liabilities assumed in connection with acquisition of
non-real estate assets $ 13,198
==========
Initial working capital to be collected on behalf of
Real Estate Companies $ 21,200
==========
See notes to consolidated financial statements.
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39
VORNADO CRESCENT LOGISTICS OPERATING
PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND FOR THE PERIOD FROM
MARCH 11, 1999 (DATE OF INCEPTION) TO DECEMBER 31, 1999
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS
Vornado Crescent Logistics Operating Partnership (the "Partnership") was
formed on March 11, 1999. The Partnership holds its assets and conducts
its business through its wholly owned subsidiary AmeriCold Logistics, LLC
(collectively "AmeriCold Logistics"). AmeriCold Logistics, headquartered
in Atlanta, Georgia, has 6,900 employees and operates 104 temperature
controlled warehouse facilities nationwide with an aggregate of
approximately 519 million cubic feet of refrigerated, frozen, and dry
storage space. Of the 104 warehouses, AmeriCold Logistics leases 89
temperature controlled warehouses with an aggregate of approximately 428
million cubic feet and manages 15 additional warehouses containing
approximately 91 million cubic feet of space. 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, 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.
Additionally, AmeriCold Logistics mines limestone at two of its
locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements of the
Partnership include the accounts of the Partnership and its subsidiary.
The Partnership is owned 60% by Vornado Operating L.P. and 40% by COPI
Cold Storage L.L.C. The partnership agreement provides that net income
and losses are allocated to each partner's account in relation to their
ownership interests. Subject to certain provisions, the Partnership
continues for a term through October 2027. Management has made estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
liquid investments purchased with original maturities of three months or
less.
Restricted Cash - Cash restricted for uses related to payment of rent
($7,229 at December 31, 1999) and settlement of certain self-insured
liabilities ($9,658 at December 31, 1999) is classified as restricted
cash.
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40
Property, Plant, and Equipment - Depreciation and amortization are
computed on the straight-line method over the estimated useful lives of
the respective assets. Depreciation and amortization begin the month in
which the asset is placed into service.
Properties are reviewed for impairment if events or changes in
circumstances indicate that the carrying amount of the property may not
be recoverable. In such an event, a comparison is made of the current and
projected operating cash flows of each such property into the foreseeable
future on an undiscounted basis to the carrying amount of such property.
Such carrying amount would be adjusted, if necessary, to estimated fair
value to reflect an impairment in the value of the asset.
Revenue Recognition - Revenues include storage, transportation and
handling fees, and management fees for locations managed on behalf of
third parties. Storage revenues are generally invoiced daily and are
recognized as billed. Transportation fees and expenses are recognized
upon tender of product to common carriers, which is not materially
different than if such revenues and expenses were recognized upon
delivery. Management fees are recognized at the conclusion of each period
in which the Company is contractually entitled to such fees. Costs
related to managed facilities are included in operating expenses.
AmeriCold Logistics charges customers for both inbound and outbound
handling in advance but defers the outbound handling revenue until the
product has been shipped. Revenues from the sale of limestone are
recognized upon delivery to customers.
Income Taxes - AmeriCold Logistics has elected to be treated as a
partnership for income tax purposes. Taxable income or loss of AmeriCold
Logistics is reported in the income tax returns of the partners.
Accordingly, no provision for income taxes is made in the financial
statements of AmeriCold Logistics.
Recently Issued Accounting Standards - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
Because the Company does not currently utilize derivatives or engage in
significant hedging activities, management does not anticipate that
implementation of this statement will have a material effect on the
Company's financial statements.
3. ACQUISITION
In March 1999, AmeriCold Logistics purchased all of the non-real estate
assets of a group of companies owned by Vornado Realty Trust and
subsidiaries of Crescent Real Estate Equities Company and Crescent
Operating, Inc. (the "Real Estate Companies").
The purchase price of the non-real estate assets was $48.7 million
including the assumption of approximately $10 million of liabilities
assumed in connection with the closure of one of the warehouse
facilities. In addition, the Company acquired capitalized leased assets
and assumed $3.2 million of capitalized lease obligations as a result of
the purchase.
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41
The purchase method of accounting was applied to this acquisition.
Approximate fair values assigned to assets and liabilities acquired were
as follows:
Property, plant, and equipment $ 43,421
Other assets 8,500
----------
51,921
Other liabilities (13,198)
----------
$ 38,723
==========
Results of operations are presented from the date of acquisition.
4. ACCRUED EXPENSES
Detail of accrued expense as of December 31, 1999 is as follows:
(amounts in thousands)
Accrued payroll and related expense $ 8,855
Accrued employee retirement and other benefits 8,521
Accrued workers' compensation 7,961
Other accrued expenses 19,233
---------
$ 44,570
=========
5. TRANSACTIONS WITH REAL ESTATE COMPANIES AND OWNERS
Amounts due to Real Estate Companies at December 31, 1999 consist of
current rent payable of $19,232,000 and current portion of deferred rent
of $10,000,000 (of which $6,000,000 was paid in March 2000). Working
capital to be collected on behalf of Real Estate Companies of $12,951,000
has been classified as a reduction of these assets.
During 1999, AmeriCold Logistics received a management fee of $201,000
from the Real Estate Companies for administrative services performed.
Included in other assets is a $952,000 receivable from the Partnership's
owners for expenditures on their behalf for a new business venture.
6. LEASE COMMITMENTS
AmeriCold Logistics entered into leases with the Real Estate Companies
covering the warehouses used in this business. The leases, which
commenced in March 1999, generally 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 Logistics receives from its
customers. Fixed base rent is approximately $130 million per annum
through 2003, $132 million per annum from 2004 through 2008, and $133
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 approximately 36% for the initial five-year period, approximately
39% for the period from 2004 through 2008, and approximately 41% 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.
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42
AmeriCold Logistics has negotiated amendments to add four new properties,
or expansions to existing properties, which were developed by the lessor
during 1999. The aggregate rentals of the four new properties in the
initial lease year is expected to be approximately $9,400,000.
The fixed base rent for each of the two five-year renewal options is
equal, generally, to the greater of the then fair market value rent and
the fixed base rent for the immediately preceding lease year plus 5%.
AmeriCold Logistics has the right to defer the payment of 15% of fixed
base rent and all percentage rent for up to three years beginning in
March 1999 to the extent that available cash, as defined in the leases,
is insufficient to pay such rent. Pursuant to the agreement, AmeriCold
Logistics exercised its deferral rights and deferred approximately $15.4
million in fixed and percentage rent. In March 2000, AmeriCold Logistics
expects to pay $10.0 million of its deferred rent obligation (of which
$6,000,000 was paid in March 2000). Accordingly, at December 31, 1999,
AmeriCold Logistics has $10.0 million classified as current deferred rent
payable and $5.4 million classified as deferred rent obligation.
AmeriCold Logistics is also required to pay for 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.
AmeriCold Logistics also has operating lease agreements for equipment and
other facilities. AmeriCold Logistics pays taxes, insurance, and
maintenance costs on substantially all of the leased property. Lease
terms generally range from 5 to 20 years with renewal or purchase
options.
At December 31, 1999, future minimum fixed lease payments under these
leases with the Real Estate Companies and future minimum lease payments
under operating leases other than leases with the Real Estate Companies
are as follows:
(amounts in thousands)
YEAR ENDED
DECEMBER 31,
REAL ESTATE OTHER
COMPANIES LESSORS TOTAL
2000 $ 129,275 $ 6,354 $ 135,629
2001 129,277 5,870 135,147
2002 129,417 4,846 134,263
2003 129,403 3,958 133,361
2004 131,562 3,158 134,720
Thereafter 1,220,488 3,684 1,224,172
---------- ---------- ----------
$1,869,422 $ 27,870 $1,897,292
========== ========== ==========
Rent expense under all lease obligations for the period was $113,899,000
for fixed rent and $26,780,000 for percentage rent.
7. EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plans - AmeriCold Logistics has defined benefit
pension plans that cover substantially all employees, other than union
employees covered by union pension plans under collective bargaining
agreements. Benefits under AmeriCold Logistics' plans are based on years
of credited service and compensation during the years preceding
retirement, or on years of credited service and established monthly
benefit levels.
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43
Postretirement Benefits Other Than Pensions - During 1999, AmeriCold
Logistics settled and curtailed postretirement healthcare and life
insurance benefits for a substantial portion of its employees. As a
result, AmeriCold Logistics recorded a gain of approximately $1,363.
Actuarial information regarding the defined benefit pension plans and
postretirement benefits other than pensions as of December 31, 1999 is as
follows:
PENSION BENEFITS
------------------------------
NATIONAL OTHER
RETIREMENT SERVICE POSTRETIREMENT
(amounts in thousands) INCOME PLAN RELATED PLAN BENEFITS
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of period $ 33,052 $ 11,653 $ 7,150
Service cost 1,297 254 147
Interest cost 2,461 576 346
Actuarial (gain) loss (3,903) 404 (320)
Curtailments - - (2,735)
Settlements - - (1,940)
Plan transfers 2,930 (2,930) -
Plan amendments - - (664)
Benefits paid (2,127) (606) (64)
--------- --------- ---------
Benefit obligation at end of year $ 33,710 $ 9,351 $ 1,920
========= ========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period $ 25,693 $ 10,058 $ -
Actual return on plan assets 3,364 1,060 -
Employer contributions - 967 64
Plan transfers 1,844 (1,844) -
Benefits paid (2,127) (606) (64)
--------- --------- ---------
Fair value of plan assets at end of year $ 28,774 $ 9,635 $ -
========= ========= =========
Funded status $ (4,936) 285 $ (1,920)
Unrecognized actuarial (gain) loss (1,809) 1,409 (2)
Unrecognized prior service cost 1,338 157 (648)
--------- --------- ---------
(Accrued) prepaid benefit cost $ (5,407) $ 1,851 $ (2,570)
========= ========= =========
Amounts recognized in the combined balance sheet consist of:
Accrued benefit liability $ (5,407) $ - $ (2,570)
Prepaid asset - 1,851 -
--------- --------- ---------
Net amount recognized $ (5,407) $ 1,851 $ (2,570)
========= ========= =========
Weighted-average assumptions as of December 31, 1999:
Discount rate 7.75% 7.75% 7.75%
Expected return 9.50% 9.50% N/A
Rate of compensation increase 4.00% N/A N/A
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44
PENSION BENEFITS
--------------------------------
NATIONAL OTHER
RETIREMENT SERVICE POSTRETIREMENT
(amounts in thousands) INCOME PLAN RELATED PLAN BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 1,297 $ 254 $ 147
Interest cost 2,461 576 346
Expected return on plan assets (2,531) (820) -
Recognized net actuarial loss 338 18 67
Amortization of prior service cost 104 5 (56)
--------- --------- ---------
$ 1,669 $ 33 $ 504
========= ========= =========
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change
in assumed health care cost-trend rates would have the following effects:
(amounts in thousands) ONE-PERCENTAGE ONE-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest cost components $ 24,839 $ (22,818)
Profit Sharing - AmeriCold Logistics has defined contribution employee
benefit plans which cover all eligible employees. The plans also allow
contributions by plan participants in accordance with Section 401(k) of
the Internal Revenue Code. Profit sharing expense for the period ended
December 31, 1999 was approximately $4,060,000.
Deferred Compensation - AmeriCold Logistics has deferred compensation and
supplemental retirement plan agreements with certain of its executives.
The agreements provide for certain benefits at retirement or disability,
and also provide for survivor benefits in the event of death of the
employee. AmeriCold Logistics charges expense for the accretion of the
liability each year.
The net expense for all deferred compensation and supplemental retirement
plans for the period was approximately $164,000.
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45
EXHIBIT INDEX
EXHIBIT NO. PAGE
- ----------- ----
The following is a list of all exhibits filed as part of this
report
2.1 Assignment Agreement, dated as of December 31, 1998, between *
Vornado Realty Trust, as assignor, and Vornado Operating
Company, assignee (incorporated by reference to Exhibit 2.1 of
the Company's Current Report on Form 8-K, dated December 31,
1998 (File No. 001-14525), as filed with the Commission on
January 15, 1999)
2.2 Put Agreement, dated as of December 31, 1998, between Vornado *
Realty Trust, as grantor, and Vornado Operating Company, as
grantee (incorporated by reference to Exhibit 2.2 of the
Company's Current Report on Form 8-K, dated December 31, 1998
(File No. 001 -14525), as filed with the Commission on January
15, 1999)
2.3 Asset Purchase Agreement dated as of February 26, 1999, between *
AmeriCold Logistics, LLC, as Purchaser, and AmeriCold
Corporation, as Seller (incorporated by reference to Exhibit 2.1 of
the Company's Current Report on Form 8-K, dated March 12, 1999
(File No. 001-14525), as filed with the Commission on March
31, 1999)
2.4 Asset Purchase Agreement, dated as of March 9, 1999, between *
Vornado Crescent Logistics Operating Partnership, as Purchaser,
and URS Logistics, Inc., as Seller (incorporated by reference to
Exhibit 2.2 of the Company's Current Report on form 8-K, dated
March 12, 1999 (File No. 001-14525), as filed with the
Commission on March 31, 1999)
2.5 Asset Purchase Agreement, dated as of March 9, 1999, between *
AmeriCold Logistics, LLC, as Purchaser, and VC Omaha Holdings,
L.L.C., as Seller (incorporated by reference to Exhibit 2.3 of
the Company's Current Report on Form 8-K, dated March 12, 1999
(File No. 001-14525), as filed with the Commission on March 31,
1999)
2.6 Asset Purchase Agreement, dated as of March 9, 1999, between *
AmeriCold Logistics II, LLC, as Purchaser, and VC Missouri
Holdings, L.L.C., as Seller (incorporated by reference to
Exhibit 2.4 of the Company's Current Report on Form 8-K, dated
March 12, 1999 (File No. 001-14525), as filed with the
Commission on March 31, 1999)
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), as 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), as filed with the Commission on
October 13, 1998)
- -----------------------------------------
* Incorporated by reference.
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46
EXHIBIT NO. PAGE
- ----------- ----
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), as 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 (incorporated
by reference to Exhibit 10.1 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (File No.
001-14525))
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 (incorporated by reference to
Exhibit 10.2 of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 001-14525))
10.3 1998 Omnibus Stock Plan of Vornado Operating Company *
(incorporated by reference to Exhibit 10.3 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 001 -14525))
10.4 Agreement of Limited Partnership of Vornado Operating L.P. *
(incorporated by reference to Exhibit 10.4 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 001-14525))
10.5 Agreement, dated March 11, 1999, between Vornado Operating L.P. *
and COPI Temperature Controlled Logistics L.L.C. (incorporated
by reference to Exhibit 10.1 of the Company's Current Report on
Form 8-K, dated March 12, 1999 (File No. 001-14525), as filed
with the Commission on March 31, 1999)
10.6 Master Lease Agreement, dated as of April 22, 1998, between URS *
Real Estate, L.P., as Landlord, and URS Logistics, Inc., as
Tenant (incorporated by reference to Exhibit 10.2 of the
Company's Current Report on Form 8-K/A, dated March 12, 1999
(File No. 001-14525), as filed with the Commission on May 26,
1999).
10.7 First Amendment to Master Lease Agreement, dated as of March 10, *
1999, between URS Real Estate, L.P. and URS Logistics, Inc.
(incorporated by reference to Exhibit 10.3 of the Company's
Current Report on Form 8-K/A, dated March 12, 1999 (File No.
001-14525), as filed with the Commission on May 26, 1999).
10.8 Assignment and Assumption of Master Lease, dated as of March 11, *
1999, between URS Logistics, Inc. and AmeriCold Logistics II,
LLC (incorporated by reference to Exhibit 10.4 of the Company's
Current Report on Form 8-K/A, dated March 12, 1999 (File No.
001-14525), as filed with the Commission on May 26, 1999).
10.9 Master Lease Agreement, dated as of April 22, 1998, between *
AmeriCold Real Estate, L.P., as Landlord and AmeriCold
Corporation, as Tenant (incorporated by reference to Exhibit
10.5 of the Company's Current Report on Form 8-K/A, dated March
12, 1999 (File No. 001-14525), as filed with the Commission on
May 26, 1999).
- -----------------------------------------
* Incorporated by reference.
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47
EXHIBIT NO. PAGE
- ----------- ----
10.10 First Amendment to Master Lease Agreement, dated as of March 10, *
1999, between AmeriCold Real Estate, L.P. and AmeriCold
Logistics, LLC (incorporated by reference to Exhibit 10.6 of the
Company's Current Report on Form 8-K/A, dated March 12, 1999
(File No. 001-14525), as filed with the Commission on May 26,
1999).
10.11 Assignment and Assumption of Master Lease, dated as of February *
28, 1999, between AmeriCold Corporation and AmeriCold Logistics,
LLC (incorporated by reference to Exhibit 10.7 of the Company's
Current Report on Form 8-K/A, dated March 12, 1999 (File No.
001-14525), as filed with the Commission on May 26, 1999).
10.12 Master Lease Agreement, dated as of March 11, 1999, between URS *
Logistics, Inc., as landlord, and AmeriCold Logistics II, LLC,
as Tenant (incorporated by reference to Exhibit 10.8 of the
Company's Current Report on Form 8-K/A, dated March 12, 1999
(File No. 001-14525), as filed with the Commission on May 26,
1999).
10.13 Master Lease Agreement, dated as of February 28, 1999, between *
AmeriCold Corporation, as Landlord, and AmeriCold Logistics,
LLC, as Tenant (incorporated by reference to Exhibit 10.9 of the
Company's Current Report on Form 8-K/A, dated March 12, 1999
(File No. 001-14525), as filed with the Commission on May 26,
1999).
10.14 Master Lease Agreement, dated as of March 11, 1999, between each *
of the entities listed on Exhibit A thereto, collectively as
Landlord, and AmeriCold Logistics, LLC, as Tenant (incorporated
by reference to Exhibit 10.10 of the Company's Current Report on
Form 8-K/A, dated March 12, 1999 (File No. 001-14525), as filed
with the Commission on May 26, 1999).
10.15 Master Lease Agreement, dated as of March 11, 1999, between VC *
Omaha Holdings, L.L.C. and Carmar Freezers Thomasville L.L.C.,
together as Landlord, and AmeriCold Logisitics, LLC, as Tenant
(incorporated by reference to Exhibit 10.11 of the Company's
Current Report on Form 8-K/A, dated March 12, 1999 (File No.
001-14525), as filed with the Commission on May 26, 1999).
21 Subsidiaries of Vornado Operating Company
27 Financial Data Schedule
- -----------------------------------------
* Incorporated by reference.
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